KUKAN INTERNATIONAL CORPORATION,
Petitioner, vs
HON. AMOR REYES, in her capacity as Presiding
Judge of the Regional Trial Court of Manila,
Branch 21, and ROMEO M. MORALES, doing
business under the name and style “RM Morales
Trophies and Plaques,” Respondents.
FACTS
Sometime in March 1998, Kukan, Inc. conducted a
bidding worth Php 5M (reduced to PhP 3,388,502) for
the supply and installation of signages in a building
being constructed in Makati City which was won by
Morales.
Despite his compliance, Morales was only paid the
amount of PhP 1,976,371.07, leaving a balance of PhP
1,412,130.93, which Kukan, Inc. refused to pay despite
demands.
Morales filed a Complaint with the RTC against Kukan,
Inc. for a sum of money. However, starting November
2000, Kukan, Inc. no longer appeared and participated
in the proceedings before the trial court, prompting the
RTC to declare Kukan, Inc. in default and paving the
way for Morales to present his evidence ex parte.
On November 28, 2002, the RTC rendered a Decision
finding for Morales and against Kukan, Inc.
After the above 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 found at what was
supposed to be Kukan, Inc.’s office at Unit 2205, 88
Corporate Center, Salcedo Village, Makati
City. Alleging that it owned the properties thus levied
and that it was a different corporation from Kukan, Inc.,
Kukan International Corporation (KIC) 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 No. 99-93173.
In reaction to KIC’s claim, Morales interposed an
Omnibus Motion dated April 30, 2003, praying, and
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. KIC opposed Morales’ motion. The court
denied the omibus motion.
In a bid to establish the link between KIC and Kukan,
Inc., Morales filed a Motion for Examination of
Judgment Debtors dated May 4, 2005 which sought
that subponae 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
court.
Morales then sought the inhibition of the presiding
judge, Eduardo B. Peralta, Jr., who eventually granted
the motion. The case was re-raffled to Branch 21,
presided by public respondent Judge Amor Reyes.
Before the Manila RTC, Branch 21, 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, by Order dated
March 12, 2007, granted the motion. From the above
order, KIC moved but was denied reconsideration in
another Order dated June 7, 2007.KIC went to the CA
on a petition for certiorari to nullify the aforesaid March
12 and June 7, 2007 RTC Orders but on January 23,
2008, the CA denied the petition and affirmed the
assailed Orders. The CA later denied KIC’s MR in the
assailed resolution.
Hence, the instant petition for review.
ISSUE: whether the trial and appellate courts correctly
applied, under the premises, the principle of piercing
the veil of corporate fiction.
HELD: NO. The principle of piercing the veil of
corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical
person with respect to a given transaction, is basically
applied only to determine established liability;[34] it is
not available to confer on the court a jurisdiction it has
not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject to the court’s
process of piercing the veil of its corporate fiction. In
that situation, the court has not acquired jurisdiction
over the corporation and, hence, any proceedings
taken against that corporation and its property would
infringe on its right to due process. Aguedo Agbayani,
a recognized authority on Commercial Law, stated as
much:
23. Piercing the veil of corporate entity applies to
determination of liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil of
corporate fiction comes to play only during the trial of
the case after the court has already acquired
jurisdiction over the corporation. Hence, before this
doctrine can be applied, based on the evidence
presented, it is imperative that the court must first have
jurisdiction over the corporation.[35] x x x (Emphasis
supplied.)
The implication of the above comment is twofold: (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.
–––
In fine, 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 purposefully employed to evade a
legitimate and binding commitment and perpetuate a
fraud or like wrongdoings. To be sure, the Court has,
on numerous occasions, applied the principle where a
corporation is dissolved and its assets are transferred
to another to avoid a financial liability of the first
corporation with the result that the second corporation
should be considered a continuation and successor of
the first entity.
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 the instant case, however, 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.
–––
It bears reiterating that piercing the veil of corporate
fiction is frowned upon. Accordingly, those who seek to
pierce the veil must clearly establish that the separate
and distinct personalities of the corporations are set up
to justify a wrong, protect fraud, or perpetrate a
deception. In the concrete and on the assumption that
the RTC has validly acquired jurisdiction over the party
concerned, Morales ought to have proved by
convincing evidence that Kukan, Inc. was collapsed
and thereafter KIC purposely formed and operated to
defraud him. Morales has not to us discharged his
burden.
