secured, or certain to be eventually paid, cannot be distributed as dividends to stockholders, the same not constituting surplus profits within the meaning of a statute making it unlawful for savings institutions to declare dividends except from "surplus profits arising from the business of the corporation." 71 But, on the other hand, a Scotch case supports the proposition that, although interest due to a corporation is not paid in cash, if securities more than sufficient to cover principal and interest are received by it from the debtor from time to time, the interest may be carried to the profit

71 People ex rel. Farnum v. San Francisco Sav. Union (1887) 72 Cal. 199, 13 Pac. 498. The above conclusion was applied so as to forbid directors of a savings bank from including in surplus profits from which they could declare a semiannual dividend interest on United States government bonds which had accrued, but was not payable until a future date, and also matured but uncollected interest on loans each of which was secured by real estate more than double in value the amount of the loan and interest. The court said: "Money earned as interest, however well secured, or certain to be eventually paid, cannot in fact be distributed as dividends to stockholders, and does not constitute surplus profits within the meaning of the statute. To hold the contrary would, we think, tend to open the door to a practice under which the assets of corporations would be liable to distribution as dividends, upon no surer basis than the judgment of their debtors as to the value of their bills receivable. Such is not, and should not be, the policy of the law. The capital and all the assets, except surplus profit, are to be retained intact, and form a fund to which creditors of the corporation have a prior right over stockholders. If some portion of this fund may be distributed in lieu of interest earned, but not collected, then cases may arise in which all of it may be so distributed, a practice which we deem subversive of the essential principles upon which corporations of this character are organized, and under which practically the rights of credi tors might be greatly impaired. The fact that defendant has security for

and loss account, and dividends declared on the basis that the interest has been paid; and that this is true although this course of procedure extends over a period of years.72

It seems that a statute which binds directors to charge their corporations with a debt such as a dividend due to

stockholders, immediately payable in cash, because of the possession of net or accumulated profits, should be construed to have in contemplation profits which exist practically in cash, i. e., in the form in which they must be paid out.73

the interest due does not make the unpaid interest a profit. Until paid in, it is not money in hand. Contingencies may arise to prevent its being realized. It is time to distribute this interest when it is actually received by the bank."

72 City of Glasgow Bank v. Mackinnon (1881) 9 Sc. Sess. Cas. 4th series, 535. It was held that a director of the corporation, a bank, was not liable as for payment of dividends out of capital, but the case turns partly on other grounds, as delay in bringing the action. A Scotch bank in this instance made advances from time to time for the completion of an American railway, in order to protect capital already invested by the bank; interest was not paid, but the bank received and held securities for the principal and interest which were reasonably sufficient to cover the debt, and no loss would have been sustained except for forced realization on the securities, on the liquidation of the bank. The court referred to the "adventurous appropriation" of unpaid interest to the payment of dividends semiannually for twelve years, and warned against considering the course pursued as a safe precedent.

73 See Stevens v. United States Steel Corp. (1905) 68 N. J. Eq. 373, 59 Atl. 905, construing Park v. Grant Locomotive Works (1885) 40 N. J. Eq. 114, 3 Atl. 162, affirmed on opinion of lower court in (1888) 45 N. J. Eq. 244, 19 Atl. 621. In the latter case, where the agreement governing the rights of stockholders required that the net profits should be distributed annually to the stockholders, and the court said that what the parties meant by the

g. Subsequent events as affecting question.

It is well settled that, in determining whether there are profits of a corporation from which dividends may be, or should have been, declared, the transaction must be viewed as of that time; debts which then appeared good and collectable, and which were propwords "net profits" was not the whole sum appearing as net profits on any annual statement, if such sum represented securities taken by the corporation in the ordinary course of its business which were not yet due and which could not be converted except at a price much less than that which the corporation had given for them; but that what was meant was net gain that had been actually realized, or which could be quickly realized without loss by a sale of the assets representing the profits.

74 In determining whether dividends. were earned, the facts must be taken as they existed at the time the dividends were declared. Hubbard v. Weare (1890) 79 Iowa, 678, 44 N. W. 915.

And since, in determining whether there are net profits out of which a dividend may rightfully be declared, the transaction must be viewed as of the time the dividend is declared, and, if accounts were then considered good, they should not be regarded as lost merely because they afterwards prove to be so, the fact that, several years after a dividend was declared, certain accounts which were then owing to the company could not be collected in winding up its affairs, does not show that they should not have been considered among the assets for the purpose of determining whether a dividend was rightfully declared. Quinn v. Quinn Mfg. Co. (1918) 201 Mich. 664, 167 N. W. 898.

