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clares that no corporation shall make dividends except from the surplus or net profits arising from its business, and shall not divide, withdraw, or pay to stockholders any part of the capital stock, the directors, although clothed in the first instance with power to determine whether there are net earnings or surplus applicable to the payment of dividends, cannot, by an erroneous determination of the point, confer upon themselves or upon the corporation power to declare a divian impairment of capital to be made good, and the only power given to the board in this respect is to require such impairment to be made good as part of an order approving an issue of new stock or bonds, it has been held that where the board, on application to it by a corporation for approval of the issuance of new stock, in approving such issue, determines that the capital of the company has been impaired, and orders that the company shall not declare or pay any dividends until at least a certain sum of its outstanding notes has been discharged, the part of the order forbidding the declaration of dividends is ineffective if the company thereafter abandons the project of issuing stock. Childs v. Krey (1908) 199 Mass. 352, 85 N. E. 442.

The New York statute forbidding directors of a corporation to make dividends except from surplus profits, or to divide or pay to the stockholders any part of the capital stock, was held in Hatch v. Western U. Teleg. Co. (1881) 9 Abb. N. C. (N. Y.) 430, to be applicable to telegraph companies, the court observing that its provisions were applicable as well to all future, as well as existing, corporations (reversed on another ground in (1883) 93 N. Y. 641).

Banking corporations have been held to be within the provisions of the Wisconsin statute forbidding the payment of dividends to any stockholder of any corporation before the capital stock has been fully paid in, or when the corporation is insolvent or in danger of insolvency, and rendering directors liable to creditors of the corporation for unlawful declaration of dividends. Williams V. Brewster (1903) 117 Wis. 370, 93 N. W. 479. It was contended that in a constitutional sense the subject covered by the

dend out of capital; nor does the approval by a majority of the stockholders validate the declaration of dividends out of capital.14 And the term "capital stock" in such a statute has been held to mean capital actually invested, and not the nominal or share capital, even though in the same section of the act the term is used in the latter sense, in a provision forbidding reduction of the capital stock except as authorized by law; so that it has been held that, although there is not statute was not appropriate to a banking law; but the court said that it was a mere remedial provision to protect the public from the fraud and wrongs of officers and others in conducting the corporate affairs, and that, although not enacted according to the requirements of the Constitution as regards banking laws, it applied to such corporations as well as to others.

And co-operative corporation has been held subject to the prohibition of the Wisconsin statute, prohibiting the declaring of dividends except from net profits, and expressly making every stockholder receiving any dividends so paid liable to restore the same. Breon v. Genger (1924) 182 Wis. 616, 197 N. W. 195.

The Michigan statute forbidding a corporation from making a dividend except from surplus profits arising from the business was applied in Privat v. Grand Bay Land Co. (1919) 41 S. D. 494, 171 N. W. 327, the issue being whether there were surplus profits under the statute which would support a declaration of a dividend, and questions only of evidence to show value of the assets being discussed.

That dairymen farmers who, in entering into an agreement for the formation of a corporation to handle the marketing of milk, stipulate that the stock shall be entitled to receive dividends at a certain per cent per annum, will be presumed to have had in mind the provision of the Stock Corporation Law, which forbids directors to declare dividends except from surplus profits, and that the agreement must be read and construed in connection with the statute, see Castorland Milk & Cheese Co. v. Shantz (1919) 179 N. Y. Supp. 131.

14 Siegman v. Electric Vehicle Co. (1907) 72 N. J. Eq. 403, 65 Atl. 910.

an excess in value of the assets over the par value of the stock issued and outstanding, because of the issuance of stock for property taken at a gross overvaluation, a declaration of a dividend is not forbidden by the statute

15 Goodnow v. American Writing Paper Co. (1907) 73 N. J. Eq. 692, 69 Atl. 1014, affirming (1907) 72 N. J. Eq. 645, 66 Atl. 607. The court said that, although a distinction was indicated by the statute between surplus and net profits, it did not necessarily follow that the latter meant the difference between the gross earnings and what might be called operating expenses; that such profits might be called annual profits, and it might be that by net profits the legislature meant the net profits upon the whole of the company's business from its organization; but that, if either of these meanings were adopted, the declaration of the dividend in this instance was justified. The court further observed that it might not infrequently happen that stock is issued on which only a partial payment is subscribed, made of the which is therefore subject to further call; and that in such a case, where the company prospers, it did not think that there were no net profits available for dividends until the earnings accumulated to an amount equal to the par value of the shares.

