G.R. No. L-20850, 29 November 1965
Edward Nell Co. obtained a favorable judgment for P1,853.80 — representing the unpaid balance of the price of a pump sold by to Insular Farms, Inc. A writ of execution, issued after the judgment had become final was returned unsatisfied, stating that Insular Farms had no leviable property.
Edward Nell Co. filed with said court the present action against Pacific Farms, Inc. for the collection of the award, upon the theory that it is the alter ego of Insular Farms. Pacific Farms, Inc. had purchased all or substantially all of the shares of stock, as well as the real and personal properties of Insular Farms, including the pumping equipment sold by appellant to Insular Farms.
Whether or not Pacific Farms, Inc. should be held liable for the judgment rendered against Insular Farms, Inc.
The court held that generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except:
(1) where the purchaser expressly or impliedly agrees to assume such debts;
(2) where the transaction amounts to a consolidation or merger of the corporation;
(3) where the purchasing corporation is merely a continuation of the selling corporation; and
(4) where the transaction is entered into fraudulently in order to escape liability for such debts.
Properly evaluating the pronouncements in Edward J. Nell insofar as they involve transfer of business concerns, the following rules apply to the enforceability of liabilities against the transferee regardless of the separate juridical personality of the transferor and transferee:
(a) In a pure “assets only” transfer, the transferee is not liable for the debts and liabilities of the transferor, except where the transferee expressly or impliedly agrees to assume such debts;
(b) In a transfer of the “business enterprise,” the transferee is liable for the debts and liabilities of the transferor; and
(c) In an “equity transfer,” the transferee is not liable for the debts and liabilities of the transferor, except where the transferee expressly or impliedly agrees to assume such debts.
It is logical in an “assets only” transfer that the transferee would not be liable for the debts and liabilities of his transferor, for there is no privity of contract over the debt obligations between the transferee and the transferor’s creditors. Indeed, modification of an obligation with the substitution of a new debtor, would necessarily require the consentof the person who is sought to be substituted as the new debtor.
The Law on Contracts properly governs the transfer of liabilities in an “asset only.”
*Case Digest by Jelyn C. Ondong, Refresher, Andres Bonifacio College, SY: 2019-2020