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cess over par which a newly organized insurance company has received for a part of its stock has been regarded as profits, which it may distribute as dividends.58 It has been held, also, that collections made on a judgment

any dividend whereby their capital stock would be in any way reduced. But the court held that the latter provision referred to paid-up capital, and not to capital assets generally.

That, on the sale of part of a company's property, an amount representing accretions to capital, and not needed for the payment of debts or the carrying on of the part of the business retained, may be distributed to shareholders as dividends, is supported also by Holt v. Croker (1922) 91 L. J. Ch. N. S. (Eng.) 346, a case involving the respective rights of the life tenant and remainderman.

And, in determining whether or not there are profits available for dividends, it has been held that a company may set off an appreciation in the value of its capital assets, as ascertained by a bona fide valuation, against losses on revenue account. Ammonia Soda Co. v. Chamberlain [1918] 1 Ch. (Eng.) 266, 9 B. R. C. 819-C. A.

In Bishop v. Smyrna & C. R. Co. [1895] 2 Ch. (Eng.) 596, where a company had invested in its own debentures, and, they having fallen, had charged a certain amount to depreciation, on later liquidation of the company the foregoing amount of depreciation was treated as appreciation in investment, the debentures having risen in value, and the court held that this amount, having been taken from profits, must go back into profits.

As to what may be treated as profits and what as capital for dividend purposes may, according to the views expressed in an English case, depend considerably upon the mode and manner in which the company is carried on, and can scarcely be treated as an abstract question. Dovey v. Cory [1901] A. C. (Eng.) 477, 6 B. R. C. 179-H. L.

That the capital and revenue accounts are distinct and separate, and that both depreciation and appreciation of the former are to be disregarded for the purpose of determining profit, is the view expressed in Lee v. Neuchatel Asphalte Co. (1889) L. R. 41 Ch. Div. (Eng.) 1 (opinion of Lo

against a person, on claims arising out of his abstractions of capital of the company, are properly declared as dividends when the company already has funds largely in excess of its capital stock.59

pes, L. J.), where, however, the property was of a wasting nature (mines), so that the rule applicable in case of accretion to capital was not directly involved.

In Equitable Life Assur. Soc. v. Union P. R. Co. (1914) 212 N. Y. 360, L.R.A.1915D, 1052, 106 N. E. 92, it was held that profits made by a railroad company by investments in stock of other corporations, and by converting its bonds into stock, need not be dealt with as an accretion to capital, to be distributed among all stockholders, but may be treated as earnings, and distributed as dividends, within the application of a clause in its articles of incorporation by which the dividends to preferred stock should not exceed a specific sum per annum; and therefore, when that per cent has been paid to preferred stockholders, the remainder may be distributed among the common stockholders.

58 Union Pacific L. Ins. Co. v. Ferguson (1913) 64 Or. 395, 43 L.R.A. (N.S.) 958, 129 Pac. 529, 130 Pac. 978. The question in this case was whether the company had paid-up unimpaired cash capital sufficient under the statute to entitle it to a certificate authorizing it to carry on the insurance business. Only a part of the capital stock of $100,000 (the amount required by the statute) had been subscribed, but it was alleged that more than this sum had been received from the stock actually sold. It was held that the company was not entitled to a certificate, because the fund required by the statute did not include profits or surplus until they had been made capital in some legal way, but referred to a trust fund which could not be diverted, and the profits accumulated in the sale of stock were subject to withdrawal at any time in dividends.

59 Hyams v. Old Dominion Copper Min. & Smelting Co. (1913) 82 N. J. Eq. 507, 89 Atl. 37, affirmed on opinion of lower court in (1914) — N. J. Eq. 91 Atl. 1069, rehearing denied in (1914) 83 N. J. Eq. 705, 92 Atl. 588.

