It has been suggested that the withheld profits are available only for dividends in lean years to make up deficiencies, and that that was the effect of the opinion in the Bassett Case. That situation was involved but the point was not.

The resolution declaring the dividend is lawful and the bill will be dimsissed.

The Day bill. This bill is by a preferred stockholder to prevent the payment of the dividend declared on the common stock "out of the profits of 1922". The dividend was declared after the company had paid seven per cent. on the preferred stock for that year. The point made is, that no dividend can be declared on the common stock until all the withheld profits applicable to dividends on the preferred stock have first been divided and paid.

It will be observed that section 18 provides not only that preferred stockholders shall be entitled to receive, and the corporation shall be bound to pay, a fixed yearly dividend, but also declares that such dividend shall be paid "before any dividend shall be set apart or paid to the common stock." The quoted language is unmistakable, and the reason for it is aptly demonstrated in the present effort of the board of directors to favor the common stock at the expense of the preferred stockholders. While the statute says that the preferred stockholders shall be entitled to receive, and the company shall be bound to pay, a fixed yearly dividend out of the profits, when that obligation is to be performed is largely a matter of discretion with the directors. They are at liberty to pass dividends. year after year and pile up profits if in their opinion it is for the welfare of the company that this be done-as was done here-and in the absence of fraud, actual or constructive, their judgment is controlling. But once having decided to divide the profits, duty supplants discretion, and it becomes incumbent upon the directors to discharge the company's obligation to pay the fixed yearly dividends, and this before any dividend shall be set apart or paid on the common stock, viz., to holders of cumulative dividend shares, all arrearages; to holders of non-cumulative dividend stock, the dividends withheld. Otherwise, if the action of the defendant company were sanctioned, and the directors pursued the course they have outlined, the rights of the preferred stockholders in the reserve profits could be indefinitely ignored and altogether subordinated to those of the common stock. Although each class has a definite sum in the reserve, and one cannot encroach on the other's for dividends, the preferential right of payment of dividends assured by the statute cannot be disregarded. The statutory design was to meet just such a situation as here confronts the preferred stockholders. The legislative scheme was to protect them in their priority rights to dividends over the common stock in all events, and where, as here, profits of past years applicable to dividends on both preferred and common stock are held in reserve, or there are current profits applicable to dividends on common stock, it was conceived that this protection would be afforded by forbidding the payment of any divi

dends on the common stock until the amount due the preferred stockholders was first paid. The statute in this respect is nothing more or less than a definition of the equitable rights of the preferred stockholders arising out of the company's obligation to pay the yearly fixed dividend, for if the company had profits not needed in its business, and was about to distribute them among the common stockholders when it owed dividends on the preferred stock, a court of equity would enjoin the diversion, just as it would intervene in behalf of creditors of a corporation when dividends are in derogation of their rights.

The fact that the dividends was declared out of the profits of 1922 adds no merit. The profits of that year had been in fact transferred to the working capital reserve, and the amount of the dividend was later withdrawn to meet it; but that is unimportant. The profits of 1922 were bulk surplus profits, by whatever name, and, as Vice-Chancellor Howell observed, mere bookkeeping entries cannot change their character. The dividend cannot be differentiated, because it was out of the profits of the last fiscal year, any more than if it had been declared out of the profits of any preceding year and carried in the working capital reserve.

The defendant company's conception of section 18 is illustrated by the stock preference clauses contained in the certificate of incorporation, which read as follows:

"The preferred stock shall be entitled out of any and all surplus net profits, whenever declared by the board of directors, to noncumulative dividends at a rate not to exceed seven per cent. (7%) per annum for the fiscal year beginning on the first day of June, 1899, and for each and every other fiscal year thereafter, payable in preference and priority to any payment of any dividend on the common stock for such fiscal year. * * * If after providing for the payment of full dividends for any fiscal year on the preferred stock there shall remain any surplus net profits for such year, any of such net profits of such year and of any other fiscal year, after full dividends shall have been paid on the preferred stock, shall be applicable to such dividends upon the common stock as from time to time shall be declared by the board of directors; and out of any such surplus net profits, after the closing of any fiscal year, the board of directors may pay dividends upon the common stock of the corporation for such fiscal year, but not until the dividends upon the preferred stock for such fiscal year shall have been actually paid or provided for and set apart."

