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G.R. No. 166282. February 13, 2013.*

HEIRS OF FE TAN UY (Represented by her heir, Manling Uy

Lim), petitioners, vs. INTERNATIONAL EXCHANGE BANK,
respondent.

G.R. No. 166283. February 13, 2013.*

GOLDKEY DEVELOPMENT CORPORATION, petitioner, vs.
INTERNATIONAL EXCHANGE BANK, respondent.

Mercantile Law; Corporation Law; Obligations incurred by the

corporation, acting through its directors, officers and employees, are its sole
liabilities. A director, officer or employee of a corporation is generally not
held personally liable for obligations incurred by the corporation.―Basic is
the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for
and in its behalf and, in general, from the people comprising it. Following
this principle, obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities. A director, officer
or employee of a corporation is generally not held personally liable for
obligations incurred by the corporation. Nevertheless, this legal fiction may
be disregarded if it is used as a means to perpetrate 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.
Same; Same; Requisites Before a Director or Officer of a Corporation
Can be Held Personally Liable for Corporate Obligations.―Before a
director or officer of a corporation can be held personally liable for
corporate obligations, however, the following requisites must concur: (1) the
complainant must allege in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or bad faith.

_______________

* THIRD DIVISION.

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Heirs of Fe Tan Uy vs. International Exchange Bank

Same; Same; Piercing the Veil of Corporate Fiction; The piercing of

the veil of corporate fiction is frowned upon and can only be done if it has
been clearly established that the separate and distinct personality of the
corporation is used to justify a wrong, protect fraud, or perpetrate a
deception.―It behooves this Court to emphasize that the piercing of the veil
of corporate fiction is frowned upon and can only be done if it has been
clearly established that the separate and distinct personality of the
corporation is used to justify a wrong, protect fraud, or perpetrate a
deception. As aptly explained in Philippine National Bank v. Andrada
Electric & Engineering Company, 381 SCRA 244 (2002): Hence, any
application of the doctrine of piercing the corporate veil should be done
with caution. A court should be mindful of the milieu where it is to be
applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in
disregard of its rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application. Indeed, there is no
showing that Uy committed gross negligence. And in the absence of any of
the aforementioned requisites for making a corporate officer, director or
stockholder personally liable for the obligations of a corporation, Uy, as a
treasurer and stockholder of Hammer, cannot be made to answer for the
unpaid debts of the corporation.
Same; Same; Same; Under a variation of the doctrine of piercing the
veil of corporate fiction, 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 two corporations are distinct entities and treat them as identical
or one and the same.―Under a variation of the doctrine of piercing the veil
of corporate fiction, 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
two corporations are distinct entities and treat them as identical or one and
the same. While the conditions for the disregard of the juridical entity may
vary, the following are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, as laid down in
Concept Builders, Inc. v NLRC, 257 SCRA 149 (1996): (1) Stock ownership
by one or common ownership of both

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corporations; (2) Identity of directors and officers; (3) The manner of

keeping corporate books and records, and (4) Methods of conducting the
business.

PETITIONS for review on certiorari of the decision and resolution

of the Court of Appeals.
   The facts are stated in the opinion of the Court.
  Mario E. Valderama for petitioners in both cases.
  Macalino and Associates for respondent Bank.

MENDOZA, J.:
Before the Court are two consolidated petitions for review on
certiorari under Rule 45 of the 1997 Revised Rules of Civil
Procedure, assailing the August 16, 2004 Decision1 and the
December 2, 2004 Resolution2 of the Court of Appeals (CA) in CA-
G.R. CV No. 69817 entitled “International Exchange Bank v.
Hammer Garments Corp., et al.”
The Facts
On several occasions, from June 23, 1997 to September 3, 1997,
respondent International Exchange Bank (iBank), granted loans to
Hammer Garments Corporation (Hammer), covered by promissory
notes and deeds of assignment, in the following amounts:3

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1  Rollo (G.R. No. 166283), pp. 41-54; penned by Associate Justice Josefina
Guevara-Salonga and concurred in by Associate Justice Conrado M. Vasquez, Jr. and
Associate Justice Fernanda Lampas Peralta of the Seventh Division.
2 Id., at pp. 56-57.
3 Id., at pp. 62, 325, 414-431.

