DOCTRINE OF SEPARATE PERSONALITY

A corporation has a juridical personality separate and distinct from that of its stockholders or members.
Consequences:
1. Liability for acts or contracts- obligations incurred by a corporation, acting through its authorized agents are
sole its sole liabilities (Creese vs CA, 93 SCRA 483)
2. Right to bring actions may bring civil and criminal actions in is own name in the same manner as natural
persons.
3. Right to acquire and possess property property conveyed to or acquired by the corporation is in law the
property of the corporation itself as a distinct legal entity and not that of the stockholders or members.
4. Acquisition of court of jurisdiction service of summons may be mad on the president, general manager,
corporate secretary, treasure or in-house counsel (Sec 11, Rule 14, Rules of Court)
5. Changes in individual membership - Remains unchanged and unaffected in its identity by changes in its
individual membership
6. Entitlement to constitutional guarantees:
Due Process
Equal protection of the law
Protection against unreasonable searches and seizures
Note: A corporation is not entitled to invoke the right against self-incrimination. (Bataan
Shipyard vs PCGG)
2. Liability for torts a corporation is liable whenever a tortuous act is committed by an officer or agent under the
express direction or authority of the stockholders or members acting as a body or generally, from the directors
as the governing body.
3. A corporation is not entitled to moral damages because it has no feelings, no emotions, no senses (ABS-CBN
vs CA)
4. Liability for crimes since a corporation is a mere legal fiction, it cannot be held liable for a crime committed
by its officers, since it does not have the essential element of malice; in such case the responsible officers
would be criminally liable (People vs Tan Boon Kong, 54 Phil 607)
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY
Nature And Effect Of The Doctrine
1. Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed to
address situations where the separate corporate personality of a corporation is abused or used for
wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
Whether the separate personality of the corporation should be pierced hinges on the obtaining facts,
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution,
albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in
the interest of justice. After all, the concept of corporate entity was not mean to promote unfair objectives.
General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).
2. Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when
other remedies are still available. Umali v. Court of Appeals, 189 SCRA 529 (1990). (When Umali said
that all piercing cases are to hold stockholders personally liable UMALI WAS HORRIBLY WRONG)
3. Objectives for Availing of Piercing: Piercing is not allowed unless the remedy sought is to make the
officer or another corporation pecuniarily liable for corporate debts. (?) Indophil Textile Mill Workers
Union-PTGWO v. Calica, 205 SCRA 697 (1992).
The rationale behind piercing a corporations identity in a given case is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or person responsible for an alleged corporate act, the situation has
been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has
been turned upside down because of its erroneous invocation. Francisco Motors Corp. v Court of
Appeals, 309 SCRA 72 (1999).
The notion of separate personality, however, may be disregarded under the doctrinepiercing the veil of
corporate fictionas in fact the court will often look at the corporation as a mere collection of individuals or
an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of
the corporation unifying the group. Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997).
Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties,
disregard the legal fiction that two corporations are distinct entitled and treat them as identical or one and the
same. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).
Requires the court to see through the protective shroud which exempts its stockholders from liabilities that they
ordinarily would be subject to, or distinguishes a corporation from a seemingly separate one, were it not for the
existing corporate fiction (Lim vs CA, 323 SCRA 102)
Extent: The application of the doctrine to a particular case does not deny the corporation of legal personality for
any and all purposes, but only for the particular transaction or instance for which the doctrine was applied (Koppel
v. Yatco 77 Phil. 496)
Rules:
1. has only a res judicata effect
2. to prevent wrong or fraud and not available for other purposes;
3. judicial prerogative only;
4. must be with necessary and factual basis
BAR QUESTION (Q): XYZ Corp. owns a beach resort with several cottages. A, the President of XYZ Corp.
occupied one of the cottages for residential purposes. After As term expired, XYZ wanted to recover possession
of the cottage. A refused to surrender the cottage, contending that as a stockholder and former President, he has

the right to enjoy the properties of the corporation. Is As contention correct? Explain.
SUGGESTED ANSWER (SA): As contention is not correct. A may own shares of stock of XYZ Corp. but such
ownership does not entitle him to the possession of any specific property of the corporation or a definite portion
thereof. Neither is he a co-owner of corporate property. Properties registered in the name of the corporation are
owned by it as an entity separate and distinct from that of its stockholders. Stockholders like A can only own
shares of stock in the corporation. Such shares of stock do not represent specific corporate property. (Rebecca
Boyer-Roxas vs. CA, 211 SCRA 470)
3 Classes of Piercing: (FAE)
1. Fraud Cases when a corporation is used as a cloak to cover fraud, or to do wrong.
2. Alter Ego Cases when the corporate entity is merely a farce since the corporation is an alter ego,
business conduit or instrumentality of a person or another corporation
3. Equity cases when piercing the corporate fiction is necessary to achieve justice or equity.