But the entire proceeds of sale by a corporation of its own stock, even when sold for more than par value, are part of its original assets or capital stock, and therefore cannot be profits earned through the conduct of its business, within the meaning of a statute declaring that directors of corporations must not make dividends except from surplus profits arising from the business thereof, nor divide, withdraw, or pay to stockholders any part of the capital stock, 60 and where a company which had issued debenture stock was able to redeem part of the same at a large discount, it was held that this discount did not constitute net profits arising out of the business, which the company was entitled to carry to its revenue account and distribute it in dividends.61

f. Estimated and unrealized profits; debts owing to corporation. On the question whether unrealized assets may be taken into consideration in determining net profits out of which

60 Merchants & Insurers' Reporting Co. v. Schroeder (1918) 39 Cal. App. 226, 178 Pac. 540.

61 Wall v. London & Provincial Trust [1920] 1 Ch. (Eng.) 45. The company had separate revenue and capital accounts, and it was said that, if it desired to gain the benefit of an appreciation in capital value, it would have to adopt a single account system, and as a consequence value its entire assets for the purpose of every dividend distribution; that, in accounts such as this company was required to keep, an appreciation in capital assets can never increase the dividend fund. This view is supported, also, by the opinion rendered on subsequent proceedings in [1920] 2 Ch. 582, in which the position was taken that, apart from the special provisions of the company's articles of association, the single gain in question could not be disassociated from the items of loss represented by the general depreciation of the company's assets, and treated as profit for dividend purposes.

62 As to realized accretions to capital, see III. e, supra.

63 Spencer v. Lowe (1912) 117 C. C. A. 497, 198 Fed. 961.

dividends may be declared, regard must be had to the nature of the particular alleged assets. Generally, it appears that debts owing to the corporation, as to which there is no reasonable question of payment, may be included among the assets, at least if due allowance is made for possible shrinkage in collection; but mere estimated increases in the value of property held by the corporation should not be taken into consideration.62 Thus, in determining whether there are net profits out of which a mercantile company may declare dividends, book accounts against parties to whom merchandise has been sold in the ordinary course of business and concerning which there is no question may be included in the assets of the company.63 And, from the nature of the banking business, the assets from which dividends may be declared must continuously be represented by what is due to it from its debtors.64 Notes given by directors of a bank to it for

That book accounts concerning which there is no question may be inIcluded in the assets of a corporation, in determining whether or not there has been a net profit from which a dividend may be declared, is held also, in Quinn v. Quinn Mfg. Co. (1918) 201 Mich. 664, 167 N. W. 898.

The question of the effect of the fact that book accounts regarded as good at the time a dividend is declared subsequently proved to be losses is treated in another connection. See III. g, infra.

64 It would be improper for the officers of a bank to collect all its bills receivable on some special day, and then determine that it had a surplus from which dividends might be paid because there were no bad debts; but, while such debts must be taken into consideration in determining the assets for payment of dividends, the officers of the bank are bound to exercise honest and sound judgment and sagacity as to the standing and value of the paper; and, while they are not expected to be infallible, they are not only bound to be honest, but to possess the requisite ability for the ordinary exigencies of the business which they undertake, and must use the caution of ordinarily prudent men engaged in

the purpose of removing any doubt as to the soundness of some of the debts owing to it, and of making the bank unquestionably solvent, have been held to be properly included among the assets for dividend purposes.65 And where new notes were given to a bank by different parties, and the old obligations, which had been discounted

such business. Main v. Mills (1874) 6 Biss. 98, Fed. Cas. No. 8,974.


In Re London & General (1894) 72 L. T. N. S. (Eng.) 227, affirmed in [1895] 2 Ch. 673—C. A., the court expressed the opinion that, apart from special provisions in the articles of the company, if directors, honestly exercising their best judgment, treat in a revenue account a debt as a profit earned, though not received, they cannot be said to be declaring dividends out of capital, although the debt turns out to be bad and the dividend ultimately proves to have been paid out of working capital. But in this instance the articles appeared to make a distinction between "estimated profits" out of which the directors were authorized to declare interim dividends, and profits out of which the directors might recommend the declaration of dividends at the general meeting of the shareholders, in view of which the court was of the opinion that the latter must be such profits as, if not, realized, could be realized within a short time. The decision, however, is based on other grounds.

It was held in Re London & General Bank (Eng.) supra, that, if it were assumed that estimated profits not yet in hand might, if properly secured, be included in gross profits of the company in a profit and loss account, for dividend purposes, yet that estimated profits were not shown in this instance warranting declaration of a dividend, where the profits of the company, a bank, consisted chiefly of interest and commissions in respect of loans made to customers paid by debiting their accounts, which accounts were for the most part placed in funds by the bank for this express purpose, so that the customers' credit, and consequent payment to the bank, was not substantial, but fictitious or in form only.

