CHAPTER XXI.

OF CERTAIN DEFENCES TO ACTIONS AGAINST STOCKHOLDERS.

I. Defence of Payment, Set-off, and Release.

SECTION 380. Payment.

381. Set-off-In Case of individual Liability.

382. Continued-In Case of Liability for unpaid Stock or for Calls. 883. Continued - Grounds on which the English Decisions proceed.

384. Continued - Special Contract for a Right of Set-off.

385. If the Shareholder is a Bankrupt.

386. Reasons which support these Rules.

887. Illustrations-Set-off under the Bankrupt Law.

388. Continued-Loss by Policy-holder cannot be set off against his

Liability.

889. Continued - Construction of Statute of Maine - Creditor dis

charged by paying Debts of Corporation.

390. Illustrations, continued-Satisfaction of Judgment by Corporation against Stockholder vacated.

891. Continued - Whether voluntary Payment of corporate Debts a Defence.

392. Continued - Whether Stockholder may compound with Cred

itors.

393. Continued - Release, by a Creditor, of a particular Shareholder. 394. Whether Stockholder may prove up Claims bought at a Dis

count.

395. Company may set off Calls against its own Debt.

II. Other Defences.

SECTION 398. Prior Judgment.

399. Prior Suit pending.

400. Bankruptcy of Corporation - Receipt of Dividend.

401. Defence of unappropriated or misappropriated Assets.

402. Defence of misconduct of Receiver and Officers of Corporation.

403. Prior Liability of Officers - Massachusetts Statute.

404. Defence of violation of corporate Duty.

405. Defence of Ultra Vires.

406. Continued.

407. Defence of no Corporation-Estoppel to deny Validity of cor

porate Organization.

SECTION 408. Illustrations.

409. Continued.

410. Continued.

411. Contrary Decisions.

412. These Decisions reviewed.

413. Continued.

414. Continued - The proper Distinction stated.

415. Defence that Act of Incorporation was unconstitutional.
416. Defence of Usury.

417. Defence of Irregularity in making Assessments.

I. Defence of Payment, Set-off, and Release.

§ 380. Payment.— Recurring to a former chapter, we see that the liability of a stockholder, though sometimes joint and several, like that of a partner, is, in general, several, and not joint.3 And, although in most of the statutes, and in the loose language of the judicial decisions, the limited statutory liability of the stockholder is said to be joint and several, yet it is clear that this means that the liability is joint only in the sense that several may be proceeded against at once, and that if any one is, in any event, compelled to pay more than his share, he may have contribution from the others. Accurately speaking, this liability is several, whether it consists of unpaid instalments due upon stock held, or whether it be the superadded liability created by statute. In either case, the amount for which each stockholder is liable depends upon the amount of stock held by him; and, although for convenience of litigation all or many are joined in one proceeding, the liability of each is separately ascertained, and a several judgment or decree is rendered against each. Each stockholder, then, unless his position is that of a mere partner under some exceptional statute or charter, is liable to pay, towards liquidating the debts of the company, a given amount, and no more. If he has paid this amount to a creditor or creditors entitled

1 Upon the question when stock is deemed to have been paid up, and as to payment in specific property, see 2 126 et seq.

2 Ante, 25 et seq.

Ante, & 45.

to call upon him to make such payment, his liability is at an end, and he may successfully plead such a payment when proceeded against by any other shareholder.1 But he must be careful not to make payment to one creditor where another has a prior right to, or lien upon, the sum which he is liable to pay. Such a payment will be deemed to have been made in his own wrong, and he will be compelled, notwithstanding it, to make payment to the creditor having the prior right.2

§ 381. Set-off — In Case of individual Liability. But whilst a stockholder may discharge himself, by paying to a creditor entitled to claim it the amount for which he is individually liable in excess of his liability for calls, he cannot do so by paying this amount to the corporation. Nor can he, in a proceeding against him by or on behalf of a creditor or creditors, set off a debt due to him by the corporation. There are, however, two or three confusing decisions on this point. In Briggs v. Penniman1 the stockholders were liable for the debts of the company to the amount of their respective shares of stock. Penniman, a creditor, filed his bill in equity to enforce that liability. The defendants set up that they had severally made advances for the company, for which the company was indebted to them. One of them claimed that the company owed him a debt of $1,500, besides what was due him for advances. The chancellor directed a reference to ascertain the amount of the defendants' liability,

