FRAUD AS BASIS FOR PIERCING THE VEIL OF CORPORATE FICTION DOES NOT EXIST WHERE THE TRANSFER OF ASSETS WAS PURSUANT TO A PREVIOUSLY PERFECTED VALID CONTRACT

Maricalum Mining Corporation vs. Ely G. Florentino, et al./Ely G. Florentino, et al. vs. National Labor Relations Commission, et al.
G.R. No. 221813/G.R. No. 222723, July 23, 2018

Fraud cannot be imputed against G Holdings considering that there is no evidence in the records that establishes it systematically tried to alienate Maricalum Mining’s assets to escape the liabilities to complainants.

There must be proof that fraud-not the inevitable effects of a previously executed and valid contract was the cause of the total asset depletion. To be clear, the presence of control per se is not enough to justify the piercing of the corporate veil.

Thus, the SC held in the following case:

Maricalum Mining Corporation vs. Ely G. Florentino, et al./Ely G. Florentino, et al. vs. National Labor Relations Commission, et al.
G.R. No. 221813/G.R. No. 222723, July 23, 2018

Piercing the veil of corporate fiction; Piercing of the veil of corporate fiction is frowned upon and must be done with caution; alter ego doctrine; mere ownership of a subsidiary does not justify the imposition of liability on the parent company; Remand of the case; Labor-only contracting; Control Test; Fraud Test; Harm or Casual Connection Test; A remand is only necessary when the proceedings below are grossly inadequate to settle factual issues; Intervention defined; Motion for intervention; A motion to intervene may be entertained or allowed even if filed after judgment was rendered by the trial court, especially in cases where the intervenors are indispensable parties; Holding company concept and definition; The term “holding company” is customarily used interchangeably with the term “investment company”; Investment company defined; Employer-employee relationship; Four-fold test; Economic reality test; Nell Doctrine; As a general rule that where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor

Facts:

The Philippine National Bank (PNB, a former government-owned-and-controlled corporation) and the Development Bank of the Philippines (DBP) transferred its ownership of Maricalum Mining to the National Government for disposition or privatization because it had become a non-performing asset.

The National Government thru the Asset Privatization Trust (APT) executed a Purchase and Sale Agreement (PSA) with G Holdings, a domestic corporation primarily engaged in the business of owning and holding shares of stock of different companies. G Holding bought 90% of Maricalum Mining’s shares and financial claims in the form of company notes. In exchange, the PSA obliged G Holdings to pay APT the amount of P673,161,280.00, with a down payment of P98,704,000.00 and with the balance divided into four tranches payable in installment over a period of ten years.

G Holdings also assumed Maricalum Mining’s liabilities in the form of company notes. The said financial liabilities were converted into three Promissory Notes which were secured by mortgages over some of Maricalum Mining’s properties. These PNs obliged Maricalum Mining to pay G Holdings the stipulated amount of P550,000,000.00.

Upon the signing of the PSA and paying the stipulated down payment, G Holdings immediately took physical possession of Maricalum Mining’s Sipalay Mining Complex, as well as its facilities, and took full control of the latter’s management and operations.

The Sipalay General Hospital, Inc. (Sipalay Hospital) was duly incorporated to provide medical services and facilities to the general public. Afterwards, some of Maricalum Mining’s employees retired and formed several manpower cooperatives.

Each of the said cooperatives executed identical sets of Memorandum of Agreement with Maricalum Mining wherein they undertook, among others, to provide the latter with a steady supply of workers, machinery and equipment for a monthly fee. Maricalum Mining’s Vice President and Resident Manager wrote a Memorandum to the cooperatives informing them that Maricalum Mining has decided to stop its mining and milling operations in order to avert continuing losses brought about by the low metal prices and high cost of production.

