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1. A valid law under which a corporation with power 2. REMEDIAL LAW; ACTIONS; PARTIES; ONLY THE REISURER OF THE INSURER ACTING
assumed might be incorporated AS AN ATTORNEY-IN-FACT OF THE REINSURER CAN COLLECT AGAINST THE INDEMNITY
AGREEMENT. The appellate court did not commit a reversible error in dismissing the
2. A bona fide attempt to organize a corporation under such petitioner's complaint as against the respondents for the reason that the petitioner was not the real
law party in interest in the complaint and, therefore, has no cause of action against the respondents.
3. Actual user or exercise in good faith of corporate powers 3. ID.; EVIDENCE; FINDINGS OF FACT OF THE TRIAL COURT UPHELD ON APPEAL. We
conferred upon it by law find the trial court's findings on the matter replete with evidence to substantiate its finding that the
counter-indemnitors are not liable to the petitioner. Pioneer, having foreclosed the chattel mortgage
USER OR EXERCISE OF CORPORATE POWERS IN GOOD FAITH on the planes and spare parts, no longer has any further action against the defendants as
1. User contemplated user must be corporate acts. The act or business indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso
must be transacted as a corporation and under the corporate forms jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they make payments to the latter.
2. Duty to correct defect if discovered must act in good faith. (Articles 2067 and 2080, New Civil Code)
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
4. CIVIL LAW; CONTRACTS; A DE FACTO PARTNERSHIP IS CREATED WHERE PERSONS 1. NO. Pioneer has no right to institute and maintain in its own name an action for the benefit of the
ASSOCIATE THEMSELVES BUT FAILED TO FORM A CORPORATION. Where persons reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name instead of
associate themselves together under articles to purchase property to carry on a business, and their that of the principal will not prosper, and this is so even where the name of the principal is
organization is so defective as to come short of creating a corporation within the statute, they
disclosed in the complaint. An attorney-in-fact is not a real party in interest, that there is no law
become in legal effect partners inter se, and their rights as members of the company to the
permitting an action to be brought by an attorney-in-fact.
property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A
268, 109 Me. 555; Whipple v. Parker, 29 Mich. 369).
2. NO. Partnership inter se does not necessarily exist, for ordinarily persons cannot be made to
5. ID.; ID.; ID.; DOCTRINE NOT APPLICABLE WHERE THERE WAS REALLY NO INVENTION assume the relation of partners as between themselves, when their purpose is that no partnership
TO FORM A CORPORATION; PARTIES NEED NOT SHARE IN LOSSES; CASE AT BAR. The
shall exist and it should be implied only when necessary to do justice between the parties; thus,
petitioner never had the intention to form a corporation with the respondents despite his
representations to them. This gives credence to the cross-claims of the respondents to the effect one who takes no part except to subscribe for stock in a proposed corporation which is never
that they were induced and lured by the petitioner to make contributions to a proposed corporation legally formed does not become a partner with other subscribers who engage in business under
which was never formed because the petitioner reneged on their agreement. Applying the the name of the pretended corporation, so as to be liable as such in an action for settlement of the
principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was alleged partnership and contribution.
created among the parties which would entitle the petitioner to a reimbursement of the supposed
losses of the proposed corporation. The record shows that the petitioner was acting on his own and
not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare Municipality of Malabang v. Benito (1969) 27 SCRA 533
parts. EN BANC
PIONEER INSURANCE vs. CA [G.R. No. L-28113. March 28, 1969.]
G.R. No. 84197; July 28, 1989 THE MUNICIPALITY OF MALABANG, LANAO DEL SUR and AMER
MACAORAO BALINDONG, petitioners, vs. PANGANDAPUN BENITO,
FACTS: HADJI NORODIN MACAPUNUNG, HADJI HASAN MACARAMPAD,
FREDERICK V. DUJERTE, MONDACO ONTAL, MARONSONG ANDOY,
MACALABA INDAR LAO,respondents.
Lim is an owner-operator of Southern Airlines (SAL), a single proprietorship. Japan Domestic
Airlines (JDA) and Lim entered into a sales contract for the sale and purchase of two (2) DC-3A L. Amores and R. Gonzales for petitioners.
Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US Jose W . Diokno for respondents.
$109,000.00 to be paid in installments. Pioneer Insurance and Surety Corp. as surety executed its
surety bond in favor of JDA on behalf of its principal Lim. Border Machinery and Heavy Equipment SYLLABUS
Co, Inc., Francisco and Modesto Cervantes, and Constancio Maglana contributed funds based on 1.ADMINISTRATIVE LAW; MUNICIPAL CORPORATIONS; RIGHT OF INDIVIDUAL TO ATTACK
the misrepresentation of Lim that they will form a new corporation to expand his business. They CORPORATION COLLATERALLY. It is indeed true that, generally, an inquiry into the legal
executed two separate indemnity agreements in favor of Pioneer, one signed by Maglana and the existence of a municipality is reserved to the State in a proceeding for quo warranto or other direct
other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements proceeding, and that only in a few exceptions may a private person exercise this
stipulated that the indemnitors principally agree and bind themselves jointly and severally to function of government. But the rule disallowing collateral attacks applies only where the municipal
corporation is at least a de facto corporation. For where it is neither a corporation de jure nor de
indemnify and hold and save Pioneer from and against any/all damages, losses, etc. of whatever
facto, but a nullity, the rule is that its existence may be questioned collaterally or directly in any
kind and nature may incur in consequence of having become surety. Lim executed in favor of action or proceeding by any one whose rights or interests are affected thereby, including the
Pioneer a deed of chattel mortgage as security. Upon default on the payments, Pioneer paid for citizens of the territory incorporated unless they are estopped by their conduct from doing so.
him and filed a petition for the foreclosure of chattel mortgage as security.
2.ID.; ID.; MUNICIPALITY IN QUESTION IS NOT A DE FACTO CORPORATION. In the cases
where a de facto municipal corporation was recognized as such despite the fact that the statute
Maglana, Bormaheco and the Cervantess filed cross-claims against Lim alleging that they were creating it was later invalidated, the decisions could fairly be made to rest on the consideration that
not privies to the contracts signed by Lim and for recovery of the sum of money they advanced to there was some other valid law giving corporate validity to the organization. Hence, in the case at
Lim for the purchase of the aircrafts. The decision was rendered holding Lim liable to pay. bar, the mere fact that Balabagan was organized at a time when the statute had not been
invalidated cannot conceivably make it a de facto corporation, as, independently of Section
ISSUE: 68 of the Administrative Code, there is no other valid statute to give color of authority to its
creation.
