IN THE MATTER OF THE VOLUNTARY DISSOLUTION OF GEORGE, O’FARRELL & CIE., INC. CHINA BANKING CORPORATION AND LEOPOLDO KAHN, CLAIMANTS AND APPELLANTS, VS. M. MICHELIN & CIE., CLAIM…

This
is a joint appeal of the China Banking Corporation and Leopoldo Kahn
from the order of the Court of First Instance of Manila dated November
7, 1931, denying the appellant bank’s motion for reconsideration of the
order of the said court of November 8, 1930, allowing the claim of the
appellee, M. Michelin & Cie., as a preferred claim against the
corporation in dissolution, George, O’Farrell & Cie., Inc., to
which reference will be made as the “corporation”.

The
appellant, China Banking Corporation, is a claimant against the
corporation as the holder of a note for P8,500 signed jointly and
severally by the corporation and the other appellant, Leopoldo Kahn,
who has joined the appeal to protect his interest.

George,
O’Farrell & Cie., Inc., is a domestic corporation organized in 1925
and registered in the same year in the mercantile register of the
Bureau of Commerce and Industry, one of its purposes being that of
acting as the agent and representative of foreign firms for the sale
and distribution of their products in the Philippines.

For a
number of years prior to its dissolution the corporation had been
acting as the representative of the appellee, M. Michelin & Cie.,
in the Philippine Islands for the sale and distribution of the rubber
tires for motor cars produced by the appellee and broadly known as
“Michelin tires”. These business relations between the appellee and the
corporation lasted until the month of May, 1930, when the appellee
decided to discontinue them, and upon settlement of accounts between
both concerns it was found that the corporation failed to account for
the sum of P23,268.83, the sale price of a number of rubber tires sold
by the corporation. This amount according to appellee’s claim and
taking appellee’s own words “was disposed of by the corporation for its
own use and benefit and without the authority or consent” of the
appellee. A few days later, however, the corporation, Gaston O’Farrell,
personally, and one Rosario Sanchez, represented by Gaston O’Farrell as
her attorney-in-fact, executed a mortgage in favor of the appellee of a
house belonging to Gaston O’Farrell and of a number of shares of stock
of the corporation owned by O’Farrell and Rosario Sanchez to guarantee
payment of the said amount to the appellee in five monthly
installments, the first one to be made on June 1, 1930, and prior to
the filing of the petition for dissolution the corporation made a
partial payment of P1,300 leaving an unpaid balance of P21,968.83,
which is the amount claimed by the appellee and allowed by the court
below as a preferred claim. (Record of Appeal, pages 16, 17, 18, 73-79.)

On July 9, 1930, the board of directors filed the petition for its
dissolution and for the appointment of its president and general
manager, Gaston O’Farrell, as receiver and liquidator to wind up the
affairs of the corporation which, according to the petition, had a
balance of P57,601.24 over and above its just debts and liabilities,
and upon publication of the notices required by law and hearing of the
petition the trial court decreed the dissolution of the corporation on
August 22, 1930, and appointed the said Gaston O’Farrell as receiver
and liquidator to wind up the affairs of the corporation, pay all its
liabilities, collect all debts and obligations and dispose of all the
remaining assets and property of the corporation subject to the order
of the court and as the law may permit and justice may require.

The appellee, M. Michelin & Cie., is a foreign “sociedad anonima”
organized under the laws of France and domiciled in said country, and
on November 4, 1930, filed its claim against the corporation for the
aforesaid balance of P21,968.83 with a prayer that the claim be allowed
as a preferred one against the corporation on the ground that the said
amount represented the proceeds from the sale of a number of rubber
tires which were on deposit with and sold by the corporation. The
attorney for the corporation, Jesus O. Serrano, gave his conformity to
the petition by signing at the foot thereof under the words “estoy
conforme en que la presente reclamacion sea considerada como credito
preferente.” Notice setting the hearing of the claim for Saturday,
November 8, 1930, was likewise served on said Jesus O. Serrano as
attorney for the corporation. No notice appears to have been given to
anybody else neither of the claim nor of the hearing thereof, and on
the same date set for the hearing, that is, November 8, 1930, the court
rendered a judgment allowing the claim as a preferred claim against the
corporation and directing the receiver to pay the amount thereof out of
any funds in his possession. Nobody except the claimant and the
attorney for the receiver was notified of such order. Under date of
November 26, 1930, the appellee filed an “ex parte petition”,
praying for an order directing the liquidator, Gaston O’Farrell, to pay
appellee’s claim within three days, and acting on said petition the
court granted the same and directed the liquidator to pay the claim
within three days with preference to all other claims. Again nobody was
served with notice of this order, and pursuant thereto, the receiver
paid the appellee on December 9, 1930, the sum of P5,000 on account
which was1 receipted for by appellee’s attorney. (Record of Appeal,
pages 16-21; Main Record, pages 233, 569, 576, 572, and 579.)

