Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through its directors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts without them.
A consequence of a corporation’s separate personality is that consent by a corporation through its representatives is not consent of the representative, personally. Its obligations, incurred through official acts of
its representatives, are its own. A stockholder, director, or representative does not become a party to a contract just because a corporation executed a contract through that stockholder, director or representative.
As a general rule, therefore, 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.
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 solidarily liable with the corporation”; 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. Rules of Court, Rule 2, sec. 2.
However, when the courts disregard the corporation’s distinct and separate personality from its directors or officers, the courts do not say that the corporation, in all instances and for all purposes, is the same as its directors, stockholders, officers, and agents. It does not result in an absolute
confusion of personalities of the corporation and the persons composing or
representing it. Courts merely discount the distinction and treat them as one, in relation to a specific act, in order to extend the terms of the contract and the liabilities for all damages to erring corporate officials who participated in the corporation’s illegal acts. This is done so that the legal fiction cannot be used to perpetrate illegalities and injustices.
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