1. Whether or not Pioneer has a cause of action against respondents. 3.ID.; ID.; EFFECT OF NULLITY OF EXECUTIVE ORDER CREATING MUNICIPALITY UPON
ACTS THEREOF BEFORE DECLARATION OF NULLITY. Executive Order 386creating
2. Whether or not failure to incorporate automatically resulted to de facto partnership. the municipality in question is a nullity pursuant to the ruling in Pelaez vs. Auditor General
and Municipality of San Joaquin vs. Siva. The executive order therefore "created no office." This is
HELD: not to say, however, that the acts done by the municipality of Balabagan in the exercise of its
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
corporate powers are a nullity because the executive order "is, in legal contemplation, as a.)been upheld for a time by the courts or
inoperative as though it had never been passed." For the existence of Executive Order 386 is "an
operative fact which cannot justly be ignored." There is then no basis for the respondents' b.) not yet been declared void
apprehension that the invalidation of the executive order creating Balabagan would have the
effect of unsettling many an act done in reliance upon the validity of the
provided that a warrant for its creation can be found in some other valid law or in the recognition of
creation of that municipality.
its potential existence by the general laws or constitution of the State.
Municipality of Malabang vs Benito
Hence, such municipality is not a de facto corp.
Held: NO. There is no other valid statute to give color of authority to its creation when EO 386 was
subsequently declared unconstitutional. the color of authoroty requisite to the organization of a de In 1947, the petitioners and the respondents signed and acknowledged in Leyte, the
facto municipal corpo may be: article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage
in a general lumber business to carry on as general contractors, operators and managers, etc.
1.) a valid law enacted by legislature Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the corporation described in a list
2.) an unconstitutional law, valid on its face which has either: appended thereto.
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
Immediately after the execution of said articles of incorporation, the corporation
proceeded to do business with the adoption of by-laws and the election of its officers.
3. A year later, the Board of Directors adopted a resolution to sell the 4 parcels of land to
In 1947, the said articles of incorporation were filed in the office of the SEC for the defendant Teodoro Sandiko. Respondent executed a promissory note in favor of
issuance of the corresponding certificate of incorporation. Thereafter, pending action on the articles defendant.
of incorporation by the SEC, the respondents filed before the Court of First Instance of Leyte a civil
case, alleging among other things that the Far Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to have it dissolved because of bitter dissension among 4. When the defendant failed to pay the sum in the PN, Cagayan Fishing brought an action
the members, mismanagement and fraud by the managers and heavy financial losses. The against Sandiko for the payment of the sum.
petitioners alleged that the court had no jurisdiction over the civil case decree the dissolution of the
company, because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.
5. The lower court absolved the defendant on the basis of vice in the consent. Cagayan
ISSUES: Whether or not the Far Eastern Lumber and Commercial Co., Inc. is a de facto Fishing appealed.
corporation.
RULING: NO. Inasmuch as the Far Eastern Lumber and Commercial Co., is a de facto ISSUE:
corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction WON, the Deed of Sale to Sandiko is valid.
to take cognizance of said civil case.
HELD:
There are least two reasons why this section does not govern the situation. (1) First, not
having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. NO. SC affirmed not on the basis of vice in consent but on the basis that Cagayan
even its stockholders may not probably claim "in good faith" to be a corporation. Fishing had no capacity.
Under our statue it is to be noted that it is the issuance of a certificate of incorporation by
the Director of the Bureau of Commerce and Industry (now SEC) which calls a corporation into The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff
being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was
corporation under this act." Such a claim is compatible with the existence of errors and affected later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five
irregularities; but not with a total or substantial disregard of the law. Unless there has been an months before the incorporation of the company.
evident attempt to comply with the law the claim to be a corporation "under this act" could not be
made "in good faith." In the case before us it cannot be denied that the plaintiff was not yet incorporated when
it entered into a contract of sale, Exhibit A. Not being in legal existence then, it did not possess
(2) Second, this is not a suit in which the corporation is a party. This is a litigation juridical capacity to enter into the contract.
between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even
the existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state. FACTS:
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of
Cagayan Fishing. v. Sandiko GR L-43350 (12/23/1937) Linao, town of Aparri, Province of Cagayan. To guarantee the payment of a loan in the sum of
P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a
EN BANC
first mortgage on the four parcels of land above-mentioned. Tabora executed a public document
G.R. No. L-43350 December 23, 1937 entitle`d "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant, parcels of land owned by him was sold to Cagayan Fishing Development Co., Inc, said to under
vs. process of incorporation, in consideration of one peso (P1) subject to the mortgages in favor of the
TEODORO SANDIKO, defendant-appellee. Philippine National Bank and Severina Buzon and, to the condition that the certificate of title to said
lands shall not be transferred to the name of Cagayan Fishing Development Co., Inc until the latter
FACTS:
has fully and completely paid Tabora's indebtedness to the Philippine National Bank.
1. Manuel Tabora owns 4 parcels of land in Aparri, Cagayan. As a guarantee for his 2 loans The board of directors of said company adopted a resolution authorizing its president,
from PNB, he executed in favor of PNB 2 mortgages over the 4 parcels. A third mortgage Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. The
was executed in favor of Severina Buzon to whom he was also indebted. (April 1930)
defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this action in
2. Thereafter Manuel Tabora sold the 4 parcels to Cagayan Fishing on May 1930 which at the Court of First Instance of Manila praying that judgment be rendered against the defendant for
that time was still in the process of incorporation. The Articles of Incorporation were filed the sum of P25,300, with interest at legal rate from the date of the filing of the complaint, and the
only on October 1930. costs of the suits. After trial, the court below rendered judgment absolving the defendant, with costs
against the plaintiff
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
ISSUE: WON the contract of sale entered between Tabora and Cagayan Fishing Development is constitute such a corporation de facto as will exempt
valid. thosewho actively and knowingly use s name to incur legalobligations from their individual liability
to pay them. There could be no incorporation or color of it under the law until the articles were filed
HELD: (requisites for valid incorporation)
No. The transfer was made on May 31 1930 and the actual incoroporation of said
company was affected later on October 22, 1930 which means that the transfer was made almost
five months before the incorporation of the company. Unquestionably, a duly organized corporation
has the power to purchase and hold such real property as the purposes for which such corporation
was formed may permit and for this purpose may enter into such contracts as may be necessary
(sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be
lawfully organized, many things have to be done. Among other things, the law requires the filing of
articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all
the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in
the case before us it can not be denied that the plaintiff was not yet incorporated when it entered
into a contract of sale. The contract itself referred to the plaintiff as "una sociedad en vias de
incorporacion." It was not even a de facto corporation at the time. Not being in legal existence then,
it did not possess juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation of
corporations are general offers to any persons who may bring themselves within their provisions;
and if conditions precedent are prescribed in the statute, or certain acts are required to be done,
they are terms of the offer, and must be complied with substantially before legal corporate
existence can be acquired. (14 C. J., sec. 111, p. 118.)
