Can corporate officers be held liable for corporation's debt?

The law vests corporations with a separate and distinct personality from those that represent these corporations.[1]The corporate legal structure draws its "economic superiority"[2] 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.[3] 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,[4] 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 solidarity liable with the corporation; or

'4. He is made, by a specific provision of law, to personally answer for his corporate action.'[5]

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. (Emphasis supplied)

Bad faith "imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, not simply bad judgment or negligence."[6] "[I]t means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud."[7]

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."[8]


[1] Solidbank Corporation v. Mindanao Ferroalloy Corporation, 502 Phil. 651, 664 (2005) [Per J. Panganiban, Third Division], citing Monfort Hermanos Agricultural Development Corporation v. Monfort 111, 478 Phil. 34, 42 (2004) [Per J. Ynares-Santiago, First Division], Spouses Firme v. Bukal Enterprises and Development Corporation, 460 Phil. 321, 345 (2003) [Per J. Carpio, First Division], and People's Aircargo and Warehousing Co. Inc. v. Court of Appeals, 357 Phil. 850, 863 (1998) [Per J. Panganiban, First Division].

[2] See Paddy Ireland, Limited liability, shareholder rights and the problem of corporate irresponsibility, Cambridge Journal of Economics 837, 838 (2010) <http://cje.oxfordjournals.org/content/34/5/837.full.pdf+html> (visited July 9, 2015).

[3] Id.

[4] See Edsa Shangri-La Hotel and Resort, Inc., et al. v. BF Corporation, 578 Phil. 588, 607 (2008) [Per J. Velasco, Jr., Second Division], Aratea v. Suico, 547 Phil. 407, 415-416 (2007) [Per J. Garcia, First Division]; Solidbank Corporation v. Mindanao Ferroalloy Corporation, 502 Phil. 651, 665 (2005) [Per J. Panganiban, Third Division], MAM Realty Development Corp. v. National Labor Relations Commission, 314 Phil. 838, 844-845 (1995) [Per J. Vitug, Third Division], citing Tramat Mercantile, Inc. v. Court of Appeals, G.R. No. 111008, November 7, 1994, 238 SCRA 14, 19 [Per J. Vitug, Third Division],

[5] Solidbank Corporation v. Mindanao Ferroalloy Corporation, 502 Phil. 651, 665 (2005) [Per J. Panganiban, Third Division], quoting Tramat Mercantile, Inc. v. Court of Appeals, G.R. No. 111008, November 7, 1994, 238 SCRA 14, 19 [Per J. Vitug, Third Division]. See also Aratea v. Suico, 547 Phil. 407, 415-416 (2007) [Per J. Garcia, First Division], quoting MAM Realty Development Corp. v. National Labor Relations Commission, 314 Phil. 838, 844-845 (1995) [Per J. Vitug, Third Division].

[6] Solidbank Corporation v. Mindanao Ferroalloy Corporation, 502 Phil. 651, 670 (2005) [Per J. Panganiban, Third Division], citing Cojuangco Jr. v. Court of Appeals, 369 Phil. 41, 55, (1999) [Per J. Panganiban, Third Division], Philippine Airlines, Inc. v. National Labor Relations Commission, 362 Phil. 197, 204 (1999) [Per J. Puno, Second Division], and Samson v. Court of Appeals, G.R. No. 108245, November 25, 1994, 238 SCRA 397, 404 [Per J. Puno, Second Division].

[7] Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224, G.R. No. 194795, June 13, 2012, 672 SCRA 562, 572 [Per J. Mendoza, Third Division].

[8] Francisco v. Mallen, Jr., 645 Phil. 369, 376 (2010) [Per J. Carpio, Second Division], quoting Carag v. National Labor Relations Commission, 548 Phil. 581, 602 (2007) [Per J. Carpio, En Banc], emphasis supplied.

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