§ 735.

736.

SECOND.-PROOF OF LIABILITY.

Liability on written contracts of agents.

When name of principal must appear.

737. Admissibility of parol evidence.

738. Liability of banks for collections through correspondents.

739. Authority presumed from use of seal by officer authorized to

affix it.

740. Proof of agent's appointment.

741. Subsequent ratification.

742. Liability of corporation on simple contracts of agents.

743. Where principal will not be bound.

744. Board of directors.

745. Fraudulent disposal of cancelled and unissued corporate secu

746.

rities and obligations.

A different rule where actually signed.

747. Where act of agent beyond powers of corporation binds the latter. 748. Reason of the rule of liability.

749.

Evidence of ratification.

750. Distinction between executory and executed contracts.

751. Ground of principal's liability on partly executed contracts. 752.

Protection from wrongs of promoters.

753. Notice to agent.

754. Must be received officially.

755. Must affect transactions entrusted to them.

756. Statements and admissions of officers and agents.

757. Representations of agents.

THIRD. OF THE DEFENCE OF A LACK OR EXCESS OF CORPORATE AUTHORITY.

758.

Matters which enter into a consideration of the subject.

759. Not favored as a defence.

760. The term ultra vires used in different senses.

761. Meaning when applied to acts of corporations. 762. Public and private considerations distinguished.

763 Common law prohibition.

764. Statutory declarations of the common prohibition.

765,

766.

General rule with respect to dealings with outside parties.
Executed contracts.

767. Contracts executed by one of the parties.

768. A strong case required to defeat a recovery of borrowed money.

770. Illegal increase of capital stock and issue of stock thereon.

771. Illegal and irregular exercise of the power.

772.

Remedies by corporation and holders of spurious stock.

773. Illegal issue of preferred stock,

774. Distinction between legal status of preferred and over issued

775.

stock.

Executory ultra vires contracts not enforceable. 776. Money paid for purpose which fails.

§ 777. Executory contracts void for excess of power but not expressly

prohibited.

778. Commercial paper.

779. Purchases of stock in other corporations.

780. Summary of principles.

FIRST.-REMEDIES AVAILABLE TO CREDITORS.

§ 706. Scope of the subject.-Those matters of almost infinite variety and compass common to both corporations and individuals will not be entered upon. The discussion will be limited to accrued liabilities, and the term "creditors" will be used to designate the holders thereof.

It may strike the juridical scholar as somewhat illogical to treat in this connection the rules which govern the liability of corporations for acts of their agents; but a liability is seldom established against a corporation except through the act of an agent. Convenience is therefore, in this instance, subserved to some extent, at the expense of logical arrangement.

707. The corporation primarily liable.-The creditors of a corporation have substantially the same means, and are subject to the same rules of procedure in the enforcement of their demands against a corporation, as against an individual. The same evidence would generally be sufficient to authorize a recovery against the one as against the other; and, subject to the advantage given to natural persons over corporations in exemption laws, the same instrumentalities may be employed for securing indemnity or lien in advance of judgment, and in collecting the judgment when obtained.1

1 A sale of corporate franchises does not affect the existence of the corporation, nor does the term "franchises" used in statutes authorizing their sale on execution include the franchise of being a corporation. Spring Val. W. W. Co. v. Schottler, 110 U. S. 352; 11 Pac. C. L. J. 430; Wood v. Truckee T. Co., 24 Cal. 474; Thomas v. Armstrong, 7 Id. 286; Monroe v. Thomas, 5

§ 708. Cannot interfere with the management.-Subject to the right of resorting to equitable remedies to have the capital preserved and preventing its waste or withdrawal, the full power of management is vested in the chosen agents of the corporation, and will not be interfered with or disturbed at the suit of a creditor. If the facts warrant it, a creditor may apply to have the corporation wound up, or to have its agents restrained from wilfully diminishing its capital, if that would directly result in loss to him; but his usual remedy against the corporation is a simple judgment and execution. He can no more interfere with the internal affairs of a corporation, when honestly conducted within the discretionary powers of its managers, than with private business of an individual debtor. It would be unreasonable and unjust-it would result that no corporation could carry on its business, if every time its policy did not accord with the opinion and judgment of an individual creditor, he might successfully invoke the interference of the courts.1

The alienation of property free from all obstructions is favored at common law, and a court will never restrain a debtor from making disposition of his own unless to refuse would result in a fraud or breach of trust.2

Id. 470; O. R. R. Co. v. O. B. & F. V. R. R. Co., 45 Cal. 365; Bracia v. Nelson, Id. 42, 107; Bank of Augusta v. Earle, 13 Pet. 575; Stewart v. Jones, 19 Nev. 140; Youngman v. R. R. Co., 65 Pa. St. 278; Stanford B'k v. Ferris, 17 Conn. 259; supra, § 3.

