part. But that is done in the exercise of their corporate rights, not adverse to the corporate interests, but coincident with them.

"When a corporation becomes insolvent, it is so far civilly dead, that its property may be administered as a trust fund for the benefit of its stockholders and creditors. A court of equity, at the instance of the proper parties, will then make those funds trust funds, which, in other circumstances, are as much the absolute property of the corporation as any man's property is his."

In a Minnesota case, in an opinion by Justice Mitchell, the court said:

"This trust fund doctrine, commonly called the American doctrine, has given rise to much confusion of ideas as to its real meaning, and much conflict of decision in its applications. To such an extent has this been the case that many have questioned the accuracy of the phrase, as well as doubted the necessity or expediency of inventing any such doctrine. While a convenient phrase to express a certain general idea, it is not sufficiently precise or accurate to constitute a safe foundation upon which to build a system of legal rules. The phrase that 'the capital of a corporation constitutes a trust fund for the benefit of creditors' is misleading. Corporate property is not held in trust, in any proper sense of the term. A trust implies two estates or interests, one equitable and one legal; one person, as trustee, holding the legal title, while another, as the cestui que trust, has the beneficial interest. Absolute control and power of disposition are inconsistent with the idea of a trust. The capital of a corporation is its property. It has the whole beneficial interest in it, as well as the legal title. It may use the income and profits of it, and sell and dispose of it, the same as a natural person. It is a trustee for its creditors in the same sense and to the same extent as a natural person, but no further."

"The trust fund doctrine only means that the property of the corporation must first be appropriated to the payment of the debts of the company before any portion can be distributed to the stockholders; it does not mean that the property is so affected by the indebtedness of the company, that it can not be sold, transferred, or mortgaged to bona 4 Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174.

fide purchasers for a valuable consideration, except subject to the liability of being appropriated to pay that indebtedness. Such a doctrine has no existence.''

§ 110. Watered or Bonus Stock. By watered or bonus stock is meant that which is issued as fully paid up, when in fact the whole amount of the par value thereof has not been paid in. It is, accordingly, stock which purports to represent but does not represent, in good faith, money paid into the treasury of the company or money's worth, or services rendered and actually contributed to the working capital of the corporation. It will be remembered that the contract of subscription between the original stockholder and the corporation upon its organization was to pay into the corporate treasury, for its benefit and the benefit of the corporate creditors, money or money's worth to the full par value of the stock. This contract obligation is used as the basis of the common law liability on the part of stockholders.

To prevent a fictitious increase in the stock or indebtedness of the corporation, many States have, by constitutional or statutory provisions, prohibited the issuing of capital stock or evidences of indebtedness except for money, property, or services or money's worth received by the corporation. The constitutional provision of Illinois, is illustrative of this class of prohibitions, "No corporation shall issue stock or bonds except for money, labor done, or money or property actually received, and all fictitious increase of stock or indebtedness shall be void." In the absence of statutory or constitutional provisions, as a rule the issue of stock of this character is not held unlawful. The legal argument against the issue of watered or bonus stock is based upon the proposition that the transaction is a fraud upon the creditors.

Liability of Stockholder on Watered or Bonus Stock. The capital stock of a corporation unimpaired is supposed to be represented by its full par value in corporate property 5 Abbott's Elliott on Private Corporations, § 318.

6 Illinois Const., Art. 11, § 13.

and constitutes a fund for the payment of its corporate debts. The issue of capital stock as fully paid up, when this is not the fact, may, under certain conditions, mislead and perpetrate a fraud upon those dealing with the corporation. Even in the absence of a statutory or constitutional prohibition, the decisions establish the doctrine that it is not every creditor who can complain because of the issue of watered or bonus stock. The test of his right to complain is whether he was injured by the act of the corporation. It is well settled that an equity in favor of a creditor does not arise absolutely and in every case to have the holder of watered or bonus stock pay for it contrary to his actual contract with the corporation. No such equity exists in favor of one whose debt was contracted prior to the issue, since he could not have trusted the company upon the faith of such stock. Again, an equity in favor of a subsequent creditor cannot exist where he has dealt with the corporation with a full knowledge of the conditions and circumstances under which it was issued, and the fact of the issue of watered or bonus stock, for no one can be defrauded by that which he knows of when he acts. If the corporation having watered or bonus stock incurs a debt, a creditor with full knowledge clearly cannot complain.8

The doctrine that no equity exists in favor of a corporate creditor to have the holder of bonus or watered stock pay its full par value to the corporation has also been applied in cases where stock has been issued and sold at its full market value, though less than par, to pay the corporate debts; or where an active corporation, whose original capital has been impaired, for the purpose of recuperating itself, issues new stock and sells it on the market for the best price obtainable though less than par.

