GERARDO LANUZA, JR. , et al vs. BF CORPORATION, et al.

,
G.R. No. 174938, October 01, 2014

Separate and distinct personality of Officers

BF Corporation filed a collection complaint with the RTC against Shangri-La and the members
of its board of directors. BF Corporation alleged that despite repeated demands, Shangri-La
refused to pay the balance owed to it. It also alleged that the Shangri-La's directors were in bad
faith in directing Shangri-La's affairs. Therefore, they should be held jointly and severally liable
with Shangri-La for its obligations as well as for the damages that BF Corporation incurred as a
result of Shangri-La's default. BF Corporation had initiated arbitration proceedings; however,
Petitioners filed their prayed that they be excluded from the arbitration proceedings for being
non-parties to Shangri-La's and BF Corporation's agreement. Petitioners argue that they cannot
be held personally liable for corporate acts or obligations. The corporation is a separate being,
and nothing justifies BF Corporation's allegation that they are solidarity liable with Shangri-La.
Neither did they bind themselves personally nor did they undertake to shoulder Shangri-La's
obligations should it fail in its obligations. Petitioners also argue that they are third parties to the
contract between BF Corporation and Shangri-La provisions including arbitration stipulations
should bind only the parties. Based on our arbitration laws, parties who are strangers to an
agreement cannot be compelled to arbitrate.

ISSUE:

Whether the directors should be made parties to the arbitration proceedings as their personalities
being separate and distinct from shangri-la.

RULING:

As a general rule, a corporation's representative who did not personally bind himself or herself to
an arbitration agreement cannot be forced to participate in arbitration proceedings made pursuant
to an agreement entered into by the corporation. He or she is generally not considered a party to
that agreement. However, there are instances when the distinction between personalities of
directors, officers, and representatives, and of the corporation, are disregarded. We call this
piercing the veil of corporate fiction.

Piercing the corporate veil is warranted when the separate personality of a corporation is used as
a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues. It is also warranted in
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.

When corporate veil is pierced, the corporation and persons who are normally treated as distinct
from the corporation are treated as one person, such that when the corporation is adjudged liable,
these persons, too, become liable as if they were the corporation.

Among the persons who may be treated as the corporation itself under certain circumstances are
its directors and officers. Section 31 of the Corporation Code provides the instances when
directors, trustees, or officers may become liable for corporate acts

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly
and severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which otherwise would
have accrued to the corporation, (n)

Based on the above provision, a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or members,
and other persons in any of the following cases:

a)The director or trustee willfully and knowingly voted for or assented to a patently unlawful
corporate act;
b)The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs;
and
c)The director or trustee acquired personal or pecuniary interest in conflict with his or her duties
as director or trustee.

Solidary liability with the corporation will also attach in the following instances:

a)"When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection
thereto";
b)"When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarity liable with the corporation";[88] and
c)"When a director, trustee or officer is made, by specific provision of law, personally liable for
his corporate action."

When there are allegations of bad faith or malice against corporate directors or representatives, it
becomes the duty of courts or tribunals to determine if these persons and the corporation should
be treated as one. Without a trial, courts and tribunals have no basis for determining whether the
veil of corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge.
Thus, the courts or tribunals must first determine whether circumstances exist to warrant the
courts or tribunals to disregard the distinction between the corporation and the persons
representing it. The determination of these circumstances must be made by one tribunal or court
in a proceeding participated in by all parties involved, including current representatives of the
corporation, and those persons whose personalities are impliedly the same as the corporation.
This is because when the court or tribunal finds that circumstances exist warranting the piercing
of the corporate veil, the corporate representatives are treated as the corporation itself and should
be held liable for corporate acts. The corporation's distinct personality is disregarded, and the
corporation is seen as a mere aggregation of persons undertaking a business under the collective
name of the corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging
malice or bad faith on their part in directing the affairs of the corporation, complainants are
effectively alleging that the directors and the corporation are not acting as separate entities. They
are alleging that the acts or omissions by the corporation that violated their rights are also the
directors' acts or omissions. They are alleging that contracts executed by the corporation are
contracts executed by the directors. Complainants effectively pray that the corporate veil be
pierced because the cause of action between the corporation and the directors is the same.

It is because the personalities of petitioners and the corporation may later be found to be
indistinct that we rule that petitioners may be compelled to submit to arbitration.
Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the
corporate veil, parties who are normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine if such distinction should indeed
be disregarded and, if so, to determine the extent of their liabilities.