PNB v.
Hydro Resources amount was manifestly excessive and grossly disadvantageous
Piercing the Veil | 13 March 2013 | Leonardo-De Castro
Petitioners: Philippine National Bank (PNB), Development Bank of the
Philippines (DBP), Asset Privatization Trust (APT)
Respondent: Hyrdo Resources Contractors Corporation (HRCC)
Nature of Case: PETITIONS for review on certiorari of the decision and
resolution of the Court of Appeals.
Digest Maker: Pia L
SUMMARY: DBP acquired 57% of the shares of then MMIC now NMIC; on
the other hand PNB acquired 43%. The members of NMIC’s board are also
either from DBP or PNB. NMIC then engaged the services of respondent
HRCC. When HRCC made demands for collection of unpaid balance,
NMIC refused to pay thus the proceedings were instituted against NMIC,
PNB, DBP, and ATP (because NMIC was later on acquired by the
Government). RTC and CA pierced the veil of NMIC and held PNB and
DBP liable. On appeal, SC ruled that the lower courts were wrong.
DOCTRINE: Instrumentality theory in piercing the veil have 3 requisites:
control, fraud, and harm. All three must be satisfied before piercing of the
veil may be allowed
FACTS:
● 1984: Petitioners DBP and PNB foreclosed on certain mortgages made
on the properties of Marinduque Mining and Industrial Corporation
(MMIC), and acquired substantially all the assets of MMIC
o They resumed the business operations of the defunct MMIC by
organizing the Nonoc Mining and Industrial Corporation (NMIC)
o DBP owned 57% of the shares of NMIC while PNB owned 43%
o There are only 5 shares that are not owned by either bank
o The members of NMIC’s board are also either from DBP or PNB
● 1985: NMIC engaged the services of Hercon, Inc., (Hercon) for NMIC’s
Mine Stripping and Road Construction Program for P35,770,120
o Hercon found that NMIC still has an unpaid balance of
P8,370,934.74, so it made repeated demands
● Heron then filed a complaint for sum of money was filed in the RTC
o Subsequently, Heron was acquired by HRCC, so the complaint
was amended to substitute HRCC for Heron
o DBP and PNB also executed deeds of transfer in favor of the
National Government assigning, transferring, and conveying
certain assets and liabilities, including their respective stakes in
NMIC; thus APT was impleaded as party as well
● Answers of the petitioners to respondent’s complaint:
o NMIC: (1) HRCC had no cause of action (2) its contract with
HRCC was entered into by its then President without any
authority (3) contract failed to comply with laws, rules and
regulations concerning government contracts (4) contract
to the government
o DBP: (1) HRCC had no cause of action against it because DBP
was not privy to HRCC’s contract with NMIC (2) NMIC’s juridical
personality is separate from that of DBP
o PNB: (1) lack of cause of action against it (2) estoppel on
HRCC’s part and laches as defenses, claiming that the inclusion
of PNB in the complaint was the first time a demand for payment
was made on it by HRCC (3) also invoked the separate juridical
personality of NMIC
o ATP: (1) lack of cause of action against it (2) lack of privity
between Hercon and APT (3) the National Government’s
preferred lien over the assets of NMIC
● RTC: Ruled in favour of respondent HRCC, piercing the coporate veil of
NMIC, and holding DBP and PNB liable
o “It had been established that except for five (5) qualifying shares,
[NMIC] is owned by defendants DBP and PNB, with the former
owning 57% thereof, and the latter 43%”
o “The business of [NMIC] was then also being conducted and
controlled by both DBP and PNB”
o Citing Philippine Veterans Investment Development Corp v CA,
“where it appears that the business enterprises are owned,
conducted and controlled by the same parties, both law and
equity will, when necessary to protect the rights of third persons,
disregard legal fiction that two (2) corporations are distinct
entities, and treat them as identical”
o Thus, RTC ruled that it appears that [NMIC] is a mere adjunct,
business conduit or alter ego of both DBP and PNB
● CA: Affirmed RTC
o “For to treat [NMIC] as a separate legal entity from DBP and
PNB for the purpose of securing beneficial contracts, and then
using such separate entity to evade the payment of a just debt,
would be the height of injustice and iniquity”
ISSUE/S & RATIO:
1. WON RTC and CA correctly pierced the veil of corporate entity of
NMIC and thus correctly held PNB and DBP liable - NO.
