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Wisconsin. Gager v. Paul (1901) 111 Wis. 638, 87 N. W. 875.

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Canada. Re Northern Constructions (1910) 19 Manitoba L. R. 528. 244 Dividends declared and paid when a corporation is insolvent and its capital stock impaired, to one who is not only a stockholder, but a director, and who knew, or had the means of knowing, that the money belonged to the creditors of the company because it was required for the payment of their claims, may be recovered by the receiver of the corporation, since they are part of a trust fund for creditors taken without consideration and with knowledge of the trust which existed in their favor. Davenport v. Lines (Conn.) supra.

See English cases cited in note 177; supra; also note 262, infra.

245 The capital of a bank or other moneyed corporation constitutes a trust fund pledged to secure the payment of its creditors; it is a breach of that trust to divert any portion of this fund from the creditors of the corporation to pay dividends to its stockholders when it is insolvent, and any funds so diverted may be followed by the creditors or by their proper representatives, and recovered from anyone but a bona fide purchaser or a creditor who has received them. Hayden v. Thompson (1895) 17 C. C. A. 592, 36 U. S. App. 361, 71 Fed. 60.

The assets of an insolvent corporation which constitute a trust fund for the payment of its creditors, include inter alia, rights against stockholders. for dividends paid out of capital. Gaunce v. Schoder (Wash.) supra.

And it is held in Hayden v. Williams (1899) 37 C. C. A. 479, 96 Fed. 279, that stockholders of a national bank are answerable to the receiver of the bank for dividends declared and paid after the bank became insolvent,

established.245 And there are various cases which support the right to recover dividends wrongfully paid from capital, regardless apparently of the question of solvency or insolvency, or even where it appeared that at the time of the declaration and payment of dividends the corporation was solvent, the right being based generally on the trust-fund theory of corporate assets.246 Thus, it has been held in Minnesota that stockholders of a corwhere necessary to meet the demands of creditors.

So, to the effect that dividends received by stockholders in an insolvent corporation which were paid out of the capital stock may be recovered by a receiver for the benefit of the creditors of the corporation, is Corn v. Skillern (Ark.) supra.

Stockholders of a corporation indebted to it on account of their original subscriptions, or on account of additional stock purchased from the company, which, while the corporation was insolvent, declared dividends on the basis of assets which were not profits, and caused to be entered on the corporate books the amount so declared as dividends to their respective credit, and thereby sought to discharge in large part their liability on account of such stock, may be held accountable for the amount of such dividends by creditors of the corporation, or a trustee in bankruptcy appointed for it. Crawford v. Roney (Ga.)


And that dividends paid at a time when the corporation is hopelessly insolvent, and credited upon the unpaid balance of the subscriptions of shareholders, will not be upheld, but the shareholders will be placed in the winding up of the company on the list of contributories, see Re Northern Constructions (Manitoba) supra.

246 As to the trust-fund theory, see notes 10 and 242, supra, and 295, infra.

An officer of a bank who is bound to knew the condition of its affairs has no right to take dividends on stock of the bank which he owns, unless it is legitimately earned and on hand; and, if the losses of the bank at the time dividends are declared and paid to him on his stock exceed the gain, so that there are in fact no profits out of which dividends may rightfully be de

poration who have received dividends which they believe to have been earned, but which in fact were paid out of capital, may be held accountable therefor by the corporation's trustee

clared, they may be recovered from the officer by the bank's assignee. Main v. Mills (1874) 6 Biss. 98, Fed. Cas. No. 8,974.

The capital stock of a corporation, and also its profits, should be regarded as a trust fund for the payment of its debts and liabilities, and the stockholders are only entitled to such surplus as may remain after their payment; being a trust fund, it may be followed by the creditors into the hands of any persons who receive it with notice of the trust, and stockholders must be considered as affected with the most ample notice. Dudley v. Price (1849) 10 B. Mon. (Ky.) 84.

The capital stock of a corporation is a fund set aside by the charter for the specific purposes of the incorporation, and all creditors have the right to look to this fund for the payment of their debts; stockholders who have received dividends made out of the capital stock may be held accountable to creditors therefor. Grant v. Southern Contract Co. (1898) 104 Ky. 781, 47 S. W. 1091; Reid v. Owensboro Sav. Bank & T. Co. (1911) 141 Ky. 444, 132 S. W. 1026.

