CORPORATION LAW UNDER ATTY MERCANO:

AYAME NOTES :WEEK 1

CORPORATION LAW
ATTY MERCANO
FIRST ASSIGNMENT
1. Can Congress pass a law creating a corporation?
I would distinguish. Article XII, Section 16 of 1987 Constitution states that the
Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. ON THE OTHER HAND, a government-owned
or controlled corporation may be created or established by special charters in the
interest of common good and subject to the test of economic viability. Thus the
congress can pass a law creating public corporations but not private corporations.
2. Is corporation a person?
Yes. Corporation is a juridical person. Article 44 of the New Civil Code states
that (1) the State and its political subdivisions; (2) other corporations, institutions
and entities for public interest or purpose, created by law, their personality begins
as soon as they have been constituted according to law; and (3) corporations,
partnerships and associations for private interest or purpose to which the law
grants juridical personality, separate and distinct from that of a shareholder,
partner or member are juridical persons. Ergo, a corporation is a juridical person.
3. Are public corporations included in the corporation code?
Section 4 of BP 68 (Corporation Code of the Philippines) which states that
Corporations created by special laws or charters shall be governed primarily by
the provisions of the special law or charter creating them or applicable to them,
supplemented by the provisions of this Code, insofar as they are applicable
states the inclusion of public corporation in the corporation code but are
supplemented by the provisions of this Code only, insofar as they are applicable.
4. What is a corporation?
Section 2 of BP 68 states that a corporation is an artificial being, created by
operation of law, having the rights of succession, powers, attributes, and
properties expressly authorized by law or incidental to its existence
5. What happened in the case International Express Travel and Tours vs
Philippine Football Federation?
FACTS: Petitioner secured the airline tickets for respondents with partial unpaid
amounts. No further payments were paid despite repeated demands. Petitioners
filed civil case before RTC against Henri Khan in his personal capacity as president
of the Philippine Football Federation (PFF)which has a separate and distinct
personality. RTC ruled in favor of IET through default and declared Henri Khan
personally liable for unpaid obligation. Ratio: A voluntary unincorporated
association has no power to ratify a contract. The contract entered by its officers
and agents on behalf of the association is NOT binding or enforceable against it.
The officers or agents themselves are personally liable. CA favored Henri Khan and
denied MR.
ISSUE: WON Philippine Football Federation is a juridical person

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HELD: Before a corporation may acquire juridical personality, the State must give
its consent either in the form of a special law or a general enabling act. Section 11
of RA 3135 states that before an entity may be considered as a national sports
association, such entity must be recognized by the accrediting organization, the
Philippine Amateur Athletic Federation under RA 3135 and the Department of Youth
and Sports Development under PD 604. This fact of recognition, however, iHenri
Khan failed to substantiate. Accordingly, we rule that the PFF is not a national
sports association within the purview of the aforementioned laws, and does not
have corporate existence of its own.
6. What is concession theory?
According to the jurisprudence of International Express Travel and Tours vs CA, the
theory of concession states that Before a corporation may acquire juridical
personality, the State must give its consent either in form of a special law or a
general enabling act.
7. Right of Succession?
Under this doctrine, the corporation shall continue to exist for the period stated in
the Articles of Corporation, and the death of any stockholder or director shall not
dissolve the corporation. The corporate life of a corporation shall continue until the
term expires or unless sooner dissolved for other causes or its term extended in
accordance with law
8. Partnership vs corporation
(1) Manner of creation. A partnership is created by mere agreement of
the parties, while a corporation is created by law or by operation of law (Sec. 2.);
(2) Number of incorporators. A partnership may be organized
by only two persons, while a corporation (except a corporation
sole) requires at least five incorporators (Sec. 10.);
(3) Commencement of juridical personality. A partnership
commences to acquire juridical personality from the moment of
the execution of the contract of partnership, while a corporation
begins to have corporate existence and juridical personality only
from the date of the issuance of the certificate of incorporation by
the Securities and Exchange Commission under its official seal
(Sec. 19.);
(4) Powers. A partnership may exercise any power authorized
by the partners provided it is not contrary to law, morals,
good customs, public order, or public policy (Art. 1306, Civil
Code.), while a corporation can exercise only the powers expressly
granted by law or implied from those granted or incident to its
existence (Sec. 2.);
(5) Management. In a partnership, when the management
is not agreed upon, every partner is an agent of the partnership,
while in a corporation, the power to do business is vested in the
board of directors or trustees (Sec. 23.);
(6) Effect of mismanagement. In a partnership, a partner as
such can sue a co-partner who mismanages, while in a corporation,

