When corporate shield becomes a sword

In a corporation, the governing body is the board of directors. Under Section 22 of the Revised Corporation Code (RCC), the board of directors or trustees of a corporation shall exercise the corporate powers, conduct all business, and control all properties of the corporation.

The raison d’etre is that this ensures efficiency, as stockholders are often too numerous and unfamiliar with the business to manage it directly. Instead, stockholders elect directors for a term to oversee corporate affairs and exercise business judgement for the corporation.

In Polymer Rubber Corporation v. Salamuding, the Supreme Court emphasized the business judgment rule, which shields directors and officers from personal liability for acts done in good faith and within the scope of their authority.

Corporate obligations are generally the responsibility of the corporation itself, and not of its directors or officers.

The doctrine of separate juridical personality must not be stretched beyond its purpose.

It was designed to protect commercial risk-taking, not to shield tortious or negligent conduct.

Yet jurisprudence remains conservative, the corporate veil is pierced only in rare cases, typically requiring evidence of fraud, bad faith, or gross negligence.

In contrast, however, under civil law, particularly in the realm of quasi-delicts, simple negligence is sufficient to establish liability when it results in an actual injury.

It must be emphasized that the separate juridical personality of a corporation is a tool for economic growth, not a weapon to evade legal responsibility.

To promote the capital market, it is high time the Philippine legal system recognized negligence, especially when it causes real harm, as a valid ground for piercing the corporate shield.

If directors and officers enjoy the privilege of limited liability, they must also bear the duty of diligence. A modest recalibration of the standard, recognizing simple negligence as a valid basis for liability, would not stifle business.

On the contrary, it would promote better governance, more prudent decision-making, and greater respect for stakeholder rights.

This aligns with Principle 1 of SEC Memorandum Circular 19 of 2016, otherwise known as the Code of Corporate Governance for Publicly Listed Companies, which states that the corporation must be headed by a “competent, working board” that fosters long-term success and sustains competitiveness and profitability in a manner consistent with the best interests of the shareholders and other stakeholders.

A “competent” board is not merely one that avoids malice or fraud—it is one that acts with care, keeps itself informed, asks hard questions, and guards against complacency.

Ultimately, the corporate form is a legal fiction, a tool the State offers to facilitate economic activity. It is not an entitlement to immunity. If directors and officers are entrusted with the power to bind a legal person with vast resources and responsibilities, then they must also be held to a reasonable standard of care. The privilege of limited liability must be matched by the duty of diligence.

This is the time for Philippine law, jurisprudence, and regulation to evolve, not to dismantle the business judgment rule and disregard the doctrine of separate juridical personality, but to clarify its limits.

When a director’s simple negligence leads to injury, the law must be willing to lift the corporate shield, not to punish entrepreneurship, but to protect justice and promote accountability and promote corporate governance.