1 In Mills v. Northern Ry. Co., L. R. 5 Ch. 621, 628, Lord HATHERLY, L. C., said: "It is wholly unprecedented for a mere creditor to say certain transactions are taking place within the company and dividends are being paid to shareholders which they are not entitled to receive; and, therefore, I am entitled to come here and examine the company's deed to see whether or not they are doing what is ultra vires, and to interfere in order that as by a bill quia timet I may keep the assets in a proper state of security for the payment of my debt whensoever the time arrives for its payment."

2 Pond v. Farmingham, 130 Mass. 194.

§ 709. Cannot prevent a dissolution or alteration of charter.-Creditors are not parties to the contract creating a corporation and fixing its duration of existence. Consequently, they have no corporate rights in common with those comprising the corporation either with respect to their contracts among themselves or with the corporation. It is the exclusive right and privilege of the members not only to limit the corporation's term of existence in the first instance, but to terminate such existence under such statutory regulations as may have been provided.

However much a dissolution may affect the interests of creditors, it is not an impairment of their contracts with the corporation within the constitutional prohibition, any more than would be the premature death of a private person so indebted. The obligation of contracts of a corporation with its creditors survives and may be enforced against any property belonging to the corporation not in the hands of bona fide purchasers.

The assets are usually held in trust by the proper officers after dissolution, even where there exists no statutory directions to that effect. The directors are usually designated by statute as trustees for the shareholders and creditors in the event of dissolution, whether voluntary or by reason of expiration of the term of existence fixed by the charter.

66

'And it would be a doctrine new in the law, that the existence of a private contract of the corporation should force upon it a perpetuity of existence contrary to public policy and the nature and objects of its charter."1

1 Mumma v. Potomac Co., 8 Pet. 286, 287, per Justice STORY; Curran v. State, 15 How. 310, 311; Smith v. Chesapeake, etc., Canal Co., 14 Pet. 45; Chicago Life Ins. Co. v. Needles, 113 U. S. 574; Mobile, etc., R. R. Co. v. State, 29 Ala. 586. See also, Barr v. Bartram, etc., Mfg. Co., 41 Conn. 506; King v. Accumulative Life, etc., Ass'n Co., 3 C. B. N. S. 151; Kearns v. Leaf, 1 H. & M. 707.

On the same principles, those who have entered into the original articles of association, or their successors in interest, may change the terms of the contract under which they have associated at will, and without the consent of creditors; and they may exercise this right though the result be the formation of a corporation entirely different from the original.

The members of a corporation have very similar rights with respect to changing their contract of association to those possessed by the members of a copartnership.1

§ 710. Lien of creditor attaches to capital after its withdrawal.—The absorption of the property and accession to the business of an original corporation is the inevitable result of the formation of a new company composed substantially of the same persons, to transact the same business, at the same places, and with the same property. Where that occurs, equity will not compel a creditor of the former to waive his right to enforce his claim against the visible and tangible property of his immediate debtor. A distinction with respect to transactions of this character exists between a corporation and a natural person. A natural person may sell all his property for a fair consideration, if the transaction is bona fide, and the buyer will not be required to see that the seller provides for the payment of his debts. A corporation, on the contrary, may, by disposing of all its property, deprive itself of the means of paying its debts; and may not only do that, but may, by its own voluntary act, put an end to its corporate existence and place itself beyond the reach of the process of law. At all events, equity will not permit the owners of one

1 See Pennsylvania College Cases, 13 Wall. 218-220; Vt., etc., R. R. Co. v. Vt. Cent. R. R. Co., 34 Vt. 1, 15.