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The president of the company was requested to remain in charge
during the month of February, the salary to be arranged here-
after, and he was authorized to reopen the macldne shop, and to



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H^ov. lS!d5.] Tradesman Pub. Co. v. Enoxville C. W. Co. 951

complete such unfinished work as was on hand, and also empower-
ing him to sell the Carter county property, which was all covered
by the trust deeds made to Jackson and Payne. On March 30,
1892, the directors authorized the execution of an additional deed
of trust to secure payment of claim of Jennifer Iron Company for
«1,080.

It further appears that no meetings of the directors were held
from March 30, 1892, to May 10, 1892, when the present bill was
filed. During ^^ this time no preparations were made for the
resumption of business, but there was every indication of perma-
nent auspension and a final liquidation of the affairs of the com-
pany.

The claim of the company that it was solvent is, in our opinion,
based largely upon extravagant valuations of its assets, and espe-
cially upon an overestimate of the value of certain lands owned
by the company in Carter county. The valuation put upon this
land by the stockholders was entirely arbitrary, and without any
sufficient reason to justify such an exaggerated figure. The evi-
dence shows that there was no market for such real estate in 1892;
that, on account of the general depression in business, it was im-
poeeible to sell real estate, and that such an asset was entirely un-
ayailable. When this bUl was filed, the company's matured and
tmeettled floating indebtedness exceeded $70,000; its bonded
indebtedness of $100,000 would mature in two months; the entire
assets of the company were covered with deeds of trust, and the
company was entirely without resources to liquidate this heavy
indebtedness.

The question, then, is whether a creditor, on May 10, 1892,
after the trust deeds had been executed and the assignees had
taken possession of the entire property of the company, could file
and maintain a bill to wind up the affairs of the company as an
insolvent corporation. We think the right to maintain the bill
is clear and unquestionable.

Complainant, without obtaining a judgment at law •^ upon
its demand, had the undoubted right to file this bill and have
the company wound up as an insolvent corporation, and its assets
distributed ratably among all the creditors. As stated in the brief,
''Vhile this bill was originally filed only to collect a debt of $400,
there are now before the court $190,000 of creditors, on whose be-
half it was also filed, and who now join with the original com-
plainant in the demand that it be sustained, and the assets of this
insolvent corporation applied to the payment of its just debts."

The bill is clearly maintainable under the following section!
<i llilliken and Ventrees' Code:



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952 Tbadesmah Pub. Co. v. Knoxvillb C. W. C!a ' [Teniu

''Sec. 5037. The creditors of a corporation may also, without
first having obtained a judgment at law, file a bill in the court
of chancery to attach the property of the corporation, and sub-
ject the same, by sale or otherwise, to the satisfaction of their debt,,
when the corporate franchises are not used, or haye been granted
to others in whole or in parf

''Sec. 6038. In such cases the court may appoint a receirer,.
take an account of the affairs of the corporation, and apply the
property and effects to the payment of debts pro rata, and divide
the surplus, if any, among the stockholders.''

"Sec. 4168. A corporation is not dissolved by the nonuse or
assignment to others, in whole or in part, of its powers, franchises,,
and privileges, tmless all the corporate property has been appro-
priated to the payment of its debts; and any creditor, for him-
self ^'^ and other creditors, whether he has recovered judgment
or not, or any stockholder, for himself and other stockholders,,
may file a luU, under the provisions of this chapter, to attach the
corporate property, and have such property applied to the pay-
ment of the debts of the corporation, and any surplus divided
among the stockholders."

In Smith v. St Louis etc. Ins. Co., 6 Lea, 569, it was said that,,
under these sections of the code, "the court may find [as] a fact
that the coiporation is insolvent, or has ceased to do business^
or has granted its franchises, in whole or in part, to others, and,,
upon the adjudication of any of these facts, the right to adminis-
ter its effects for the benefit of creditors follows."

We are also of the opinion that the execution of these deeds-
of trust, under the drcumstances, was an overt act of insolvency,
and was a preferential diversion of the corporate assets to the pay*
ment of debts of one dass to the exclusion of other classes. The
execution of the deeds of trust, under the circumstances, was a^
confession of insolvency. We therefore adjudge the several deedr
of trust executed by the car wheel company to Payne, Spillman,.
and McMillan void, and the decree of the chancellor in setting:
them aside was correct.

