G.R. No. 117416 – 400 Phil. 1260 – 347 SCRA 453 – Mercantile Law – Corporation Law – Piercing the Veil of Corporate Fiction – When Not Applicable
Avelina Ramoso and several others are investors and majority stock holders of the franchise branches of Commercial Credit Corporation (CCC).
CCC is a lending and investment firm. CCC contracted with its franchise branches for the latter to assign its receivables to CCC. But this practice was discontinued due to a prohibition (DOSRI rule) issued by the Central Bank where corporations are prohibited from lending funds to persons with related interests, among others. To circumvent this, CCC incorporated CCC Equity, a wholly owned subsidiary to manage the franchise branches. CCC later changed its name to General Credit Corporation (GCC).
In 1981, Ramoso et al alleged that they discovered several bad business practices being conducted by GCC; that such questionable practices divested GCC of its assets thereby placing the franchise branches at a disadvantage; that GCC, through CCC Equity mismanaged the franchise branches thereby causing imminent losses to the investors.
Ramoso et al then sued GCC before the Securities and Exchange Commission. The hearing officer ruled in favor of Ramoso et al. He pierced the veil of corporate fiction and he declared that the franchise branches, GCC, and CCC equity are one and the same corporation; that as such, the franchise branches, in whom Ramoso et al invested, are not liable to the obligations incurred by GCC. The SEC en banc however reversed the ruling of the hearing officer. The Court of Appeals affirmed the SEC en banc.
ISSUE: Whether or not the veil of corporate fiction should be pierced.
HELD: No. Ramoso et al did not properly plead their cause. They merely alleged that CCC Equity is a conduit of GCC. As found by the SEC en banc, Ramoso et al were not able to prove that CCC Equity was incorporated in order to perpetrate fraud against them. Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that the stockholders or officers and the corporation are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of the corporate entity. It was not shown that the debts incurred by GCC were actually incurred in bad faith. Further, there is a pending case relating to the liability of Ramoso et al as guarantors – that will be the proper forum to raise their respective liability as regards said debts.
(Compare this case with Reynoso IV vs Court of Appeals involving same corporations (GCC, CCC, CCC Equity) where the veil of corporate fiction was pierced. Case was decided by the 2nd Division of the SC, this case was decided by the 1st Division of the same sitting SC, but I guess the main difference was, in Reynoso, the allegation was properly pleaded and proved)
