In Nell v. Pacific Farms, the Supreme Court first pronounced the rule, referred to as the Nell Doctrine, that the transfer of all the assets of a corporation to another shall not render the transferee liable to the liabilities of the transferor. The Supreme Court also laid down the exceptions, in which instances, the transferee shall assume the liabilities of the transferor, as follows:
Where the purchaser expressly or impliedly agrees to assume such debts;
Where the transaction amounts to a consolidation or merger of the corporations;
Where the purchasing corporation is merely a continuation of the selling corporation; and
Where the transaction is entered into fraudulently in order to escape liability for such debts.
In Y-I LEISURE PHILIPPINES v.JAMES YU, the Supreme Court discussed the legal basis of each exception.
The first exception under the Nell Doctrine, where the transferee corporation expressly or impliedly agrees to assume the transferor’s debts, is provided under Article 2047 of the Civil Code. When a person binds himself solidarity with the principal debtor, then a contract of suretyship is produced. Necessarily, the corporation which expressly or impliedly agrees to assume the transferor’s debts shall be liable to the same.
The second exception under the doctrine, as to the merger and consolidation of corporations, is well-established under Sections 76 to 80, Title X of the Corporation Code (Sections 75 to79 of the Revised Corporation Code). If the transfer of assets of one corporation to another amounts to a merger or consolidation, then the transferee corporation must take over the liabilities of the transferor.
Section 40 of the Corporation Code (Sec. 39 of the Revised Corporation Code) suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine because the purchasing or transferee corporation necessarily continued the business of the selling or transferor corporation. Given that the transferee corporation acquired not only the assets but also the business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the former.
Another exception of the doctrine, where the sale of all corporate assets is entered into fraudulently to escape liability for transferor’s debts, can be found under Article 1388 of the Civil Code. It provides that whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered. Thus, if there is fraud in the transfer of all the assets of the transferor corporation, its creditors can hold the transferee liable.