VII.-Insolvency.

63. Directors must call meeting of stockholders when corporation becomes insolvent.

Whenever any corporation shall become insolvent, the directors, within ten days thereafter, shall call a meeting of the stockholders, and lay before them for inspection and examination all the books of accounts, by-laws and minutes of the corporation, and exhibit a full and true statement of all its estate, funds and property, and of all the debts due and owing to it, and by whom, and of all the debts owing by it, and to whom, as far as the directors can at that time make out the same; so as to exhibit to the stockholders a full, fair and true account of the situation of the affairs of the corporation.

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P. L. 1829, p. 58; Act of 1875, §69.

This and the following sections are in substance a re-enactment of Act to Prevent Frauds by Incorporated Companies." (P. L. 1829, p. 58.) Under that Act it was held that the only criterion of insolvency furnished by the Act was the suspension of business, and that the act of insolvency contemplated by the statute is committed at the time the company suspends its ordinary business operations. Bedford v. Newark Machine Co., 16 N. J. Eq., 117.

Insolvency defined. Bank v. Sprague, 21 N. J. Eq., 538; Miller v. Gourley, 65 N. J. Eq., 237.

64. Conveyance or assignment of property, etc., after insolvency, or contemplation of insolvency, void as against creditors.

Whenever any corporation shall become insolvent or shall suspend its ordinary business for want of funds to carry on the same, neither the directors nor any officer or agent of the corporation shall sell, convey, assign or transfer any of its estate, effects, choses in action, goods, chattels, rights or credits, lands or

tenements; nor shall they or either of them make any such sale, conveyance, assignment or transfer in contemplation of insolvency, and every such sale, conveyance, assignment or transfer shall be utterly null and void as against creditors; provided, that a bona fide purchase for a valuable consideration, before the corporation shall have actually suspended its ordinary business, by any person without notice of such insolvency or of the sale being made in contemplation of insolvency, shall not be invalidated or impeached. P. L. 1829, p. 58; P. L. 1895, p. 166.

This section was enacted in 1829, and continued in force to 1875, but was omitted from the Revision of that year. It was again enacted in the Revision of 1896.

While such provision was not in force (in 1886) Wilkinson v. Bauerle, 41 N. J. Eq., 635, was decided in the Court of Errors and Appeals, which held that a corporation might sell and transfer its property and prefer one or more of its creditors to others, although it was insolvent. Several other cases to the same point followed.

Montgomery v. Phillips, 53 N. J. Eq., 203, held that the board of directors of an insolvent corporation could not by a mortgage upon the corporate property prefer one of its own members, distinguishing Wilkinson v. Bauerle, supra. See also Mallory v. Kirkpatrick, 54 N. J. Eq., 50; Richard v. Haliday, 92 Fed. Rep., 798; Porch v. Agnew Co., 70 N. J. Eq., 328, 341; aff'd 71 Id., 305.

In Streit v. Citizens' Fire Insurance Co., 29 N. J. Eq., 21, it was held that mere impairment of capital, even though to the extent of more than one-fourth, is not prima facie evidence of the condition of insolvency.

The directors of a corporation are not trustees for creditors in transacting the ordinary business of the company but only become such when dealing with the property of an insolvent company. The duty

to the creditors springs into existence when the corporation becomes insolvent, and this duty may arise before actual steps, either voluntary or involuntary, are taken to wind up the corporate business. Bird v. Magowan, 43 Atl. Rep., 278.

The object of this provision is to prevent companies, actually insolvent, or whose embarrassments are such as must inevitably lead to insolvency from making a preference in favor of any one or more of its creditors. Holcomb's Exr's v. New Hope Del. Br. Co., 9 N. J. Eq., 457; and see Van Wagenen v. Savings Bank, 10 N. J. Eq., 13; State Bank v. Receiver, 3 N. J. Eq., 266; Receivers v. Paterson Gas Co.,

23 N. J. Law, 291; Kinsela v. Cataract Bank, 18 N. J. Eq., 158; Vail v. Jameson, Id., p. 648; Frost v. Barnert, 56 N. J. Eq., 290, 292.

Its object is not, therefore, to prevent officers of a company from disposing of its property where they act in good faith, for the purpose of avoiding insolvency. Such dealings do not constitute fraud. If a mortgage be thus made it is valid as to the property conveyed in good faith. Miller v. Gourley, 65 N. J. Eq., 237.

The statute applies to the financial situation of the company at the time the challenged transfer of the property is actually made. Wells v. Rahway White Rubber Co., 19 N. J. Eq., 402.

It also applies to assignments for the benefit of creditors. American Ice Machine Co. v. Paterson, etc., Machine Co., 22 N. J. Eq., 72.

Cases since the Revision of 1896.

A mortgage, executed pending a suit to wind up the corporation as an insolvent debtor, is void, as being an unlawful attempt to prefer certain creditors. Bissell v. Besson, 47 N. J. Eq., 580.

For a statement of facts on which it was held that a corporation was insolvent within the meaning of this section at the time it executed certain bonds and a mortgage securing the same, see Skirm, et al., v. Eastern Rubber Mfg. Co., 57 N. J. Eq., 179; Holmes v. Sheridan, 56 Atl. Rep., 308; aff'd 65 N. J. Eq., 765.

A mortgage executed by the president without the knowledge of the directors and ratified by resolution of such directors after the corporation had become insolvent and suspended business and the mortgagee had notice of such insolvency and suspension, is invalid as against the receiver. Bennett v. Keen, 59 N. J. Eq., 634.

Directors of a corporation are liable to creditors for negligence occurring while the company is insolvent. Bird v. Magowan, 43 Atl. Rep., 278.

