Legal Personality of Corporations and Liability of Incorporators

A recent query concerns the liability of incorporators (incorporators are basically the stockholders who created the company, with their names appearing in the articles of incorporation). We briefly touched on the liability of incorporators in a previous post (Forms of Business: Sole Proprietorship, Partnership, Corporation). In incorporating a business for our clients, we sometimes need to address the same concern so we might as well have a discuss here.

A corporation has a separate legal personality and, as such, it is entitled to rights and subject to obligations, very much like a natural person. Considering that a corporation has a legal personality distinct and separate from its incorporators or members, any liability of the corporation is limited to its properties and does not spill over to its incorporators, directors, stockholders, officers or members. Also, it may happen that the incorporator already sold all his/her stocks to another person. While he would still remain on official record as an incorporator, he will no longer be liable for subsequent acts of the corporation (if piercing the corporate veil is proper).

In piercing the corporate veil, however, this mask or veil (also called the “corporate fiction”) is set aside in certain instances, as when it is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws. This could also be resorted to when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. The law in these instances will regard the corporation as a mere association of persons and, in case of two corporations, merge them into one.

No hard and fast rules exist in piercing the corporate veil. The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case.  While there’s no hard and fast rule that can be accurately laid down, there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil: (1) Stock ownership by one or common ownership of both corporations; (2) Identity of directors and officers; (3) The manner of keeping corporate books and records; and (4) Methods of conducting the business. The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights.

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents “piercing the corporate veil”. In applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. It is a question of fact that must be decided on a case-to-case basis.

Indeed, there are certain instances where personal liability may arise. Personal liability of a corporate director, trustee, or officer may validly attach when:

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

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection.

3. He agrees to hold himself personally and solidarily liable with the corporation.

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

Still, this does not detract from the general rule that corporations are distinct from its incorporators and members. Entrepreneurs should not be worried about personal liability as incorporator, so long as the corporate fiction is not used in a manner discussed above. The corporation is still a preferred form of business.

(References: Concept Builders, Inc. vs. NLRC, G.R. No. 108734, 29 May 1996; Commissioner of Internal Revenue vs. Estate of Benigno Toda, Jr., G.R. No. 147188, 14 September 2004)

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