BAD FAITH CANNOT BE ASCRIBED ON CORPORATE OFFICER FOR FAILURE TO COMPLY WITH NOTICE REQUIREMENTS ON CLOSURE OF BUSINESS

Bad faith cannot be ascribed on any of the Corporation’s officers by the mere fact that the Corporation failed to comply with the notice requirement before closing down the restaurant.

Case law instructs that “[n]either does bad faith arise automatically just because a corporation fails to comply with the notice requirement of labor laws on company closure or dismissal of employees.”

Thus, the SC held in the following case:

Hayden Kho, Sr. vs. Dolores G. Magbanua, et al.
G.R. No. 237246, July 29, 2019

Corporation as a juridical entity; Distinct and separate legal personality; A corporation may act only through its directors, officers, and employees; Obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities, and these persons should not be held jointly and solidarily liable with the corporation; Piercing the veil of corporate fiction; Personal liability of corporate officer; Closure of business; Notice to employees;

Facts:

A complaint for illegal dismissal was filed by Dolores G. Magbanua, Marilyn S. Mercado, Archimedes B. Calub, MariaE. Ongotan, Francisco J. Duque, Merle G. Rivera, Dolores A. Pulido, Paulino R. Balangatan, Jr., Anafel L. Escropolo, Percival A. Deinla, Jerry C. Zabala, Rogelio C. Ongonion, Jr., Helen B. Dela Cruz, Cenon Jardin, and Rovilla L. Catalan (Magbanua, et al.) before the LA against Holy Face Cell Corporation (Corporation), Tres Pares Fast Food (Tres Pares), and the Corporation’s stockholders, including its alleged President/Manager, Kho, and the latter’s wife, Irene S. Kho (Irene; collectively Spouses Kho ).

Magbanua, et al. claimed that they were employed by the Corporation in the Tres Pares as cooks, cashiers, or dishwashers. They posited that on January 14, 2011, Spouses Kho’s daughter, Sheryl Kho, posted a notice in the company premises that the restaurant would close down on January 19, 2011. Fearing the loss of their jobs, they tried to seek an audience with Kho about the closure, but to no avail.

The restaurant closed as scheduled; thus Magbanua, et al. filed the complaint for illegal dismissal with payment of separation pay, salary differentials, nominal damages, differentials on overtime pay, service incentive leave pay, and holiday pay, including damages, as well as attorney’s fees.

For their part, Spouses Kho argued that they had no employer-employee relationship with Magbanua, et al., as the latter’s employer was the Corporation, and that they cannot be held liable for the acts of the Corporation, the same having been imbued with a personality separate and distinct from its stockholders, directors, and officers.

HR/Labor Books Bundle by Atty. Elvin

LA Ruling:

The LA ruled in favor of Magbanua, et al., and accordingly, ordered the Corporation and Kho to solidarily pay Magbanua, et al. separation pay, salary and 13th month pay differentials, nominal damages, and attorney’s fees.

Aggrieved, Kho appealed before the NLRC, particularly contesting the finding that he should be held solidarily liable with the Corporation.

NLRC Ruling:

The NLRC reversed and set aside the LA Decision and dismissed the complaint as against Kho.

It ruled that Kho cannot be held solidarily liable with the Corporation, absent any allegation and proof from Magbanua, et al. that he committed any act that would justify piercing the veil of corporate fiction. It stressed that mere failure to comply with the procedural due process does not constitute an unlawful act that would render Kho personally liable.

Lastly, and contrary to the finding of the LA, it pointed out that per the Corporation’s latest General Information Sheet (GIS), Kho was not the Corporation’s President at the time of the closure, but a certain “Domingo M. Ifurung.”

Aggrieved, Magbanua, et al. moved for reconsideration, which was denied; hence, they filed a petition for certiorari before the CA.

CA Ruling:

The CA reversed and set aside the NLRC ruling, and accordingly, held the Corporation and Kho solidarily liable for the payment of Magbanua, et al.’ separation pay equivalent to one (1) month pay for every year of service, as well as nominal damages and attorney’s fees.

As regards Kho’s liability, the CA noted that Kho effectively admitted that: (i) he managed the Corporation; (ii) his daughter posted the notice of closure; and (iii) Magbanua, et al. sought an audience with him to discuss the closure.