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Date of Promissory Note Amount

June 23, 1997 P 5,599,471.33
July 24, 1997 2,700,000.00
July 25, 1997 2,300,000.00
August 1, 1997 2,938,505.04
August 1, 1997 3,361,494.96
August 14, 1997 980,000.00
August 21, 1997 2,527,200.00
August 21, 1997 3,146,715.00
September 3, 1997 __1,385,511.75
Total P24,938,898.08

These were made pursuant to the Letter-Agreement,4 dated

March 23, 1996, between iBank and Hammer, represented by its

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President and General Manager, Manuel Chua (Chua) a.k.a. Manuel

Chua Uy Po Tiong, granting Hammer a P 25 Million-Peso Omnibus
Line.5 The loans were secured by a P 9 Million-Peso Real Estate
Mortgage6 executed on July 1, 1997 by Goldkey Development
Corporation (Goldkey) over several of its properties and a P 25
Million-Peso Surety Agreement7 signed by Chua and his wife, Fe
Tan Uy (Uy), on April 15, 1996.
As of October 28, 1997, Hammer had an outstanding obligation
of P25,420,177.62 to iBank.8 Hammer defaulted in the payment of
its loans, prompting iBank to foreclose on Goldkey’s third-party
Real Estate Mortgage. The mortgaged properties were sold for P 12
million during the foreclosure sale, leaving an unpaid balance of P
13,420,177.62.9 For failure of

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4 Id., at pp. 106-107.
5 Id., at pp. 60.
6 Id., at pp. 432-433.
7 Id., at pp. 434-435.
8 Id., at pp. 42, 60 and 350.
9 Id., at pp. 60-61.

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Hammer to pay the deficiency, iBank filed a Complaint10 for sum of

money on December 16, 1997 against Hammer, Chua, Uy, and
Goldkey before the Regional Trial Court, Makati City (RTC).11
Despite service of summons, Chua and Hammer did not file their
respective answers and were declared in default. In her separate
answer, Uy claimed that she was not liable to iBank because she
never executed a surety agreement in favor of iBank. Goldkey, on
the other hand, also denies liability, averring that it acted only as a
third-party mortgagor and that it was a corporation separate and
distinct from Hammer.12
Meanwhile, iBank applied for the issuance of a writ of
preliminary attachment which was granted by the RTC in its
December 17, 1997 Order.13 The Notice of Levy on Attachment of
Real Properties, dated July 15, 1998, covering the properties under
the name of Goldkey, was sent by the sheriff to the Registry of
Deeds of Quezon City.14
The RTC, in its Decision,15 dated December 27, 2000, ruled in
favor of iBank. While it made the pronouncement that the signature
of Uy on the Surety Agreement was a forgery, it nevertheless held
her liable for the outstanding obligation of Hammer because she was
an officer and stockholder of the said corporation. The RTC agreed
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with Goldkey that as a third-party mortgagor, its liability was limited

to the properties mortgaged. It came to the conclusion, however, that
Goldkey and Hammer were one and the same entity for the
following reasons: (1) both were family corporations of Chua and
Uy, with Chua as the President and Chief Operating Officer; (2) both
corporations shared the same office and

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10 Id., at pp. 349-357.
11 Id., at p. 321.
12 Id., at pp. 61-62.
13 Id., at p. 43.
14 Id., at pp. 323 and 385.
15 Id., at pp. 60-69.

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transacted business from the same place, (3) the assets of Hammer
and Goldkey were co-mingled; and (4) when Chua absconded, both
Hammer and Goldkey ceased to operate. As such, the piercing of the
veil of corporate fiction was warranted. Uy, as an officer and
stockholder of Hammer and Goldkey, was found liable to iBank
together with Chua, Hammer and Goldkey for the deficiency of
P13,420,177.62.
Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the
case to the CA. On August 16, 2004, it promulgated its decision
affirming the findings of the RTC. The CA found that iBank was not
negligent in evaluating the financial stability of Hammer. According
to the appellate court, iBank was induced to grant the loan because
petitioners, with intent to defraud the bank, submitted a falsified
Financial Report for 1996 which incorrectly declared the assets and
cashflow of Hammer.16 Because petitioners acted maliciously and in
bad faith and used the corporate fiction to defraud iBank, they
should be treated as one and the same as Hammer.17
Hence, these petitions filed separately by the heirs of Uy and
Goldkey. On February 9, 2005, this Court ordered the consolidation
of the two cases.18
The Issues
Petitioners raise the following issues:
Whether or not a trial court, under the facts of this case, can
go out of the issues raised by the pleadings;19
Whether or not there is guilt by association in those cases
where the veil of corporate fiction may be pierced;20 and

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16 Id., at pp. 46-47.
17 Id., at p. 50.
18 Rollo (G.R. No. 166282), p. 8a.
19 Id., at p. 22.
20 Id., at p. 22.

