Maricalum Mining Corp. v.

Florentino
GR. No. 221813, July 23, 2018| Tablizo

Doctrine:
The doctrine of piercing the corporate veil applies only in three (3) basic areas: Defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation,
Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime , and
in Alter ego cases, where a corporation is 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.

In order for a parent corporation to be held liable for the obligations or liabilities of its subsidiary, all
three (3) tests must be satisfied. "Piercing of the corporate veil" cannot be done when only one or two of
the said tests have been satisfied.

Facts:
The dispute traces its roots back to when the Philippine National Bank (PNB, a former
government-owned-and-controlled corporation) and the Development Bank of the Philippines (DBP)
transferred its ownership of Maricalum Mining to the National Government for disposition or
privatization because it had become a non-performing asset.

National Government through the Asset Privatization Trust (APT) executed a Purchase and Sale
Agreement (PSA) with G Holdings. G Holding bought 90% of Maricalum Mining's shares and financial
claims in the form of company notes. Concomitantly, G Holdings also assumed Maricalum Mining's
liabilities in the form of company notes. Upon the signing of the Purchase and sale agreement and paying
the stipulated down payment, G Holdings immediately took physical possession of Maricalum's Sipalay
Mining Complex, as well as its facilities, and took full control of the latter's management and operations.

Subsequently, the Sipalay General Hospital, Inc. (Sipalay Hospital) was duly incorporated to
provide medical services and facilities to the general public. Afterwards, some of Maricalum Mining's
employees retired and formed several manpower cooperatives (there were 5 in total). Each of the
cooperatives executed identical Memorandum of Agreements with Maricalum wherein they will
Maricalum with a steady supply of workers, machinery and equipment for a monthly fee.

Maricalum informed the cooperatives that it decided to stop its mining and milling operations in
order to avert continuing losses brought about by the low metal prices and high cost of production. The
properties of Maricalum, which had been mortgaged to secure the Promisorry Notes, were extrajudicially
foreclosed and eventually sold to G Holdings as the highest bidder.

Some of Maricalum's workers, including complainants, and some of Sipalay General Hospital's
employees jointly filed a Complaint with the LA against G Holdings for illegal dismissal and other
labor-related claims (Case 1)
 Complainants and CeMPC (one of the cooperatives) Chairman Sitchon filed his complaint for
illegal dismissal and corresponding monetary claims with the LA against G Holdings, its officer-in-
charge and CeMP. Thereafter, the complaints were consolidated by the LA. (Case 2)

Complainants: Claimed that G holdings had full control over them and their services were terminated by
Maricalum as part of its retrenchment program. They claimed that they were forced to form a cooperative
and they were "rehired" only after their respective manpower cooperative services were formed. They
claimed that the manpower cooperatives were mere alter egos of G Holdings organized.

G Holdings, (being the parent company) argued that: They had no control because there is no No EE-ER
between G holdings and the complainants. And that Maricalum should have been impleaded because it is
supposed to be the indispensable party in the present suit; it also argued that Maricalum as well as the
manpower cooperatives, each have distinct legal personalities and that their individual corporate liabilities
cannot be imposed upon each other.

LA ruled in favor of complainants: complainants effectively became the employees of G Holdings

NLRC: Modified the decision of LA. Imposed liability of paying the monetary awards of the
complainants against the corporation Maricalum, not G Holdings: (Important)

NLRC RULED THAT it was Maricalum-not G Holdings- who entered into service contracts by way of a
MOA with each of the manpower cooperatives and complainants continued rendering their services at the
insistence of Maricalum through their cooperatives; Maricalum never relinquished possession over the
Sipalay Mining Complex; Maricalum continuously availed of the services of complainants through their
respective manpower cooperatives; and lastly in a previous case, the Court already held that G Holdings
and Maricalum Mining have separate and distinct corporate personalities.

CA: Affirmed decision of NLRC

Issue:
Whether or not the court should allow the piercing of the corporate veil of subsidiary Mariculum and G
holdings as the parent corporation?

Held:

No.. The corporate veil should not be pierced. Maricalum and G holdings has separate and distinct
juridical personality.

The doctrine of piercing the corporate veil applies only in three (3) basic areas: Defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation,
Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime , and
in Alter ego cases, where a corporation is 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.

Complainants mainly harp their cause on the alter ego theory. Under this theory, piercing the veil of
corporate fiction may be allowed only if the following elements concur:

1. Control-not mere stock control, but complete domination-not only of finances, but of policy and
business practice in respect to the transaction attacked, must have been such that the corporate
entity as to this transaction had at the time no separate mind, will or existence of its own;
 Such control must have been used by the defendant to commit a fraud or a wrong, to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an
unjust act in contravention of plaintiffs legal right;
 And the said control and breach of duty must have proximately caused the injury or
unjust loss complained of.

In relation to the elements above, SC laid down the jurisprudential tests for piercing, to wit.