Based on these observations, the CA, citing Marc JI Marketing, Inc. v. Jason, concluded that Kho acted in bad faith when he assented to the sudden and abrupt closure of the restaurant despite the absence of a board resolution authorizing the closure.

As such, he should be held solidarily liable with the Corporation. Dissatisfied, Kho moved for reconsideration but was denied; hence, the petition before the SC.

Issue/s:

Whether or not a stockholder who was not the president on record at the time of company closure can be held solidarily liable for the relevant labor claims based on allegations that he managed the Corporation, his daughter posted the notice of closure, and employees sought an audience with him to discuss the closure

Whether or not a stockholder can be held solidarily liable with the corporation in the absence of allegation in the complain that he committed bad faith, fraud, negligence, or any of the aforementioned exceptions to warrant his personal liability

Whether or not a stockholder can be held solidarily liable with the corporation if his daughter was the one who posted the notice of closure subject of the complaint

Whether or not bad faith can be ascribed on any of the Corporation’s officers by the mere fact that the Corporation failed to comply with the notice requirements for closure of business

SC Ruling:

The SC found the petition meritorious.

It is settled that a corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it.

As a juridical entity, a corporation may act only through its directors, officers, and employees. As such, obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities, and these persons should not be held jointly and solidarily liable with the corporation.

However, being a mere fiction of law, this corporate veil can be pierced when such corporate fiction is used: (a) to defeat public convenience or as a vehicle for the evasion of an existing obligation; (b) to justify wrong, protect or perpetuate fraud, defend crime, or as a shield to confuse legitimate issues; or (c) as a mere alter ego or business conduit of a person, or 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.

Fundamental in the realm of labor law that corporate directors, trustees, or officers can be held solidarily liable with the corporation when they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders, or other persons.

However, it bears emphasis that a finding of personal liability against a director, trustee, or a corporate officer requires the concurrence of these two (2) requisites, namely: (a) a clear allegation in the complaint of gross negligence, bad faith or malice, fraud, or any of the enumerated exceptional instances; and (b) clear and convincing proof of said grounds relied upon in the complaint sufficient to overcome the burden of proof borne by the complainant.

In this case, the evidence on record do not support the findings of both the LA and the CA that Kho was the Corporation’s President at the time of its closure, and that he assented to a patently unlawful act, thereby exposing him to solidary liability with the Corporation.

A plain reading of the Corporation’s GIS for the years 2007 and 2008 show that Kho was not the Corporation’s President as he was merely its Treasurer, while the GIS for the year 2009 indicates that he is no longer a corporate officer of the Corporation. More importantly, aside from Magbanua, et al.’s bare allegations, there is a dearth of evidence on record that would indicate that Kho was a corporate officer at the time the restaurant, where Magbanua, et al. worked, closed down.

On this score, even assuming arguendo that Kho was a corporate officer, nowhere in the complaint nor in the Magbanua, et al.’s submissions before the labor tribunals did they allege that Kho committed bad faith, fraud, negligence, or any of the aforementioned exceptions to warrant his personal liability.

The fact that it was Kho’s daughter who posted the closure notice and with whom Magbanua, et al. requested for an audience with Kho to tackle the issue of closure – which notice was not even presented in evidence – is no proof that he orchestrated the closure or assented to the same, let alone in bad faith. Relatedly, bad faith cannot be ascribed on any of the Corporation’s officers by the mere fact that the Corporation failed to comply with the notice requirement before closing down the restaurant.

Case law instructs that “[n]either does bad faith arise automatically just because a corporation fails to comply with the notice requirement of labor laws on company closure or dismissal of employees.”

The failure to give notice is not an unlawful act because the law does not define such failure as unlawful. Such failure to give notice is a violation of procedural due process but does not amount to an unlawful or criminal act. Such procedural defect is called illegal dismissal because it fails to comply with mandatory procedural requirements, but it is not illegal in the sense that it constitutes an unlawful or criminal act.

Verily, absent any finding that Kho was a corporate officer of the Corporation who willfully and knowingly assented to patently unlawful acts of the latter, or who is guilty of bad faith or gross negligence in directing its affairs, or is guilty of conflict of interest resulting in damages thereto, he cannot be held personally liable for the corporate liabilities arising from the instant case.