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the suit against a member of the board of directors or trustees

who mismanages must be in the name of the corporation;
(7) Right of succession. A partnership has no right of
succession, while a corporation has such right (Sec. 2.);
(8) Extent of liability to third persons. In a partnership, the
partners (except limited partners) are liable personally and subsidiarily
(sometimes solidarily) for partnership debts to third
persons, while in a corporation, the stockholders are liable only
to the extent of their investment as represented by the shares
subscribed by them (see Sees. 66, 67.);
(9) Transferability of interest. In a partnership, a partner
cannot transfer his interest in the partnership so as to make the transferee a
partner without the consent of all the other existing
partners because the partnership is based on the principle of
delectus personarum, while in a stock corporation, a stockholder
has the right to transfer his shares without the prior consent of
the other stockholders because a corporation is not based on this
principle (see Sec. 63.);
(10) Term of existence. A partnership may be established
for any period of time stipulated by the partners, while a corporation
may not be formed for a term in excess of 50 years extendible
to not more than 50 years in any one instance (Sec. 11.);
(11) Firm name. A limited partnership is required by the
law to add the word "Ltd." to its name, while a corporation may
adopt any firm name provided it is not identical or deceptively
similar to any registered firm name or contrary to existing law
(see Sec. 18.);
(12) Dissolution. A partnership may be dissolved at any
time by the will of any or all of the partners, while a corporation
can only be dissolved with the consent of the State, (see Sees. 117122.)
(13) Laws which govern. A partnership is governed by the
Civil Code, while a corporation is governed by the Corporation Code.
9. Corporation vs sole proprietorship
1. A sole proprietorship is owned by one natural person called proprietor or
proprietress, while a corporation is owned by several persons (can be natural or
juridical persons) called shareholders or stockholders. Take note that juridical
persons are entities that are created by law and recognized as a legal entity
for example, the corporation, itself, is a juridical person or entity which can also
be a shareholder of another corporation.
2. 2. The proprietor and his or her proprietorship business are one and the same
entity, while the corporation and its owners are separate and distinct legal
entities. In the Philippines, the proprietor and his or her proprietorship business
share one and the same TIN (Taxpayers identification Number), whereas the
corporation has a separate and unique TIN from its shareholders. In other
words, a proprietorship and its owner are considered the same taxpayer, while a
corporation and its owners are considered separate taxpayers.

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3. 3. In the Philippines, the income tax rate of a sole proprietorship is based on a

