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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXXIII

Commerce and Finance - Chapter XXXIII

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII



The affairs of private corporations are frequently wound up
under the control of a receiver, who is appointed upon the
application of some interested party by a court, usually in the
county where the corporation has its principal place of business,
or where some of its property is situated. There are many
grounds for the appointment of a receiver. Chief among them
is the doing of some illegal act by the corporation or its agents,

which would subject the corporation to a forfeiture
Receiver of its charter, or when the corporation refuses or

fails to pay a judgment or decree for money, or
otherwise is unable to meet its obligations. A receiver is an
officer of the court. He acts under the direction of the court
and must report all of his doings to the court. His chief duty is
j;he conservation of the company's property until it can be de-
termined whether the business is to be continued or must be
wound up, and if the latter, then to dispose of the assets and
distribute the net proceeds to the proper persons as the court
may direct.

The function of a receiver is often, therefore, a very im-
portant one. It frequently happens that the interest of all
concerned requires the business to be continued while proceed-
ings are pending, and in such cases the receiver is usually given

the necessary authority. An illustration of this

would be in the case of the financial embarrass-


ment of a manufacturing concern having on hand
a large quantity of partly finished goods of little value in that
condition, but which by the expenditure of a small amount of



money could be finished and marketed at a fair price. The
receiver thereupon runs the factory under the supervision of the
court, long enough to complete the product then under con-
struction, which is sold by the receiver when completed, and
the creditors thereby receive a much larger percentage on their
claims than would be the case if the product were sold by the
receiver before its completion. The chief reason for the appoint-
ment of a receiver, however, is to enforce a ratable distribution
of the corporate assets among the creditors.

A corporation is said to be insolvent when its assets at a
fair valuation are insufficient, if sold, to discharge the existing
obligations to corporate creditors. It is possible
insolvency that a corporation may be solvent, yet its stock

practically worthless. Such would be the case of
a corporation having just enough assets when sold to pay cor-
porate creditors, leaving nothing for distribution to the stock-
holders in return for the sum invested by them in their stock.

When a corporation becomes insolvent or unable to pay its
debts, or has exceeded its corporate powers, a court of equity
will, generally upon the application of a creditor or stockholder,
take charge of the affairs of the corporation and appoint a
receiver to either continue or close up the business, subject to the
court's direction. The directors of a corporation formerly had
no power to commence proceedings for a dissolu-
Receivers ^ on ^ ^ e corporation and appointment of a re-

ceiver or for the distribution of its assets among
the stockholders, but the Supreme Court of the United States
in the Wabash Eailway cases laid down the doctrine that a com-
pany could itself ask for the protection of the court if such
was for the best interests of all concerned. Under this doctrine
many corporations are placed in the hands of "friendly" receiv-
ers, by means of proceedings and without notice to other credit and the public, thus opening the door to great abuses of
corporate privileges and no doubt in many instances inflicting

serious loss and injury on innocent stockholders. Directors
sometimes mismanage corporations in order to get them into
trouble and then by defaulting on the interest or other obliga-
tions of the company bring about a receivership and reorganiza-
tion in order to "freeze out" and get rid of the stockholders and
acquire the assets, after which the business is continued pros-
perously. Corporations sometimes procure the appointment of
friendly receivers and effect a reorganization in order to get
rid of certain bonds, guarantees, leases or other contracts which
have proven unprofitable. Such proceedings, however, cannot be
justified on grounds of business honor.

Only stockholders and creditors of an insolvent corporation
are concerned in the settlement and distribution of the estate.
The public generally has no interest in the matter. But in the
failure of large corporations upon which the public is accustomed
to depend for a particular service, like a railroad company, and
especially one having subsidiary companies, the public is interest-
ed and the matter brings up a multitude of complications. The
road must be kept running. It cannot be shut down, the property
sold, creditors paid and assets distributed among stockholders, as
in the case of an ordinary private business. Salaries and other
running expenses must be paid and the business tided along
until the entire property can be sold in bulk or a reorganization
of the corporation is effected. When entering upon his
duties the receiver will usually find many debts
Receiverships unpaid and pressing repairs needed, with a con-
stant deficit in cash to meet current expenses.
The court will then authorize the issuance of receiver's cer-
tificates for the purpose of raising the necessary funds to carry on
the business. These certificates are a first lien upon the prop-
erty of the corporation, coming in before first mortgage bonds.
Sometimes the cash requirements of the receiver are met by an
assessment upon the stock and bonds of the company. The
stockholders and boldholders may as well submit to an assess-


merit as have receiver's certificates issued, which are a first
claim upon the assets.

