CASE ANALYSIS III

Armando David vs. National Federation of Labor Union, et al.

G.R. No. 148263 and 148271-72, April 21, 2009.
http://sc.judiciary.gov.ph/jurisprudence/2009/april2009/148263_148271-72.htm

FACTS:

MAC hired David as IMPEX and Treasury Manager on 16 September 1988. David
began serving as MAC's President in May 1990. David served as President in the nature of a
nominee as he did not own any of MAC's shares. David tendered his irrevocable resignation
from MAC on 30 September 1993. David's resignation was made effective on 15 October
1993.
In a complaint for illegal dismissal dated 12 August 1993, National Federation of Labor
Unions (NAFLU) and Mariveles Apparel Corporation Labor Union (MACLU) alleged that MAC
ceased operations on 8 July 1993 without prior notice to its employees. MAC allegedly gave
notice of its closure on the same day that it ceased operations. MACLU and NAFLU further
alleged that, at the time of MAC's closure, employees who had rendered one to two weeks
work were not paid their corresponding salaries.
Atty. Joshua Pastores, as MAC's counsel, submitted a position paper dated 21
February 1994 and argued that Carag and David should not be held liable because MAC is
owned by a consortium of banks. Carag's and David's ownership of MAC shares only served
to qualify them to serve as officers in MAC.

ISSUE:

Whether or not David may be held liable for the illegal dismissal of MAC employees.

RULING:

NO.

It is improper to hold David liable for MAC's obligations to its employees. However,
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable
for the debts of the corporation because Section 31 of the Corporation Code is still the
governing law on personal liability of officers for the debts of the corporation. Section 31 of the
Corporation Code provides: Directors or trustees who willfully and knowingly vote for or assent
to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith
in directing the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors, or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or members and
other persons.
There was no showing of David willingly and knowingly voting for or assenting to patently
unlawful acts of the corporation, or that David was guilty of gross negligence or bad faith.
Also, the NLRC never gained jurisdiction over David for there was an invalid service of
summons.

Discussion Questions:

(1) Is there an instance where corporate officers liable are held jointly and severally liable with
the corporation? Explain and cite legal basis.
 Solidary liability will attached to the directors, officers or employees of the corporation
in certain circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with
gross negligence in directing the corporate affairs; and (c) are guilty of conflict of interest
to the prejudice of the corporation, its stockholders or members, and other persons;

2. When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his written
objection

3. When a director, trustee or officer has contractually agreed or stipulated to hold

himself personally and solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law, personally

liable for his corporate action.

In labor cases, the Supreme Court has held corporate directors and officers solidarily
liable with the corporation for the termination of employment of employees done with
malice or in bad faith (Sunio vs. National Labor Relations Commission, 127 SCRA 390
[1984]

(2) In what instances corporate officers are held liable? Cite legal basis.

A corporation being a juridical entity, may act only through its directors, officers and
employees. Obligations incurred by them, acting as such corporate agents are not theirs
but the direct accountabilities of the corporation they represent. True solidary liabilities
may at times be incurred but only when exceptional circumstances warrant such as,
generally, in the following cases:

1. When directors and trustees or, in appropriate cases, the officers of a corporation:

(a) vote for or assent to patently unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate affairs;

The Corporation Code provides:

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty
of gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur:

1. the complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and
2. the complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.

(3) How is the rule related to separate personality doctrine?

In separate personality doctrine, 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.

As a consequence of its status as a distinct legal entity and as a result of a conscious

policy decision to promote capital formation, a corporation incurs its own liabilities and is
legally responsible for payment of its obligations. In other words, by virtue of the separate
juridical personality of a corporation, the corporate debt or credit is not the debt or credit
of the stockholder. This protection from liability for shareholders is the principle of limited
liability. Phil. National Bank vs. Hydro Resources Contractors Corp., .G.R. Nos. 167530,
167561, 16760311. March 13, 2013

The ruling is similar with the separate personality doctrine because in the case it provides
that:

Section 31 of the Corporation Code provides:

Liability of directors, trustees or officers. Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

