November 17, 2017 (First Half) pa ng mata nimo.
Di ka kasulti kay paralyzed
We are still in Section 2. The section which
gives us the definition of a Corporation.
Section 2. Corporation defined. A
corporation is an artificial being created
by operation of law, having the right of
succession and the powers, attributes ad
properties expressly authorized by law or
incident to its existence.
Attributes of corporations discussed in the first
hour:
A. It is an artificial being
B. Its legal personality is separate and
distinct from the personality of its
stockholders.
C. It is created by operation of law.
A. The first attribute is that a corporation is
an artificial being. It has no physical
existence. But it is a being nonetheless. How
many here have taken up metaphysics? To
exist you must be something, either a stone, an
animal, a tree. You have to be something. But
here, we postulate an existence that is a
creature of the state by mere consent of the
law. It does not occupy space, does not have
weight, you cannot touch it, you cannot smell it
but it is there by legal postulate. It has no
physical existence.
Now, most of the Bill of Rights apply to the
corporation as a person, but the right against
self-incrimination does not apply to a
corporation. Why? Because the corporation
has no mouth and the freedom against self-
incrimination is freedom against testimonial
evidence. The one who can invoke it is
somebody who can express himself. The
corporation cannot express itself except
through an agent. It needs to go through the
formality of passing a resolution.
Now, suppose you are paralyzed, such as
when di ka katingog, di ka kasulat, pero gasiga
ka, makapirma ba na sya ug contract? Di na
sya kapirma ug contract pero makuha nimo
iyang thumbmark. Maka-communicate sya kay
naa sya’y physical existence, ang corporation,
wala man. The only way to go is through the
formality of a resolution, that’s why resolutions
are important.
A corporation as an artificial being also means
that it cannot accept new agents if it has no
agents anymore. They cannot act. To give you
an example, suppose here is a corporation with
5 incorporators, they are all classmates and
they are the same stockholders who are also in
the Board of Directors. 5 sila
incorporators/stockholders/sa Board kay sila ra
nag-piliay sa ilang kaugalion. They love each
other, no complications. Unya karon
pagbakasyon nila sabay 5, ni-crash ilang
gisakyan, namatay ang 3. What happens? The
corporation is paralyzed. 2 na lang man ang
nahibilin. You cannot be elected a Director
unless you are the owner of at least 1 share,
meaning you are a stockholder of the
corporation, so the Board of Director has no
quorum, it cannot act, it cannot pass a
resolution. This is why the corporation has
to be dissolved. When the formalities can
no longer be done than it could end up that
the corporation will have to be dissolved.
It’s not like a person, amang na sya and
paralyzed, naa pa man sya. Makalihok
gihapon, thumbmark gihapon. Maski comatose
pa, maka-transact pa. That is when he needs
an agent, you go to court to be appointed as
guardian of his properties and another
appointment to be the guardian of his person.
B. Second attribute: The corporation has a
separate personality from the personality of
its constituents, whether members or its
stockholders or its offices. That is the
DOCTRINE OF LEGAL ENTITY. Mainly that
the corporation has a personality separate and
distinct from the personality of its stockholders
or officers or other constituents.
What is the exception to that rule?
1. Piercing the veil of corporate entity –
Laid down by the US Supreme Court in
the case of United States vs Milwaukee
Refrigerator Transit Company; 142
Federal Reports 247 (1905) as follows:
“When the notion of legal entity
is used to defeat public
convenience, justify wrong,
protect fraud or defend crime,
the law will disregard the
corporation as an association of
persons.”
There are 2 ways where Piercing The Veil has
been applied:
1. the first way is you have the corporation
and you have a dominant,
overwhelming, controlling stockholder
and he uses the corporation either to
defeat public convenience, justify wrong,
protect fraud or perpetrate crime. That is
why the law will disregard the separate
legal entity of the corporation and the
veil is pierced. The dominant
stockholder using the corporation as a
conduit and he will be the only person
considered by the court.
2. The 2nd way is that you have 2
corporations, the mother and the
subsidiary, and it ends up that the
subsidiary is just used by the mother
corporation. In fact the funds of the
subsidiary are not placed in a separate
bank account but co-mingled with the
mother corporation. For all practical
purposes, the officers of the mother
corporation considers the officers of the
subsidiary corporation as a division of
the mother corporation and in so doing
they avoid payment of tax, they
disregard their obligations under
contract, or they perpetrate crime. What
does the court do? The court cancels
out the separate and distinct personality
of the subsidiary and only the mother
