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Vol. II.] OSSIPEE HOSIERY AND WOOLLEN MANUFACTURING Co. v. CANNEY. [No. 11. when the General Statutes were adopted. The scope of the Act of 1846 is to limit the risk of the stockholder, and render its extent certain even as against the creditor; and while democratic jealousy toward corporations gave the creditor enlarged rights, by chapter 146 cited above, it restricted the corporation's power as to all parties, and in a few years relaxed its policy between creditors and stockholders, and by the Act of 1846 limited and defined the cases in which he can be held; and the whole argument from the intent of the legislation is, that, as to the powers of the corporation, the legislation was restrictive, from early dates to this time, as to every one; and hence we find, in the Act of 1846, the prohibition as to creating debts beyond half the capital stock paid in, &c. The other general position is, that, as between the creditor and the stockholder, the legislature favored the creditor up to the Act of 1846, when the current was changed. And it is somewhat remarkable to see how clearly the legislature have always marked the distinction between the right of a creditor to sue a stockholder to collect his debts, and the right of the corporation to assess the stockholder for the purpose of paying those debts.

We entertain grave doubts as to the power of a creditor to collect of the stockholder debts contracted beyond one half of the capital stock, &c. The debt is ultra vires, and perhaps, under Rich v. Errol, as the corporation has power to contract for some purpose, a creditor would not be estopped unless it appeared that he knew that the limit established by the statute had been exceeded. But when the question comes, Can the corporation or directors assess to pay such a debt, even if the par value has not been paid in? a different conclusion must be reached; for the right to assess to pay debts means legal debts, &c., such debts as the corporation had the right to contract with a view of having them paid by stockholders, but not such debts as both the "corporation and directors are forbade to incur under a heavy penalty. To hold otherwise is to negate the whole protection the law has attempted to give to the stockholder. The intent of this provision is benign and wise. It is intended that, as soon as the corporation has become so reduced as to owe one half its value, the directors must cease to further involve the stockholders; and if they are deprived of all power as against the stockholders to hire money or buy on credit, an immediate stop to unprofitable and unskilful efforts will take place: and hence we find, in sec. 15, Gen. Stats. 135, and long before, that a director or officer who had violated this limitation and had been forced by a creditor to pay the debts, could not have contribution from the other stockholders. Are the court prepared to hold, nevertheless, that they can assess such other stockholders to pay such debts? The case makes the books used as evidence part of the case, and they show that the directors were present, and authorized the contracting of these debts, and that Canney (as the case finds) had nothing to do with it, nor knew anything about the condition of the corporation.

How, then, is he estopped to say that he could not be assessed until all the shares were taken up and paid for? He had no knowledge but what they were all taken up, and his letter meant legal assessment, as was held in 14 N. H. 548, 30 Ñ. H. 390, and 32 N. H. 369. We have failed to find anything in the case showing bad faith on the defendant's part.

OSSIPEE HOSIERY AND WOOLLEN MANUFACTURING Co. v. Canney.

[No. 11.

Vol. II.] Living in Massachusetts, he could not be expected to know that all the shares were not taken up, but we say, thinking they had been, he wrote the letter in the case at bar. The case at bar is a much stronger case for the defendant than the one just cited, for in this case the assessment was not made on the faith of the defendant's promise, but the assessment had been made before the letter. If the defendant understood that all the shares had been taken, and under this misapprehension wrote the letter, he is not to be holden, unless the cases cited are inapplicable or bad law. See, also, Act of 1856, p. 1769, sec. 1, ch. 1852.

Debts were included as to which no demand was made, and many of the debts could not be assessed at all, nor be collected of the corporation or stockholder by the creditor. Under sec. 4, p. 281, Gen. Stats., the corporation could not contract debts exceeding one half its capital stock paid in, and its other property, &c. Any contract beyond that is ultra vires, and binds neither the corporation nor stockholder; and the creditor, dealing with an agent of a corporation, must see for himself that the agent acts within the scope of his authority, and an act ultra vires cannot be ratified. The assessment is made for an amount greater than all of the plaintiffs' capital stock and other property, and certainly includes debts that the agent and directors could not, within the scope of their authority, contract; that the corporation could not, for the statute forbids it under a heavy penalty. Sec. 5, p. 281. This section does not make the corporation liable, but charges the directors for a contract made in the name of the corporation. It is idle to say that a stockholder can be assessed for a debt not binding upon the corporation. One half of the claims in the case at bar, at least, were not legal claims of the company. The assessment is illegal for that reason. Rich v. Errol, 51 N. H., is decisive on this point. The plaintiffs should have voted to sell all the corporate property under the term "or otherwise" to pay its legal liabilities. It could not do that to pay debts contracted ultra vires, and, as the defendant claims in his fourth ground of nonsuit, having paid the par value of his share, he cannot be assessed to pay debts, especially when they are not debts the corporation are bound to pay. If section 4 gives any right of assessment, it is perfectly clear that that right is not restricted to those cases where the stockholder is individually liable, but applies as well to those cases where he is not personably liable. A consideration of this fact sufficiently demonstrates the utter absurdity of the plaintiffs' theory.

