KUKAN INTERNATIONAL CORPORATION VS. HON.

AMOR REYES
G.R. NO. 182729, SEPTEMBER 29, 2010
FACTS:
Private respondent Romeo M. Morales doing business under the name RM Morales Trophies
and Plaques was awarded a P5 million contract for the supply and installation of signages in a
building constructed in Makati sometime in March 1998. The contract price was later reduced to
P3,388,502 because some items were deleted from the contract. Morales complied with his
contractual obligations but he was paid only the amount of P1,976,371.07 leaving a balance of
P1,412,130.93. He filed a case against Kukan, Inc., for sum of money with the RTC of Manila
docketed as Civil Case No. 99-93173. Kukan Inc., stopped participating in the proceedings in
November 2000, hence, it was declared in default and Morales presented his evidence ex-parte
against petitioner.
On November 28, 2002, the RTC rendered a decision in favor of Morales and against
Kunkan, Inc. ordering the latter to pay the sum of P1,201,724.00 with legal interest of 12% per
annum until fully paid; P50,000.00 as moral damages,P20,000.00 as attorney's fees and P7,960.06
as litigation expenses. The counterclaimfiled by Kunkan, Inc. was dismissed. The decision became
final and executory During the execution, the sheriff levied the personal properties found at the
office of Kukan, Inc.. Claiming it owned the properties levied, Kukan International Corporation
(KIC) fied an Affidavit of Third Party Claim. Morales filed an Omnibus Motion praying to apply
the principle of piercing the veil of corporate entity. He alleged that Kankun, Inc. and KIC are one
and the same corporation His Motion was denied. On Motion of Morales the presiding Judge of
Branch 17 of RTC Manila inhibited himself from hearing the case. It was raffled to Branch 21
which granted the Motion filed by Morales on March 12, 2007 and decreed that Kukan, Inc. and
Kukan International Inc., as one and the same corporation; that the levy made on the properties of
KIC is valid; and ordering Kunkan International Corp. and Michael Chan as jointly and severally
liable to pay the award pursuant to the Decision dated November 28, 2002. KIC filed a Motion for
Reconsideration which was denied.KIC brought the case to the Court of Appeals which rendered
the Decision n January 23, 2008 denying KIC's petition. The CA also denied its Motion for
Reconsideration in the Resolution dated June 7, 2007.
Hence, this case.
ISSUE/S: One of the issues raised is whether or not the trial court and the appellate court
correctly applied the principle of piercing the veil of corporate entity.
HELD: The Supreme Court ruled that the doctrine of piercing the veil of corporate entity finds no
application in this case.
According to the Supreme Court, the principle of piercing the veil of corporate entity and
the resulting treatment of two related corporation as one and the same juridical person applies only
to established liability and not to confer jurisdiction. In this case, the Supreme Court ruled that KIC
was not made a party defendant in Civil Case No. 99-93173. It entered a special but not a voluntary
appearance in the trial court to assert that it was a separate entity and has a separate legal
personality from Kunkan, Inc. KIC was not impleaded nor served with summons. Hence, it could
only assert its claim through the affidavits, comments and motions filed by special apperance before
the RTC that it is a separate juridical entity.
The Supreme stated that the doctrine of piercing the veil of corporate entity comes to play

during the trial of the case after the court has already acquired jurisdiction over the corporation.
To justify the piercing of the veil of corporate fiction, it must be shown by clear and
convincing proof that the separate and distinct personality of the corporation was purposely
employed to evade a legitimate and binding comittment and perpetuate a fraud or like a
wrongdoings.
In those instances when the Court pierced the veil of corporate fiction of two corporations,
there was a confluence of the following factors:
1.

A first corporation is dissolved;

2.
The assets of the first corporation is transferred to a second corporation to avoid a financial
liability of the first corporation; and
3.
Both corporations are owned and controlled by the same persons such that the second
corporation should be considered as a continuation and successor of the first corporation.
In this case, the second and third factors are conspicuously absent. There is, therefore, no
compelling justification for disregarding the fiction of corporate entity separating Kukan, Inc. from
KIC. In applying the principle, both the RTC and the CA miserably failed to identify the presence
of the abovementioned factors.
The High Court stated that neither should the level of paid-up capital of Kukan, Inc. upon its
incorporation be viewed as a badge of fraud, for it is in compliance with Sec. 13 of the Corporation
Code, which only requires a minimum paid-up capital of PhP 5,000.
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. The fact that Michael
Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both corporations 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.
Petition granted.