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Whether or not the “alter ego” theory in disregarding the

corporate personality of a corporation is applicable to
Goldkey.21
Simplifying the issues in this case, the Court must resolve the
following: (1) whether Uy can be held liable to iBank for the loan
obligation of Hammer as an officer and stockholder of the said
corporation; and (2) whether Goldkey can be held liable for the
obligation of Hammer for being a mere alter ego of the latter.
The Court’s Ruling
The petitions are partly meritorious.
Uy is not liable; The piercing of the
veil of corporate fiction is not justified
The heirs of Uy argue that the latter could not be held liable for
being merely an officer of Hammer and Goldkey because it was not
shown that she had committed any actionable wrong22 or that she
had participated in the transaction between Hammer and iBank.
They further claim that she had cut all ties with Hammer and her
husband long before the execution of the loan.23
The Court finds in favor of Uy.
Basic is the rule in corporation law that a corporation is a
juridical entity which is vested with a legal personality separate and
distinct from those acting for and in its behalf and, in general, from
the people comprising it. Following this principle, obligations
incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or employee of
a corporation is generally not

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21 Rollo (G.R. No. 166283), p. 20.
22 Id., at p. 253.
23 Id., at pp. 245-246.

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held personally liable for obligations incurred by the corporation.24

Nevertheless, this legal fiction may be disregarded if it is used as a
means to perpetrate 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.25 This is consistent with the provisions of
the Corporation Code of the Philippines, which states:

Sec. 31. Liability of directors, trustees or officers.―Directors or trustees

who wilfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

Solidary liability will then attach to the directors, officers or

employees of the corporation in certain circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of a

corporation: (a) vote for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross negligence in directing the
corporate affairs; and (c) are guilty of conflict of interest to the prejudice of
the corporation, its stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or stipulated
to hold himself personally and solidarily liable with the corporation; or

_______________
24 Garcia v. Social Security Commission Legal and Collection, G.R. No. 170735, December
17, 2007, 540 SCRA 456, 473-474.
25  Aratea v. Suico, G.R. No. 170284, March 16, 2007, 518 SCRA 501, 507 citing
Prudential Bank v. Alviar, 502 Phil. 595; 464 SCRA 353 (2005).

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4. When a director, trustee or officer is made, by specific provision of law,

personally liable for his corporate action.26

Before a director or officer of a corporation can be held

personally liable for corporate obligations, however, the following
requisites must concur: (1) the complainant must allege in the
complaint that the director or officer assented to patently unlawful

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acts of the corporation, or that the officer was guilty of gross

negligence or bad faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or bad faith.27
While it is true that the determination of the existence of any of
the circumstances that would warrant the piercing of the veil of
corporate fiction is a question of fact which cannot be the subject of
a petition for review on certiorari under Rule 45, this Court can take
cognizance of factual issues if the findings of the lower court are not
supported by the evidence on record or are based on a
misapprehension of facts.28
In this case, petitioners are correct to argue that it was not
alleged, much less proven, that Uy committed an act as an officer of
Hammer that would permit the piercing of the corporate veil. A
reading of the complaint reveals that with regard to Uy, iBank did
not demand that she be held liable for the obligations of Hammer
because she was a corporate officer who committed bad faith or
gross negligence in the performance of her duties such that the
lifting of the corporate mask would be merited. What the complaint
simply stated is that she, together with her errant husband Chua,
acted as surety of Hammer, as evidenced by her signature on the

_______________
26  Uichico v. National Labor Relations Commission, 339 Phil. 242, 252; 273
SCRA 35, 45-46 (1997).
27 Francisco v. Mallen, Jr., G.R. No. 173169, September 22, 2010, 631 SCRA
118, 123.
28 Sarona v. National Labor Relations Commission, G.R. No. 185280, January 18,
2012, 663 SCRA 394, 415.

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Surety Agreement which was later found by the RTC to have been
forged.29
Considering that the only basis for holding Uy liable for the
payment of the loan was proven to be a falsified document, there
was no sufficient justification for the RTC to have ruled that Uy
should be held jointly and severally liable to iBank for the unpaid
loan of Hammer. Neither did the CA explain its affirmation of the
RTC’s ruling against Uy. The Court cannot give credence to the
simplistic declaration of the RTC that liability would attach directly
to Uy for the sole reason that she was an officer and stockholder of
Hammer.
At most, Uy could have been charged with negligence in the
performance of her duties as treasurer of Hammer by allowing the
company to contract a loan despite its precarious financial position.
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Furthermore, if it was true, as petitioners claim, that she no longer

performed the functions of a treasurer, then she should have
formally resigned as treasurer to isolate herself from any liability
that could result from her being an officer of the corporation.
Nonetheless, these shortcomings of Uy are not sufficient to justify
the piercing of the corporate veil which requires that the negligence
of the officer must be so gross that it could amount to bad faith and
must be established by clear and convincing evidence. Gross
negligence is one that is characterized by the lack of the slightest
care, acting or failing to act in a situation where there is a duty to
act, wilfully and intentionally with a conscious indifference to the
consequences insofar as other persons may be affected.30
It behooves this Court to emphasize that the piercing of the veil
of corporate fiction is frowned upon and can only be done if it has
been clearly established that the separate and distinct personality of
the corporation is used to justify a wrong,