graduated tax rate, whereas a corporation is generally taxed using a fixed rate.
4. 4. A sole proprietorship is easier and less costly to establish as a legal business
than a corporation in terms of documentation and registration. In the
Philippines, a corporation is required to be registered with the SEC (Securities
and Exchange Commission), while a sole proprietorship business is not required
to register with the commission.
5. 5. A sole proprietorship is also easier to comply with the reportorial and other
regulatory requirements compare with a corporation. Corporations are governed
and regulated by the SEC and required to comply with their reportorial and
other regulatory requirements, such as good corporate governance and
corporate social responsibility. Corporations in the Philippines are governed by
the Corporation Code of the Philippines.
6. 6. The death of the proprietor or the owner of the proprietorship will terminate
the business, while the death of a shareholder will not necessarily terminate the
corporation. The shares of ownership or stock of a corporation can be assigned
or transferred from one owner to another. A corporation can continue to exist
until the shareholders decide to dissolve it or merge it with another corporation.
7. 7. The proprietor is indebted up to his or her personal assets, whereas the
owners or shareholders of a corporation can enjoy limited liability, that is, they
are only indebted to the extent of their interest in the corporation. In other
words, the creditors of a proprietorship can run after the personal assets of the
proprietor, while the creditors of a corporation can only run after the corporate
assets and not on the personal assets of the shareholders.
8. 8 A corporation may attract more investors than a proprietorship since the
former is more regulated, has a continuing or perpetual existence, its shares of
ownership is transferable, and it has a limited liability feature.
10.
Advantages and Disadvantages of a corporation
The advantages are the following:
(1) The corporation has a legal capacity to act and contract as a distinct unit in its
own name;
(2) It has continuity of existence because of its non-dependence on the lives of
those who compose it;
(3) Its credit is strengthened by such continuity of existence;
(4) Its management is centralized in the board of directors;
(5) Its creation, organization, management, and dissolution are standardized as
they are governed under one general incorporation law;
(6) It makes feasible gigantic financial undertakings since it
enables many individuals to invest their separate funds in the enterprise
in order to furnish large amounts of capital upon which big business depends;
(7) The shareholders have limited liability;
(8) They are not general agents of the business; and
(9) The shares of stocks can be transferred without the consent of the other
stockholders.
Disadvantages of a business corporation:
(1) The corporation is relatively complicated in formation and management;

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(2) It entails relatively high cost of formation and operations;

(3) Its credit is weakened by the limited liability of the stockholders;
(4) There is ordinarily lack of personal element in view of the
transferability of shares;
(5) There is a greater degree of governmental control and supervision
than in any other forms of business organization;
(6) In large corporations, management and control are separated
from ownership;
(7) The stockholders' voting rights have become theoretical
particularly in large corporations because of the use of proxies
and widespread ownership; and
(8) The stockholders have little voice in the conduct of the
business
11.
What happens when there is a failed attempt on the creation of a
corporation
The Code makes liable as general partners "all persons who assume to act
as a corporation," and they include persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name. A de facto
partnership among them is created.
12.

Pioneer insurance vs ca

FACTS: Jacob Lim was the owner of Southern Air Lines, a single proprietorship. In
1965, Lim convinced Constancio Maglana, Modesto Cervantes, Francisco
Cervantes, and Border Machinery and Heavy Equipment Company (BORMAHECO)
to contribute funds and to buy two aircrafts which would form part a corporation
which will be the expansion of Southern Air Lines. Maglana et al then contributed
and delivered money to Lim.But instead of using the money given to him to pay in
full the aircrafts, Lim, without the knowledge of Maglana et al, made an agreement
with Pioneer Insurance for the latter to insure the two aircrafts which were brought
in installment from Japan Domestic Airlines (JDA) using said aircrafts as security. So
when Lim defaulted from paying JDA, the two aircrafts were foreclosed by Pioneer
Insurance.
It was established that no corporation was formally formed between Lim and
Maglana et al.
ISSUE: Whether or not Maglana et al must share in the loss as general partners.
HELD: No. There was no de facto partnership. Ordinarily, when co-investors
agreed to do business through a corporation but failed to incorporate, a de facto
partnership would have been formed, and as such, all must share in the losses
and/or gains of the venture in proportion to their contribution. But in this case, it
was shown that Lim did not have the intent to form a corporation with Maglana et
al. This can be inferred from acts of unilaterally taking out a surety from Pioneer
Insurance and not using the funds he got from Maglana et al. The record shows

