The Nell Doctrine

The Nell Doctrine

The Nell Doctrine is known as such for it was first pronounced by the Supreme in the case of Nell vs. Pacific Farms. It lays down the rule regarding the transfer of all the assets of one corporation to another, particularly in respect of the liability of the transferee for the debts of the transferor. The Supreme Court declared, thus:

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. However, should any of the above-cited exceptions be present, then the transferee corporation shall assume the liabilities of the transferor.

Basis of the Nell Doctrine

In the case of Y-I LEISURE PHILIPPINES v. JAMES YU, the Supreme Court explained the legal basis of the Nell Doctrine. The Court said:

“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 1311of the Civil Code.”

Art. 1311 of the Civil Code provides:

“Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.”

The Court elucidated:

“ 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.”