G.R. No. 85266. January 30, 1990.*FIRST DIVISION.

PHILIPPINE VETERANS INVESTMENT DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS

and VIOLETA MONTELIBANO BORRES, respondents.

Corporation Law; Veil of corporate fiction may be pierced when it is used to defeat public convenience,
justify wrong, protect fraud or defend crime.—In Koppel v. Yatco, the Court, citing Fletcher, declared
that the veil of corporate fiction may be pierced when it is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. It added that when the corporation is the mere alter ego or
business conduit of a person it may be disregarded, “to prevent injustice, or the distortion or hiding of
the truth, or to let in a just defense.”

Same; Same; Rule in piercing the veil of corporate fiction.—The rule is that: Where it appears that 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 persons, disregard the legal fiction that two corporations
are distinct entities, and treat them as identical.

Same; Same; Same.—In Yutivo Sons Hardware Co. v. Court of Tax Appeals, this Court held: It is an
elementary and fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected. However,
“when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or
defend crime,” the law will regard the corporation as an association of persons, or in the case of two
corporations merge them into one. x x x Another rule is that, when the corporation is the “mere alter
ego or business conduit of a person, it may be disregarded.”
Same; Same; Rule is that if a parent-holding company assumes complete control of the operation of its
subsidiary’s business, the separate corporate existence of the subsidiary must be disregarded.—Besides,
PHIVIDEC’s act of selling PRI to PHILSUCOM shows that PHIVIDEC had complete control of PRI’s business.
This circumstance renders applicable the rule cited by third-party plaintiff-appellee (Costan v. Manila
Electric, 24 F 2nd 383) that if a parent-holding company (PHIVIDEC in the present case) assumes
complete control of the

_______________

* FIRST DIVISION.

670

670

SUPREME COURT REPORTS ANNOTATED

Philippine Veterans Investment Development Corporation vs. Court of Appeals

operations of its subsidiary’s business, the separate corporate existence of the subsidiary must be
disregarded, such that the holding company will be responsible for the negligence of the employees of
the subsidiary as if it were the holding company’s own employees.

Same; Same; Same; The evidence on record is clear that by virtue of the agreement between PHIVIDEC
and PHILSUCOM, PHIVIDEC had expressly assumed liability for any claim against PRI.—It is clear from the
evidence of record that by virtue of the agreement between PHIVIDEC and PHILSUCOM, particularly the
stipulation exempting the latter from any “claim or liability arising out of any act or transaction” prior to
the turn-over, PHIVIDEC had expressly assumed liability for any claim against PRI. Since the accident
happened before that agreement and PRI ceased to exist after the turn-over, it should follow that
PHIVIDEC cannot evade its liability for the injuries sustained by the private respondent.

Same; Same; Same; Same; Veil of corporate fiction must be pierced and PHIVIDEC and PRI regarded as
one and the same entity.—A contrary conclusion would leave the private respondent without any
recourse for her legitimate claim. In the interest of justice and equity, and to prevent the veil of
corporate fiction from denying her the reparation to which she is entitled, that veil must be pierced and
PHIVIDEC and PRI regarded as one and the same entity.

PETITION to review the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

The Government Corporate Counsel for petitioner.

Ricardo P.C. Castro, Jr. for private respondent.

CRUZ, J.:

The concept of piercing the veil of corporate fiction is a mystique to many people, especially the layman.
But it is not as esoteric as all that as this case will demonstrate.

