Question: Is the DOCTRINE THAT A CORPORATION IS A LEGAL ENTITY DISTINCT AND SEPARATE FROM THE MEMBERS AND STOCKHOLDERS A hard fast rule? Well not all the time.
It's kinda bit complicated when you read this case. But here's what's its all about. It's all about FOUR CONTRACTS OF SALE:
1. Villarama → PANTRANCO (Conditional Sale - 2 Certificates)
2. CORPORATION ← Fernando ( 5 Certificates)
3. SHERIFF → Ferrer (Public Bidding - 2 Certificates)
4. Ferrer → PANTRANCO (Subsequent Sale - 2 Certificates)
Just pay attention to the first one, co'z the crux of this case lies in it. Let me give you an overview of this case:
Jose Villarama was a bus operator, under the business name of Villa Rey Transit. He operated 32 bus units on various route lines from Pangasinan to Manila, vice-versa, by virtue of 2 certificates of public convenience granted him by the Public Service Commission (PSC).
Now, he sold the 2 certificates of public convenience to the Pangasinan Transportation Company, Inc. (PANTRANCO), for P350 grand. PANTRANCO? remember? Fisherman's Mall? (NOW TAKE NOTE) this is a conditional sale with a stipulated condition that the seller (Villarama) "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer." This simply means NO COMPETITION WITH BUYER FOR 10 YEARS.
But barely 3 months thereafter, a corporation called VILLA REY TRANSIT INC. (let's call this 'the Corporation' as differentiated from the previous Villa Rey Transit ) was organized with a capital stock of P500,000.00 where Natividad Villarama (wife of JoseVillarama) was one of the incorporators other than the brother and sister-in-law of Jose Villarama.
And in less than a month after its registration with the SEC the Corporation, bought 5 certificates of public convenience, 49 buses, tools and equipment from one Valentin Fernando, for the sum of P249 grand. Wow. So there you go, sold at high bought at low. The guy really knows what he's doing.
So, the very same day the contract of sale was executed, the parties to the sale immediately applied with the PSC for approval of the sale coupled with a permit to operate provisionally while the case is pending. (Q: Why approval of the sale? A: Because public transport involves public interest therefore the government must come in to regulate)
But before PSC could take final action on said application for approval, however, the Sheriff of Manila, pursuant to a writ of execution issued by the CFI of Pangasinan, levied on 2 of the 5 certificates of public convenience in favor of Eusebio Ferrer (respondent in this case) against Valentin Fernando (vendor of 5 certificates). So.. simply, the 2 of 5 certificates sold by Fernando to the Corporation was under litigation in a pending case which was newly decided and now executed. (Bummer huh? Too bad for Villarama).
So consequently the Sheriff conducted a public sale for the said 2 certificates of public convenience. And Ferrer was the highest bidder, therefore a certificate of sale was issued in his name.
And here's what Ferrer did. He sold the 2 certificates of public convenience to none other than PANTRANCO.
So.. nagsabay ngayon... the applications for approval of sale, filed before the PSC, by Fernando and the Corporation, for the supposed 5 certificates and that of Ferrer and Pantranco, for the subsequent 2 certificate sale, and both were scheduled for a joint hearing.
And here's what irked Villarama. In the meantime during the pendency of the case the PSC issued an order disposing that before a final resolution on the aforesaid applications, PANTRANCO shall be the one to operate provisionally the service under the two certificates embraced in the contract between Ferrer and Pantranco.
The Corporation took issue with this particular ruling of the PSC and elevated the matter to the Supreme Court, which decreed, that until the issue on the ownership of the disputed certificates shall have been finally settled by the proper court, the CORPORATION should be the one to operate the lines provisionally.
So the PSC was pro-PANTRANCO and the SC was pro-CORPORATION.
Now to get an upper-hand on this case, the Corporation filed in the CFI of Manila, a complaint praying for the annulment of the :
1. sheriff's sale of the aforesaid two certificates of public convenience in favor of Ferrer,
2. the subsequent sale thereof by the latter to Pantranco.
3. that all the orders of the PSC relative to the parties' dispute over the said certificates
And BOOM! The CFI of Manila declared the sheriff's sale of two certificates of public convenience in favor of Ferrer and the subsequent sale thereof by the latter to Pantranco NULL AND VOID; declared the Corporation to be the lawful owner of the said certificates of public convenience; and ordered Ferrer and Pantranco, jointly and severally, to pay the Corporation, the sum of P5,000.00 as and for attorney's fees.
The case against the PSC was dismissed. All parties appealed. And PANTRANCO rested it's defense on the very first contract of sale zeroing in on the 10 year prescriptive period of competition between vendor and vendee stipulated in the very first conditional sale, assailing the DISTINCT AND SEPARATE PERSONALITY and therefore LIMITED LIABILITY of the members and stockholders of the corporation from the corporation it self, since the seller of the 2 certificates in the conditional sale are one and the same with their competitor CORPORATION (Villa Rey Transit Inc.)
So clearly this is an alter-ego issue. And Villarama committed fraud by creating another company which is merely a fictional corporation in order to evade the 10 year prescriptive period stipulated in the conditional sale.
Issue:
Whether the stipulation, "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER" in the contract between Villarama and Pantranco, binds the Corporation (the Villa Rey Transit, Inc.).
Held:
The court answered YES. And therefore PIERCED THE VEIL OF CORPORATE FICTION.
1. Villarama supplied the organization expenses and the assets of the Corporation, where he himself made use of the money of the Corporation and deposited them to his private accounts. The Corporation furthermore paid his personal accounts.
Villarama himself admitted that HE MINGLED THE CORPORATE FUNDS WITH HIS OWN MONEY. These circumstances are strong persuasive evidence showing that Villarama has been too much involved in the affairs of the Corporation to altogether negative the claim that he was only a part-time general manager.
2. They show beyond doubt that the Corporation is his alter ego. The interference of Villarama in the complex affairs of the corporation, and particularly its finances, are much too inconsistent with the ends and purposes of the Corporation law, which, precisely, seeks to separate personal responsibilities from corporate undertakings.
3. It is the very essence of incorporation that the acts and conduct of the corporation be carried out in its own corporate name because it has its own personality. The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law.
4. When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.
5. Hence, the Villa Rey Transit, Inc. is an alter ego of Jose Villarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and binding against the said Corporation.