The properties of Maricalum Mining, which had been mortgaged to secure the PNs, were extrajudicially foreclosed and eventually sold to G Holdings as the highest bidder. Some of Maricalum Mining’s workers, including complainants, and some of Sipalay General Hospital’s employees jointly filed a Complaint with the LA against G Holdings, its president, and officer-in-charge, and the cooperatives and its officers for illegal dismissal, underpayment and nonpayment of salaries, underpayment of overtime pay, underpayment of premium pay for holiday, nonpayment of separation pay, underpayment of holiday pay, nonpayment of service incentive leave pay, nonpayment of vacation and sick leave, nonpayment of 13th month pay, moral and exemplary damages, and attorneys fees.

Complainants and CeMPC, one of the cooperatives formed, Chairman Alejandro H. Sitchon filed the complaint for illegal dismissal and corresponding monetary claims with the LA against G Holdings, its officer-in-charge and CeMPC. Thereafter, the complaints were consolidated by the LA.

During the hearings, complainants presented the affidavits which attested that, prior to the formation of the manpower cooperatives, their services were terminated by Maricalum Mining as part of its retrenchment program. They claimed that, in 1999, they were called by the top executives of Maricalum Mining and G Holdings and informed that they will have to form a cooperative for the purpose of providing manpower services in view of the retrenchment program. Thus, they were “rehired” only after their respective manpower cooperative services were formed.

Complainants claim that they have not received any increase in wages since they were allegedly rehired. Except for Sipalay Hospital’s employees, they worked as an augmentation force to the security guards charged with securing Maricalum Mining’s assets which were acquired by G Holdings. Maricalum Mining’s assets have been exposed to pilferage by some of its rank-and-file employees whose claims for collective bargaining benefits were undergoing litigation. The Sipalay Hospital is purportedly “among the assets” of Maricalum Mining acquired by G Holdings. The payrolls for their wages were supposedly prepared by G Holdings’ accounting department. Since the second half of April 2007, they have not been paid their salary and some of their services were dismissed without any due process.

Complainants posited that the manpower cooperatives were mere alter egos of G Holdings organized to subvert the “tenurial rights” of the complainants. G Holdings implemented a retrenchment scheme to dismiss the caretakers it hired before the foreclosure of Maricalum Mining’s assets and G Holdings was their employer because it allegedly had the power to hire, pay wages, control working methods and dismiss them.

G Holdings maintained that it was Maricalum Mining who entered into an agreement with the manpower corporations for the employment of complainants’ services for auxiliary or seasonal mining activities. The manpower cooperatives were the ones who paid the wages, deducted social security contributions, withheld taxes, provided medical benefits and had control over the working means and methods of complainants; despite Maricalum Mining’s decision to stop its mining and milling operations, complainants still continued to render their services for the orderly winding down of the mines’ operations; Maricalum Mining should have been impleaded because it is supposed to be the indispensable party in the present suit; (e) Maricalum Mining, as well as the manpower cooperatives, each have distinct legal personalities and that their individual corporate liabilities cannot be imposed upon each other; and there was no employer-employee relationship between G Holdings and complainants.

Likewise, the manpower cooperatives jointly filed their Position Paper24 arguing that: complainants had exhibited a favorable response when they were properly briefed of the nature and benefits of working under a cooperative setup; complainants received their fair share of benefits; complainants were entitled to cast their respective votes in deciding the affairs of their respective cooperatives; complainants, as member of the cooperatives, are also co-owners of the said cooperative and they cannot bargain for higher labor benefits with other co-owners; and the LA has no jurisdiction over the case because there is no employer-employee relationship between a cooperative and its members.

LA Ruling:

The LA ruled in favor of complainants. It held that G Holdings is guilty of labor-only contracting with the manpower cooperatives thereby making all of them solidarily and directly liable to complainants.

The LA reasoned that G Holdings connived with Marcalum Mining in orchestrating the formation of manpower cooperatives to circumvent complainants’ labor standards rights. The LA found it highly unlikely that complainants (except Sipalay Hospital’s employees) would spontaneously form manpower cooperatives on their own and in unison without the guidance of G Holdings and Maricalum Mining and complainants effectively became the employees of G Holdings because their work had changed from assisting in the mining operations to safeguarding the properties in the Sipalay Mining Complex, which had already been acquired by G Holding.