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29 Rollo (G.R. No. 166283), pp. 64 and 351.
30 Magaling v. Ong, G.R. No. 173333, August 13, 2008, 562 SCRA 152, 169-170.

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protect fraud, or perpetrate a deception.31 As aptly explained in

Philippine National Bank v. Andrada Electric & Engineering
Company:32

Hence, any application of the doctrine of piercing the corporate veil

should be done with caution. A court should be mindful of the milieu where
it is to be applied. It must be certain that the corporate fiction was misused
to such an extent that injustice, fraud, or crime was committed against
another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that
was never unintended may result from an erroneous application.33

Indeed, there is no showing that Uy committed gross negligence.

And in the absence of any of the aforementioned requisites for
making a corporate officer, director or stockholder personally liable
for the obligations of a corporation, Uy, as a treasurer and
stockholder of Hammer, cannot be made to answer for the unpaid
debts of the corporation.
Goldkey is a mere alter ego of Hammer
Goldkey contends that it cannot be held responsible for the
obligations of its stockholder, Chua.34 Moreover, it theorizes that
iBank is estopped from expanding Goldkey’s liability beyond the
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35
real estate mortgage. It adds that it did not authorize the execution
of the said mortgage.36 Finally, it passes the blame on to iBank for
failing to exercise the requisite due diligence in properly evaluating
Hammer’s creditworthiness before it was extended an omnibus
line.37

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31 Kukan International Corporation v. Reyes, G.R. No. 182729, September 29,
2010, 631 SCRA 596, 628.
32 430 Phil. 882; 381 SCRA 244 (2002).
33 Philippine National Bank v. Andrada Electric & Engineering Company, 430
Phil. 882, 894; 381 SCRA 244, 254 (2002).
34 Rollo (G.R. No. 166283), p. 257.
35 Id., at p. 260.
36 Id., at p. 262.
37 Id., at p. 234.

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The Court disagrees with Goldkey.

There is no reason to discount the findings of the CA that iBank
duly inspected the viability of Hammer and satisfied itself that the
latter was a good credit risk based on the Financial Statement
submitted. In addition, iBank required that the loan be secured by
Goldkey’s Real Estate Mortgage and the Surety Agreement with
Chua and Uy. The records support the factual conclusions made by
the RTC and the CA.
To the Court’s mind, Goldkey’s argument, that iBank is barred
from pursuing Goldkey for the satisfaction of the unpaid obligation
of Hammer because it had already limited its liability to the real
estate mortgage, is completely absurd. Goldkey needs to be
reminded that it is being sued not as a consequence of the real estate
mortgage, but rather, because it acted as an alter ego of Hammer.
Accordingly, they must be treated as one and the same entity,
making Goldkey accountable for the debts of Hammer.
In fact, it is Goldkey who is now precluded from denying the
validity of the Real Estate Mortgage. In its Answer with Affirmative
Defenses and Compulsory Counterclaim, dated January 5, 1998, it
already admitted that it acted as a third-party mortgagor to secure
the obligation of Hammer to iBank.38 Thus, it cannot, at this late
stage, question the due execution of the third-party mortgage.
Similarly, Goldkey is undoubtedly mistaken in claiming that
iBank is seeking to enforce an obligation of Chua. The records
clearly show that it was Hammer, of which Chua was the president
and a stockholder, which contracted a loan from iBank. What iBank
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sought was redress from Goldkey by demanding that the veil of

corporate fiction be lifted so that it could not raise the defense of
having a separate juridical personality to evade liability for the
obligations of Hammer.

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38 Id., at pp. 367-368.

