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§ 992. Not entitled to preference as creditor.—If he is a creditor, his claim against the corporation should be paid subject to a set-off to the amount of any unpaid sums on his subscription necessary to place him on an equality with other shareholders in the matter of contribution of capital.' If, however, the corporation is insolvent on winding up, he stands as any other creditor with respect to his claim against the company and as other shareholders with respect to contribution. He would therefore have to pay up his shares in full and take a pro rata on his claim along with other creditors.2 If, on the other hand, a shareholder be indebted to the company, he must pay his indebtedness and then share in the distribution with the other shareholders on the final distribution.3 If the enterprise has been a losing one and the capital originally invested has suffered impairment or total loss, each shareholder bears. a proportion equal to the amount of his shares; and though he gets nothing in return must contribute, if needed to settle the losses, the entire amount of capital represented by his shares. A stockholder who is a creditor may file a bill in equity to wind up an insolvent corporation, and have all suits by creditors pending against it consolidated, and proper accounts taken.* The corporation is a necessary party to a bill filed by its stockholders.5 But on such bill, whether filed by a creditor or a stockholder, the corporation cannot be proceeded against for violation of the statute in impairing the value of its stock."

1 Supra, § 818.

2 Supra, Id.

3 Stockton v. Mechanics', etc., Bank, 32 N. Y. Eq. 163; Onley v. Connecticut L. Co. (R. I.), 18 A. 181.

Crutchfield v. Mut. Gas L. Co. (Tenn.), 2 S. W. 658. In such case other stockholders may show that the claim of the one filing the bill is not valid, although the bill was taken for, confessed against the corporation. Ib. 5 Hurst v. Coe, 30 W. Va. 158; 3 S. E. 564.

6 Headly v. Oc. City Imp. Assn. (N. J.) 10 A. 471.

§ 993. Preferred shareholders possess no superior claim upon assets. Upon winding up the business affairs of a corporation either in case of dissolution or insolvency, preferred shareholders stand upon an equal footing with others and no better. In the absence of a provision to the contrary they have no priority in the distribution of assets or immunity in the matter of contribution to payment of losses over common stockholders. Their only preference was with respect to dividends, which necessarily cease when the business comes to an end.1 There may, however, be a preference given by statute or by articles with respect to the capital stock. When that is the case of course stockholders having such preference would have an advantage over others in the distribution of any surplus which remained after satisfying the claims of creditors.2

§ 994. Indefinite liability.—If, as is sometimes provided by statute or in articles of association, each shareholder is liable to the full extent of the liabilities, there are no equities of contribution recognized as between individual shareholders and creditors. Still the liability of mutual contribution would remain between the shareholders themselves independently of the rights of creditors. Where one has paid more than his share, whether voluntarily or under compulsion, he is entitled to contribution from other shareholders until the payments are equalized, the mutual liabilities being adjusted according to the amount of stock held by each respectively. So whether the liability be limited or indefinite, and whether the corporation be insolvent or have a

1 McGregor v. Home Ins. Co., 33 N. J. Eq. 181; In re London India Rubber Co., L. R. 15 Eq. 519; Re Bridgewater Nav. Co., 58 L. T. Rep. 476. 2 See McGregor v. Home Ins. Co., supra; Re Bangor, etc., State Co., L. R. 20 Eq. 59; Griffith v. Paget L. R. O. Ch. D. 511; s. c. 25 W. R. 523.

surplus of earnings on winding up the losses and gains as between members, are measured and adjusted equitably according to interest in the corporate venture. The right to contribution grows out of the organic relation existing among stockholders. As between them and the creditors each shareholder is severally liable; as between themselves each shareholder is bound to pay in proportion to his stock.1

§ 995. Analogy to winding-up copartnership.-There is a complete analogy between the final settlement of affairs and distribution of assets of a corporation and of a copartnership, both as respects the rights of creditors and the mutual rights and equities of members. The only difference consists in the extent of liability to creditors, that of shareholders being usually limited in amount, as we have seen, while each partner is liable in solido to the full extent of the firm's indebtedness.2

§ 996. Parties to insolvency proceedings. In the adjustment of liabilities among shareholders and to creditors where the corporation is insolvent, all solvent shareholders within the jurisdiction of the court should be brought before the court and assessed ratably.

1 Masters v. Rossie Mining Co., 2 Sandf. Ch. 301, 305; Umsted v. Buskirk, 17 Ohio St. 113, 118; Nonantum, etc., Co. v. Halliston Mills, 149 Mass. 359; Matthews v. Albert, 24 Md. 527; Stewart v. Lay, 45 Iowa, 604; Erickson v. Nesmith, 46 N. H. 371; Aspinall v. Torrauce, 1 Lans. 381; Farrow v. Bivings, 13 Rich. Eq. 25; Gray v. Coffin, 9 Cush. 192; Middletown Bank v. Magill, 5 Conn. 61, per HOSMER, C. J.; Brinham v. Wellersburg Coal Co., 47 Pa. St. 49. Concerning the right of contribution and indemnity in case of partnership and joint stock companies, see Lindley on Partnership (4th. ed.). 753, 1442. Compare O'Reilly v. Bard, 105 Pa. St. 569; Ray v. Powers, 132 Mass. 22.

