PNB vs.
Ritratto Group
G.R. No. 142616 July 31, 2001
Doctrine: Doctrine of Piercing the corporate evil is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful purposes. It applies
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime,
or when it is made a shield to confuse the legitimate issues, or where a corporation is the 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.
The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not
sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s
separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be
confined to those arising in their respective business. The courts may, in the exercise of judicial discretion, step
in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity.
Facts:
Petitioner PNB is a domestic corporation organized and existing under the Philippine law.
Respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are domestic
corporations organized and existing under Philippine law. In May 29, 1996 – PNB International Finance Ltd.
(PNB-IFL), a subsidiary company of PNB, organized and doing business in Hongkong, extended a letter of
credit in favor of the respondents in the amount of US$300,000 secured by real estate mortgages constituted
over four parcels of land in Makati City. This credit facility was later increased successively to US$1,290,000 in
November 1996; to US$1,425,000 in February 1997; and decreased to US$1,421,316.18 in April 1998.
Respondents made repayments of the loan incurred by remitting those amounts to their loan account with
PNB-IFL in Hongkong. As of April 30,1998, their outstanding obligations stood at US$1,497,274.70.
PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real
estate mortgages and that the properties subject thereof were to be sold at a public auction. Respondents filed
a complaint for injunction with prayer for the issuance of a writ of preliminary injunction and/or TRO before
the RTC of Makati. Petitioner filed a motion to dismiss on the grounds of failure to state a cause of action and
the absence of any privity between the petitioner and respondents. TC issued an order for the issuance of writ
of prelim injunction. Motion to Dismiss denied. CA dismissed. Hence, this petition.
Issue:
1. Whether PNB is privy to the loan contracts entered into by the respondent? NO
2. Whether PNB is an alter ego of PNB-IFL? No
Held:
The contract is one entered into between respondent and PNB-IFL, not PNB. Respondents admit that
petitioner is a mere attorney-in-fact for the PNB IFL with full power and authority to, inter alia, foreclose on
the properties mortgaged to secure their loan obligations with PNB-IFL. Petitioner is an agent with limited
authority and specific duties under a special power of attorney incorporated in the real estate
mortgage. It is not privy to the loan contracts entered into by respondents and PNB-IFL.
The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not
sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s
separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be
confined to those arising in their respective business. The courts may, in the exercise of judicial discretion, step
in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity.
Doctrine of Piercing the corporate evil is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful purposes. It applies
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime,
or when it is made a shield to confuse the legitimate issues, or where a corporation is the 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.
Test in determining the applicability of the doctrine of piercing the veil:
1. Control, not mere majority or complete control, but complete domination, not only of finances but of
policy and business practice.
2. Such control must have been used by the defendant to commit fraud or wrong
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained
of.
*The absence of any one of these elements prevents piercing the corporate veil. In applying the
“instrumentality” or “alter ego” doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant’s relationship to the operation.
Doctrine of piercing the veil based on alter ego or instrumentality finds no application in this case.
PNB-IFL is a wholly owned subsidiary of petitioner PNB.
There is no showing of the indicative factors that the former corporation is a mere instrumentality of
the latter.
There is no demonstration that any of the evils sought to be prevented by the doctrine of piercing the
corporate veil exists.
