THE LIABILITIES OF STOCKHOLDERS, DIRECTORS AND OFFICERS, UNDER THE GENERAL INCORPO

RATION ACT OF ILLINOIS, OF 1872.

In this paper this act only of Illinois, and but few of the various questions arising in its interpretation and application, can be considered. What is said is, however, of quite general application, as many states have provisions similar to those of this act as to stockholders liabilities,' and similar burdens of responsibility are laid on directors and officers in other states. The sections of the general act of 1872, which govern all corporations created in Illinois since its enactment, (excepting railroads, banks, insurance corporations, etc.) and which are here considered, are as follows.

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1. As to Stockholders. Ch. 32. §8. Rev. Stat. Ill. “Every assignment or transfer of stock, on which there remains any portion unpaid, shall be recorded in the office of the recorder of deeds of the county within which the principal office is located, and each stockholder shall be liable for the debts of the corporation to the extent of the amount that may be unpaid upon the stock held by him, to be collected in the manner herein provided. No assignor of stock shall be released from any such indebtedness by reason of any assignment of his stock, but shall remain liable therefor jointly with the assignee until the said stock be fully paid. Whenever any action is brought to recover any indebtedness against the corporation, it shall be competent to proceed against any one or more stockholders at the same time to the extent of the balance unpaid by such stockholders upon the stock owned by them respectively, whether called in or not, as in cases of garnishment. Every assignee or transferee of stock shall be liable to the company for the amount unpaid thereon, to the extent and in the same manner as if he had been the original subscriber."

1 II Stimson Am. Stat. Law. §8140 pp. 100, 101. See Foote and Elliot's Law of Incorporated Companies.

2 II Stimson Am. Stat. Law §8232. pp. 140 & 141. See Foote and Elliot's Law of Incorporated Companies. Thompson Com. Corp. §4263.

Ch. 32. § 25. Ibid. "If any corporation or its authorized agents shall do, or refrain from doing, any act which shall subject it to a forfeiture of its charter or corporate powers. or shall allow any execution or decree of any court of record for a payment of money, after demand made by the officer. to be returned, "No property found," or to remain unsatisfied for not less than ten days after such demand, or shall dissolve or cease doing business, leaving debts unpaid, suits in equity may be brought against all persons who were stockholders at the time, or liable in any way, for the debts of the corporation, by joining the corporation in such suit; and each stockholder may be required to pay his pro rata share of such debts or liabilities to the extent of the unpaid portion of the stock after exhausting the assets of such corporation. And if any stockholder shall not have property enough to satisfy his portion of such debts or liabilities, then the amount shall be divided equally among all the remaining solvent stockholders. (Provisions as to receiver

ship)

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2. As to directors and officers. Ch. 32. § 16. Rev. Stat. Ill. "If the indebtedness of any stock corporation shall exceed the amount of its capital stock, the directors and officers of such corporation, assenting thereto, shall be personally and individually liable for such excess, to the creditors of such corporation."

Liability of Stockholders.

It will be observed that under

§ 8 there can be no doubt that the liability of a stockholder cannot exceed the amount unpaid upon the stock held by him. Section 25, however, is of itself doubtful on this point; for by that section each stockholder, i. e. every, is liable for his pro rata share of the debts of the corporation to the extent of the unpaid portion of the stock, i. e. for his proportion of the collective amount unpaid on all the stock. Further, if any stockholder is not good for his pro rata share, such amount is to be paid by all the remaining solvent stockholders proportionately. An equitable construction of this section would require however that the proviso be read into it that no stockholder shall be liable to pay more than the

amount unpaid upon the stock held by him, and it has been so construed.' Sections 8 and 25 must be read together. There is little doubt then, that, in amount, the liability is merely the contractual common law liability to the corporation upon the subscription. The statutes extend the liability to pay this to both assignors and assignees, and enlarge the remedies of the creditor of the corporation against this liability.

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The uncertainties and conditions as to liability for the amount unpaid upon the subscription price which existed at common law as between the transferor and transferee of stock and the corporation, are to some extent avoided, by the provision that the transferor shall remain jointly liable with the transferee to creditors. Some question arises, however, as to the effect of a failure to record a transfer of partly unpaid stock. Does such failure relieve the assignor of his statutory liability, and afford the creditor only the whole liability of the assignee at common law to the corporation? Can the assignor, in whose breast the information lies that the stock is unpaid, claim any diminution of his statutory joint liability if the transfer is not recorded? Can either assignee or assignor defend against joint liability to the creditor merely because the transfer is not recorded? This question must undoubtedly be answered in the negative. But can the assignee without notice refuse contribution to the assignor on such ground? Probably, if indeed such an assignee is liable at all for the debts of the corporation.

There is no doubt, that, if a corporation issues stock as full paid, that at common law a bona fide transferee without notice of such stock is not liable to pay to creditors the amount which in fact is unpaid on such stock. In fact the weight

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1 Mallinckrodt Chemical Works v. Belleville Glass Co. 34 Ill. App. 404. Alling v. Wenzel, 133 Ill. 264. p. 273. Thebus v. Smiley, 1 0 Ill. 316.

2See Chapter xxxvii, Thompson's Commentaries on Corporations. Chapter xvi, Cook on Stock and Stockholders. 3rd. ed.

