CHAPTER XIII.

LEGAL RELATIONS BETWEEN SHAREHOLDERS AND CREDITORS OF A CORPORATION.

Rights of creditors in absence of Extinguishment of liability, § 728. statutory liability, § 700. Set-off. Unpaid subscriptions, § 729. Liability incurred by subscribing. Set-off. Dividends improperly reConditions, § 701. ceived, § 730. Liability in respect of shares issued Set-off.

Statutory liability, §§ 731,

Corporate assets a "trust fund"? When shareholder, who is also a

Recent cases, § 702a.

"Bonus" stock, § 702b.

Creditors' remedies, § 703.

Joinder of parties in creditors' bills, §§ 704-706.

Appointment of receiver.

in bankruptcy, § 707.

Assignee

Rights of creditors against shareholders improperly withdrawing corporate funds, § 708.

Shareholders, in what respects trus

tees for creditors, §§ 709-711. Classes of statutes imposing personal liability, § 712.

Return of unsatisfied execution against the corporation, § 713. Nature of statutory liability, §§ 714

716.

creditor, cannot sue another share

holder at law, § 733.

Liability for debts of a particular
class. "Debts," § 734.

Waiver or repeal of statutory lia-
bility. Substantial compliance
with statute, § 735.
Statute of limitations, § 736.
Effect of judgment against corpora-
tion, § 737.

Shareholders cannot deny corporate
existence, § 738.

Nor can the creditor ordinarily, § 739.

Who are shareholders as to creditors, $ 740.

Transferee of shares as collateral security, § 741.

Shareholders not left, but made lia- Real owner of shares liable, § 742. ble, § 717.

Rationale, § 743.

To what shareholders statutory lia- Fraud, when no defence, § 744.
bility attaches, §§ 718-720.
Releases, no defence, § 745.

Creditors the proper parties to sue, Compromises: forfeitures, § 746. § 721.

Necessary averments in pleading,

§§ 722, 723.

Effect of transfers of shares. Transfers to the corporation, § 747. Irregular transfers, § 748.

Performance by creditor of condi- Transfers in fraud of creditors,

Rights of

creditors in

absence of

statutory liability.

§700. WHEN, according to the constitution of a corporation, liability for corporate indebtedness is not extended beyond the corporate funds properly so called, that is, not beyond the capital named in the charter or articles of association, paid up or agreed to be paid up, and to be used in the corporate business, it is almost an identical proposition to say that the shareholders, provided they honestly pay what they have subscribed, are not personally liable to creditors of the corporation.1 When such is the constitution of a corporation, creditors have but two general and comprehensive rights as against shareholders: the one right, that each shareholder, unless cash in amount or property in value equal to the par value of his shares has been paid to the corporation on account of them, shall contribute to the corporate funds the amount unpaid on his shares when necessary to meet the corporate indebtedness; the other right, that shareholders shall not, to the injury of creditors, divert the funds of the corporation from their proper function of discharging the corporate indebtedness. Whatever rights against shareholders in a corporation with a constitution of this nature creditors may have, are incidental to these two main rights.

Liability

§ 701. By subscribing for shares in the capital stock of a corporation, subscribers, even without an express incurred by promise to pay, are held impliedly to agree to pay subscribing. Conditions. to the corporation the par value of the shares sub

1 See Seymour v. Sturges, 26 N. Y. the defendant never agreed to be134. A statute prescribing that come a shareholder nor accepted no shareholder shall be liable to that relationship, but repudiated it creditors of the corporation for as soon as he knew it was put upon more than the amount subscribed him by another person, as, for inby him is declaratory of the com- stance, where one stockbroker ormon law. Walker v. Lewis, 49 Tex. ders another to purchase stock, and 123. the second broker has it transferred to the name of the broker who sent the order. No implied authority can exist in such case to transfer stock to the name of the broker ordering it, for the other broker knows him to be acting merely as a broker. Glenn v. Garth, 133 N.