That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would seem to be self
10 ) Corporation by Estoppel Sec. 21 (rationale, liabilities, validity)
evident.. A corporation, until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract, unless so authorized by the Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to
charter there is not a corporation nor does it possess franchise or faculties for it or others to be without authority to do so shall be liable as general partners for all debts, liabilities and damages
exercise, until it acquires a complete existence incurred or arising as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use as a defense its lack of corporate personality.
If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by sale to the On who assumes an obligation to an ostensible corporation as such, cannot resist performance
defendant, Teodoro Sandiko. thereof on the ground that there was in fact no corporation.
Harill v. Davis (1909) 168 F. 187 RATIONALE:
168 F. 187; 1909 o Estoppel is essentially a common law practice theory that an admission or
representation is rendered conclusive upon the person making it, and cannot be
FACTS: The constitutive documents were filed with the clerk of the Court of Appeals but not with
denied or disproved as against the person relying thereon and having changed his
the clerk of court in the judicial district where the business was located. Arkansas law requires
position based on such reliance
filing in both offices.
o Based on equity
ISSUE: Was there colorable compliance enough to give the supposed corporation at least the
status of a de facto corporation? o To hold contractual parties to their representations or expectations at the time the
contract was perfected
HELD: NO. Neither the hope, the belief, nor the statement by parties that they are incorporated,
nor the signing of the articles of incorporation which are not filed, where filing is requisite to create
the corporation, nor the use of the pretended franchise of the nonexistent corporation, will
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
Asia Banking Corp. v. Std. Products Co. (1924) 46 Phil. 145 HORNEY, J., delivered the opinion of the Court.
On the theory that the Real Estate Service Bureau was neither a de jure nor ade facto corporation
ASIA BANKING CORPORATION vs. STANDARD PRODUCTS, CO., INC and that Albion C. Cranson, Jr., was a partner in the business conducted by the Bureau and as
such was personally liable for its debts, the International Business Machines Corporation brought
G.R. No. 22106 September 11, 1924 this action against Cranson for the balance due on electric typewriters purchased by the Bureau. At
the same time it moved for summary judgment and supported the motion by affidavit. In due
course, Cranson filed a general issue plea and an affidavit in opposition to summary judgment in
FACTS: Standard Products, Co., Inc., was indebted to Asia Banking Corporation for the amount of which he asserted in effect that the Bureau was a de facto corporation and that he was not
P37,757.22. To secure its indebtedness, it executed a promissory note in favor of plaintiff-appellee. personally liable for its debts.
Upon demand for the balance due, the respondent-appellant failed to pay. Hence an action was The agreed statement of facts shows that in April 1961, Cranson was asked to invest in a new
brought by plaintiff-appellee to recover the sum of P24,736.47. The court rendered judgment in business corporation which was about to be created. Towards this purpose he met with other
favor of the plaintiff-appellee for the sum demanded in the complaint, with interest on the sum of interested individuals and an attorney and agreed to purchase stock and become an officer and
P24,147.34 from November 1, 1923, at the rate of 10 per cent per annum, and the costs. Hence director. Thereafter, upon being advised by the attorney that the corporation had been formed
this appeal by the respondent-appellant. At the trial of the case the plaintiff failed to prove under the laws of Maryland, he paid for and received a stock certificate evidencing ownership of
affirmatively the corporate existence of the parties and the appellant insists that under these shares in the corporation, and was shown the corporate seal and minute book. The business of the
circumstances the court erred in finding that the parties were corporations with juridical personality new venture was conducted as if it were a corporation, through corporate bank accounts, with
and assigns same as reversible error. auditors maintaining corporate books and records, and under a lease
[234 Md. 480]
ISSUE: Whether or not respondent is estopped from denying the corporate existence of the entered into by the corporation for the office from which it operated its business. Cranson was
plaintiff. elected president and all transactions conducted by him for the corporation, including the dealings
with I.B.M., were made as an officer of the corporation. At no time did he assume any personal
RULING: The general rule is that in the absence of fraud a person who has contracted or obligation or pledge his individual credit to I.B.M. Due to an oversight on the part of the attorney, of
otherwise dealt with an association in such a way as to recognize and in effect admit its legal which Cranson was not aware, the certificate of incorporation, which had been signed and
existence as a corporate body is thereby estopped to deny its corporate existence in any action acknowledged prior to May 1, 1961, was not filed until November 24, 1961. Between May 17 and
leading out of or involving such contract or dealing, unless its existence is attacked for cause which November 8, the Bureau purchased eight typewriters from I.B.M., on account of which partial
have arisen since making the contract or other dealing relied on as an estoppel and this applies to payments were made, leaving a balance due of $4,333.40, for which this suit was brought.
foreign as well as to domestic corporations. The defendant having recognized the corporate
Although a question is raised as to the propriety of making use of a motion for summary judgment
existence of the plaintiff by making a promissory note in its favor and making partial payments on
as the means of determining the issues presented by the pleadings, we think the motion was
the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course, also
appropriate. Since there was no genuine dispute as to the material facts, the only question was
estopped from denying its own corporate existence. Under these circumstances it was
whether I.B.M. was entitled to judgment as a matter of law. The trial court found that it was, but we
unnecessary for the plaintiff to present other evidence of the corporate existence of either of the
disagree.
parties. It may be noted that there is no evidence showing circumstances taking the case out of the 1
The fundamental question presented by the appeal is whether an officer of a defectively
rules stated. J
incorporated association may be subjected to personal liability under the circumstances of this
case. We think not.
