Liability of Transferee for the Debts of Transferor When a Corporation Sells All of Its Assets to Another

THE EDWARD J. NELL COMPANY, petitioner, vs. PACIFIC FARMS, INC., respondent; G.R. No. L-20850; November 29, 1965

Law and Jurisprudence

In the 1965 case of Nell v. Pacific Farms, the Supreme Court established the Nell Doctrine – the rule on the liability of the transferee corporation for the debts and liabilities of the transferor corporation when the latter sells all or substantially all of its assets to the former.

THE EDWARD J. NELL COMPANY, petitioner, vs. PACIFIC FARMS, INC., respondent; G.R. No. L-20850; November 29, 1965

FACTS:

On March 21, 1958, Pacific Farms (PACIFIC) purchased 1,000 shares of stock of Insular Farms  (INSULAR) for 285,126.99. PACIFIC, in turn, sold said shares of stock to certain individuals, who forthwith reorganized INSULAR. The board of directors thereof, as reorganized, then caused its assets, including its leasehold rights over a public land in Bolinao, Pangasinan, to be sold to PACIFIC for 10,000.00. 

On October 9, 1958, Edward J. Nell Co. (NELL) secured from the Municipal Court of Manila (COURT)  a judgment against INSULAR for the sum of 1,853.80 — representing the unpaid balance of the price of a pump sold by NELL to INSULAR. After the judgment had become final, a writ of execution (WRIT) was issued.

On August 14, 1959, the WRIT was returned unsatisfied, stating that INSULAR had no leviable property.

On November 13, 1959, NELL filed with the COURT an action against PACIFIC for the collection of the judgment against INSULAR. The complaint was anchored upon the theory that PACIFIC was the alter ego of INSULAR because the former had purchased all or substantially all of the shares of stock, as well as the real and personal properties of the latter, including the pumping equipment sold by appellant to Insular Farms. 

In due course, the COURT rendered judgment dismissing NELL’s complaint. NELL appealed, with the same result, to the court of first instance and, subsequently, to the Court of Appeals.

ISSUE:

Whether or not PACIFIC is liable for the debt of INSULAR to NELL.

RULING:

No.

The rule is set forth in Fletcher Cyclopedia Corporations, Vol. 15, Sec. 7122, pp. 160-161, as follows:

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 corporations; (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.

There is neither proof nor allegation that PACIFIC had expressly or impliedly agreed to assume the debt of INSULAR in favor of NELL, or that the PACIFIC is a continuation of INSULAR, or that the sale of either the shares of stock or the assets of INSULAR to PACIFIC has been entered into fraudulently, in order to escape liability for the debt of the INSULAR in favor of NELL. In fact, these sales took place (March, 1958) not only over six (6) months before the rendition of the judgment (October 9, 1958) sought to be collected in the present action, but, also, over a month before the filing of the case (May 29, 1958) in which said judgment was rendered. 

Moreover, PACIFIC purchased the shares of stock of INSULAR as the highest bidder at an auction sale held at the instance of a bank to which said shares had been pledged as security for an obligation of IINSULAR in favor of said bank. It has, also, been established that the appellee had paid 285,126.99 for said shares of stock, apart from the sum of 10,000.00 it, likewise, paid for the other assets of Insular Farms.

Hence, PACIFIC is not an alter ego of INSULAR, and is not liable for INSULAR’s debts.