The instinct which denies a remedy in indebitatus assumpsit also seems sound. But it is not sound to say that the man should keep to himself the accumulations resulting from her services and from the property she has contributed. At least three jurisdictions have allowed her to recover as a partner. That there was anything more than a fictitious agreement in the Arkansas case is improbable. 88 The reasoning there is preferable to that of the New York court. 84 The conclusion of the Texas court 85 that where a man and woman work together for a common purpose, the woman should occupy the same position as regards the proceeds of their labor as she would if she were a man, seems to be just.

83 Supra, n. 73. 84 Supra, n. 64. 85 Supra, n. 79.

Excessive Indebtedness

ROSCOE E. HARPER†

In a number of states, statutes have been adopted which impose a liability upon the directors of a corporation for creating indebtedness in excess of a prescribed amount. The purpose and scope of this article is to study these various statutes and some of the problems of interpretation, construction and enforcement that arise thereunder.

The capital stock of a corporation is the only fund available to it for the transaction of its business and the payment of its debts. Creditors extend credit to it upon the implied representation that it has a capital stock, and that this capital stock is available for the payment of its debts.1 Various statutes have been passed by the different states for the purpose of protecting such corporate creditors. The issuance of shares of stock, except for money, labor done, or property actually received to the amount of the par value thereof, is prohibited. Each stockholder of a corporation is made individually and personally liable for the debts of the corporation to the extent of the amount that is unpaid upon the stock that is held by him.3

†Of the Tulsa, Okla., Bar.

In Moore v. Lent, 81 Cal. 502, 504, 505, 22 Pac. 875 (1889), Paterson, J., said: "It is conceded that both the property of a corporation and its subscribed capital stock are trust funds for the benefit of the creditors * * *The subscribed capital stock is the fund upon which the transactions of the corporation are to be made. It is a guaranty to creditors that all obligations up to that amount will be met, and the intention of the legislature seems to have been to control the corporate power of the directors to contract beyond that amount, and to render them individually liable to creditors when they exceed it in the amount of debts." In Mott Iron Works v. Arnold, 35 R. I. 456, 469, 87 Atl. 17, L. R. A. 1915 D 1028 (1913), the court said: "The capital stock paid in is under the policy of our law, as under similar laws of other states, *** and generally, regarded as a fund for the security of creditors; it is the duty of the directors to keep it intact for such security, and they are expressly made liable for their acts in exceeding the debt limit; and their liability is in the nature of a surety fund for the protection of creditors in the event of such excess."

"This prohibition is usually set out in the constitution of the state. The constitution of Pennsylvania is typical in this respect. It provides (art. XVI, sec. 7): "No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void.'

These constitutional provisions were designed not only to protect the creditors of the corporation but the stockholders as well.

The Stock Corporation Law of New York provides (sec. 70): "Every holder of shares of stock not fully paid shall be personally liable to the creditors of the corporation, to an amount equal to the amount unpaid on the shares held by

A number of states have gone much farther than the enactment of such statutes in an effort to protect the creditors of a corporation. The statutes in these states require not only the payment of the capital stock in full, but also limit the amount of indebtedness that may lawfully be incurred against this capital stock. In most of these latter states, the directors of corporations are expressly made liable to the creditors of the corporation for creating debts in excess of the prescribed limit.4

him for debts of the corporation contracted while such shares were held by him.

The Corporation Law of Delaware provides (sec. 20): "When the whole capital stock of a corporation shall not have been paid in, and the assets shall be insufficient to satisfy the claims of its creditors, each stockholder shall be bound to pay on each share held by him the sum necessary to complete the amount of the par value of such share as fixed by the charter of the company or its certificate of incorporation, or such proportion of that sum as shall be required to satisfy the debts of the company; in the case of stock without par value, this liability shall be limited to the unpaid balance of the consideration for which such stock was issued by the corporation, which said sum or proportion thereof may be recovered as provided for in Section 49 of this Chapter, after a writ of execution against the corporation has been returned unsatisfied, as provided for in Section 51 of this Chapter."-Rev. Code, c. 65, sec. 20, as amended by L. 1917, c. 113, sec. 10. *The statutes of some states impose a limit upon the amount of indebtedness that a corporation may lawfully contract without expressly making the directors liable for violating this restriction. But the statutes of the following states expressly impose a liability upon the directors for creating excessive indebtedness, and it is with the construction, interpretation and enforcement of such statutes as the following that this article is concerned:

Alaska: "If the bonded indebtedness of any corporation organized under this act shall exceed the amount of its paid-in and unimpaired capital stock, the directors of such corporation assenting therto shall be jointly and severally liable to the creditors of the corporation for any loss or damage arising therefrom ***"-L. 1913, c. 58, sec. 16.