A corporation in a failing condition cannot place part of its assets in the hands of a trustee to protect any of its directors as sureties on its bonds. Taylor v. Gray, 59 N. J. Eq., 621.

A corporation may make a general assignment for the benefit of creditors. P. L. 1899, p. 146, §24.

The lack of sufficient cash in hand to meet matured obligations does not demonstrate that the assets of a going concern would not have been worth more than its debts; consequently, such a corporation is not necessarily insolvent. Richards v. Haliday, 92 Fed. Rep., 798.

This section does not apply to conveyances made in good faith where a consideration moves to the company. A company does not become insolvent at a given instant. There is therefore no "fraud by an incorporated company" when the officers, acting in good faith, attempt to prevent threatened failure. Reed v. Helois Carbide Co., 64 N. J. Eq., 231.

It does not refer to transactions where cash is actually given by

the mortgagees at the time of the execution of the mortgage. Such a mortgage may therefore be sustained in part. Id. Savage v. Miller, 56 N. J. Eq., 432.

Where a company was in a failing condition and two of the directors took over the stock and goods of the company and paid the claims of certain pressing creditors, the transaction, even if done in good faith, is within the terms of this section and the receiver may recover the amounts from the directors. To the extent of the debts paid, however, the directors are subrogated to the rights of the creditors. Mills v. Hendershot, 70 N. J. Eq., 258.

Stockholders are liable to the receiver for dividends paid out of the capital within six years from time of filing of bill, and officers are liable to refund excessive salaries. Id.

Independent of Section 64 directors of an insolvent corporation are trustees of the funds for creditors. Directors who are creditors cannot, therefore, take advantage of their positions to prefer their claims. Schmidt v. Perkins, 74 N. J. Law, 785.

Since it is well settled that the title to tangible personal property is determined by the law of its situs, it follows that a sale of the property, within this state, of an insolvent foreign corporation to directors and creditors in satisfaction of an antecedent debt is void. Schmidt v. Perkins, supra.

The intention of the parties to the transaction must be considered. Bergen v. Rogers, 67 Atl. Rep., 290; aff'd 70 Id., 1100.

Where a bona fide loan is made without notice of the condition of the company, the section does not apply. "Contemplation of Insolvency" defined. Regina Music Box Co. v. Otto & Sons, 65 N. J. Eq., 582; aff'd 68 Id., 801.

Insolvency, under this section, denotes a general inability to meet pecuniary liabilities as they mature, by means of either available assets or honest use of credit. Empire State Trust Co. v. Trustees of Fisher & Co., 67 N. J. Eq., 602.

Insolvency is further defined in Reinhardt v. Inter-State Telephone Co., 71 N. J. Eq., 70; Ft. Wayne Electric Co. v. Franklin Electric Light Co., 57 N. J. Eq., 7; aff'd 58 Id., 543.

A mortgage given to secure an antecedent debt is not given "for value" within the meaning of clause e, section 70 of the Federal Bankrupt Act, or for a valuable consideration" within the meaning of this section. Id.

A mortgage given in good faith on the expectation that it would enable the company to continue business is held in Barrett v. Perth Amboy Shipbuilding, etc., Co., 67 Atl. Rep., 757, to be a mortgage given in expectation of insolvency and void under this section.

An assignment of book accounts to satisfy a pre-existing debt to a creditor who has notice, is within the prohibition of this section whether

the suspension was voluntary or involuntary. Russell and Erwin Mfg. Co. v. Faitoute Hardware Co., 62 Atl. Rep., 421.

When a president and a treasurer paid to themselves claims due from the company within ten days of insolvency, they may be charged with knowledge of the conditions and required to refund. Miller, Receiver v. Audenried, 67 N. J. Eq., 252; distinguished, Jessup v. Thompson, 68 N. J. Eq., 443.

Where the treasurer executed a bill of sale the statute was violated. Richardson v. Gerli, 54 Atl. Rep., 438.

The holder of unpaid coupons of bonds secured by a mortgage is a creditor for the purpose of instituting insolvency proceedings. Reinhardt v. Telephone Co., 71 N. J. Eq., 70.

It is not necessary that the stock should stand in the name of the owner to give him standing in court under this section. Reinhardt v. Inter-State Tel. Co., 71 N. J. Eq., 70; O'Connor v. International Silver Co., 68 N. J. Eq., 67; aff'd 68 Id., 680.

Sections 64 and 86 do not extend so far as to authorize equity, at the suit of a receiver, to set aside a judgment in favor of the wife of an officer, when such judgment was secured by the activity of the officer and the purposeless inaction of the other officers. Kummerle, 72 N. J. Eq., 828.

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Any agreement which comes within this section being invalid, the receiver may enforce the liability without reference to the terms of the agreement between the parties. Mills v. Hendershot, 70 N. J. Eq., 258.

He may have an accounting for money wrongfully realized under a void chattel mortgage. Pryor v. Gray, 70 N. J. Eq., 413; aff'd 72 Id., 436.

As to the jurisdiction of the U. S. Courts in suits brought under these sections, see Land Title & Trust Co. v. Asphalt Co. of America, 127 Fed. Rep., 1.

65. Remedy in chancery by injunction and appointment of a receiver in case of insolvency.

Whenever any corporation shall become insolvent or shall suspend its ordinary business for want of funds to carry on the same, any creditor or stockholder may by petition or bill of complaint setting forth the facts and circumstances of the case, apply to the court of chancery for a writ of injunction and the appointment of a receiver or receivers or trustees, and the court being satisfied by affidavit or otherwise of the sufficiency of said application, and of the truth of the al