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that Lim was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.
13.
Two franchises
(a)
PRIMARY OR CORPORATE FRANCHISE/ GENERAL FRANCHISE
-act or privilege granted by the State to individuals to exist and act as a
corporation after its incorporation. This privilege enables them to act for certain
designated purposes as a single individual and exempts them, unless otherwise
especially provided, from individual liability for corporate debts.
- granted to and vest in the individuals who compose the corporation and not the
corporation itself
-cannot be sold or transferred, in the absence of legislative authority to do so. This
is because it is inseparable from the corporation itself.
(B) SECONDARY FRANCHISE
- right granted to the corporation to exercise its powers
- conferred upon the corporation after its incorporation and not upon individuals
who compose the corporation.
-right to operate a messenger and delivery service by virtue of a legislative
enactment is a secondary franchise
-May be sold, or transferred under a general power granted to a corporation to
dispose of its properties; may also be subject to sale on execution or levy.
14.
Secosa vs heirs of Francisco
Facts: Francisco, an 18 year old 3rd year physical therapy student was riding a
motorcycle. A sand and gravel truck was traveling behind the motorcycle, which in
turn was being tailed by the Isuzu truck driven by Secosa. The Isuzu cargo truck
was owned by Dassad Warehousing and Port Services, Inc.. The three vehicles
were traversing the southbound lane at a fairly high speed. When Secosa overtook
the sand and gravel truck, he bumped the motorcycle causing Francisco to fall. The
rear wheels of the Isuzu truck then ran over Francisco, which resulted in his
instantaneous death. Secosa left his truck and fled the scene of the collision.
The parents of Francisco, respondents herein, filed an action for damages against
Secosa, Dassad Warehousing and Port Services, Inc. and Dassads president, El
Buenasucenso Sy.
The court a quo rendered a decision in favor of herein respondents; thus
petitioners appealed the decision to the Court of Appeals, which unfortunately
affirmed the appealed decision in toto. Hence, the present petition.
Issues:
(1) Whether or not Dassad Warehousing and Port Services, Inc. exercised the
diligence of a good father of a family in the selection and supervision of its
employees; hence it cannot be held solidary liable with the negligence of its
employee.

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(2) Whether or not Dassads president, El Buenasucenso Sy, can be held solidary
liable with co-petitioners.
Held:
(1) No. Dassad Warehousing and Port Services, Inc. did not exercise the required
diligence of a good father of a family in the selection and supervision of its
employees. Hence, it cannot be held solidary liable with the negligence of its
employee.
Article 2176 of the Civil Code provides:
Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a quasidelict and is governed by the provisions of this Chapter.
On the other hand, Article 2180, in pertinent part, states:
The obligation imposed by article 2176 is demandable not only for ones own acts
or omissions, but also for those of persons for whom one is responsible x x x.
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though the
former are not engaged in any business or industry x x x.
The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damage.
Based on the foregoing provisions, when an injury is caused by the negligence of
an employee, there instantly arises a presumption that there was negligence on
the part of the employer, which however, may be rebutted by a clear evidence
showing on the part of the employer that it exercised the care and diligence of a
good father of a family in the selection and supervision of his employee.
In the selection of prospective employees, employers are required to examine
them as to their qualifications, experience, and service records. On the other hand,
with respect to the supervision of employees, employers should formulate standard
operating procedures, monitor their implementation, and impose disciplinary
measures for breaches thereof. To establish these factors in a trial involving the
issue of explicit liability, employers must submit concrete proof, including
documentary evidence. The reason for this is to obviate the biased nature of the
employers testimony or that of his witnesses.
In the case at bar, Dassad Warehousing and Port Services, Inc. failed to
conclusively prove that it had exercised the requisite diligence of a good father of a
family in the selection and supervision of its employees. Dassad Warehousing and
Port Services, Inc. failed to support the testimony of its lone witness, Edilberto

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Duerme, with documentary evidence which would have strengthened its claim of
due diligence in the selection and supervision of its employees. Such an omission
is fatal on account of which, Dassad can be rightfully held solidarily liable with its
co-petitioner Secosa for the damages suffered by the heirs of Francisco.
(2) No. Sy cannot be held solidarily liable with his co-petitioners. While it may be
true that Sy is the president of Dassad Warehousing and Port Services, Inc., such
fact is not by itself sufficient to hold him solidarily liable for the liabilities adjudged
against his co-petitioners.
A corporation has a personality separate from that of its stockholders or members.
The doctrine of veil of corporation treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a rule, a corporation will be looked
upon as a legal entity, unless and until sufficient reason to the contrary appears.
When the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an
association of persons. Also, the corporate entity may be disregarded in the
interest of justice in such cases as fraud that may work inequities among members
of the corporation internally, involving no rights of the public or third persons. In
both instances, there must have been fraud and proof of it.
The records of the case does not point toward the presence of any grounds
enumerated above that will justify the piercing of the veil of corporate entity such
as to hold Sy, the president of Dassad Warehousing and Port Services, Inc.,
solidarily liable with it.
Furthermore, the Isuzu cargo truck which ran over Francisco was registered in the
name of Dassad and not in the name of Sy. Secosa is an employee of Dassad and
not of Sy. These facts showed Sys exclusion from liability for damages arising from
the death of Francisco
.