Pantranco Employees Asso., et al. vs. NLRC, et al. & Philippine National Bank Vs.
Pantranco Employees Association Inc., et al.
G.R. No. 170689/G.R. No. 170705, March 17, 2009
http://sc.judiciary.gov.ph/jurisprudence/2009/march2009/170689.htm

FACTS:
 The Gonzales family owned two corporations, namely, the PNEI and Macris Realty
Corporation. PNEI provided transportation services to the public, and had its bus terminal at
the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood on four
valuable pieces of real estate registered under the name of Macris. The Gonzales family later
incurred huge financial losses despite attempts of rehabilitation and loan infusion. In March
1975, their creditors took over the management of PNEI and Macris. By 1978, full ownership
was transferred to one of their creditors, the National Investment Development Corporation
(NIDC), a subsidiary of the PNB.
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned
by Gregorio Araneta III. In 1992, PNEI applied with the Securities and Exchange Commission
(SEC) for suspension of payments.

ISSUE:

Whether PNEI employees can attach the properties (specifically the Pantranco
properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims against
PNEI.

RULING:

NO.

First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere
in the records was it shown that PNEI owned the Pantranco properties. Settled is the rule that
the power of the court in executing judgments extends only to properties unquestionably
belonging to the judgment debtor alone. To be sure, one mans goods shall not be sold for
another mans debts. A sheriff is not authorized to attach or levy on property not belonging to
the judgment debtor, and even incurs liability if he wrongfully levies upon the property of a
third person.
Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities
separate and distinct from that of PNEI. PNB is sought to be held liable because it acquired
PNEI through NIDC at the time when PNEI was suffering financial reverses. PNB-Madecor is
being made to answer for petitioners labor claims as the owner of the subject Pantranco
properties and as a subsidiary of PNB. Mega Prime is also included for having acquired PNBs
shares over PNB-Madecor.
The general rule is that a corporation has a personality separate and distinct from those
of its stockholders and other corporations to which it may be connected. This is a fiction
created by law for convenience and to prevent injustice. Obviously, PNB, PNB-Madecor, Mega
Prime, and PNEI are corporations with their own personalities. Neither can we merge the
personality of PNEI with PNB simply because the latter acquired the former. Settled is the rule
that where one corporation sells or otherwise transfers all its assets to another corporation for
value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.
Lastly, while we recognize that there are peculiar circumstances or valid grounds that
may exist to warrant the piercing of the corporate veil, none applies in the present case
whether between PNB and PNEI; or PNB and PNB-Madecor.

Discussion Questions:

(1) Discuss the doctrine of piercing the corporate veil. Give its rationale.

When a corporation is a sham, engages in fraud or other wrongful acts, or is used

solely for the personal benefit of its directors, officers, or shareholders, courts may
disregard the separate corporate existence and impose personal liability on the directors,
officers, or shareholders. In other words, courts may pierce the "veil" that the law uses to
 divide the corporation (and its liabilities and assets) from the people behind the
corporation. The veil creates a separate, legally recognized corporate entity and shields
the people behind the corporation from personal liability.

In these cases, courts look beyond the form to the substance of the corporation's
actions. The facts of a particular case must show some misuse of the corporate privilege
or show a reason to cut back or limit the corporate privilege to prevent fraud,
Misrepresentation, or illegality or to achieve Equity or fairness.

Courts traditionally require fraud, illegality, or misrepresentation before they will pierce
the corporate veil. Courts also may ignore the corporate existence where the controlling
shareholder or shareholders use the corporation as merely their instrumentality or alter
ego, where the corporation is undercapitalized, and where the corporation ignores the
formalities required by law or commingles its assets with those of a controlling shareholder
or shareholders. In addition, courts may refuse to recognize a separate corporate
existence when doing so would violate a clearly defined statutory policy.

(2) Relate the doctrine to the limited liability and the separate personality doctrines.

In the doctrine of piercing the corporate veil, it 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.

In doctrine of separate personality, 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. As a consequence of its status as a distinct legal entity and as
a result of a conscious policy decision to promote capital formation, a corporation incurs
its own liabilities and is legally responsible for payment of its obligations.

