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tions have arisen as to the construction and effect of such provisions. It has been held that such statutes should not be construed as reducing the directors' liability, and that, in so far as they do not cover the field of such liability they will not prevent the bringing of an action under pre-existing rules of law. 188

The question as to the penal nature of statutes imposing liability on directors for wrongfully declaring dividends out of capital has come before the courts in various instances. 189

188 A statutory provision declaring that directors of corporations must not make dividends except from surplus profits arising from the business thereof, nor divide, withdraw, or pay to the stockholders any part of the capital stock, and that, for a violation of the statute, they shall be individually liable to the corporation and to creditors thereof to the full amount of the capital stock so divided, withdrawn, or paid out, has been held not to be intended as a codification merely of the pre-existing common law, and not to reduce responsibility of directors by declaring them liable only for the specific breaches of trust mentioned; but directors may still be liable under the old rules in cases other than those provided for by the statute. Southern California Home Builders v. Young (1920) 45 Cal. App. 679, 188 Pac. 586.

See in this connection Kimbrough v. Davies (Miss.) set out in note 255, infra, in which a statute declaring stockholders liable to creditors for dividends received under certain conditions was held not to be intended as a declaration of the full measure of the stockholders' liability under other conditions.

189 A statute forbidding the trustees of a corporation from declaring and paying a dividend when the company is insolvent, or when the payment of the same would render it insolvent or diminish the amount of the capital stock, and declaring that, for violation of the act, they shall be liable for all debts of the company then existing or thereafter incurred while they respectively continue in office, is highly penal, and a clear case must be established to hold the trustees liable. Rorke v. Thomas (1874) 56 N. Y. 559.

55 A.L.R.-6.

This is, of course, a question which depends on the particular statutory provisions involved, and the statutes vary as to the extent of liability which they impose on the directors, i. e., as to whether they are liable for all the debts of the corporation or only for the dividends wrongfully declared.

It has been held that the duties imposed on directors cannot be delegated so as to relieve them of the statutory liability, 190 And since a declaration

of dividends otherwise than out of net profits or surplus, in violation of stat

As to the penal nature of statutes imposing a liability on directors of corporations for wrongfully declaring and paying dividends out of capital, see also White-Wilson-Drew Co. v. Lyon-Ratcliff Co. (Fed.) note 192, infra; Patterson v. Wade and Patterson v. Thompson (Fed.) note 337, infra; Appleton v. American Malting Co. (N. J.) note 199, infra; Dykman v. Keeney (N. Y.) note 235, infra; Merchants' Bank v. Bliss (N. Y.) note 337, infra; Killen v. Barnes (Wis.) note 335, infra; Smith v. Henderson (Can.) note 192, infra. And see notes 336 and 336a, 339, 340, infra.

190 The duty of reserving sufficient property of the corporation to pay its debts, on the distribution of a dividend, is one which cannot be delegated by the directors, under the Massachusetts statute, so as to relieve them of liability. Pennsylvania Iron Works Co. v. Mackenzie (1906) 190 Mass. 61, 76 N. E. 228. The statute declared that directors should be liable for the debts of the corporation in certain cases, among which was the making of, or consenting to, a dividend if the corporation was insolvent, or thereby was rendered insolvent; and it was held that the directors could not avoid liability on the ground that the company was rendered insolvent by the acts of a stockholder who owned all of the capital stock, in not retaining enough property to pay the debts, where they voted to sell all of the property of the company for a certain sum to such stockholder, reserving an amount sufficient to pay its debts, but a sufficient sum for this purpose was not reserved, and the money paid by the stockholder for the property was immediately repaid to him, such repayment being held to be a dividend within the meaning of the statute.

ute, is illegal and incapable of ratification by the board of directors or even by a majority of the stockholders, a subsequent board of directors or a majority of the stockholders cannot waive a cause of action against a director for unlawfully declaring dividends out of capital, since this would be in effect to permit them by indirection to confirm the making of dividends from capital, which the law forbids. 191

One of the important questions aris*ing under these statutes is whether an absolute liability is imposed thereby on the directors, or whether they will