On the other hand, the LA denied the claims of complainants Nenet Arita and Domingo Lavida for lack of factual basis. The parties filed their respective appeals to the NLRC. On July 18, 2011, Maricalum Mining filed its Appeal-in-Intervention seeking to: (a) reverse and set aside the Labor Arbiter’s Decision; (b) declare Maricalum Mining as the true and proper party-in-interest; (c) remand the case back to the Labor Arbiter for proper computation of the money claims of the complainants; and (d) give Maricalum Mining the opportunity to settle with the complainants.

NLRC Ruling:

The NLRC modified the LA ruling.

It held that Dr. Welilmo T. Neri, Erlinda L. Fernandez and Edgar M. Sobrino are not entitled to the monetary awards because they were not able to establish the fact of their employment relationship with G Holdings or Maricalum Mining because Sipalay Hospital has a separate and distinct corporate personality. As to the remaining complainants, it found that no evidence was adduced to prove that the salaries/wages and the 13th month pay had been paid.

However, the NLRC imposed the liability of paying the monetary awards imposed by the LA against Maricalum Mining, instead of G Holdings, stating that it was Maricalum Mining-not G Holdings-who entered into service contracts by way of a Memorandum of Agreement with each of the manpower cooperatives. The NLRC found that complainants continued rendering their services at the insistence of Maricalum Mining through their cooperatives and Maricalum Mining never relinquished possession over the Sipalay Mining Complex.

Further, the NLRC observed that Maricalum Mining continuously availed of the services of complainants through their respective manpower cooperatives. Citing G Holdings, Inc. vs. National Mines and Allied Workers Union Local 103 (NAMAWU), et al. (NAMA WU Case), the SC already held that G Holdings and Maricalum Mining have separate and distinct corporate personalities.

Complainants and Maricalum Mining filed their respective motions for reconsideration before the NLRC. The NLRC issued a resolution modifying its previous decision and partially granted the intervenor’s Motion for Reconsideration. The monetary awards adjudged in favor of complainants Wilfredo Taganile and Bartholomew T. Jamboy were cancelled.

Undaunted, the parties filed their respective petitions for certiorari before the CA.

CA Ruling:

The CA affirmed the NLRC in all respects.

The CA denied the petitions and affirmed the decision of the NLRC. It ratiocinated that factual issues are not fit subjects for review via the extraordinary remedy of certiorari.

The CA emphasized that the NLRC’s factual findings are conclusive and binding on the appellate courts when they are supported by substantial evidence. Thus, it maintained that it cannot review and re-evaluate the evidence all over again because there was no showing that the NLRC’s findings of facts were reached arbitrarily.

Hence, the consolidated petitions before the SC.

Issue/s:

Whether or not despite the unsubstantiated allegation of miscomputation of amount of monetary award there is basis to remand the case to the LA grossly inadequate to settle factual issues

Whether or not piercing the veil based on alter ego theory applies in a holding company for violations of a subsidiary

Whether or not mere presence of control and full ownership of a parent over a subsidiary is enough to pierce the veil of corporate fiction

Whether or not the existence of payment of wages and evidence of dismissal would still require examination of the element of control where the companies involved are not affiliated

SC Ruling:

The SC affirmed in toto the Decision of the CA.

Complainants argue that the CA committed several reversible errors. The CA failed to consider that G Holdings had already acquired all of Maricalum Mining’s assets and that Teodoro G. Bernardino (Bernardino) was now the president and controlling stockholder of both corporations. The CA failed to take into account that Maricalum Mining was allowed to intervene only on appeal even though it was not a real party-in-interest. The CA failed to appreciate the LA’ s findings that Maricalum Mining could not have hired complainants because G Holdings had already acquired in an auction sale all the assets in the Sipalay Mining Complex. It failed to consider that all resident managers of the Sipalay Mining Complex were employed by G Holdings.

