G.R. No. 29119 - Teal Motor Co., Inc. vs. Court of 1st Instance of Manila

Teal Motor Co., Inc. was organized as a domestic corporation with a capital stock of P1,000,000, divided into 10,000 shares at a par value of P100 each.
Of the 8,000 issued shares, 3,999 were in the name of Bachrach (with one held by his nominee) and 3,998 were in the name of Teal (with two held by his nominees).

On August 28, 1926, Teal represented to Bachrach that he had subscribed and paid in full for P500,000—representing 50% of the corporation’s capital stock—by transferring assets of equal fair value to the company.
Relying on these representations, Bachrach subscribed to and paid for P300,000 of the capital stock.
Teal subsequently transferred P100,000 of the stock held in his name to Bachrach, thus nominally achieving a fully paid capital stock of P800,000.
The parties agreed that they would become partners in a corporate organization with corresponding fifty-percent interests, with the board of directors composed of two members representing Bachrach and three representing Teal.

It was alleged that Teal, as President, mismanaged the corporation by dissipating and misapplying its assets, thereby placing it in imminent danger of insolvency.
Numerous transactions raised serious red flags:

Promissory notes issued in partial payment of subscriptions were accepted and discounted by the company, with a significant portion remaining unpaid at maturity.
Teal allegedly manipulated the discounting process to conceal the corporation’s precarious financial state.
Unapproved transactions included the cancellation of chattel mortgages securing automobile sales and the conversion of such transactions into new notes secured by different mortgages.

Unauthorized overdrafts and questionable transactions, such as the sale of a Buick automobile charged to Teal’s personal account.
An inventory conducted as of July 31, 1927, revealed a grossly inflated valuation of corporate assets, which resulted in a significant loss being recorded.

As a measure to safeguard and preserve the corporation’s assets pending litigation, the plaintiff filed a complaint for the appointment of a receiver, asserting that the corporation was insolvent or in imminent danger thereof.
The lower court, after reviewing the complaint and evidence, appointed Theodore G. Davis as receiver, ordering him to have custody and control over the company’s assets pending further proceedings.
The appointment order detailed the powers, duties, and limitations of the receiver under the applicable statutory provisions.
Controversy arose when:

Teal and the corporation challenged the lower court’s jurisdiction and the extent of powers conferred upon the receiver, alleging that such powers were “illegal, improper and excessive.”
Disputes emerged over the substitution of attorneys and the receiver’s role in facilitating the payment of unsecured claims, notably that of Haskins & Sells.
The receiver, acting on his own motion, sought court orders to validate payments on certain claims, prompting further objections by Teal and the corporation.

Following the receiver’s initial appointment, Teal petitioned this Honorable Supreme Court via a writ of certiorari, challenging not only the authority of the lower court to appoint a receiver but also the scope of the receiver’s powers.
A detailed record, including the original complaint, the lower court’s order appointing the receiver, and subsequent petitions and motions, was presented for judicial review.
Emphasis was placed on the fact that the receiver was meant to act solely as a custodian to preserve the corporation’s assets for equitable distribution among creditors, rather than to represent or favor any party.

Whether the lower court had the proper jurisdiction to appoint a receiver under the circumstances described in the complaint.
Whether the discretion exercised in appointing the receiver was lawful given the statutory framework and the facts of the case.

Whether the powers conferred on the receiver exceeded those specified under section 175 of the Code of Civil Procedure.
Whether such powers were “illegal, improper and excessive” to the extent that they impaired the rights of the parties or disrupted existing contractual obligations.

Whether the receiver acted appropriately in allowing, or facilitating payment for, unsecured claims (e.g., the claim of Haskins & Sells) before the final determination of creditor priorities.

Whether the receiver maintained the requisite neutrality between the competing interests of the plaintiff, creditors, and the corporation during his administration.

Whether the actions of the lower court and the receiver are in harmony with established jurisprudence regarding the appointment of receivers and the discretionary nature of such appointments.