Law 106 – IIIB | Group 1 – Agustin, Esteban, Gancayco, Ledesma, Miñano
Chapter: XVII – Corporate Combinations
Case Name: Y-I Leisure Philippines, Inc, Yats
International Ltd. And Y-I Clubs and Resorts, Inc. v.
James Yu
Case Number: G.R. No. 207161
Date: September 8, 2015
Ponente: Mendoza, J.
Facts:
 Petitioners Yats International Ltd. (YIL), Y-I
Leisure Phils., Inc. (YILPI), and Y-I Club &
Resorts, Inc. (YICRI) were the buyers of the
entire assets of Mt. Arayat Development
Co., Inc. (MADCI), consisting of 120
hectares of land. Respondent James Yu
was the buyer of 500 golf and 150 country
club shares of MADCI.
 MADCI was a real estate development
corporation, registered before the SEC in
February 1996. According to its AOI, its
primary purpose was “to acquire by purchase,
lease, donation or otherwise, and to own, use,
improve, develop, subdivide, sell, mortgage,
exchange, lease, develop and hold for
investment or otherwise, real estate of all
kinds, whether improved, managed or
otherwise disposed of buildings, houses,
apartment, and other structures of whatever
kind, together with their appurtenance.”
 In 1997, MADCI offered for sale shares of a
golf and country club located near Mt. Arayat in
Pampanga. As of the moment, its entire asset
consisted of 120 hectares of land, which was
yet to be developed into a golf course.
Respondent James Yu, a businessman,
bought 500 golf and 150 country club shares
for a total amount of P650,000.00.
 When respondent Yu visited the supposed site
for the golf course, he discovered that it was
non-existent. In 2000, he demanded for the
return of his investment from MADCI, but it was
not fulfilled by the latter. Yu then filed a
complaint for collection of sum of money
against MADCI and its President, Rogelio
Sangil (Sangil). The latter was impleaded
because it was he whom Yu dealt with and Yu
alleged that Rogelio used MADCI’s corporate
personality to defraud him.
 In their Answers, Sangil averred that Yu dealt
with MADCI as a juridical entity and he did not
benefit from the sale of shares. MADCI, on the
other hand, claimed that Sangil indeed
defrauded Yu. It presented the MOA dated
May 1999, entered into by MADCI, Sangil and
petitioner Yats International Ltd. (YIL). Under
the MOA, YIL was to subscribe to 40% of
MADCI’s capital stock for the amount of P31M,
the remaining 60% of the corporation’s stocks
being held by Sangil. As a condition for YIL’s
subscription, MADCI and Sangil were obligated
to obtain several government permits for the
utilization of its land. Should MADCI and Sangil
fail in their obligations, they must return YIL’s
investment or YIL would be authorized to sell
the 120 hectares of land. Furthermore, Sangil
should redeem all the MADCI proprietary
shares sold to third parties, such as Yu, or to
settle in full all their claims for refund.
 An Amended Complaint was filed, where Yu
impleaded YIL, YILPI, and YICRI. Yu alleged
that the transfer to the petitioner companies
was done to defraud MADCI’s creditors. In
their Answer, the petitioners asserted that they
were mere stockholders of MADCI and
therefore should not be held liable for MADCI’s
obligations. Furthermore, it was stipulated in
the MOA that Sangil should be the one to settle
all the claims for refund of third parties.
 During the trial, YIL’s President, Denny Wang
(Wang), testified that YIL was an investment
company engaged in the development of real
estate projects, leisure, tourism, and related
businesses. He claimed that he signed the
MOA on behalf of YIL, subject to the fulfillment
of Sangil’s obligations.
 RTC: MADCI and Sangil were held solidarily
liable for the obligation to Yu. The RTC held
that Sangil had absolute control of MADCI and
he even started selling the golf and country
club shares without the clearance from the
SEC. On the other hand, the petitioner
companies were exonerated from the liability
because they were not privy to the contract of
MADCI, Sangil, and Yu.
 CA: It held the petitioner companies jointly and
severally liable with MADCI and Sangil for the
satisfaction of Yu’s claim on the following
grounds:
o The provision under the MOA that Sangil
would settle the creditors’ claim for refund
was, in effect, a novation under Article
1293 of the Civil Code, specifically the
substitution of debtors, which requires
consent of the creditor. Since Yu, as
creditor of MADCI, had no knowledge of
the “change of debtors,” the MOA could
Law 106 – IIIB | Group 1 – Agustin, Esteban, Gancayco, Ledesma, Miñano
not validly take effect against him.
Therefore, MADCI was still Yu’s debtor.
o The transfer of assets of MADCI to
petitioner companies necessarily included
the assumption of its liabilities.
Issue/Ratio:
WON the transferee of the assets of a
corporation is liable for the claims of the
transferor corporation’s creditors? – YES. The
Court held that a transfer of all or substantially
all of the assets of a corporation is allowed
under the Corporation Code (Sec. 40) but such
should not prejudice the creditors of the
seller/transferor company.
 The Court cited the 1965 case of Nell vs.
Pacific Farms which laid down the general rule,
referred to as the Nell Doctrine, that the
transfer of all the assets of a corporation to
another shall not render the latter liable to the
liabilities of the transferor. However, there are
exceptions (wherein the transferee is not
liable), namely:
o Where the purchaser expressly or
impliedly agrees to assume such debts;
o Where the transaction amounts to a
consolidation or merger of the
corporations;
o Where the transaction is entered into
fraudulently in order to escape liability for
such debts; and
o Where the purchasing corporation is
merely a continuation of the selling
corporation.
 The Court took effort to discuss the legal bases
of principles under the Nell Doctrine:
 General rule: The transferee corporation is not
liable for the liabilities of the transferor
corporation.
o It reflects the principle of relativity under
Article 1311 of the Civil Code, which
provides that the rights and obligations
arising from a contract are valid and
binding only between the contracting
parties and their successors-in-interest.
 First exception: The transferee corporation is
liable if it expressly or impliedly agrees to
assume the transferor’s debts. This is found
under Article 2047 of the Civil Code, which
provides that when a person binds himself
solidarily with the principal debtor, a contract of
suretyship is produced.
 Second exception: The transferee corporation
is liable if the transactions amount to a
consolidation or a merger.
 This is well-established under Sections 76 to
80 of the Corporation Code.
 Third exception: The transferee corporation is
liable if the sale of all corporate assets is
entered into fraudulently to escape liability for
transferor’s debts. This is found under Article
1388 of the Civil Code which provides that
whoever acquires in bad faith the things
alienated in fraud of creditors, he shall
indemnify the latter for damages suffered.
 Fourth exception (Applicable in the present
case): The transferee corporation is liable if
the purchasing corporation is merely a
continuation of the selling corporation. This
situation contemplates a business-enterprise
transfer wherein the transferee corporation
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 industry and earning
capacity. This situation is contemplated under
Section 40 of the Corporation Code which
provides for the rules on sale and other
dispositions of all or substantially all of a
corporation’s assets. The effect of such sale
must be that the corporation would be
rendered incapable of continuing the business
or accomplishing the purpose for which it was
incorporated.
o Note, however, that Sec. 40 does not
apply:
 if the sale of the entire property and
assets is necessary in the usual and
regular course of business of the
corporation, or
 if the proceeds of the sale or other
disposition of such property and
assets will be appropriated for the
conduct of its remaining business.
(Sec. 40, par. 4)
 The Court held that the transfer of all its
business, properties and assets without the
consent of its creditors must certainly include
the liabilities; or else, the assignment will place
the assignor's assets beyond the reach of its
creditors.
WON fraud must exist before the concept of
business-enterprise transfer applies – NO.
 The purpose of the business-enterprise
transfer is to protect the creditors of the
Law 106 – IIIB | Group 1 – Agustin, Esteban, Gancayco, Ledesma, Miñano

