The Second Company’s Deceitful Purpose

The Supreme Court reiterated the doctrine of piercing the corporate veil in that it applies in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation merely 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 are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

It is the act of hiding behind the separate and distinct personalities of juridical entities to perpetuate fraud, commit illegal acts and evade one’s obligations, that the equitable piercing doctrine was formulated to address and prevent. A settled formulation of the doctrine of piercing the corporate veil is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that these two entities are distinct and treat them as identical or as one and the same. However, [an employer’s] attempt to isolate [itself] from and hide behind the supposed separate and distinct personality of [a different company] so as to evade [its] liabilities is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy.1De Castro v. Court of Appeals, G.R. No. 204261, October 5, 2016, 796 PHIL 681-713.

In Nextphase International, Inc. v. National Labor Relations Commission — Third Division,2G.R. No. 249046, December 9, 2020., Nextphase International, Inc. (NPI) was found to have used the corporate veil to perpetrate a fraud against certain employees. Thus:

In this instance, petitioner denies committing fraud to defeat legal processes and deny private respondents of what is legally theirs, alleging merely that the evidence adduced by the latter is not sufficient to determine fraud or misuse of corporate fiction. However, it must be remembered that allegation is not equivalent to proof and, as such, the party who asserts a particular fact or affirmative defense is duty-bound to support the same with the requisite quantum of evidence.

Here, petitioner miserably failed to support its denial of the commission of fraud to evade liability to private respondents or of the fact that it created NGII at around the same time as the conclusion of the case before the CA where being made to pay for P2,735,722.82 was likely. The deceitful purpose for which the second company was created was made clear by the fact that the sheriff was barred from serving the writ of execution to petitioner because its official address was suddenly under a new management whereas the banks to which he had sent notices of garnishment had all but refused. If the two companies were, indeed, separate and distinct from one another, the execution of the judgment would not have encountered a hitch, which it did. Thankfully, the private respondents inquired into the problem that led to the discovery of the surreptitious change in name cum creation of NGII for the purpose of thwarting the enforcement of the judgment award.

In view thereof, there is no doubt that petitioner’s attempt to hide behind a new identity constitutes fraud within the meaning of the law. Fraud in this context proceeds from the intentional deception practiced by means of misrepresentation or concealment of a material fact. Petitioner did it by cloaking itself with a new legal personality in the hope that by hiding behind the legal fiction it could evade existing obligations and defeat the rights of the claimants to which it was held liable.

As last ditch effort, petitioner contends that it has a different purpose than that of NGII’s. It claims that its main objective is to engage in the business of trading goods such as but not limited to novelty items on wholesale or retail basis whereas NGII is not. However, a reading of its petition yields to the fact that its nature of business is essentially the same as NGII’s. “[T]o engage in, conduct and carry on business of manufacturing, importing, exporting, marketing at retail/wholesale” is practically just a stretched-out itemization of the word “trading.” The identity of each of the companies’ business model (apart from their corporate names, address, contact numbers and website as well as directors, officers and shareholders) is rendered even more plainly and unambiguously by the subject of their enterprise which is plastic.

Further reading:

  • Nextphase International, Inc. v. National Labor Relations Commission — Third Division, G.R. No. 249046, December 9, 2020.