said company. On the 10th day of May, 1872, said Slavens tendered his resignation as receiver to said court, which was accepted, and on same day said court, by its order and decree, and in furtherance of its purpose of winding up the affairs of said -company, appointed Turner A. Gill, the plaintiff in the present suit, receiver and devolved upon him the performance of all duties required of the former receiver, Slavens. By the further order of said court, made in June, 1873, the said receiver, Gill, was required and directed to join in an action prosecuted in his own name, all parties liable in any way for and on account of subscriptions to the capital stock of the said insurance company, now unpaid, and for balances unpaid on stock or subscription therefor. In obedience to this order plaintiff Gill, as such reeeiver, instituted the present suit in his own name against all the defendants as stockholders of said company for the purpose of recovering forty per cent. of the par value of each share of the capital stock of said company. The trial of the cause resulted in a judgment for the plaintiff from which the defendants prosecute their appeal to this court.

The principal grounds of error relied upon by the defendants as touching the merits of the cause are, first, that the plaintiff, as receiver, could not institute or maintain a suit in his own name; and second, that if he could do so, they were in no way liable as stockholders, each of the defendants claiming exemption from liability as such, by reason of their having surrendered their stock to said company, whereby they insist they ceased to become stockholders thereof. It will be observed that the receiver in this case derives his power and right to sue from an order of the Jackson County circuit court; and the question presented, whether or not he can maintain this suit in his own name, is dependent upon a construction of section 32, page 772, Wag. Stat. The above section is found in a law entitled, "Insurance," which, among other things, provides for the creation of an Insurance Department, which shall be charged with the execution of all laws in relation to insurance and insurance companies in this State; and also provides for the appointment of a superintendent of the insurance department as the chief officer thereof. Section 32, supra, of this law, makes it the duty of the superintendent, when upon an examination of the affairs of any insurance company, it shall appear that such company is insolvent, or that its condition is such as to render its further proceedings hazardous to the public, to file in the office of the circuit court of the county in which it has its principal office or place of business, a petition setting forth the condition of the company and praying for a writ of injunction to restrain said company, in whole or in part, from further proceeding in its business. At any time after such petition is filed, the court in which it is pending is charged with the duty of appointing agents or receivers to take possession of the property of said company; and upon final hearing, with the

further duty of making such orders and decrees as may be needful to suspend, restrain and prohibit the further continuance of the business of said company, or any part thereof, or for the dissolution of the company and the winding up of its affairs.

By virtue of this section, when the superintendent of the insurance department files his petition, the court or judge may, upon inspection of the petition, before answer filed or any hearing is had upon the merits, appoint a receiver to take charge of the property of the delinquent company; and if no other power than this had been conferred upon the court, the position taken by appellants, that the receiver could not prosecute a suit in his own name for the recovery of a debt due the company, would be maintainable.

But the section goes further, and authorized the court, on a final hearing, to make such orders and decrees as may be needful in winding up the affairs of such company."

It is difficult to conceive how the court could perform the duty enjoined upon it of winding up the affairs of the company, if it could not employ agencies to enforce the collection of the debts owing to said company.

The settlement or winding up the affairs of a delinquent corporation can only be accomplished by the application of its assets to the payment of its debts, and the distribution to the stockholders of what may remain after the debts are paid. Ordinarily before the assets, when they consist in property and of debts due the company, can be thus applied, it is necessary to convert the property into cash and to collect the debts; and until this is done, its affairs can not be settled, and the duty enjoined upon the court of winding up its affairs would remain unperformed.

The duty of settling up the affairs of the company being thus devolved upon the court, no reason is perceived why it might not (without any statutory provision), resort to such methods as would enable it to perform the duty. But we think that section 32, supra, sets this question at rest by expressly authorizing the court to make all orders and decrees needful to winding up its affairs. The statute invests the court in which the proceeding is pending with the power to determine the necessity of the orders and decrees it may make in respect to the end to be attained; and if, in order to the attainment of the end, it appears to the court that a necessity exists for the collection of debts due the company, and if, acting upon that necessity it does order and direct a ' receiver, its own officer, to institute suits in his own name for that purpose, we would not be authorized to review its action in that respect, unless the power thus exercised was a gross and palpable abuse of it, and in no aspect of the case calculated to accomplish the winding up of the affairs of the company.