15.
Doctrine of separate entity
As an artificial being, a corporation is a legal or juridical person with a personality
separate and apart from its individual stockholders or members and from any other
legal entity to which it may be connected.
16.
Piercing of corporate veil
Piercing the veil of corporate entity is merely an equitable remedy, and may be
granted only in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime (Yutivo Sons v CTA 1961)
or where the corporation is a mere alter ego or business conduit of a person.
(Koppel Phil v Yatco) (Ratio: to remove the barrier between corporation from the

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persons compromising it to thwart the fraudulent and illegal scheme of those who
use the corporate personality as a shield for undertaking certain proscribed
activities.)
Not because two foreign companies came from the same country and closely
worked together on certain projects would the conclusion arise that one was the
conduit of another, thus piercing the veil of corporate fiction; Where a sister
corporation is used a shield to evade a corporations subsidiary liability for
damages, the corporation may not be heard to say that it has a separate
personality distinct from the other corporation (Marubeni vs Lirag; Concept
Builders vs. NLRC)
GR: A corporation has a separate personality distinct from its stockholders and
members
EXCPTN: The court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice.

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 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;

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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
17.
Concept builders vs nlrc
FACTS: Private Respondents were the employees of the Petitioner Corporation.
They filed illegal dismissal, unfair labor practice and claimed for their benefits with
the NLRC. They alleged that their contract of employment had not yet expired and
the project in which they were hired were not yet completed, as stated in the
written notices sent by the Company.
NLRC, ruled in favor of the Employees. At the time of the termination of private
respondents employment, the project in which they were hired had not yet been
finished and completed. Petitioner had to engage the services of sub-contractors
whose workers performed the functions of private respondents.
An alias Writ of Execution was issued by the Labor Arbiter to collect the balance of
the judgment award and to reinstate private respondents. However, the sheriff
failed to enforce because the security guard on the premises refused him to enter
on the ground that, it is no longer occupied by the petitioner.
A certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter
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. He alleged that HPPI is
a manufacturing firm while petitioner was then engaged in construction.
Private respondents filed a Motion for Issuance of a Break-Open Order, alleging
that HPPI and petitioner corporation were owned by the same incorporator and
stockholders. NLRC granted the Motion.

ISSUES:
1. WON the Sister Company (HPPI) has a personality separate and distinct from the
petitioner corporation (CONCEPT BUILDERS)?
2. WON HPPI is used as a shield to evade the corporations subsidiary liability for
damages?
3. WON NLRC commited a grave abuse of discretion when it issued a break open
order?
HELD:
PETITIONER DENIED.
1. The Sister Company has NO separate and distinct personality from the Concept
Builders
2. HPPI is used to Evade Corporations liability.

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3. NLRC did not commit a grave abuse of discretion when it issued a break-open
order against HHPI.
RATIONALE:
1. 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
2. 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.
3. 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;
1.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
2.
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.
4. NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casino as the corporate
secretary of both corporations. It would also not be amiss to note that both
corporations had the same president, the same board of directors, the same
corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by
the sheriff were not of respondents.16
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