2 Lindley on Partnership (4th ed.) 753, 1442; O'Reilly v. Bard, 105 Pa. St. 569; Ray v. Powers, 134 Mass. 22.

* See Mann v. Pentz, 3 N. Y. 415; Adler v. Milwaukee, etc., Brick Co., 13 Wis. 57, 63; Hamilton v. Glenn, 85 Va. 901; 9 S. E. 129; Vick v. Lane, 56 Miss. 681.

While each shareholder is liable to creditors to the full extent of the capital unpaid on his stock, still those before the court should not be compelled to bear burdens which the law imposes on those who are absent, unless their insolvency or other good reason be shown for their absence.1 But while all who are known and are within the jurisdiction should be made parties they are not necessary parties to a creditor's bill.2 The corporation, however, is a necessary party.3

997. Rule only applies to winding-up proceeding.—It is not a duty incumbent on a creditor to institute and conduct insolvency proceedings or to take his chances with the other creditors in the result of such proceeding as long as the shareholders refuse or neglect to avail themselves of such adjustment and settlement of liabilities. He may resort to his action against individual shareholders in the first instance on their statutory liability while the corporation is still a going concern, leaving the right of contribution growing out of a recovery to be enforced by the defendants against the other shareholders afterwards. And this right may be exercised by the creditors in case of the actual insolvency of the corporation so long as no insolvency proceedings have been instituted. Creditors' bills against individual stockholders in insolvent corporations on their liability for unpaid stock have been sustained in numerous cases.*

1 See Wood v. Dummer, 3 Mason, 308, 321; Marsh v. Burroughs, 1 Woods, 463; Erickson v. Nesmith, 46 N. H. 371; Vick v. Lane, 56 Miss. 681; Bronson v. Wilmington, etc., Life Ins. Co., 85 N. C. 411. A decree as prayed for is not erroneous, because issue was not joined as to added defendants. Bailey v. Pittsburgh Coal Co. (Pa.), 21 A. 72.

2 Hambleton v. Glenn, 85 Va. 901; 9 S. E. 129.

Hurst v. Coe, 30 W. Va. 158; 3 S. E. 564; Hubbard v. Camperdown Mills, 26 S. C. 581; 1 S. E. 5.

Bartlett v. Drew, 57 N. Y. 587; Oglivie v. Know. Ins. Co., 22 How. 380;

998. Whether forfeiture destroys delinquent shareholder's liability to prior creditors.-The construction by the courts of the statutory provision in the various states where there are statutes must be looked to principally to determine the effect upon the liability of a stockholder to creditors of a forfeiture of his shares. Taking the California statute for illustration, it directs that unless the full amount of assessments due together with costs and charges shall be bid by outside parties at the sale, "the same may be bid in and purchased by the corporation through the secretary, president or director thereof, and the amount of the assessments, costs and charges, must be credited as paid in full on the books of the corporation, and entry of the transfer of the stock to the corporation must be made on the books thereof." The same section further provides: "While the stock remains the property of the corporation it is not assessable nor must any dividends be declared thereon; but all assessments and dividends must be

Hatch v. Dana, 101 U. S. 214, per Justice STRONG. See also, Marsh v. Burroughs, 1 Woods, 463; compare Vick v. Lane, 56 Miss. 681; Phoenix Warehousing Co. v. Badger, 67 N. Y. 294. In Hatch v. Dana, supra, Justice STRONG said: "We hold that the complainant was under no obligation to make all the shareholders of the bank defendants in his bill. It was not his duty to marshal the assets of the bank or to adjust the equities between the corporators. In all that he had no interest. The appellants may have had such interest, and, if so, it was quite in their power to secure its protection. They might have moved for a receiver, or they might have filed a cross bill, obtained a discovery of the other stockholders, brought them in, and enforced contribution from all who had not paid their subscriptions. Their equitable right to contribution is not yet lost." In an action against a corporation to collect and convert its assets and apportion them among creditors under Gen. St. Minn. c. 76, the individual liability of stockholders for the corporate debts may be enforced upon the application of any creditor who is a party to the proceedings, although the complaint of the judgment creditor who instituted them did not demand any such relief. Arthur v. Willius, 44 Minn. 409; 46 N. W. 851, holding also that if all the stock holders are not joined as parties to the proceedings, the defect is waived if objection is not taken by answer or demurrer; and, if any of the stockholders joined as parties are not served or brought into court, the defect is waived if the others go to trial on the merits without applying to have the cause stayed until their associates are brought in.

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