The question is not as to the power of the receiver to sue in his own name, but as to the power of the court charged with the duty of

winding up the affairs of a corporation to make such orders as in its judgment are necessary to enable it to perform the duty enjoined. This question the statute settles by expressly giving such power to the court. and to deny that it possessed it, would be to nullify the statute.

The making of an order in terms dissolving the corporation, is not a condition precedent to the exercise of the power given to wind up its affairs, since the defendant corporation in the suit instituted by the superintendent of the insurance department for the purpose of dissolving it and winding up its affairs, withdrew its answer to the petition, and suffered judgment to go by default.

2. Defendants base their claim of exemption from liability as stockholders on a certain resolution passed by the board of directors on the 17th of February, 1871, to the effect that all stockholders who would pay five per cent. on their respective shares of stock, and surrender their stock certificates to the company, should have the privilege of retiring from the company and withdrawing their stock notes. Defendants claim that they complied strictly with the above resolution, and that, by reason of such compliance, they are released from liability as stockholders.

It is, on the other hand, insisted that the passage of said resolution by the directors was uitra vires, and for that reason void, and that it was also fraudulent as to creditors and stockholders.

A solution of this question can only be reached by reference to the facts found by the referee to whom the case was referred. It appears from his report that the capital stock of the company was $400,000, of which-$255,250, had been subscribed, and on which only ten per cent. had been paid, and the remainder secured by the stock notes of the respective share-holders; that after the resolution of February, 17. 1871, stockholders, among whom the defendants are embraced, surrendered to the company certificates of stock amounting to $167,200, after paying five per cent. thereon, and received, therefor, from the company their stock notes given to secure the payment of stock respectively subscribed for by them to the amount of $150,400. The only stock remaining after their surrender amounted to $88.000, on which there was owing not to exceed $81,000, only $41,760 of which, the referee finds, was collectable; that at the time the resolution was adopted according to the report of the finance committee of said company, the company had lost $48,250, and the liabilities of the company, other than capital stock, amounted to $32,121.27, including a reinsurance fund estimated at $10,000, which estimate the referee finds to be $5,621.37 less than it ought to have been. In the report of this committee, no account was taken of $350,000 of outstanding policies and liabilities. The referee further finds that on the 7th of February, 1871, the superintendent of the insurance department entered, through an expert, upon an examination of the condition of said company, who, on the 14th of February, three days before the passage of the resolution

under which defendants claim exemption, reported to the superintendent that the condition of the company was such as to render its further proceeding in business hazardons to the public and those holding its policies. The referee finds further, That at the time of the passage and adoption of said resolution, the affairs of said company were in a bad, unsound, unsafe condition, and in such a state that stockholders of said company were liable to lose heavily: and said directors also then each and all knew of this before-mentioned examination of the affairs of the company caused to be made by said superintendent of the insurance department, and that said superintendent would probably file a petition praying for an injunction to restrain said company in whole from further proceeding with its business, and wind up its affairs; and they also knew that said company had failed to make the report to the insurance department required by law, and to comply with the law governing it and its business in many respects. That said resolutions were never ratified or adopted by the stockholders of said company." The referee further finds that at the time of the passage of the resolution excluding the statement held by the company, the remaining assets amounted only to $2,000.

In the light of the above facts, we can not see how the action of the board of directors, in the passage of the resolution of February, 1871, can be upheld. Casting out of view liabilities which might come against the company in consequence of the $350.000 of outstanding policies, and taking the estimate of its liabilities to be $32,121.27, as reported by the finance committee, if all the stockholders had complied with the terms of the resolution by paying five per cent. of their stock notes and surrendering their stock and receiving in return therefor their stock notes, constituting all the assets of the company except $2.000, and the five per cent. thus paid in on the $255.250, amounting to $12,762.50, the spectacle would be presented of a company with liabilities amounting to $32,121.27, with no one responsible for the payment of the balance of $17,358.77, which would be remaining after the application of the $12,672.50, and $2,000 of its assets to the payment of such liabilities. A resolution which embraces in its scope such a result, can neither be maintained on principle nor authority. It is no answer to this to say that but two-thirds of the stockholders availed themselves of the avenue of escape from liability provided in the resolution. Its validity is to be tested by the fact that under its terms, all the stockholders might have escaped liability, taking with them all the assets of the company, amounting to $230,780, except $2,000, and putting in the treasury in lieu thereof $12,722.50 in money with which to pay liabilities amounting to $32,121, for the payment of which all stockholderswould have been ratably bound previous to such withdrawal. If such withdrawal of all would have operated as a fraud in law-if not in facton the ereditors, so the withdrawal of a part

would likewise, pro tanto, have the same effect.