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Citing the Goodnow Case (N. J.) supra, the court in Borg v. International Silver Co. (1925) 11 F. (2d) 147 (circuit court of appeals in New York), said that it is not unlawful in New Jersey to pay dividends out of profits though the capital is in fact impaired. And it was held that dividends so paid by a New Jersey corporation, which were lawful under the laws of that state, did not become unlawful under the laws of New York, where the company did a part of its business.

A statute declaring that dividends must not be made except from surplus profits, and forbidding the withdrawal of the "capital stock" of a company by, or payment thereof to, the stockholders, was held in Martin v. Zellerback (1869) 38 Cal. 300, 99 Am. Dec. 365, to refer to the capital with of the corporation or assets which it transacts business, whether the same consists of money, property, or other valuable commodities. 55 A.L.R.-2.

if there is an excess of gross earnings
over operating expenses for the cur-
rent year, and the value of the assets
exceeds the value of the actual assets
with which the company began busi-
ness.15 But the provision of the Com-

And in Kohl v. Lilienthal (1889) 81 Cal. 378, 6 L.R.A. 520, 20 Pac. 401, 22 Pac. 689, the court takes the same view, stating that the term "capital stock" as used in the statute before it had a very different meaning from that of shares of the capital stock, as representing the interest which the holders thereof had in the business and property of the corporation whose shares they hold; that the words "capital stock" as used in the statute had the meaning of "capital," and meant the money and property with which the company carried on its corAnd to the effect, porate business.

also, that the term "capital stock" as
used in such a statute means actual
capital, that is, property used in the
conduct of the business, as distin-
guished from the shares of nominal
capital of the corporation, see Ex-
celsior Water & Min. Co. v. Pierce
(1891) 90 Cal. 131, 27 Pac. 44; Tap-
scott v. Mexican Colorado River Land
Co. (1908) 153 Cal. 664, 96 Pac. 271;
Burne v. Lee (1909) 156 Cal. 221, 104
Pac. 438; Schulte v. Boulevard Gar-
dens Land Co. (1913) 164 Cal. 464,
44 L.R.A. (N.S.) 156, 129 Pac. 582,
Ann. Cas. 1914B, 1013; Merchants' &
Insurers' Reporting Co. v. Schroeder
(1918) 39 Cal. App. 226, 178 Pac. 540.

However, the provision of the Cali-
fornia Code above referred to, which
unconditionally prohibited the mak-
ing of dividends except from surplus
profits, was amended in 1917, so as
to provide in effect that the directors
of a corporation might make divi-
dends otherwise than from surplus
profits upon receiving permission
from the commissioner of corpora-
tions. And in Dominguez Land Corp.
v. Daugherty (1925) 196 Cal. 468, 238
Pac. 703, it was held to be a reason-
able inference from the provisions of
the corporate securities act in that
state, that the legislature intended
that the commissioner should give his
permission to make dividends from
other than surplus profits only when
he found that, if the dividends were
made, the corporation would still be
left in a sound financial condition,-
that is, a condition which would be

panies Causes Consolidation Act of England, that companies "shall not make any dividends whereby their capital stock will be in any way reduced," has been construed to refer to paid-up capital, and not to capital assets generally.16

In ascertaining whether there is a surplus fund available for dividends, capital must be set down at its paidin, and not at its par, value, where the statute provides that directors shall have power, after reserving "over and above its capital stock paid in" such sum as shall have been fixed by stockholders, to declare a dividend of the whole of its accumulated profits in excess of the amount reserved.17

safe for the interests of creditors as well as of stockholders.

And it was held in Dominguez Land Corp. v. Daugherty (Cal.) supra, that the amendment in conferring upon the commissioner of corporations power to permit the making of dividends otherwise than from surplus profits did not conflict with the provision of the state Constitution, declaring that no corporation should issue stock or bonds except for money paid, labor done, or property actually received, and that all fictitious increase of stock or indebtedness should be void, on the theory that the handing back of assets to stockholders would be tantamount to issuing stock wholly or partly as a bonus, and be an indirect violation of the statute,-this conclusion being reached, at least so as to permit dividends to be declared from so much of the surplus capital as arose from assessments levied and collected upon stock which was fully paid for at its par value, even though the same did not represent surplus profits arising from the business as a corporation.

It was held, also, in Dominguez Land Corp. v. Daugherty, (Cal.) supra, that the power which the statute conferred on the commissioner of corporations to permit payment of dividends otherwise than from surplus profits, while involving in some degree the exercise of judgment and discretion, was a ministerial or administrative function, and not an unconstitutional delegation of judicial or legislative power.