** *

California: nor must they [directors] create any debts beyond their subscribed capital stock *** For a violation of the provisions of this section, the directors under whose administration the same may have happened (except those who may have caused their dissent therefrom to be entered at large on the minutes of the directors at the time, or were not present when the same did happen) are, in their individual or private capacity, jointly and severally liable to the corporation, and to the creditors thereof, to the full amount of the *** debt contracted."-Civil Code, sec. 309, as amended L. 1917, p. 657.

Illinois: "The directors shall jointly and severally be liable for the debts and contracts of the corporation in the following cases: (1) For assenting to an indebtedness in excess of the amount of the capital of the corporation, to the amount of such excess ***

"Unless a director was absent from the meeting at which such *** loan [was] made, or unless his dissent therefrom shall be entered on the corporate records, he shall be conclusively presumed to have assented thereto."-Gen. Corp. Act (1919), sec. 23.

Iowa: "Such articles [of incorporation] must fix the highest amount of indebtedness or liability to which the corporation is at any one time to be subject, which in no case, except risks of insurance companies, and liabilities of banks not in excess of their available assets, not including their capital, shall exceed two-thirds of its capital stock. ***"-Comp. Code (1919), sec. 5331.

*****If the indebtedness of any corporation shall exceed the amount of indebtedness permitted by law the directors and officers of such corporation knowingly consenting thereto shall be personally and individually liable to the creditors of such corporation for such excess."-Comp. Code (1919), sec. 5353.

Kentucky: "Such persons shall execute articles of incorporation which shall specify: *** The highest amount of indebtedness or liability which the corporation may at any time incur *"-Carroll's Ky. Stat. (1922), sec. 539.

"If the directors or officers of any corporation shall fail or refuse to comply with, or shall violate any of the provisions of, this article, those so failing, refusing or violating shall be jointly and severally individually liable for any loss or damage resulting to any person from such failure, refusal, or violation ***". "-Carroll's Stat. (1922), sec. 550.

Mississippi: "The amount of debts which any trading corporation or company may contract or owe shall not exceed the amount of its capital stock paid in; and, in case the debts exceed that amount, the directors who contracted such debts shall be individually liable for the excess over the amount of capital stock, and may be sued therefor by any creditor ***"-Miss. Code (1906), sec. 924.

New Hampshire: "No corporation *** shall contract debts or incur liabilities exceeding one half the value of its property."-Pub. Stat. (1901), c. 150, sec. 4. "If a corporation, by vote or by its officers, shall violate either of the provisions of the three preceding sections, the directors shall be individually to the amount of*** the excess of debts and liabilities above half the value of its property, for the debts and contracts of the corporation then existing or contracted while they remain in office."-Pub. Stat., c. 150, sec. 5.

If a director, being absent at the time of the acts done in violation of the foregoing provisions, shall not have advised or consented thereto, or, being present, shall have objected thereto and filed his objections in writing with the clerk, at the time, he shall be exempt from such liability.-Pub. Stat., c. 150, sec. 6. The Business Corporation Law adopted in 1919 (L. 1919, c. 92, sec. 35) omitted the above provisions.

North Dakota: "The directors of a corporation must not beyond the subscribed capital stock ***"-C. L., sec. 4543.

create debts

"For a violation of the provisions of the last section, the directors under whose administration the same may have happened, except those who may have caused their dissent therefrom to be entered at large on the minutes of the directors at the time, or were not present when the same did happen, are in their individual and private capacity, jointly and severally liable to the corporation, and to the creditors thereof, in the event of its dissolution, to the full amount of the *** debt contracted."-C. L., sec. 4544, as amended by L. 1919, c. 100.

Oklahoma: "The directors of corporations must not *** create debts beyond their subscribed capital stock *** For a violation of the provisions of this section, the directors under whose administration the same may have happened (except those who may have caused their dissent therefrom to be entered at large on the minutes of the directors at the time, or were not present when the same did happen), are, in their individual and private capacity, jointly and severally liable to the corporation, and to the creditors thereof, in the event of its dissolution, to the full amount of the *** debt contracted * * *"'—C. S. (1921), sec. 5336.