65 Dykman v. Keeney (1897) 16 App. Div. 131, 45 N. Y. Supp. 137, affirmed 55 A.L.R.-3.

by the bank several years previously and had been renewed, were surrendered within a year prior to the declaration of the dividend by the bank, the transaction being in good faith, and not for the purpose of carrying an old loss into the bank's resources, it was held 66 that the money secured thereby was properly included among

on opinion of lower court in (1899) 160 N. Y. 677, 54 N. E. 1090. The court said: "Unless a liability attached to the notes upon their delivery to the bank, it was no more solvent after the transaction than before. The purpose undoubtedly was, as expressed, to remove doubt as to the solvency of the bank, and to create a condition which removed that doubt, not as a mental condition, but as an existing fact. It was, in effect, as we view the transaction, a contribution of capital to the bank for the purpose of creating a liability in support of the debts regarded doubtful or bad then held by the bank. This proposition was not to provide for a contingent liability in the sense that the bank should have no interest therein unless insolvency was subsequently ascertained to exist. But it was to create a present condition of undoubted solvency. And in order that this should be accomplished it was essential that the notes have present actual vitality as an absolute promise and liability to pay the money. With respect to the enforcement of the liability, it doubtless rested with the bank to be exercised as contingencies might arise. There is nothing in the agreement or its legal effect which provides for postponement in the payment of the notes to any particular period of time."

66 Dykman v. Keeney (1896) 10 App. Div. 610, 42 N. Y. Supp. 488, later appeal to the same effect 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. On the subsequent appeal, the court said: "We think that the intent and meaning of this statute is that it embraces debts due for which no provision has been made by those liable thereon for a year, and upon which interest has not been paid. We do not think that it was intended to relate to, or that it embraces, notes which have been received from time to time

the resources of the bank for dividend purposes, such notes not being within the provisions of the New York Banking Law, which, in prescribing the method for ascertaining surplus profits, directed a deduction of all debts owing to the bank which remained due without prosecution, and upon which no interest had been paid for more than a year.

And if profits "earned and appearing to the credit of the corporation" are the basis upon which the statute permits the declaration of a dividend, in the ordinary course of business, and which, by the terms of the renewal obligation, are not then due, even though the renewal obligation embraced interest as well as principal, and the debt had been continued beyond a year. This was a bank of discount, in which the assets of the bank consisted largely of notes discounted and in renewals thereof; and in the usual prosecution of the business it might frequently happen that extensions and accommodations to its customers would result in its possession of perfectly good notes, where no payments either for principal or interest have been made within a year in money, and yet where the bank held a live and enforceable obligation not yet due by its terms. To hold that such an obligation must be charged up as a loss, and deducted from the assets of the bank for the purpose of the declaration of a dividend by the directors, would, we think, impose an obligation not contemplated or intended by the statute. Such construction would certainly render the declaration of a dividend by the directors at any time extremely hazardous. The statute is abundantly satisfied by limiting its application to those debts which have become due, and remain unprosecuted, and upon which no interest has been paid for a year. Such is its terms, and such we conceive to have been its spirit and intent."

But on a subsequent appeal in the above case, reported in (1898) 34 App. Div. 45, 54 N. Y. Supp. 1, it was pointed out that the earlier decisions, interpreting the statutory provision for deduction of debts which mained due without prosecution and upon which no interest had been paid for more than a year, were based on renewals made in the ordinary course


the money to pay the dividend declared need not be actually in hand, but it is sufficient if it has been earned though it has not been actually received.67

But an estimated increase in the value of the property owned by a corporation, however accurately the increase is estimated, is not a net profit arising from the business of the company from which dividends may be declared, where the same can be declared only out of surplus or net profits arising from the business of the of business, which, the court said, included such loans as would ordinarily bc made by an institution seeking to loan its funds in order that it might receive the interest thereon,-not the taking of new obligations from insolvent debtors or the carrying along of a bad debt in a new form. And it was held that the evidence was sufficient to require submission to the jury of the questions whether the notes involved had been taken in the ordinary course of business, and whether the amounts of accrued interest included in the new notes were in reality loans of money such as would have been made apart from any prior relation of the debtors to the bank, or whether they were taken merely to cover defaulted debts. It was shown that the original loans had been made in some cases as far back as six years before the declaration of the dividend, and that during this time there had been no payments on either principal or interest except so far as interest was included in the renewal notes or in separate obligations; that some of the notes had been renewed in this manner from six to twenty-three times, and that notes had been given to cover overdrafts and interest thereon. The court observed that it had previously held that, where a new obligation was given by a new party for an old debt of another party, even though the new obligation included the arrears of interest accrued upon the old, the interest on the obligation was not within the meaning of the statute; and stated that it was not prepared to say that the same rule would not obtain even where the new obligation is only that of the original debtor.