And in Murray v. Beattie Mfg. Co. (1912) 79 N. J. Eq. 604, 82 Atl. 1038, where six years had elapsed since the filing of the bill in a suit to compel the directors to declare additional dividends, it was said that the question was not whether the court, with all the light that had been thrown upon the case by a prolonged litigation, during which the company had continued to thrive and had increased its assets, should now say that the directors should have declared a larger dividend more than six years ago, but

erly included in the assets, cannot be held otherwise merely because subsequent events proved that they were bad; nor can expenditures for capital account, which were then considered proper, afterwards be charged up to surplus, because they subsequently proved to be injudicious.74

whether the directors, in view of their knowledge at the time, their experience of the business, and their reasonable apprehension of its future hazards, were justified in withholding from the stockholders all the profits except a dividend declared; that it would be very unfair, after the directors had for six years conducted a corporation successfully, for the court to say that they ought to have anticipated the successful operation of the company for six years in ad

vance.

The proposition that the transaction of declaring a dividend must be viewed as of the time it was declared, in determining its legality, is supported, also, by Segerstrom v. Holland Piano Mfg. Co. (1924) 160 Minn. 95, 199 N. W. 897.

In an action against an officer and stockholder of a bank to recover dividends paid to him on his stock, on the ground that they were declared and paid out of capital at a time when there were no profits applicable to their payment, the principal inquiry is whether a sagacious and prudent banker would have considered those who were then debtors of the bank as solvent and the debts of the bank good and collectable; the court or jury should place itself as nearly as possible in the place of the managers of the bank at the time the dividends were paid, and decide whether the debts which turned out to be losses ought to have been considered at that time as good or as doubtful assets. Main v. Mills (1874) 6 Biss. 98, Fed. Cas. No. 8,974.

In Re National Bank [1899] 2 Ch. (Eng.) 629, affirmed on other grounds in [1901] A. C. 477, 6 B. R. C. 179, it is held, in determining the question whether a director of a corporation was justified at the time a dividend was recommended, in dealing as he did with debts which have since turned out to be bad, that it is the duty of the court to examine the condition of affairs as they appeared at

IV. Right of directors to borrow money to pay dividends.

It is well settled that circumstances may exist, as where a corporation has

the time the dividend was declared, and not in the light of subsequent events.

And it is held in Re London & General Bank (1894) 72 L. T. N. S. (Eng.) 227, affirmed in [1895] 2 Ch. 673—C. A., that, in determining estimated profits of a bank for dividend purposes, securities held by the bank should be regarded as they would have been considered by a prudent man as of that time.

Also, in Tradesman Pub. Co. v. Knoxville Car Wheel Co. (1895) 95 Tenn. 634, 31 L.R.A. 593, 49 Am. St. Rep. 943, 32 S. W. 1097, it is held that, in determining whether directors are liable for declaring dividends at a time when it is insolvent, in violation of the charter of the corporation, their conduct is to be viewed in the light of the financial status of the company at that period, and not by its ultimate insolvency when later the assets prove to be of much less value than estimated.

See also note 219, infra, as to liability of directors as affected by subsequent events.

Expenditures on the part of a corporation for permanent improvements considered judicious at the time must be treated as capital expenses, and cannot be charged to current working expense, so as to reduce the amount of the surplus profits applicable to dividends, although they turn out to be unprofitable; the result must be treated as a loss of capital. Excelsior Water & Min. Co. v. Pierce (1891) 90 Cal. 131, 27 Pac. 44, where a mining company incurred expense for the construction of a tunnel to a mine, and it was unsuccessfully

sought to hold a director of the company liable for paying dividends otherwise than out of surplus profits.

Where the stockholders of a national bank, in order to escape an assessment of $75,000 by the comptroller in consequence of a bad or doubtful investment of about $71,000, reduced its capital stock by $75,000, and later more than the latter amount was received from such investment, it was held that a stockholder could not compel the bank to distribute this money, the court saying that the bank

in good faith expended net earnings or surplus in capital improvements, which will warrant it in borrowing money to pay dividends.75 Thus, a could only distribute its surplus money accumulated in the course of business, and "its right to distribute would depend upon an examination into the condition and affairs of the bank at that time. The rights

of the shareholders to compel a distribution growing out of the reduction were fixed by the condition of the bank as it existed when the reduction was made, and are not to be determined in the light of subsequent events." McCann v. First Nat. Bank (1887) 112 Ind. 354, 14 N. E. 251. Further litigation over the same transaction reported in (1891) 131 Ind. 95, 30 N. E. 893.