The capital stock of a corporation ought to be considered as a pledge for the payment of its debts, and, if it is withdrawn before the debts are discharged, there would seem to arise an equitable obligation on the part of the stockholders to account for so much as they originally consented to pledge. Spear v. Grant (1819) 16 Mass. 9.

When a corporation holds itself out. to the world as possessed of a given capital, those who deal with it have a right, in the application of such capital, to the payment of such debts as it may incur, and it has no authority to impair its capital by refunding to the stockholders a portion of it by way of dividends. American Steel & Wire Co. v. Eddy (1902) 130 Mich. 266, 89 N. W. 952.

In Shields v. Hobart (1902) 172 Mo. 491, 95 Am. St. Rep. 529, 72 S. W. 669, it is said that neither the directors of a corporation, nor even a majority of the stockholders, have any authority to diminish the prescribed capital of the corporation by distributing a por

in bankruptcy, for the benefit of creditors who have become such after payment of the dividends, in ignorance of the impairment of the capital, notwithstanding the corporation was not in

tion of it among the stockholders in the shape of dividends, for this would be a fraud upon creditors contracting with it on the faith of its capital stock.

In Williams v. Boice (1884) 38 N. J. Eq. 364, it is said that it is undeniably true as a general proposition that stockholders are liable in equity to repay, for the benefit of the creditors of the corporation, money which has been paid to them out of the capital stock. This, it was said, is not based on any statute, but upon the equitable ground that the stock is regarded as a trust fund for all the debts of the corporation, and no stockholder can entitle himself to any dividend or share of it until all the debts are paid.

In Benedum v. First Citizens Bank (1913) 72 W. Va. 124, 78 S. E. 656, in which it is not clear that the insolvency existed at the time of the declaration of a dividend, the court holds that, in the settlement of the affairs of an insolvent bank, stockholders may be required to restore dividends unlawfully declared out of funds and assets other than profits, and paid in cash, or applied in satisfaction of unpaid subscriptions.

In Holmes v. Newcastle-upon-Tyne Freehold Abattoir Co. (1875) L. R. 1 Ch. Div. (Eng.) 682, which was an action by a shareholder to restrain the distribution of certain money by way of dividends among the shareholders, it was said that the creditors of the company, if it should ever come to be wound up, would be entitled to say that the division of a portion of the capital was clearly not good as against them, and that it must be repaid.

It is held in Hyde v. Scott (1918) Rap. Jud. Quebec 28 B. R. 80, 47 D. L. R. 260, that bonds of a railroad company issued to a construction company as part of the consideration for the building of a railroad, which were distributed by the latter to its shareholders by way of dividends, might be recovered by the liquidator of the construction company, where, at the time the dividends were declared, the bonds, which were of doubtful value, were the only assets the company had, the road had not been constructed, and no payments had been made on

solvent at the time the dividends were declared and paid.247 And the facts that the corporation might not have been actually insolvent at the time of the payment of a dividend, and that no then existing creditors were harmed, have been held not to prevent recovery of the dividend by its trustee in bankruptcy, where it was at the time heavily indebted, and there were no surplus profits or earnings out of which the dividend could be legally declared, and the party to whom the payment was made knew of its financial condition.248

The solvency of the corporation at the time of the payment to a stockholder of a part of the capital stock is neither controlling nor material, under the Michigan statute, providing that if the capital stock of any corporation shall be withdrawn and refunded to the stock of the construction company, and the dividends were of prospective paper profits only, and therefore an impairment of capital in violation of statute. It was said that the distribution of the bonds under the circumstances was illegal, whether considered under English, French, American, or Canadian statute law.

247 Mackall v. Pocock (1917) 136 Minn. 8, L.R.A.1917C, 390, 161 N. W. 228.

248 Rheinstrom v. Seasongood (1917) 19 Ohio N. P. N. S. 393, 27 Ohio Dec. 430. The court said that it was impossible to say that injury was not inflicted upon those who thereafter dealt with the company upon the assumption, which they had a right to entertain, that the capital of the corporation was intact, or at least that it had not been illegally given away to stockholders.