We do not decide, and do not winh to be so understood, that a
corporation, although actually insolvent, so long as it is a going-
concern, may not deal with its property and transfer it for value,,
in ^^ due course of business, to general creditors. A mere ex-
cess of liabilities over assets would not alone be sufficient to jus-
tify an interference and stoppage of business at the suit of a cred-
itor. "A corporation is authorized to continue the management
of its affairs, to deal with its property, and to assign it for value,,
in due course of business, notwithstanding its actual insolvency^

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Nov- 1895.] Tradesman Pub. Co. v. Knoxvillb C. W. Co. 958

60 long as there is an honest intention and a reasonable expecta-
tion on the part of the company of redeeming its fortunes; and it
is only when a corporation is about to defraud its creditors by
waste of its assets, or when the insolvency of the company is hope-
less, so that further prosecution of the enterprise would clearly
be at the expense of the creditors, that the latter may interfere
to protect their lien'^ 2 Morawetz on Corporations, 2d ed., sec.
78G; Wait on Insolvent Corporations, sec. 34, quoting the above
with approval; 2 Spelling on Corporations, sec. 712. '^t has
accordingly been held that a corporation which is insolvent and
unable to pay all of its creditors in full may continue its opera-
tions, and pay off debts in regular course of business, though a
part of the creditors be thereby deprived of their security^': 8
Morawetz on Corporations, 786.

We hold, however, that this corporation, at the date of the filing
of the bill, was not only actually insolvent, but had committed
«n overt act of insolvency by preferential assignments to creditors.

The next question presented is in respect of the ^'^ individual
liability of the directors. The charter of the Enoxville Car
Wheel Company contains the following clause, to wit: *^ the
indebtedness of said company shall at any time exceed the capital
stock paid in, the directors assenting thereto shall be individu*
ally liable to the creditors for said excess.'' The chancellor found
that the capital stock of the company subscribed and paid in
amounted to $107,000, and that all debts created after April 30,
1885, were in excess of the capital stock paid in; that the directors
had assented to the creation of such indebtedness, and were indi-
vidually liable. He decreed, however, that tins liability upon the
part of the directors was secondary, and that the sum could not
be ascertained until the property of the corporation was sold and
its proceeds distributed. The finding of the chancellor that the
capital stock of the company was $107,000 is tuLlj sustained by
the record. The capital stock is shown by the first report made
by the secretary and treasurer of the company to stockholders, on
May 19, 1882, to be $107,000, and it appears at the same sum in
every subsequent annual report from that time to February 1,
1892, upon which date the last report was made. The capital
atock is proven to have been $107,000 by C. H. Brown, who was
secretary and treasurer, or president of the corporation from its
organization*

It is insisted in behalf of complainants that the excess of indebt-
edness over capital stock for which ^"^ the directors are liable
Mnounts to the sum of $73,000. It is conceded by defendants



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964 Tradesman Pub. Co. v. Ekozvtlle C. W. Co. [Teim.

that if the term "indebtedness,** employed in the statute, should
be held to embrace the fixed bonded indebtedness of the company,
as well as its floating debts, then its indebtedness does exceed the
capital stock paid in. The insistence in behalf of the directors
on this branch of the case is twofold, to wit: 1. That the term,
"capital stock paid in,'' includes not merely the capital stock paid
in by the subscribers, but the entire capital and available assets
of the company; 2. That the term "indebtedness," used in the
statute, does not include the bonded indebtedness, but merely the
floating debts, of the company. The proper solution of this ques-
tion involves the determination of the correct meaning of the
terms, "indebtedness** and "capital stock paid in,'* as employed
in the charter of the company. What, then, is the meaning, in
this connection, of the term "capital stock paid in"?

