Separate corporate personality

As a general rule, a corporation has a separate and distinct personality from those who represent it. Its officers are solidarily liable only when exceptional circumstances exist, such as cases enumerated in Section 31 of the Corporation Code. The liability of the officers must be proved by evidence sufficient to overcome the burden of proof borne by the plaintiff.

It is important to note that issues such as whether the separate and distinct personality of a corporation was used for fraudulent ends, or whether the evidence warrants a piercing of the corporate veil, involve questions of fact.

The law vests corporations with a separate and distinct personality from those that represent these corporations.

The corporate legal structure draws its "economic superiority" from key features such as a separate corporate personality. Unlike other business associations such as partnerships, the corporate framework encourages investment by allowing even small capital contributors to be part of a big business endeavor made possible by the aggregation of their capital funds. The consequent limited liability feature, since corporate assets will answer for corporate debts, also proves attractive for investors. However, this legal structure should not be abused.

A separate corporate personality shields corporate officers acting in good faith and within their scope of authority from personal liability except for situations enumerated by law and jurisprudence, thus:

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when —

[1] He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

[2] He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

[3] He agrees to hold himself personally and solidarily liable with the corporation; or

[4] He is made, by a specific provision of law, to personally answer for his corporate action.

The first exception comes from Section 31 of the Corporation Code: SECTION 31. Liability of Directors, Trustees or Officers. —

Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.
Petitioner imputes gross negligence and bad faith on the part of the individual respondents for incurring the huge indebtedness to International Air Transport Association.

Bad faith "imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, not simply bad judgment or negligence." "[I]t means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud."

The trial court gave weight to its finding that respondent Morning Star still availed itself of loans and/or obligations with International Air Transport Association despite its financial standing of operating at a loss:

Based on the plaintiff’s examination of the financial statements submitted by the defendant Morning Star with the Securities and Exchange Commission (SEC) for the years 2000 and 2001 with comparative figures for the years ending 1998, 1999 and 2000, herein defendant corporation has been accumulating losses as early as 1998 continuing to 1999 and 2000 resulting to a deficit of Php26, 168,176.80 as of December 31, 2000. It was also shown that for the prior years of 1998 and 1999, defendant Morning Star incurred a deficit of Php3,910,763.00 as of December 31, 1998 and Php2,841,626.00 as of December 31, 1999 and in the Balance Sheet, it indicated therein the defendants’ total assets of Php150,579,421.00 while the total liabilities amounted to Php160,222,966.00, thereby making the defendant Morning Star insolvent. Despite the fact that defendant Morning Star was already incurring losses as early as 1998 up to the year 2000, the latter still contracted loans and/or obligations with IATA sometime in 2002 and which indebtedness ballooned to the huge amount of Php109,728,051.00 andUS$496,403.21 as of April 30, 2003, which obviously it could not pay considering its financial standing.

Further investigation by the plaintiff shows that it could not find any assets or properties in the name of defendant Morning Star because even the land and the building where it held office was registered in the name of "Morning Star Management Ventures Corporation", as evidenced by the certified true copies of the transfer certificates of title (TCT) nos. 192243 and 192244 in the name of Morning Star Management Ventures Corporation and unlike the defendant Morning Star, which has practically the same officers and members of the Board, has only an asset of Php125,392,960.00 and liabilities of Php4,306,702[.]00 and an income deficit of Php26,922,598.00 as of December 31, 2001. Similarly, the Pic [‘]N Pac Mart, Inc., which has the same set of officers, said corporation has shown a total assets of Php5,423,201.30 and liabilities/stockholders equity of Php5,423,201.30 but with a retained earnings of Php194,412[.]74 as of December 31, 1999. Plaintiff contends that in such a case, defendant Morning Star has used the separate and distinct corporate personality accorded to it under the Corporation Code to commit said fraudulent transaction of incurring corporate debts and allow the herein individual defendants to escape personal liability and placing the assets beyond the reach of the creditors.

On the other hand, the Court of Appeals ruled that the general rule on separate corporate personality and against personal liability by corporate officers applies since petitioner failed to prove bad faith amounting to fraud by the corporate officers. The appeals court said:

The mere fact that Morning Star has been incurring huge losses and that it has no assets at the time it contracted large financial obligations to IATA, cannot be considered that its officers, Defendants-Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and Wong Yan Tak, acted in bad faith or such circumstance would amount to fraud, warranting personal and solidary liability of its corporate officers. The same is also true with the fact that Morning Star Management Ventures Corporation and Pic ‘N Pac Mart, Inc., corporations having the same set of officers as Morning Star, were doing relatively well during the time that the former incurred huge losses. Thus, only Morning Star should be held personally liable to Plaintiff- Appellee, and not its corporate officers.

Piercing the corporate veil in order to hold corporate officers personally liable for the corporation’s debts requires that "the bad faith or wrongdoing of the director must be established clearly and convincingly [as] [b]ad faith is never presumed." (G.R. No. 198436. July 8, 2015)

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