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general meeting, which has to be held before the registration of the company, has to appoint them. Both these boards have to examine and report on all the circumstances of the formation of the company. They have in particular to inquire into the accuracy and completeness of the statements contained in the promoters' report, and this inquiry must also include the examination of the question, whether the prices at which any property to be taken over by the company are open to any objection. (Sections 192, 193.) .

(d) In any case in which one of the members of either board . is a promoter or derives any pecuniary benefit from the promotion of the company, and also in any case in which any property is to be taken over by the company on its formation, independent auditors appointed by the local chamber of commerce have to examine and report as well as the two boards and in the same manner. The auditors' report under the law of 1884 had degenerated into a mere formality, but the new code has added some provisions which will make it much more effective in the future.

Under the new law the auditors may ask for any information in connection with the subject of their inquiry which appears relevant to them, and in case of any dispute with the promoters as to the necessity of any such information, the authority by whom the auditors were appointed is entitled to give a binding decision. As long as the promoters decline to give the information, the auditors' report is not issued and the incorporation of the company cannot take place. The remuneration payable to the auditors is not fixed by any person connected with the company, but by the authority by whom they are appointed (section 194). Any agreement to the contrary is void. (Esser, p. 24.)

All the reports have to be filed in the registry and are open to public inspection (sections 195, 199). This right of inspection is not taken advantage of to a large extent, but if the reports contained any damaging facts their contents would soon be known to the public and prevent them from taking shares. As mentioned before, the simultaneous method of formation is almost universally applied, and under that method the promoters have to keep the shares and pay up in full, unless the public comes forward. This circumstance alone is a sufficient check against purchases of property at excessive prices.

It is no doubt true that most persons who take shares in new companies are not very watchful in reading reports or inspecting documents, but if there is only one watchful person any irregularity will soon be known in the circles in which shares are usually placed and will damp the enthusiasm, which might otherwise have been created in favour of the new issue.

It may of course still happen that the prices at which property is taken over on the formation of a new company are too high, but the unnatural increase of these prices caused by the commissions and profits of middlemen, which is such a characteristic feature of English company promoting, is a practical impossibility under the above-mentioned provisions.

The question naturally arises, how do people in Germany, who take trouble or risk in the formation of a new company, obtain the remuneration, without which they would hardly be inclined to enter into such transactions ? The answer is that the profit is entirely derived from the premium at which the shares are sold to the public. It is clear that the profits obtained in this manner cannot be nearly as high as those which are frequently obtained by the English methods of company promotion, but large and adequate profits are frequently obtained, which nobody can object to, as they are perfectly open. The necessity of paying for the shares before they are issued to the public shuts out a certain class of professional company promoters, who may now be said to be non-existent in Germany, but the starving out of this class of men is an advantage from the moral as well as from the economic point of view.

The principal point is this : in England the promoters' and middlemen's profit is added to the nominal capital of a company, whilst in Germany it is added to the price of the shares. To the shareholder it may be a matter of indifference whether he buys shares from the promoters at 100 per cent. premium, or whether the company buys its assets at twice their real value and sells him his shares at par, but a creditor is necessarily misled by being told that a company's paid-up capital is £100,000, when the real value of its property is £50,000, the rest consisting of promoters' profits. Moreover, the necessity of paying dividends on a capital swollen by such profits leads to the adoption of unsound methods of trading and book-keeping.

It has been suggested that the provisions requiring the whole of a company's capital to be taken up before the registration of the company may be evaded by the employment of dummies, in whose names the shares are taken, the real promoters remaining in the background and only pocketing the profit on the sale of the shares in case of such a profit being realised; but such a course does not appear to be adopted in practice, and would, if adopted, in all probability defeat its own object; if the promoters' report was signed by persons willing and able to contemplate their liability with the indifference of the “ vacuus viator,” the public would not be tempted to take the shares, and the real promoters would lose their chance of a profit.

There are some other possible modes of evasion which have been specially guarded against by the German law.

It is enacted by section 207 that all contracts made within the first two years after the formation of the company for the purchase or construction of any buildings or plant intended to be used permanently for the purposes of the company's business, or of any land or other immoveable property at a price exceeding one-tenth of the company's capital, are invalid unless confirmed at a general meeting in a special manner which enables shareholders holding only 26 per cent. of the company's capital to defeat the scheme.

A report must be presented to the meeting by the supervising board, which, together with the contract, must, in case of adoption by the meeting, be filed in the mercantile registry. The members of the supervising board are, according to section 208, responsible for the contents of this report in the same way as they are responsible for the original report on the formation of the company.

In the case of an increase of capital sections 278 and 279 provide for similar safeguards as those existing with regard to the original formation of a company.