business by allowing them a remedy against Resolution of the Court of Appeals in CA-GR CV
the new owner of the assets and business No. 96036 are hereby affirmed in toto. So ordered.
enterprise. The requisites for the application of
the business-enterprise rule are as follows:
o the transferor corporation sells all or
substantially all of its assets to another
entity; and
o the transferee corporation continues the
business of the transferor corporation.
WON the business-enterprise rule applies in the
present case or in other words, W/N the
petitioner companies were a mere continuation
of MADCI’s business – YES. Section 40 of the
Corp. Code applies.
 The Court found that after the transfer of
MADCI’s assets to the petitioner companies
because of alleged violations of Sangil under
the MOA, there was no showing 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. Applying the
business-enterprise transfer rule, the petitioner
companies inherited the liabilities of MADCI
because they acquired all the assets of
MADCI. The continuity of MADCI’s land
developments is now in the hands of the
petitioner companies.
 With regard to the stipulation under the MOA
that Sangil would undertake to settle the claims
of MADCI’s creditors, the Court affirmed the
ruling of the CA that such provision constituted
novation under Article 1293, which requires the
consent of the judgment creditor. However, in
this case, Yu’s consent was clearly not
obtained. Therefore, MADCI remained to be
Yu’s debtor.
 The Court finally held the petitioner companies
were not left without recourse as they may still
invoke the Free and Harmless clause under
the MOA. That clause refers to Sangil’s
obligation to settle the claims for refund of third
parties. This provision is still valid between the
petitioner companies and MADCI and Sangil
as they were the parties to the contract. Hence,
the petitioner companies may resort to this
provision to recover damages in a third-party
complaint such as in this case.

Ruling: WHEREFORE, the petition is denied. The

January 30, 2012 Decision and the April 29, 2013