249 First Nat. Bank v. A. Heller Sawdust.Co. (1927) 240 Mich. 688, 216 N. W. 464. The court said that the statute simply meant that an existing creditor of a corporation may recover his debt from a stockholder to the amount of any sum that has been refunded to him by the corporation for his corporate stock; that the statute does not make the transaction illegal or void, but in effect creates a trust fund for the benefit of then existing creditors of the corporation, to

the stockholders before the payment of all the debts of the corporation for which such stock would have been liable, the stockholders of the corporation shall be jointly and severally liable to any creditor of the corporation, in an action founded on the statute, to the amount of the sum refunded to him or them respectively.249 And it has been held in New York that, in view of the provision of the Stock Corporation Law, prohibiting directors from declaring dividends except from surplus profits arising from the business of the corporation, an action may be maintained against stockholders who have received dividends which, to their knowledge, were paid out of capital stock, notwithstanding the dividends did not render the corporation insolvent at the time.250 It has been held, also, in the same state that stockholdbe turned over to them on proof of their demands.

250 Cottrell v. Albany Card & Paper Mfg. Co. (1911) 142 App. Div. 148, 126 N. Y. Supp. 1070. The court said: "The complaint of the appellant here was dismissed upon the opening, principally upon the ground that appellant disclaimed that the dividends in question, although paid out of capital, rendered the corporation actually insolvent at such times. But if the capital of a corporation be regarded as a fund for the ultimate payment of creditors, and so to be kept intact unless diminished in the manner prescribed by statute, the mere fact that the assets still remain equal to the liabilities cannot justify dividends such as these. The statute does not allow capital to be depleted by means of dividends up to the very point of insolvency; on the contrary, the capital is to be kept intact and unimpaired, and creditors have a right to rely upon this policy of the law in their dealings with corporations. The argument of respondent, if admitted, would manifestly put a premium upon fraud, as then the entire net assets of a corporation, including capital paid in, over and above its actual debts and liabilities at any one time, could be secretly withdrawn by its stockholders in the form of dividends, thus forcing its creditors to bear all the risk of insolvency arising from any slight business loss or shrinkage of assets."

ers cannot escape the liability imposed by a statute declaring that any dividend having the effect of impairing the capital stock shall subject each stockholder receiving the same to an individual liability to the creditors of the corporation to the extent of the dividends received by him, upon the theory that the so-called dividend, being paid out of capital, and not out of profits, was not a dividend within the meaning of the law, but a misappropriation of capital.251

In considering the question of liability under a statute which provides that, if the capital stock of a corporation shall be withdrawn and refunded to the stockholders before the payment of all the debts of the corporation for which such stock would have been liable, they shall be jointly and severally liable to any creditor of such corporation to the amount of the sum so refunded, the question of good faith, either of the corporation or of the stockholder, is immaterial.252 So, under the Ohio statute, prohibiting the

251 Osgood v. Laytin (1867) 3 Keyes (N. Y.) 521, affirming (1867) 48 Barb. 463.

252 American Steel & Wire Co. v. Eddy (1904) 138 Mich. 403, 101 N. W. 578; Detroit Trust Co. v. Goodrich (1913) 175 Mich. 168, 141 N. W. 882, Ann. Cas. 1915A, 821.

253 Mente v. Groff (1910) 10 Ohio N. P. N. S. 148 (no statutory provision dealing with stockholders' liability is set out).

254 Where a statute prohibits dividends by withdrawing the capital stock, or out of profits while the paidup capital is deficient, so long as there are any debts owing by the corporation, a credit which a stockholder received upon his capital stock by a dividend improperly declared is not to be regarded as a payment of such amount, in an action brought by the receiver to compel the payment. Sagory v. Dubois (1846) 3 Sandf. Ch. (N. Y.) 466.

The word "funds" as used in a statute imposing liability on stockholders for diversion of funds of the corporation to other than corporate purposes, or for payment of dividends which leaves insufficient funds to meet the liabilities of the corporation, has been held to include all the resources of

making of dividends except from surplus profits, the fact that the dividends were received in good faith, without knowledge that they were paid from capital, has been held not to prevent recovery thereof by a trustee in bankruptcy of the corporation, if they are paid out of capital.253

Other decisions are governed by express statutory provisions, or are concerned with matters of construction of statutes relating to the liability of stockholders to refund dividends improperly paid.254

A statutory provision that no part of the capital stock in any corporation shall be withdrawn or diverted from its purpose, nor a dividend declared when the company is insolvent, or would be rendered insolvent by such withdrawal on the payment of such dividend, and that the stockholders who received it shall be jointly and severally liable to creditors whose debts then existed, to the extent of such withdrawal or dividends and interest, has been held not to contain the company, including their property of every kind, and not to be limited merely to cash in hand. Miller v. Bradish (1886) 69 Iowa, 278, 28 N. W. 594. The court said that a corporation may lawfully declare and pay a dividend although it does not have enough cash on hand to pay all its liabilities; that necessarily this must be so, for there was not a national bank in the state which had been in business over a year that had at any time sufficient cash on hand to pay all its liabilities, and the same was true of other corporations engaged in active business.