NOTE: The name of parties as plaintiff/respondent in this case was not changed. They remained Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively
as such even on appeal. incorporated association with the corporate attribute of limited liability. The first, often referred to as
the doctrine of de factocorporations, has been applied in those cases where there are elements
showing: (1) the existence of law authorizing incorporation: (2) an effort in good faith to incorporate
under the existing law; and (3) actual user or exercise of corporate powers. Ballantine, Private
Cranson v. IBM Corp.(1964) 234 Md. 477; 200 A. 2d 33
Corporations, 23; 8 Fletcher, Cyclopedia of the Law of Private
CRANSON v. I.B.M. CORP.
[234 Md. 481]
234 Md. 477 (1964) Corporations, 3777; 13 Am. Jur., Corporations, 49-56; 18 C.J.S.,Corporations, 99. The
200 A.2d 33 second, the doctrine of estoppel to deny the corporate existence, is generally employed where the
CRANSON v. INTERNATIONAL BUSINESS MACHINES CORPORATION person seeking to hold the officer personally liable has contracted or otherwise dealt with the
Court of Appeals of Maryland. association in such a manner as to recognize and in effect admit its existence as a corporate body.
Decided April 30, 1964. Ballantine, op.cit., 29; Machen, Modern Law of Corporations, 278-282; 18 C.J.S., op.cit.,
109.
William J. Brannan, Jr., with whom were Kardy, Brannan & Neumann on the brief, for the appellant.
It is not at all clear what Maryland has done with respect to the two doctrines. There have been no
Henry J. Noyes for the appellee.
recent cases in this State on the subject and some of the seemingly irreconcilable earlier cases
The cause was argued before HENDERSON, HAMMOND, HORNEY, MARBURY and SYBERT, 2
offer little to clarify the problem.
JJ.
In one line of cases, the Court, in determining the rights and liabilities of a defectively organized
corporation, or a member or stockholder thereof, seems to have drawn a distinction between those
acts or requirements which are a condition precedent to corporate existence and those acts
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
prescribed by law to be done after incorporation. In so doing, it has been generally held that where [234 Md. 484]
there had been a failure to comply with a requirement which the law declared to be a condition In the Hammond case, an action by a creditor against a stockholder of a state bank on his statutory
precedent to the existence of the corporation, the corporation was not a legal entity and was liability, the Court, after stating that a corporation or a stockholder could not defeat an action by
therefore precluded from suing or being sued as such. Boyce v. M.E. Church, 46 Md. 359 showing noncompliance with the requirements of the corporation law unless the acts required are
(1877); Regester v. Medcalf, 71 Md. 528, 18 Atl. 966 (1889); Bonaparte v. Lake Roland R.R. conditions precedent to corporate existence, said (at p. 15):
Co., 75 Md. 340, 23 Atl. 784 (1892); Jones v. Linden Building Asso., 79 Md. 73, 29 Atl. 76 By holding otherwise, parties might avail themselves of the powers and privileges of a corporation,
(1894); Maryland Tube Works v. West End Imp. Co., 87 Md. 207, 39 Atl. 620 (1898); Cleaveland v. without in any manner subjecting themselves to its duties and obligations, and might set up their
Mullin, 96 Md. 598, own neglect of duty, of wilful omission to comply with the requirements of the statute, as means of
discharge from all their just obligations under the law. This is forbidden by every principle of law
[234 Md. 482] and justice, and hence such a defense could never be tolerated.
54 Atl. 665 (1903); National Shutter Bar Co. v. Zimmerman, 110 Md. 313, 73 Atl. 19 (1909). These
cases appear to stand for the proposition that substantial compliance with those formalities of the It seems clear therefore that when a defect in the incorporation process resulted from a failure to
corporation law, which are made a condition precedent to corporate existence, was not only comply with a condition subsequent, the doctrine of estoppel may be applied for the benefit of a
necessary for the creation of a corporation de jure, but was also a prerequisite to the existence of creditor to estop the corporation, or the members or stockholders thereof, from denying its
a de facto corporation or a corporation by estoppel. corporate existence. See Brune (Herbert M., Jr.), Maryland Corporation Law and Practice (rev.
ed.), 339.
In the Boyce case, an action in assumpsit against a defectively incorporated religious society, the In another line of Maryland cases which determined the rights and liabilities of a defectively
Court (at p. 373 and p. 374), in holding that the society was not estopped to deny its corporate organized corporation, or a member or stockholder thereof, the Court, apparently disregarding the
existence, said: distinction made between those requirements which are conditions precedent and those which are
We think it would be extending the doctrine of estoppel to an extent, not justified by the principles conditions subsequent to corporate existence, has generally precluded, on the grounds of estoppel
of public policy, to allow it to operate through the conduct of the parties concerned, to create or collateral attack, inquiry into the question of corporate existence.Maltby v. Northwestern Va.
substantially a de facto corporation, with just such powers as the parties may by their acts give to R.R. Co., 16 Md. 422 (1860); Franz v. Teutonia Building Asso., 24 Md. 259 (1866); Grape Sugar &
it.* * *The statute law of the State, expressly requiring certain prescribed acts to be done to Vinegar Mfg. Co. v. Small,40 Md. 395 (1874); Laflin & Rand Powder Co. v. Sinsheimer, 46 Md. 315
constitute a corporation, to permit parties indirectly, or upon the principle of estoppel, virtually to (1877);Keene v. Van Reuth, 48 Md. 184 (1878); Bartlett v. Wilbur, 53 Md. 485 (1880);Pott & Co. v.
create a corporation for any purpose, or to have acts so construed, would be in manifest opposition Schmucker, 84 Md. 535, 36 Atl. 592 (1897). In the Grape Sugarcase, an action against a
to the statute law, and clearly against its policy, and justified upon no sound principle in the defectively organized corporation to
administration of justice. [234 Md. 485]
In the Maryland Tube case, an action by a corporation for specific performance of a contract to recover the balance due for work done and materials furnished, the Court said (at p. 400):
convey land which it had entered into prior to its becoming a legal entity, the Court, having cited (at The second prayer proceeds upon the assumption that the [corporation] is not liable, provided the
3
p. 217) the statements inJones v. Aspen Hardware Co., 40 Pac. 457 (Colo. 1895), with approval work was done prior to the recording of the certificate of incorporation. It is true, that under the
for the general incorporation law of this State, the recording of the certificate was necessary to constitute
the [corporation] a body politic. If, however, the contract was made with the [creditor] through * * *
[234 Md. 483] [the] President of the [corporation], after the certificate had been signed by the members of the
proposition that "`the doctrine of estoppel cannot be successfully invoked, unless the corporation proposed corporation, but before it was recorded, and the company, after its incorporation was
has at least a de facto existence,'" that "`a de factocorporation can never be recognized in violation complete, accepted the work done under the contract, it will be estopped, both in law and equity,
of a positive law'" and that "`there is a broad distinction between those acts made necessary by the from denying its liability, on account of the same.
statute as a prerequisite to the exercise of corporate powers, and those acts required of individuals
seeking incorporation but not made prerequisite to the exercise of such powers,'" went on to say Cf. Hammond v. Straus, supra. And see to the contrary Boyce v. M.E. Church, supra, which might
(at p. 218) that "these principles were clearly recognized and applied" in the Boyce case. be distinguishable in that it involved an effort to impose liability on a religious society and not a
business corporation.