This case arose when Violeta M. Borres, private respondent herein, was injured in an accident that was
later held by the trial and respondent courts to be due to the negligence of Phividec Railways, Inc.
(PRI).1Rollo, pp. 25-34; 56-64. The accident occurred on March

_______________

1 Rollo, pp. 25-34; 56-64.

671

VOL. 181, JANUARY 30, 1990

671

Philippine Veterans Investment Development Corporation vs. Court of Appeals

 29, 1979. On May 25, 1979, petitioner Philippine Veterans Investment Development Corporation
(PHIVIDEC) sold all its rights and interests in the PRI to the Philippine Sugar Commission (PHILSUCOM).
Two days later, PHILSUCOM caused the creation of a wholly-owned subsidiary, the Panay Railways, Inc.,
to operate the railway assets acquired from PHIVIDEC. On January 21, 1980, Borres filed a complaint for
damages against PRI and Panay Railways Inc. (Panay),2Ibid., pp. 40-44. whereupon the latter filed with
leave of court a third-party complaint against the herein petitioner.3Id., pp. 37-39. It alleged that upon
the sale to PHILSUCOM of PRI, the corporate name of PRI was changed to Panay Railways, Inc. It
disclaimed liability on the ground that in the Agreement concluded between PHIVIDEC and PHILSUCOM,
it was provided that:

D. With the exception of the Liabilities and Contracts specified in Annexes 4 and 5 of the preceding
paragraph, PHIVIDEC hereby holds PHILSUCOM harmless from and against any action, claim or liability
that may arise out of or result from acts or omissions, contracts or transactions prior to the turn-over.

After trial, Judge Ricardo M. Ilarde of the Regional Trial Court of Iloilo held Phividec Railways, Inc.
negligent and so liable to the plaintiff for damages. It also held that as PRI was a wholly-owned
subsidiary of PHIVIDEC, the latter should answer for PRI’s liability. The decision was affirmed on appeal
by the respondent court,4Lombos-De la Fuente, J., with Martinez and Pe, JJ., concurring. which is now
faulted for grave abuse of discretion in this petition.

The sole issue raised in this petition is the ruling of the Court of Appeals that:

Thus, the piercing of the veil of corporate fiction is called for in the case at bar. When PRI was sold by
PHIVIDEC to PHILSUCOM on May 25, 1979, the legal fiction of PRI as a separate corporate entity from
PHIVIDEC disappeared pursuant to and in view of the representations and warranties contained in the
agreement of sale between

_______________
2 Ibid., pp. 40-44.

3 Id., pp. 37-39.

4 Lombos-De la Fuente, J., with Martinez and Pe, JJ., concurring.

672

672

SUPREME COURT REPORTS ANNOTATED

Philippine Veterans Investment Development Corporation vs. Court of Appeals

PHIVIDEC and PHILSUCOM, particularly the stipulation already quoted above, by virtue of which
PHIVIDEC held PHILSUCOM harmless from any claim or liability arising out of any act or transaction
“prior to the turn-over.” By virtue of this provision, PHIVIDEC had expressly assumed liability for any
claim arising before the turn-over of PRI to PHILSUCOM. And since the accident in question took place
before said turn-over and since after said turn-over PRI ceased to exist (in the sense that its railways
operations were taken over by PHILSUCOM thru the Panay RW), the only logical conclusion is that
PHIVIDEC should be solely liable for the damages to the plaintiff in the case at bar. Indeed, applying the
Koppel precedent just cited, PHIVIDEC cannot hide behind the veil of corporate fiction in order to evade
this liability, nor could the veil of corporate fiction be made a shield to confuse claimants such as
plaintiff-appellee.

It is the position of the petitioner that PHIVIDEC and PRI are entirely distinct and separate corporations
although the latter is its subsidiary. The transfer of the shares of stock of PRI to PHILSUCOM did not
divest PRI of its juridical personality or of its capacity to direct its own affairs and conduct its own
business under the control of its own board of directors. By the same token, it is answerable for its own
obligations, which cannot be passed on to the petitioner as its own liability. To support this stand, the
petitioner invokes the case of E.J. Nell v. Pacific Farms,515 SCRA 415. which, however, it has not
accurately quoted.

We must sustain the respondents.

