no right to rely upon the security of a false representation with regard to the amount actually subscribed.

And where, after his debt arose, new shares are issued under authority to increase the company's capital, it is plain that he would have no right to look to the holders of those shares for a greater amount of capital than the corporation itself could, under its contracts with them, compel them to contribute.

Whatever of capital was derived from them would be an additional security in the form of assets to that with reference to which he gave credit in the first instance.1

Creditors who became such prior to an increase of capital and issue of new shares are not held to a greater liability on their subscriptions than the corporation itself could be held, unless the charter, independent of the amendment or resolution increasing the capital, indicated that such increase might be made, or it was represented at or before the time of contracting that it had been made. But they are presumed to have trusted it on the faith of an increase in the capital stock from the time it was voted; and the fact that the subscribers did not receive it until after the debts were contracted will not relieve them from liability.2

A just and equitable application of the same rule would require that if the company's capital were reduced by amendment of the charter or articles, the rights of pre-existing and subsequent creditors with respect to security in the shape of capital would relate

1 Coit v. North Carolina, etc., Amal. Co., 14 Fed. Rep. 12; s. c. 14 Phila. 496. In a recent Arkansas case, Carter v. Union Printing Co. (Ark.), 16 S. W. 579, it was held that a fraudulent release by a corporation of an unpaid subscription to an increase in the capital stock of a corporation is void even against a debt arising before the increase.

2 Reversing, 41 F. 531; Handley v. Stutz, 11 S. Ct. 530.

to and be fixed according to whether they gave credit before or after such change.1

§ 797. Creditors not prejudiced without reduction of security.—The real test of all questions between creditors and shareholders arising out of the equitable rights of the former with respect to contributions of capital and the infringement of those rights by transactions between the corporation and its members, or among members, is whether a given transaction, if allowed to stand, would deprive the creditors of any portion of the security upon which they were entitled to rely or impair any remedy for making it available. It may happen in some special cases that a division or distribution of capital among the shareholders would not really reduce the security of creditors.

If an insolvent corporation should release solvent shareholders from their obligations for unpaid capital, or return to them a portion or all of that already paid, it would undoubtedly subserve the best interests of creditors to allow the transaction to stand, and treat the amount so released or returned as so much due and unpaid on their shares.

In this way they would obtain the benefit of the security they originally had. But to do this would often fail to meet the requirements of the case, and restore to creditors what they had lost by the diversion or withdrawal.

Certificates for shares may have been issued to the members participating in the fraudulent scheme as fully paid up, and these may have passed into the hands of bona fide purchasers for value. The latter could not, under these circumstances, be compelled to refund

1 Hepburn v. Exchange, etc., Co., 4 La. Ann. 87; Palfrey v. Paulding, 7 La. Ann. 363; Cooper v. Frederick, 9 Ala. 742.

what the vendors had wrongfully received. The creditors would have no remedy against a bona fide purchaser under these circumstances.1

If, after the claim of a creditor arose, the corporation should issue new shares, it could not be presumed that the credit was given on the faith of any capital represented by these, and consequently they could not insist upon a contribution by the holders of a greater amount of capital than the corporation itself could claim from them.2

§ 798. When voidable subscriptions are binding as to creditors. So long as a party defrauded in the procurement of his subscription for shares allows his name to appear as a shareholder and himself to be represented to persons dealing with the company as a shareholder, he is liable on the shares held by him to all those who have given credit to the corporation on the strength of them, the same as other shareholders.

Of course, if, while the corporation is solvent, the defrauded party repudiates and rescinds his contract, no injury can be said to have resulted to the creditor. And it has been repeatedly held that even after a corporation becomes insolvent and before its creditors are paid, a shareholder who was induced to become such by fraud may avail himself of such defence, provided

1 Steacy v. Little Rock, etc., R. R. Co., 5 Dill. 348, 373, 374; Burkinshaw v. Nichols, 26 W. R. 819; Foreman v. Bigelow, 4 Cliff. 508; Waterhouse v. Jamieson, L. R. 2 H. L. Sc. 29; McCracken v. McIntyre, 1 Duy. (Canada) 479; Skrainka v. Allen, 76 Mo. 384, 392; Brant v. Ehlen, 59 Md. 1. And see Withrington v. Rosenthal, 25 Hun, 580. An innocent purchaser of stock taken in good faith as paid up, in the absence of anything to put him upon inquiry, is not liable to the creditors of the corporation for the amount unpaid where the books of the corporation give no notice that the stock is not paid up. Keystone Bridge Co. v. McCluney, 8 Mo. App. 49.

