FACTS
Concept Builders, Inc. (Concept Builders) was a domestic corporation engaged in the construction business. The private respondents were its employees, working as laborers, carpenters, and riggers. In November 1981, they were individually given notices terminating their employment effective November 30, 1981, on the ground that their employment contracts had expired and that the project for which they had been hired had already been completed. The National Labor Relations Commission (NLRC), however, found that the project had not actually been completed and that Concept Builders had engaged subcontractors whose workers performed the same functions previously performed by the employees. The employees consequently filed a complaint for illegal dismissal, unfair labor practice, and nonpayment of legal holiday pay, overtime pay, and 13th-month pay.
On December 19, 1984, the Labor Arbiter ordered Concept Builders to reinstate the employees and to pay them back wages equivalent to one year or 300 working days. The NLRC later dismissed Concept Builders' motion for reconsideration, making the decision final and executory. A writ of execution was issued, and a portion of the judgment award was satisfied through garnishment. An alias writ was subsequently issued for the remaining balance of ₱117,414.76, together with the order to reinstate the employees.
When the sheriff attempted to enforce the alias writ, he discovered that Concept Builders was no longer occupying its former premises. The persons inside the premises claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI). The sheriff also encountered resistance from security guards and was unable to remove the properties he had levied upon. He therefore recommended the issuance of a break-open order. A third-party claim was then filed by Dennis Cuyegkeng, who asserted that the properties were owned by HPPI rather than Concept Builders. The employees opposed the claim and argued that HPPI and Concept Builders were essentially the same corporation.
The NLRC eventually issued a break-open order against Concept Builders and HPPI and dismissed the third-party claim. The NLRC found significant similarities between the two corporations. Their General Information Sheets showed the same president, board of directors, corporate officers, and subscribers, and both corporations had the same office address. The NLRC concluded that Concept Builders had ceased its operations to evade its obligation to pay the employees' back wages and to prevent their reinstatement, while HPPI was being used as a business conduit. Concept Builders challenged the NLRC's action before the Supreme Court, arguing that HPPI had a separate and distinct juridical personality and that the NLRC had committed grave abuse of discretion.
ISSUE
The first issue was whether the NLRC correctly applied the doctrine of piercing the corporate veil to Concept Builders and HPPI. Concept Builders maintained that a corporation has a personality separate and distinct from its stockholders and from other corporations, and that HPPI's properties could not be used to satisfy Concept Builders' judgment debt merely because the corporations were allegedly related.
The second issue was whether the facts justified disregarding the separate juridical personality of HPPI and treating it as a mere instrumentality or alter ego of Concept Builders. The Court had to determine whether the common ownership, officers, directors, subscribers, corporate address, and manner of conducting business demonstrated the degree of control and misuse of the corporate fiction necessary to pierce the corporate veil.
HELD
The Supreme Court DENIED the petition and sustained the NLRC's action. The Court held that the corporate veil between Concept Builders and HPPI was properly pierced. The separate juridical personality of a corporation is a fundamental principle of corporation law, but it is a fiction created by law for convenience and to promote justice. When that fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the corporate personality may be disregarded.
The Court identified several probative factors of identity that may justify piercing the corporate veil: (1) stock ownership by one corporation or common ownership of both corporations; (2) identity of directors and officers; (3) the manner of keeping corporate books and records; and (4) the methods of conducting the business. The Court also discussed the instrumentality rule, under which the corporate entity may be disregarded when one corporation is so organized and controlled that it is merely an instrumentality or adjunct of another.
The Court stated the three-part test for applying the instrumentality rule: first, there must be control—not merely majority or complete stock control, but complete domination of finances, policy, and business practices concerning the transaction involved, such that the controlled corporation had no separate mind, will, or existence of its own; second, such control must have been used to commit fraud or wrong, perpetuate a violation of a statutory or other positive legal duty, or perform a dishonest and unjust act in violation of another's legal rights; and third, the control and breach of duty must have been the proximate cause of the injury or unjust loss complained of.
Applying these principles, the Court found that Concept Builders and HPPI had the same president, board of directors, corporate officers, and subscribers, and that they maintained the same business address. The circumstances showed that Concept Builders had ceased its operations in order to evade the payment of the employees' back wages and to prevent their reinstatement, while HPPI emerged as the business conduit through which the corporate obligation could be avoided. The Court therefore held that HPPI could not invoke its separate juridical personality to defeat the employees' lawful claims.
Accordingly, the Supreme Court sustained the piercing of the corporate veil and the NLRC's issuance of the break-open order. The corporate fiction could not be used as a shield to evade Concept Builders' obligations to its illegally dismissed employees. The Court thus upheld the NLRC's action in treating the two corporations as one for purposes of enforcing the judgment award.
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