75 United States.-Alabama Consol. Coal & I. Co. v. Baltimore Trust Co. (1912; D. C.) 197 Fed. 347.

California. Excelsior Water & Min. Co. v. Pierce (1891) 90 Cal. 131, 27 Pac. 44.

Maine.-Hazeltine & B. & M. L. R. Co. (1887) 79 Me. 411, 1 Am. St. Rep. 330, 10 Atl. 328 (dictum).

Maryland.-State v. Baltimore & O. R. Co. (1847) 6 Gill, 363.

New York.-Bankers Trust Co. v. R. E. Dietz Co. (1913) 157 App. Div. 594, 142 N. Y. Supp. 847; Holmes v. St. Joseph Lead Co. (1914) 84 Misc. 278, 147 N. Y. Supp. 104, affirmed, without opinion, in (1914) 163 App. Div. 885, 147 N. Y. Supp. 1117; Frank Gilbert Paper Co. v. Prankard (1923) 204 App. Div. 83, 198 N. Y. Supp. 25. See also Cox v. Leahy (1924) 209 App. Div. 313, 204 N. Y. Supp. 741.

England. Stringer's Case (1869) L. R. 4 Ch. 475.

In Excelsior Water & Min. Co. v. Pierce (Cal.) supra, in which it was unsuccessfully sought to hold a director of a mining company liable for improperly declaring a dividend on the ground that the same was not declared from the surplus profits, the court took the view that there had been in effect only a temporary borrowing from the fund applicable to the payment of dividends, for permanent improvements, which fund might legally be subsequently replenished by borrowing to pay dividends. It is said: "A mining company is working its mines at a profit, but discovers that they can be worked to bet

corporation is not required to keep a sum representing net profits which it intends to distribute as dividends idle in its coffers until the period of declaration of a dividend arrives; it may use the same and refund a net profit by borrowing, even from stockholders,

ter advantage by constructing a new tunnel; that is to say, it will be wise economy to incur an expense of, say, a hundred thousand dollars to construct such a tunnel; that it will in fact add more than that sum to the value of the property. Clearly, we think, the corporation would be justified in incurring a debt to that amount to carry out the object, and that it could go on declaring dividends after providing for the payment of the accruing interest, and for the gradual extinction of the principal of such debt. But suppose, instead of borrowing in advance to meet payments on the tunnel, it makes some of the payments out of the current profits of its mining operations, -profits justly applicable, at its option, to the payment of dividends, but not presently needed to meet a declared dividend. Afterwards it borrows money, no more than it might have borrowed originally on account of the tunnel, and out of the money so borrowed replenishes the fund applicable to dividends. In such a case the result is precisely the same as if the money had been borrowed sooner, and the identical money borrowed paid out on the tunnel. Nothing has been accomplished beyond what the directors had a right to do, and surely the mode in which it has been done can make no difference. In fact, the transaction may be regarded as a temporary borrowing from the dividend fund of a sum necessary to meet an immediate demand, with the advantage to the corporation of keeping its money employed and saving it the payment of interest."

So, it is said in Cox v. Leahy (N. Y.) supra, that the directors of a corporation may declare and pay a dividend when the corporation has surplus profits equal to or greater than the amount of the dividend paid, and that the fact that a corporation does not have the ready funds with which to pay the dividend does not render the declaration and payment illegal.

And it is held in Holmes v. St.

in order to pay dividends.76 And it is said in a Federal case,77 that a corporation may have earned money and invested it for corporate purposes, and that, if it has, it may borrow cash for the purpose of paying dividends. And it was held in this instance that the Joseph Lead Co. (1914) 84 Misc. 278, 147 N. Y. Supp. 104, affirmed without opinion in (1914) 163 App. Div. 885, 147 N. Y. Supp. 1117, that a corporation which has earned profits is not precluded from distributing them as dividends, because some of its assets are in such a form that it must borrow money for its business.

And the doctrine is approved also in Bankers Trust Co. v. R. E. Dietz Co. (1913) 157 App. Div. 594, 142 N. Y. Supp. 847, that a corporation may, if it so elects, borrow money with which to pay dividends, when it has invested the profits in improvements at least equaling in value the dividends declared.