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Under a variation of the doctrine of piercing the veil of corporate

fiction, 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 two corporations are distinct entities and treat them as
identical or one and the same.39While the conditions for the
disregard of the juridical entity may vary, the following are some
probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, as laid down in Concept
Builders, Inc. v. NLRC:40
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.41

These factors are unquestionably present in the case of Goldkey

and Hammer, as observed by the RTC, as follows:

1. Both corporations are family corporations of defendants Manuel Chua

and his wife Fe Tan Uy. The other incorporators and shareholders of the two
corporations are the brother and sister of Manuel Chua (Benito Ng Po Hing
and Nenita Chua Tan) and the sister of Fe Tan Uy, Milagros Revilla. The
other incorporator/share holder is Manling Uy, the daughter of Manuel Chua
Uy Po Tiong and Fe Tan Uy.
The stockholders of Hammer Garments as of March 23, 1987, aside from
spouses Manuel and Fe Tan Uy are: Benito Chua, brother Manuel Chua,
Nenita Chua Tan, sister of Manuel Chua and Tessie

_______________
39 General Credit Corporation v. Alsons Development and Investment Corporation, 542
Phil. 219, 231; 513 SCRA 225, 238 (2007).
40 326 Phil. 955; 257 SCRA 149 (1996).
41 Concept Builders, Inc. v. NLRC, 326 Phil. 955, 965; 257 SCRA 149, 158 (1996).

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See Chua Tan. On March 8, 1988, the shares of Tessie See Chua Uy were
assigned to Milagros T. Revilla, thereby consolidating the shares in the
family of Manuel Chua and Fe Tan Uy.
2. Hammer Garments and Goldkey share the same office and practically
transact their business from the same place.
3. Defendant Manuel Chua is the President and Chief Operating Officer of
both corporations. All business transactions of Goldkey and Hammer are
done at the instance of defendant Manuel Chua who is authorized to do so
by the corporations.
The promissory notes subject of this complaint are signed by him as
Hammer’s President and General Manager. The third-party real estate
mortgage of defendant Goldkey is signed by him for Goldkey to secure the
loan obligation of Hammer Garments with plaintiff “iBank. The other third-
party real estate mortgages which Goldkey executed in favor of the other
creditor banks of Hammer are also signed Manuel Chua.
4. The assets of Goldkey and Hammer are co-mingled. The real properties
of Goldkey are mortgaged to secure Hammer’s obligation with creditor
banks.
The proceeds of at least two loans which Hammer obtained from plaintiff
“iBank”, purportedly to finance its export to Wal-Mart are instead used to
finance the purchase of a manager’s check payable to Goldkey. The
defendants’ claim that Goldkey is a creditor of Hammer to justify its receipt
of the Manager’s check is not substantiated by evidence. Despite subpoenas
issued by this Court, Goldkey thru its treasurer, defendant Fe Tan Uy and or
its corporate secretary Manling failed to produce the Financial Statement of
Goldkey.
5. When defendant Manuel Chua “disappeared”, the defendant Goldkey
ceased to operate despite the claim that the other “officers” and stockholders
like Benito Chua, Nenita Chua Tan, Fe Tan Uy, Manling Uy and Milagros T.
Revilla are still around and may be able to continue the business of
Goldkey, if it were different or distinct from Hammer, which suffered
financial set back.42

Based on the foregoing findings of the RTC, it was apparent that

Goldkey was merely an adjunct of Hammer and, as

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42 Rollo (G.R. No. 166283), pp. 66-67.

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such, the legal fiction that it has a separate personality from that of
Hammer should be brushed aside as they are, undeniably, one and
the same.
WHEREFORE, the petitions are PARTLY GRANTED. The
August 16, 2004 Decision and the December 2, 2004 Resolution of
the Court of Appeals, in CA-G.R. CV No. 69817, are hereby
MODIFIED. Fe Tan Uy is released from any liability arising from
the debts incurred by Hammer from iBank. Hammer Garments
Corporation, Manuel Chua Uy Po Tiong and Goldkey Development
Corporation are jointly and severally liable to pay International
Exchange Bank the sum of
P 13,420,177.62 representing the unpaid loan obligation of Hammer
as of December 12, 1997 plus interest. No costs.
SO ORDERED.

Velasco, Jr. (Chairperson), Abad, Villarama, Jr.** and Leonen,

JJ., concur.

Petitions partly granted, judgment and resolution modified.

Notes.―Under the doctrine of “piercing the veil of corporate

fiction,” the court looks at the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a
group, disregarding the separate juridical personality of the
corporation unifying the group. (Kukan International Corporation
vs. Reyes, 631 SCRA 596 [2010])
A corporation not impleaded in a suit cannot be subject to the
court’s process of piercing the veil of its corporate fiction—in that
situation, the court has not acquired jurisdiction over the corporation
and, hence, any proceedings taken against that corporation and its
property would infringe on its right to due process. (Ibid.)
――o0o―― 
_______________
** Designated additional member in lieu of Associate Justice Diosdado M.
Peralta, per raffle, dated July 20, 2011.

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