What is Corporate Juridical Personality?

Doctrine of Separate Personality

A corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members. It also has separate personality from that of any other entity to which it may be related. [Sulo ng Bayan, Inc. vs. Araneta, Inc., (GRN L-31061, 17 August 1976)].

Meaning, the property of the corporation is its property and not that of the stockholders, as owners, although they have equities in it.

Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless transferred to the corporation, even in the case of a one-man corporation.

Corollarily, corporation’s obligations are not obligations of its stockholders, directors, or officers [Francisco vs. CA, (GRN 116320, 29 November 1999)]

Substantial ownership of the shares of a corporation does not make the stockholder the owner of its properties or entitle him to the possession of any definite portion of the corporate properties. Even if a stockholder owns 99% of the corporation, that is still a property of the corporation and not by that specific stockholder.

We define corporation as an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

So the corporation has three classification of powers: Express, Incidental and Implied Powers.

Express Powers – those expressly conferred by the law or enumerated in the Articles of Incorporation

Incidental Powers – those which can be exercised by the corporation by the mere fact of it being a corporation and are inherent to a corporation, and

Implied Powers – those which are necessary to exercise the express and incidental powers and which are derived from them.

Corporate Power to Sue and Be Sued

The corporate power to sue and be sued is not only an expressed power. It is also an incidental power. The power to sue and be sued should be exercised in the corporate name, not in the name of the Board or any of its stockholders.

Of course, any suit must be approved and filed by the Board because the corporate powers are exercised through the Board. But what if the corporation suffered injuries through the acts of another, but the Board refuses to sue? How may the wrong done to the corporation be redressed? In this event, a remedy is provided.

Any stockholder of record may then file the suit in the name of the corporation. This is called a DERIVATIVE SUIT. Sometimes, the Directors themselves caused injury to the corporation and of course they won’t initiate a corporate suit against themselves. In this case, a derivative suit may likewise be filed by any stockholder of record in the name of the corporation. In this kind of suit, the stockholder is only a nominal party and not the real party in the suit. The real party in the suit is the corporation. Any damages awarded shall of course go to the corporation and not to the stockholders who initiated the suit.

So that is the legal principles in case it is the corporation that sues. Now, what if it is the corporation that is being sued? For example a tax evasion case that has a criminal liability. What will happen then?

Corporation’s Criminal Liability

To be held criminally liable for the acts of a corporation, there must be showing that its officers, directors, and shareholders actively participated in or had the power to prevent the wrongful act.

Corporations, being artificial beings are incapable of intent, thus they cannot commit felonies that are punishable under the Revised Penal Code. Neither can a corporation commit crimes that are punishable under special law; as such crimes are personal in nature, requiring performance of any overt act. Incarceration or imprisonment cannot obviously be imposed against a corporation. However, criminal liability may fall upon the responsible officers, who accordingly cannot invoke the Doctrine of Separate Personality.

In one case, the Supreme Court said that since it is the responsible officer or officers of the corporation who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise, this liability as created by the law would be illusory, and the deterrent effect of the law, negated. [Sia vs. People, GRN L-30896, 28 April 1983)]

If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. [Alfredo Ching vs. Secretary of Justice, (GRN 164317, 6 February 2006); Ong vs CA, (GRN 119858, 29 April 2003)]

But, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined. [Alfredo Ching vs. Secretary of Justice, (GRN 164317, 6 February 2006)]

That leads us to the Doctrine of Piercing the Corporate Veil

This doctrine is the exception to the doctrine of corporate entity. It provides that when the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong, or defend crime, this fiction shall be disregarded and the individuals composing it will be treated identically.

The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law.

When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation or circumvention of statutes, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. [Villa Key Transit, Inc. vs. Ferrer, (GRN L-23893, 29 October 1968)]

Three Cases of Piercing the Corporate Veil

1.    Fraud Cases

These are cases when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. There is intent to commit a wrong in this type of cases and the corporation is the tool that is being used to accomplish such purpose.

2.    Alter Ego Cases (Instrumentality Theory)`

These are cases when the corporate entity is merely a farce, since the corporation is a mere alter ego, business conduit, or instrumentality of a person or another corporation. Fraud is not an element in these cases.

3.    Equity Cases

These are cases when piercing the corporate fiction is necessary to achieve justice or equity. [California Manufacturing Company, Inc. vs. Advanced Technology System, Inc. (GRN 202454, 25  April 2017)]

Any application of the doctrine of piercing the corporate veil should be done with caution.

Mere ownership by a single stockholder or by another corporation of a substantial block of shares of a corporation does not, standing alone, provide sufficient justification for disregarding the separate corporate personality. [California Manufacturing Company, Inc. vs. Advanced Technology System, Inc. (GRN 202454, 25 April 2017)].

There must be proof that one had control or complete dominion of the company’s finances, policies, and business practices; he used such control to commit fraud; and the control was the proximate cause of the financial loss complained of. The absence of any of the elements prevents the piercing of the corporate veil.

The above post does not create a lawyer-client relationship between you and me. While I am a lawyer, I am not your lawyer. It is still best for you to engage the services of your lawyer to address your specific legal concerns, if there is any.

Finally, the write ups stated above was written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future legal developments on the subject matter under discussion.

Thank you for dropping by. I hope we can spend time together here in my website during your coffee break.