Corporations — Preferred Stock — Debtor and Creditor — Assets — Prorate.
The issuance of preferred stock by a corporation does not create the relation of creditor and debtor between the owner thereof and the corporation so as to entitle him to prorate with the creditors in the assets of an insolvent corporation in the hands of a receiver.
This is a petition in the cause (a proceeding commenced for the purpose of winding up the affairs of the Elk Mountain Company, an insolvent corporation) filed by Mary A. Stewart to have certain certificates set out in the record declared a debt against the corporation, to the end that she may share pro rata with creditors in its assets. His Honor sustained a demurrer to the petition, and defendant appealed.
BROWN, J.
The certificates set out in the record are substantially in the usual from for preferred shares of stock in a corporation, issued by authority of our statute, Rev., sec. 1159, which authorizes corporations to issue two or more kinds of stock of such classes with such designations, preferences, and voting powers, or restrictions or qualifications thereof, as shall be presented by those holding two-thirds of the capital stock outstanding.
At one time it was a matter of discussion as to whether a preferred stockholder had any rights as a creditor of the corporation or could properly be classified as such. But the law is now clearly settled and beyond dispute that a preferred stockholder is not a creditor, and must be confined to his rights as a stockholder. Cook on Corp. (6 Ed.), sec. 217, where the cases are fully collected in the notes. Field v. Lamson, 27 L.R.A., 136, and notes; Warren v. King, 108 U.S. 389; 2 Thompson on Corp., secs. 2278 et seq.; 1 Machen on Modern Corp., secs. 540 to 548.
The difference between a creditor and a preferred stockholder is well stated by Judge Lurton, now of the United States Supreme Court, in Hamlin v. R. R., 78 Fed., 664. "There is a wide difference," says the learned judge, "between the relation of a creditor and a stockholder to the corporate property. One cannot well be a creditor, as respects creditors proper, and a stockholder by virtue of a certificate (78) evidencing his contribution to the capital of the corporation. Stock is capital, and a stock certificate but evidences that the holder has ventured his means as a part of the capital. It is a fixed characteristic of capital stock that no part of it can be withdrawn for the purpose of reimbursing the principal of the capital stock until the debts of the corporation are paid. These principles are elementary. Warren v. King, 108 U.S. 389; Cook Stock, Stockholders and Corp. Law (3 Ed.), sec. 271. The chance of gain throws on the stockholders, as respects creditors, the entire risk of the loss of his contribution to capital. He cannot be both a creditor and debtor by virtue of his ownership of stock. If the purpose in providing for these peculiar shares was to arrange matters so that, under any circumstances, a part of the principal of the stock might be withdrawn before the full discharge of all corporate debts, the device would be contrary to the nature of capital stock, opposed to public policy, and void as to creditors affected thereby. Cook Stock, Stockholders and Corp. Law (2 Ed.), 271; Chaffee v. R. R., 55 Vt. 110; McCutcheon v. Capsule Co., 19 C.C.A., 108-115, 71 Fed., 787; Morrow v. Steel Co., 87 Tenn. 262. If that was the purpose of this arrangement, most doubtful language was employed. There is a sense in which every shareholder is a creditor of the corporation to the extent of his contribution to the capital stock. In that sense every corporation includes its capital stock among its liabilities. But that creditor relation is one which exists only between the corporation and its shareholders. It is a liability which is postponed to every other liability, and no part of the capital stock can be lawfully returned to the stockholders until all debts are paid or provided for. The violation of this well understood principle is a breach of trust, and a creditor affected thereby may pursue the stockholders, and recover as for an unlawful diversion of assets."
It is true that in the petitioner's certificates of stock it is provided that they "shall be a preferred lien on the assets of the company." But those words are to be construed along with the entire instrument, and it is manifest from the whole paper that the corporation never intended to place the petitioner in the position of a creditor, but only to give her, and like stockholders, a preferred lien on the assets of the corporation when in liquidation over the common stockholders.
The judgment of the Superior Court is
Affirmed.
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