Philippine National Bank vs. Hydro Resources Contractors Corporation

The doctrine of piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: (1) complete domination by the parent corporation of the subsidiary's finances, policies, and business practices such that the subsidiary has no separate mind, will, or existence of its own; (2) use of such control to commit fraud or wrong, perpetuate violation of legal duty, or commit dishonest/unjust acts; and (3) proximate causation of injury or unjust loss to the plaintiff. The absence of any element prevents piercing. Mere ownership of all or nearly all capital stock and the existence of interlocking directorates, standing alone, do not justify piercing the corporate veil absent fraud or other public policy considerations.

The case arose from the foreclosure by DBP and PNB of mortgages on the properties of Marinduque Mining and Industrial Corporation (MMIC) in 1984. Following the foreclosure, the two government banks acquired substantially all of MMIC's assets and organized Nonoc Mining and Industrial Corporation (NMIC) to continue the mining operations, with DBP owning 57% and PNB owning 43% of NMIC's shares. Subsequently, NMIC engaged Hercon, Inc. (later merged into HRCC) for mine stripping and road construction services. When NMIC failed to pay the remaining contract balance, HRCC filed suit seeking to hold DBP and PNB solidarily liable with NMIC, alleging that NMIC was merely the banks' alter ego. The case was complicated by the subsequent transfer of DBP and PNB's interests in NMIC to the National Government under Proclamation No. 50, and then to the APT as trustee.

• In 1984, DBP and PNB foreclosed on mortgages on the properties of Marinduque Mining and Industrial Corporation (MMIC) and acquired substantially all of MMIC's assets.
• DBP and PNB organized Nonoc Mining and Industrial Corporation (NMIC) to continue MMIC's business operations, with DBP owning 57% and PNB owning 43% of NMIC's shares, except for five qualifying shares held by their officers to meet incorporator requirements.
• As of September 1984, all five members of NMIC's Board of Directors were either from DBP or PNB: Jose Tengco, Jr. (DBP), Rolando Zosa (DBP), Ruben Ancheta (DBP/PNB), Geraldo Agulto (PNB), and Faustino Agbada (DBP).
• In 1985, NMIC engaged Hercon, Inc. for a Mine Stripping and Road Construction Program with a total contract price of P35,770,120.
• After accounting for payments made and credits for NMIC's receivables from Hercon, Inc., an unpaid balance of P8,370,934.74 remained.
• Hercon, Inc. made several demands for payment, including a final demand dated August 12, 1986, which were not heeded.
• Hercon, Inc. was subsequently acquired by Hydro Resources Contractors Corporation (HRCC) through a merger, prompting the substitution of HRCC as plaintiff in the pending litigation.
• On December 8, 1986, President Corazon Aquino issued Proclamation No. 50 creating the Asset Privatization Trust (APT) for the disposition and privatization of government corporations and assets.
• On February 27, 1987, DBP and PNB executed deeds of transfer assigning their respective stakes in NMIC to the National Government, which transferred these to APT as trustee.
• HRCC's evidence showed that it dealt with NMIC as a distinct juridical person, addressing proposals and communications to NMIC and its officers, without reference to DBP or PNB control over the specific transaction.
• The records showed that only two NMIC directors (Tengco and Zosa) were members of DBP's Board of Governors, and no NMIC director sat on PNB's Board of Directors; no director sat simultaneously on both DBP and PNB boards.
• NMIC maintained a separate office address (2283 Pasong Tamo Ext., Makati) distinct from DBP (Makati Avenue corner Sen. Gil J. Puyat Avenue) and PNB (Escolta, Manila).

• DBP, PNB, and APT argued that NMIC is a corporate entity with a juridical personality separate and distinct from its stockholders, and that majority ownership by DBP and PNB is insufficient to disregard this separate personality.
• They contended that the alter ego doctrine requires proof that the corporate fiction was used to commit fraud, illegality, or injustice, which was absent in this case.
• They asserted that there was no evidence that DBP and PNB controlled NMIC's day-to-day operations or the specific transaction with HRCC to such an extent that NMIC had no separate mind or will of its own.
• DBP and PNB argued that assuming they could be held liable, such liability was transferred to and assumed by the National Government through APT under the deeds of transfer executed pursuant to Proclamation No. 50.
• APT contended that it could not be held liable absent an unqualified assumption by the National Government of all NMIC liabilities, and that HRCC failed to prove that the adjudged liability was among those assigned and transferred by DBP and PNB to the National Government.

