Opinion
Submitted February 12th, 1932.
Decided May 16th, 1932.
1. The powers and duties of the directors of a company incorporated under the Insurance act ( 2 Comp. Stat. p. 2838) at the dissolution of the company are to be ascertained by the provisions of the General Corporation act in view of section 57 ( 2 Comp. Stat. p. 2855) of the Insurance act which provides that all companies organized under the latter act shall be subject to all the duties and obligations imposed by the General Corporation act.
2. Section 58 of the General Corporation act contemplates a pro rata distribution among creditors, should assets be inadequate to pay creditors in full. Defendant will therefore be restrained from further prosecuting an action at law to recover money due to him from the dissolved corporation. Not to do so would seriously embarrass the board of directors, as statutory trustees of the dissolved corporation, from advantageously performing their trust.
3. On the dissolution of a corporation, its property constitutes a trust fund for the payment of debts and stockholders. This conception of a trust fund for the benefit of creditors inherently embraces the idea of equal protection, and the directors, as trustees of this trust, are entitled to the aid of the court of chancery to protect the trust fund from acts which will either deny an equal distribution or prevent its efficient administration by trustees.
4. Aside from this element of equitable jurisdiction, section 58 of the General Corporation act contemplates that creditors prove their claims in a manner to be directed by the court of chancery, and a pro rata distribution to creditors should the assets prove inadequate to discharge all claims.
On appeal from a decree of the court of chancery advised by Vice-Chancellor Leaming, who filed the following opinion:
"I adhere to the views expressed by me in Trustees of Sea Isle City Realty Co. v. The First National Bank of Ocean City, 87 N.J. Eq. 84, and Camden Mortgage Guaranty and Title Co. v. Borton, decided July 16th, 1930, but not reported (Docket No. 79/189). The facts in the latter case are the same as in the present case.
"The restraint sought by complainant will be awarded."
In the unreported case of Camden Mortgage Guaranty and Title Co. v. Borton, referred to above and relied upon in the court below in the instant case, Vice-Chancellor Leaming delivered the following opinion:
"Camden Mortgage Guaranty and Title Company was incorporated under our Insurance Companies act ( 2 Comp. Stat. p. 2838) and has been voluntarily dissolved pursuant to section 15 of that act as amended by P.L. 1929 p. 771. That section provides that upon such dissolution `the board shall proceed to settle up and adjust its business and affairs,' the board at this time is actively engaged in settling up the affairs of the dissolved corporation. The Insurance act nowhere prescribes the powers or duties of the board in settling up the business after dissolution except in section 57 ( 2 Comp. Stat. p. 2855). That section provides:
"`All companies organized under this act, and the stockholders, members and directors thereof, shall have all the powers granted and be subject to all the duties and obligations imposed by the act concerning corporations, approved April twenty-first, one thousand eight hundred and ninety-six, and the acts supplementary thereto and amendatory thereof, except so far as they may be inconsistent with the provisions of this act.'
"It seems clear that by force of this section the powers and duties of the directors at dissolution are to be ascertained by the provisions of the General Corporation act therein referred to.
"The material provisions of the General Corporation act relating to the affairs of dissolved corporations are sections 53 to 60. 2 Comp. Stat. pp. 1634-1637.
"The present bill of complaint is filed by the board of directors as statutory trustees, and seeks to restrain defendant from further prosecuting an action at law to recover money due to him from the dissolved corporation. The indebtedness is admitted.
"The ground of relief is precisely the same as that in Trustees of Sea Isle City Realty Co. v. First National Bank of Ocean City, 87 N.J. Eq. 84, in which case restraint was sustained by me. If defendant herein prosecutes his action at law to judgment, the existence of the judgment will alone seriously embarrass the advantageous performance of the trust, but defendant's obvious purpose is also to enforce the payment of the judgment by process of execution and thus collect as a preferred creditor. It is entirely clear that if creditors with undisputed claims are privileged to enforce their claims in this manner an advantageous administration of the trust will be impossible.
"In these circumstances I adhere to the views stated in the case cited. Section 58 of the act contemplates a pro rata distribution among creditors, should assets be inadequate to pay creditors in full; the enforcement of admitted claims is clearly inconsistent with that duty on the part of the trustees. While it does not appear that this corporation is not in enjoyment of assets which, if properly conserved, may be adequate to discharge all its liabilities, no one can safely assume to predict the result if creditors are to enforce immediate payment by judgments, or even encumbered the assets by unnecessary judgment liens.
"The argument presented against the duty of the trustees to make a pro rata distribution is that section 58, which so provides, is applicable only in case the provisions of section 56 have been invoked by a creditor or stockholder. On the contrary I entertain the view that all the sections from 53 to 60, inclusive, are a part of one general plan for winding up the corporation's affairs, and that the only office and purpose of section 56 is to enable the court to remove the statutory trustees, if good cause exists. The refusal of the court to remove in no way germinates new or other powers or duties in the trustees; in such case they continue to function as theretofore. Accordingly the provisions of section 58 are not to be understood as relating only to trustees whom creditors or stockholders have unsuccessfully sought to remove. Section 57 specifically relates to proceedings under section 56, but section 58 is in no manner limited and embraces both receivers and trustees, and provides for pro rata distribution, as far as the assets will extend, among `all the creditors of the corporation who prove their debts in the manner directed by the court;' any balance to stockholders. It will be noted that all the provisions of the act from section 53 to 60 are in one enactment and relate to the one general subject of winding up the affairs of the dissolved corporation and the disposition of its assets; and that all these sections are essentially the same as corresponding sections of the act of April 7th, 1875 (Revision of 1875, page 175). Section 62 of that act is essentially the same as section 58 of the present act, but more specific in its terms touching pro rata distribution, and section 63 gives to laborers preferred claims.
"Referring to section 59 of the Corporation act of 1875, which is the same as section 53 of the present act, Mr. Justice Depue, in American Dock and Improvement Co. v. Trustees, c., of Public Schools, 39 N.J. Eq. 409 (at p. 419), said: `On the dissolution of a corporation, its property constitutes a trust fund for the payment of debts and stockholders.' This conception of a trust fund for the benefit of creditors inherently embraces the idea of equal protection as distinguished from a scramble of creditors for preference; also a pro rata distribution in the event of insufficient assets to pay all; the directors are trustees of this trust and are entitled to the aid of the court of chancery to protect the trust fund from acts which will either deny an equal distribution or prevent its efficient administration by the trustees. But aside from this general element of equitable jurisdiction, I am convinced section 58 of our statute contemplates that creditors prove their claims in a manner to be directed by the court of chancery, and a distribution pro rata to creditors should the assets prove inadequate to discharge all claims.
"Restraint will be advised."
Messrs. French, Richards Bradley, for the appellant.
Messrs. Bleakly, Stockwell Burling, for the respondents.
The decree appealed from will be affirmed, for the reasons expressed in the opinion filed in the court below by Vice-Chancellor Leaming, which rests upon the reasoning of the case of Camden Mortgage Guaranty and Title Co. v. Borton, above set out.
For affirmance — THE CHIEF-JUSTICE, TRENCHARD, PARKER, CAMPBELL, LLOYD, CASE, BODINE, DONGES, VAN BUSKIRK, KAYS, HETFIELD, DEAR, WELLS, KERNEY, JJ. 14.
For reversal — None.