67 Van Dyck v. McQuade (1881) 86 N. Y. 38.

company. 68 And in other cases where the profit was merely an estimated or anticipated one, or

68 Kingston v. Home L. Ins. Co. (1917) 11 Del. Ch. 258, 101 Atl. 898 (affirmed in (1918) 11 Del. Ch. 428, 104 Atl. 25) (estimated increase in the value of buildings owned by an insurance company and occupied by its officers and employees). The court observed that, if the investment was of the capital of the company, its increased value when realized might perhaps be treated as a profit, but that until realized it was surely unwise, inaccurate, and wrong so to regard it and pay out money based on such an estimate; for it was only a guess, and, if a correct one, it might become incorrect later when the conditions which produced the estimated increase of value change.

And in Southern California Home Builders v. Young (1920) 45 Cal. App. 679, 188 Pac. 586, in discussing the question whether there were surplus profits out of which directors of the corporation might properly pay dividends, the court says that mere advance in value of property prior to its sale, or estimated profits on partially executed contracts, do not constitute profits, because the fluctuation of the market and the uncertainty of the completion of such contracts may (as was true in this instance) bring about a condition where the estimated profits are in fact liabilities or direct losses.

Profits are not shown to have been Caned for the purpose of the declaration of dividends, by proof merely of increase in the market value of property of the corporation; but the profits must have been realized to be denominated as such. Sexton v. C. L. Percival Co. (1920) 189 Iowa, 586, 177 N. W. 83.

It has been held that an alleged increase in the value of cattle belonging to a corporation, not realized by an actual sale of the cattle, is not a proper item to be taken into consideration in determining the surplus out of which the company as a going concern may pay dividends. Hill v. International Products Co. (1925) 129 Misc. 25, 220 N. Y. Supp. 711.

A conjectural increase in the value of lands held by a company cannot be considered as part of its income for the purpose of dividends. Salisbury

the assets were unrealized, it has been held that dividends cannot be based thereon,69 at least without

v. Metropolitan R. Co. (1870) 22 L. T. N. S. (Eng.) 839.

The question whether a land company which had purchased a large tract of land for subdivision and sale, and had sold a part of the land on contracts upon which only a small cash payment had been made, had a surplus profit arising from the business, as required by statute, which would support declaration of a dividend, was presented in Privat v. Grand Bay Land Co. (1919) 41 S. D. 494, 171 N. W. 327, but only questions of evidence are discussed, the court assuming, without deciding, that in estimating assets the company had a right to figure unsold lands at their real value at the time the dividend was declared, regardless of their cost price, and that it had a right to declare a dividend whenever the assets, so computed, exceeded the liabilities. It was held that the future value of lands returned to the company was immaterial, and that evidence respecting the same was properly excluded; also that evidence as to what the promoters had paid for the land which was afterwards transferred to the corporation was properly received.

69 A declaration of dividends based on prospective profits of a railway construction company was held illegal, and the shareholders ordered to return the same to the liquidator of the company, in Hyde v. Scott (1918) Rap. Jud. Quebec 28 B. R. 80, 47 D. L. R. 260.

In determining surplus or net profits of a manufacturing corporation, from which alone, under express statute, dividends may be declared, it has been held that anticipated profits on contracts for future delivery should not be taken into account. Hutchinson v. Curtiss (1904) 45 Misc. 484, 92 N. Y. Supp. 70. The court said: "These contracts were to deliver at a future time a product not yet made from raw material, not yet purchased, with the aid of labor not yet expended. The price agreed to be paid at that future time had to cover all the possible contingencies of the market. in the meanwhile, and might show a profit, and ran the chance of showing a loss. When the sales actually took

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