The insistence of defendants' counsel is that the assets on hand
and available for payment of debts, no matter how derived, must
constitute the fund called "capital stock paid in." In support
of this contention, counsel cites Beach on Corporations, volume
2, section 466, viz: **In respect to corporate capital, the word
'capital' is, in general, used in agnifying the sum paid in by the
subscribers, with the addition of all gains and profits realized, with
such diminutions as have resulted from losses incurred ^^^ in
transacting business. In this sense, the capital of a corporation
is the fund with which it transacts its business, and embraces all
its property, real and personal, constituting the assets of the cor-
poration, such as are subject to execution at law. So much of the
capital as is represented by the capital stock issued must be kept
unimpaired during* the existence of the corporation; but that
portion of the capital which represents the surplus arising from
the operation of business of the corporation is subject to the dis-
cretion of the managers in regard to its disposition. Therefore,
profits remain a part of the fund constituting the capital until
actually divided among the stockholders."

We do not think the quotation from Beach on Corporations
sustains the position. It will be observed that Mr. Beach, in this
quotation, is dealing with the word "capital," and he does not
treat this terra as synonymous with "capital stock." In the very
next section the same author says, viz: '^here is a distinction be-
tween the capital of a corporation and its capital stock, thougb
they are often used as interchangeable terms."

The capital stock is clearly not the same as property possessed
by the oorporaition, for the capital stock remains fixed, although
the actual property of the corporation varies in value, and is con-



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Nov. 1895.] Tradesman Pub. Co. v. Knoxville C. W, Co. 966

stantly increasing or diminishing in amount. What the amount
of the capital shall be is in the discretion of the managers^ but the
amount of the capital stock ®^ is limited, and determined by the
charter and the ]aws goveming it It follows, therefore, that the
limit imposed upon the capital stock of the corporation does not
restrict the amount of property which it may own: 2 Beach
on Corporations, sec. 466. This distinction is clearly shown in
section 79] of Morawetz on Corporations, in these words: ''The
amount of the capital stock of a corporation is usually fixed at a
definite sum by the charter, or other instrument, which has been
agreed to by the shareholders as containing the essential condi-
tions of their association. It is so fixed, partly for the purpose
of determining the scope of the compan/s business and the rela«
tive rights and obligations of its shareholders as among them-
selves, and partly, also, for the purpose of obtaining commercial
credit on behalf of the corporation by indicating to it what secu-
rity has been provided with those who deal with it Every person
who becomes a shareholder in a corporation and every person who
deals with the corporation, understands that the fund con-
tributed, or agreed to be contributed, as the compan/s capi-
tal shall be charged with the payment of corporate debts. It
is likewise understood, where there is no express provision to the
contrary, that the funds so charged shall be the only security for
creditors, and that the shareholders shall not be individually
liable for the corporate debts and obligations. Every contract
entered into by the corporation, therefore, includes: 1. An im-
plied agreement ^® that the company's capital shaU be held and
used as a trust fund, equitably pledged as security for the corpo-
rate debts; 2. An implied representation that the company's cap-
ital has been paid in, or subscribed, as indicated by the company's
charter, and that the fund contributed or subscribed has been pre-
served for the purposes for which it was provided." ''Capital stock
is the sum fixed by the corporate charter as the amount paid in, or
to be paid in, by the stockholders, for the prosecution of the business
of the corporation and for the benefit of corporate creditors. The
capital stock is to be clearly distinguished from the amount of
property possessed by the corporation. Occasionally it happens
that, under the terms of statutes relating to 'taxation' which have
been drawn without regard to the technical meaning of words,
the courts will construe the capital stock to mean 'all the actual
property of the corporation.' But this is for the purpose of carry-
ing out the intent of the statute, and is not the real meaning of
the term. At common law the actual stock does not vary, but re-



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956 TaAD£8MAN Pub. Co. v. Kmoxvillb C. W. Co. [Teon*

znaLns fixed, although the actual property of the corporation may
fluctuate widely in yalue, and may be diminished by loBBea or
increased by gains'': 1 Cook on Stockholdersy see 9. See, also,
Bailroad Cos. y. Gaines, 97 U. S. 697; Ohio life Ins. Co. t. Mav
chants' Ins. Co., 11 Humph. 1; 53 Am. Dec. 742; Union Bank t.
State, 9 Yerg. 490; Street Kailroad Co. y. Morrow, 87 Tenn.
406; Memphis y. Ensley, 6 ^^ Baxt 553; 32 Am. Bep. 532;
Kashyille Gaslight Co. y. Mayor of Nashyille, 8 Lea, 406. We
therefore conclude that the term '^capital stock paid in'' means
ihe amount subscribed and paid by the stockholders, and that
amount is clearly shown by the proof to haye been $107,000.