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emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.
5. 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.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
property subject of the execution, private respondents had no other recourse but
to apply for a break-open order after the third-party claim of HPPI was dismissed
for lack of merit by the NLRC.
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC,
dated April 23, 1992 and December 3, 1992, are AFFIRMED.
SO ORDEREd
INSTRUMENTALITY RULE: When 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. ( Concept Builders vs. NLRC)
18.
When may corporate veil be pierced
(1) When legal fiction to be disregarded. Being a mere creature
of the law, a corporation may be allowed to exist solely for lawful purposes but
where the fiction of corporate entity is being used as a cloak or cover for fraud or
illegality, or "to defeat public convenience, justify wrong, protect fraud, or defend
crime" (Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 SCRA 160 [1961].), or
for ends subversive of the policy and purpose behind its creation, especially where
the corporation is a closed family corporation (Emiliano Cano Enterprises, Inc. vs.
Court of Industrial Relations, 13 SCRA 290 [1965].), on equitable considerations,
this fiction will be disregarded and the individuals composing it or two corporations
will be treated as identical.
(a) In other words, the law will not recognize separate corporate existence with
reference to the particular transaction involved. This non-recognition is sometimes
referred to as the doctrine of piercing the veil of corporate entity or disregarding
the fiction of corporate entity (see Claparols vs. Court of Industrial Relations, 65
SCRA 613 [1965]; Republic vs. Razon, 20 SCRA 234 [1967]; A.D. Santos, Inc. vs.
Vasquez, 22 SCRA 1156
[1968]; Liddel & Co., Inc. vs. Collector, 2 SCRA 632 [1961].) or the doctrine of
corporate alter ego. (9-A Words and Phrases 377.) The rationale is to remove the
barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities. (Velarde vs. Lopez, Inc., 419
SCRA 422 [2003]; Francisco Motors
vs. Court of Appeals, 309 SCRA 72 [1999].)
19.

Maurubeni vs lirag

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FACTS:
Marubeni Corporation is a foreign corporation organized under the laws
of Japan. It was doing business in the Philippines through its duly licensed, wholly
owned subsidiary, Marubeni Philippines Corporation. Petitioners Ryoichi Tanaka,
Ryohei Kimura and Shoichi One were officers of Marubeni assigned to its Philippine
branch.
On January 27, 1989, Lirag filed with the RTC of Makati a complaint for specific
performance and damages in the sum of P6M as commission pursuant to an oral
consultancy agreement with Marubeni for obtaining government contracts of
various projects. Lirag claimed that on February 2, 1987, petitioner Ryohei Kimura
hired his consultancy group for the purpose of obtaining government contracts of
various projects. The agreement was merely oral because of the mutual trust
between Marubeni and the Lirag family which dates back to the 1960s. One of the
projects handled by respondent Lirag, the Bureau of Post project, amounting to
P100,000,000.00 was awarded to the Marubeni-Sanritsu tandem. Despite
repeated demands of his 6% commission was never paid.
Marubeni claimed that Ryohei Kimura did not have the authority to enter into such
agreement in their behalf. Only the general manager, upon issuance of a SPA by
the principal office in Tokyo, Japan, could enter into any contract in behalf of the
corporation. They also claimed that Marubeni never participated in the Bureau of
Post project nor benefited from such project.
ISSUE: Whether or not there was a consultancy agreement to make Lirag entitled
to commission.
RULING: NO.
The only basis of Lirag in claiming from Marubeni was because he claims that they
are sister companies since Marubeni was the supplier and contractor of the
Sanritsu. Not because two foreign companies came from the same country and
closely worked together on certain projects would the conclusion arise that one
was the conduit of the other, thus piercing the veil of corporate fiction.
The separate personality of the corporation may be disregarded only when the
corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or
where necessary for the protection of creditors. Aside from the self-serving
testimony of respondent regarding the existence of a close working relationship
between Marubeni and Sanritsu, there was nothing that would support the
conclusion that Sanritsu was an agent of Marubeni.
Any agreement entered into because of the actual or supposed influence which the
party has, engaging him to influence executive officials in the discharge of their
duties, which contemplates the use of personal influence and solicitation rather
than an appeal to the judgment of the official on the merits of the object sought is
contrary to public policy. Consequently, the agreement, assuming that the parties
agreed to the consultancy, is null and void as against public policy. Therefore, it is
unenforceable before a court of justice.
20.