In the National Shutter Bar case, an action by a corporation for an alleged libel which had occurred In the Laflin & Rand case, decided in the same year (1877) as the Boyce case, the Court, in an
before the performance of a condition precedent necessary for legal incorporation, it was held action against certain members of a corporation to make them individually liable for goods sold and
citing the Maryland Tubecase for the proposition that statutory conditions precedent must have delivered to the corporation, said (at p. 321):
been complied with to give existence to corporations formed under general laws that the
corporation had no legal existence at the time of the alleged libel. In referring to the Boyce case, it [The company] has been clothed with all the forms of a corporation by the laws of a neighboring
was said (at p. 320) that "it has been held by our predecessors that a corporation cannot be State, and was in the exercise and use of the franchises conferred upon it. It was a corporation de
actually or virtually created by estoppel in Maryland." And, on the basis of the statements in Jones facto at the time the goods were sold and delivered to it * * * and its existence as a corporation
v. Aspen Hardware Co., supra (also relied on in the Maryland Tube case), it was concluded that cannot be collaterally drawn into question.To permit a recovery against the defendants, and
the corporation could not maintain the action. thereby to say that they are to be regarded in law as a voluntary unincorporated association, would
On the other hand, where the corporation has obtained legal existence but has failed to comply be a departure from all the cases. The debt was not created with them individually, but with a
with a condition subsequent to corporate existence, this Court has held that such nonperformance company acting under a formal incorporation, and in the exercise of its corporate powers. This
afforded the State the right to institute proceedings for the forfeiture of the charter, but that such [creditor] dealt with it and gave it credit as a corporation. If its assets are not ample to pay, it is the
neglect or omission could never be set up by the corporation itself, or by its members and misfortune of the creditor.4
stockholders, as a defense to an action to enforce their liabilities. C. & O. Canal Co. v. B. & O. See also the Franz case at p. 270 (of 24 Md.) and the Bartlett case at p. 498 (of 53 Md.) for similar
Railroad Co., 4 G. & J. 1 (1832); Hammond v. Straus, 53 Md. 1 (1880); Murphy v. Wheatley, 102 statements of the law. From these cases it appears that where the parties have assumed corporate
Md. 501, 63 Atl. 62 (1906).
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
existence and dealt with each other on that basis, the Court will apply the estoppel doctrine on the Co., 58 So. 90 (Ala. 1912); Lockwood v. Wynkoop, 144 N.W. 846 (Mich. 1914); John Lucas Co. v.
theory that the parties by recognizing the organization as a corporation were thereafter prevented Bernhardt's Estate, 100 So. 399 (La. 1924).
from raising a question as to its corporate existence. Since I.B.M. is estopped to deny the corporate existence of the Bureau, we hold that Cranson was
When summarized, the law in Maryland pertaining to the de facto and estoppel doctrines reveals not liable for the balance due on account of the typewriters.
that the cases seem to fall into one or the other of two categories. In one line of cases, the Court, Judgment reversed; the appellee to pay the costs.
choosing to disregard the nature of the dealings between the parties, refused to recognize both
doctrines where there had been a failure to comply with a condition precedent to corporate
existence, but, whenever such noncompliance concerned a condition subsequent to incorporation, Salvatierra v. Garlitos et al.(1958) 103 Phil. 757
the Court often applied the estoppel doctrine. In the other line of cases, the Court, choosing to
make no distinction between defects which EN BANC
LIM TONG LIM, petitioner, boats, the boat which has earlier been proven to be an asset of the partnership. Lim, Chua and
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent. Yao decided to form a corporation. Although it was never legally formed for unknown reasons, this
fact alone does not preclude the liabilities of the three as contracting parties in representation of it.
FACTS: Clearly, under the law on estoppel, those acting on behalf of a corporation and those benefited by
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a it, knowing it to be without valid existence, are held liable as general partners.
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged petitioner.
in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the
Separate Opinions
agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth VITUG, J., concurring opinion;
P68,000 were also sold to the Corporation. However, they were unable to pay PFGI and hence I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V.
were sued in their own names as Ocean Quest Fishing Corporation is a non-existent corporation. Panganiban, particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim
have incurred the liabilities of general partners. I merely would wish to elucidate a bit, albeit briefly,
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting
the liability of partners in a general partnership.
a reasonable time within which to pay. He also turned over to respondent some of the nets which When a person by his act or deed represents himself as a partner in an existing partnership or with
were in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his one or more persons not actual partners, he is deemed an agent of such persons consenting to
such representation and in the same manner, if he were a partner, with respect to persons who rely
right to cross-examine witnesses and to present evidence on his behalf, because of his failure to 1
upon the representation. The association formed by Chua, Yao and Lim, should be, as it has
appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with been deemed, a de facto partnership with all the consequent obligations for the purpose of
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. enforcing the rights of third persons. The liability of general partners (in a general partnership as so
2
opposed to a limited partnership) is laid down in Article 1816 which posits that all partners shall
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear be liable pro rata beyond the partnership assets for all the contracts which may have been entered
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, into in its name, under its signature, and by a person authorized to act for the partnership. This rule
were jointly liable to pay respondent. On appeal, the CA affirmed the RTCs decision. is to be construed along with other provisions of the Civil Code which postulate that the partners
can be held solidarily liable with the partnership specifically in these instances (1) where, by any
ISSUE: Whether Lim Tong Lim is liable as a partner wrongful act or omission of any partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or injury is caused to any person, not being
HELD: a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act; (2) where one partner acting within the scope of
Yes. From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided his apparent authority receives money or property of a third person and misapplies it; and (3)
where the partnership in the course of its business receives money or property of a third person
to engage in a fishing business, which they started by buying boats worth P3.35 million, financed
and the money or property so received is misapplied by any partner while it is in the custody of the
3
by a loan secured from Jesus Lim (brother of Lim Tong Lim). In their Compromise Agreement, they partnership consistently with the rules on the nature of civil liability in delicts and quasi-delicts.
subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and
to divide equally among them the excess or loss. These boats, the purchase and the repair of Intl Express Travel v. CA (2000) 343 SCRA 674
FIRST DIVISION
which were financed with borrowed money, fell under the term common fund under Article 1767.