In Williams v. Western U. Teleg. Co. (1883) 93 N. Y. 162, the term

And it has been held that a statutory provision, that a board of directors of a bank when it declares a dividend "shall first set apart" to the surplus fund 10 per cent of the net profits for the period covered by the dividend, until the same amounts to 20 per cent of the capital stock, is mandatory, and not merely directory; and that, before there can be a dividend which the law will recognize in a suit to recover it, there must not only be a net profit, but the dividend can only be declared on that portion of the profit remaining after 10 per cent has been set aside to the surplus fund.18

It is not necessary apparently that there should be net earnings of the "capital stock" in the statute of that state, forbidding directors to make dividends except from the surplus profits arising from the business of the corporation, or to divide, withdraw, or pay to the stockholders any part of the capital stock, and declaring that they should be liable for violation of the act to the amount of the capital stock so divided or paid out, was held not to mean share stock or nominal capital, but property of the corporation contributed by the stockholders or otherwise obtained by it, the purpose of the statute being to create a property capital for the corporation, and to keep the same intact, so as to secure its solvency and its responsibility to creditors.

It is held, also, in Cox v. Leahy (1924) 209 App. Div. 313, 204 N. Y. Supp. 741, that the words "capital of the corporation" in the New York statute, providing that directors shall not make dividends except from surplus, or divide, withdraw, or pay to the stockholders any part of the capital of the corporation, means property capital, and that property accumulated by the corporation in excess of its capital stock at par constitutes the surplus profits, and may be so regarded in the declaration of dividends.

16 Cross v. Imperial Continental Gas Asso. [1923] 2 Ch. (Eng.) 553.

17 Peters v. United States Mortg. Co. (1921) 13 Del. Ch. 11, 114 Atl. 598.

18 Lapsley V. Merchants Bank (1904) 105 Mo. App. 98, 78 S. W. 1095. The court said in effect that it was manifestly the aim of the statute to compel the accumulation of a sur

particular year during which the dividends are declared, available for their payment, but dividends may properly be declared and paid out of surplus of previous years.19

Without attempting to treat the question of the right of a corporation

plus fund out of net profits for the protection of depositors and others doing business with the bank, which result could not be secured if dividends were permitted to be declared out of profits in preference to surplus; and that, whenever third persons or the public have an interest in having done that which is prescribed by the legislature, then the act is mandatory even though words permissive in form are used. The decision was followed on similar facts in Edwards V. Merchants' Bank (1904) Mo. App. 78 S. W. 1132. 19 That dividends may properly be declared out of surplus earnings of a corporation from previous years is supported by Council v. Brown (1921) 151 Ga. 564, 107 S. E. 867, holding that an allegation that, in a certain year, dividends have been paid in excess of the earnings for that year, showed no liability on the part of the directors, in the absence of allegations that dividends were improperly paid, or were not paid, out of earnings of the corporation during prior

years.

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And in Mente v. Groff (1910) 10 Ohio N. P. N. S. 148, the court approved the doctrine that directors of a corporation are not prohibited from declaring dividends out of accumulated and undivided profits of previous years, even when there has been no surplus profits for the particular year in which the dividend is declared; and took the view that the statute of that state, providing that it should be unlawful for directors to make dividends except from surplus profits, and providing the method for ascertaining such profits, did not prevent the application of this rule.

In Fricke v. Angemeier (1913) 53 Ind. App. 140, 101 N. E. 329, the court says that a dividend cannot be rightly declared until there is a showing that a profit has been really earned for the year such dividend was declared. But in this case there had been a net deficit for several years, and the corporation at the time was insolvent.

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It has been held in New York that, when a corporation under statutory authority reduces its capital stock, the surplus, if any, which it is authorized to pay to its stockholders, depends upon the result of an examination into its affairs, and not upon the difference between the original amount of capital and the reduced amount; and that whenever, by sales of property, or by means of earnings, or otherwise, a corporation comes into possession of funds which are in excess of the reduced amount of such capital, it can distribute that excess without violating any law. Strong v. Brooklyn C. T. R. Co. (1883) 93 N. Y. 426.

Where a national bank, pursuant to statute, reduced its capital stock by requiring stockholders to relinquish a certain per cent of their stock, it was held in Seeley v. New York Nat. Exch. Bank (1878) 4 Abb. N. C. (N. Y.) 61, modified on other grounds in (1878) 8 Daly, 400, which is affirmed in (1879) 78 N. Y. 608, that the return of the reduced capital to stockholders was not a subject for the exercise of the directors' discretion; and that the bank could not, after such reduction, retain as a surplus, or for other purposes, the whole or any portion of the money which it had received for the stock that was retired.

