PNB v. Hydro Resources

I.SHORT TITLE: PNB V.
HRCC
II. FULL TITLE: Philippine National Bank versus Hydro Resources Contractors
Corporation – G.R. No. 167530,
Asset Privitization Trust versus Hydro Resources Contractors
Corporation – G.R. No. 167561,
Development Bank of the Philippines versus Hydro Resources
Contractors Corporation – G.R. No. 167603,
March 13, 2013, J. Leonardo-De Castro
III. TOPIC: Doctrine of Piercing the Corporate Veil – Test in determining

applicability
IV. STATEMENT OF FACTS:

Petitioners DBP and PNB foreclosed the properties of Marinduque Mining. As a result, it
acquired the substantial assets of MMIC, 57% for DBP and 43% for PNB. The two banks
resumed the business operations of MMIC as Nonoc Mining and Industrial Corp.
NMIC contracted Hercon for its construction program. After accounting, Hercon found out that
NMIC still has an unpaid balance of P8,370,934.74. It made several demands on NMIC but it
was ignored. Thus, it filed a complaint for sum of money before the RTC Makati to hold NMIC,
DBP, and PNB solidarily liable for the amount owing to Hercon.
Hercon was acquired by Hydro in a merger and the complaint was properly amended to
substitute Hydro as the plaintiff.
Meanwhile, President Cory Aquino issued a proclamation that created APT for the expeditious
disposition and privatization of government corporations and assets. Pursuant to the
proclamation, DBP and PNB transferred in favor of the National Government certain assets and
liabilities, including their respective stakes in NMIC. The National Government then transferred
the said assets and liabilities to APT as a trustee. The complaint was again properly amended to
implead APT as a defendant.
NMIC, PNB, DBP and APT filed their answers which included claims that HRCC has no cause
of action. For NMIC, its contract with Hydro was entered by its President without any authority
and that the contract was excessive and disadvantageous. For DBP and PNB, it said that it is not
privy to the contract between NMIC and Hydro and that NMIC has separate juridical personality.
For APT, it claimed lack of privity with Hercon/Hydro.
V. STATEMENT OF THE CASE:

It filed a complaint for sum of money before the RTC Makati to hold NMIC, DBP, and PNB
solidarily liable for the amount owing to Hercon. RTC Makati decided in favor of Hydro. It
pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC.
DBP and PNB filed their respective appeals with the appellate court. The CA affirmed the
decision of RTC to pierce the corporate veil of NMIC. It said that treating NMIC as separate
legal entity from DBP and PNB for securing beneficial contracts and then using the separate
entity to evade the payment of a just debt, would be the height of injustice.
DBP, PNB and APT filed its respective motions for reconsideration but was subsequently denied.
VI. ISSUE:
Whether or not piercing the corporate veil was proper.
VII. RULING:
No.
A corporation is an artificial entity created by operation of law and possess the right of
succession and such powers, attributes, and properties expressly authorized by law or incident to
its existence. It has a personality separate and distinct from that of its stockholders and from that
of other corporations to which it may be connected. A corporation incurs its own liabilities and is
legally responsible for payment of its obligations. By virtue of the separate juridical personality,
the corporate debt is not the debt of the stockholder.
The corporate veil may be pierced when the corporation is just an alter ego of a person or of
another corporation. It shall be impaled only when it becomes an avenue for injustice, fraud and
illegality. With this, courts must be careful in assessing circumstances of the case when the
corporate veil is sought to be pierced.
Any application of the doctrine of piercing the corporate veil should be done with due care and
caution. It must be certain that the corporate fiction was misused to defraud, or cause injustice
against another. It applies in 3 situations, namely:
1. When the corporate fiction is used as a vehicle for the evasion of an existing obligation;
2. When the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or
3. 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.
Hydro alleged that DBP and PNB should be held solidarily liable with NMIC as its alter egos. To
test whether a corporation is merely an alter ego of another, it must pass the three-pronged test,
namely:
1. “Instrumentality” or “Control” Test – the control must be complete domination, not only
of finances but of practices and policy in respect to the transaction complained of. There
must be an actual control meaning the subsidiary must be completely under the control
and domination of the parent. The subsidiary must be so organized and controlled and its
affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation. The subsidiary has no mind, no will of its own, no independent existence, no
autonomy from the parent corporation and is merely a conduit for the principal. The
principal, through its subsidiary is operating the business directly for itself.
In addition, the control must be shown to have been exercised at the time the acts complained of
took place.
2. “Fraud” Test – the subsidiary corporation was used to defraud and cause injustice to
another person. To disregard the separate juridical personality of a corporation, the
wrongdoing or the unjust act in contravention of the plaintiff’s rights must be clearly and
convincingly established.
3. “Harm” Test – the transaction complained of must cause the injury suffered by the
plaintiff. There must be a causal connection between the fraudulent conduct committed
through the subsidiary and injury that was dealt to the plaintiff.
To summarize, piercing the corporate veil based on alter ego theory requires: control of the
corporation by the stockholder/another corporation; fraud or fundamental unfairness imposed on
the plaintiff; and harm was caused to the plaintiff by the fraudulent act of the corporation. All
requisites must be present.
There were no requisites met in this case.
In applying the alter ego doctrine, the court looks into the reality and not what is on the paper.
For the first element, the trial and appellate court based its application of the alter ego theory on
the ownership by DBP and PNB of all the stocks of NMIC and the interlocking directorates of
DBP, PNB, and NMIC. While the ownership by one corporation of all or great majority of stocks
of another corporation and interlocking directorates may serve as indication of control, these are
insufficient to establish alter ego relationship to justify the piercing of the corporate veil. Mere
ownership of all or nearly all of the capital stock of a corporation is not of itself sufficient ground
for disregarding separate corporate personality.
In this case, there was no showing that corporate finances, policies and practices of NMIC were
dominated by DBP and PNB in such a way that it can be considered that NMIC had no mind,
will or existence of its own. There was also no showing that DBP, PNB, and NMIC had
interlocking directorates.
For the second element, the CA admitted that they are not saying that “PNB and DBP are guilty
of fraud in forming NMIC nor are we implying that it was used to conceal fraud.” Indeed, it
clearly negates the defrauding intent of DBP and PNB in organizing the NMIC. There was no
evidence of fraudulent, illegal or unfair act committed against Hydro by DBP and PNB.
For the third element, no harm could be said to have been proximately caused by DBP and PNB
on Hydro because there was no actual control nor was there a fraud or fundamental unfairness
perpetuated.
VIII. DISPOSITIVE PORTION:

WHEREFORE, the petitions are hereby GRANTED.
The complaint as against Development Bank of the Philippines, the Philippine National Bank,
and the Asset Privatization Trust, now the Privatization and Management Office, is DISMISSED
for lack of merit. The Asset Privatization Trust, now the Privatization and Management Office,
as trustee of Nonoc Mining and Industrial Corporation, now the Philnico Processing
Corporation, is DIRECTED to ensure compliance by the Nonoc Mining and Industrial
Corporation, now the Philnico Processing Corporation, with this Decision. AaIDHS
SO ORDERED.
IX. PREPARED BY: Ian Joshua P. Romasanta

PNB v. Hydro Resources

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I.SHORT TITLE: PNB V.

III. TOPIC: Doctrine of Piercing the Corporate Veil – Test in determining

IV. STATEMENT OF FACTS:

V. STATEMENT OF THE CASE:

There were no requisites met in this case.

VIII. DISPOSITIVE PORTION:

IX. PREPARED BY: Ian Joshua P. Romasanta

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