Piercing the corporate veil based on the alter ego theory requires the concurrence of three (3)
elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental
unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or
unfair act of the corporation.—The elements of the alter ego theory were discussed in

Philippine National Bank v. Hydro Resources Contractors Corporation:

1. The first prong is the “instrumentality” or “control” test. This test requires that the
subsidiary be completely under the control and domination of the parent. It examines
the parent corporation’s relationship with the subsidiary. It inquires whether a
subsidiary corporation is so organized and controlled and its affairs are so conducted
as to make it a mere instrumentality or agent of the parent corporation such that its
separate existence as a distinct corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no autonomy and the parent corporation,
though acting through the subsidiary in form and appearance, “is operating the
business directly for itself.”
2. The second prong is the “fraud” test. This test requires that the parent corporation’s
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It
examines the relationship of the plaintiff to the corporation. It recognizes that
piercing is appropriate only if the parent corporation uses the subsidiary in a way that
harms the plaintiff creditor. As such, it requires a showing of “an element of injustice
or fundamental unfairness.”
3. The third prong is the “harm” test. This test requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner
toward it, caused the harm suffered. A causal connection between the fraudulent
conduct committed through the instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff should be established. The plaintiff
must prove that, unless the corporate veil is pierced, it will have been treated unjustly
 by the defendant’s exercise of control and improper use of the corporate form and,
thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory requires
the concurrence of three elements: control of the corporation by the stockholder or
parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The
absence of any of these elements prevents piercing the corporate veil.

Application:

1. Control Test: There is no doubt that G Holdings - being the majority and controlling
stockholder - had been exercising signifcant control over Maricalum Mining. This is
because this Court had already upheld the validity and enforceability of the Purchase
and Sale Agreement (PSA) between the APT and G Holdings. It was stipulated in the
PSA that APT shall transfer 90% of Maricalum Mining’s equity securities to G
Holdings and it establishes the presence of absolute control of a subsidiary’s
corporate affairs. It can be reasonably inferred that G Holdings is paying for
Maricalum Mining’s salary expenses. Hence, the presence of both circumstances of
dominant equity ownership and provision for salary expenses may adequately
establish that Maricalum Mining is an instrumentality of G Holdings.

However, mere presence of control and full ownership of a parent over a

2. Fraud Test: No clear and convincing evidence was presented by the complainants to
conclusively prove the presence of fraud on the part of G Holdings.

In this case, G Holdings cannot be held liable for the satisfaction of labor-related
claims against Maricalum Mining under the fraud test for the following reasons:
 First, the transfer of some Maricalum Mining’s assets in favor G Holdings
was by virtue of the PSA as part of an official measure to dispose of the
government’s nonperforming assets — not to evade its monetary obligations
to the complainants.
 No fraud could be attributed to G Holdings because the transfer of assets was
pursuant to a previously perfected valid contract.
 Second, it was not proven that all of Maricalum Mining’s assets were
transferred to G Holdings or were totally depleted. Complainants never
offered any evidence to establish that Maricalum Mining had absolutely no
substantial assets to cover for their monetary claims.
 Lastly, to disregard the separate juridical personality of a corporation, the
wrongdoing must be established clearly and convincingly — it cannot be
presumed.

Here, the complainants did not satisfy the requisite quantum of evidence to
prove fraud on the part of G Holdings.
 3. Harm Test: In the case at bench, complainants have not yet even suffered any
monetary injury. They have yet to enforce their claims against Maricalum.

In WPM International Trading, Inc., et al. v. Labayen, the Court laid down the
criteria for the harm or casual connection test,

In this connection, we stress that the control necessary to invoke the instrumentality
or alter ego rule is not majority or even complete stock control but such domination
of finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. The
control must be shown to have been exercised at the time the acts complained of took
place. Moreover, the control and breach of duty must proximately cause the
injury or unjust loss for which the complaint is made.

Since complainants failed to show that G Holdings’ mere exercise of control had a
clear hand in the depletion of Maricalum Mining’s assets, no proximate cause was
successfully established.

Hence, in order for a parent corporation to be held liable for the obligations or liabilities of its subsidiary,
all three (3) tests must be satisfied. "Piercing of the corporate veil" cannot be done when only one or two
of the said tests have been satisfied.

In the present case, only one of the three (3) tests was met (particularly, control). The complainants
therein (who claimed to be employees of the subsidiary) failed to prove that the parent purposely used the
separate corporate fiction of its subsidiary to defraud them; neither were complainants able to show any
harm inflicted upon them, which was proximately caused by the control of the parent over the subsidiary.

In other words, while control was undoubtedly present in this case, there was neither fraud done nor
harm inflicted. Hence, the complainants were held unable to proceed against the parent corporation for
supposed liabilities of its subsidiary, in keeping with the principle of separate and distinct juridical
personalities of corporations.

Leonen Dissent: DISSENT as to the ruling that the corporate veil should not be pierced. I maintain that
the doctrine of piercing the corporate veil properly applies and that G Holdings, Inc. should be held liable
with Maricalum Mining Corporation G Holdings did not merely own Maricalum Mining sa holding
company. It had a say in its processes and procedures.

Thus, it cannot claim to be innocent. It cannot participate in the illegal dismissal of employees and
thereafter hide behind its separate corporate personality to avoid the liability arising from it. The elements
of control, bad faith, and injury are present in the case at bar. Moreover, assuming that the case does not
fall within the purview of fraud or alter-ego cases, the doctrine of piercing the corporate veil still applies
when the separate personality of the corporation is being used to "defeat public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing obligation. It is established that the
relations between capital and labor are impressed with public interest, with the working class usually at a
disadvantage. Thus, in case of doubt, courts rule in favor of labor.