Published 10 September 2018, The Daily Tribune

It is a common estate planning strategy to save taxes by

transferring properties to a corporation in exchange of stock or unit
participation therein. Under the Tax Code, transfer of properties to a
corporation which results in control over that corporation by the transferor is
not subject to internal revenue taxes.

Considering that after the tax-free exchange, the properties now form  part of
the assets of the corporation, can the creditors of the transferor run after the
transferred properties to satisfy their unpaid credits?

Before dealing with this issue, it is helpful to discuss first some of the widely
accepted doctrines in Corporation Law.

Under the doctrine of separate legal entity, a corporation is considered to

have a legal personality distinct and separate from its directors, individual
stockholders or members (Bustos v. Millians Shoe, Inc., G.R. No. 185024,
April 24, 2017). The assets and liabilities of the corporation are not owned by
the stockholders even if they own the capital stock of the corporation and
vice-versa. Hence, in cases of satisfaction of debt, a creditor of the
corporation cannot claim the assets of its stockholders, and a creditor of a
stockholder cannot claim the assets of the corporation. This is just, however,
a general rule. As a matter of exception, the doctrine of Piercing the
Corporate Veil allows a stockholder or member of a corporation to be held
liable for the obligations of the corporation. This doctrine allows the State to
disregard for certain justifiable reasons the notion or fiction that the the
corporation has a legal personality separate and distinct from the corporators
composing it. The said doctrine is applicable when the separate personality of
the corporation is used as a means to perpetuate fraud or an illegal act, or as
a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues ( Lanuza, Jr. v. BF Corp., G.R. No.
174938, October 1, 2014).

Note that the doctrine of Piercing the Corporate Veil has an end objective to
hold liable the stockholder or a member of the corporation. Hence, this
doctrine cannot be applied to resolve the question I earlier posed.
Nevertheless, the question may still be answered in the affirmative, which
means that the creditor can still seize the assets of a corporation to satisfy
the personal obligation of a stockholder applying the doctrine of Reverse
Corporate Piercing which was introduced by the Supreme Court in the fairly
recent case of International Academy of Management and Economics v.
Litton and Co., Inc. promulgated on December 13, 2017. Reverse-piercing
flows in the opposite direction of traditional corporate veil-piercing and
makes the corporation liable for the debt of the shareholders.

In the above-mentioned case, the lessee owed his lessor rental arrears and
share in realty taxes. In an unlawful detainer case filed by the lessor, the
court ordered the lessee to pay various sums of money representing unpaid
arrears, realty taxes, penalty, and attorney’s fees. During the pendency of the
case, the lessee formed a corporation and transferred therein a real property.
After the judgement became final and executory, the said real property, now
in the name of the corporation, was levied by the sheriff in order to execute
the judgement against lessee.

In justifying the application of the Reverse Corporate Piercing to enforce the

levy on execution of the real property, the Supreme Court held that the
corporation was formed by the lessee to conceal assets which were supposed
to pay for the judgement against his favor.

The Supreme Court, however, cautioned that Reverse Corporate Piercing may
lead to disastrous consequences for corporations and that ordinary
judgement collection procedures or other legal remedies are preferred over
that which would risk damage to third parties (for instance, innocent
stockholders or voluntary creditors) with unprotected interest in the assets of
the corporation.

In conclusion, in satisfaction of a debt, it is advisable for a creditor to claim

first for the properties in the name of the debtor. If this is not possible, the
doctrine of Reverse Corporate Piercing may be resorted to as long as it can be
proven that the debtor deliberately incorporated a separate vehicle to
transfer his properties therein with the end goal of evading his obligation to
the creditor.