191 Siegman v. Electric Vehicle Co. (1907) 72 N. J. Eq. 403, 65 Atl. 910, affirming (1906) 71 N. J. Eq. 123, 62 Atl. 941. The case was decided under a statute providing that no corporation shall make dividends except from surplus or net profits, nor divide or pay to stockholders any part of the capital stock, and declaring that for violation of the statute the directors (except those dissenting) under whose administration the same occurred should be jointly and severally liable to the corporation and to creditors to the full amount of the dividend made or capital so divided. And it was held, in a suit by a stockholder in behalf of himself and other stockholders to require a former director to pay to the company the dividends which were unlawfully declared and paid out of capital, that a plea was insufficient which stated in effect that a subsequent board of directors, entirely different from the board which had declared the dividend in question, had investigated the matter through a committee, and in good faith had resolved not to bring suit to recover the dividend, as the same would not be for the best interests of the company, and that the action in this regard had been ratified at a meeting of the stockholders. See also, supporting the same principle, Siegman v. Electric Vehicle Co. (Fed.) in note 279, infra.

192 The words "assenting thereto" in the Illinois statute providing that, if directors or other officers or agents of a corporation shall declare and pay a dividend when the corporation is insolvent, or any dividend the payment of which would render it insolvent or diminish the amount of its capital

be exonerated in case they act in good faith and without negligence. This question obviously depends, to a considerable extent, upon the terms of the particular statute, and the conclusions reached are not uniform. In some jurisdictions, it has been held that the statutes do not impose an absolute liability on the directors, and that they are not liable in case they act in good faith and without such negligence that the law will impute knowledge to them of the real situation under which dividends were wrongfully declared. 192 Good faith has been held in Kentucky to affect the stock, all directors, etc., "assenting thereto" shall be jointly and severally liable for all debts of the corporation then existing or thereafter contracted while they respectively continued in office, have been held to mean a conscious approval of facts actually known, so that actual knowledge of the directors that the indebtedness created is in excess of the capital stock is a condition precedent to recovery; it is not sufficient merely that the directors did not exercise proper diligence to acquire such knowledge. White-Wilson-Drew Co. v. Lyon-Ratcliff Co. (1920; C. C. A. 7th) 268 Fed. 525. The court took the view that, even if the statute was not a penal one, the liability imposed on directors was like that of a surety, and should not be extended by construction so as to make it embrace a case not clearly within its terms.

And it is held in Lippitt v. Ashley (1915) 89 Conn. 451, 94 Atl. 995, that a statute making directors and trustees of savings banks "assenting" to a violation of any provision of statutory law relating to such banks liable for any loss resulting therefrom does not impose an absolute liability upon directors for losses occasioned by the payment of illegal dividends, whether they were negligent or not; but that there can be no assent, within the meaning of the statute, unless the directors have actual knowledge that the dividends declared were not legally earned, or unless they are negligent in not knowing the actual financial condition of the bank, in which case knowledge of the actual facts will be imputed to them for the purposes of the statute.

And, in an action by judgment

amount of liability. 193 But in other jurisdiction the view has been taken that as a general rule good faith on the part of the directors of a corporation in declaring dividends from capital, instead of from surplus profits, is not a defense, in a suit to recover the statutory liability; that, at least, this is true unless it is shown that fraud was practised on the directors against which they could not have guarded. 194 creditors to hold directors of a corporation liable for the declaration and payment of a dividend when the company was insolvent, it was held in Chick v. Fuller (1902) 51 C. C. A. 648, 114 Fed. 22 (certiorari denied in (1902) 187 U. S. 640, 47 L. ed. 345, 23 Sup. Ct. Rep. 841), that no recovery could be had under the statute of Illinois, construed as implying knowledge of the conditions of the company on the part of directors, or such negligence with respect to examination of the company's affairs that the law would presume knowledge, where it appeared

that the fraud which wrecked the company was perpetrated by its president, who concealed purchases and sales, failed to enter them on the books, appropriated proceeds of sales to his own use, and issued fictitious notes therefor, so that the trial balance presented to the board by the president of the company showed, as did also the books, a profit warranting a dividend, it appearing that the directors acted in good faith, without means sufficient to put them on notice of the insolvency of the company at the time the dividend was declared.

