Corporation has a distinct juridical entity


A bank granted several loans to a corporation. These loans were secured by a nine million real estate mortgage and P25-million surety agreement. The loans were entered into by the corporation’s president and general manager (GM) while the surety agreement was signed by the GM and his wife.
The corporation defaulted in its payments. And despite the sale of the mortgaged properties, a deficit of over P13 million subsisted. Thus, a claim for a sum of money was filed against the corporation, it’s GM, and the GM’s wife.

The Regional Trial Court (RTC) found all four (4) liable for the remaining sum of money. Although the signature of the GM’s wife was proven to be a forgery in trial, the Court found her liable regardless, because the wife was also a director and stockholder of the indebted corporation. On appeal, the Court of Appeals (CA) agreed with the RTC and held that the signatories to the loan and surety agreement connived together by showing false bank statements to induce the bank to believe that the corporation could afford the loan.

The Supreme Court (SC), however, overturned the CA. It reiterated that “a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf.” Thus, obligations incurred by the corporation are its sole liabilities and the directors, officers, and employees of a corporation generally cannot be held personally liable for the corporation’s obligations. As an exception, directors and officers shall have solidary liability with the corporation if “they willfully and knowingly vote or assent to patently unlawful acts of the corporation, 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.”

The SC explained that since the only basis for holding the GM’s wife liable for the corporation’s debt was a forged document, there was insufficient proof of her solidary liability. It also held that “the court cannot give credence to the simplistic declaration of the RTC that liability would attach for the sole reason that she was an officer and stockholder.”

The SC reminded that the piercing of the veil of corporate fiction is “frowned upon and can only be done if it has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception” –

[t]he doctrine of piercing the corporate veil should be done with caution… It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed.

As treasurer of the corporation, the GM’s wife was negligent for allowing the corporation to contract a loan in spite of its financial situation. Nevertheless, the Court held the wife’s shortcomings as lacking to “justify the piercing of the corporate veil which requires that the negligence of the officer must be so gross that it could amount to bad faith and must be established by clear and convincing evidence.” Gross negligence is defined as the lack of the slightest care, acting or failing to act in a situation where there is a duty to act, willfully and intentionally with a conscious indifference to the consequences insofar as other persons may be affected (Uy v. International Exchange Bank, G.R. No. 166282, 13 February 2013, J. Mendoza).


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