Corporation Law

CONCEPT BUILDERS, INC. v. NLRC G.R. No. 108734. May 29, 1996 Doctrine of Piercing the Veil of Corporate Fiction

FACTS:

Petitioner Concept Builders, Inc., a domestic corporation, is engaged in the construction business. Private respondents were employed by said company as laborers, carpenters and riggers.

Private respondents were served individual written notices of termination of employment by petitioner, stating that their contracts of employment had expired and the project in which they were hired had been completed.

Private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.

The Labor Arbiter (LA) rendered judgment ordering petitioner to reinstate private respondents and to pay them back wages.

The NLRC dismissed the Motion for Reconsideration.

The LA issued a writ of execution directing the sheriff to execute the Decision. The writ was partially satisfied through garnishment of sums from petitioners debtor.

An Alias Writ of Execution was issued for the collection of the balance of the judgment award, and to reinstate private respondents to their former positions. However, the security guard on duty refused the service of the Writ saying that petitioner no longer occupied the premises.

The LA issued a second alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report,

  1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
  2. Levy was made upon personal properties he found in the premises;
  3. Security guards with high-powered guns prevented him from removing the properties he had levied upon.

The said special sheriff recommended that a break-open order be issued to enable him to enter petitioners premises so that he could proceed with the public auction sale of the aforesaid personal properties.

A certain Dennis Cuyegkeng filed a third-party claim alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.

Private respondents filed a Motion for Issuance of a Break-Open Order, alleging that HPPI and petitioner corporation were owned by the same incorporators/stockholders.

HPPI filed an Opposition, contending that HPPI is a corporation which is separate and distinct from petitioner.

The motion for break-open order was denied by the LA.

On appeal to the NLRC, a break-open order was issued, and the sheriff was directed to proceed with the auction sale of the properties already levied upon. It dismissed the third-party claim for lack of merit.

 

ISSUE:

Whether the doctrine of piercing the veil of corporate fiction is applicable in this case.

 

RULING:

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation. Where badges of fraud exist; where public convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come to naught. The law in these instances will regard the corporation as a mere association of persons and, in case of two corporations, merge them into one.

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice.

So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation.

The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit:

  1. Stock ownership by one or common ownership of both corporations.
  2. Identity of directors and officers.
  3. The manner of keeping corporate books and records.
  4. Methods of conducting the business.

The SEC en banc explained the instrumentality rule which the courts have applied in disregarding the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:

  1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
  2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and
  3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents piercing the corporate veil. in applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation.

The question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one of fact.

Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of backwages and to bar their reinstatement to their former positions.

HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and should, be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.

 

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