3 I Cook on Stock and Stockholders § 50, 3d Ed. Brant v. Ehlen, 59 Md. 1. Erskine v. Lowenstein, 11 Mo. App. 595. 82 Mo. 302. Young v. Co. 65 Mich. 111, 126. Foreman v. Bigelow, 1 Cliff. 508. Steacy v. Little Rock & Ft. Smith R. R. Co., 5 Dillon. 348. Sanger v. Upton, 91 U. S. 56. Handley

of the authorities is that even if the stock does not purport to be full paid a transferee for value, without notice that it is unpaid, is not liable either to the corporation or its creditors.'

As already suggested in respect to the construction of section 25 of the corporation act, the precise terms of the act must be read in connection with the common law rules as to stockholders' liabilities, of which sections 8 and 25 are declaratory, and with equitable rules in mind. By the strict letter of these sections an innocent purchaser for value of stock purporting on its face to be full paid, would seem liable to creditors for the amount in fact not paid. For the statute makes no provision which would extend to such purchaser the protection against a creditor which estoppel affords him against the corporation.

But applying equitable principles announced in cases decided in this state, the innocent purchaser would be protected by an elastic and equitable construction of the statute."

In Peck v. Coalfield C. Co., 11 Ill. App. 88, the court says; "Stock paid for in property will be held to be fully paid "stock unless actual fraud3 is shown in the transaction between the creditor and subscriber, and that where a party. "seeking to enforce the liability of a stockholder, was not a 'creditor of the corporation at the time the stock was paid "for, he will be considered as having given credit to it in the condition in which it then was, and the examination of the

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v. Stutz. 139 U. S. 417. Coffin v. Ransdell, Receiver, 110 Ind. 417. Christensen v. Eno, 106 N. Y. 97. Phelan v. Hazard, 5 Dillon 45. Taylor on Corp. $$ 522 c: 702. 723.

'Keystone Bridge Co. v. McCluney, 8 Mo. App. 194. 501.

"Protection Life Ins. Co. v. Osgood, 93 Ill. 69. Mallinckrodt Chem. Works v. Belleville G. Co.. 34 [ll. App. 404. Streator Car Seat Co. v. Rankin, 45 Ill. App. 226. Dupont v. Tilden, 42 Fed. 87. Sangamon Mining Co. v. Richardson. 33 Ill. App. 277, 279. See Coleman v. Howe, 154 Ill. 458, as to who is an innocent purchaser.

3 See Coit v. Gold Co.. 119 U. S. 343. Streator Car Seat Co. v. Rankin, Supra. Fort Madison Bank v. Alden, 129 U. S. 372. Bickley v. .Schlag, 46 N. J. Eq. 533. Coffin v. Ransdell, 110 Ind..417. Scoville v. Thqyer, 105 U. S. 153. Am. T. & 1. Co. v. Hayes, 165 Pa. St. 489. 94 Tenn. 602. Van Cott v. Van Brunt, 82 N. Y. 525. Pac. 115. N. W. M. L. 1. Co. v. Cotton Ex. R. E. Co.,

Jones v. Whitworth, Turner v. Bailey, 12 70 Fed. 155.

"books of the corporation would have shown him that the "stock was fully paid.""

In Illinois, it cannot well be now said, that the creditor has any right to claim the liability for unpaid stock on the "trust fund" theory.*

In Coleman v. Howe, 154 Ill. 458, however, the supreme court declares the capital stock a trust fund for the benefit of creditors, and says: "A declaration by the company that the shares "are paid up will not avail against the creditors in case of "insolvency." Although the court was dealing with a case of stock paid in overvalued property, of which fact the subsequent creditors had notice. The court also says: "The obli"gation of a subscriber to pay his subscription cannot be "released or surrendered to him by the trustees of the cor"poration." "

While this case seems to go far toward holding the liability an absolute one, there was also involved in the facts before the court the principle of giving relief to a defrauded creditor, and the decision did not necessarily rest on the ground of a trust, or of an absolute liability on the part of the stockholder. The very notice to the creditor in that case was coupled with an assurance by the officers of the corporation that there were assets in unpaid subscriptions. (See 46 Ill. App. p. 94.) And the overvaluation of the property taken

1 But in general creditors are not supposed to have notice of corporate records. Marion v. Ins. Co., 80 Ill. 446. Wetherbee v. Baker, 35 N. J. Eq. 501. Gilkie & Anson Co. v. Dawson Town & G. Co., 64 N. W. 978.

2 Glover v. Lee, 140 Ill. 102. Warren v. First Nat'l Bank of Columbus, 149 Ill. 9, 28. Turner Bros. v. Mining Co.. 25 Ill. App. 114, 152. See Hospes v. Mfg. Co., 48 Minn. 174. Brandt v. Ehlen, 59, Md. 1.

3 Zirkell v. Opera House Co., 97 Ill. 537. Melvin v. Ins. Co., 80 Ill. 446. Lloyd v. Preston, 146 U. S. 630. 2 Thomson Com. Corp. § 1514. Review of cases in Elyton Sand Co. v. Birmingham Co., 9 So. 129. On trust fund theory, see Ins. Co. v. Frear Stone Mfg. Co., 97 Ill. 537. Clapp v. Peterson, 104 Ill. 26. Burke v. Smith, 16 Wall. 390, 395. Upton v. Tribilcock, 91 U. S. 45 Camden v. Stuart, 144 U. S. 104. And in general on the strict requirement of full payment see Wheelock v. Kost, 77 Ill. 298. Brown v. Hitchcock, 36 Oh. St. 681. Root v. Sinnock, 120 Ill. 350, 360. Thayer v. El Plomo Mining Co., 40 Ill. App. 347. Jackson v. Traer, 64 Iowa 469. Bk. v. Burch, 40 Ill. App. 513. Chisholm v. Forney, 65 Iowa 333.

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