transfer of the stock relieves the transferrer from all future liabilities on the stock. It does not relieve him from assessments made on the stock before the transfer. Where stock is issued by the company as non-assessable, and is transferred to one who had no notice that full par value of the stock had not been assessed and paid, the transferee is generally held not to be liable on the unpaid assessment of the stock."" In Pennsylvania, the law formerly seems to have been that the mere fact of a transfer, without more, will not operate to. release the transferrer of his liability on his stock. To have such an effect the transferee must have undertaken with the transferrer that the latter shall not be liable, or where the former has agreed with the corporation that he shall hereafter be liable. By statute in Pennsylvania and Virginia it is provided that the transferee shall be liable. It follows that probably both transferrer and transferee are liable on the subscription" 118 A transfer in order to release the transferrer, and to render the transferee liable, must be registered on the books of the company. Otherwise, the transfer will not be recognized by the company and the transferrer will be held liable."" Where, however, the company recognizes the transferee as the true stockholder and pays the dividends to him but fails to have the transfer registered on its books, the transferee is nevertheless liable.'" 33. In case of statutory liability, the law is generally the same; that is, the complete transfer of the stock relieves the transferrer from any statutory liability. While this is the prevailing rule, yet in many instances the statutes make the transferrer liable for debts contracted while he was a stockholder."" In other cases, under the peculiar provisions of the statute, the rule is announced to be that those who were stockholders when the suit was brought against the = 1175 Conn. 28 (1823)· 99 U. S. 628 (1878). 118 96 Pa. 440 (1880); 115 Pa. 564 (1887); 96 Pa. 440 (1880). 119 Pa. P. L. 1849, 75, Sec. 7; 115 Pa. 88 (1886), 36 Fed. Rep. 824 (1888); 51 Fed. Rep. 400 (1892). 12054 N. J. Law 425 (1892). 1225 Conn. 28 (1823); 69 N. W. Rep. 610 corporation, judgment recovered and execution returned. unsatisfied, are liable, even though they have transferred their stock after the return of the execution. A transfer of stock to operate as relieving the transferrer must be to one who is able to enter into a valid contract. Thus, where a transfer is made to an infant, who, in law, is not liable on his contracts, the transfer is invalid and the transferrer is still liable, even though the transfer be duly registered on the books of the company. Moreover, a transfer of the stock must be made in good faith, and not to one of no means, for the purpose of escaping the liability on the stock. This is the prevailing rule in this country. It is accordingly held that when the corporation is in the process of dissolution, or has become insolvent, a transfer of the stock will not relieve the transferrer, as it is evidently done with fraudulent intentions." It has also been held that where a stockholder, who is informed that the corporation is about to fail, transfers his stock to one in his employ, a man of no means, for a nominal consideration, he has not made a bona-fide transfer, and is still liable on his stock.125 In England, the law is that a transfer will relieve the transferrer, even if made with the evident intention of avoiding liability on the stock. This will be the effect even if the transfer be to a person of no means, and without consideration. Such transfer must, however, be out and out. Thus, where such a transfer of stock is made under a private understanding that if the corporation do not fail and the stock become valuable again, then all the benefits shall accrue to the transferrer, it is not an out-and-out transfer, and, even in England, will not release the transferrer from his liability on the stock subscribed. The one who desires to escape liability must show that he has actually parted with all interest. in the shares.' 126 123 98 Pa. 505 (1881). 12499 U. S. 628 (1878). 1251 De G. F. & J. (Eng.) 79 (1859). 126 Ibid. CORPORATION BONDS AND MORTGAGES DEFINITION OF BONDS 34. A corporation bond, as before defined, is an obligation to pay money given by a corporation under its corporate seal." "Corporation bonds are frequently issued with small notes, known as coupons, attached, which secure the payment of instalments of interest upon the principal sum of the bond, as they mature. These coupons, when severed from the bonds, are promissory notes, negotiable by delivery, and bear interest from their maturity." 