This interpretation, if such it be, is, in effect, that non-cumulative dividends are entitled to precedence only in years for which dividends are declared on the common stock out of profits of such years sufficient to pay dividends on both preferred and common stock, and not for years when applicable profits are available but undivided. The view is manifestly too narrow, for in the favored circumstances the preferred stock would be, as a matter of course, entitled to priority because of, as has already been pointed out, the

company's bounden duty to pay the preferred stockholder a fixed. yearly dividend. The fixed yearly dividend is the measure of their income per year out of profits per year, and the obligation of lean. years is not met by preferential payments in fat years. Sight is lost entirely of the specific subordination of all dividends on the common stock.

Section 18 was amended in 1901 (P. L. 1901, p. 245), and in respect of dividends on preferred stock it provides:

"And such dividends may be made payable before any dividends shall be set apart or paid on the common stock, and such dividends may be made cumulative; provided the corporation shall set apart or pay the said dividends to the holders of non-cumulative preferred stock before any dividends shall be paid on the common stock."

The preservation of the priority right of non-cumulative dividends, it would seem, emphasizes the view here entertained that the legislature intended that no profits were to be divided among common stockholders, whatever may have been their origin or however applicable, unless the company's obligation to the preferred stockholders was first discharged.

The statutory ban on payments of dividends on the common stock, until the preferred stockholders have been awarded their just due, is explicit and imperative. The preference clauses in the certificate of incorporation, in so far as they are thus inconsistent with the statute, are invalid. Gen. Stat., p. 1604, § 8, par. 7. The dividend under consideration is without warrant in law and will be enjoined.45

Section 8.-Overissued Stock. Watered Stock. No Par Value

THE Grangers' Life and Health Insurance Company brought suit against J. W. Turner and Abner Echols for $250.00, as an assess

45 Cf. Norwich Water Power Co. v. Southern Ry. Co., decision by Judge Crump in law and equity court at Richmond, Va., July, 1925, holding contra to the New Jersey decisions which were distinguished as based upon the provisions of the New Jersey statute, which differ from those of the Virginia statute. In Bassett v. U. S. Cast Iron & Pipe Foundry Co. (1909) 75 N. J. Eq. 539, 73 Atl. 514, the chief justice said at p. 541: "On the one hand the corporation has no right to accumulate a reserve fund from earnings which would otherwise be paid out as dividends to the holders of common stock, and afterward use it to pay dividends to the preferred stockholders, when the net profits of the year for which the dividend is declared are not sufficient for that purpose. On the other hand, when the reserve fund is accumulated, in whole or in part, by cutting down of dividends, which would otherwise have been paid to preferred stockholders that fund, so far as it represents

ment of ten per cent. on a stock subscription of $2,500.00, on which $250.00 was paid and a note given for the balance of $2,250.00, dated August 10, 1875, payable on demand without interest, "in part consideration for twenty-five shares of the capital stock of said company, subscribed for by John W. Turner, subject to the conditions. and regulations in the constitution of said company in regard to stock notes."

Defendant, Turner, pleaded the general issue and a special plea, to the effect that the plaintiff was incorporated under a declaration of incorporation filed in the office of the probate court of the county of Mobile, Ala.; that under this declaration, the capital stock of the company was limited to $100,000.00; that a general statement that it desired to have the privilege of increasing the capital had been decided by the courts of Alabama not to be sufficient to give any right of increase under the laws of that state; that the entire amount of capital was subscribed for, but afterward, nevertheless, the plaintiff represented to this defendant and others that it had the right to increase its capital to $200,000.00, and obtained from him a subscription to $2,500.00 of the stock of the company; that he paid the ten per cent. required, and gave the note in suit for the balance, with Echols as security; that this subscription was ultra vires and void, and the note given therefor was not collectible.