The resolution in question, never having been ratified nor sanctioned by the stockholders, is also assailable on the ground that the directors had no power to pass it, inasmuch as by its operation the capital stock was diminished from $255.250 to $88,000. The directors had only the general power of managing the affairs of the company in the prosecution of its business, and its business was to make contracts of "insurance against loss or damage by fire on land and water on any description of property or merchandise." Such powers do not authorize the directors either to increase or diminish the capital stock, or to change the fundamental organization of the company. The case of Railroad Company v. Alberton, 18 Wall, 233, fully sustains the above proposition, where it is held that changes in the extent of the constituency or membership of a corporation, involving the amount of its capital stock, are necessarily fundamental in their character, and cannot,on gen..eral principles, be made without the express or implied consent of the members. "A change as respects the constituency or capital and membership of a body corporate, being fundamental and next in importance to the purposes and objects of the corporation, without the consent of the stockholders," would be to make them members of an association, in which they never consented to become such. It would change the relative influence, control and profit of each member. If the directors alone could do it, they could always perpetuate their power. Their agency does not extend to such an act, unless so expressed in the charter." The case of Upton, Assignee, v. Tribilcock, 1 Otto, 45, is equally emphatic in condemnation of the right of directors, to limit the liability of stockholders as to unpaid stock, and pronounces such a transaction void. Justice Hunt, speaking for the court, uses the following language: The capital stock of a moneyed corporation is a fund for the payment of its debts. It is a trust fund of which the directors are trustees. It is a trust to be managed for the benefit of its shareholders during its life, and for the benefit of its creditors in the event of its dissolution. duty is a sacred one, and can not be disregarded. Its violation will not be underteken by any just minded man and will not be permitted by the courts. The idea that the capital of a corporation is a foot-ball to be thrown into the market for purposes of speculation, and that its value may be elevated or depressed to advance the interests of its managers, is a modern and wicked invention. Equally unsound is the opinion that the obligation of a subscriber to pay his subscription may be released or surrendered to him by -the trustees of the company. This has often been attempted, but never successfully. The capital paid in, and promised to be paid in, is a fund which the trustees can not squander or give away. They are bound to call in what is unpaid, and carefully to husband it when received."

This

Sec. 201. Thompson on Stockholders, is an authority to the effect that the American courts have steadily annulled all arrangements between corp ›rations and their stockholders, whereby the latter were sought to be released from liability to creditors. The same author, in the following section, refers to the case of Dorr v. Stockdale, 19 Iowa, 269 (which counsel for defendants have cited us as sustaining the resolution of February 17, 1871). as the only American case showing a departure from the rule laid down by him. It is, however, urged by counsel, that, notwithstanding the retirement of defendants from the company under the resolution of the directors with $150,000 of its assets, the unpaid stock notes of other stockholders who did not retire were sufficient to pay all creditors, and that no wrong was done by virtue thereof to creditors, and that they could not therefore complain. In the case of Bedford R. Co. v. Bowser, 48 Penn. St. 29, a similar question to the one here presented was considered. In that case, two hundred and sixty-six subscribers to the stock of a railroad company claimed to be released by virtue of an order of the board of directors authorizing the cancellation of their stock, and the court instructed the jury that if the company had sufficient assets to pay their debts, such order was valid, and the cancellation of the stock under it released the defendants. The court held that this instruction was erroneous, and remarked, in passing upon it, that the directors of the company then in office were its agents with limited power, the extent of which the defendant was bound to know. Their duties were to conduct the affairs to the furtherance of the ends for which the company was created. They had no right to give away any of its funds, or to deprive it of any of its means to accomplish the full purpose for which it was chartered. The creditors were not the only persons who had interests at stake. The stockholders who had paid their subscriptions or bought their stock

were at least equally interested. So in the case of Spackman v. Evans, L. R. 3 H. L. 171, where a kindred question came before the court, Lord Cranworth remarked, that a stockholder might well object to the relieving of other stockholders and say “I became a stockholder, relying on the names of those who were engaged with me in the partnership: I delegated the management to certain directors with defined powers and duties; it was part of the stipulation of the deed of partnership, that none of my fellow-stockholders should quit the partnership except by substituting in his place some other person approved by the directors. This was, I thought, sufficient security to me,that in the event of my being called on by a creditor who,having recovered judgment against the company, should proceed to enforce payment against me, I had solvent partners from whom I might obtain contribution; and now I find that without authority you (the directors) have taken on yourselves to enable several of my partners to withdraw from the partnership, by a proceeding

