corporation to organize another and transfer to it all corporate property without paying all the corporate debts.1

Whether the capital withdrawn or divided renders the corporation insolvent, or whether the corporation be insolvent at the time or afterwards becomes insolvent, is immaterial. The equitable lien of creditors attaches at all times, so long as it is in the hands of shareholders, or those chargeable with notice of the trust.

Of course, if after a transfer or withdrawal is made a creditor is paid, he would have no occasion to resort to the remedy of pursuing and charging the fund; but if after his equitable claim has attached the corporation continues in business after having distributed part of its capital to shareholders, or transferred it without value and becomes insolvent, he would be entitled to follow the capital and charge it with the payment of his claim,2

§ 711. The form of the unauthorized withdrawal immaterial. The execution of mortgages and the issue of certificates of indebtedness without consideration are only other forms of withdrawing capital without the substitution of anything of value in its place, and creditors would have the same rights and remedies with respect to capital so transferred as in other cases. Money or property acquired by the original holder would be subject to the claims of the creditors; while as evidences of debt they could not be enforced against the corporation, as long as any bona fide creditor remained unpaid.3

1 Hibernia Ins. Co. v. St. Louis N. O. Transp. Co., 3 McCrary, 368.

2 Union Nat. B'k v. Douglas, 1 McCrary, 86.

3 Skrainka v. Allen, 76 Mo. 384, affirming 7 Mo. App. 434; Keystone Bridge Co. v. Barstow, 8 Mo. App. 494. Under Code N. C. § 685, a chattel mortgage of its property, executed by a corporation, is void as to its creditors existing at

But the fact that officers of a corporation have violated its charter by issuing bonds secured by mortgage in an amount greater than twice its paid up capital stock, does not entitle the general creditors of the company, who became such with notice of the mortgage, to share the proceeds of the foreclosure sale on an equality with bona fide purchasers of the over-issued bonds.1

§ 712. Rights of creditors in case of insolvency.—The mere insolvency of a corporation prior to the institution of any process of liquidation and suspension of business, which takes place on winding up its affairs, does not of itself affect the rights and relations between it and its creditors.

The managing agents still have the right of control and management of its assets, whether they be great or small, and the creditors have the right to insist that their security be not still further impaired by withdrawal and fraudulent diversion. If the institution is. hopelessly insolvent, and the further successful prosecution of the business seems improbable, it is the duty of the agents to collect its assets and apply them to the settlement of indebtedness, as far as they will reach; and if under these circumstances, the agents neglect or refuse to wind up the business, and make distribution, it is the privilege of the creditors to institute proceedings to that end. But until some step is taken in that direction, by the one or the other, or on the application of a shareholder, the management remains in the legal

the time of the execution of said mortgage, who commence proceedings to enforce their claims within 60 days after its registration. Duke v. Markham, 105 M. C. 138; 10 S. E. 1003. In the same state a final settlement made between a corporation and its members, on closing up its business, is not valid as against corporate creditors. Heggie v. Bldg. & Loan Ass'n (N. C.), 12 S. E 275.

Trust & S. D. Co. v. W. Pa. & S. C. R. R. Co. (Pa.), 21 A. 21; App. of First Nat. B'k, Id.

possession of all the property, with full power to pay and discharge such portion of the indebtedness as they see fit, leaving others unpaid, to contract other indebtedness and to dispose of the property at whatever consideration they honestly deem adequate.1

A mere excess of liabilities over assets would not alone be sufficient to justify an interference and stoppage of business at the suit of a creditor.

It is only when a further prosecution of the business would be at their expense, and there is no reasonable prospect of the company redeeming its fortunes, that a court would interfere on their behalf. Any other rule would be productive of the greatest inconvenience.2

§ 713. Rights altered by formal insolvency of corporation. But notwithstanding the legal right of control by the managing agents after insolvency-using that term in its ordinary sense, signifying inability to pay-the equitable rights and interests of creditors and shareholders are altered by formal insolvency.

The equitable interest of the shareholders in the assets is superseded by the equitable liens of the creditors, which thereupon become fixed upon all the company's

1 Where the holders of paid-up stock of a corporation conveyed their stock and deed to the corporate property to the president thereof, who assumed all liabilities, and executed mortgages on the corporate property to secure the purchase price of the stock, such transfer of the stock and property is not in effect a withdrawal of the capital stock from the corporation, and therefore void as to creditors, under Rev. St. Ind. 1881, §§ 3858, 3859, allowing transfers of paid-up corporate stock in accordance with the by-laws, and providing that the capital stock shall be paid into the treasury within a certain time after the incorporation, where there is no evidence that the transfer of stock was not made in accordance with the by-laws. Parke County Coal Co. v. Terre Haute Paper Co. (Ind.), 26 N. E. 884.