It has been held, also, that a director is not liable, under the Canadian statute, for the payment of dividends when the company was insolvent, unless he knew, or was, according to legal rules, bound to know, of the insolvency of the company or impairment of its capital by the payment of the dividend, the statute being regarded as imposing a penalty and requiring mens rea. Smith v. Henderson [1924] Rap. Jud. Quebec 62 C. S. 270, 1 D. L. R. 863. The statute prohibited the payment of dividends on corporate stock which would render the company insolvent or impair its capital, and declared that directors participating should be jointly and severally liable for all the debts of the company then existing, and for all

And the New York statute has been construed as rendering the directors liable for any loss sustained by the corporation or creditors through the payment of an illegal or unauthorized dividend, regardless of the question whether the failure on the part of the directors to make proper deductions in ascertaining the surplus profits was intentional or merely an error. 195

In some states the statutes make didebts thereafter contracted during their continuance in office.

193 See cases from this state in notes 232 and 233, infra.

194 Southern California Home Builders v. Young (1920) 45 Cal. App. 679, 188 Pac. 586. The statute provided that directors of corporations must not make dividends except from the surplus profits arising from the business thereof, nor divide, withdraw, or pay to the stockholders any part of the capital stock; and that for a violation of the statute they shall be individually liable to the corporation and to creditors thereof to the full amount of the capital stock so divided or paid out. The court overruled the contention that the statute was only a codification of the common-law rules of liability; and held that the fact that in this instance the directors had had the real estate of the corporation appraised and caused the books of the company to be audited by a certified public accountant, and that such audit showed a sufficient surplus to pay the dividend, was not a defense, if the inventory and balance sheet were in fact false and the assets excessively valued.

195 Dykman v. Keeney (1896) 10 App. Div. 610, 42 N. Y. Supp. 488 (later appeal in (1897) 16 App. Div. 131, 45 N. Y. Supp. 137, affirmed on opinion of lower court in (1899) 160 N. Y. 677, 54 N. E. 1090). The statute forbade directors to make dividends except from surplus profits, or to divide, withdraw, or pay to the stockholders any part of the capital stock, and declared that for a violation of the act the directors under whose administration the same occurred (except those absent or dissenting) should be jointly and severally liable to the corporation, and to the creditors thereof, to the full amount of the capital of the corporation so divided, withdrawn, or paid out. And

rectors liable for "knowingly" declaring dividends under certain circumstances, and knowledge may be im

the banking law directed that, in determining the surplus profits of a bank, the losses should be deducted, which losses should include debts owing to the bank remaining due without prosecution and without payment of interests thereon for more than a year. The court said: "The only liability created by that act is one which requires the directors assenting thereto to make good to the corporation or its creditors the amount of the capital withdrawn as a result of the declaration and payment of the dividend. This result, by force of the statute, follows the failure to deduct, from the actual profits, debts that should be classed as losses, whether that failure is intentional or a mere error, and the effect of the statute is to make the directors guarantors of every debt which it is prescribed should be charged to the profit and loss account, but which the directors have omitted to so charge, to the extent that the payment of the dividend may reduce the capital below the sum fixed in the charter."

And in Wesp v. Muckle (1910) 136 App. Div. 241, 120 N. Y. Supp. 976, reargument denied in (1910) 136 App. Div. 945, 121 N. Y. Supp. 1151, affirmed without opinion in (1911) 201 N. Y. 527, 94 N. E. 1100, it is held that it is not material under the statute, as to whether or not a director, in consenting to a declaration of a dividend out of capital instead of net earnings, knew of the financial condition of the company; that it is his duty to ascertain whether the earnings authorize a dividend, and that he cannot safely rely upon statements of the secretary of the corporation as to its financial condition. In this instance the declaration of dividends was based upon a statement presented by the secretary of the company, in which the bills receivable were grossly exaggerated in value or padded; and it was held proper to admit in evidence, in an action to recover the dividends from the directors, the ledger and other account books of the company.

196 Under a statute providing that any director who "knowingly" declared and paid a dividend while the corporation was insolvent should be

puted to the directors under such statutes. 196

The question has also arisen in variliable for the amount of the dividend, it has been held sufficient to render the directors liable if they knew that the company was not in a condition to pay dividends out of surplus, or if the circumstances were such that knowledge must be imputed to them. Hodde v. Nobbe (1920) 204 Mo. App. 109, 221 S. W. 130.