The complainants argued further that the foreclosure of the assets in the Sipalay Mining Complex was intended to bring the said properties outside the reach of complainants and that the Sipalay Hospital had been existing as a hospital for Maricalum Mining’s employees long before G Holdings arrived. Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. were all hired by Maricalum Mining but were dismissed by G Holdings. Sipalay Hospital existed without a board of directors and its employees were receiving orders from Maricalum Mining and, later on, replaced by G Holdings’ officer-in-charge and Maricalum Mining and G Holdings controlled the affairs of Sipalay Hospital.

Maricalum Mining contended that the CA committed grave abuse of discretion because the monetary awards were improperly computed. It claims that complainants had stopped rendering their services since September 23, 2010, hence, their monetary claims covering the second half of April 2007 up to July 2007 have already prescribed as provided pursuant to Article 291 of the Labor Code. Moreover, it also stressed that the NLRC should have remanded the case to the LA for the determination of the manpower cooperatives’ net surpluses and how these amounts were distributed to their members to aid the proper determination of the total amount of the monetary award. Finally, Maricalum Mining avers that the awards in favor of some of the complainants are “improbable” and completely unfounded.

G Holdings argued that piercing the corporate veil of Maricalum Mining is not proper because it did not acquire all of Maricalum Mining’s assets. It is primarily engaged in the business of owning and holding shares of stocks of different companies-not participating in the operations of its subsidiaries. Maricalum Mining, the actual employers of complainants, had already manifested its willingness to settle the correct money claims. Bernardino is not a controlling stockholder of Maricalum Mining because the latter’s corporate records show that almost all of its shares of stock are owned by the APT.

Further, G Holdings averred that Joost Pekelharing-not Bernardino-is G Holdings’ president. In the NAMA WU Case, it was already held that control over Maricalum Mining was exercised by the APT and not G Holdings. The NLRC did not commit any grave abuse of discretion when it allowed Maricalum Mining to intervene after the LA’s decision was promulgated. The cash vouchers, payment schedule, termination letters and caretaker schedules presented by complainants do not prove the employment relationship with G Holdings because the signatories thereto were either from Maricalum Mining or the manpower cooperatives. The pronouncements in the NAMA WU Case and in Republic vs. G Holdings, Inc. prove that Maricalum Mining never relinquished possession of the Sipalay Mining Complex in favor of G Holdings. Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. were employees of the Sipalay Hospital, which is a separate business entity, and were not members in any of the manpower cooperatives, which entered into a labor-only arrangement with Maricalum Mining.

The SC held that ordinarily, when there is sufficient evidence before the Court to enable it to resolve fundamental issues, it will dispense with the regular procedure of remanding the case to the lower court or appropriate tribunal in order to avoid a further delay in the resolution of the case. A remand is only necessary when the proceedings below are grossly inadequate to settle factual issues. This is in line with the Court’s power to issue a process in order to enforce its own decrees and thus avoid circuitous actions and vexatious litigation.

In the case at bench, Maricalum Mining is seeking to have the case remanded because the LA allegedly miscomputed the amount of the monetary awards. However, it failed to offer any reasonable argument or explanation why the proceedings conducted before the NLRC or LA were “grossly inadequate to settle factual issues,” especially as regards the computation of monetary awards. According to the SC, Maricalum Mining’s bare allegations -that the monetary awards were improperly computed because prescribed claims have been granted, that the net surpluses of the manpower cooperative were not properly distributed, and that the awards in favor of some of the complainants were improbable -do not warrant the invocation of this Court’s power to have the case remanded back to the LA. Bare and unsubstantiated allegations do not constitute substantial evidence and have no probative value.

The SC held that it is not imperative to remand the case to the LA for the determination of the amounts of net surpluses that each of the manpower cooperatives had received from Maricalum Mining. The records show that Maricalum Mining was guilty of entering into a labor-only contracting arrangement with the manpower cooperatives, thus, all of them are solidarily liable to the complainants by virtue of Article 106 of the Labor Code.