In other words, by virtue of the separate juridical personality of a corporation, the

corporate debt or credit is not the debt or credit of the stockholder. This protection from
liability for shareholders is the principle of limited liability.

(3) When do you apply the said doctrine?

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely:

a) when the separate and distinct corporate personality defeats public convenience,
as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;

b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a
fraud, or defend a crime; or
 c) is used in alter ego cases, i.e., where a corporation is essentially 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 so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.

In the absence of malice, bad faith, or a specific provision of law making a corporate
officer liable, such corporate officer cannot be made personally liable for corporate
liabilities.

(4) When can you say that a subsidiary is just a mere instrumentality of the parent
corporation?

In PNB v. Ritratto Group, Inc., the following circumstances which are useful in the
determination of whether a subsidiary is but a mere instrumentality of the parent-
corporation:

1. The parent corporation owns all or most of the capital stock of the subsidiary;

2. The parent and subsidiary corporations have common directors or officers;

3. The parent corporation finances the subsidiary;

4. The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation;

5. The subsidiary has grossly inadequate capital;

6. The parent corporation pays the salaries and other expenses or losses of the
subsidiary;

7. The subsidiary has substantially no business except with the parent corporation or
no assets except those conveyed to or by the parent corporation;

8. In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporations own;

9. The parent corporation uses the property of the subsidiary as its own;

10. The directors or executives of the subsidiary do not act independently in the interest
of the subsidiary, but take their orders from the parent corporation;

11. The formal legal requirements of the subsidiary are not observed.

Gloria V. Gomez vs. PNOC Development and Management Corporation (PDMC)

G.R. No. 174044, November 27, 2009
http://sc.judiciary.gov.ph/jurisprudence/2009/november2009/174044.htm

Facts:
 Petitioner Gloria V. Gomez used to work as Manager of the Legal Department of
Petron Corporation, then a government-owned corporation. With Petrons privatization, she
availed of the companys early retirement program and left that organization on April 30, 1994.
On the following day, May 1, 1994, however, Filoil Refinery Corporation (Filoil), also a
government-owned corporation, appointed her its corporate secretary and legal counsel, with
the same managerial rank, compensation, and benefits that she used to enjoy at Petron.
However, the privatization did not materialize so Gomez continued to serve as corporate
secretary of respondent PDMC. On September 23, 1996 its president re-hired her as
administrator and legal counsel of the company.

On March 29, 1999 the new board of directors of respondent PDMC removed petitioner
Gomez as corporate secretary. Further, at the boards meeting on October 21, 1999 the board
questioned her continued employment as administrator. In answer, she presented the former
presidents May 24, 1998 letter that extended her term. Dissatisfied with this, the board sought
the advice of its legal department, which expressed the view that Gomezs term extension was
an ultra vires act of the former president. It reasoned that, since her position was functionally
that of a vice-president or general manager, her term could be extended under the companys
by-laws only with the approval of the board. The legal department held that her de facto
tenure could be legally put to an end.

Petitioner Gomez for her part conceded that as corporate secretary, she served only as a
corporate officer. But, when they named her administrator, she became a regular managerial
employee. Consequently, the respondent PDMCs board did not have to approve either her
appointment as such or the extension of her term in 1998.

Issue:
Is Gomez an ordinary employee whose complaint is within the jurisdiction of the
NLRC?

Held:
Yes. The relationship of a person to a corporation, whether as officer or agent or
employee, is not determined by the nature of the services he performs but by the incidents of
his relationship with the corporation as they actually exist. That the employee served
concurrently as corporate secretary for a time is immaterial. A corporation is not prohibited
from hiring a corporate officer to perform services under circumstances which will make him
an employee. Indeed, it is possible for one to have a dual role of officer and employee. NLRC
has jurisdiction over a complaint filed by one who served both as corporate officer and
employee, when the money claims were made as an employee and not as a corporate officer.

Discussion Questions:

(1) Give the distinction between ordinary employees and corporate officers.