It has been held, also, that, under a statute declaring that, if any director of a bank shall "knowingly" violate any of the provisions of the law relating to banks, he shall be liable to creditors and stockholders for resulting loss or damage, and providing that directors may declare a dividend out of the net profits of the bank, after making certain deductions, directors of a bank who declare a dividend when the bank is insolvent will not be permitted to shield themselves from liability to a depositor on the ground that they did not knowingly violate the provisions of the statute, if they failed to use ordinary care to acquaint themselves with the business of the bank and to exercise reasonable control and supervision of its officers; that facts which they ought by proper diligence to have known they will be presumed to have known, in a contest between the corporation and those who have done business with it, and had the right to believe that the directors were exercising ordinary care and prudence in the management of its affairs. Franklin V. Caldwell (1906) 123 Ky. 528, 96 S. W. 605.

The decision in Penzel v. Townsend (1917) 128 Ark. 620, 195 S. W. 25, turns on the sufficiency of the evidence to show knowledge on the part of the directors of the corporation of its insolvency at the time of their declaration of dividends, it being held that the evidence sustained a finding that they had such knowledge and so were liable, under a statute providing that, if the directors of a corporation declared and paid a dividend when the corporation was insolvent, knowing the same to be insolvent, the directors assenting thereto shall be jointly and severally liable for all debts due from the corporation at the time of such dividend.

ous cases as to the necessity for dissolution or for insolvency of the corporation, in order to render directors liable under the statute. The Oklahoma statute has been construed as rendering the directors of a corporation liable to a creditor for dividing, withdrawing, or paying to stockholders any part of the capital stock, only in the event of dissolution of the corporation. But under the similar provision of the Idaho statute, it has been held that judicial dissolution is not necessary to give the receiver of a

197

197 Topeka Paper Co. v. Oklahoma Pub. Co. (1898) 7 Okla. 220, 54 Pac. 455. The statute provided that directors of corporation should not make dividends except from the surplus profits arising from the business, nor divide, withdraw, or pay to the stockholders any part of the capital stock, and declared that for violation of the act the directors under whose administration the same occurred should be jointly and severally liable "to the corporation and to the creditors thereof, in the event of its dissolution, to the full amount of the capital stock so divided," etc. And the court said that, before any liability could accrue so that an action could be brought against the directors for debts of the corporation, the event of its dissolution must have already occurred, which could only have taken place, under statutory provisions, upon the expiration of the time limited by the articles of incorporation or by the judgment of a competent court. The claim, in this instance, which was held untenable, was that, by an attempted consolidation of two corporations, there had been an unlawful division, withdrawal, or payment to stockholders of capital stock.

A similar conclusion was reached in Stevirmac Oil & Gas Co. v. Smith (1919; D. C.) 259 Fed. 650, in holding that a receiver of a corporation could not maintain an action against directors for wrongful division of capital unless the corporation was first dissolved. See note 288, infra.

198 Stoltz v. Scott (1912) 23 Idaho, 104, 129 Pac. 340. The statute forbade directors to make dividends except from the surplus profits arising from the business, or to divide or pay to the stockholders any part of the

corporation authority to maintain an action against directors, the corporation being held to be dissolved, for the purpose of such an action, when it ceases to do business because of insolvency, and is put into the hands. of a receiver. 198

The New Jersey statute has been held to render directors liable to the corporation for participating in the declaration and payment of a dividend out of capital, even in cases where there has not been a dissolution and the corporation is not insolvent. 199 capital stock, and declared that for a violation thereof they should be individually "liable to the corporation, and to the creditors thereof, in the event of dissolution," to the full amount of the capital stock so divided or paid out, a corporation being held to be dissolved, for the purpose of such an action, when it ceases business because of its insolvency and is put in the hands of a receiver.

199 Appleton v. American Malting Co. (1903) 65 N. J. Eq. 375, 54 Atl. 454, reversing (1902) 63 N. J. Eq. 422, 51 Atl. 1003. The statute forbade the making of dividends except from surplus or net profits arising from the business, or the withdrawing or paying to the stockholders of any part of the capital stock, and declared that for violation of the act the directors under whose administration the same occurred (except those absent or dissenting) should be jointly and severally liable "to the corporation and to its creditors, in the event of its dissolution or insolvency," to the full amount of the dividend made or capital so withdrawn. The lower court took the view that the statute was limited in its operation to cases where the assets of the company were insufficient to pay its creditors; that it was intended to provide a fund to satisfy creditors, and that directors could not be held liable for violation of the act, without regard to the financial condition of the company or to the question whether the money was needed to pay creditors; and that, if the statute imposed a liability on directors without regard to the financial condition or needs of the corporation, it was penal in its nature, and for that reason a court of equity should refuse to entertain a suit for its enforcement. On

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