corporation is considered.
So those are the 2 ways by which Piercing the
Veil is exercised. What are the cases that you
have to remember?
1. Mother corporation and subsidiary
corporation - PNB vs Ritratto; 362 scra
216 (2002)
2. Then a corporation as a mere conduit of
a dominant overwhelming stockholder –
Francisco vs Mejia; 326 scra 738 (2001)
The SC says in the case of a person
dominating a corporation, what are the
elements that must be present to justify
piercing the corporate veil on the ground that
the corporation is a mere alter ego:
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 breach of duty, or a
dishonest and unjust act in contravention of
plaintiff’s legal right; and
3. The aforesaid control and breach of duty
must have approximately caused the injury
or unjust loss complained of. (Carillo vs
PCMC; GR 224099; June 21, 2017)
Question: Is the corporation that is
disregarded ceases to be a corporation? Does
it mean that the said corp is cancelled as to its
registration?
The application of piercing the veil of corporate
entity in a particular case does not deny the
corporation of legal personality for any and all
purposes, but only for the particular transaction
or instance of which the doctrine is invoked. It
is a reference to a particular transaction.
General Rule: Doctrine of Corporate Entity
(meaning separate legal personality)
Exception: Piercing the Veil of Corporate
Entity
C. Third attribute, that a corporation is
created by operation of law. It is not created
by law. Historically, a corporation was created
by law, in the days where the King had all the
great powers, executive, legislative and
judicial. All the King had to do was issue a
decree that the following group of people are
now to be accepted as a corporation of limited
liability, and shall be called, let’s say “East India
Company Ltd.” So all those who put their
money there, they are the stakeholders. Now
that is prohibited by the Constitution.
Section 16, Article XII on National
Economy and Patrimony which stated
that “Congress shall not, except by
general law, provide for the formation,
organization, or regulation of private
corporations. Government-owned and
controlled corporations may be created
or established by special charters in
the interest of common good and
subject to the test of economic
viability.”
By law means there is a charter. Baluyot vs
Holganza; 324 scra 248 (2000) where the SC
said
“The test to determine whether a
corporation is government-owned and
controlled or private in nature is simple:
Is it ceated by its own charter for the
exercise of a public function or by
incorporation under the General
Corporation Law? Those with special
charters are government corporations
subject to its provisions, and its
employees are under the jurisdiction of
the Civil Service Commission and are
compulsory members of the GSIS.”
That is the Charter Test.
The charter test is applied prospectively, it
does not apply retrospectively. So it does not
apply to the Philippine Society for the
Prevention of Cruelty to Animals, because it
was issued a charter by law on January 19,
1905.
How does the coporation act? By passing its
own laws equivalently through a resolution.
In Liban et al vs Gordon; January 18, 2011 en
banc resolution by J. de Castro. In 2010 the
decision was penned by J. Abad. The original
decision as its stands is that the Red Cross is
neither private nor public, it has the
characteristics of both. Why public? Because
its work is governmental, to respond to victims
of human tragedy, either natural or man-made
calamities. But when Red Cross responds to
victims of man-made tragedy such as
terrorism, kidnapping of hostages, that is their
private aspect. The court says neither public
nor private but it has aspects of both.
Begin to distinguish by law or by operation of
law. All you have to do is comply with the
requirements of the general enabling law.
Please take note that there is not just 1 general
enabling law. Not just the Corporation Code.
The Labor Code is also a general enabling law.
Because a group of persons can so constitute
themselves and apply to be issued a cert of
registration to be a union. And that union has a
separate and distinct personality from its
members. That is also creation of a juridical
person by operation of law.

In the Cooperative’s Code, when a group of

persons at least 15, constitute themselves into
a cooperative they are issued a certificate of
registration by the Cooperative Development
Authority then you have another juridical
personality. There are many ways to have a
separate juridical personality, not just one. But
for us, that is the Corporation Code. Whether it
be by law or by operation of law, what is
common with the two is government
intervention. The consent in corporations
created by law is direct. The consent of
government in private corporations is
indirect. You comply with the requirements
than you are granted.

If you are not granted but you think you have

fully complied with the law, what is your
remedy? Mandamus. Because for SEC to
grant a certificate of registration is not
discretionary, it is purely ministerial.