[G.R. No. 119020. October 19, 2000.]
The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petition
or industry. That the parties agreed that any loss or profit from the sale and operation of the boats er, vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINES
FOOTBALL FEDERATION, respondents.
would be divided equally among them also shows that they had indeed formed a partnership.
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
International Express Travel and Tour Services, Inc. vs. Court of Appeals The powers and functions granted to national sports associations clearly indicate that
these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber
property are acts which may only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national sports associations may
FACTS: be accorded corporate status, such does not automatically take place by the mere passage of
these laws.
1. Petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), It is a basic postulate that before a corporation may acquire juridical personality, the
through its president private respondent Henri Kahn. State must give its consent either in the form of a special law or a general enabling act. We cannot
2. Petitioner offered its services as a travel agency to the latter. agree with the view of the appellate court and the private respondent that the Philippine Football
Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A.
3. The offer was accepted.
3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely
4. Petitioner secured the airline tickets for the trips of the athletes and officials of the recognized the existence of national sports associations and provided the manner by which these
Federation to the South East Asian Games
entities may acquire juridical personality.
5. For the tickets received, the Federation made two partial payments, both in
September of 1989, in the total amount of P176,467.50. Clearly the above cited provisions require that before an entity may be considered as a
6. petitioner wrote the Federation, through the private respondent a demand letter national sports association, such entity must be recognized by the accrediting organization, the
requesting for the amount of P265,894.33 Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports
7. the Federation, through the Project Gintong Alay, paid the amount of P31,603.00. Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate.
8. Henri Kahn issued a personal check in the amount of P50,000 as partial payment In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion
for the outstanding balance of the Federation. for reconsideration before the trial court a copy of the constitution and by-laws of the Philippine
Football Federation. Unfortunately, the same does not prove that said Federation has indeed been
9. Thereafter, no further payments were made despite repeated demands.
recognized and accredited by either the Philippine Amateur Athletic Federation or the Department
10. This prompted petitioner to file a civil case before the Regional Trial Court of of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is
Manila. Petitioner sued Henri Kahn in his personal capacity and as President of the
not a national sports association within the purview of the aforementioned laws and does not have
Federation
corporate existence of its own.
11. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri Kahn allegedly guaranteed
Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
the said obligation.
obligations of the unincorporated Philippine Football Federation. It is a settled principal in
12. Henri Kahn filed his answer with counterclaim: he averred that the petitioner has no corporation law that any person acting or purporting to act on behalf of a corporation which has no
cause of action against him either in his personal capacity or in his official capacity
valid existence assumes such privileges and becomes personally liable for contract entered into or
as president of the Federation. He maintained that he did not guarantee payment
but merely acted as an agent of the Federation which has a separate and distinct for other acts performed as such agent.
juridical personality.
13. In due course, the trial court rendered judgment and ruled in favor of the petitioner 11) Corps. that are neither de jure, de facto, nor by estoppel
and declared Henri Kahn personally liable for the unpaid obligation of the o When both parties knew that the corporate party to the contract did not exist
Federation. o The doctrine that could be applied is IN PARI DELICTO doctrine problem is that
14. In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of there should be ollegality of the cause or object of the contract
o Salvatierra Ruling since a non-existed corporation has no personality, and is
the Federation. It rationalized that since petitioner failed to prove that Henri Kahn
guaranteed the obligation of the Federation, he should not be held liable for the incompetent to act and appropriate for itself the powers and attributes of a
same as said entity has a separate and distinct personality from its officers. corporation
ISSUE: It cannot create agents or confer authority on another to act in its behalf
In contracts entered the law considere such agents as principles,
possessed of all the rights and subject to all the liability of the principles
Whether or not the Philippine Football Federation may be considered as a juridical
person. Y-I LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD. and Y-I
CLUBS AND RESORTS, INC., petitioners, vs. JAMES YU, respondent.
FACTS:
RULING: Mt. Arayat Development Co., Inc. (MADCI) was a real estate development
corporation, which was registered on February 7, 1996 before the Security and Exchange
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
Commission (SEC). On the other hand, respondent James Yu (Yu) was a businessman, The RTC, however, exonerated YIL, YILPI and YICRI from liability because they
interested in purchasing golf and country club shares. were not part of the transactions between MADCI and Sangil, on one hand and Yu, on the
other hand
Sometime in 1997, MADCI offered for sale shares of a golf and country club located
in the vicinity of Mt. Arayat in Arayat, Pampanga, for the price of P550.00 per share. Relying The CA Ruling
on the representation of MADCI's brokers and sales agents, Yu bought 500 golf and 150
country club shares for a total price of P650,000.00 which he paid by installment with fourteen In its assailed Decision, dated January 30, 2012, the CA partly granted the appeals
(14) Far East Bank and Trust Company (FEBTC) checks. and modified the RTC decision by holding YIL and its companies, YILPI and YICRI, jointly and
severally, liable for the satisfaction of Yu's claim.
Upon full payment of the shares to MADCI, Yu visited the supposed site of the golf
and country club and discovered that it was non-existent. Yu demanded from MADCI that his The CA held that the sale of lands between MADCI and YIL must be upheld
payment be returned to him. MADCI recognized that Yu had an investment of P650,000.00, because Yu failed to prove that it was simulated or that fraud was employed. This did not
but the latter had not yet received any refund. mean, however, that YIL and its companies were free from any liability for the payment of Yu's
claim.
