Manuel R. Dulay Enterprises vs.

Court of Appeals
225 SCRA 678
27 August 1993

FACTS:
Manuel R.Dulay Enterprises, Inc., a domestic corporation with the following as members of its Board of Directors: Manuel R. Dulay
with 19,960 shares and designated as president, treasurer and general manager; Atty. Virgilio E. Dulay with 10 shares and designated
as vice-president; Linda E. Dulay with 10 shares; Celia Dulay-Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10 shares and
designated as secretary, owned a property known as Dulay Apartment consisting of 16 apartment units in Pasay City.

Manuel Dulay by virtue of Board Resolution 18 of the corporation sold the subject property to spouses Maria Theresa and Castrense
Veloso. Subsequently, Manuel Dulay and the spouses Veloso executed a Memorandum to the Deed of Absolute Sale giving Manuel
Dulay within 2 years to repurchase the subject property which was, however, not annotated. Thereafter, Maria Veloso, without the
knowledge of Manuel Dulay, mortgaged the subject property to Manuel A. Torres which was duly annotated. Upon the failure of Maria
Veloso to pay Torres, the subject property was sold to Torres as the highest bidder in an extrajudicial foreclosure sale.

Maria Veloso executed a Deed of Absolute Assignment of the Right to Redeem in favor of Manuel Dulay assigning her right to
repurchase the subject property from Torres. Neither Veloso nor her assignee Dulay was able to redeem the subject property within
the one year statutory period for redemption. Torres then filed a petition for the issuance of a writ of possession against spouses
Veloso and Manuel Dulay. However, when Virgilio Dulay appeared in court to intervene in said case alleging that Manuel Dulay was
never authorized by the corporation to sell or mortgage the subject property, the trial court ordered Torres to implead the corporation
as an indispensable. Torres and Edgardo Pabalan, real estate administrator of Torres, filed an action against the corporation, Virgilio
Dulay and Nepomuceno Redovan, a tenant of Dulay Apartment for the recovery of possession, sum of money and damages with
preliminary injunction.

ISSUE:
Whether the sale of the subject property between spouses Veloso and Manuel Dulay has no binding effect on the corporation as Board
Resolution 18 which authorized the sale of the subject property was resolved without the approval of all the members of the board of
directors and said Board Resolution was prepared by a person not designated by the corporation to be its secretary.

HELD:
The corporation's claim that the sale of the subject property by its president, Manuel Dulay, to spouses Veloso is null and void as the
alleged Board Resolution 18 was passed without the knowledge and consent of the other members of the board of directors cannot
be sustained.

Section 101 of the Corporation Code of the Philippines provides that "When board meeting is unnecessary or improperly held. Unless
the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed
valid if: (1) Before or after such action is taken, written consent thereto is signed by all the directors; or (2) All the stockholders have
actual or implied knowledge of the action and make no prompt objection thereto in writing; or (3) The directors are accustomed to
take informal action with the express or implied acquiesce of all the stockholders; or (4) All the directors have express or implied
knowledge of the action in question and none of them makes prompt objection thereto in writing. If a directors' meeting is held
without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof."

Herein, the corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of
the subject property is not necessary to bind the corporation for the action of its president. At any rate, a corporate action taken at a
board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly
files his written objection with the secretary of the corporation after having knowledge of the meeting which, in this case, Virgilio
Dulay failed to do.

In ordinary parlance, the said entity is loosely referred to as a "family corporation." The nomenclature, if imprecise, however, fairly
reflects the cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation of which Manuel R.
Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, 3 children and their father whose name
identifies their corporation. Besides, the fact that Virgilio Dulay executed an affidavit that he was a signatory witness to the execution
of the post-dated Deed of Absolute Sale of the subject property in favor of Torres indicates that he was aware of the transaction
executed between his father and Torres and had, therefore, adequate knowledge about the sale of the subject property to Torres.
Consequently, the corporation is liable for the act of Manuel Dulay and the sale of the subject property to Torres by Manuel Dulay is
valid and binding.
PHILIPPINE NATIONAL BANK v. HYDRO RESOURCES CONTRACTORS CORPORATION
G.R. No. 167530, March 13, 2013

FACTS:

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque Mining and
Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed
the business operations of the defunct MMIC by organizing the Nonoc Mining and Industrial Corp. (NMIC). DBP and PNB owned 57%
and 43% of the shares of NMIC, respectively, except for five qualifying shares. The members of the Board of Directors of NMIC were
either from DBP or PNB.

Subsequently, NMIC engaged the services of Hercon, Inc., for their Mine Stripping and Road Construction Program. After computing
the payments already made by NMIC under the program and crediting the NMICs receivables from Hercon, Inc., the latter found that
NMIC still has an unpaid balance of P8,370,934.74.10. Hercon, Inc. made several demands on NMIC, and when these were not heeded,
a complaint for sum of money was filed in the RTC of Makati seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the
amount owing to Hercon, Inc.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by Hydro Resources Contractors Corporation (HRCC) in a merger.

Thereafter, then President Corazon C. Aquino issued Proclamation No. 50 creating the Asset Privatization Trust (APT) for the
expeditious disposition and privatization of certain government corporations and/or the assets thereof. Pursuant to the said
Proclamation, DBP and PNB executed their respective deeds of transfer in favor of the National Government assigning, transferring
and conveying certain assets and liabilities, including their respective stakes in NMIC. In turn and on even date, the National
Government transferred the said assets and liabilities to the APT as trustee under a Trust Agreement.

ISSUE:

Whether or not there is sufficient ground to pierce the veil of corporate fiction of NMIC and hold DBP and PNB (and APPT as their
assignee) solidarily liable with NMIC?

HELD:

No. DBP and PNB cannot be held solidarily liable with NMIC.

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. It has a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected. Equally well-settled is the principle that the corporate
mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation.
For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield
for fraud, illegality or inequity committed against third persons. However, any application of the doctrine of piercing the corporate
veil should be done with caution. A court 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.

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when
the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of DBP and PNB) should be held
solidarily liable for using NMIC as alter ego. The RTC sustained the allegation of HRCC and pierced the corporate veil of NMIC pursuant
to the alter ego theory when it concluded that NMIC "is a mere adjunct, business conduit or alter ego of both DBP and PNB." The Court
of Appeals upheld such conclusion of the trial court. In other words, both the trial and appellate courts relied on the alter ego theory
when they disregarded the separate corporate personality of NMIC.
In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known
as the instrumentality theory, namely:

(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 right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and
domination of the parent. It examines the parent corporations relationship with the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary
corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, "is operating
the business directly for itself."

The second prong is the "fraud" test. This test requires that the parent corporations conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate
only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of "an
element of injustice or fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the defendants control, exerted in a fraudulent, illegal
or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed
through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established.
The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendants exercise of
control and improper use of the corporate form and, thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the
corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the
corporate veil.

This Court finds that none of the tests has been satisfactorily met in this case.