Having the immediate necessities of the corporation pro-
vided for in cash, the receiver usually finds it necessary to have
the accounts of the company gone over carefully in order to

ascertain what the actual earnings of the business
Reorganization are. The prospects of the future business of the

company are also taken into consideration, and
with these at hand a reorganization committee* or banking firm
is able to determine what the earning power of the company
after the reorganization will be, and hence what its capital may
be. If the capital must be reduced in order to bring it within
the earning limits, then the bondholders and stockholders must
suffer this loss in just proportions. Frequently the stockholders
are required to bear the entire shrinkage, upon the principal
that to them belong all the gains if the enterprise is successful,
and therefore they should be willing to stand the losses. The
stockholders, or bondholders, as the case may be, pay in their
assessments to aid in the continuation of the business and
usually are given additional stock (preferred) or bonds to cover
the amount of the assessment so that in case the company in
future years should become prosperous, they may bring forward
their claims for recognition and payment.

To adjust the respective interests, the reorganization com-
mittee may have recourse to the issuance of stock in several
classes, some of the shares being preferred as to the payment of

dividends, the remaining, or "common," shares not
Reorganization being entitled to participate until the preferred

stock has received a certain percentage, which may
or may not be cumulative:)* Likewise there may be an issue of
bonds, called "income bonds," upon which interest will be paid

*The reorganization committee consists of representatives of the cred-
itors, stockholders and bondholders.

+ Cumulative dividends are such as. if not paid, are added to future
dividends, and thus accumulate until they are paid.


only in the event of its being earned. As m the case of dividends
on preferred stock, the interest on such bonds may or may not be

If a propr proportion of the bondholders of a corporation,
usually one-half, are not satisfied with the reorganization as
outlined by the committee, or the amount or kind of new securi-
ties to be given them for their assessment under the proposed
plan, they may compel the trustees to begin foreclosure proceed-
ings, and when the property is sold, bid it in and take the property
in payment of their debt. The usual method in such an event
would be for the bondholders participating in this
Foreclosure movement to form a new corporation provided
with the necessary working capital so as to be
ready to make repairs and put the property in good condition,
and also to pay off the non-participating bondholders who would
be entitled to their pro rata share of the price realized at the
sale. This would leave out the stockholders entirely. The
new company could then issue its own bonds free from all
obligations of the former corporation.

William W. Cook says: "The object of a reorganization is to
avoid foreclosure. The prospect of a foreclosure is the cause of a
reorganization. Frequently the reorganization is made after a
foreclosure has been commenced, the object of the foreclosure
being to cut off those persons who refuse to come into the reor-
ganization. Sometimes the reorganization practically does away
with the necessity of foreclosure, and this is the ideal condition
towards which the times are tending."

Frequently newly organized railroad companies and large
corporations issue bonds upon their property and franchises, os-
tensibly for the purpose of raising funds for extending and
improving their existing property. These bonds, not being paid,
at maturity, a foreclosure of the bond issue results. The prop-
erty is sold under foreclosure sale and a reorganization is had,
usually by a new class of investors, the property and franchises
transferred to the new organization, and the original stockholders
get nothing for their investment. This is a plan much favored

by unscrupulous manipulators and organizers who
Foreclosure ^ suc ^ manipulation acquire for themselves and

their associates the amount originally paid in by
the unsuspecting subscribing stockholders. Railroad and mining
corporations especially have been the means of filching the pub-
lic in general of enormous sums by this means.

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