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Arco Pulp Digest

The document discusses a case where a company failed to pay for scrap paper delivered by a supplier. The supplier sued the company and its president. The court ruled that the company president could be held personally liable because she exhibited bad faith by issuing an unpaid check and trying to avoid the company's obligations.

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Nikki Rose C'zare A. Abalos
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47 views2 pages

Arco Pulp Digest

The document discusses a case where a company failed to pay for scrap paper delivered by a supplier. The supplier sued the company and its president. The court ruled that the company president could be held personally liable because she exhibited bad faith by issuing an unpaid check and trying to avoid the company's obligations.

Uploaded by

Nikki Rose C'zare A. Abalos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Facts:

Dan T. Lim (LIM) delivered scrap papers worth ₱7,220, 968.31 to Arco Pulp and Paper
Company, Inc. (ARCO) through ARCO’s Chief Executive Officer and President, Candida A.
Santos (SATOS). The parties allegedly agreed that ARCO would either pay LIM the value of
the raw materials or deliver to him their finished products of equivalent value. LIM alleged
that when he delivered the raw materials, ARCO issued a post-dated check in the amount
of ₱1, 487, 766.68 as partial payment, with the assurance that the check would not bounce.
When he deposited the check, it was dishonored for being drawn against a closed account.
On the same day, ARCO and a certain Eric Sy (SY) executed a memorandum of agreement
where ARCO bound themselves to deliver their finished products to Megapack Container
Corporation, owned by SY, for his account. According to the memorandum, the raw
materials would be supplied by LIM, through his company, Quality Paper and Plastic
Products.

LIM sent a letter to ARCO demanding payment but no payment was made to him.

LIM filed a complaint for collection of sum of money with prayer for attachment before the
RTC. The RTC rendered a judgment in favor of ARCO and dismissed the complaint. 

On appeal, the Court of Appeals (CA) ruled that LIM was entitled to damages and attorney’s
fees due to the bad faith exhibited by ARCO in not honoring its undertaking and that Santos
was solidarily liable with ARCO.

Issue:
Whether SANTOS was solidarily liable with ARCO.

Ruling:
Yes.

As a general rule, directors, officers, or employees of a corporation cannot be held


personally liable for obligations incurred by the corporation. However, this veil of corporate
fiction may be pierced if complainant is able to prove, as in this case, that (1) the officer is
guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly and
convincingly proven.

Here, SANTOS entered into a contract with LIM in her capacity as the President and Chief
Executive Officer of ARCO. She also issued the check in partial payment of ARCO’s
obligations to LIM on behalf of ARCO. This is clear on the face of the check bearing the
account name, “Arco Pulp & Paper, Co., Inc.” Any obligation arising from these acts would
not, ordinarily, be SANTOS’  personal undertaking for which she would be solidarily liable
with ARCO.

Doctrine of Piercing the Veil of Corporate Fiction


Piercing the veil of corporate fiction is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful
purposes.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger
Philippines: “Piercing the veil of corporate fiction is an equitable doctrine developed to
address situations where the separate corporate personality of a corporation is abused or
used for wrongful purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non- legitimate purposes, such as to
evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry
out similar or inequitable considerations, other unjustifiable aims or intentions, in which
case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical.” 

According to the Court of Appeals, SANTOS was solidarily liable with ARCO, stating that:

“In the present case, we find bad faith on the part of the [petitioners] when they unjustifiably
refused to honor their undertaking in favor of the [respondent]. After the check in the
amount of P1,487,766.68 issued by [petitioner] Santos was dishonored for being drawn
against a closed account; [petitioner] corporation denied any privity with [respondent].
These acts prompted the [respondent] to avail of the remedies provided by law in order to
protect his rights.”

We agree with the Court of Appeals. SANTOS cannot be allowed to hide behind the
corporate veil. When ARCO’s obligation to LIM became due and demandable, she not only
issued an unfunded check but also contracted with a third party in an effort to shift ARCO’s
liability. She unjustifiably refused to honor ARCO’s obligations to LIM. These acts clearly
amount to bad faith. In this instance, the corporate veil may be pierced, and SANTOS may
be held solidarily liable with ARCO.

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