Corporate Liability

In criminal law, corporate liability determines the extent to which a corporation as a legal person can be
liable for the acts and omissions of the natural persons it employs. It is sometimes regarded as an aspect
of criminal vicarious liability, as distinct from the situation in which the wording of a statutory offence
specifically attaches liability to the corporation as the principal or joint principal with a human agent.
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 theres
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
plaintiffs 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 defendants 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.

Differences Between Criminal and Civil Cases Under Philippine Law
From the manner they are initiated, their effects while pending, to the resulting consequences, there
are huge differences between criminal and civil cases.
There are two major types of cases that can be encountered in regular courts in the Philippines: criminal
and civil cases. Unlike in other countries however, regular courts try both types of cases. The State,
through the government's prosecutory arm, always participates in criminal cases as a party, while only
private parties are usually involved in civil cases. The State involves itself in civil cases only when it is one
of the party litigants.
Causes of Criminal and Civil Cases
Criminal cases stem from violations of penal statutes or laws that impose penalties for their violation.
The principal penal statute in the Philippines is the Revised Penal Code, which defines various conducts
or activities as crimes and provides penalties for their commission. Examples of crimes are murder,
theft, robbery, swindling, arson, rebellion, slander, rape, etc. There are also laws being passed by
Congress from time to time, violations of which can result in criminal cases, such as laws against
possessing unlicensed firearms or issuing worthless checks. These are called special criminal laws.

Civil cases, on the other hand, are caused not by conduct prohibited by law, but personal dealings which
give rise to certain obligations, such as entering into a contract or performing acts which result in
damages (injuries or financial loss) to another. Examples are non-payment of indebtedness or rents,
failure to deliver ordered goods or delivering defective ones, rendering defective service, negligently
causing injuries to another or his property, etc.

Party Litigants in Criminal and Civil Cases
As mentioned, in criminal cases the State is always a party. This is because crimes offend not only the
victim, but the State which has an interest in maintaining peace and order in society; this is why all
criminal cases are titled "People of the Philippines" versus the accused person.

The people or the State is represented by a public prosecutor (formerly called fiscal) whose role is
chiefly to prosecute the accused person by proving the charges against him or her. Although strictly
speaking the public prosecutor's job is not to seek the conviction of the accused but to find the truth, in
reality the prosecutor's disposition is almost always to secure a conviction.

The victim of the crime is called the private offended party, but is properly considered merely as the
principal witness to the crime, assuming of course he or she is alive or competent to testify. There are
crimes, however, where there is no private offended party and are, therefore, called public crimes, such
as prostitution, illegal possession of firearms or illegal drugs cases.

Consequences of a Criminal Case
In a criminal case, if the accused person is convicted or proven guilty, he or she will be penalized. The
penalty may be a mere censure, fine, imprisonment or even death, depending on the gravity of the
crime committed. The death penalty has been abolished in the Philippines and has been replaced by life
imprisonment as the ultimate penalty.

Consequences of a Civil Case
Unlike criminal cases, civil cases cannot result in the imposition of a penalty. If a person loses a civil suit
filed against him or her - depending on the nature of the case - it can result in the payment of a sum of
money (not in the sense of a fine but as payment of an obligation or for damages), delivery of property,
vacating of premises, desistance from performing certain acts, declaration of certain status, etc.

Sometimes, certain civil or contractual transactions can give rise to criminal liabilities. The most common
example is the issuance of a post-dated check that is without or with insufficient funds. Under paragraph
2 (d) of Article 315 of the Revised Penal Code, as amended by Republic Act No. 4885, when a person
issues a worthless check to another in payment of an obligation or for value, he or she can be held liable
for swindling or estafa and violation of the Bouncing Checks Law (B.P. 22).

It should be noted, however, that the basis of criminal liability here is not the non-payment of an
obligation, but the very act of issuing a worthless check which is punishable by law as a crime.

SarbanesOxley Act
A variety of complex factors created the conditions and culture in which a series of large corporate
frauds occurred between 2000-2002. The spectacular, highly-publicized frauds at Enron WorldCom, and
Tyco exposed significant problems with conflicts of interest and incentive compensation practices. The
analysis of their complex and contentious root causes contributed to the passage of SOX in 2002.
The hearings produced remarkable consensus on the nature of the problems: inadequate oversight of
accountants, lack of auditor independence, weak corporate governance procedures, stock analysts'
conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities
and Exchange Commission
Major elements
1. Public Company Accounting Oversight Board (PCAOB)
Title I consists of nine sections and establishes the Public Company Accounting Oversight Board, to
provide independent oversight of public accounting firms providing audit services ("auditors"). It also
creates a central oversight board tasked with registering auditors, defining the specific processes and
procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing
compliance with the specific mandates of SOX.
2. Auditor Independence
Title II consists of nine sections and establishes standards for external auditor independence, to limit
conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and
auditor reporting requirements. It restricts auditing companies from providing non-audit services (e.g.,
consulting) for the same clients.
3. Corporate Responsibility
Title III consists of eight sections and mandates that senior executives take individual responsibility for
the accuracy and completeness of corporate financial reports. It defines the interaction of external
auditors and corporate audit committees, and specifies the responsibility of corporate officers for the
accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of
corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance.
For example, Section 302 requires that the company's "principal officers" (typically the Chief Executive
Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports
quarterly.
4. Enhanced Financial Disclosures
Title IV consists of nine sections. It describes enhanced reporting requirements for financial transactions,
including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers.
It requires internal controls for assuring the accuracy of financial reports and disclosures, and mandates
both audits and reports on those controls. It also requires timely reporting of material changes in
financial condition and specific enhanced reviews by the SEC or its agents of corporate reports.
5. Analyst Conflicts of Interest
Title V consists of only one section, which includes measures designed to help restore investor
confidence in the reporting of securities analysts. It defines the codes of conduct for securities analysts
and requires disclosure of knowable conflicts of interest.
6. Commission Resources and Authority
Title VI consists of four sections and defines practices to restore investor confidence in securities
analysts. It also defines the SEC's authority to censure or bar securities professionals from practice and
defines conditions under which a person can be barred from practicing as a broker, advisor, or dealer.
7. Studies and Reports
Title VII consists of five sections and requires the Comptroller General and the SEC to perform various
studies and report their findings. Studies and reports include the effects of consolidation of public
accounting firms, the role of credit rating agencies in the operation of securities markets, securities
violations and enforcement actions, and whether investment banks assisted Enron, Global Crossing and
others to manipulate earnings and obfuscate true financial conditions.
8. Corporate and Criminal Fraud Accountability
Title VIII consists of seven sections and is also referred to as the "Corporate and Criminal Fraud
Accountability Act of 2002". It describes specific criminal penalties for manipulation, destruction or
alteration of financial records or other interference with investigations, while providing certain
protections for whistle-blowers.
9. White Collar Crime Penalty Enhancement
Title IX consists of six sections. This section is also called the "White Collar Crime Penalty Enhancement
Act of 2002." This section increases the criminal penalties associated with white-collar crimes and
conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify
corporate financial reports as a criminal offense.
10. Corporate Tax Returns
Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the
company tax return.
11. Corporate Fraud Accountability
Title XI consists of seven sections. Section 1101 recommends a name for this title as "Corporate Fraud
Accountability Act of 2002". It identifies corporate fraud and records tampering as criminal offenses and
joins those offenses to specific penalties. It also revises sentencing guidelines and strengthens their
penalties. This enables the SEC to resort to temporarily freezing transactions or payments that have
been deemed "large" or "unusual".