128 In In England and Canada, bonds are issued in the form of debentures. Debentures, in those countries, in a broad sense include any instrument issued by a corporation which creates or acknowledges a debt. "In the United States, debentures, or debenture bonds, as they are commonly called, have come into use quite recently, and have been issued in large amounts by loan and investment, and railroad, companies. They are, in effect, bonds or notes secured by a pledge of bonds or other securities as collateral." that country, also, bonds are sometimes issued not secured by a mortgage, but each bond contains a pledge of the property of the corporation as security. Such bonds are treated as in effect equitable mortgages, that is, instruments intended to be mortgages, but not executed and recorded with due formality, and as between the parties and those who have notice, such instruments are treated as perfectly valid mortgages. Sometimes, by statute, it is provided that bonds of corporations and in particular railroad corporations shall be secured in the same way as if a mortgage were executed to secure them. Income bonds have of late become general, especially among railroad companies. These bonds pledge the income derived from the corporate property and its undertaking, for satisfying them. While the railroad is a running concern, the holders of these bonds are practically in the same position as the holders of the other kinds of bonds. But where default is made or the corporation ceases to do business, the holders of these bonds may have a receiver appointed, who is to receive the income for the benefit of the holders of these bonds.130 FORMALITIES-NEGOTIABILITY 35. All private corporations have a right to issue bonds, as an incident of the power of borrowing money, unless. expressly prohibited by charter or statute.""1 No formalities are necessary to make a valid bond unless the charter or a statute make them necessary. The essential features of a corporate bond are a promise to pay under the common corporate seal, and, if secured by a mortgage or otherwise, a recital of the mortgage or the nature of the other securities. It also recites the series of which it is one, and the number of the bond. Where the charter provides that certain steps should be taken by the corporation, prior to the issuing of the bonds, this provision must, of course, be complied with. Where a person buys such a bond, and has no notice that such provision has not been complied with, and the bond appears to be perfectly valid and regular on its face, it will be treated as valid and enforceable. Where, for example, the charter provides that before bonds can be issued by the corporation, resolutions to that effect must first be passed at a meeting of the stockholders, stock issued by a corporation without such resolution, will nevertheless be good, if in the hands of a purchaser who had no notice of this irregularity. Where, however, the 130 125 U. S. 361 (1888). 131 10 Allen (Mass.) 448 (1865); 3 Wall. (U. S.) 327, 365 (1865). charter contains a prohibition against the issuing of bonds by the corporation, purchasers of bonds issued in the face of such prohibition will be bound by such provisions and the bonds will not be enforceable." 132 9133 36. As to the negotiability of corporation bonds, there has been much conflict of authority, but it is well settled that "such instruments are made negotiable when drawn payable to the bearer,' or 'the order' of persons. They are held to be negotiable so far as regards their transferability, delivery, or indorsement."" Such bonds therefore pass by delivery, and one who is a purchaser can maintain suit in his own name. Moreover, a holder of these bonds, if he be a purchaser in good faith and without any notice of any fault, can recover on these bonds even if the corporation have a good defense against the original holders. Thus, where bonds are fraudulently issued by the authorities of the corporation, without any consideration, the one who thus receives the bonds cannot recover on them, as the corporation has a good defense. But, where a holder, who purchased these bonds, without notice of this defense, sues the corporation, he can recover the par value of the bond and the corporation cannot interpose the defense it had against the original holder. Where a person buys bonds to which are attached the last instalment of overdue coupons, he does not thereby get notice that there is any defect or irregularity about these bonds, so as to prevent his recovering against the company, although it may have a defense which would prevail against the original holder or one having notice. Where, however, all the coupons for the past several years are still attached to the bonds when bought, this is sufficient notice to put the purchaser upon his guard against some defect in the bonds, and, if the bonds for any reason be not good and enforceable, the purchaser cannot recover." Bonds, like other negotiable paper, that have been purchased after the principal has become due, are in the hands 1326 E. & B. (Eng.) 327 (1856). 133 See The Law of Commercial Paper: Corporation Bonds. 134 96 U. S. 659 (1877). |