Ordinary company employees are generally employed not by action of the directors
and stockholders but by that of the managing officer of the corporation who also
determines the compensation to be paid such employees.

Corporate officers, on the other hand, are elected or appointed by the directors or
stockholders, and are those who are given that character either by the Corporation Code
or by the corporations by-laws.

(2) When is an employee considered corporate officer?

 He is considered a corporate officer when he is elected or appointed by the directors
or stockholders, and those who are given that character either by the Corporation
Code or by the corporations by-laws.

(3) Give five (5) examples of corporate officers and their corresponding duties.

1. The Chairman of the Board shall be elected by and among the Directors. He shall
preside at all meetings of the Board and shall perform such other duties as he may be called
upon to perform by the Board.

He shall assist in ensuring that the Board meets regularly in accordance with the corporate
governance policies and practices. He shall likewise ensure that the Board meets regularly in
accordance with an approved annual schedule and performs it duties responsibly. He shall
determine the agenda of each meeting in consultation with the President.

2. The Vice-Chairman performs the duties and responsibilities of the Chairman whenever
the latter is unavailable, as well as such other duties as the Board from time to time designate.

3. The President is responsible for leadership of the business and management of the
operations of the Company within the authorities delegated by the Board. He shall ensure
that the business and affairs of the Company are managed in a sound and prudent manner
and that organization and procedural controls are adequate and effective to ensure reliability
and integrity of financial and operational information, effectiveness and efficiency of
operations, safeguarding of assets and compliance with laws, regulations and contracts.

The President shall provide the Board with a balanced and understandable account of the
Companys performance, position and prospects on a regular basis.

4. The Chief Executive Officer shall have general supervision over the business and
affairs, and the properties of the Corporation. He shall also perform such duties and
responsibilities that shall be assigned to him by the Board of Directors from time to time.

If one person holds the position of CEO and Chairman, the Board shall take steps to
ensure that proper checks and balances should be laid down to ensure that the Board gets
the benefit of independent views and perspectives.

5. The Chief Operating Officer shall be primarily responsible to oversee the everyday
operations and functions of the company and such duties as the Board of Directors and/or the
President from time to time designate.

6. The Corporate Secretary and Assistant Corporate Secretary who shall be citizens and
residents of the Philippines shall be the ex-officio Secretaries of the Board of Directors; they
shall attend all sessions of the Board and shall record all votes and the minutes of all
proceedings in a book to be kept for that purpose, and shall perform like duties for any
committee of the Board when required. They shall give or cause to be given notice of all
meetings of the stockholders and of the Board of Directors as may be required and shall
perform such other duties as may be prescribed by the Board of Directors or by the President
under whose supervision they shall be.

In addition to the general powers hereinabove conferred and the specific powers granted by
the Companys By-Laws, the Corporate Secretary and Assistant Corporate Secretary shall
have the following duties:
 They shall at all times strive to achieve perfection in the performance of their functions
and undertake that no surprises are likely to come from them. Likewise, loyalty to the mission,
vision and specific business objectives of the Company shall form an important part of their
duties.

Valle Verde Country Club vs. Victor Africa

G.R. No. 151969 dated September 4, 2009
http://sc.judiciary.gov.ph/jurisprudence/2009/september2009/151969.htm

FACTS:

During the Annual Stockholders Meeting of petitioner Valle Verde Country Club, Inc.
(VVCC), the following were elected as members of the VVCC Board of Directors: Ernesto
Villaluna, Jaime C. Dinglasan, Eduardo Makalintal, Francisco Ortigas III, Victor Salta, Amado
M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa. In the years 1997, 1998,
1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders
meeting could not be obtained. Consequently, the above-named directors continued to serve
in the VVCC Board in a hold-over capacity. Two of the said members resigned (Makalintal and
Dinglasan). After the resignation of Dinglasan, Eric Roxas was elected. Makalintal was
replaced by Jose Ramirez.
Respondent Africa, a member of VVCC, questioned the election of Roxas and Ramirez
as members of the VVCC Board with the Securities and Exchange Commission (SEC) and
the Regional Trial Court. Africa alleged that the election of Roxas was contrary to Section 29,
in relation to Section 23, of the Corporation Code of the Philippines. The respective trial courts
ruled in favor of Africa.