RTC:
The CA explained that YIL, YILPI and YICRI could not escape liability by simply
On August 14, 2000, Yu filed with the RTC a complaint for collection of sum of invoking the provision in the MOA that Sangil undertook the responsibility of paying all the
money and damages with prayer for preliminary attachment against MADCI and its president creditors' claims for refund. The provision was, in effect, a novation under Article 1293 of
Rogelio Sangil (Sangil) to recover his payment for the purchase of golf and country club the Civil Code, specifically the substitution of debtors. Considering that Yu, as creditor of
shares. In his transactions with MADCI, Yu alleged that he dealt with Sangil, who used MADCI, had no knowledge of the "change of debtors," the MOA could not validly take effect
MADCI's corporate personality to defraud him. against him. Accordingly, MADCI remained to be a debtor of Yu. DETA
In his Answer, Sangil alleged that Yu dealt with MADCI as a juridical person and The sale by MADCI of all its corporate assets to YIL and its companies necessarily
that he did not benefit from the sale of shares. He added that the return of Yu's money was no included the assumption of the its liabilities. Otherwise, the assets were put beyond the reach
longer possible because its approval had been blocked by the new set of officers of MADCI, of the creditors, like Yu. The CA stated that the liability of YIL and its companies was
which controlled the majority of its board of directors. determined not by their participation in the sale of the golf and country club shares, but by the
fact that they bought the entire assets of MADCI and its creditors might not have other means
In its Answer, MADCI claimed that it was Sangil who defrauded Yu. It invoked the of collecting the amounts due to them, except by going after the assets sold.
Memorandum of Agreement (MOA), entered into by MADCI, Sangil and petitioner Yats
International Ltd. (YIL). Under the MOA, Sangil undertook to redeem MADCI proprietary YIL and its companies, YILPI and YICRI, moved for reconsideration, but their
shares sold to third persons or settle in full all their claims for refund of payments. Thus, it was motion was denied by the CA.
MADCI's position that Sangil should be ultimately liable to refund the payment for shares
purchased. ISSUE
After the pre-trial, Yu filed an Amended Complaint, wherein he also impleaded YIL, WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT
Y-I Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu, he PETITIONERS YATS GROUP SHOULD BE HELD JOINTLY AND SEVERALLY
discovered in the Registry of Deeds of Pampanga that, substantially, all the assets of MADCI LIABLE TO RESPONDENT YU DESPITE THE ABSENCE OF FRAUD IN THE SALE
were sold to YIL, YILPI and YICRI. The transfer was done in fraud of MADCI's creditors, and OF ASSETS AND BAD FAITH ON THE PART OF PETITIONERS YATS GROUP. 29
without the required approval of its stockholders and board of directors under Section 40 of HELD
the Corporation Code. IHTE
The petition lacks merit.
In their Answer, YIL, YILPI and YICRI alleged that they only had an interest in
MADCI in 1999 when YIL bought some of its corporate shares pursuant to the MOA. This Background on the corporate assumption of liabilities
occurred two (2) years after Yu bought his golf and country club shares from MADCI. As a
mere stockholder of MADCI, YIL could not be held responsible for the liabilities of the Nell Doctrine:
corporation. As to the transfer of properties from MADCI to YILPI and subsequently to Generally, where one corporation sells or otherwise
YICRI, they averred that it was not undertaken to defraud MADCI's creditors and it was done transfers all of its assets to another corporation, the latter is not
in accordance with the MOA. In fact, it was stipulated in the MOA that Sangil undertook to liable for the debts and liabilities of the transferor, except:
settle all claims for refund of third parties.
1. Where the purchaser expressly or impliedly agrees to
The RTC Ruling assume such debts;
In its August 31, 2010 Decision, the RTC ruled that because MADCI did not deny its 2. Where the transaction amounts to a consolidation or
contractual obligation with Yu, it must be liable for the return of his payments. The trial court merger of the corporations;
also ruled that Sangil should be solidarily liable with MADCI because he used the latter as a
mere alter ego or business conduit. The RTC was convinced that Sangil had absolute control 3. Where the purchasing corporation is merely a continuation
over the corporation and he started selling golf and country club shares under the guise of of the selling corporation; and
MADCI even without clearance from SEC.
4. Where the transaction is entered into fraudulently in order
to escape liability for such debts.
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
The Nell Doctrine states the general rule that the transfer of all the assets of a (1) if the sale of the entire property and assets is necessary in the usual and
corporation to another shall not render the latter liable to the liabilities of the transferor. If any regular course of business of corporation, or
of the above-cited exceptions are present, then the transferee corporation shall assume the
liabilities of the transferor. (2) if the proceeds of the sale or other disposition of such property and
assets will be appropriated for the conduct of its remaining business.
Legal bases of the Nell Doctrine
Thus, the litmus test to determine the applicability of Section 40 would be the capacity of the
The general rule expressed by the doctrine reflects the principle of relativity corporation to continue its business after the sale of all or substantially all its assets.
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- Jurisprudential recognition of the business-enterprise transfer
interest. Thus, despite the sale of all corporate assets, the transferee corporation cannot be Jurisprudence has held that in a business-enterprise transfer, the transferee is
prejudiced as it is not in privity with the contracts between the transferor corporation and its liable for the debts and liabilities of his transferor arising from the business enterprise
creditors. conveyed. Many of the application of the business-enterprise transfer have been related by
1. The first exception under the Nell Doctrine, where the transferee corporation the Court to the application of the piercing doctrine.
expressly or impliedly agrees to assume the transferor's debts, is provided under Perhaps the most telling jurisprudence which recognized the business-enterprise
Article 2047 of the Civil Code. When a person binds himself solidarily with the transfer would be the assailed case of Caltex. In that case, under an agreement of
principal debtor, then a contract of suretyship is produced. Necessarily, the assumption of obligations, LUSTEVECO transferred, conveyed and assigned to respondent
corporation which expressly or impliedly agrees to assume the transferor's debts PSTC all of its business, properties and assets pertaining to its tanker and bulk business
shall be liable to the same. together with all the obligations, properties and assets. Meanwhile, petitioner Caltex, Inc.
