Monday, March 16, 2009


D is the controlling stockholder of a pre need firm BBC that becomes insolvent amidst allegations of fraud. Unpaid plan holders contend that D operated the pre need firm as a Ponzi scheme. Can D be held personally liable on the pre need plans issued by BBC?

Yes. This is a case where a piercing of the corporate veil is warranted. A corporation is considered an alter ego of an individual if he uses the corporation in conducting personal business; and under the alter ego doctrine, shareholders will be treated as real parties in interest, when this is necessary to prevent fraud or to do justice (Black’s). In a 1962 case, the Philippine Supreme Court held that the corporate veil may be pierced to prevent evasion of civil liability by a stockholder who uses a business conduit or alter ego (Palacio et al v Fely Transportation Co.). In the given facts of this problem, D is charged with fraud, and if such fraud is proved, he is liable, being a controlling owner of BBC, as a real party in interest (BBC is his alter ego), and therefore his personal assets may be held answerable for the liabilities of BBC.

Note: There are other specific grounds for a proper piercing of the corporate veil, which fall under the general ground of “doing justice.” These grounds exist when the corporate veil is used to defeat public convenience, justify wrong, or commit crime. The corporate veil will also be pierced to enforce laws on nationalization, labor, tax, and succession.

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