 ARGUMENTS OF PARTIES BEFORE THE SC
o PETITIONERS: (1) the majority ownership by DBP and PNB of
NMIC is not a sufficient ground for disregarding the separate
corporate personality of NMIC because NMIC was not a mere
adjunct, business conduit or alter ego of DBP and PNB (2) the
application of the doctrine of piercing the corporate veil is
unwarranted as nothing in the records would show that the
ownership and control of the shareholdings of NMIC by DBP and
PNB were used to commit fraud, illegality or injustice
 o PNB and DBP further argue that their interest in NMIC is already
transferred to the National Government; while ATP argues that it
could not be held for NMIC’s contractual liability in the absence
of express assumption by the National Government
o RESPONDENT: (1) NMIC was the alter ego of DBP and PNB
which owned, conducted and controlled the business of NMIC as
shown by the following circumstances: NMIC was owned by DBP
and PNB, the officers of DBP and PNB were also the officers of
NMIC, and DBP and PNB financed the operations of NMIC (2) a
parent corporation may be held liable for the contracts or
obligations of its subsidiary corporation where the latter is a mere
agency, instrumentality or adjunct of the parent corporation
o Respondent also argues that ATP is liable alongside PNB and
DBP because it assumed the obligations of DBP and PNB as the
successor-in-interest of the said banks with regard to NMIC, and
under Section 2.02 of their transfer deeds 1
 COURT RULING: PNB, DBP, and ATP are NOT LIABLE; veil of
corporate entity should not have been pierced
o 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
o Doctrine of limited liability: corporate debt or credit is not the debt
or credit of the stockholder
o Doctrine of piercing the veil: 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, and when it becomes a shield
for fraud, illegality or inequity committed against third persons
o The doctrine of piercing the veil must be applied with caution
o Citing Sarona v NLRC, corporate veil may be pierced only when
defeats public convenience, used to protect fraud, or in alter ego
cases where a corporation is business conduit of another
 Case law lays down a three-pronged test to determine the application of
the alter ego theory, which is also known as the instrumentality theory2
o CONTROL- 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
1
SECTION 2. TRANSFER OF BANK’S LIABILITIES
xxxx
 2.02 With respect to the Bank’s liabilities which are contingent and those liabilities where
the Bank’s creditors consent to the transfer thereof is not obtained, said liabilities shall remain in
the books of the BANK with the GOVERNMENT funding the payment thereof
2 contravention of plaintiff’s legal right; and
(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
its separate existence as a distinct corporate entity will be
ignored; no autonomy on part of subsidiary corporation
o FRAUD- parent corporation’s conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful
o HARM- 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
 APPLICATION: None of the tests were satisfied in this case
o CONTROL- it refers not to paper or formal control by majority or
even complete stock control but actual control which amounts to
such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal
o Just because PNB and DBP own most of the shares and are the
officers does not necessarily mean that NMIC is an alter ego
o Nothing in the records shows that the corporate finances,
policies and practices of NMIC were dominated by DBP and
PNB in such a way that NMIC could be considered to have no
separate mind, will or existence of its own but a mere conduit for
DBP and PNB
o FRAUD- HRCC admitted that NIMC was not created to conceal
fraud, and such admission already precludes the presence of the
2nd requisite
o HARM- no harm could be said to have been proximately caused
by DBP and PNB on HRCC for which HRCC could hold DBP and
PNB solidarily liable with NMIC
Ruling/Dispositive Portion: WHEREFORE, the petitions are hereby
GRANTED. The complaint as against Development Bank of the Philippines,
the Philippine National Bank, and the Asset Privatization Trust, now the
Privatization and Management Office, is DISMISSED for lack of merit. The
Asset Privatization Trust, now the Privatization and Management Office, as
trustee of Nonoc Mining and Industrial Corporation, now the Philnico
Processing Corporation, is DIRECTED to ensure compliance by the Nonoc
Mining and Industrial Corporation, now the Philnico Processing Corporation,
with this Decision.
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
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of