And the word "liabilities" as used in such a statute has been construed to mean existing indebtedness at the time the dividend is declared, the payment of which may be enforced, and not to include the capital stock of the corporation. Ibid.

And it has been held that the statute does not preclude the payment of dividends to the impairment of the capital stock, so long as the resources of the corporation remain sufficient to meet its outstanding indebtedness; and it is immaterial that, but for the payment of the dividends subsequent insolvency would not have occurred. Ibid.

the full measure of the liability of a stockholder upon the withdrawal by him of a portion of the capital stock of the corporation; and he may accordingly be held liable for a dividend received by him upon the winding up of the affairs of the corporation, although, when he received his distributive share of the capital stock, the corporation was not, nor did it thereby become, insolvent.255

A statute which provides that the directors of a corporation shall be liable to repay dividends not declared out of the profits does not exonerate the stockholders from liability to repay such dividends for the benefit of the creditors of the corporation.256 And the fact that a statute imposes severe penalties on directors of a corporation for declaring dividends out of capital, while it is silent as to shareholders, does not preclude resort to the principles of the common law for recovery from the shareholders of dividends received by them which have been illegally paid out of capital.257

Stockholders who have not received payment of a dividend in cash, but by a credit of the amount thereof on unpaid subscriptions on their stock, have been held liable in various cases for the amount of the dividend, where it was wrongfully paid out of capital; and it appears that the obligation on the part of the stockholder to make such a refund is the same whether the

255 Kimbrough v. Davies (1913) 104 Miss. 722, 61 So. 697. See in this connection Southern California Home Builders v. Young (Cal.) in note 188, supra. In the Davies Case, the court said that the capital stock of a corporation is a fund set apart, among other purposes, for that of paying the debts of the corporation; and that, whether or not it is a trust fund impressed with all the attributes of such a fund, it is held, on sound and plain principles of common honesty, that it cannot be withdrawn by the stockholders until all of the debts then owing by the corporation have been paid.

256 Williams v. Boice (1884) 38 N. J. Eq. 364. See in this connection note 220, supra.

257 See Hyde v. Scott (1918) Rap. Jud. Quebec 28 B. R. 80, 47 D. L. R. 260 (opinion of Carroll, J.)


payment is made in a credit on the stock, or whether it is made in cash.258 Where the whole fund wrongfully paid out as dividends should be restored, that it may be applied to the satisfaction of the company's debts and the object of its creation, a stockholder whom a judgment creditor of the corporation is seeking to hold liable to the extent of the dividends received by him cannot contend that he is not equitably liable to refund more than his ratable share, with other stockholders, of an amount sufficient to satisfy the judgment.25 But it seems that where the bill shows that dividends have been received by the other stockholders, and it contains no allegation showing any reason why the whole of the fund in the defendant's hands should be applied to the payment of the plaintiff's demand, as that the other stockholders are insolvent and unable to contribute their proportion, or that other debts existed against the company sufficient to exhaust the fund in the hands of the other stockholders, or any other circumstances denoting an equity against the defendant to contribute toward the payment of the plaintiff's demand more than the ratable proportion of the fund in his hands to that which had been received by the other stockholders, it is error to render a decree against the defendant for more than his ratable proportion.260

258 Gratz v. Redd (1843) 4 B. Mon. (Ky.) 178; Crawford v. Roney (1908) 130 Ga. 515, 61 S. E. 117 (subsequent appeal in (1910) 135 Ga. 2, 68 S. E. 701; Edwards v. Schillinger (1910) 245 Ill. 231, 33 L.R.A. (N.S.) 895, 137 Am. St. Rep. 308, 91 N. E. 1048; Benedum V. First Citizens Bank (1913) 72 W. Va. 124, 78 S. E. 656; Re County Marine Ins. Co. (1870) L. R. 6 Ch. (Eng.) 104. See also Ebelhar v. German-American Secur. Co. (1909) Ky. - 119 S. W. 220; Sagory v. Dubois (1846) 3 Sandf. Ch. (N. Y.) 466; and Re Northern Constructions (1910) 19 Manitoba L. R. 528.

259 Gratz v. Redd (1843) 4 B. Mon. (Ky.) 178.

260 Dudley v. Price (1849) 10 B. Mon. (Ky.) 84.

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