G.R. No. 178618, 11 October 2010


The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange Commission (SEC) under Registry Nos. 34869 and 32388, respectively, primarily engaged in the business of granting loans and receiving deposits from the general public, and treated as banks.

Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation. The articles of merger were not registered with the SEC due to incomplete documentation. On August 12, 1985, DSLAI changed its corporate name to MSLAI by way of an amendment to Article 1 of its Articles of Incorporation, but the amendment was approved by the SEC only on April 3, 1987.

Meanwhile, the Board of Directors of FISLAI passed a resolution, assigning its assets in favor of DSLAI which in turn assumed the former’s liabilities.The business of MSLAI, however, failed was ordered its closure and placed under receivership.

Prior to the closure of MSLAI, Uy filed an action for collection of sum of money against FISLAI. The RTC issued a summary decision in favor of Uy, directing defendants therein (which included FISLAI) to pay the former the sum of P136, 801.70. Therafter, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI and Willkom was the highest bidder. New certificates of title covering the subject properties were issued in favor of Willkom who sold one of the subject parcels of land to Go.

MSLAI, represented by PDIC, filed a complaint for Annulment of Sheriff’s Sale, Cancellation of Title and Reconveyance of Properties against respondents. The respondents averred that MSLAI had no cause of action against them or the right to recover the subject properties because MSLAI is a separate and distinct entity from FISLAI as the merger did not take effect.


1. Whether or not the merger between FISLAI and DSLAI (now MSLAI) is valid and effective;
2. Whether or not there was novation of the obligation by substituting the person of the debtor.


Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties, and liabilities are acquired by the surviving corporation. Although there is a dissolution of the absorbed or merged corporations, there is no winding up of their affairs or liquidation of their assets because the surviving corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities. The merger, however, does not become effective upon the mere agreement of the constituent corporations. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them.

It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. Article 1293 of the Civil Code states that Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.

In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that DSLAI (now MSLAI) would assume the liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the assets that FISLAI transferred to DSLAI remained subject to execution to satisfy the judgment claim of Uy against FISLAI. The subsequent sale of the properties by Uy to Willkom, and of one of the properties by Willkom to Go, cannot, therefore, be questioned by MSLAI.

The consent of the creditor to a novation by change of debtor is as indispensable as the creditor’s consent in conventional subrogation in order that a novation shall legally take place. Since novation implies a waiver of the right which the creditor had before the novation, such waiver must be express.

*Case Digest by Jelyn C. Ondong, Refresher, Andres Bonifacio College, SY: 2019-2020