What is the Nell Doctrine? (Corporations); Transfer of Business Property

In the 1965 case of Nell v. Pacific Farms, Inc., the Court first pronounced the rule regarding the transfer of all the assets of one corporation to another (hereafter referred to as the Nell Doctrine) 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.

The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions are present, then the transferee corporation shall assume the liabilities of the transferor.

LEGAL BASES OF THE NELL DOCTRINE: An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully supported by Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity under Article 1311 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are valid and binding only between the contracting parties and their successors-in-interest. Thus, despite the sale of all corporate assets, the transferee corporation cannot be prejudiced as it is not in privity with the contracts between the transferor corporation and its creditors.

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. 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.

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.

The legal basis of the last in the four (4) exceptions to the Nell Doctrine, where the purchasing corporation is merely a continuation of the selling corporation, is challenging to determine. In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that this exception contemplates the "business-enterprise transfer." In such transfer, the transferee corporation's interest goes beyond the assets of the transferor's assets and its desires to acquire the latter's business enterprise, including its goodwill. The exception of the Nell doctrine, which finds its legal basis under Section 40, provides that the transferee corporation assumes the debts and liabilities of the transferor corporation because it is merely a continuation of the latter's business. A cursory reading of the exception shows that it does not require the existence of fraud against the creditors before it takes full force and effect. Indeed, under the Nell Doctrine, the transferee corporation may inherit the liabilities of the transferor despite the lack of fraud due to the continuity of the latter's business.

The purpose of the business-enterprise transfer is to protect the creditors of the business by allowing them a remedy against the new owner of the assets and business enterprise. Otherwise, creditors would be left "holding the bag," because they may not be able to recover from the transferor who has "disappeared with the loot," or against the transferee who can claim that he is a purchaser in good faith and for value.53 Based on the foregoing, as the exception of the Nell doctrine relates to the protection of the creditors of the transferor corporation, and does not depend on any deceit committed by the transferee -corporation, then fraud is certainly not an element of the business enterprise doctrine. (G.R. No. 207161; September 08, 2015)

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