2. The second exception under the doctrine, as to the merger and consolidation of obtained a judgment debt against LUSTEVECO, and it sought to enforce the same against
corporations, is well-established under Sections 76 to 80, Title X of the PSTC. The Court ruled that PSTC was bound by its agreement with LUSTEVECO and the
Corporation Code. If the transfer of assets of one corporation to another former assumed all of the latter's obligations pertaining to such business.
amounts to a merger or consolidation, then the transferee corporation must take More importantly, the Court held that, even without the agreement, PSTC was still
over the liabilities of the transferor. liable to Caltex, Inc. based on Section 40
3. Another exception of the doctrine, where the sale of all corporate assets is ...The acquisition by the assignee of all or substantially all
entered into fraudulently to escape liability for transferor's debts, can be found of the assets of the assignor necessarily includes the assumption of
under Article 1388 of the Civil Code. It provides that whoever acquires in bad the assignor's liabilities, unless the creditors who did not consent to the
faith the things alienated in fraud of creditors, shall indemnify the latter for transfer choose to rescind the transfer on the ground of fraud]
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 Caltex case, thus, affirmed that the transfer of all or substantially all the
proper from one corporation to another under Section 40 necessarily entails the
4. For the exception that a corporation merely a continuation of the selling assumption of the assignor's liabilities, notwithstanding the absence of any agreement
corporation, the book Philippine Corporate Law, by Dean Cesar Villanueva on the assumption of obligations. The transfer of all its business, properties and assets
explained that this exception contemplates the "business-enterprise transfer." In without the consent of its creditors must certainly include the liabilities; or else, the
such transfer, the transferee corporation's interest goes beyond the assets of the assignment will place the assignor's assets beyond the reach of its creditors. Caltex justifiably
transferor's assets and its desires to acquire the latter's business enterprise, concluded that the transfer of assets of a corporation under Section 40 must likewise carry
including its goodwill. In other words, in this last exception, the transferee with it the transfer of its liabilities.
purchases not only the assets of the transferor, but also its business. As a result
of the sale, the transferor is merely left with its juridical existence, devoid of its Fraud is not an essential consideration in a business-enterprise transfer
industry and earning capacity. Fittingly, the proper provision of law that is
contemplated by this exception would be Section 40 of the Corporation Code. 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
To reiterate, Section 40 refers to the sale, lease, exchange or disposition of all or corporation because it is merely a continuation of the latter's business. A cursory reading of
substantially all of the corporation's assets, including its goodwill. The sale under this the exception shows that it does not require the existence of fraud against the creditors before
provision does not contemplate an ordinary sale of all corporate assets; the transfer must be it takes full force and effect. Indeed, under the Nell Doctrine, the transferee corporation may
of such degree that the transferor corporation is rendered incapable of continuing its business inherit the liabilities of the transferor despite the lack of fraud due to the continuity of the
or its corporate purpose. latter's business.
Section 40 suitably reflects the business-enterprise transfer under the exception of The purpose of the business-enterprise transfer is to protect the creditors of the
the Nell Doctrine because the purchasing or transferee corporation necessarily continued the business by allowing them a remedy against the new owner of the assets and business
business of the selling or transferor corporation. Given that the transferee corporation enterprise. Otherwise, creditors would be left "holding the bag," because they may not be able
acquired not only the assets but also the business of the transferor corporation, then the to recover from the transferor who has "disappeared with the loot," or against the transferee
liabilities of the latter are inevitably assigned to the former. who can claim that he is a purchaser in good faith and for value.
It must be clarified, however, that not every transfer of the entire corporate assets Applicability of the business-enterprise transfer in the present case
would qualify under Section 40. It does not apply
OUTLINE 2 - BUSINESS ORGANIZATION 2.2 Prof. M.I.P. Romero (2015 - 2016) 2013400036
Synthesizing Section 40 and the previous rulings of this Court, it is apparent and the transferee. These stipulations, though, are not binding on the creditors of the
that the business-enterprise transfer rule applies when two requisites concur: business enterprise who can still go after the transferee for the enforcement of the liabilities.
(a) the transferor corporation sells all or substantially all of its assets to another In the present case, the MOA stated that Sangil undertook to redeem MADCI
entity; and proprietary shares sold to third persons or settle in full all their claims for refund of payments.
While this free and harmless clause cannot affect respondent as a creditor, the petitioners
(b) the transferee corporation continues the business of the transferor may resort to this provision to recover damages in a third-party complaint. Whether the
corporation. Both requisites are present in this case. petitioners would act against Sangil under this provision is their own option.
Based on these factual findings, the Court is convinced that MADCI indeed had WHEREFORE, the petition is DENIED. The January 30, 2012 Decision and the
assets consisting of 120 hectares of landholdings in Magalang, Pampanga, to be developed April 29, 2013 Resolution of the Court of Appeals in CA-G.R. CV No. 96036 are
into a golf course, pursuant to its primary purpose. Because of its alleged violation of the hereby AFFIRMED in toto.
MOA, however, MADCI was made to transfer all its assets to the petitioners. No evidence
existed that MADCI subsequently acquired other lands for its development projects. Thus,
MADCI, as a real estate development corporation, was left without any property to develop
eventually rendering it incapable of continuing the business or accomplishing the purpose for
which it was incorporated.
Section 40 must apply.
Consequently, the transfer of the assets of MADCI to the petitioners should have
complied with the requirements under Section 40. Nonetheless, the present petition is not
concerned with the validity of the transfer; but the respondent's claim of refund of his
P650,000.00 payment for golf and country club shares. Both the CA and the RTC ruled that
MADCI and Sangil were liable.
On the question of whether the petitioners must also be held solidarily liable to Yu,
the Court answers in the affirmative.
While the Corporation Code allows the transfer of all or substantially all of the
assets of a corporation, the transfer should not prejudice the creditors of the assignor
corporation. Under the business-enterprise transfer, the petitioners have consequently
inherited the liabilities of MADCI because they acquired all the assets of the latter corporation.
The continuity of MADCI's land developments is now in the hands of the petitioners, with all its
assets and liabilities. There is absolutely no certainty that Yu can still claim its refund from
MADCI with the latter losing all its assets. To allow an assignor to transfer all its business,
properties and assets without the consent of its creditors will place the assignor's assets
beyond the reach of its creditors. Thus, the only way for Yu to recover his money would be to
assert his claim against the petitioners as transferees of the assets.
The MOA cannotprejudice respondent
The MOA, which contains a provision that Sangil undertook to redeem MADCI
proprietary shares sold to third persons or settle in full all their claims for refund of payments,
should not prejudice respondent Yu. The CA correctly ruled that such provision constituted
novation under Article 1293 of the Civil Code. When there is a substitution of debtors, the
creditor must consent to the same; otherwise, it shall not in any way affect the creditor. In this
case, it was established that Yu's consent was not secured in the execution of the MOA.
Thus, insofar as the respondent was concerned, the debtor remained to be MADCI. And given
that the assets and business of MADCI have been transferred to the petitioners, then the
latter shall be liable.
Free and Harmless Clause
The petitioners, however, are not left without recourse as they can invoke the free
and harmless clause under the MOA. In business-enterprise transfer, it is possible that the
transferor and the transferee may enter into a contractual stipulation stating that the
transferee shall not be liable for any or all debts arising from the business which were
contracted prior to the time of transfer. Such stipulations are valid, but only as to the transferor