FACTS

First Iligan Savings and Loan Association, Inc. (FISLAI) and Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the SEC primarily
engaged in the business of granting loans and receiving deposits from the general
public, and treated as banks. In 1985, FISLAI and DSLAI entered into a merger,
with DSLAI as the surviving corporation but their articles of merger were not
registered with the SEC due to incomplete documentation. DSLAI changed its
corporate name to MSLAI by way of an amendment to its Articles of Incorporation
which was approved by the SEC. In1986, the Board of Directors of FISLAI passed
and approved Board Resolution assigning its assets in favor of DSLAI which in turn
assumed the formers liabilities. The business of MSLAI, however, failed. Hence,
the Monetary Board of the Central Bank of the Philippines ordered its liquidation
with PDIC as its liquidator. Prior to the closure of MSLAI, Uy filed with the RTC of
Iligan City, an action for collection of sum of money against FISLAI. The RTC issued
a summary decision in favor of Uy, directing FISLAI to pay. As a consequence, 6
parcels of land owned by FISLAI were levied and sold to Willkom. In 1995, MSLAI,
represented by PDIC, filed before the RTC a complaint for the annulment of the
Sheriffs Sale alleging that the sale on execution of the subject properties was
conducted without notice to it and PDIC. Respondents, in its answer, averred that
MSLAI had no cause of action because MSLAI is a separate and distinct entity from
FISLAI on the ground that the unofficial merger between FISLAI and DSLAI (now
MSLAI) did not take effect considering that the merging companies did not
comply with the formalities and procedure for merger or consolidation as
prescribed by the Corporation Code of the Philippines. RTC dismissed the case for
lack of jurisdiction. CA affirmed but ruled that there was no merger between
FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure laid
down by the Corporation Code for a valid merger or consolidation.
ISSUE
Was the merger between FISLAI and DSLAI (now MSLAI) valid and effective?
HELDNO.
In merger, one of the corporations survives while the rest are dissolved and all
their rights, properties, andliabilities are acquired by the surviving corporation.
Although there is a dissolution of the absorbed or merged corporations,there is
no winding up of their affairs or liquidation of their assets because the surviving
corporation automatically acquiresall their rights, privileges, and powers, as well
as their liabilities.The merger, however, does not become effective upon the
mere agreement of the constituent corporations. Since amerger or consolidation
involves fundamental changes in the corporation, as well as in the rights of
stockholders andcreditors, there must be an express provision of law authorizing
them. The steps necessary to accomplish a merger or consolidation, as provided
for in Sections 76,[24] 77,[25] 78,[26] and 79[27] of the Corporation Code, are:(1)
The board of each corporation draws up a plan of merger or consolidation. Such
plan must include anyamendment, if necessary, to the articles of incorporation of
the surviving corporation, or in case of consolidation, allthe statements required
in the articles of incorporation of a corporation;(2) Submission of plan to
stockholders or members of each corporation for approval. A meeting must be
called andat least two (2) weeks notice must be sent to all stockholders or
members, personally or by registered mail. Asummary of the plan must be
attached to the notice. Vote of two-thirds of the members or of
stockholdersrepresenting two-thirds of the outstanding capital stock will be
needed. Appraisal rights, when proper, must berespected;(3) Execution of the
formal agreement, referred to as the articles of merger or consolidation, by the
corporateofficers of each constituent corporation. These take the place of the
articles of incorporation of the consolidatedcorporation, or amend the articles of
incorporation of the surviving corporation;(4) Submission of said articles of
merger or consolidation to the SEC for approval;(5) If necessary, the SEC shall set
a hearing, notifying all corporations concerned at least two weeks before;(6)
Issuance of certificate of merger or consolidation.Clearly, the merger shall only be
effective upon the issuance of a certificate of merger by the SEC, subject to
itsprior determination that the merger is not inconsistent with the Corporation
Code or existing laws. In this case, it isundisputed that the articles of merger
between FISLAI and DSLAI were not registered with the SEC due to
incompletedocumentation. Consequently, the SEC did not issue the required
certificate of merger. Even if it is true that the MonetaryBoard of the Central Bank
of the Philippines recognized such merger, the fact remains that no certificate
was issued by theSEC. Such merger is still incomplete without the certification.
The issuance of the certificate of merger is crucial because notonly does it bear
out SECs approval but it also marks the moment when the consequences of a
merger take place. By
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Issues:1. Whether the merger between FISLAI and DSLAI valid and effective2.
Whether there was novation of the obligation by substituting the person of
thedebtor Held:1. No. A merger does not become effective upon the mere
agreement of thecorporations. There must be an express provision of law
authorizing them. There is aprocedure to be followed as stated in the Corporation
Code. The board of eachcorporation draws up a plan of merger and is submitted
to stockholders or membersfor approval. The formal agreement is executed (the
articles of merger) and issubmitted to the SEC for approval. If approved, the SEC
issues a certificate of merger.
The merger shall only be effective upon the issuance of the certificate
. (Anexception would be if a party to a merger is a special corporation governed
by its owncharter, then a favorable recommendation of the appropriate
government agencyshould first be obtained.)In this case,
no certificate was issued and such merger is incomplete withoutit. The certificate
is important because it bears the approval of the SEC andit marks the moment
when the consequences of a merger take place
. Sincethere is no valid merger, FISLAI and MSLAI are still considered as two
separatecorporations. ASs far as third parties are concerned, FISLAI's assets still
belongs tothem, not MSLAI.2. No. The assumption by MSLAI of FISLAI's liabilities
did not result in novation."
Novation is the extinguishment of an obligation by the substitution orchange of
the obligation by a subsequent one which extinguishes ormodifies the first, either
by changing the object or principal conditions, bysubstituting another in place of
the debtor, or by subrogating a third personin the rights of the creditor."
Novation must
always be done with the consent of the creditor
as stated inArticle 1293 of the Civil Code. In this case, it was not shown that Uy
consented to theagreement between FISLAI and MSLAI. MSLAI cannot question
the levy, andsubsequent sale of the properties of FISLAI.Since novation
implies a waiver of right
which the creditor had before novation,
such waiver must be express.
*CA ruling affirmed.