Plaintiff having assigned its property to Clark, he was made the party plaintiff in its stead. The case was submitted to the presiding judge without a jury. The plaintiff introduced the note sued on, having on it a credit of $25.00 for a dividend, January, 1877, and showed the assessment of ten per cent. on subscribers; also that there was an outstanding judgment against the company for $2,000.00 principal, recovered by one Mrs. Deppish on a policy issued on her husband's life after the date of Turner's subscription, and that a return of nulla bona had been made on the fi. fa.; also that the company had assigned to Clark. A witness testified that Turner had been appointed a trustee of the company, and he thought had acted as such. Under the constitution of the company, the president and secretary of the company, with the approval of the board of directors, could establish branch departments in different states and appoint a board of trustees for such branch departments, and they, in turn, should annually elect a board of directors of the branch; each trustee was also empowered to receive applications for insurance.

The charter and constitution of the company were before the He found for the defendants on the pleas of the general issue and the invalidity of the subscription. Plaintiff moved for a new trial, on the ground that the finding was contrary to law and evidence. The motion was overruled, and plaintiff excepted.

JACKSON, CHIEF JUSTICE.

moneys so retained, is available for the payment of subsequent dividends upon the preferred stock." See, also, Drewry-Hughes Company v. Throckmorton (1916) 120 Va. 859, 92 S. E. 818; Johnson v. Johnson (1924) 138 Va. 487, 122 S. E. 100; 23 Col. Law Rev. (April, 1923), p. 358; 11 Virginia Law Rev. (May, 1925), p. 553.-Eds.

This suit was brought by the Grangers' Life and Health Insurance Company of the United States of America, a corporation created by virtue of the laws of the state of Alabama, against John W. Turner, for the recovery of a ten per cent. instalment called for on a promissory note for stock therein. The defendant set up by plea that the corporation was permitted by the laws of Alabama to issue stock only to the amount of one hundred thousand dollars, which had been exhausted by the issue of stock to that amount prior to his subscription, and therefore the issue of more stock was ultra vires and void, and if he paid his subscription, he would get nothing therefor. The entire case, on law and facts, was submitted to the presiding judge without a jury; the judge rendered a decision for the defendant, and the assignee of the corporation having been made a party, excepted, and assigns that judgment for error here.

It seems clear from the evidence that the stock was limited to one hundred thousand dollars in the application for and grant of the charter, under the general laws of Alabama, by the proper court of that state. There was some sort of reservation of the right to issue more in this application, but nothing was done by the court in respect thereto, nor was any authority granted to the corporation to issue more, under the laws of Alabama.

Indeed, in the case of this same company against Kampes et al., decided by the Supreme Court of Alabama at the December term, 1882, it was held that, under the general law of Alabama and the amendments thereto and the charter of this company by the Mobile court, there was given it no power to go beyond the sum of one hundred thousand dollars; that the issue of stock beyond that amount was ultra vires and void, and consequently that the subscription beyond that sum could not be collected. A certified copy of the opinion in that case is before us, the case not having been yet reported and published, and that judgment must control and conclude this case.46 The Alabama decision upon its own statute law is respected in the sister states of the Union, and would be recognized as giving the true intent and scope of her statute law by the Supreme Court of the United States. The latter court, in the case of Scovill v. Thayer, 105 U. S. 143, announces the same principle as is decided in the case of this corporation by the Alabama decision, in a similar Louisiana case, and holds stock beyond an amount authorized by the laws of Louisiana utterly void and uncollectible by judicial process, ruling that subscription to such stock created no privilege or right in the subscriber and no liability on his part. If this subscriber had induced insurance on the part of any person in the Grangers' Life and Health Insurance Company by his acts as trustee or agent, or on the faith of his subscription, then an action on his individual right for the tort against Turner would lie; but this assignee stands in the shoes of the corporation and sues for the benefit of all creditors, and there is no pretense in this record.

46 See Granger's Life & Health Ins. Co. v. Kamper (1882) 73 Ala. 325, per Bricknell, C. J.-Eds.