Bank v. Globe Works, 101 Mass. 57, is not in point for the plaintiffs. In the case at bar, the suit is not against a corporation by a creditor, but is by a corporation to collect an assessment to pay debts the corporation had no right to contract. This is one radical ground of distinction. The second is, that some of the debts included in the assessment were incurred after the auditor's report in 1869, when the corporation owed some $9,000, as the books show and the report states, and a part of this last amount is debts due to John Chick, treasurer and president of the company and a director, and to Levi Smith, a director, and to Pepper, and sundry stockholders. These parties, being officers of the corporation, are charged with knowledge of the matter of ultra vires at the time they in their capacity of directors allowed the corporation to

OSSIPEE HOSIERY AND WOOLLEN Manufacturing Co. v. CANNEY.

[No. 11.

Vol. II.] become their debtor; 101 Mass. 58, near bottom of page; but in this state the restriction on the corporation in regard to incurring debts is a public penal statute, and every one is charged with knowledge of it. Can a corporation make an assessment to pay a debt which both the corporation and directors are prohibited from contracting?

Quarles, Wheeler & Whipple, for the plaintiffs.

ISAAC W. SMITH, J. The questions raised in this case, as it was originally drawn, were decided by us at the adjourned term in March last.

By an amendment to the case, although the fact does not distinctly appear, it may be assumed that the debts and liabilities for which the assessment was made exceeded in amount the property and assets of the company, and one half of its capital stock paid in and limited. The defendant contends that for this reason the assessment was illegal, and that this action cannot be maintained.

Chapter 135, sec. 4, of the General Statutes provides that "No corporation, banks and insurance companies excepted, shall contract debts or incur liabilities exceeding one half of its capital stock then actually paid in and unimpaired, and of its other property and assets."

Section 5 of the same chapter provides that if any corporation, by vote or by its officers, shall violate the provisions of section 4, the directors shall be individually liable to the amount of the excess of debts and liabilities above half the capital stock paid in and of the other property and assets, for all the debts and contracts of the corporation then existing, or contracted while they respectively remain in office.

It is claimed by the defendant that as to any debt contracted beyond the amount limited in section 4, the contract is ultra vires, and binds neither corporation nor stockholder; and that a creditor dealing with an agent of a corporation must see for himself that the agent acts within the scope of his authority; and that an act ultra vires cannot be ratified.

I. Is a debt thus contracted binding upon the corporation?

It will be observed that by these provisions of the statute, debts contracted beyond the amount limited in the fourth section are not declared illegal and void. The penalty imposed for a violation of this provision of section 4 is, that the directors are made individually liable for all the debt and contracts of the corporation to the amount of such excess. The language is, "for all the debts and contracts of the corporation," not for such debts and contracts contracted in excess of the amount limited. If they are not debts and contracts of the corporation, then there are no debts and contracts of the corporation for which the directors can be made individually liable in excess of the amount limited.

We think it is clear that the provisions of section 4 must be regarded as merely directory, although their violation may be culpable on the part of the officers, and for this conduct of the corporation the government might probably seize their franchise upon due process.

We think this view of the construction of sections 4 and 5 is confirmed by an examination of the corresponding provisions of the statute in regard to banking corporations, ch. 153, sec. 9, which is as follows: "No such bank (authorized to issue bills, sec. 2) shall have in cir

OSSIPEE HOSIERY AND WOOLLEN MANUFACTURING Co. v. CANNEY.

[No. 12.

Vol. II.] culation its own bills to an amount greater than the amount of the excess of its capital actually paid in above the amount of loans made to its stockholders on pledge of its own stock; and in case of any excess, the directors, under whose administration it shall happen, shall be jointly liable, to the extent of such excess, for all debts of the corporation then existing and that shall be contracted during their continuance in office, until the circulation shall be reduced to the limit above described." Here the penalty is, not that the excess of circulation shall be null and void, thus punishing the innocent bill holder, but the directors are made individually liable for all debts of the bank to the amount of such excess of circulation, until the circulation shall be reduced to the limit prescribed. Reduced how? By being redeemed, that is, paid by the bank that put the bills in circulation.