Error to the District Court of Scioto County. The action below was brought by Sylvester H. Rosecrans against Elizabeth McQuade, and John McQuade, administrator de bonis non of Hugh Reilly, to foreclose two mortgages executed by said Reilly and his wife, Elizabeth, now the plaintiff Elizabeth McQuade, to secure the payment of certain promissory notes, amounting in the aggregate to $1,600, executed by Hugh Reilly and delivered to Emanuel Thinpoint, the defendant's testator, in the years 1857 and 1858. Said Elizabeth was sole heir of said Hugh Reilly. The answer averred, among other things, that at the time said Hugh Reilly executed the said notes and mortgages, he was in embarrassed circumstances, and involved in debt beyond his means to pay, without resort to the real estate mortgaged; and that said mortgages were executed by said Reilly, and received by said Thinpoint, in double the amount actually loaned, for the purpose of placing the property mortgaged beyond the reach of the creditors of Reilly.

The reply admitted that the consideration of said notes, secured by said mortgages to the amount of $800, was never paid to said Reilly by said Thinpoint, but was a trust fund created by said Reilly in favor of said Elizabeth, who, after the death of said Hugh Reilly, and before said suit was commenced. in'ermarried with John MeQuade. The reply denied that said conveyances were made with intent to defraud the creditors of said Hugh Reilly. On the trial in the district court to which the cause had been appealed, the plaintiff in error called as a witness Cornelius McCoy, who stated that he was acquainted with

Hugh Reilly in his lifetime, the former husband of the said Elizabeth McQuade, and counsel for defendants therein propounded to the witness the following question, viz.: "What, if anything, do you know as to the pecuniary circumstances of Hugh Reilly, prior to his death?" To which question the plaintiff, by his counsel, objected, and the court sustained said objection, and the witness was not permitted to answer said question.

Counsel for defendants then proposed and offered to prove by said witness, and other witnesses, that at the time of the execution of said notes and mortgages sued upon, the same were given for just double the amount of money actually loaned. That the said Hugh Reilly was being sued by various creditors, and was in embarrassed circumstances, and wholly insolvent, which facts were well known to both said Hugh Reilly and the said Emanuel Thinpoint, and that the object on the part of both said Reilly and Thinpoint in taking the notes and mortgages for double the amount loaned, was to cover up and protect said real estate so mortgaged from being levied on and sold in payment of the debts due to said creditors; that, in fact, the giving and taking of the said notes and mortgages did operate as a fraud on said creditors; but the court ruled that the said evidence, and each part thereof, was incompetent; that the contract, as between the said Emanuel Thinpoint and Hugh Reilly must be regarded as executed, and that the defendant, Elizabeth Reilly, was not in a position to raise the question of fraud upon the creditors of the said Hugh Reilly, and thereupon excluded the testimony offered.

Judgment having been given for the plaintiff below, the exclusion of said testimony is here assigned as error.

BOYNTON, C. J., delivered the opinion of the

court:

We think the court erred in excluding the evidence offered to show that the object of the mortgagor, in giving the mortgages sued on tɔ secure double the amount borrowed, and of the mortgagee in receiving the same, was to defraud the creditors of the mortgagor. Sec. 97 of the Crimes Act (1 S. & C. 429) makes it a penal offense, punishable by fine and imprisonment, for any person to make any grant or conveyance with intent to defraud his creditors of their just demands. The object of the testimony offered and rejected was to show that a part of the consideration of each of the notes the mortgages were given to secure, was illegal, and consequently that the mortgages were void. If a part of the consideration of each note was illegal, the effect would be the same as if the entire consideration were illegal, and such effect would be to render the mortgages void. If any distinct note, that either mortgage was given to secure in part, was not tainted with the fraudulent purpose to defraud the maker's creditors, no doubt,equity would follow the law and enforce to that extent the mortgage security; but where a