WHEREFORE, the petition is hereby GRANTED. The
CA’s January 23, 2008 Decision and April 16, 2008
Resolution in CA-G.R. SP No. 100152 are hereby
REVERSED and SET ASIDE. The levy placed upon
the personal properties of Kukan International
Corporation is hereby ordered lifted and the personal
properties ordered returned to Kukan International
Corporation. The RTC of Manila, Branch 21 is hereby
directed to execute the RTC Decision dated November
28, 2002 against Kukan, Inc. with reasonable dispatch.
________________________________________
Narra Nickel Mining vs Redmont
GR 185590, Apr 21 2014
Facts:
Redmont is a domestic corporation interested in the
mining and exploration of some areas in Palawan.
Upon learning that those areas were covered by
MPSA applications of other three (allegedly Filipino)
corporations – Narra, Tesoro, and MacArthur, it filed a
petition before the Panel of Arbitrators of DENR
seeking to deny their permits on the ground that these
corporations are in reality foreign-owned. MBMI, a
100% Canadian corporation, owns 40% of the shares
of PLMC (which owns 5,997 shares of Narra), 40% of
the shares of MMC (which owns 5,997 shares of
McArthur) and 40% of the shares of SLMC (which, in
turn, owns 5,997 shares of Tesoro).
Aside from the MPSA, the three corporations also
applied for FTAA with the Office of the President. In
their answer, they countered that (1) the liberal Control
Test must be used in determining the nationality of a
corporation as based on Sec 3 of the Foreign
Investment Act – which as they claimed admits of
corporate layering schemes, and that (2) the
nationality question is no longer material because of
their subsequent application for FTAA.
Commercial / Political Law
Issue 1: W/N the Grandfather Rule must be applied in
this case
Yes. It is the intention of the framers of the
Constitution to apply the Grandfather Rule in cases
where corporate layering is present.
First, as a rule in statutory construction, when there is
conflict between the Constitution and a statute, the
Constitution will prevail. In this instance, specifically
pertaining to the provisions under Art. XII of the
Constitution on National Economy and Patrimony, Sec.
3 of the FIA will have no place of application.
Corporate layering is admittedly allowed by the FIA,
but if it is used to circumvent the Constitution and other
pertinent laws, then it becomes illegal.
Second, under the SEC Rule1 and DOJ Opinion2 , the
Grandfather Rule must be applied when the 60-40
Filipino-foreign equity ownership is in doubt. Doubt is
present in the Filipino equity ownership of Narra,
Tesoro, and MacArthur since their common investor,
the 100% Canadian-owned corporation – MBMI,
funded them.
Under the Grandfather Rule, it is not enough that the
corporation does have the required 60% Filipino
stockholdings at face value. To determine the
percentage of the ultimate Filipino ownership, it must
first be traced to the level of the investing corporation
and added to the shares directly owned in the investee
corporation. Applying this rule, it turns out that the
Canadian corporation owns more than 60% of the
equity interests of Narra, Tesoro and MacArthur.
Hence, the latter are disqualified to participate in the
exploration, development and utilization of the
Philippine’s natural resources.
1 DOJ Opinion No. 020 Series of 2005 (paragraph 7)
2 SEC Opinion May 13, 1990
**********************
Narra Nickel Mining vs Redmont
G.R. No. 195580, January 28, 2015
Facts:
Narra and its co-petitioner corporations – Tesoro and
MacArthur, filed a motion before the SC to reconsider
its April 21, 2014 Decision which upheld the denial of
their MPSA applications. The SC affirmed the CA
ruling that there is a doubt to their nationality, and that
in applying the Grandfather Rule, the finding is that
MBMI, a 100% Canadian-owned corporation,
effectively owns 60% of the common stocks of
petitioners by owning equity interests of the petitioners’
other majority corporate shareholders. Narra, Tesoro
and MacArthur argued that the application of the
Grandfather Rule to determine their nationality is
erroneous and allegedly without basis in the
Constitution, the FIA, the Philippine Mining Act, and
the Rules issued by the SEC. These laws and rules
supposedly espouse the application of the Control Test
in verifying the Philippine nationality of corporate
entities for purposes of determining compliance with
Sec. 2, Art. XII of the Constitution that only
corporations or associations at least 60% of whose
capital is owned by such Filipino citizens may enjoy
certain rights and privileges, like the exploration and
development of natural resources.
