Barrows v. Natchaug Silk Co. , 72 Conn. 658 ( 1900 )

In this proceeding Mr. Bevin sought to take out of the assets of the Natchaug Silk Company the amount he paid for certain of its shares, upon the claim that the shares issued to him were issued under such circumstances that no obligation rests on him to pay for them. Indeed, his claim is that neither the corporation, nor its creditors represented by the receiver, have any demand against him therefor, but that on the contrary they are liable to him for the amount he paid for the shares, less such dividends as he has received.

The stock of a corporation which is being wound up by insolvency proceedings is a trust fund for the payment of its debts. A person who attempts to take away any part of that fund and thereby to subject the creditors of the corporation to a loss, must show a clear right to do so or the attempt ought to fail. Mr. Bevin makes his claim upon two grounds: The first is that he was induced to take the shares by fraud; the other ground is that the shares were void.

To understand clearly the force of these claims it is desirable to recur briefly to some of the salient facts set forth by the court in its finding. The Silk Company was organized under and pursuant to the joint stock laws of this State. The organization was completed in October, 1887, when the notices and certificates required by law were all properly made and filed, so that the company was authorized to engage in business. Its capital stock amounted to $25,000, being 250 shares at $100 per share. The corporation at once commenced business, and apparently with success. In August, 1888, the stockholders at a meeting legally warned and held voted to increase the capital stock to $200,000. To do this required the issuing of 1,750 more shares of stock at $100 per share. The vote did not specify when and in what order these additional shares should be issued, nor was there any formal subscription paper signed for these new shares. Intending to act under this vote, the directors issued shares of stock to various persons from time to time and at different times between that date and 1895. They issued in all 1,600 shares, all of which were paid for. In the early part of April, 1889, fifty of these shares were issued to Mr. Bevin. He paid $3,750 in cash, and for the balance gave his two negotiable notes, each for the sum of $625. At that time the corporation was not indebted to any of its present creditors. Thereafter, Mr. Bevin attended the meeting of the stockholders and voted for its directors, and each year received dividends on his stock, semi-annually, at six per cent, until the receiver was appointed. All this time he had ample means, had he chosen to avail himself of them, to ascertain the truth or falsity of the statements which had been made to him respecting the business of the corporation and its management. No certificate showing the number and value of the shares of the authorized increase of stock was ever filed. The certificate required by § 1956 of the General Statutes was duly filed each year with the secretary of State and with the town clerk.

The sole ground on which these shares are said to be void is, that the certificate of the increase of stock, as required by § 1954 of the General Statutes, was not made and filed. This section requires that certificates shall be filed as is provided in the other section for original stock. The certificate prescribed by this section, as well as the certificates prescribed in the other sections in the same chapter of the statutes, are required to be made and filed with the secretary of the State and with the town clerk, primarily for the benefit of the public; that is, of those persons who may desire to do business with the corporation. Johnston v. Allis, 71 Conn. 207. Sections 1947 and 1948 (being in the same chapter) require that certain notices must be made and filed, as in the other sections above cited, before the corporation shall commence business. But there is nothing in any of these sections to show that the failure to file these notices, or any of them, makes the stock void. As between the shareholders and the corporation the shares, so far as this omission is concerned, may be good, and the shareholders be compelled to pay. These omissions are doubtless irregularities. The statutes, however, provide no penalty for them other than that the directors are made personally liable for all the debts of the corporation. Such irregularities do not exempt the subscriber after he has acted as a stockholder, as he did here, from paying for his stock. Nutter v. Lexington W. C. R. Co., 6 Gray, 85; NaugatuckWater Co. v. Nichols, 58 Conn. 403. The notices required by § 1956 have been each year made and filed since this increase was voted. These have furnished to the public full opportunity to learn the real condition of the Silk Company, as full and complete as the certificate named in § 1954 could have done.

It would have been entirely competent for the stockholders, when they voted the increase of stock in August, 1888, to have authorized the directors to issue the stock at such time or times and in such amounts as they should determine. It would have been wiser perhaps, if such authority had been specified in the vote. The directors have proceeded as though they had authority to sell the stock in this way, without such a vote. More than six years elapsed after the vote increasing the capital was passed, before the company became insolvent All of this time the stockholders knew, or had every means of knowing, the way in which this stock was being issued and sold by the directors. As none of them, Mr. Bevin nor any of the others, have ever objected, he and they may be fairly held to have assented to the course the directors have taken. They have certainly acquiesced in this course, and it is now too late for any one of them to say that this stock was not lawfully issued. Such continued acquiescence is equivalent to a ratification; it binds the stockholder to the same extent that original authority by a vote would have done. Whitney v. Wyman, 101 U.S. 392, 397; Railway Co. v. Allerton, 18 Wall. 233, 236; Stanton v. New York E.Ry. Co., 59 Conn. 272. If Mr. Bevin ever had the right to question the validity of his shares of stock, even as against the corporation, we think the Superior Court might now fairly find that he had lost that right. Derby v. Alling,40 Conn. 410, 436; New York, N. H. H.R. Co. v. New Haven, 46 id. 257; Roper v. Williams, 1 Turn. Rus. 18; Sayers v. Collyer, L. R. 28 Ch. Div. 103; Knight v. Simmonds, L. R. (1896) 2 Ch. 294.

Similar considerations are decisive against the right to set up Risley's fraudulent misrepresentations, upon which he claims he was induced to subscribe for the shares of stock. Assuming that such representations were established by the finding as the procuring cause of the subscription, Bevin was too late in setting them up. He should have availed himself earlier of his means of knowledge and been prompt in his rescission of the contract of subscription.

As against the creditors of the corporation for whom the receiver stands, it is entirely clear that Bevin has no just claim to the money he paid. Northrop v. Bushnell, 38 Conn. 498;New Haven Wire Co. Cases, 57 id. 352, 387; Crandall v. Lincoln, 52 id. 73.

There is no error.

In this opinion the other judges concurred.