INSTRUMENTALITY / ALTER EGO RULE

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded.
Requisites:
1. There must be 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 that time, no separate mind, will or existence of its own (control);
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation
of a statutory or other positive duty, or dishonest and unjust act in contravention of plaintiffs legal rights
(breach of duty); and
3. Such control and breach of duty must proximately cause the injury to the plaintiff. (proximate cause)
DOCTRINE OF EQUALITY OF SHARES
Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the
corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities.
Definition of Terms
1. Capital Stock or Legal Stock or Stated Capital - The amount fixed in the corporate charter to be subscribed
and paid in cash, kind or property at the organization of the corporation or afterwards and upon which the
corporation is to conduct its operation.
2. Capital The value of the actual property or estate of the corporation whether in money or property. Its net
worth (or stockholders equity) is its assets less liabilities.
3. Authorized Capital Stock - The capital stock divided into shares with par values. Par value stocks are
required in the case of corporations issuing preferred shares, as well as in the case of banks, trust
companies, insurance companies, building and loan associations, and public utilities. It is the total amount in
the charter, which may be raised by the corporation for its operations.
4. SUBSCRIBED CAPITAL STOCK - The total amount of the capital stock subscribed whether fully paid or not.
5. OUTSTANDING CAPITAL STOCK - The portion of the capital stock issued to subscribers except treasury
stocks.
6. STATED CAPITAL The capital stock divided into no par value shares.
7. PAID-UP CAPITAL The amount paid by the stockholders on subscriptions from unissued shares of the
corporation.
DOCTRINE OF LIMITED LIABILITY
Shields the corporators from corporate liability beyond their agreed contribution to the capital or shareholding in the
corporation.
DOCTRINE OF IMMUNITY
Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions
DOCTRINE OF CORPORATE OPPORTUNITY
Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business
opportunity which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with corporations business and is of practical advantage to it; and
3. The corporation has an interest or a reasonable expectancy.
The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture.
TRUST FUND DOCTRINE
Nature
Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as
equity in trust for the payment of the corporate creditors. Comm. of Internal Revenue v. Court of Appeals, 301
SCRA 152 (1999).
The trust fund doctrine considers the subscribed capital stock as a trust fund for the payment of the debts of the
corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the
subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the
redeemable shares) without violating this principle. Thus dividends must never impair the subscribed capital
stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares
using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999).
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which
means that the capital stock, property and other assets of a corporation are regarded as equtiy in trust for the
payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in

the distribution of corporate assets. There can be no distribution of assets among the stockholders without first
paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void.
Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988).
To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera, 44 Phil. 469 [1923];
Steinberg v. Velasco, 52 Phil. 953 [1929])
Rescission of Subscription Agreement Based on Breach
The violation of terms embodied in a subscription agreement, with are personal commitments, do not
constitute legal ground to rescind the subscription agreement since such would violate the Trust Fund
Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. In
the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and
the Corporation Code, since the rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed. Ong Yong v. Tiu, 401 SCRA 1
(2003).
Distribution of Corporate Assets
The distribution of corporate assets and property cannot be made to depend on the whims and caprices of
the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the
court a quo to prevent further squabbles and future litigations unless the indispensable conditions and
procedures for the protection of the corporate creditors are followed. Otherwise, the corporate peace
laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors turn
to engage in squabbles and litigations should the court order an unlawful distribution in blatant disregard of
the Trust Fund Doctrine. Ong Yong v. Tiu, 401 SCRA 1 (2003).
IMPORTANT: The subscribed capital stock of the corporation is a trust fund for the payment of debts of the
corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not
dissipate. The creditors may sue the stockholders directly for the latters unpaid subscription.
Application of the TFD:
1. Where the corporation has distributed its capital among the stockholders without providing for the
payment of creditors;
2. Where it had released the subscribers to the capital stock from their subscriptions;
3. Where it has transferred the corporate property in fraud of its creditors; and
4. Where the corporation is insolvent.
Coverage of the TFD:
1. If the corporation is solvent, the TFD extends to the capital stock represented by the corporations legal
capital.
2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation as well as all of its
property and assets.
Exceptions to the TFD:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there should be a deadlock and the SEC orders the payment of the appraised
value of the stockholders share. (Sec. 104)

DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION

No certificate of stock shall be issued until the full amount of the subscription is paid. It espouses that the subscription is
one, entire, indivisible, and whole contract, which cannot be divided into portions.
DOCTRINE OF ISOLATED TRANSACTIONS
Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from
their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object
of business transaction. (Eriks Pte.Ltd vs. CA, 267 SCRA 567). No element of continuity.
INSTRUMENTALITY / ALTER EGO RULE
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded.
Requisites:
1. There must be 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 that time, no separate mind, will or existence of its own (control);
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a
statutory or other positive duty, or dishonest and unjust act in contravention of plaintiffs legal rights (breach of
duty); and
3. Such control and breach of duty must proximately cause the injury to the plaintiff. (proximate)
BUSINESS JUDGMENT RULE
A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed
in good faith by the board of directors, is valid and binding, and generally the courts have no authority to review the same
and substitute their own judgment, even when the exercise of such power may cause losses to the corporation or
decrease the profits of a department. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.)
Consequences:
Resolutions and transactions entered into by the Board within the powers of the corporation cannot be
reversed by the courts not even on the behest of the stockholders.
Directors and officers acting within such business judgment cannot be held personally liable for such acts.
(Philippine Corporate Law, Cesar Villanueva, 2001 ed.)
SPECIAL RULES ON CONTRACTS ENTERED INTO BY DIRECTORS, TRUSTEES OR OFFICERS