Where, on the reduction of the capital stock of a national bank, a trust fund was created, with the approval of the Comptroller of the Currency, for the stockholders, consisting

b. Distinction in England between fixed and floating capital.

In England a distinction has been made between fixed and floating capital. Thus, it is held, on the one hand, of bad or doubtful assets of the bank, it was held in Cogswell v. Second Nat. Bank (1905) 78 Conn. 75, 60 Atl. 1059, affirmed in (1907) 204 U. S. 1, 51 L. ed. 343, 27 Sup. Ct. Rep. 241, that a sum realized from this fund was the equivalent of net profits, within the meaning of the Federal statute forbidding directors of national banks from declaring dividends except from net profits.

As to the right to distribute property instead of money on reduction of the capital stock, see Continental Securities Co. v. Northern Securities Co. (N. J.) in note 162, infra.

21 Bolton v. Natal Land & Colonization Co. [1892] 2 Ch. 124; Verner v. General & C. Invest. Trust [1894] 2 Ch. 239; Wilmer v. McNamara & Co. [1895] 2 Ch. 245; Re Kingston Cotton Mill Co. [1896] 1 Ch. 331-C. A., reversed on other grounds in [1896] 2 Ch. 279; Bosanquet v. St. John D'El Rey Min. Co. (1897) 77 L. T. N. S. 206; Re National Bank [1899] 2 Ch. 629, affirmed on other grounds in [1901] A. C. 477, 6 B. R. C. 179; Re Crichton's Oil Co. [1901] 2 Ch. 184 (affirmed in [1902] 2 Ch. 86-C. A.); Re Hoare [1904] 2 Ch. 208-C. A.; Ammonia Soda Co. v. Chamberlain [1918] 1 Ch. 266, 9 B. R. C. 819 -C. A.; Lawrence v. West Somerset Mineral R. Co. [1918] 2 Ch. 250; Stapley v. Read Bros. [1924] 2 Ch. 1,; Phillips v. Melbourne & C. S. & C. Co. [1890] 16 Vict. L. R. 111.

In Verner v. General & C. Invest. Trust [1894] 2 Ch. 239, where a limited company was formed to invest in securities, and the income so realized was to be paid in dividends, and its fixed capital was diminished by reason of investments shrinking and proving worthless, it was held that a dividend might be declared out of profits realized in a given year, without making up the loss of the fixed capital previously suffered. It was observed that the term "profits" is not free from ambiguity; and that the law is more accurately expressed by saying that dividends cannot be paid out of capital, than by saying that they can only be paid out of profits; that the last expression leads to the inference that the capital must al

that dividends may be declared out of profits of a given year without making good losses of the fixed capital of the company in other years.21 It has been said, for example, that there is

ways be kept up and represented by assets which if sold would produce it, and that this is more than the law requires; that perhaps the shortest way of expressing the distinction is to say that fixed capital may be sunk and lost, and yet that the excess of current receipts over current payments may be divided, but that floating or circulating capital must be kept up, as otherwise it would enter into and form part of such excess, in which case, to divide the excess without deducting the capital constituting a part of it, would be contrary to law.

The above case was followed in Wilmer v. McNamara & Co. [1895] 2 Ch. 245, where the articles of a company formed to conduct a carrier's business merely provided that no dividends should be payable except from profits arising out of the business; and it was held that dividends could be declared out of profits realized in a particular year, although because of depreciation in good will, leases, etc., the assets were insufficient to make good the fixed capital.

And, relying on the Verner and Wilmer Cases, supra, the court in Bosanquet v. St. John D'El Rey Min. Co. (1897) 77 L. T. N. S. 206, held that a mining company might declare a dividend without applying profits realized in a certain year to the payment of capital paid out in previous years for interest on debentures during a period when the mine, which had fallen in, was being reopened and no profits were made.

And in Bolton v. Natal Land & Colonization Co. [1892] 2 Ch. 124, where a limited company was organized to deal in land, and its articles provided for the payment of dividends out of net profits, and it appeared that profits were actually earned in a particular year, the court refused to restrain the paying of a dividend on the ground that in a previous year the value of the property was less than that put on the balance sheet, and that this difference ought to be treated as a loss, in which case there would be no profits realized for the payment of dividends.

It has been held, also, in England

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