Porto Rico: "No corporation shall incur any indebtedness for any purpose whatever in excess of the paid-up value of its capital stock or of the value of its property and assets. The directors who shall authorize by their votes the incurrence of any such indebtedness shall be jointly and severally liable individually for the amount of such indebtedness ***'* -Corp. Act 1911, sec. 35.

South Dakota: "The directors of any corporation must not *** create debts beyond the subscribed capital stock *** For a violation of the provisions of this section, the directors under whose administration the same may have happened, except those who may have caused their dissent therefrom, to be entered at large on the minutes of the directors at the time, or were not present when the same did happen, are, in their individual and private capacity, jointly and severally liable to the corporation, and to the creditors thereof, in the event of its dissolution, to the full amount of the *** debt contracted ***"-R. C. (1919), sec. 8789. Tennessee: "If the indebtedness of said [a mining, quarrying, boring or manufacturing] company shall at any time exceed the capital stock paid in, the directors assenting thereto shall be individually liable to the creditors for said excess Shannon's Code (1917), sec. 2337.

Wyoming: "If the indebtedness of any such company shall at any time exceed the amount of its capital stock, the directors of such company assenting thereto, shall be personally and individually liable for such excess, to the creditors of such company."-Comp. Stat. (1920), sec. 5065.

The capital stock of a corporation-the fund contributed to the corporate enterprise by the stockholders-has been referred to as the margin of safety upon which those who extend credit to a corporation may rely for the payment of their claims. As the amount of indebtedness increases, the actual margin of safety diminishes; and to insure the continued existence of this margin of safety, the amount of indebtedness of a corporation must not be allowed to equal, or exceed, the capital stock plus the accretions thereto, if any."

The statutes of different states place various limits upon the amount of corporate indebtedness that may lawfully be created. Some statutes provide that the directors must not create any debts beyond

"Capital Stock" is defined by Professor Edward H. Warren in his article on "Safeguarding the Creditors of Corporations," 36 Har. L. Rev. 509, 535, as follows: ""The amount of capital stock' is, then, the value of the assets received from stockholders at the time they were so received, less the value of any assets received from stockholders as paid-in surplus, but plus the amount of surplus lawfully converted by the corporation itself into a corresponding amount of capital."

See "Safeguarding the Creditors of Corporations," by Edward H. Warren, in 36 Har. L. Rev. 509.

It is sometimes said by the courts that the capital stock is a trust fund for its creditors, following Story, J., in Wood v. Dummer, 3 Mason (U. S. C. C.) 308 (1824). The inaccuracy of this statement is pointed out in the above article in which the writer says (36 Har. L. R. 546): "Now it is inaccurate and therefore most unfortunate to express this fact (that owing to such a legislative command or commands the corporation must do or refrain from doing some act or acts relating to its capital) by saying that the capital stock is a trust fund for creditors. That is not the fact, the creditors are not the equitable owners of a fraction of the corporate assets equal to the amount of its capital stock. The fact is that the legislature has provided some safeguards for the protection of the creditors of corporations, and that any act, in defiance or attempted evasion of these legislative provisions, is illegal."

"Such a limitation would not wholly protect creditors if the capital stock has decreased in value or become dissipated. In such a case the actual margin of safety is the value of the corporate assets, rather than the original value of the capital stock. To safeguard creditors under all circumstances, the limitation would have to be that the indebtedness of a corporation should not be permitted to exceed the value of the corporate assets. Such a statute might raise interesting speculations as to the liability of directors for the indebtedness of a corporation whose assets suddenly decreased in value.

The New Hampshire Statute provides that no corporation shall contract debts or incur liabilities exceeding one half the value of its property. See supra, n.4. See also the statute of Porto Rico, supra, n.4.; and Wilcox v. Davis, 7 İnd. 248 (1855).

The Statutes of Arizona make the following provision for the limitation of indebtedness of corporations having non-par value stock: "The articles of incorporation must contain: *** The highest amount of indebtedness or liability, direct or contingent, to which the corporation is at any time to subject itself, which must in no case exceed two-thirds of the amount of capital stock, and in cases of corporations having no par value stock which amount shall be computed by rules and regulations of the Corporation Commission. Such limitation, however, shall not apply to indebtedness incurred under the terms of the War Finance Corporation Act ***"-R. S., sec. 2100 as amended by L. 1921, c. 15, and L. 1922, C. 29.