That money may properly be borrowed by a trading company under some conditions to pay dividends is supported also by Stringer's Case (1869) L. R. 4 Ch. (Eng.) 475, where the assets turned out to have been overvalued, in good faith, and it was held that the dividends could not be recovered. It was said that if the court were to lay down as a rule that there must be actual cash in hand to the full amount of the dividends declared, it would be laying down a rule inconsistent with the custom of the company and with mercantile uses.

In Frank Gilbert Paper Co. V. Prankard (1922) 195 N. Y. Supp. 638, affirmed in (1923) 204 App. Div. 83, 198 N. Y. Supp. 25, it is held that a charge of conspiracy to make dividends not earned should be made unequivocally; and that an allegation. in a complaint against directors and officers of a corporation, that the defendants "caused dividends to be declared and paid, which dividends were paid out of borrowed money, and not out of profits, and were wholly illegal," was insufficient, where it was not alleged that there were no surplus profits.

76 State v. Baltimore & O. R. Co. (1847) 6 Gill (Md.) 363.

Alabama Consol. Coal & I. Co. v. Baltimore Trust Co. (1912; D. C.) 197 Fed. 347.

fact that some of the money paid to stockholders as dividends was borrowed for that purpose did not show that the dividends paid were not paid out of the earnings or surplus.

This procedure of investing net earnings in corporate enterprises, and subsequently borrowing money represented by such earnings to pay dividends, obviously may have certain advantages, as the keeping of the funds of the company actively at work, and is not apparently an inherently dangerous policy to be condemned by the courts.78

But the view has been taken that a court of equity will not compel direc

78 See Excelsior Water & Min. Co. v. Pierce (1891) 90 Cal. 131, 27 Pac. 44; State v. Baltimore & O. R. Co. (Md.) and other cases cited, supra.

79 Hunter v. Roberts, T. & Co. (1890) 83 Mich. 63, 47 N. W. 131. See note 111 infra.

And, in Stevens v. United States Steel Corp. (1905) 68 N. J. Eq. 373, 59 Atl. 905, the court observed that it knew of no rule of equity which required directors to sell property at a loss, or to borrow money, in order to pay dividends, because an appraisement of the corporate assets exhibited a surplus of what bookkeepers might call profits.

In Murray v. Beattie Mfg. Co. (1912) 79 N. J. Eq. 604, 82 Atl. 1038, it was said that stockholders can only obtain the aid of a court to compel the distribution to them of profits which exist in the form of cash, or which can be readily converted into cash, and which the corporation does not reasonably require for the continuation of the business.

80 See Sexton v. C. L. Percival Co. (1920) 189 Iowa, 586, 177 N. W. 83, in note 390, infra.

81 Lee v. Neuchatel Asphalte Co. (1889) L. R. 41 Ch. Div. (Eng.) 1. It was held in this instance that a limited company formed to acquire and work a mine or quarry, which was of a wasting nature, might pay dividends from profits without setting aside money to meet the depreciation in the value of its wasting property, and that in so doing nothing in the Companies Act was violated. It was said that, if a company is formed to acquire and work a property of a wasting nature, as a mine, quarry, or

tors of a corporation, acting in good faith, to borrow money for the purpose of paying dividends, against their judgment and wishes.79

The presumption is that a stock dividend was from earnings, and not from capital, even though at the time the corporation was in such a financial condition that it could not have paid a dividend of like amount in cash without borrowing money,80

V. Wasting-assets corporations. The so-called wasting-assets doctrine seems to have originated in an English case of comparatively recent date.81 According to this doctrine a

a patent, the capital expended in acquiring the property may be regarded as sunk or gone, and if the company retains sufficient assets to pay its debts, there is nothing in the act to prevent any excess of money obtained by working the property, over the cost of working it, from being divided among the shareholders; that there is no obligation imposed by law or statute to create a reserve fund out of revenue to recoup the wasting nature of capital; and that, subject to any provision to the contrary contained in the articles of the company, the disposition of the revenue is entirely in its hands and under its control. And in reply to the contention that a company is not at liberty to pay a dividend unless it can show that it has available property which at the time of declaring the dividend is equivalent to its nominal or share capital, it was said (opinion of Lopes, L. J.): "In my opinion such a contention is untenable. Where nominal or share capital is diminished in value, not by means of any improper dealing with it by the company, but by reason of causes over which the company has no control, or by reason of its inherent nature, that diminution need not, in my opinion, be made good out of revenue. In such a case a dividend may be paid out of current annual profits, out of profits arising from the excess of ordinary receipts over expenses properly chargeable to the revenue account, provided there is nothing in the articles of association prohibiting such an application, and provided it is done honestly. It appears to me that, if a contrary view were adopted, it might be success