ISSUE:

Whether or not the elections were valid.

RULING:

YES.

Section 23 of the Corporation Code declares that "the board of directors shall hold
office for one (1) year until their successors are elected and qualified," we construe the
provision to mean that the term of the members of the board of directors shall be only for one
year; their term expires one year after election to the office. The holdover period that time
from the lapse of one year from a members election to the Board and until his successors
election and qualification is not part of the directors original term of office, nor is it a new
term; the holdover period, however, constitutes part of his tenure. Corollary, when an
incumbent member of the board of directors continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has expired, and the incumbent is holding the
succeeding term.
After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintals term of office is deemed to have already expired. That he continued to serve in
the VVCC Board in a holdover capacity cannot be considered as extending his term. This
holdover period, however, is not to be considered as part of his term, which, as declared, had
already expired.
 With the expiration of Makalintals term of office, a vacancy resulted which, by the
terms of Section 29of the Corporation Code, must be filled by the stockholders of VVCC in a
regular or special meeting called for the purpose. As correctly pointed out by the RTC, when
remaining members of the VVCC Board elected Ramirez to replace Makalintal, there was no
more unexpired term to speak of, as Makalintals one-year term had already expired. Pursuant
to law, the authority to fill in the vacancy caused by Makalintals leaving lies with the VVCCs
stockholders, not the remaining members of its board of directors.

Discussion Questions:

(1) Distinguish term from tenure.

Term is the time during which the officer may claim to hold the office as of right, and
fixes the interval after which the several incumbents shall succeed one another.

While, tenure is tenure represents the term during which the incumbent actually holds
office.

(2) Discuss the principle of holdover. Give its rationale.

Section 23 of the Corporation Code declares that "the board of directorsshall hold
office for one (1) year until their successors are elected and qualified," we construe the
provision to mean that the term of the members of the board of directors shall be only for
one year; their term expires one year after election to the office.

The holdover period is the time from the lapse of one year from a members election
to the Board and until his successors election and qualification is not part of the directors
original term of office, nor is it a new term; the holdover period, however, constitutes part
of his tenure.

(3) Can the BOD fill the vacancy of directorship brought about by the expiration of the term?
Explain.

Yes.

Under Section 29 of the Corporation Code, in cases where the vacancy in the
corporations board of directors is caused not by the expiration of a members term, the
successor so elected to fill in a vacancy shall be elected only for the unexpired term of the
his predecessor in office. The law has authorized the remaining members of the board to
fill in a vacancy only in specified instances, so as not to retard or impair the corporations
operations; yet, in recognition of the stockholders right to elect the members of the board,
it limited the period during which the successor shall serve only to the unexpired term of
his predecessor in office.

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or
trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the
vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.

(4) What are the instances where the remaining BOD can fill any vacancy in the board? Relate
this to the theory of delegated power of BOD.

The following are the instance:

 a. when the remaining directors still constitute a quorum

b. when the vacancy is caused for reasons other than by removal by the stockholders

c. by expiration of the term.

The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.

This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporations board
of directors is caused not by the expiration of a members term, the successor so elected
to fill in a vacancy shall be elected only for the unexpired term of the his predecessor in
office. The law has authorized the remaining members of the board to fill in a vacancy only
in specified instances, so as not to retard or impair the corporations operations; yet, in
recognition of the stockholders right to elect the members of the board, it limited the period
during which the successor shall serve only to the unexpired term of his predecessor in
office.

(5) Is resignation as director while in a holdover capacity the same with expiration of term?
Explain.

No. resignation as director while in a holdover capacity is not the same with expiration
Term because they are different in nature.

Term is the time during which the officer may claim to hold the office as of right, and
fixes the interval after which the several incumbents shall succeed one another. The term of
office is not affected by the holdover. The term is fixed by statute and it does not change simply
because the office may have become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not been elected and has
failed to qualify.
The resignation as a holdover director did not change the nature of the vacancy; the
vacancy due to the expiration of term had been created long before resignation.