Issue: W/N the application by the SC of the
grandfather resulted to the abandonment of the
‘control test’
Held:
No. The ‘control test’ can be applied jointly with the
Grandfather Rule to determine the observance of
foreign ownership restriction in nationalized economic
activities. The Control Test and the Grandfather Rule
are not incompatible ownership-determinant methods
that can only be applied alternative to each other.
Rather, these methods can, if appropriate, be used
cumulatively in the determination of the ownership and
control of corporations engaged in fully or partly
nationalized activities, as the mining operation involved
in this case or the operation of public utilities.
The Grandfather Rule, standing alone, should not be
used to determine the Filipino ownership and control in
a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized
or partly nationalized activities. Hence, it is only when
the Control Test is first complied with that the
Grandfather Rule may be applied. Put in another
manner, if the subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is
immediately considered foreign-owned, in which case,
the need to resort to the Grandfather Rule disappears.
In this case, using the ‘control test’, Narra, Tesoro and
MacArthur appear to have satisfied the 60-40 equity
requirement. But the nationality of these corporations
and the foreign-owned common investor that funds
them was in doubt, hence, the need to apply the
Grandfather Rule.
**********
Commercial law; Tests to determine the nationality of a
corporation. There are two acknowledged tests in
determining the nationality of a corporation: the control
test and the grandfather rule. Paragraph 7 of DOJ
Opinion No. 020, Series of 2005, adopts the 1967 SEC
Rules which implemented the requirement of the
Constitution and other laws pertaining to the controlling
interests in enterprises engaged in the exploitation of
natural resources owned by Filipino citizens. The first
part of paragraph 7, DOJ Opinion No. 020, stating
“shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine
nationality,” pertains to the control test or the liberal
rule. On the other hand, the second part of the DOJ
Opinion which provides, “if the percentage of the
Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares
corresponding to such percentage shall be counted as
Philippine nationality,” pertains to the stricter, more
stringent grandfather rule.
Application of the Grandfather Rule. Based on the said
SEC Rule and DOJ Opinion, the Grandfather Rule or
the second part of the SEC Rule applies only when the
60-40 Filipino-foreign equity ownership is in doubt (i.e.,
in cases where the joint venture corporation with
Filipino and foreign stockholders with less than 60%
Filipino stockholdings [or 59%] invests in other joint
venture corporation which is either 60-40% Filipino-
alien or the 59% less Filipino). Stated differently,
where the 60-40 Filipino- foreign equity ownership is
not in doubt, the Grandfather Rule will not apply.
Existence of doubt. The assertion of petitioners that
“doubt” only exists when the stockholdings are less
than 60% fails to convince this Court. DOJ Opinion No.
20, which petitioners quoted in their petition, only
made an example of an instance where “doubt” as to
the ownership of the corporation exists. It would be
ludicrous to limit the application of the said word only
to the instances where the stockholdings of non-
Filipino stockholders are more than 40% of the total
stockholdings in a corporation. The corporations
interested in circumventing our laws would clearly
strive to have “60% Filipino Ownership” at face value.
It would be senseless for these applying corporations
to state in their respective articles of incorporation that
they have less than 60% Filipino stockholders since
the applications will be denied instantly. Thus, various
corporate schemes and layerings are utilized to
circumvent the application of the Constitution.
Manila International Airport Authority vs CA
GR No. 155650, July 20, 2006, 495 SCRA 591
Facts:
Manila International Airport Authority (MIAA) is
the operator of the Ninoy International Airport located at
Paranaque City. The Officers of Paranaque City sent
notices to MIAA due to real estate tax delinquency.
MIAA then settled some of the amount. When MIAA
failed to settle the entire amount, the officers of
Paranaque city threatened to levy and subject to auction
the land and buildings of MIAA, which they did. MIAA
sought for a Temporary Restraining Order from the CA
but failed to do so within the 60 days reglementary
period, so the petition was dismissed. MIAA then sought
for the TRO with the Supreme Court a day before the
public auction, MIAA was granted with the TRO but
unfortunately the TRO was received by the Paranaque
City officers 3 hours after the public auction.
MIAA claims that although the charter provides
that the title of the land and building are with MIAA still
the ownership is with the Republic of the Philippines.
MIAA also contends that it is an instrumentality of the
government and as such exempted from real estate tax.
That the land and buildings of MIAA are of public
dominion therefore cannot be subjected to levy and
auction sale. On the other hand, the officers of
Paranaque City claim that MIAA is a government owned
and controlled corporation therefore not exempted to
real estate tax.