The Labor Code of the Philippines 2018 Edition (updated and re-numbered)

Intervention is a remedy by which a third party, who is not originally imp leaded in a proceeding, becomes a litigant for purposes of protecting his or her right or interest that may be affected by the proceedings. The factors that should be reckoned in determining whether or not to allow intervention are whether intervention will unduly delay or prejudice the adjudication of the rights of the original parties and whether the intervenors rights may be fully protected in a separate proceeding.

A motion to intervene may be entertained or allowed even if filed after judgment was rendered by the trial court, especially in cases where the intervenors are indispensable parties. Parties may be added by order of the court on motion of the party or on its own initiative at any stage of the action and/or at such times as are just.

In this case, it was never contested by complainants that it was Maricalum Mining-not G Holdings-who executed several sets of memorandum of agreement with the manpower cooperatives. The contractual connection between Maricalum Mining and the manpower cooperatives is crucial to the determination of labor-related liabilities especially when it involves a labor-only contracting arrangement. Accordingly, Maricalum Mining will eventually be held solidarily liable with the manpower cooperatives. In other words, it stands to be injured by the incontrovertible fact that it entered into a labor-only arrangement with the manpower cooperatives. Thus, Maricalum Mining is an indispensable party and worthy of being allowed to intervene in this case.

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: (a) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; (b) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or (c) 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.

According to the SC this principle is basically applied only to determine established liability. However, piercing of the veil of corporate fiction is frowned upon and must be done with caution. This is because a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related.

In other words, a “holding company” is organized and is basically conducting its business by investing substantially in the equity securities of another company for the purposes of controlling their policies (as opposed to directly engaging in operating activities) and “holding” them in a conglomerate or umbrella structure along with other subsidiaries. Significantly, the holding company itself-being a separate entity-does not own the assets of and does not answer for the liabilities of the subsidiary or affiliate. The management of the subsidiary or affiliate still rests in the hands of its own board of directors and corporate officers. It is in keeping with the basic rule a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The corporate form was created to allow shareholders to invest without incurring personal liability for the acts of the corporation.

While the veil of corporate fiction may be pierced under certain instances, mere ownership of a subsidiary does not justify the imposition of liability on the parent company. It must further appear that to recognize a parent and a subsidiary as separate entities would aid in the consummation of a wrong. Thus, a holding corporation has a separate corporate existence and is to be treated as a separate entity; unless the facts show that such separate corporate existence is a mere sham, or has been used as an instrument for concealing the truth.

Under the alter ego theory, piercing the veil of corporate fiction may be allowed only if the following elements concur: 1) Control-not mere stock control, but complete domination-not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2) Such control must have been used by the defendant to commit a fraud or a wrong, to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiffs legal right; and 3) The said control and breach of duty must have proximately caused the injury or unjust loss complained of.

The elements of the alter ego theory were discussed in Philippine National Bank vs. Hydro Resources Contractors Corporation. In said case the SC summarized the rule on piercing the corporate veil based on the alter ego theory as requiring the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.

The SC discussed the Control or Instrumentality test by citing the case of Concept Builders, Inc. vs. National Labor Relations Commission, et al. The SC held that the SC first laid down the first set of probative factors of identity that will justify the application of the doctrine of piercing the corporate veil. This was later expanded in the case of Philippine National Bank vs. Ritratto Group Inc., et al., the probative factors and enumerated a combination of any of the common circumstances that may also render a subsidiary an instrumentality.

These probative factors are:

1)The parent corporation owns all or most of the capital stock of the subsidiary;

2) The parent and subsidiary corporations have common directors or officers;

3) The parent corporation finances the subsidiary;

4) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;

5) The subsidiary has grossly inadequate capital;

6) The parent corporation pays the salaries and other expenses or losses of the subsidiary;

7) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation; 8) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own;

9) The parent corporation uses the property of the subsidiary as its own;

10) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation; and 11) The formal legal requirements of the subsidiary are not observed.

In the instant case, G Holdings-being the majority and controlling stockholder-had been exercising significant control over Maricalum Mining. This is because the SC had already upheld the validity and enforceability of the PSA between the APT and G Holdings. It was stipulated in the PSA that APT shall transfer 90% of Maricalum Mining’s equity securities to G Holdings and it establishes the presence of absolute control of a subsidiary’s corporate affairs.