2 First Nat. B'k v. Gustin M. C. M. Ins. Co., 42 Minn. 327. See Also Nettles v. Masco (S. C.), 11 S. E. 595.

he has been guilty of no laches.1 But he cannot sleep upon his rights and enjoy the benefits of membership and wake up after insolvency, and ask to be relieved of his obligations to creditors.2

Creditors contracting after the cancellation of such subscription and the withdrawal of the defrauded party from all connection with the company, would have no right of action on account of the share of capital unpaid on the annulled contract.3

§ 799. Collusive cancellation of subscriptions.-The idea at once suggests itself, that the cancellation and rescission of contracts to take shares might be collusively resorted to on the eve of insolvency by the management and actual shareholders for the purpose of depriving creditors of the benefit of the security represented by such contracts. It is scarcely necessary to say that such a scheme would be defeated by adequate remedies or preventives upon being made manifest to the proper tribunal.4

1 Henderson v. Royal British B'k, 7 El. & Bl. 356; Dossett v. Harding, 1 C. B. N. S. 524; Powis v. Harding, Id. 533; Daniell v. Royal British B'k, 1 H. & N. 681; Reese River, etc., Mining Co. v. Smith, L. R. 4 H. L. 64; Re Ætna Ins. Co., 6 Ir. Rep. Eq. 298; McNeill's Case, L. R. 10 Eq. 503; Houldsworth v. City of Glasgow B'k, L. R. 5 App. Cas. 317. Compare Brockwell's Case, 4 Drewbrey, 205; Ayre's Case, 25 Beav. 513; Blake's Case, 34 Beav. 639; Ex parte Ginger, 5 Ir. Ch. Rep. 174.

2 In Farrar v. Walker, U. S. Cir. Ct. E. D. Mo. 2 Cent. L. J. Justice MILLER, speaking to the defence of fraud in obtaining his subscription in an action by the assignee in bankruptcy, said: "It is too late when the creditors pursue the corporation into bankruptcy and the assignee pursues him for his note to turn around and say, 'I find out that I was swindled." See also, Oakes v. Turquand, L. R. 2 H. L. 325, 344; Rees v. Smith, L. R. 4 H. L. 64; Clarke v. Dickson, E. B. & E. 148; Upton v. Hansborough, 10 Nat. B'k Reg. 368; Stone v. B'k, L. R. 3 C. P. D. 307; Duffield v. Wire & Iron Wks., 64 Mich. 293; 31 N. W. 310; Howard v. Glenn (Ga.), 11 S. E. 610; Guarantee & Collection Co. of America v. Well (Pa.), 21 A. 665; Same v. Mayer, Id.

3 Upton v. Englehart, 3 Dillon, 505.

4 See Marshall F. Co. v. Killian, 99 N. C. 501; 6 S. E. 680; Coffin v. Ramsdell, 110 Ind. 417; 11 N. E. 20; Turner v. A. M. & M. Co., 25 Ill. App. 144.

It is difficult to legally defeat recovery on a subscription after the insolvency of a corporation has clothed its creditors with an equitable interest in all its assets among which unpaid capital is often the most important. As has been stated, it requires unanimous consent of the shareholders to release or validate a cancellation of a subscription under ordinary circumstances. After insolvency, all the creditors would have to unite their consent with that of the entire membership in order to give validity and effect to a release or cancellation.2

3

§ 800. Agreements not to enforce.-The same rule applies, and for the same reasons, to agreements made with subscribers; in advance of entering into the contracts that they shall not be bound either to perform the contract either at all or in part. But since the terms of the charter or articles enter into each contract of membership, directors may therein be given power to cancel subscriptions, and in that event, if they should exercise the power in good faith, no shareholder or creditor would have any ground of complaint.*

That the directors cannot release subscribers either before or after insolvency is well settled. It is an abuse of their trust wholly unauthorized and at war with the

1 Supra, § § 568-371

2 Plate Glass Ins. Co. v. Sunley, 8 El. & Bl. 47; Fox's Case, L. R. 5 Ch. 79; Lord Belhaven's Case, 34 L. J. (Ch.) 503; Ex parte Watson, 54 L. T. 233; Ex parte Blake, 32 L. J. (Ch.) 278; Burt v. Farrar, 24 Barb. 518; Erskine v. Peck, 83 Mo. 465; Gregory v. Lamb, 16 Neb. 205.

3 Jewett v. Valley Ry. Co., 34 O. St. 601; Melvin v. Lamar Ins. Co., 80 Ill. 446; White Mt. R. R. Co. v. Eastman, 34 N. H. 124; Blodgett v. Morrill, 20 Vt. 509; Litchfield B'k v. Church, 29 Conn. 137; Pickering v. Templeton, 2 Mo. App. 425; Robinson v. Pittsburgh & Connellsville R. R. Co., 32 Pa. St. 334; Downie v. White, 12 Wis. 176; Davidson's Case, 3 De G. & S. 21; Minor v. B'k of Alexandria, 1 Pet. 65.

Teasdale's Case, L. R. 9 Ch. 54; Snell's Case, Wright's Case, L. R. 12 Eq. 334, rev'd in L. R. 7 Ch. 55.