G.R. No. 182729, 29 September 2010
Sometime in March 1998, Kukan, Inc. conducted bidding for the supply and installation of signages in a building being constructed in Makati City. Romeo Morales tendered the winning bid and was awarded the PhP 5 million contract. Short changed, Morales filed a Complaint with the RTC against Kukan, Inc. for a sum of money. The RTC rendered a Decision in favor of Morales and against Kukan, Inc. After the decision became final and executory, Morales moved for and secured a writ of execution against Kukan, Inc. The sheriff then levied upon various personal properties of Kukan International Corporation (KIC).
KIC then filed an Affidavit of Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil Case. In reaction to the third party claim, Morales interposed an Omnibus Motion. In it, Morales prayed, applying the principle of piercing the veil of corporate fiction, that an order be issued for the satisfaction of the judgment debt of Kukan, Inc. with the properties under the name or in the possession of KIC, it being alleged that both corporations are but one and the same entity. However, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship between the two, Morales filed a Motion for Examination of Judgment Debtors which sought that subpoena be issued against the primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This too, was denied by the trial court. Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually granted the motion.
The case was re-raffled. Morales filed a Motion to Pierce the Veil of Corporate Fiction to declare KIC as having no existence separate from Kukan, Inc. This time around, the RTC granted the motion. KIC moved but was denied reconsideration. On petition for certiorari before CA, the same was denied. The CA later denied KIC’s motion for reconsideration in the assailed resolution. Hence, the instant petition for review.
Whether or not the trial and appellate courts correctly applied, under the premises, the principle of piercing the veil of corporate fiction.
NO. Piercing the veil of corporate entity apllies only: (1) the court must first acquire jurisdiction over the corporation or corporations involved before its or their separate personalities are disregarded; and (2) the doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly brought under the authority of the court by way of service of summons or what passes as such service.
Mere ownership by a single stockholder or by another corporation of a substantial block of shares of a corporation does not, standing alone, provide sufficient justification for disregarding the separate corporate personality. For this ground to hold sway in this case, there must be proof that Chan had control or complete dominion of Kukan and KIC’s finances, policies, and business practices; he used such control to commit fraud; and the control was the proximate cause of the financial loss complained of by Morales. The absence of any of the elements prevents the piercing of the corporate veil. And indeed, the records do not show the presence of these elements.
In fine, there is no showing that the incorporation, and the separate and distinct personality, of KIC was used to defeat Morales’ right to recover from Kukan, Inc. Judging from the records, no serious attempt was made to levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc. tried to avoid liability or had no property against which to proceed.
The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as they are by the same stockholders, stands without factual basis. It is true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both corporations. But such circumstance, standing alone, is insufficient to establish identity. There must be at least a substantial identity of stockholders for both corporations in order to consider this factor to be constitutive of corporate identity.
Evidently, the aforementioned case relied upon by Morales cannot justify the application of the principle of piercing the veil of corporate fiction to the instant case. As shown by the records, the name Michael Chan, the similarity of business activities engaged in, and incidentally the word “Kukan” appearing in the corporate names provide the nexus between Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the identity of KIC as the alter ego or successor of Kukan, Inc.
*Case digest by Radolf Zell Adasa JD-IV, Andres Bonifacio Law School, SY 2019-2020