Issues:
Whether or not MIAA is an instrumentality of the
government and not a government owned and
controlled corporation and as such exempted from tax.
Whether or not the land and buildings of MIAA
are part of the public dominion and thus cannot be the
subject of levy and auction sale.
Ruling:
Under the Local government code, government
owned and controlled corporations are not exempted
from real estate tax. MIAA is not a government owned
and controlled corporation, for to become one MIAA
should either be a stock or non stock corporation. MIAA
is not a stock corporation for its capital is not divided into
shares. It is not a non stock corporation since it has no
members. MIAA is an instrumentality of the government
vested with corporate powers and government
functions.
Under the civil code, property may either be
under public dominion or private ownership. Those
under public dominion are owned by the State and are
utilized for public use, public service and for the
development of national wealth. The ports included in
the public dominion pertain either to seaports or
airports. When properties under public dominion cease
to be for public use and service, they form part of the
patrimonial property of the State.
The court held that the land and buildings of
MIAA are part of the public dominion. Since the airport
is devoted for public use, for the domestic and
international travel and transportation. Even if MIAA
charge fees, this is for support of its operation and for
regulation and does not change the character of the
land and buildings of MIAA as part of the public
dominion. As part of the public dominion the land and
buildings of MIAA are outside the commerce of man. To
subject them to levy and public auction is contrary to
public policy. Unless the President issues a
proclamation withdrawing the airport land and buildings
from public use, these properties remain to be of public
dominion and are inalienable. As long as the land and
buildings are for public use the ownership is with the
Republic of the Philippines.
BATAAN SHIPYARD & ENGINEERING CO., INC.
(BASECO), petitioner,
vs.
PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT, CHAIRMAN JOVITO SALONGA,
COMMISSIONER MARY CONCEPCION BAUTISTA,
COMMISSIONER RAMON DIAZ, COMMISSIONER
RAUL R. DAZA, COMMISSIONER QUINTIN S.
DOROMAL, CAPT. JORGE B. SIACUNCO, et al.,
respondents.
FACTS
Challenged in this special civil action of certiorari and
prohibition by a private corporation known as the
Bataan Shipyard and Engineering Co., Inc. are: (1)
Executive Orders Numbered 1 and 2, promulgated by
President Corazon C. Aquino on February 28, 1986
and March 12, 1986, respectively, and (2) the
sequestration, takeover, and other orders issued, and
acts done, in accordance with said executive orders by
the Presidential Commission on Good Government
and/or its Commissioners and agents, affecting said
corporation.
The sequestration order which, in the view of the
petitioner corporation, initiated all its misery was
issued on April 14, 1986 by Commissioner Mary
Concepcion Bautista.
On the strength of the above sequestration order, Mr.
Jose M. Balde, acting for the PCGG, addressed a
letter dated April 18, 1986 to the President and other
officers of petitioner firm, reiterating an earlier request
for the production of certain documents such as Stock
Transfer Book and other Legal documents (Articles of
Incorporation, By-Laws, etc.)
Orders were also issued in connection with the
sequestration and takeover, such as termination of
Contract for Security Services and abortion of contract
for Improvement of Wharf at Engineer Island; Change
of Mode of Payment of Entry Charges; Operation of
Sesiman Rock Quarry, Mariveles, Bataa; disposal of
scrap, etc.; and the provisional takeover by the PCGG
of BASECO, “the Philippine Dockyard Corporation and
all their affiliated companies.”
While BASECO concedes that “sequestration without
resorting to judicial action, might be made within the
context of Executive Orders Nos. 1 and 2 before
March 25, 1986 when the Freedom Constitution was
promulgated, under the principle that the law
promulgated by the ruler under a revolutionary regime
is the law of the land, it ceased to be acceptable when
the same ruler opted to promulgate the Freedom
Constitution on March 25, 1986 wherein under Section
I of the same,y Article IV (Bill of Rights) of the 1973
Constitution was adopted providing, among others,
that “No person shall be deprived of life, liberty and
property without due process of law.” (Const., Art. I V,
Sec. 1).”
It declares that its objection to the constitutionality of
the Executive Orders “as well as the Sequestration
Order * * and Takeover Order * * issued purportedly
under the authority of said Executive Orders, rests on
four fundamental considerations: First, no notice and
hearing was accorded * * (it) before its properties and
business were taken over; Second, the PCGG is not a
court, but a purely investigative agency and therefore
not competent to act as prosecutor and judge in the
same cause; Third, there is nothing in the issuances
which envisions any proceeding, process or remedy by
which petitioner may expeditiously challenge the
validity of the takeover after the same has been
effected; and Fourthly, being directed against specified
persons, and in disregard of the constitutional
presumption of innocence and general rules and
procedures, they constitute a Bill of Attainder.”
