Case Digest: Ever Electrical v. Samahang Manggagawa

G.R. No. 194795 : June 13, 2012




Ever Electrical Manufacturing, Inc. (EEMI) closed its business operations on October 11, 2006 resulting in the termination of the services of its employees. Aggrieved, respondents, who are members of Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224, filed a complaint for illegal dismissal with prayer for payment of 13th month pay, separation pay, damages, and attorney fees. Respondents alleged that the closure was made without any warning, notice or memorandum and in full disregard of the requirements of the Labor Code.

In its defense, EEMI explained that it had closed the business due to various factors, most of which included huge financial loss all the way back from 1995. EEMI business suffered further losses due to the continued entry of cheaper goods from China and other Asian countries. Adding to EEMI financial woes was the closure of Orient Bank where most of its resources were invested. As a result, EEMI was not able to meet its loan obligations with UCPB.

In an attempt to save the company, EEMI entered into a dacion en pago arrangement with UCPB which, in effect, transferred ownership of the company property to UCPB. Originally, EEMI wanted to lease the premises to continue its business operation but under UCPB policy, a previous debtor who failed to settle its loan obligation was not eligible to lease its acquired assets. Thus, UCPB agreed to lease it to an affiliate corporation, EGO Electrical Supply Co, Inc. (EGO), for and in behalf of EEMI. On February 2, 2002, a lease agreement was entered into between UCPB and EGO. The said lease came to a halt when UCPB instituted an unlawful detainer suit against EGO before the MeTC of Makati, who ruled in favor of UCPB and ordered EGO to vacate the leased premises and pay rentals to UCPB in the amount of P21,473,843.65. On September 19, 2006, a writ of execution was issued.Consequently, on October 11, 2006, the Sheriff implemented the writ by closing the premises and, as a result, EEMI employees were prevented from entering the factory.

The Labor Arbiter (LA) ruled that respondents were not illegally dismissed but ordered EEMI and its President, Vicente Go to pay their employees separation pay and 13th month pay respectively.

On September 15, 2008, the NLRC reversed and set aside the decision of the LA. The NLRC dismissed the complaint for lack of merit and ruled that since EEMI cessation of business operation was due to serious business losses, the employees were not entitled to separation pay. Respondents moved for reconsideration of the NLRC decision, but the NLRC denied the motion in its March 23, 2009 Resolution.

Unperturbed, respondents elevated the case before the CA via a petition for certiorari under Rule 65. The appellate court granted the petition and nullified the decision of the NLRC and reinstated the LA decision.


1. Whether the CA erred in finding that the closure of EEMI operation was not due to business losses?

2. Whether the CA erred in finding Vicente Go solidarily liable with EEMI?

HELD: The petition is partly meritorious.


Article 283 of the Labor Code identifies closure or cessation of operation of the establishment as an authorized cause for terminating an employee. Similarly, the said provision mandates that employees who are laid off from work due to closures that are not due to business insolvency should be paid separation pay equivalent to one-month pay or to at least one-half month pay for every year of service, whichever is higher. A fraction of at least six months shall be considered one whole year.

Although business reverses or losses are recognized by law as an authorized cause, it is still essential that the alleged losses in the business operations be proven convincingly; otherwise, this ground for termination of employment would be susceptible to abuse by conniving employers, who might be merely feigning business losses or reverses in their business ventures in order to ease out employees.

In this case, EEMI failed to establish that the main reason for its closure was business reverses. As aptly observed by the CA, the cessation of EEMI business was not directly brought about by serious business losses or financial reverses, but by reason of the enforcement of a judgment against it. Thus, EEMI should be required to pay separation pay to its affected employees.


As a general rule, corporate officers should not be held solidarily liable with the corporation for separation pay for it is settled that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

The LA was of the view that Go, as President of the corporation, actively participated in the management of EEMI corporate obligations, and, accordingly, rendered judgment ordering EEMI and Go "in solidum to pay the complainants" their due. He explained that "[r]espondent Go negligence in not paying the lease rental of the plant in behalf of the lessee EGO Electrical Supply, Inc., where EEMI was operating and reimburse expenses of UCPB for real estate taxes and the like, prompted the bank to file an unlawful detainer case against the lessee, EGO Electrical Supply Co. The CA affirmed the LA decision citing the case of Restaurante Las Conchas v. Llego,where it was held that "when the employer corporation is no longer existing and unable to satisfy the judgment in favor of the employees, the officers should be held liable for acting on behalf of the corporation."

A study of Restaurante Las Conchas case, however, bares that it was an application of the exception rather than the general rule. As stated in the said case, "as a rule, the officers and members of a corporation are not personally liable for acts done in the performance of their duties." The Court therein explained that it applied the exception because of the peculiar circumstances of the case. If the rule would be applied, the employees would end up in an empty victory because as the restaurant had been closed for lack of venue, there would be no one to pay its liability as the respondents therein claimed that the restaurant was owned by a different entity, not a party in the case.

In Mandaue Dinghow Dimsum House, Co., Inc., the Court declined to apply the ruling in Restaurante Las Conchas because there was no evidence that the respondent therein, Henry Uytrengsu, acted in bad faith or in excess of his authority. It stressed that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. For said reason, the doctrine of piercing the veil of corporate fiction must be exercised with caution.Citing Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, the Court explained that corporate directors and officers are solidarily liable with the corporation for the termination of employees done with malice or bad faith. It stressed that bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.

In Pantranco Employees Association, the Court also rejected the invocation of Restaurante Las Conchas and refused to pierce the veil of corporate fiction. It explained:

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist that because the company, PNEI, has already ceased operations and there is no other way by which the judgment in favor of the employees can be satisfied, corporate officers can be held jointly and severally liable with the company.

This reliance fails to persuade. The aforesaid decisions are inapplicable to the instant case.

In the said cases, the persons made liable after the company cessation of operations were the officers and agents of the corporation. The rationale is that, since the corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the person acting in the interest of the employer. The corporation, only in the technical sense, is the employer. In the instant case, what is being made liable is another corporation (PNB) which acquired the debtor corporation (PNEI).

More importantly, as aptly observed by this Court in A.C. Ransom Labor Union-CCLU v. NLRC, it appears that Ransom, foreseeing the possibility or probability of payment of backwages to its employees, organized Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their case. The execution could not be implemented against Ransom because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. Hence, the Court sustained the piercing of the corporate veil and made the officers of Ransom personally liable for the debts of the latter.

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities.

Similarly, in the case at bench, the records do not warrant an application of the exception. The rule, which requires the presence of malice or bad faith, must still prevail. In the recent case of Wensha Spa Center and/or Xu Zhi Jie v. Yung,the Court absolved the corporation president from liability in the absence of bad faith or malice. In the said case, the Court stated:

In labor cases, corporate directors and officers may be held solidarily liable with the corporation for the termination of employment only if done with malice or in bad faith. Bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.

In the present case, Go may have acted in behalf of EEMI but the company failure to operate cannot be equated to bad faith. Cessation of business operation is brought about by various causes like mismanagement, lack of demand, negligence, or lack of business foresight. Unless it can be shown that the closure was deliberate, malicious and in bad faith, the Court must apply the general rule that a corporation has, by law, a personality separate and distinct from that of its owners. As there is no evidence that Go, as EEMI President, acted maliciously or in bad faith in handling their business affairs and in eventually implementing the closure of its business, he cannot be held jointly and solidarily liable with EEMI.