2 This right of creditors, or liability of shareholders, is sometimes expressed by statute. (See N. Y. Rev. Stat. chap. 18, tit. iii. § 1, par. 5); Morgan v. New York and Albany R. R. Co., 10 Paige (N. Y.), 290. But no implied promise to pay for shares can be held to arise when Y. 18.

scribed for by them respectively. However, as it is the law that when a certain amount of stock is mentioned in the charter or articles of incorporation, a contract to subscribe cannot be enforced by the corporation before the total amount is subscribed, so creditors cannot compel a subscriber to pay up his subscription when the same implied condition is unfulfilled and the subscriber has done nothing to estop himself from setting up such defence. But a subscriber does

1 See § 513.

The shareholders of a corporation The original holder of stock in a who were under no personal liability corporation is liable for unpaid in- to its creditors, at a time when the stalments of stock without an ex- corporation was insolvent made an press promise to pay them, and a agreement to pay the treasurer "the contract made by him with the cor- sums set opposite our names, respecporation or its agents, limiting his tively, for the purpose of liquidating liability therefor, is void as to cred- the debt against said association." itors of the company and its assignee All but one paid the amount, and in bankruptcy who represents them. the business was continued three Upton . Tribilcock, 91 U. S. 45; years. It was held that an action Tuckerman v. Brown, 33 N. Y. 297; of assumpsit, in the name of the Jewell v. Rock River Paper Co., 101 treasurer, could be maintained on Ill. 57; Union Mut. Life Ins. Co. v. behalf of those who were creditors Frearstone M'f'g Co., 97 Ill. 537; at the time of the above agreement, Keystone Bridge Co. v. Barstow, 8 the corporation having ceased to do Mo. App. 494; Wight Co. v. Steinke- business, and transferred its assets meyer, 6 Mo. App. 574; Farnsworth to its creditors. Haskell v. Oak, 75 . Robbins, 36 Minn. 369; Goodwin Me. 519. A corporation was organv. McGehee, 15 Ala. 232. Compare ized, the members agreeing that its Ross v. Kelly, 36 Minn. 38. The liabilities should not exceed an charter of a trust company provided: "If at any time the capital stock paid into said corporation shall be impaired by losses or otherwise, the directors shall forthwith repair the same by assessment." The company being insolvent and in the hands of a receiver, it was held that a personal liability was not imposed on the shareholders, and that they could not be assessed to pay creditors, and that the purpose of said provision was to prevent the continuance of business with impaired capital. Dewey v. St. Albans Trust Co., 57 Vt. 332.

amount much less than its nominal capital stock; they then distributed its capital stock among themselves, paying for it only a small fraction of its face. Held, a shareholder who was a party to the original agreement could not recover against other shareholders for debts owing him by the corporation beyond the limited amount; but seems an outside creditor could. Halderman v. Ainslie, 82 Ky. 395.

2 Temple v. Lemon, 112 Ill. 51; Hawkins v. Citizens' Inv. Co., 38 Or. 544. See § 518. But the subscriber may estop himself by delay from in

estop himself by paying a call and acting as a shareholder.1 The capital stock, whether actually paid up or subject to call, constitutes the primary fund to be applied in furthering the objects of incorporation. It is the fund which subscribers are bound to contribute, and which creditors may rely on for the payment of their claims. It need not be altogether cash, but may consist partly in buildings, plant, and properties. Accordingly, a shareholder may pay for his shares in property or even in services, provided such property or services be fairly worth the par value of the capital stock received as fully paid up in return.3

Liability in respect of shares issued for property.

§ 702. To issue shares as fully paid up for property known to the corporation and the shareholder receiving them to be grossly below their par value, is a fraud on creditors, for whose benefit the shareholder to whom the shares are issued may be compelled to make up the difference. This rule has been held not to be

sisting (as against creditors) on the condition. Lee v. Imbrie, 13 Oreg. 510.

where the stock of a company has all been issued as full-paid stock, that it has been paid for in full in money,

1 Cornell and Michler's Appeal, or in property at a fair value." Goff 114 Pa. St. 153.

2 See Thompson v. Reno S'v'gs Bank, 19 Nev. 103 and §§ 654, 655.

When sued by a creditor a subscriber cannot plead an agreement not contained on the face of the subscription, that the subscription was to be paid only under certain conditions. Hickman v. Wilson, 104 Ill. 54; Hawkins v. Citizens' Inv. Co., 38 Or. 544. See §521.

v. Hawkeye Pump, etc., Co., 62 Iowa, 691, 694, opinion of court per Adams, J. Where a corporation issued all its stock for a patent which turned out worthless, the stock. holders were held liable to creditors. Chisholm Bros. v. Forney, 65 Iowa, 333. Where the articles of incorporation provided that 15 per cent. only of the par value of shares be paid in, it was held that payment

8 Coit v. Gold Amalgamating Co., of the balance of 85 per cent. could 119 U. S. 343. See § 522c.

not be enforced by a receiver appointed after the corporation became Bent v. Underdown, 156

