MAP Insights
By Dean Cesar L. Villanueva
Commentaries on the One Person Corporation under the Revised Corporation Code
(Fourth of five parts)
Discharging the Burden to Prove that One Person Corporation (OPC) Property “Is Independent of the Single Stockholder’s Personal Property” — As distinguished from the first paragraph of Section 130, the second paragraph uses the present tense in describing the burden placed upon the Single Stockholder to “prove that the property of the OPC is independent of the stockholders’ personal property,” thus:
Where the single stockholder cannot prove that the property of the One Person Corporation is independent of the stockholder’s personal [non-invested] property, the stockholder shall be jointly and severally liable for the debts and other liabilities of the One Person Corporation. (emphasis supplied)
It seems well-suggested under Section 130 that the two burdens of proof placed upon the Single Stockholder under the OPC setting are separate and distinct, thus:
• Burden of Proof that OPC “Was Adequately Financed” refers to primarily the time the business or property was incorporated into the OPC;
— While —
• Burden of Proof that the “Property of the One Person Corporation Is Independent of the Single Stockholder’s Non-invested Properties,” basically refers to the period of conduct of the business operations, much more precisely when the OPC becomes insolvent by the fact that the corporation cannot service its debts and other liabilities from its own assets and properties.
What legally is the meaning of the term “OPC’s property is not independent of the Single Stockholders’ non-invested properties”? The term “OPC’s property is not independent of the Single Stockholders’ non-invested properties,” can cover either of the following situations:
(i) Piercing Doctrine Test: The established jurisprudence is that when the assets and properties of the corporation are mixed with those of the acting stockholders, such that a clear delineation of the difference between the two sets of assets and properties can no longer be made by the public for the proper enforcement of the doctrine of limited liability, then the separate juridical personality of the corporation may be pierced to include the assets of the acting stockholders/officers to make them all liable for the debts and other liabilities of the corporation; or
(ii) Company in a State of Insolvency: It means that the OPC is in a state of insolvency that its debts and other liabilities can no longer be paid without the Single Stockholder putting up some of his/her non-invested assets and properties into the OPC to be able to continue its operations.
The situation falls well within the “state of insolvency” as defined under Article 1636(2) of the Civil Code that “A person is insolvent … who either has ceased to pay his debts in the ordinary court of business or cannot pay his debts as they become due, whether insolvency proceedings have been commenced or not.”
If the meaning of the term “OPC’s property is not independent of the Single Stockholder’s non-invested properties,” is intended to refer to the application of the piercing doctrine for commingling of properties, that would mean that the second paragraph of Section 130 has in fact reversed the burden of proof from the creditors of the corporation to that of the Single Stockholder. This point is discussed in more details in the piercing doctrine section below.
If the meaning of the term “OPC’s property is not independent of the Single Stockholder’s non-invested properties,” is intended to cover situations when the OPC is in a state of insolvency, then the doctrine of limited liability, which is one of the most essential attributes of the corporate medium, is practically denied from the OPC setting. In Philippine Corporate Law, the doctrine of limited liability is primarily operative to protect the stockholders in situations when the corporation has become insolvent.
Application of the Piercing Doctrine in the OPC Setting. — The third paragraph of Section 130, as is provides that “The principles of piercing the corporate veil applies (sic) with equal force to One Person Corporation as with other corporations,” is quite an astounding statement since it is the first time in the history of our statutory rendition of Philippine Corporate Law that the piercing doctrine has been given a statutory recognition; and the essence of the statement that the piercing doctrine is to applied to OPCs with the same “equal force” as with other corporations, is belied by the first two paragraphs of Section 130.
The piercing doctrine is essentially a common law doctrine, developed by the common law courts of the United States to allow the primary doctrines of “separate juridical personality” and “limited liability” to operate more efficiently in promoting the corporate medium as the attractive means of doing business.
The application of the piercing doctrine is for the purpose of shedding-off the protection of the limited liability rule from the non-invested assets of the defaulting stockholders or lifting the agency protection from its culprit officers and directors of “no liability for debts and liabilities against the corporation when they acted in behalf of the corporation and within the scope of their authority.”
In our jurisdiction, the piercing doctrine had continued to be a common law doctrine — since the main intention of Philippine statutory law — from the Corporation Law and up to the Corporation Code — was primarily to promote the fact that the corporate medium is granted a strong juridical personality in order to promote its attractive to the investing public, as it results into a strong enforcement of the doctrine of limited liability.
To apply the piercing doctrine, the burden of proving the fraud, malice or equity consideration is generally on the part of the third party seeking to lift the corporate veil. In other words, every stockholder can invoke the limited liability rule as a matter of course, and no burden of proof is required on his/her side to invoke its protection.
Up until the enactment of the RCC, the piercing doctrine had remained primarily an “equitable remedy” in our jurisdiction — that it can be invoked by the courts only when the following parameters have been shown by creditors of the corporation who seek to make the acting stockholders liable for the corporate debts and other liabilities sued upon, thus:
• Piercing the corporate veil is an equitable doctrine, a remedy of last resort, developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes;
• Application of the piercing doctrine must be based on clear evidence that the veil of corporate fiction has been used to commit fraud, or to do a wrong, or the corporate veil is used as a means to evade the consequences of one’s criminal or fraudulent acts; or when the corporation is merely used as an instrumentality of the stockholders or to defeat public convenience; and
• Application of the piercing doctrine can only be invoked by corporate creditor who constitute the “victim of fraud or unlawful act;” and cannot be invoke by a creditor who assumed the risk or who was fully aware of the finances of the corporation;
In the case of an OPC, the burden of proof to avail of the limited liability rule is placed upon the shoulders of the Single Stockholder. All that the creditors of the OPC have to show is either that the OPC is not adequately financed (that is undercapitalized at the time of incorporation), or that the OPC’s assets are not enough to cover its liabilities (that the OPC’s property are not independent of Single Stockholder’s non-invested properties), and thereby the Single Stockholder becomes “jointly and severally liable for the debts and other liabilities of the One Person Corporation.” It should be noted that it would become mathematically impossible for the Single Stockholder to overcome the proven fact that the OPC “inadequately financed” or has become insolvent.
Under Section 130 therefore, the OPC has the same legal effect on the Single Stockholder on his unlimited liability to the debts and other liabilities of the business venture when pursued under the medium of sole proprietorship.
The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.
Cesar L. Villanueva is Chair of the MAP Corporate Governance Committee, the Founding Partner of the Villanueva Gabionza & Dy Law Offices, and the former Chair of the Governance Commission for GOCCs (GCG).
