Mass sale of corporate assets

UNDER ordinary circumstances, the sale of all or substantially all of the assets of a corporation does not make its buyer automatically liable for its outstanding debts or obligations.

However, if what were sold are shares of stocks, the sale carries with it the obligation of the buyer to be responsible for the satisfaction of the corporation’s liabilities.

The change in ownership does not alter the corporation’s juridical personality, so all unpaid or unsatisfied obligations remain in force.

In a recent case, “Y-I Leisure Philippines Inc., et al. vs. James Yu, G.R. No. 207161, dated Sept. 8, 2015,” the Supreme Court fine-tuned the consequences of the mass transfer or sale of a corporation’s assets in relation to its creditors.

Sometime in 1997, Mt. Arayat Development Co. Inc. (Madci), a real estate development company, sold shares of a golf and country club to the public. James Yu bought and fully paid 500 golf and 150 country club shares for P650,000.

Three years later, he found out the supposed site of the club was non-existent. He demanded the return of his money from Madci. The latter acknowledged his investment but claimed Madci’s president then, Rogelio Sangil, should be held personally liable for the return of Yu’s money.

Development

Yu sued in court to recover his money. He included Y-1 Leisure Phils. Inc., Yats International Ltd. and Y-I Clubs and Resorts Inc. (YIL) in his complaint because, in 1999, Madci sold substantially all of its assets, consisting of 120 hectares of land in Pampanga, to them.

It turned out Sangil, then 60 percent owner of the capital stock of Madci, invited YIL to invest in the remaining 40 percent (worth P31 million) on condition, among others, that if he fails to get the necessary government approvals for the construction of the club, he will return YIL’s subscription plus interest.

Additionally, in case Sangil reneges on the repayment of that amount, YIL would be authorized to sell the 120 hectares of land to cover the obligation. Sangil also agreed to redeem the proprietary shares that Madci had sold or settle all the claims for their refund.

Sangil failed to live up to his commitment. As a result, the land was sold to YIL for P9.3 million, which was way below its true market value.

The president of YIL testified his company was engaged in the development of real estate projects for leisure and tourism purposes and that it bought into Madci because of the latter’s golf development project in Pampanga.

The lower court ruled in Yu’s favor. It ordered Madci to return his money and Sangil to be solidarily liable for such payment because he used Madci as a business conduit.

The parties appealed the decision to the Court of Appeals for different reasons. The appellate court ruled in Yu’s favor and held YIL jointly and severally liable for the payment of his claim. YIL elevated the case to the Supreme Court for final resolution.

Consequence

The issue before the tribunal was “whether the transfer of all or substantially all the assets of a corporation under Section 40 of the Corporation Code carries with it the assumption of corporate liabilities.”

In a 1965 decision, the high court stated that, as a rule, if a 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.

This rule does not apply if (a) the purchaser expressly or impliedly agrees to assume such debts, (b) the transaction amounts to a consolidation or merger of the corporations, (c) the purchasing corporation is merely a continuation of the selling corporation, and (d) the transaction is entered into fraudulently in order to escape liability for such debts.

The tribunal said exception (c), which it described as “business-enterprise transfer,” envisions a situation where the transferee corporation’s interest is not limited to the assets acquired but covers its business operations, including its goodwill.

As a consequence of the transfer, the selling corporation is “merely left with its judicial existence, devoid of its industry and earning capacity.” In effect, the corporation is rendered incapable of continuing its operation or accomplishing its corporate purpose.

The justices stated the rule applies when the transferor corporation sells all or substantially all of its assets to another corporation, and the latter continues the business of the transferor corporation.

Objective

In the instant case, the 120 hectares of land that Madci sold to YIL was all that Madci had for purposes of accomplishing its objective to operate a golf and country club.

By selling the property to YIL, Madci rendered itself incapable or unable to continue the business for which it was incorporated. YIL, which was in the business of developing real estate properties for leisure and tourism purposes, continued the business of Madci and undertook the development of the golf course.

Thus, according to the justice, YIL inherited the liabilities of Madci because it acquired all of the assets of the latter.

The tribunal said the business-enterprise transfer rule aims “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.”

For these reasons, the high court held YIL jointly and severally liable with Madci in satisfying Yu’s demand for payment.

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