In each of the instances above noted, the trust fund theory has been applied by some courts, but the weight of

7 Coit v. Gold Amalgamating Company, 119 U. S. 343; Handley v. Stutz, 139 U. S. 417.

8 First National Bank v. Gustin, Minerva, etc., Mining Co., 42 Minn. 327.

modern authority follows the application of that rule as stated in Hollins v. Brierfield Coal & Iron Co. cited above. In the Minnesota case above cited, Hospes v. Mfg. Car Co., Justice Mitchell, in explaining the trust fund doctrine as applied to bonus or watered stock, said:

"It is difficult, if not impossible, to explain or reconcile these cases upon the trust fund doctrine, or, in the light of them, to predicate the liability of the stockholder upon that doctrine. But by putting it upon the ground of fraud, and applying the old and familiar rules of law on that subject to the peculiar nature of a corporation and the relation which its stockholders bear to it and to the public, we have at once rational and logical ground on which to stand. The capital of a corporation is the basis of its credit. It is a substitute for the individual liability of those who own its stock. People deal with it and give it credit on the faith of it. They have a right to assume that it has paid-in capital to the amount which it represents itself as having; and if they give it credit on the faith of that representation, and if the representation is false, it is a fraud upon them; and, in case the corporation becomes insolvent, the law, upon the plainest principles of common justice, says to the delinquent stockholder, 'Make that representation good by paying for your stock.' It certainly cannot require the invention of any new doctrine in order to enforce so familiar a rule of equity. It is the misrepresentation of fact in stating the amount of capital to be greater than it really is, that is the true basis of the liability of the stockholder in such cases; and it follows that it is only those creditors who have relied, or who can fairly be presumed to have relied, upon the professed amount of capital, in whose favor the law will recognize and enforce an equity against the holders of bonus stock."

The leading case on the right of a corporation, whose capital stock has been impaired, to issue stock and place it upon the market at less than its par value, is Handley v. Stutz, cited above, where the court said:

"The case then resolves itself into the question whether an active corporation, or, as it is called in some cases, a 'going concern,' finding its original capital impaired by loss

or misfortune, may not, for the purpose of recuperating itself and providing new conditions for the successful prosecution of its business, issue new stock, put it upon the market, and sell it for the best price that can be obtained. To say that a corporation may not, under the circumstances above indicated, put its stock upon the market and sell it to the highest bidder, is practically to declare that a corporation can never increase its capital stock by a sale of shares, if the original stock has fallen below par. The wholesome doctrine, so many times enforced by this court, that the capital stock of an insolvent corporation is a trust fund for the payment of its debts, rests upon the idea that the creditors have a right to rely upon the fact that the subscribers to such stock have put into the treasury of the corporation, in some form, the amount represented by it; but it does not follow that every creditor has a right to trace each share of stock issued by such corporation, and inquire whether its holder, or the person of whom he purchased, has paid its par value for it. It frequently happens that corporations, as well as individuals, find it necessary to increase their capital in order to raise money to prosecute their business successfully, and one of the most frequent methods resorted to is that of issuing new shares of stock and putting them upon the market for the best price that can be obtained; and so long as the transaction is bona fide, and not a mere cover for 'watering' the stock, and the consideration obtained represents the actual value of such stock, the courts have shown no disposition to disturb it. Of course, no one would take stock so issued at a greater price than the original stock could be purchased for, and hence the ability to negotiate the stock and to raise the money must depend upon the fact whether the purchaser shall or shall not be called upon to respond for its par value. While, as before observed, the precise question has never been raised in this court, there are numerous decisions to the effect that the general rule that holders of stock, in favor of creditors, must respond for its par value, is subject to exceptions where the transaction is not a mere cover for an illegal increase."

Parties Interested in Issue of Bonus or Watered Stock. The parties interested in an issue of watered or bonus stock are the corporation, the stockholders, and the creditors. The authorities are agreed that the corporation and all