But a subscriber cannot as against creditors set up a collateral agree-insolvent. ment that his subscription was to Ind. 516. be paid in land which the corporation had no authority to acquire. Noble v. Callender, 20 Ohio St. 199. Compare In re Glen Iron Works, Wilbur v. Stockholders, 13 Phila. (Pa.) 479; S. C., 18 Bankr. Reg. 178. "The public has a right to assume,

4 Stout v. Hubbell, 104 Ia. 499; Jackson v. Traer, 64 Iowa, 469; Freeman v. Stine, 15 Phila. (Penn.) 37; Crawford v. Rohrer, 59 Md. 599; Osgood v. King, 42 Iowa, 478; Wishard v. Hansen, 99 Iowa, 307; Wetherbee v. Baker, 35 N. J. Eq. 501; Elyton

affected by the facts that the corporation was insolvent when the shares were issued, and that they were issued in payment of a debt owed by it. If, however, shares are issued as fully paid up, when in fact the corporation has never received the par value of them, creditors cannot compel a person who buys them in good faith as full paid, to pay the difference between their par value and the value of whatever property was given for them originally. Though possibly the creditors could hold the original subscriber who took the shares as fully paid up,

den, 129 U. S. 372; Brant v. Ehlen, 59 Md. 1; Penfield v. Dawson Town & Gas Co., 57 Neb. 231; Kroenert v. Johnston, 19 Wash. 96. See Coffin v. Ransdell, 110 Ind. 417, and § 723. The stockholder who receives bonds as a bonus upon paying for his stock in property cannot be charged therefor. The bonds may not be enforceable, but no obligation to pay for them exists in favor of the creditor of the corporation. Roman v. Dimmick, 123 Ala. 366.

Land Co. v. Birmingham Warehouse less. Coit v. Gold Amalgamating Co., 92 Ala. 407; Roman v. Dimmick, Co., 14 Fed. Rep. 12; S. C., aff'd 119 115 Ala. 233; Pickering v. Town-U. S. 343; Fort Madison Bank v. Alsend, 118 Ala. 351; Lea v. Iron Belt Mercantile Co., 119 Ala. 271, 276; Roman v. Dimmick, 123 Ala. 366; Shickle v. Watts, 94 Mo. 410; Van Cleve v. Berkey, 143 Mo. 109; Kelly v. Clark, 21 Mont. 291; Coleman v. Howe, 154 Ill. 458; Hastings Malting Co. v. Iron Range Co., 65 Minn. 28; Marshal Foundry Co. v. Killian, 99 N. C. 501; Clayton v. Ore Knob Co., 109 N. C. 385. Compare Whitehill v. Jacobs, 75 Wis. 474; Gogebic Inv. Co. v. Iron, etc., Co., 78 Wis. 427; In re South Mountain Consolidated M'g Co., 14 Fed. Rep. 347; Sprague Nat. Bank, 172 Ill. 149. Actual fraud on the part of the corporation and stockholders need not be shown. Gillin v. Sawyer, 93 Me. 151. When a person receives shares as a gift, in consideration of his influence and service in recommending the goods of the corporation, creditors may compel him to pay in the amount of his subscription. Savings Bk. v. Stove Co., 105 Mich. 535. See, also, Eddystone Ins Co., In re, L. R. Ch. Div. 1893, III. 9. Where stock is issued in good faith | Waterhouse v. Jamieson, L. R. 2 for property supposed to equal in value the amount of stock issued for it, the subscriber will not be liable to creditors because subsequent events show that the property was worth

1 Jackson v. Traer, 64 Iowa, 469. In this case $350,000 of stock were issued in payment of a debt of $70,000. Contra, Clark v. Bever, 139 U. S. 96.

2 Brant v. Ellen, 59 Md. 1; Phelan v. Hazard, 5 Dill. 45; Steacy v. Little Rock, etc., R. R. Co., ib. 348; Foreman v. Bigelow, 4 Cliff. 508; Erskine e. Loewenstein, 82 Mo. 301; Johnson v. Lullman, 15 Mo. App. 55; S. C.. 88 Mo. 567; Keystone Bridge Co. v. McCluney, 8 Mo. App. 496; West Nashville Mill Co. v. Bank, 86 Tenn. 252; Morgan v. Howland, 89 Me. 484; see

H. L. Sc. 29. Compare Peck v. Coalfield Coal Co., 11 Ill. App. 88; Railroad Co. v. Howard, 7 Wall. 392; Troup v. Horbach, 53 Neb. 795. § 522c.