Law and Jurisprudence

On Piercing the Veil of Corporate Fiction – Arco Pulp and Paper versus Cupertino Realty

A corporation is a juridical entity with legal personality separate and distinct from the people comprising it, such as stockholders or members, and from the directors, trustees, and officers who act on its behalf. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation acting through any of them. Time and again, however, the Supreme Court has consistently held that this separate personality of a corporation is merely a fiction of law created for convenience which may be pierced or disregarded to promote the ends of justice.

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners, -versus- CUPERTINO REALTY CORP. and DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES, Respondent; G.R. No. 206806; 25 JUNE 2014

Facts:

Dan T. Lim (LIM) delivered scrap papers worth ₱7,220, 968.31 to Arco Pulp and Paper Company, Inc. (ARCO) through ARCO’s Chief Executive Officer and President, Candida A. Santos (SATOS). The parties allegedly agreed that ARCO would either pay LIM the value of the raw materials or deliver to him their finished products of equivalent value. LIM alleged that when he delivered the raw materials, ARCO issued a post-dated check in the amount of ₱1, 487, 766.68 as partial payment, with the assurance that the check would not bounce. When he deposited the check, it was dishonored for being drawn against a closed account. On the same day, ARCO and a certain Eric Sy (SY) executed a memorandum of agreement where ARCO bound themselves to deliver their finished products to Megapack Container Corporation, owned by SY, for his account. According to the memorandum, the raw materials would be supplied by LIM, through his company, Quality Paper and Plastic Products.

LIM sent a letter to ARCO demanding payment but no payment was made to him.

LIM filed a complaint for collection of sum of money with prayer for attachment before the RTC. The RTC rendered a judgment in favor of ARCO and dismissed the complaint. 

On appeal, the Court of Appeals (CA) ruled that LIM was entitled to damages and attorney’s fees due to the bad faith exhibited by ARCO in not honoring its undertaking and that Santos was solidarily liable with ARCO.

Issue:

Whether SANTOS was solidarily liable with ARCO.

Ruling:

Yes.

As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven.

Here, SANTOS entered into a contract with LIM in her capacity as the President and Chief Executive Officer of ARCO. She also issued the check in partial payment of ARCO’s obligations to LIM on behalf of ARCO. This is clear on the face of the check bearing the account name, “Arco Pulp & Paper, Co., Inc.” Any obligation arising from these acts would not, ordinarily, be SANTOS’  personal undertaking for which she would be solidarily liable with ARCO.

Doctrine of Piercing the Veil of Corporate Fiction

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines: “Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for non- legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical.” 

According to the Court of Appeals, SANTOS was solidarily liable with ARCO, stating that:

“In the present case, we find bad faith on the part of the [petitioners] when they unjustifiably refused to honor their undertaking in favor of the [respondent]. After the check in the amount of P1,487,766.68 issued by [petitioner] Santos was dishonored for being drawn against a closed account; [petitioner] corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies provided by law in order to protect his rights.”

We agree with the Court of Appeals. SANTOS cannot be allowed to hide behind the corporate veil. When ARCO’s obligation to LIM became due and demandable, she not only issued an unfunded check but also contracted with a third party in an effort to shift ARCO’s liability. She unjustifiably refused to honor ARCO’s obligations to LIM. These acts clearly amount to bad faith. In this instance, the corporate veil may be pierced, and SANTOS may be held solidarily liable with ARCO.