In Koppel v. Yatco,677 Phil. 496. the Court, citing Fletcher, declared that the veil of corporate fiction may
be pierced when it is used to defeat public convenience, justify wrong, protect fraud, or defend
crime.7Ibid., p. 505, citing 1 Fletcher, Cyclopedia of Corporation; Permanent Ed., pp. 135-136. It added
that when the corporation is the mere alter ego or business conduit of a person it may be disregarded,
“to prevent injustice, or the distortion or hiding of the truth, or to let in a just defense.”8Fletcher, pp.
139-140.

The rule is that:

_______________

5 15 SCRA 415.

6 77 Phil. 496.

7 Ibid., p. 505, citing 1 Fletcher, Cyclopedia of Corporation; Permanent Ed., pp. 135-136.
8 Fletcher, pp. 139-140.

673

VOL. 181, JANUARY 30, 1990

673

Philippine Veterans Investment Development Corporation vs. Court of Appeals

Where it appears that 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 persons, disregard the
legal fiction that two corporations are distinct entities, and treat them as identical.9Abney v. Belmont
Country Club Properties, Inc. 279 Pac., 829.

In Yutivo Sons Hardware Co. v. Court of Tax Appeals,101 SCRA 160. this Court held:

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be connected. However,
“when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or
defend crime,” the law will regard the corporation as an association of persons, or in the case of two
corporations merge them into one. x x x Another rule is that, when the corporation is the “mere alter
ego or business conduit of a person, it may be disregarded.”

In Commissioner of Internal Revenue v. Norton and Harrison Co.,1111 SCRA 714. this Court likewise
ruled that where a corporation is merely an adjunct, business conduit or alter ego of another
corporation the fiction of separate and distinct corporate entities should be disregarded.

In fact, contrary to the suggestion in the petition, what the Court said in the Nell Case was:

Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser
expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a
consolidation or merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in
order to escape liability for such debts.

Moreover, as correctly pointed out by the respondent court:

_______________

9 Abney v. Belmont Country Club Properties, Inc. 279 Pac., 829.

10 1 SCRA 160.

11 11 SCRA 714.
674

674

SUPREME COURT REPORTS ANNOTATED

Philippine Veterans Investment Development Corporation vs. Court of Appeals

Besides, PHIVIDEC’s act of selling PRI to PHILSUCOM shows that PHIVIDEC had complete control of PRI’s
business. This circumstance renders applicable the rule cited by third-party plaintiff-appellee (Costan v.
Manila Electric, 24 F 2nd 383) that if a parent-holding company (PHIVIDEC in the present case) assumes
complete control of the operations of its subsidiary’s business, the separate corporate existence of the
subsidiary must be disregarded, such that the holding company will be responsible for the negligence of
the employees of the subsidiary as if it were the holding company’s own employees.

It is clear from the evidence of record that by virtue of the agreement between PHIVIDEC and
PHILSUCOM, particularly the stipulation exempting the latter from any “claim or liability arising out of
any act or transaction” prior to the turnover, PHIVIDEC had expressly assumed liability for any claim
against PRI. Since the accident happened before that agreement and PRI ceased to exist after the turn-
over, it should follow that PHIVIDEC cannot evade its liability for the injuries sustained by the private
respondent.
A contrary conclusion would leave the private respondent without any recourse for her legitimate claim.
In the interest of justice and equity, and to prevent the veil of corporate fiction from denying her the
reparation to which she is entitled, that veil must be pierced and PHIVIDEC and PRI regarded as one and
the same entity.

WHEREFORE, the challenged decision is AFFIRMED and the petition is DENIED, with costs against the
petitioner. It is so ordered.

Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

Decision affirmed. Petition denied.

Note.—A corporation has a personality distinct and separate from its individual stockholders or
members. (Cruz vs. Dalisay, 152 SCRA 482.)

——o0o—— Philippine Veterans Investment Development Corporation vs. Court of Appeals, 181 SCRA
669, G.R. No. 85266 January 30, 1990