DOCTRINE OF CORPORATE OPPORTUNITY (2001, 2005 Bar Exams)

Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business
opportunity which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with corporations business and is of practical advantage to it; and
3. The corporation has an interest or a reasonable expectancy.
The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture.
CONTRACTS OF SELF-DEALING DIRECTORS
Contracts which are entered into by the corporation with one or more of its own directors/trustees, or officers. (Sec. 32)
They are voidable, unless:
1. The presence of such director/trustee in the board meeting approving the contract was not necessary to
constitute a quorum for such meeting;
2. The vote of such director/trustee in the board meeting approving the contract was not necessary for the
approval of the contract;
3. The contract is fair and reasonable under the circumstances;
4. In the case of an officer, there was previous authorization by the board of directors.
Although not all said conditions are present, the corporation may elect not to attack or question the validity of the
contract, without prejudice, however, to the liability of the director/trustee for damages under Sec. 31.
Where any of the first two conditions is absent, said contract must be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the
purpose, provided that full disclosure of the adverse interest of the director/ trustee involved is made at such
meeting.
CONTRACTS OF INTERLOCKING DIRECTORS
Contracts entered into between corporations with interlocking directors (interest of said directors is substantial, i.e.
exceeding 20% of the outstanding capital stock).
They are valid, provided that:
The contract is not fraudulent; and
The contract is fair and reasonable under the circumstances.
If the interlocking directors interest in one corporation or corporations is nominal (not exceeding 20% of
the outstanding capital stock), then all the conditions prescribed in Sec. 32 on self-dealing directors must
be present with respect to the corporation in which he has nominal interest.
BAR Q: A, the President of XYZ Corp., wrote a letter to B, offering to sell to the latter 5000 bags of
cement at P100 per bag. B signed his conformity to the letter offer, and paid a down payment of 50000. A
few days later, C the Corporate Secretary of XYZ Corp. informed B of the decision of the Board of
Directors not to ratify the letter offer. However, since B had already paid the down payment, XYZ Corp.
delivered 500 bags of cement which B accepted. XYZ Corp. made it clear that the delivery should be
considered as an entirely new transaction. Thereafter, B sought to enforce the letter-offer. Is there a
binding contract for the 5000 bags of cement?
SA: NO. There is no binding contract for the 5000 bags of cement. First, the facts do not indicate that A,
the President , was authorized by the Board of Directors to enter into the contract or that he was
empowered to do so under some provision of the by-laws of XYZ Corp. The facts do not indicate that A
has been clothed with the apparent power to execute the contracts or agreements similar to it. Second,
XYZ Corp. has specifically informed B that it has not ratified and that the delivery to B of the 500 bags,
which A accepted, is an entirely new transaction (Yao Ka Sin Trading vs. CA, 209 SCRA 763).
RULES ON CONVERSION
1. Stock to non-stock corporation
Conversion may be made by mere amendment of the articles of incorporation.
2. Non-stock to stock corporation
The corporation must first be dissolved; mere amendment of the articles of incorporation would not suffice
because the conversion would change the corporate nature from non-profit to monetary gain.
The conversion without dissolving it first would be tantamount to distribution of its assets or income to its
members inasmuch as after its conversion, the asset of the non-stock corporation would now be treated
as payment to the subscriptions of the members who will now become stockholders of the corporation.
RULES FOR DISTRIBUTION OF ASSETS IN CASE OF DISSOLUTION
All liabilities and obligations of the corporation shall be paid, satisfied and discharged or adequate provision shall be made
therefor
1. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition
occurs by reason of dissolution, shall be returned, transferred or conveyed in accordance with such requirements
2. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes but not held upon a condition requiring return, transfer or conveyance
by reason of dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations
engaged in activities in the Philippines substantially similar to those of the dissolving corporation pursuant to a
plan of distribution
3. Other assets, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the bylaws
4. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or
not organized for profit, as may be specified in a plan of distribution.
Note: The plan of distribution shall be approved by a majority vote of the board of trustees and by 2/3 of the
members having voting rights at a meeting

DOCTRINE OF APPARENT AUTHORITY

The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its agent
where the representation was made by the agent in the course of business and acting within his/her general scope of
authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud
upon his/her principal or some other person for his/her own ultimate benefit.