It argues that the order to produce corporate records
from 1973 to 1986, which it has apparently already
complied with, was issued without court authority and
infringed its constitutional right against self-
incrimination, and unreasonable search and seizure.
14
BASECO further contends that the PCGG had unduly
interfered with its right of dominion and management
of its business affairs.
ISSUE
Whether or not the sequestration order dated April 14,
1986, and all other orders subsequently issued and
acts done on the basis thereof, inclusive of the
takeover order of July 14, 1986 and the termination of
the services of the BASECO executives are valid;
DECISION
Yes. The petition cannot succeed. The writs of
certiorari and prohibition prayed for will not be issued.
Other evidence submitted to the Court by the Solicitor
General proves that President Marcos not only
exercised control over BASECO, but also that he
actually owns well nigh one hundred percent of its
outstanding stock.
Executive Orders Not a Bill of Attainder – In the first
place, nothing in the executive orders can be
reasonably construed as a determination or
declaration of guilt. On the contrary, the executive
orders, inclusive of Executive Order No. 14, make it
perfectly clear that any judgment of guilt in the
amassing or acquisition of “ill-gotten wealth” is to be
handed down by a judicial tribunal, in this case, the
Sandiganbayan, upon complaint filed and prosecuted
by the PCGG. In the second place, no punishment is
inflicted by the executive orders, as the merest glance
at their provisions will immediately make apparent. In
no sense, therefore, may the executive orders be
regarded as a bill of attainder.
No Violation of Right against Self-Incrimination and
Unreasonable Searches and Seizures – It is
elementary that the right against self-incrimination has
no application to juridical persons. While an individual
may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not
follow that a corporation, vested with special privileges
and franchises, may refuse to show its hand when
charged with an abuse ofsuchprivileges * *
Scope and Extent of Powers of the PCGG – PCGG
cannot exercise acts of dominion over property
sequestered, frozen or provisionally taken over. AS
already earlier stressed with no little insistence, the act
of sequestration; freezing or provisional takeover of
property does not import or bring about a divestment of
title over said property; does not make the PCGG the
owner thereof.
The PCGG may thus exercise only powers of
administration over the property or business
sequestered or provisionally taken over, much like a
court-appointed receiver, such as to bring and defend
actions in its own name; receive rents; collect debts
due; pay outstanding debts; and generally do such
other acts and things as may be necessary to fulfill its
mission as conservator and administrator.
Powers over Business Enterprises Taken Over by
Marcos or Entities or Persons Close to him; Limitations
Thereon – Now, in the special instance of a business
enterprise shown by evidence to have been “taken
over by the government of the Marcos Administration
or by entities or persons close to former President
Marcos,” the PCGG is given power and authority, as
already adverted to, to “provisionally take (it) over in
the public interest or to prevent * * (its) disposal or
dissipation;” and since the term is obviously employed
in reference to going concerns, or business enterprises
in operation, something more than mere physical
custody is connoted; the PCGG may in this case
exercise some measure of control in the operation,
running, or management of the business itself. But
even in this special situation, the intrusion into
management should be restricted to the minimum
degree necessary to accomplish the legislative will,
which is “to prevent the disposal or dissipation” of the
business enterprise.
Voting of Sequestered Stock; Conditions Therefor –
So, too, it is within the parameters of these conditions
and circumstances that the PCGG may properly
exercise the prerogative to vote sequestered stock of
corporations, granted to it by the President of the
Philippines through a Memorandum dated June 26,
1986. In the case at bar, there was adequate
justification to vote the incumbent directors out of office
and elect others in their stead because the evidence
showed prima facie that the former were just tools of
President Marcos and were no longer owners of any
stock in the firm, if they ever were at all.
No Sufficient Showing of Other Irregularities -As to the
other irregularities complained of by BASECO, i.e., the
cancellation or revision, and the execution of certain
contracts, inclusive of the termination of the
employment of some of its executives, this Court
cannot, in the present state of the evidence on record,
pass upon them. It is not necessary to do so. The
issues arising therefrom may and will be left for initial
determination in the appropriate action.

WHEREFORE, the petition is dismissed. The

temporary restraining order issued on October 14,
1986 is lifted.