On September 30, 1931, the appellant, China Banking Corporation, filed
a motion praying that the orders of November 8 and November 26, 1930,
be set aside as null and void, that appellee’s claim be allowed as an
ordinary claim and that the sum of P5,000 paid by the receiver to the
appellee on account of the latter’s claim be refunded to the funds of
the corporation in liquidation for the benefit of the rest of the
creditors. In support of said motion and with the permission of the
court the appellant, Leopoldo Kahn, submitted a memorandum, arguing on
the nullity of the said orders on the ground of want of notice and on
the proposition that under the provisions of the Insolvency Law
appellee’s claim could not and should not have been allowed as a
preferred claim under the allegations contained therein. Upon
consideration of the motion, the memorandum, appellee’s opposition and
the arguments of counsel, the trial court denied the motion under order
of November 7, 1931, as far as it referred to the order of November 8,
1930, on the ground that said order, “whether erroneous or not”, had
become final and unappealable and ordered that the order of November
26, 1930, be given no effect as being manifestly contrary to law.
(Record of Appeal, pages 27-32; page 1266 of the second “Pieza” of the
main record.)

The assignment of error made by the appellants
contends that the lower court erred in not finding that the order of
November 8, 1930, is null and void ab initio for lack of
jurisdiction on the part of the court when the said order was issued
and in not finding the said order just as contrary to law as the court
found the order of November 26, 1930, to be, and arguing on this point,
they raise the question as to whether appellee’s claim can legally be
allowed on its face as a preferred claim.

The appellee, on
the other hand, argues at length on the theory that the appellants have
had sufficient constructive notice of the claim and of its allowance by
the court and that under the provisions of section 113 of the Code of
Civil Procedure appellants’ motion for reconsideration is untenable.

In so far as the service of notice is concerned, we adhere to the rule laid down in Whalen vs.
Pasig Iron Works (13 Phil., 417), where this court held that “* * *
claims against a corporation in the hands of a receiver should not be
approved and paid without some formal and regular proceeding whereby
their justice and correctness may be inquired into after a reasonable
opportunity has been given to all the parties in interest to present
objections and submit evidence in support of such objections.” The said
case is a parallel of the case at bar in that the receiver in that
case, together with the claimant, appeared in open court and without
previous notice to any of the other parties in interest, the claim was
submitted upon the favorable recommendation of the receiver and allowed
by the court, and upon appeal to this court it was held that the trial
court erred in rendering judgment in such a summary manner.

After a careful consideration of the arguments of the attorney for the
appellee to show that under the provisions of section 113 of the Code
of Civil Procedure appellants’ motion for reconsideration cannot be
favorably considered and upon due consideration having been given also
to the peculiar circumstances surrounding this case, we have reached
the conclusion that the issue should be governed by the provisions of
the Corporation Law or Act No. 1459.

A close examination of
the record in this case fails to disclose the reasons which led the
corporation to resort to the court for a decree of voluntary
dissolution. If the corporation was under such a financial condition as
alleged in its petition for dissolution and did not desire to continue
doing business because of failing conditions or of any other reason, we
are unable to understand the necessity of its seeking judicial
intervention in the winding up of its affairs coupled with the
appointment for a receiver to deal with its creditors as though they
were the creditors of an insolvent corporation.

Section 176
of the Code of Civil Procedure dealing with the appointment of receiver
upon decree of dissolution of a corporation provides that the court “may
* * * appoint a receiver to take charge” off the estate and effects of
the corporation, “and to pay the outstanding debts thereof, and to
divide the money and other properties that shall remain over among the
stockholders or members”, and consistent with said provision section 66
of the Corporation Law provides with respect to decrees of dissolution
rendered upon voluntary application that the court “may appoint
receivers to collect and take charge of the assets of the corporation.”
Such language found in both statutes on the subject is permissive
rather than mandatory and tends to recognize that in cases of voluntary
dissolution there is no occasion for the appointment of a receiver
except under special circumstances and upon proper showing. There can
be no doubt that when enacting the Corporation Law the Legislature
intended to let the shareholders have the control of the assets of the
corporation upon dissolution in winding up its affairs. The normal
method of procedure is for the directors and executive officers to have
charge of the winding up operations, though there is the alternative
method of assigning the property of the corporation to trustees for the
benefit of its creditors and shareholders.

Sections 77 and
78 of the Corporation Law make the general purpose of the law manifest.
Section 77 provides that every corporation whose charter expires by its
own limitation or whose corporate existence terminates in “any other
manner”, shall nevertheless be continued as a body corporate for three
years “after the time when it would have been so dissolved” for winding
up operations; and section 78 provides that “said corporations at any
time during the three years term may convey its property to trustees
for the benefit of creditors, stockholders and others concerned”.