Moreover, Maricalum Mining’s corporate name appearing on the heading of the cash vouchers issued in payment of the services rendered by the manpower cooperatives is being superimposed with G Holding’s corporate name. Due to this observation, it can be reasonably inferred that G Holdings is paying for Maricalum Mining’s salary expenses. Hence, the presence of both circumstances of dominant equity ownership and provision for salary expenses may adequately establish that Maricalum Mining is an instrumentality of G Holdings.

However, mere presence of control and full ownership of a parent over a subsidiary is not enough to pierce the veil of corporate fiction. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

In discussing Fraud Test, the SC held that to aid in the determination of the presence or absence of fraud, the “Totality of Circumstances Test” may be considered, which among others, in relation to the instant case includes:

• Commingling of funds and other assets of the corporation with those of the individual shareholders;
• Use of the same office or business location by the corporation and its individual shareholder(s);
• Diversion of corporate assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to concentrate the assets in one and the liabilities in another;

The SC held that aside from the aforementioned circumstances, it must be determined whether the transfer of assets from Maricalum Mining to G Holdings is enough to invoke the equitable remedy of piercing the corporate veil. The same issue was resolved in Y-1 Leisure Phils., Inc., et al. vs. Yu where the SC applied the “Nell Doctrine” regarding the transfer of all the assets of one corporation to another. As a general rule that where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except:

1) Where the purchaser expressly or impliedly agrees to assume such debts;

2) Where the transaction amounts to a consolidation or merger of the corporations;

3) Where the purchasing corporation is merely a continuation of the selling corporation; and

4) Where the transaction is entered into fraudulently in order to escape liability for such debts.

If any of the above-cited exceptions are present, then the transferee corporation shall assume the liabilities of the transferor. In this case, G Holdings cannot be held liable for the satisfaction of labor-related claims against Maricalum Mining under the fraud test for the following reasons:

First, the transfer of some Maricalum Mining’s assets in favor G Holdings was by virtue of the PSA as part of an official measure to dispose of the government’s non-performing assets-not to evade its monetary obligations to the complainants. Even before complainants’ monetary claims supposedly existed in 2007, some of Maricalum Mining’s assets had already been validly extrajudicially foreclosed and eventually sold to G Holdings in 2001. Thus, G Holdings could not have devised a scheme to avoid a non-existent obligation. No fraud could be attributed to G Holdings because the transfer of assets was pursuant to a previously perfected valid contract.

Settled is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor. In other words, control or ownership of substantially all of a subsidiary’s assets is not by itself an indication of a holding company’s fraudulent intent to alienate these assets in evading labor-related claims or liabilities. Although there was proof that G Holdings has an office in Maricalum Mining’s premises and that that some of their assets have been commingled due to the PSA’ s unavoidable consequences, there was no fraudulent diversion of corporate assets to another corporation for the sole purpose of evading complainants’ claim. Hence, no fraud can be imputed against G Holdings considering that there is no evidence in the records that establishes it systematically tried to alienate Maricalum Mining’s assets to escape the liabilities to complainants.

Second, it was not proven that all of Maricalum Mining’s assets were transferred to G Holdings or were totally depleted. Complainants never offered any evidence to establish that Maricalum Mining had absolutely no substantial assets to cover for their monetary claims. Their allegation that their claims will be reduced to a mere “paper victory” has not confirmed with concrete proof. At the very least, substantial evidence should be adduced that the subsidiary company’s “net realizable value” of “current assets” and “fair value” of “non-current assets” are collectively insufficient to cover the whole amount of its liability subject in the instant litigation.