Types of corporation

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Section 3. Classes of corporations. Corporations formed or organized under

this Code may be stock or non-stock corporations.
21.
Stocks corporation
Corporations which have capital stock divided into shares and are authorized to
distribute to the holders of such shares dividends or allotments of the surplus
profits on the basis of the shares held are stock corporations. All other corporations
are non-stock corporations.
22.
Dividend
Portion of its profits, which the corporation, by its directors sets apart for ratable
division among share holders
23.
Corporators vs incorporators
INCORPORATORS are stockholders or members mentioned in the Articles of
Incorporation as priginally forming and composing the corporation and who are
signatories thereof.
CORPORATORS, on the other hand, are those who compose the corporation
whether stockholders or members
24.

Crystal vs BPI

Facts: On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained

a P300,000.00 loan in behalf of the Cebu Contractors Consortium Co. (CCCC) from
the BPI-Butuan. The loan was secured by a chattel mortgage on heavy equipment
and machinery of CCCC. Thereafter, or on 29 March 1979, Raymundo Crystal
executed a promissory note for the amount of P300,000.00, also in favor of BPIButuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from BPI, Cebu
City branch. The renewal was evidenced by a promissory note dated 13 August
1979, signed by the spouses in their personal capacities and as managing partners
of CCCC.
The promissory note states that the spouses are jointly and severally liable with
CCCC. It appears that before the original loan could be granted, BPI-Cebu City
required CCCC to put up a security. However, CCCC had no real property to offer as
security for the loan; hence, the spouses executed a real estate mortgage over
their own real property on 22 September 1977.
On 3 October 1977, they executed another real estate mortgage over the same lot
in favor of BPI-Cebu City, to secure an additional loan of P20,000.00 of CCCC.
CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they
became due despite demands.
Thus, BPI resorted to the foreclosure of the chattel mortgage and the real estate
mortgage. The foreclosure sale on the chattel mortgage was initially stalled with
the issuance of a restraining order against BPI.

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However, following BPIs compliance with the necessary requisites of extrajudicial

foreclosure, the foreclosure sale on the chattel mortgage was consummated on 28
February 1988, with the proceeds amounting to P240,000.00 applied to the loan
from BPI-Butuan which had then reached P707,393.90.
Meanwhile, on 7 July 1981, Insular Bank of Asia and America (IBAA), through its
Vice-President for Legal and Corporate Affairs, offered to buy the lot subject of the
two (2) real estate mortgages and to pay directly the spouses indebtedness in
exchange for the release of the mortgages. BPI rejected IBAAs offer to pay.
BPI filed a complaint for sum of money against CCCC and the spouses before the
Regional Trial Court of Butuan City, seeking to recover the deficiency of the loan of
CCCC and the spouses with BPI-Butuan.
The trial court ruled in favor of BPI. Pursuant to the decision, BPI instituted
extrajudicial foreclosure of the spouses mortgaged property.
On 10 April 1985, the spouses filed an action for Injunction With Damages, With A
Prayer For A Restraining Order and/ or Writ of Preliminary Injunction.
The spouses claimed that the foreclosure of the real estate mortgages is illegal
because BPI should have exhausted CCCCs properties first, stressing that they are
mere guarantors of the renewed loans. They also prayed that they be awarded
moral and exemplary damages, attorneys fees, litigation expenses and cost of
suit.
The trial court dismissed the spouses complaint and ordered them to pay moral
and exemplary damages and attorneys fees to BPI. It ruled that since the spouses
agreed to bind themselves jointly and severally, they are solidarily liable for the
loans; hence, BPI can validly foreclose the two real estate mortgages. Moreover,
being guarantors-mortgagors, the spouses are not entitled to the benefit of
exhaustion.
The spouses appealed the decision of the trial court to the Court of Appeals, but
their appeal was dismissed. The spouses moved for the reconsideration of the
decision, but the Court of Appeals also denied their motion for reconsideration.
Issue:
1)
2)
3)

Whether or not the liability is extinguished;

Whether or not Spouses are solidarily liable with the corporations debt; and
Whether or not they are entitled to moral damages

Held:
The contention has no merit.