Statutes authorizing voluntary dissolutions are generally held to apply
only to a dissolution brought about by the stockholders themselves,
and. while the appointment of a receiver rests within the sound
judicial discretion of the court, such discretion must, however, always
be exercised with caution and governed by legal and equitable
principles, the violation of which will amount to its abuse, and in
making such appointment the court should take into consideration all
the facts and weigh the relative advantages and disadvantages of
appointing a receiver to wind up the corporate business. The court
should only act on facts which have been proved by competent legal
evidence. (8 Thompson on Corp. [2d ed.], pages 693, 701, 727, and 738.)

The appointment of a receiver by the court to wind up the affairs of
the corporation upon petition of voluntary dissolution does not empower
the court to hear and pass on the claims of the creditors of the
corporation at first hand. In such cases the receiver does not act as a
receiver of an insolvent corporation. Since “liquidation” as applied to
the settlement of the affairs of a corporation consists of adjusting
the debts and claims, that is, of collecting all that is due the
corporation, the settlement and adjustment of claims against it and the
payment of its just debts, all claims must be presented for allowance
to the receiver or trustee or other proper persons during the winding
up proceedings which in this jurisdiction would be within the three
years provided by sections 77 and 78 of the Corporation Law as the term
for the corporate existence of the corporation, and if a claim is
disputed or unliquidated so that the receiver cannot safely allow the
same, it should be transferred to the proper court for trial and
allowance, and the amount so allowed then presented to the receiver or
trustee for payment. The rulings of the receiver on the validity of
claims submitted are subject to review by the court appointing such
receiver though no appeal is taken to the latter’s ruling (8 Thompson
on Corp., 718), and during the winding up proceedings after
dissolution, no creditor will be permitted by legal process or
otherwise to acquire priority, or to enforce his claim against the
property held for distribution as against the rights of other
creditors. (5 Thompson on Corp. [2d ed.], pages 1389, 1391, 1402, and
1403.)

The decree of dissolution in the case at bar having
been entered on August 22, 1930, and the motion of the appellant, China
Banking Corporation, appearing to have been filed on September 30,
1931, or about thirteen months later, it follows that the motion was
filed on time to have the appellee’s claim reviewed by the court under
the provisions of the said sections of the Corporation Law, and the
trial court, therefore, erred in finding that the order of November 8,.
1930, allowing appellee’s claim was final and unappealable under the
provisions of section 113 of the Code of Civil Procedure.

The record in this case shows that Gaston O’Farrell, the receiver
herein, besides being the principal promoter of the corporation and the
holder of the largest number of shares was elected president and
general manager and that he held the said offices ever since the
organization of the corporation and his conduct in executing a mortgage
on his own house and giving a pledge on his shares of stock and on
those of Rosario Sanchez represented by him as attorney in fact, in
favor of the appellee to guarantee the latter’s claim, lends itself to
a serious suspicion. The facts appearing of record leave no room for
doubt that his administration of the business of the corporation left
much to be desired and that he alone ought to be blamed for the
shortage claimed by the appellee, but to save himself from personal
liability he made the corporation shoulder the burden of the obligation
in exchange for a simulated conveyance of his house to the corporation.
No sooner had the corporation become delinquent in the payment of the
obligation under the terms of the written agreement than he resorted to
a judicial proceeding of voluntary dissolution in an attempt to settle
appellee’s claim and to free himself from all harm, but fearing that
the alleged preference of appellee’s claim might be defeated, in
collusion with the appellee they had the claim allowed summarily as a
preferred claim ignoring the rest of the world.

Appellants’
contention that appellee’s claim cannot be allowed as a preferred claim
is well taken for even admitting for the sake of argument that the
merchandise which sale price is the subject of appellee’s claim was
shipped to the corporation under a commission agreement or any other
agreement carrying the obligation to return either the goods or its
price, the fact is that the merchandise in the case at bar was no
longer in the corporation’s possession nor could the appellee trace the
proceeds from its sale, and this is made manifest by the very fact of
the written agreement entered into between the appellee and the
corporation whereby the appellee accepted payment of the obligation by
installments duly secured with a mortgage of property to guarantee its
payment. But such is not the case, however, for the very agreement of
May 31, 1930, mentioned in paragraph 5 of appellee’s claim, shows that
the rubber tires consigned to the corporation were to be sold by the
latter “por orden, cuenta y riesgo de los Sres. M. Michelin & Cie.”
and that the customers’ accounts were opened “por orden, cuenta y
riesgo de M. Michelin & Cie.”, and so much is this true that the
uncollected accounts were turned over to and received by the appellee,
M. Michelin & Cie. Under such circumstances the amount of
appellee’s claim appears to be in the nature of a balance of a current
account between the two firms more than anything else. (Record of
Appeal, page 68, together with the 4th and 5th paragraphs of the
agreement.)

The order appealed from is reversed, and the
appellee’s claim is hereby declared to be an ordinary claim. The
appellee, is ordered to refund to the corporation the sum of P5,000
erroneously paid by the receiver, with costs against the appellee. So
ordered.

Avanceña, C. J., Street, Malcolm, Villa-Real, Abad Santos, and Imperial, JJ., concur.