8. ZAMBRANO v. PHILIPPINE CARPET MANUFACTURING CORP.

G.R. No. 224099, June 21, 2017

Topic: Corporate Entity/Piercing Corporate Veil

Petition for review on certiorari under Rule 45 of the Rules of Court seeking to reverse
and set aside the Decision and Resolution of the Court of Appeals (CA) which affirmed
the National Labor Relations Commission’s Decision in five consolidated complaints for
illegal dismissal and unfair labor practice.

Doctrine:

Any application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that
the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.
—-

Mere ownership by a single stockholder or by another corporation of all or nearly all of

the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality. Likewise, the "existence of interlocking directors,
corporate officers and shareholders is not enough justification to pierce the veil of
corporate fiction in the absence of fraud or other public policy considerations."

Facts:

Petitioners were employees of respondent Philippine Carpet Manufacturing Corporation

(PHIL CARPET). On January 3, 2011, they were notified of the termination of their
employment, effective on February 3, 2011, on the ground of cessation of operations due
to serious business losses.

Petitioners alleged that their dismissal was without cause because the closure of PHIL
CARPET was merely a pretense to transfer its operations to Pacific Carpet
Manufacturing Corporation (PACIFIC CARPET), a wholly owned and controlled
corporation of PHIL CARPET. Allegedly, a number of orders from PHIL CARPET had
been transferred to PACIFIC CARPET and that several pieces of equipment were also
transferred from PHIL CARPET to PACIFIC CARPET.

PHIL CARPET countered that it permanently closed and totally ceased its operations
because there had been a steady decline in the demand for its products due to global
recession, stiffer competition, and the effects of a changing market. Based on several
audited financial statements made by SGV, PHIL CARPET had incurred millions in
losses from 2006 to 2009 and that in 2010 its unaudited losses already amounted to
26.59 million pesos. In order to stem the bleeding, the company implemented several
cost-cutting measures, including voluntary redundancy and early retirement programs.

The termination of the petitioners' employment was effective as of the close of office
hours on February 3, 2011. PHIL CARPET also complied with the requisites for closure
or cessation of business under the Labor Code. The petitioners and the Department of
Labor and Employment (DOLE) were served written notices 1 month before the intended
closure of the company. The petitioners were also paid their separation pay and they
voluntarily executed their respective Release and Quitclaims before the DOLE officials.
LABOR ARBITER: Dismissed the complaints for illegal dismissal and unfair labor
practice. LA ruled that the termination of the petitioners' employment was due to total
cessation of manufacturing operations of PHIL CARPET because it suffered continuous
and serious business losses from 2007 to 2010.

NLRC: Affirmed LA. It held that the Audited Financial Statements show that Phil Carpet
continuously incurred net losses starting 2007 leading to its closure in the year 2010.
The NLRC added that Phil Carpet complied with the procedural requirements of effecting
the closure of business pursuant to the Labor Code.

COURT OF APPEALS: Affirmed LA and NLRC. It ruled that the total cessation of Phil
Carpet's manufacturing operations was not made in bad faith because the same was
clearly due to economic necessity.

Pertinent Contentions of the Parties:

PETITIONERS:
● Petitioners argue that their dismissal was without cause.
● They were of the belief that their dismissal was without just cause and in
violation of due process because the closure was a mere pretense to
transfer its operations to its wholly owned and controlled corporation,
PACIFIC CARPET.
● They claimed that the job orders of some regular clients of Phil Carpet
were transferred to PACIFIC CARPET and that several machines were
moved from the premises of PHIL CARPET to PACIFIC CARPET
● They asserted that their dismissal constituted unfair labor practice as it
involved the mass dismissal of all union officers and members of the
Philippine Carpet Manufacturing Employees Association (PHILCEA).

RESPONDENTS:
● That the dismissal was for proper cause, particularly the severe financial
downturns which resulted in millions in losses
● PHIL CARPET faithfully complied with the requisites for closure or
cessation of business under the Labor Code.

Issue(s):

1) Whether the petitioners were terminated for authorized cause; and

2) Whether PHIL CARPET and PACIFIC CARPET have separate and distinct
personalities

Ruling:

1) Yes. Closure of business is the reversal of fortune of the employer whereby there
is a complete cessation of business operations and/or an actual locking-­up of the
doors of establishment, usually due to financial losses. Closure of business, as
an authorized cause for termination of employment, aims to prevent further
financial drain upon an employer who cannot pay anymore his employees since
business has already stopped. In such a case, the employer is generally
required to give separation benefits to its employees, unless the closure is
due to serious business losses.
 In this case, the LA's findings that PHIL CARPET suffered from serious business
losses which resulted in its closure were affirmed by the NLRC, and
subsequently by the CA. It is a rule that absent any showing that the findings of
fact of the labor tribunals and the appellate court are not supported by evidence
on record or the judgment is based on a misapprehension of facts, the Court
shall not examine the evidence submitted by the parties.

PHIL CARPET continuously incurred losses starting 2007, as shown by the

Audited Financial Statements which were offered in evidence by the
petitioners themselves. The petitioners, in claiming that PHIL CARPET
continued to earn profit in 2011 and 2012, disregarded the reason for such
income, which was PHIL CARPET’s act of selling its remaining inventories.
Notwithstanding such income, PHIL CARPET continued to incur total
comprehensive losses in the amounts of 9,559,716 and 12,768,277 in 2011 and
2012.

Even if the petitioners refuse to consider these losses as serious enough to

warrant PHIL CARPET’s total and permanent closure, it was a business
judgment on the part of the company's owners and stockholders to cease
operations, a judgment which the Court has no business interfering with.
The only limitation provided by law is that the closure must be "bona fide in
character and not impelled by a motive to defeat or circumvent the tenurial rights
of employees."

Records also show that PHIL CARPET notified both the DOLE and the
petitioners of their decision to cease operations at least 1 month prior to the date
of closure and paid them their proper separation pays.

2) Yes. The doctrine of piercing the corporate veil applies only in three (3) basic
areas, namely: 1) defeat of public convenience as when the corporate fiction
is used as a vehicle for the evasion of an existing obligation; 2) fraud cases
or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) 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.

Case law lays down a three-pronged test to determine the application of the alter
ego theory, which is also known as the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but

complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity
as to this transaction had at the time no separate mind, will or existence
of its own;

(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiff's legal
right; and
 (3) The aforesaid control and breach of duty must have been the
proximate cause of the injury or unjust loss complained of.

In this case, none of the tests have been satisfactorily met.

Although ownership by one corporation of all or a great majority of stocks of

another corporation and their interlocking directorates may serve as indicia of
control, by themselves and without more, these circumstances are
insufficient to establish an alter ego relationship or connection between PHIL
CARPET on the one hand and PACIFIC CARPET on the other hand, that will
justify the puncturing of the latter's corporate cover

It must be noted that PACIFIC CARPET was registered with the Securities and
Exchange Commission on January 29, 1999, such that it could not be said that
PACIFIC CARPET was set up to evade PHIL CARPET's liabilities (termination
due to business losses occurred only in 2011).

As to the transfer of PHIL CARPET machines to PACIFIC CARPET, settled is the

rule that "where one corporation sells or otherwise transfers all its assets to
another corporation for value, the latter is not, by that fact alone, liable for
the debts and liabilities of the transferor."

All told, the petitioners failed to present substantial evidence to prove their
allegation that Pacific Carpet is a mere alter ego of Phil Carpet.