• HRCC argued that NMIC was merely the alter ego of DBP and PNB, citing complete stock ownership, interlocking directorates, and the financing of NMIC's operations by the banks.
• HRCC claimed that a parent corporation may be held liable for the obligations of its subsidiary where the latter is a mere agency, instrumentality, or adjunct of the parent.
• HRCC asserted that the corporate veil should be pierced because treating NMIC as separate from DBP and PNB would permit the banks to secure beneficial contracts while using the separate entity to evade just debts, which would be unjust.
• HRCC argued that APT was properly held solidarily liable because it stepped into the shoes of DBP and PNB as successor-in-interest and assumed the obligations of the Republic under Section 2.02 of the deeds of transfer, which provided for government funding of contingent liabilities.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the doctrine of piercing the corporate veil applies to hold DBP and PNB solidarily liable with NMIC for the latter's contractual debt to HRCC.
  • Whether the Asset Privatization Trust (APT) may be held solidarily liable with NMIC, DBP, and PNB for the judgment indebtedness.

• Procedural: N/A
• Substantive:
  • The Supreme Court held that the doctrine of piercing the corporate veil does not apply. The Court applied the three-pronged test for the alter ego theory: (1) complete domination of finances, policy, and business practice; (2) use of control to commit fraud or unjust acts; and (3) proximate causation of injury. The Court found that while DBP and PNB owned nearly all of NMIC's stock, mere ownership and the existence of interlocking directorates, without more, are insufficient to establish an alter ego relationship. There was no showing that DBP and PNB controlled NMIC's corporate finances and policies to the extent that NMIC had no separate existence, or that such control was used to commit fraud or injustice against HRCC.
  • The Court ruled that DBP and PNB are not solidarily liable with NMIC. The corporate debt remains the debt of NMIC alone, consistent with the principle that a corporation is an artificial being with a personality separate from its stockholders.
  • The Court held that APT incurs no liability for NMIC's indebtedness because its liability as assignee of DBP and PNB's interests would only attach if DBP and PNB were held liable. Since the banks are not liable, APT assumes no liability. Section 2.02 of the deeds of transfer refers only to contingent liabilities of DBP and PNB, not NMIC.
  • The Court directed APT, as trustee of NMIC (now Philnico Processing Corporation), to ensure compliance by NMIC with the judgment against it.

• Corporation as an Artificial Being — A corporation is an artificial entity created by operation of law, possessing a personality separate and distinct from that of its stockholders and from other corporations. This separate juridical personality is the basis for the principle of limited liability, where shareholders are generally not liable for corporate debts. The Court emphasized that this separate personality is a conscious policy decision to promote capital formation and should not be lightly disregarded.
• Doctrine of Piercing the Corporate Veil — This equitable remedy allows courts to disregard the separate corporate personality where the corporate fiction is used as a shield for fraud, illegality, or injustice against third persons. The Court cautioned that this doctrine should be applied with care and caution, only when the corporate fiction was misused to commit injustice or fraud, which must be clearly and convincingly established and cannot be presumed.
• Alter Ego Theory (Instrumentality Theory) — A specific application of piercing the corporate veil where a corporation is merely a farce, being a mere alter ego, business conduit, or instrumentality of another corporation or person. The Court adopted a three-pronged test requiring: (1) Control, not mere majority stock ownership, but complete domination of finances and business practices; (2) Use of such control to commit fraud or wrong; and (3) Proximate causation of the injury complained of. The absence of any element prevents application of the theory.

• "A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence."
• "Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. 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."
• "While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship."
• "The existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations."

• Concept Builders, Inc. v. National Labor Relations Commission — Cited for establishing the three-pronged test for the alter ego theory: control, fraud/wrongful conduct, and proximate causation of injury.
• Sarona v. National Labor Relations Commission — Cited for defining the three basic areas where piercing applies: defeat of public convenience, fraud cases, and alter ego cases; also cited for the rule that the Court may resolve questions of fact if findings are unsupported by evidence.
• Sibagat Timber Corporation v. Garcia — Distinguished by the Court of Appeals but clarified by the Supreme Court as factually different; in Sibagat, there was identity of officers, same office address, and assumption of management, whereas here NMIC operated as a distinct entity with separate offices and different management structures.
• Francisco v. Mallen, Jr. — Cited for the principle that a corporation has a personality separate from its stockholders.
• Philippine Veterans Investment Development Corp. v. Court of Appeals — Cited by the lower courts for the general proposition that courts may disregard the corporate fiction when enterprises are owned and controlled by the same parties, but distinguished by the Supreme Court on the facts.
• Ramoso v. Court of Appeals — Cited for the rule that fraud must be clearly and convincingly established to disregard corporate personality, and that the wrongdoing cannot be presumed.

• Section 2, Corporation Code (Batas Pambansa Blg. 68) — Defines a corporation as an artificial being created by operation of law with separate juridical personality.
• Proclamation No. 50 (December 8, 1986) — Created the Asset Privatization Trust for the disposition and privatization of government corporations and assets.
• Section 2.02, Deeds of Transfer (DBP and PNB to the National Government) — Provided that contingent liabilities and liabilities where creditor consent was not obtained would remain with the banks but be funded by the Government; cited to show that APT's assumption of liability was contingent upon DBP/PNB liability and limited to their specific obligations, not NMIC's corporate debts.

• N/A (Sereno, C.J., Bersamin, Villarama, Jr., and Reyes, JJ., concurred without separate opinions).