The next question presented is whether the word ^^debted*
ness," in the clause of the charter imposing personal liability on
the directors assenting to an indebtedness in excess of the capital
stock paid, includes bonded indebtedness. The chancellor so
held. The contention of the directors' counsel is, that the term
means the floating indebtedness, and does not embrace the bonded
debt Counsel, in order to support this contention, go into a his-
tory of preyious legisktion on this subject, but we haye been
unable to deriye much light from that source. The only mate-
rial difference we note between the former acts and the statute in
question is that,in the latter, the words^^paid in"haye been added.
The former acts simply proyided that the indebtedness should not
exceed the capital stock. We think the addition of the words
''paid in" strengthens, rather than diminishes, the force of the
argument that bonded indebtedness is within the meaning of the
statute. The construction contended for by counsel for the di-
rectors would lead to this anomaly, that directors, haying con-
tracted indebtedness to the limit allowed by the charter, may fund
this liability in bonds, secure than by a recorded mortgage, and
then, without risk to themselyes, incur additional ^^^ indebted-
ness, and repeat the process toties quoties. We haye been fur-
nished with no direct authority on the point now bdng adjudged.
Counsel, howcyer, cite Stone y. Chisolm, 113 XT. S. 302, where it
appears that the indebtedness, with which the directors were
sought to be charged under a North Carolina statute was a regis-
tered bonded indebtedness, but the precise point raised here was
not presented or decided. We think this section of the charter
of the car wheel company is unambiguous, and fhe term 'in-
debtedness" clearly includes the bonded debt

It is insisted by defendants' counsel that the directors' liability
does not constitute a fund for the benefit of creditors generally,
but that it is a specific liability in fayor of indiyidual creditors



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I\ov. IbOO.j Tkadesman Pub. Cu. v. Knuxvillb C. W, Co. 957

^hose debts were illegally contracted, and that other creditors,
whose debts were legally contracted, cannot avail themselves of it.
That proposition is true; but, in conceding tliis, we do not wish to
be understood as agreeing that each creditor whose debt has been
illegally contracted may maintain a sopai-ate suit against the di-
rectors for the assertion of his individual claim. We held in
Moulton V. Ck)nnell-Hall-McLester Co., 93 Tenn. 377, that the
liability of the directors ia a fund created by the statute for the
benefit of all the creditors whose debts were incurred in excess of
the capital stock paid in with the assent of directors, and that the
bill mhst be filed for the benefit of all creditors so situated. In
this view, the present bill is properly framed: •**• Homerv. Hen-
ning, 93 U. S. 231; Stone v. Chisolm, 113 U. S. 302; Pollard t.
Badley, 20 Wall. 620. In Stone v. Chisolm, 113 U. S. 302, Jus-
tice Matthews, in stating the reason of the rule, said, tIs: '^The
conditions of the personal liability of the directors of the corpo-
ration, expressed in the statute, are that there shall be debts of
the corporation in excess of the capital stock paid in, to which

the directors sought to be charged shall have assented To

ascertain the extent of the liability in a given case requires an ac-
count to be taken of the amount of the corporate indebtedness,
and of the amount of the capital stock actually paid in, facts
which the directors, upon whom the liability is imposed, have a
right to have determined once for all in a proceeding which
shall include all who have an adverse interest and a right to par-
ticipate in the benefit to result from enforcing the liability

The evident intention of the provision is, that the liability shall
be for the common benefit of all entitled to enforce it, according
to their interest, an apportionment which, in case there cannot be
satisfaction for all, can only be made in a single proceeding, to
which all interested can be made parties. It is immaterial," con-
tinues the court, "that, in the present case it does not appear that
there are other creditors than the plaintiff in error. There can be
but one rule for construing the section, whether the creditors be
one or many.**

••* The next assignment is that the chancellor erred in decree-
ing that all the debts of the company contracted after April 30,
1885, were created with the assent of the directors. It may be
conceded that this assignment presents a question of some diffi-
culty, and probably the determining isBtie in the case. The lan-
guage of the statute is, viz: *^t the indebtedness of said company
ehall at any time exceed the capital stock paid in, the directoit
assenting thereto shall be individually liable to the erediton for