Third, G Holdings purchased Maricalum Mining’s shares from the APT not for the purpose of continuing the latter’s existence and operations but for the purpose of investing in the mining industry without having to directly engage in the management and operation of mining. A holding company’s primary business is merely to invest in the equity of another corporation for the purpose of earning from the latter’s endeavors. It generally does not undertake to engage in the daily operating activities of its subsidiaries that, in tum, have their own separate sets of directors and officers. Thus, there should be proof that a holding company had indeed fraudulently used the separate corporate personality of its subsidiary to evade an obligation before it can be held liable. Since G Holdings is a holding company, the corporate veil of its subsidiaries may only be pierced based on fraud or gross negligence amounting to bad faith.

Lastly, no clear and convincing evidence was presented by the complainants to conclusively prove the presence of fraud on the part of G Holdings. Although the quantum of evidence needed to establish a claim for illegal dismissal in labor cases is substantial evidence, the quantum need to establish the presence of fraud is clear and convincing evidence. Thus, to disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly-it cannot be presumed.

In this case, the SC held that the complainants did not satisfy the requisite quantum of evidence to prove fraud on the part of G Holdings. They merely offered allegations and suppositions that, since Maricalum Mining’s assets appear to be continuously depleting and that the same corporation is a subsidiary, G Holdings could have been guilty of fraud. As emphasized earlier, bare allegations do not prove anything. There must be proof that fraud-not the inevitable effects of a previously executed and valid contract such as the PSA-was the cause of the latter’s total asset depletion. To be clear, the presence of control per se is not enough to justify the piercing of the corporate veil.

The SC, in discussing Harm or Casual Connection Test, cited the case of WPM International Trading, Inc., et al. vs. Labayen, where the Court held that control and breach of duty must proximatelv cause the injury or unjust loss.

In the case at bench, complainants have not yet even suffered any monetary injury. They have yet to enforce their claims against Maricalum Mining. It is apparent that complainants are merely anxious that their monetary awards will not be satisfied because the assets of Maricalum Mining were allegedly transferred surreptitiously to G Holdings. However, since complainants failed to show that G Holdings’ mere exercise of control had a clear hand in the depletion of Maricalum Mining’s assets, no proximate cause was successfully established. The transfer of assets was pursuant to a valid and legal PSA between G Holdings and APT.

Accordingly, complainants failed to satisfy the second and third tests to justify the application of the alter ego theory. This inevitably shows that the CA committed no reversible error in upholding the NLRC’s Decision declaring Maricalum Mining as the proper party liable to pay the monetary awards in favor of complainants.

Sipalay Hospital was incorporated by Romulo G. Zafra, Eleanore B. Gutierrez, Helen Grace B. Fernandez, Evelyn B. Badajos and Helen Grace L. Arbolario. However, there is absence of indication that G Holdings subsequently acquired the controlling interests of Sipalay Hospital. There is also no evidence that G Holdings entered into a contract with Sipalay Hospital to provide medical services for its officers and employees. This lack of stockholding or contractual connection signifies that Sipalay Hospital is not affiliated with G Holdings. Thus, due to this absence of affiliation, the Court must apply the tests used to determine the existence of an employee-employer relationship; rather than piercing the corporate veil.

Under the four-fold test, the employer-employee relationship is determined if the following are present: a) the selection and engagement of the employee; b) the payment of wages; c) the power of dismissal; and d) the power to control the employee’s conduct, or the so-called “control test.” Here, the “control test” is the most important and crucial among the four tests.

However, in cases where there is no written agreement to base the relationship on and where the various tasks performed by the worker bring complexity to the relationship with the employer, the better approach would therefore be to adopt a two-tiered test involving: a) the putative employer’s power to control the employee with respect to the means and methods by which the work is to be accomplished; and b) the underlying economic realities of the activity or relationship.

In applying the second tier, the determination of the relationship between employer and employee depends upon the circumstances of the whole economic activity (economic reality or multi-factor test), such as: a) the extent to which the services performed are an integral part of the employer’s business; b) the extent of the worker’s investment in equipment and facilities; c) the nature and degree of control exercised by the employer; d) the worker’s opportunity for profit and loss; e) the amount of initiative, skill, judgment or foresight required for the success of the claimed independent enterprise; f) the permanency and duration of the relationship between the worker and the employer; and g) the degree of dependency of the worker upon the employer for his continued employment in that line of business.