B.—Provisions presenting a diminution of the property represent

ing a company's capital. The measures which are taken for the purpose of assuring that the amount of the original capital of a company is truly represented by the value of its property are insufficient, unless they are accompanied by measures preventing, as far as possible, the diminution of the capital during the subsequent stages of the company's existence. In this respect also the provisions of English law are hopelessly inadequate. The courts have indeed frequently laid down the rule that dividends must not be paid out of capital, but the payment of dividends, notwithstanding the contemporaneous diminution or depreciation of that part of its property which is called "fixed capital,” is considered legitimate and cannot be prevented.

A trust company holding stock, which during the last business year has paid 50 per cent. dividend, but before the end of the year became utterly worthless, may include the 50 per cent. in its yearly profit, without deducting a penny for the depreciation of the property from which this profit was derived. This is not called paying dividends out of capital. A company, owning a mining lease, may include the proceeds of the minerals extracted in each year in the profit of that year and value the mine at cost price in its balance sheet, although in the course of a few years the mine will be worthless and the lease will have expired. This is not paying dividends out of capital. A company having paid £100,000 for goodwill and earning an income of £1,000 with every prospect of earning nothing, or less than nothing, in the following year, may divide the profit as dividend, whilst the goodwill is still valued at £100,000. This is not paying dividends out of capital.

The distinction between the depreciation of fixed and circulating capital, which is the basis of these decisions, is unsound from a mercantile point of view.

Income derived from any source, which by furnishing the income becomes gradually exhausted, cannot be wholly considered as income. It is partly income and partly re-payment of capital, like a terminable annuity. There is hardly any property, classed as fixed capital, which is not of a wasting nature. In some cases the wasting process is very slow, in some cases it is very fast, but the rate of waste can be generally calculated with sufficient accuracy to enable a trader to write off the proper amount for depreciation.

If it was really correct to disregard the depreciation of the fixed part of the capital in the calculation of the profits the total disappearance of such property would not have to be considered either; new buildings and machines would have to be provided and their cost added to the “Buildings and Machinery Account," but the demolished buildings and the disused machinery could still be valued at cost price. In the case of a private partnership such a mode of trading would invariably lead those who adopt it into the Bankruptcy Court, if it were persisted in for any length of time, but in the case of a private partnership, the fact that retiring partners must from time to time be paid out on the basis of the balance sheet of the last year, acts as an effective check against the over-valuation of permanent investments.

In the case of companies omitting to provide for the waste, new capital must of course be required from time to time, and such new capital may up to a certain point be furnished by a confiding public on the strength of the forced dividends, but the crash will inevitably come some day.

i Verner v. General, &c., Investment Trust (1894) 2 Ch. 239. ? Lee v. Neuchatel Asphalte Company 41 Ch. D. 1.

Another objection against the distinction between the two kinds of capital is pointed out by Mr. Palmer (one of the most experienced company lawyers in this country): “It is extremely difficult to determine what is and what is not fixed capital. Thus shares or other assets are sometimes bought by a company without any distinct determination whether they shall be kept or resold ..... further intentions change. Supposing a company formed to buy, sell, hold by way of investment, and deal in shares and that it holds some shares intending at the time to sell, they are circulating capital, but if they happen to fall in price, the company may determine to keep them and thereupon they become fixed capital, and a few months afterwards the company may determine to sell them and thereupon they again become circulating capital.” (Company Precedents, Part I., 7th ed., p. 540.)

The distinction which the Courts have made between circulating and fixed capital and the rule which they have laid down, according to which a company may continue paying dividends notwithstanding the gradual disappearance of its “fixed” capital, have had the further consequence, that the notion of a permanent fund on which the creditors of a limited company can rely, has been entirely abandoned. This was shown in a very recent case, in which it was held that a loss shown on the working of a particular year, for which no reserve is available, need not be replaced from the profit of the following year. The result of this, translated into book-keeping language, is, that a debit balance on the profit and loss account may be carried forward as an asset in the balance sheet, and that, whilst this is done, dividends may be divided among the shareholders. By judicious book-keeping a company may easily arrange to have a profit in each alternate year and a loss in each following year. The loss diminishes the capital, and the profit goes to the shareholders until the capital is exhausted. A law which allows such a state of things turns limited liability into a source of serious public danger. From the point of view of common business prudence the following rules ought to be strictly maintained : a sum representing the depreciation of a company's property, whether acquired for permanent investment or for the purpose of resale, should be deducted from the profits in each year, and either credited to a depreciation account or deducted from the

1 In re National Bank of Wales (1899) 2 Ch. 629, 669.

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