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956 Tbadksman Pub. Co, v, Knoxvills C. W. Ca [Teniu

said excess.'' It may be remarked that this clause is peculiar to
charters of mining and manufacturing companies, and ia a dis-
crimination, to some extent, against this class of domestic corpo-
rations. It has been uniformly held that such statutes, being in
derogation of the common law, must be strictly construed. Aa
stated by Mr. Cook in his work on Stocks and Stockholders:
''They [such statutes] are a wide departure from established
rules, and, though founded on considerations of public policy and
general convenience, are not to be extended beyond the plain in-
tent of the words of the statute": Hand y. Cole, 88 Tenn. 402,
403; 2 Spelling on Corporations, sec. 921; Allison y. Coal Co., ST
Tenn. 62, 63.

Says Mr. Thompson in his Commentaries on Priyate Corpora-
tions, section 4271: 'It is a principle of legal procedure thaA>
when a party sues to enforce a liability created by statute in dero-
gation of the common law, he must not only distinctly ^^ ayer,
but he must make strict proof of, a case within the terms of the
statute. The principle operates, if possible, more strongly where,
as in the case under consideration, the statute creates a liability
in the nature of a penalty. The principle is believed to be a rule
of right rather than a rule of procedure, and hence applicable in
the equitable as well as the legal forum.'' Where the liability is
imposed upon the directors assenting thereto, "the creditor ....
must both allege and prove that the directors against whom he
proceeds did assent to the unlawful contract": Thompson on
Private Corporations, 4206.

Again, the same author, at section 4264, says: "On the other
hand, where the liability .... is for the excess, an interpreta-
tion has been fallen into which assimilates their liability to that of
guarantors of final payment, which is believed to comport best
with the real policy of all such statutes, by holding that the effect
of the statute is to make the directors individually liable for such
specific debts only as were contracted with their assent in excess
of the paid-up capital, and which remained unpaid after the ex-
haustion of the corporate assets": 3 Thompson on Private Corpo-
rations, sec. 4264.

These principles have all been recognized and applied by thi?
court in the case of Allison v. Coal Co., 87 Tenn. 62, 63. The
liability of a director is contingent, and is made to depend upon
four conditions, viz: 1. Assent by him to the creation of ••■ the
particular debt upon which he is sued; 2. That the debt has not
been paid; 3. That the assets of the corporation have been ex-
hausted; 4. That the particular debt is in excess of the capital



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Nov. 1895.] Tradesman Pub. Co. v. Knoxvillb C. W. Co, 969

stock. Judge Lurton^ in delivering the opinion of this court in
Allison V. Coal Co., 87 Tenn. 62, said: ^TJnless the very debt upon
which it is sought to hold the director to individual liability was
created by the assent of the director, it is not the case provided
for by the charter.^' The cardinal inquiry, then, upon this branch
of the case is whether there is proof in this record of assent by the
directors to the creation of the particular debts for which the di-
rectors are sought to be held individually liable under this statute.
It is insisted by counsel for the directors that the assent contem-
plated by the statute must be given by the directors, not as indi-
viduals, nor even as stockholders, but in their capacity as directors.
We are constrained to believe, upon mature consideration, that
this construction is the proper one to be given this statute. This
construction accords with the general rule that directors must
ftct as an official body. Mr. Cook, in his work on Stocks and
Stockholders, states the rule thus: 'Moreover, the directors can
contract and act only as a board duly notified and assembled.
The members of the board cannot agree separately and outside
of the meeting, and thereby bind the corporation. Nor can a
minority of the body meet and bind the board. A majority must
be present, and then a majority of that majority binds the corpo-
ration. ^^ A single director has no power to contract for the
corporation'': 2 Cook on Stocks and Stockholders, see. 712. So
we think, when it is sought to hold a director to individual liabil-
ity under the provisions of this highly penal statute, it must be
shown that his assent was given in his capacity as director, acting
concurrently with a majority of the official board. We do not
hold that the only evidence of this official assent must be found
in the minutes of the board, but we do hold there must have



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