1 Garrison v. Howe, 17 N. Y. 458; Grose v. Hilt, 36 Me. 22 (case governed by statute); Jones v. Wiltberger, 42 Ga. 575; Tallmadge v. Fishkill Iron Co., 4 Barb. 382; Robinson v. Bank of Darien, 18 Ga. 65, 109; Hall, v. Boyd, 52 Ga. 456; Lane v. Harris, 16 Ga. 217; Sackett's Harbor Bank v. Blake, 3 Rich. Eq. 225. So by statute in California. Larrabee v. Baldwin, 35 Cal. 155. 2 Post, Ch. XXII.

Matter of Empire City Bank, 18 N. Y. 199, 227; Lawrence v. Nelson, 21 N. Y. 158; Hillier v. Allegheny County Ins. Co., 3 Pa. St. 470; Matthews v. Albert, 24 Md. 527; Grose v. Hilt, 36 Me. 22.

48 Cow. 390.

and directed the master, upon the reference, to allow the defendants, respectively, such sums as they had paid on account of the debts of the company after its dissolution. Upon an appeal from this decree, Mr. Senator Spencer said: "I confess I can see no reason why the credits for sums advanced by the appellants should be restricted to a period since the dissolution of the company. The members of the company might bona fide advance money, as they allege they have done, to carry on the business of the corporation, and they are equally entitled with any other creditors to be indemnified from the funds of the company, or from the individual liability of the stockholders." The decree was finally entered in accordance with these views. In another case, a suit in equity by several judgment creditors against directors, determined in the Supreme Court of New York, in 1848, the liability of the defendants was created by statute, and was limited. It was held, on the authority of the last-named case, that the directors were entitled to have credited against their liability the amount of their advances for the company. "In either case," said Harris, P. J., drawing a comparison between the case before him and Briggs v. Penniman, "the law for the protection of creditors, and to induce greater carefulness in the management of the affairs of the corporation, adds the limited personal liability of the stockholders or directors to the effects of the corporation itself. In either case, such limited personal liability is at an end when the stockholder or director has paid or been charged with debts to an equal amount. He can be required to pay the amount of his liability but once; and whether he pays that amount voluntarily, in the discharge of the debts of the corporation, or whether he is compelled to pay it upon suit brought by the corporation or any of its creditors, having paid it, he may set up such payment as a defence against

18 Cow. 397.

any further liability."1 These decisions, the last of which was by a court not of final resort, cannot, it is thought, be supported, for reasons hereafter stated, unless, being suits in equity, the right of set-off declared to exist is understood to mean no more than an equitable abatement of liability, such as would be brought about by compelling the defendants to pay up as shareholders, and then permitting them to take their dividends as creditors. In a late case in Georgia, a suit in equity, where it was sought to charge a stockholder on account of his individual liability for a proportionate share of the debts of the corporation, it was ruled that he was entitled to set off a judgment which he had obtained against the company, the same not being subject to impeachment for fraud, against the cause of action against him. The court formulated its ruling in the following proposition: "If a stockholder has already paid his proportion of all the debts, or if the company bond fide owe him that proportion, it cannot be recovered from him again." 3

§ 382. Continued-In Case of Liability for unpaid Stock or for Calls. -The same rule obtains, denying the right of set-off, where the liability of the stockholder is for a percentage unpaid on account of his stock, and where the company is insolvent. The like rule obtains under the English Companies Act, 1862, in respect of shareholders liable as contributories. There, a shareholder in a limited

1 Tallmadge v. Fishkill Iron Co., 4 Barb. 382, 391; Rensselaer General Term, Harris, Watson, and Parker, JJ.; quoted with approval in Robinson v. Bank of Darien, 18 Ga. 109.

2 Post, 2386.

3 Boyd v. Hall, 56 Ga. 563.

Sawyer v. Hoag, 17 Wall. 610. Contra, Tallmadge v. Fishkill Iron Co., 4 Barb. 382, 392.

5 Grissell's Case, L. R. 1 Ch. 528; Black & Co.'s Case, L. R. 8 Ch. 254; Calisher's Case, L. R. 5 Eq. 214; Barnett's Case, L. R. 19 Eq. 449. Contra, in case of a voluntary winding-up, Brighton Arcade Co. v. Dowling, L. R. 3 C. P. 175.