Topic: Doctrine of Separate Juridical Entity

Case #28

PNB v. RITRATTO GROUP INC., RIATTO INTERNATIONAL INC., DADASAN GENERAL MERCHANDISE
G.R. No. 142616, 31 July 2001, First Division, Kapunan, J

FACTS:

PNB International Finance Ltd. (PNB-IFL) is organized and doing business in Hong Kong, but a
subsidiary of Philippine National Bank (PNB). PNB-IFL extended a credit facility with the respondents,
secured by real estate mortgages constituted over 4 parcels of land in Makati. The credit incurred in
total reached $1,497,274, which they failed to pay. As such a foreclosure proceeding was instituted,
pursuant to the terms of the mortgage. It was PNB, acting as attorney-in-fact of PNB-IFL, notified the
respondent of the foreclosure, and the subject properties are to be sold in a public auction.

Respondent filed a complaint for injunction with prayer for the issuance of a writ of preliminary
injunction before the RTC.. Respondent anchored their prayer on alleged invalid provisions of their
contract. Petitioner filed a motion to dismiss on the ground of failure to state a cause of action and the
absence of the privity of contract between them, since the loan agreement was between respondent
and PNB-IFL. However, RTC granted the respondents application, applying the doctrine of “piercing veil
of corporate entity.” PNB-IFL, being a wholly owned subsidiary of petitioner PNB, the suit against
petitioner is a suit against PNB-IFL.

Aggrieved, a petition for certiorari and prohibition was filed before the CA, which was denied.
Hence this petition. Respondents argues that, assuming arguendo, that the two are separate entities,
PNB is a party-in-interest, since it is tasked to commit acts of foreclosing their properties. They futher
hold, that PNB is a mere alter ego or a business conduit of PNB-IFL, justifying the piercing of the
corporate veil.

ISSUE:

Whether PNB-IFL is a separate juridical entity with PNB.

(Side Issue on Validity of the Load agreement between PNB-IFL and Respondents-Court ruled
that it cannot be raised as against PNB, since it needs to be raised with PNB-IFL. PNB iss not
privy to the contract that the two parties signed. )

RULING:

YES. The general rule is that a legal entity, a corporation has personality distinct and separate from its
individual stockholders or member, and is not affected by the personal rights, obligations and
transactions of the latter. The mere fact that a corporation owns all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary’s separate existence may be respected, and the liability of the
parent corporation as well as the subsidiary will be confined to those arising in their respective business.

Koppel Case, finds no application in this case, for in Koppel, the court disregarded the separate
existence of the parent and subsidiary on the ground that the latter was formed merely for the purpose
of evading payment of higher taxes.

In Concept Builder’s Inc. v. NLRC, we have laid the test in determining the applicability of the
doctrine of piercing the corporate veil of fiction, to wit:

1. Control, not mere majority or complete 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 plaintiff’s legal rights;
and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.

In the absence of any one of these elements prevents “piercing of 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 defendant’s relationship to the operation.

There is no showing of the indicative factors that the PNB-IFL is a mere instrumentality of PNB.
Neither is there a demonstration that any of the evils sought to be prevented by the doctrine of piercing
the corporate veil exists.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant
legal relationship involved in this case since the petitioner was not sued because it is the parent
company of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL
in initiation the foreclosure proceeding. A suit against an agent cannot without compelling reasons be
considered a suit against the principal.