Extrajudicial rescission of contracts


Agas company filed a case against a corporation for collection of a sum of money. The Regional Trial Court (RTC), affirmed by the Court of Appeals (CA), ordered the corporation to pay the gas company P103,659.44 with legal interest. Little did it know that while the case was ongoing, the corporation entered into an agreement with a transport corporation, which stipulated that the transport corporation would assume all the obligations of the corporation.

The gas company found it difficult to satisfy the judgment of the court because all the remaining property of the corporation was previously foreclosed by the corporation’s creditors. Upon discovery that the transport corporation agreed to assume all the obligations of the corporation, it filed a case for collection of sum of money against the transport corporation with the RTC.

The transport corporation claimed that because it was not made a party to the earlier case filed in court, it was not the proper party for the gas company to demand payment from. The RTC ordered the transport corporation to pay the gas company, but on appeal, the CA ruled in favor of the transport corporation holding that the gas company could only go against the corporation, the real party in interest in the case.

The Supreme Court (SC) reversed the CA and agreed with the RTC’s ruling that the gas company had every right to recover its money from the transport company. As clearly shown in the agreement entered into by the corporation and transport corporation, the corporation “transferred, conveyed, and assigned to the (transport corporation) all of the (corporation’s) business, properties, and assets pertaining to its tanker and bulk business together with all the obligations relating to the said business, properties, and assets.” In fact, one of the obligations specifically stipulated in the agreement was the money claims of the gas company against the corporation.

The High Court, however, also ruled that absent any stipulation in the agreement, the transport company would still be liable to the gas company for the sum of money. To rule otherwise, would prejudice the creditors of the corporation, who in this case is the gas company.

While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor’s liabilities, unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to transfer all its business, properties and assets without the consent of its creditors and without requiring the assignee to assume the assignor’s obligations will defraud the creditors. The assignment will place the assignor’s assets beyond the reach of its creditors.

If a creditor is found prejudiced by the transfer of all or substantially all of the corporations assets, this is considered a fraudulent transaction from which the law grants the creditor the right to rescind the contract. As such, the SC held that “a creditor who is not a party to a contract can sue to rescind the contract to prevent fraud upon him. Or, the same creditor can instead choose to enforce the contract if a specific provision in the contract allows him to collect his claim, and thus protect him from fraud.” (Caltex v PNOC, GR No. 150711, 10 August 2006, J. Carpio).


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