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1.
Petitioners rely on IBAAs offer to purchase the mortgaged lot from them and
to directly pay BPI out of the proceeds thereof to settle the loan. BPIs refusal to
agree to such payment scheme cannot extinguish the spouses loan obligation. In
the first place, IBAA is not privy to the loan agreement or the promissory note
between the spouses and BPI. Contracts, after all, take effect only between the
parties, their successors in interest, heirs and assigns.
Besides, under Art. 1236 of the Civil Code, the creditor is not bound to accept
payment or performance by a third person who has no interest in the fulfillment of
the obligation, unless there is a stipulation to the contrary. We see no stipulation in
the promissory note which states that a third person may fulfill the spouses
obligation. Thus, it is clear that the spouses alone bear responsibility for the same.
2.
A solidary obligation is one in which each of the debtors is liable for the
entire obligation, and each of the creditors is entitled to demand the satisfaction of
the whole obligation from any or all of the debtors. A liability is solidary "only when
the obligation expressly so states, when the law so provides or when the nature of
the obligation so requires."
Thus, when the obligor undertakes to be "jointly and severally" liable, it means that
the obligation is solidary, such as in this case. By stating "I/we promise to pay,
jointly and severally, to the BANK OF THE PHILIPPINE ISLANDS," the spouses
agreed to be sought out and be demanded payment from, by BPI. BPI did demand
payment from them, but they failed to comply with their obligation, prompting
BPIs valid resort to the foreclosure of the chattel mortgage and the real estate
mortgages.
Thus we held in one case that if solidary liability was instituted to "guarantee" a
principal obligation, the law deems the contract to be one of suretyship.26 And
while a contract of a surety is in essence secondary only to a valid principal
obligation, the suretys liability to the creditor or promisee of the principal is said to
be direct, primary, and absolute; in other words, the surety is directly and equally
bound with the principal. T
3.
Moral damages are meant to compensate the claimant for any physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injuries unjustly caused.
Such damages, to be recoverable, must be the proximate result of a wrongful act
or omission the factual basis for which is satisfactorily established by the
aggrieved party. There being no wrongful or unjust act on the part of BPI in
demanding payment from them and in seeking the foreclosure of the chattel and
real estate mortgages, there is no lawful basis for award of damages in favor of the
spouses.
Neither is BPI entitled to moral damages. A juridical person is generally not entitled
to moral damages because, unlike a natural person, it cannot experience physical

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suffering or such sentiments as wounded feelings, serious anxiety, mental anguish

or moral shock.
Indeed, while the Court may allow the grant of moral damages to corporations, it is
not automatically granted; there must still be proof of the existence of the factual
basis of the damage and its causal relation to the defendants acts. This is so
because moral damages, though incapable of pecuniary estimation, are in the
category of an award designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer.
The spouses complaint against BPI proved to be unfounded, but it does not
automatically entitle BPI to moral damages. Although the institution of a clearly
unfounded civil suit can at times be a legal justification for an award of attorney's
fees, such filing, however, has almost invariably been held not to be a ground for
an award of moral damages.
The rationale for the rule is that the law could not have meant to impose a penalty
on the right to litigate. Otherwise, moral damages must every time be awarded in
favor of the prevailing defendant against an unsuccessful plaintiff. BPI may have
been inconvenienced by the suit, but we do not see how it could have possibly
suffered besmirched reputation on account of the single suit alone. Hence, the
award of moral damages should be deleted.
The awards of exemplary damages and attorneys fees, however, are proper.
Exemplary damages, on the other hand, are imposed by way of example or
correction for the public good, when the party to a contract acts in a wanton,
fraudulent, oppressive or malevolent manner, while attorneys fees are allowed
when exemplary damages are awarded and when the party to a suit is compelled
to incur expenses to protect his interest.
The spouses instituted their complaint against BPI notwithstanding the fact that
they were the ones who failed to pay their obligations. Consequently, BPI was
forced to litigate and defend its interest. For these reasons, BPI is entitled to the
awards of exemplary damages and attorneys fees.
25.
Are Corporations entitled to moral damages?
While the Court may allow the grant of moral damages to corporations, it is not
automatically granted. The must still be proof of the existence of the factual basis
of the damage and its causal relation to the defendants acts. This is so because
moral damages, though incapable of pecuniary estimation, are in the category of
an award designed to compensate the claimant for actual injury suffered and not
to impose a penalty on the wrongdoer.