The Inherent Rights of Corporate Creditors

Creditors' procedure in law and equity to obtain payment

A creditor, qua creditor, is entitled merely to collect from the debtor the sum of money owed to him. In the broad and general sense his status as a creditor in nowise confers upon him any right to the specific property of the debtor. He is entitled to the payment of the sum of money owed him, to be sure; but in the absence of default the mode by which the debtor comes into funds with which to pay the claim is not his concern. Thus, the simple existence of a debt does not in and of itself set in motion any legal machinery. Although there is the familiar distinction between secured and unsecured creditors, it must be emphasized that the security is in reality "but an incident to the debt it secures, and a mortgagee is nothing more than a creditor secured by a mortgage." In other words, secured creditors are not a class entirely apart, but simply creditors who have definable rights against some of the debtor's assets over and above those possessed by simple creditors.

In the ordinary run of events, of course, debts are paid when due and the inherent rights of creditors have no occasion for exercise. In the case of non-payment, however, by what procedure does the creditor seek the enforcement of his claim?

If a debt is due and unpaid then the creditor may sue at common law for its payment. If the case be clear, i.e., there is no question of the money being owed, then the suit at law will result in a judgment. Now the importance of the judgment is notable. In the first place the judgment gives the creditor a "claim upon the debtor" which, in the legal sense, he did not possess previously, i.e., the debt is determined at law to be owing and unpaid. That is, for legal purposes, there is no longer any question of the validity of the debt, of the fact that its due date has arrived, and that it has not been paid. In the second place, the judgment sets in motion certain machinery which will presumably lead to the payment of the creditor's claim. For a creditor who has had his claim reduced to a judgment, a "judgment creditor," is entitled, by means of a "writ of execution" which accompanies the judgment, to secure payment of his claim from the sale proceeds of whatever property of the debtor the sheriff finds it necessary to sell in order to meet the claim. The creditor's claim at law upon the debtor's property grows out of the judgment in an important sense: the judgment gives the creditor the right of realization upon his debt. Armed with his judgment and the writ of execution the creditor's position is greatly strengthened.

The judgment and the ensuing writ of execution, however, only extend to those assets of the debtor which a common law court may recognize as property It must be emphasized, though, that not everything of value which a person would regard as an asset falls within the category of property at common law. For instance, a person's interest in a trust estate or an equity of redemption in a mortgage would not be property at common law. The usual practice among legal writers is to refer to such assets as "equitable assets," meaning thereby that jurisdiction over them resides in courts of equity as opposed to courts of law. Sometimes equitable assets are also called "choses in action." A recent writer describes these as follows:

This is the nondescript remainder -- the choses in action. They consist of all less than present possessory rights which are nevertheless recognized at law. They are rights (and therefore "things") of a most highly incorporeal nature because no present possession is conceived to adhere to them. Thus in actual fact they represent little more than a right to bring an action. On the other hand the very reason for the right of action is itself the basis of their status as "things" -- incorporeal "things" -- for, as a class, they are all conceived to represent the right of the dispossessed to be repossessed-his persisting property in an object, possession of which he has temporarily surrendered or failed to gain. The recovery is of this object or its equivalent. Choses in action are thought of along somewhat the same lines as the future estates in land, which are at first included with them. They are slices of a right of possession which has been "protected upon the plane of time." In order for the sheriff to assume control over property by writ of execution that property would have to be "the subject matter of a common law possessory action."

Fortunately for our purposes it is not necessary to indicate all the various kinds of property which fall within the definition of equitable assets. It suffices to recognize that certain of the debtor's assets in the ordinary meaning of that term cannot be reached by a writ of execution at common law.

But if the creditor's claim remains unpaid despite the writ of execution and the debtor has other assets, his equitable assets, which the writ cannot reach, what further remedy is available to the creditor in order to obtain payment?

Until comparatively recently the creditor's further prosecution of his claim was via a creditor's bill in equity. That is, a judgment creditor whose judgment was returned unsatisfied, or, as frequently expressed, a "creditor who had exhausted his remedy at law," could invoke the assistance of a court of equity by means of a judgment creditor's bill which, in effect, asked that the court compel the debtor to turn over to a receiver (a court appointee) those assets, unreachable at common law proceedings, which would yet permit the payment of the creditor's claim. This somewhat circuitous procedure, however, has been shortened in recent times by statutory enactment so that the creditor may now achieve the same net result of filing a creditor's bill in equity by merely initiating so-called "supplementary proceedings" to his legal action.

In other words, the two proceedings are joined in a manner to expedite the relief available to the creditor. In this way, then, creditors are placed in a position to enforce their claims upon debtors by being able to reach out after both their common law and their equitable assets.

Still leaving special contractual relations for subsequent consideration, is there anything peculiar in the situation when the debtor is a corporation? Do creditors of a corporation hold any special rights which do not obtain against real persons?