2 Catlin v. Eagle B'k, 6 Conn. 233; Paulding v. Chrome Steel Co., 94 N. Y. 334, 338; Pond v. Framingham, etc., R. R. Co., 130 Mass. 194; Savings B'k v. Bates, 48 Conn. 506; Hoyt v. Shelden, 3 Bosw. 269; Bishop v. Brainerd, 28 Conn. 301; Curtis v. Leavitt, 15 N. Y. 10, 108, 138, 198; State v. B'k of Md., 6 G. & J. 219, 220; Lamb v. Laughlin, 25 W. Va. 300, and cases cited.

assets; and the beneficial interest therein becomes vested in the creditors rather than in the shareholders as before. The directors or managing agents in the event of insolvency become trustees for the creditors, the fiduciary relation to the shareholders no longer standing in the way of the resulting cestui que trustent. Such trust must be faithfully executed in the interest of creditors, and cannot be exercised by the directors in their own interest at the expense of others.1 And where a sale of corporate property is made by an insolvent corporation to one of its directors taking part in the transaction, it devolves upon him to show the good faith of the transaction and that the sale produced the full value of the property.2

§ 714. Rights of director who is also a creditor.—A director, however, who is a creditor of the company, is not to be deprived of any fair advantage he may acquire by the exercise of superior diligence in protecting his interest. In case there be no concealment or undue ad

1 Jackson v. Ludeling, 21 Wall. 616; Bradley v. Farwell, 1 Holmes (U. S.), 433; Drury v. Cross, 7 Wall. 299; S. F. Water Co. v. Pattee (Cal.), 25 P. 135; Richards v. New Hampshire Ins. Co., 43 N. H. 263; San Francisco, etc., R. R. Co. v. Bee, 48 Cal. 398; Wilkinson v. Bauerle, 41 N. J. Eq. 635; 7 A. 514; Smith v. Lansing, 22 N. Y. 521. Under 1 Rev. St. N. Y., c. 18, tit. 4, § 4, forbidding a corporation or its officers, when it has refused payment of its debts," to assign or transfer any of the property or choses in action of such company to any officer or stockholder of such company, directly or indirectly for the payment of any debts," a trustee of such corporation cannot, as a creditor, maintain an attachment against its property, even though he has not been active as a trustee, and his co-trustees have conspired to defraud him and other creditors. Following Kingsley v. B'k, 31 Hun, 329; Throop v. Hatch Lithographic Co., 11 N. Y. S. 532. Compare Hope v. Valley City Salt Co., 25 W. Va. 789. The same rule is applicable to the treasurer and other managing agents having the corporate assets in their control. Taylor v. Taylor, 74 Me. 582. After the directors have transferred by chattel mortgage all the property of the corporation to a trustee, they no longer have a right to continue its business themselves, nor can they authorize the trustee to do so. Kendall v. Bishop, 76 Mich. 634; 43 N. W. 645.

2 Wilkinson v. Bauerle, 41 N. J. Eq. 635; 7 A. 514.

vantage taken of his position, he may obtain and retain a preference over other creditors, provided he occupy and proceed in the independent character and relation of creditor throughout.'

But it is only in such exceptional cases as these that a director would be allowed to retain an advantage thus obtained. As a general rule the directors cannot secure to themselves an advantage as creditors not enjoyed in common by all.2

§ 715. Creditors after insolvency entitled to equal treatment. The same reason for not allowing the directors of an insolvent corporation to derive an unequal ad

1 Where a director had advanced money to prevent a failure of the venture at a time when the company was sorely in need of funds, and had, by the voluntary act of his associate directors, obtained a mortgage on the company's property to secure the debt thus created, he was allowed to receive and hold the benefit of his lien to the exclusion of other creditors. Sutter St. R. R. Co. v. Baum, 66Cal. 44, 51; 4 P. 916; Smith v. Skeary, 47 Conn. 47; Barings v. Dabney, 19 Wall. 1; Wasatch Min. Co. v. Jennings (Utah), 15 P. 65. A mortgage by a solvent corporation to one of its officers and stockholders, to secure a loan made by him, is not invalid on account of the relation between the parties. Mullanphy B'k v. Scott (Ill.), 26 N. E. 640; Warfield v. Marshall County, etc., Co., 72 Ia. 666; 34 N. W. 467. It was held that where it did not appear that the corporation was insolvent at the time its board of directors executed judgment bonds to secure debts due certain directors, or that there was any collusion or actual fraud, the mere entry of judgment on the bond after supposed insolvency was not such a fraud in law as to warrant the continuance of an injunction restraining the sale of corporate property on execution issued on the judgment. App. of Neal, 129 Pa. 64; 18 Atl. Rep. 564. See also, Philadelphia, etc., R. Co. v. Love, 125 Pa. St. 488; 17 A. 455; McMurty v. Temple Co., 86 Ky. 206; 5 S. W. 570.

2 Richards v. New Hampshire Ins. Co., 43 N. H. 263; Bradley v. Farwell, 1 Holmes, 433; Hopkin's App., 90 Pa. St. 69; Smith v. Lansing, 22 N. Y. 521; Corbett v. Woodward, 5 Sawy. 403; Stout v. Yaeger Milling Co., 13 Fed. Rep. 902. Contra, Planters' B'k v. Whittle, 78 Va. 737; Whitwell v. Warner, 20 Vt. 425; Buell v. Buckingham, 16 Ia. 269, 284; Olney v. Conn. L. Co. (R. I.), 18 Atl. Rep. 181. Where a majority of the directors of a corporation, knowing it to be insolvent, voted for the execution to them of the corporation's judgment note, which is executed by one of their number as treasurer, and upon which judgment is immediately entered, such judgment is fraudulent as to other creditors, though the note was given in payment of a bona fide debt. Roseboom v. Warner (Ill.), 23 N. E. 339.