And by chapter 159 no foreign insurance company is permitted to transact any business in this state until certain requirements of the law are complied with; but by section 10 any insurance made by any such company is made valid against them, though they have not complied with the requirement of the law.

Returning to chapter 135, there is another objection to holding that debts contracted in excess of the amount prescribed are not binding, and that is, the difficulty of ascertaining with readiness and accuracy the amount of the other property and assets of the corporation. It might consist of personal property widely scattered, debts or choses in actions of a doubtful character, and of real estate and machinery liable to rapid depreciation and loss. Before any creditor could safely deal with such a corporation, it would require an inventory of the property and assets to be frequently taken, to say nothing of the fluctuations of values in the market.

But suppose the limit to which this corporation could incur debts was $10,000, and that that limit had been reached on the first day of January, 1871; and suppose, on the second day of January, 1871, it had borrowed $15,000, and given its note therefor, payable in six months, and on the third day of January, 1871, had applied $10,000 of the sum so borrowed in payment of the debts outstanding January 1st: If the debt (note) contracted on the 2d was illegal and void, can it ever become a valid debt? Can a void debt or contract ever become a valid and legal one? And if this debt became legal in any sense when the debts that stood prior to it in age were paid, did the note become a valid note to the amount of $10,000, and did it remain an invalid note to the amount of $5,000? As fast as the debts, prior in point of time, are paid, do those incurred after the limit prescribed in the fourth section had been reached slide into their places to the amount of the older debts so paid? and if so, which of a dozen or twenty invalid debts are so transposed into the list of valid debts? and if those prior in age, which of two that might happen to have been contracted at the same moment? or, if the oldest invalid claim happens to exceed in amount the place left for it to fill, will it become valid in part and remain invalid as to the rest?

For these and other reasons that might be given, we find it impossible to hold that debts contracted beyond the amount limited by law are invalid as against the corporation. There is, besides, the argument of jus

VOL. II.

34

OSSIPEE HOSIERY AND WOOLLEN MANUFACTURING Co. v. Canney.

[No. 12.

Vol. II.] tice in favor of holding that a corporation, equally with an individual, after having received the benefit of such contracts, shall not be permitted to repudiate them upon the ground that it has violated some statute provision in contracting them. Not only estoppels technically (so called), but estoppels in pais, operate both for and against a corporation. Ang. & Am. on Corp. 215.

Section 5 gives the creditor who has been thus imposed upon an additional remedy for the collection of his debt. While the corporation remains liable for his debt, he can, if he shall choose, collect it of the directors; but it could not be the intention of the legislature to confine him to persons who might be unknown or irresponsible, or who might be skilful enough to conceal their property from legal process, and so leave him without remedy. It is not the policy of the law to visit the penalty for violation of laws upon the innocent, and allow the guilty to escape.

It is immaterial whether these debts were contracted by a vote of the corporation or by its officers, or whether the officers were authorized to contract them. If by the corporation, they are valid, as we have seen, without reference to the fact whether the corporation, having received the benefit of them, is estopped to deny their validity; if by officers duly authorized, they are valid for the same reason; and if the officers were unauthorized, they have been ratified by the corporation : (1) by receiving and enjoying their benefit; (2) by the action of the corporation at the meeting Feb. 15, 1871, when the stockholders voted to assess themselves to pay these debts. Subsequent ratification is equivalent to an original authority. Rich v. Errol, 51 N. H. 350. Ang. & Am. on Corp. 212, 216.

II. If, as there would seem to be no doubt, these debts in excess of the limit fixed in section 4 are valid debts against the corporation, it follows of necessity that the stockholders, acting as a corporation, may assess themselves under the provisions of sec. 4 of ch. 136 to pay such debts. The statute makes no distinction between these and any other debts of the corporation. The language of the statute is, "upon demand of any debt is," of a corporation being made," "the officers of the corporation shall forthwith call a meeting of the stockholders to provide means for its payment by assessments upon themselves or otherwise," &c.

We decided in March last, in this case, that the stockholders can assess themselves only for such debts as can be legally demanded to be paid, under sec. 2 of ch. 136, and we think it is entirely clear that those creditors, whose debts were contracted after the limit fixed had been reached, can demand payment under that section and enforce payment under section 1. There is no exception made of such debts in the statute, and we can perceive nothing in the statute that indicates that the legislature intended to put such creditors in any different position from the other creditors of a corporation.

There are many cases in the books where it is held that a corporation cannot enforce contracts inconsistent with the purpose of its creation, because, being created for a specific purpose, it not only can make no contract forbidden by its charter, but in general can make no contract which is not necessary, directly or indirectly, to enable it to answer that end.

Thus, where a company was chartered for the conveyance of passengers

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