Under all of these tests, the burden to prove by substantial evidence all of the elements or factors is incumbent on the employee for he or she is the one claiming the existence of an employment relationship. In light of the present circumstances, the Court must apply the four-fold test for lack of relevant data in the case records relating to the underlying economic realities of the activity or relationship of Sipalay Hospital’s employees.

To prove the existence of their employment relationship with G Holdings, complainants Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. presented the affidavit of Dr. Welilmo T. Neri attesting among others that he was the Medical Director of Sipalay Hospital which is allegedly owned and operated by G Holdings/Maricalum Mining, several cash vouchers issued by G Holdings/Maricalum Mining representing Dr. Welilmo T. Neri’s payment for services rendered to “various” personnel, schedules of social security premium payments in favor of Dr. Welilmo T. Neri, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. stamped paid by G Holdings, notice of termination issued by Rolando G. Degojas (OIC of G-Holdings Inc.) issued to Dr. Welilmo T. Neri and some of his companions who are not complainants in this case, notice of termination addressed to Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and some of their co-employees who are not complainants in this case with a collatilla stating that the services of Dr. Welilmo T. Neri and nurse Erlinda L. Fernandez will be engaged on per call basis, and a “Statement of Unpaid Salaries of Employees of G Holdings, Inc. Assigned to the Sipalay General Hospital” prepared by Dr. Welilmo T. Neri which included his own along with complainants Erlinda L. Fernandez, Wilfredo C. Taganile, and Edgar M. Sobrino.

However, the SC held that a perusal of the aforementioned documents fails to show that the services of complainants Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. were indeed selected and engaged by either Maricalum Mining or G Holdings. This gap in evidence clearly shows that the first factor of the four-fold test, or the selection and engagement of the employee, was not satisfied and not supported by substantial evidence.

The SC ruled that the same cannot be said as to the second and third factors of the four-fold test (the payment of wages and the power of dismissal). Since substantial evidence is defined as that amount of relevant evidence which a reasonable mind might accept as adequate to justify a conclusion, the cash vouchers, social security payments and notices of termination are reasonable enough to draw an inference that G Holdings and Maricalum Mining may have had a hand in the complainants’ payment of salaries and dismissal.

Notwithstanding the absence of the first factor and the presence of the second and third factors of the four-fold test, the Court still deems it best to examine the fourth factor-the presence of control-in order to determine the employment connection with G Holdings.

Accordingly, in order to determine the presence or absence of an employment relationship between G Holdings and the employees of Sipalay Hospital by using the control test, the Court deems it essential to examine the salient portion of Sipalay Hospital’s Articles of Incorporation imparting its ‘primary purpose. Sipalay Hospital, even if its facilities are located inside the Sipalay Mining Complex, does not limit its medical services only to the employees and officers of Maricalum Mining and/or G Holdings. Its act of holding out services to the public reinforces the fact of its independence from either Maricalum Mining or G Holdings because it is free to deal with any client without any legal or contractual restriction. Moreover, G Holdings is a holding company primarily engaged in investing substantially in the stocks of another company-not in directing and managing the latter’s daily business operations.

Because of this corporate attribute, the SC inferred that G Holdings does not have a considerable ability to control means and methods of work of Sipalay Hospital employees. Markedly, the records are simply bereft of any evidence that G Holdings had, in fact, used its ownership to control the daily operations of Sipalay Hospital as well as the working methods of the latter’s employees. There is no evidence showing any subsequent transfer of shares from the original incorporators of Sipalay Hospital to G Holdings.

In conclusion, a holding company may be held liable for the acts of its subsidiary only when it is adequately proven that: a) there was control over the subsidiary; (b) such control was used to protect a fraud (or gross negligence amounting to bad faith) or evade an obligation; and c) fraud was the proximate cause of another’s existing injury. Further, an employee is duly-burdened to prove the crucial test or factor of control thru substantial evidence in order to establish the existence of an employment relationship-especially as against an unaffiliated corporation alleged to be exercising control.