Can a company simply change its corporate name -- with almost the same set of incorporators, the same address, the same line of business and even the same website -- to evade payment of its obligations?
No, said the Supreme Court (SC) in its resolution that affirmed the ruling of the Court of Appeals (CA) in the case of Nextphase International, Inc. (Nextphase) which challenged the 2018 order of the National Labor Relations Commission (NLRC).
The CA found in its April 12, 2019 decision that Nextphase changed its corporate name to ACS Plastic Packaging and NPPET Global Innovention, Inc. (NGII) to evade payment of P2,735,722.82 to its employees.
The appellate court ruled, in a decision written by Associate Justice Stephen C. Cruz, that Nextphase is the same corporation as NGII as it applied the doctrine on piercing the corporate veil.
Reiterating its previous rulings in the resolution released late last month, the SC said:
“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.”
The SC also said that “it is the act of hiding behind the separate and distinct personalities of juridical entities to perpetuate fraud, commit illegal acts and evade one's obligations, that the equitable piercing doctrine was formulated to address and prevent.”
Explaining the formulation of the doctrine, the SC said: “When two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that these two entities are distinct and treat them as identical or as one and the same.”
In the case of Nextphase, the SC said: “Here, the Court of Appeals found that the incorporation of NPPET (NGII) was resorted to by petitioner to evade its obligations to respondents. In other words, petitioner used the corporate veil to perpetrate a fraud.”
Quoting from the CA decision, the SC said:
“In this instance, petitioner (Nextphase) denies committing fraud to defeat legal processes and deny private respondents of what is legally theirs, alleging merely that the evidence adduced by the latter is not sufficient to determine fraud or misuse of corporate fiction.
“Petitioner miserably failed to support its denial of the commission of fraud to evade liability to private respondents or of the fact that it created NGII at around the same time as the conclusion of the case before the CA where being made to pay for P2,735,722.82 was likely.
“The deceitful purpose for which the second company was created was made clear by the fact that the sheriff was barred from serving the writ of execution to petitioner because its official address was suddenly under a new management whereas the banks to which he had sent notices of garnishment had all but refused.
“There is no doubt that petitioner's attempt to hide behind a new identity constitutes fraud within the meaning of the law. Fraud in this context proceeds from the intentional deception practiced by means of misrepresentation or concealment of a material fact.
“Petitioner did it by cloaking itself with a new legal personality in the hope that by hiding behind the legal fiction it could evade existing obligations and defeat the rights of the claimants to which it was held liable.
“As last-ditch effort, petitioner contends that it has a different purpose than that of NGII's. It claims that its main objective is to engage in the business of trading goods such as but not limited to novelty items on wholesale or retail basis whereas NGII is not.
“However, a reading of its petition yields to the fact that its nature of business is essentially the same as NGII's. To engage in, conduct and carry on business of manufacturing, importing, exp01iing, marketing at retail/wholesale" is practically just a stretched-out itemization of the word ‘trading.’
“The identity of each of the companies' business model (apart from their corporate names, address, contact numbers and website as well as directors, officers and shareholders) is rendered even more plainly and unambiguously by the subject of their enterprise which is plastic.”
Case records showed that the legal distpute started in 2010 with the filing of an illegal dismissal case by four employees – Pinky C. Dulalia, Julieta Vargas, Erlinda Dulalia and ArgieL. Ibatuan -- before the NLRC.
After four years, the NRC issued a resolution which affirmed much of the 2017 labor arbiter’s findings as it ruled that Nextphase and NGII and its president Alfonso Arcenal “are declared jointly and severally liable for private respondents' judgment awards. The other directors and officers of both corporations are absolved of any liability.”
However, the NLRC deleted the award of backwages to Ibatuan as he was found not illegally dismissed.
The NLRC found that Nextphase and NGII “are one and the same” as both companies have the same business address, contact numbers and official website and both companies share the same stockholders, among other things.
Assailing the CA’s ruling, Nextphase elevated the case to the SC.