Creditors' right to insist upon full value contribution by shareholders

Shareholders are obligated on various theories to contribute full value to the corporation for shares received. Both the trust fund theory and the holding-out theory seek to emphasize shareholders' responsibilities to creditors. While jurists have more or less abandoned the trust fund doctrine as untenable it may be emphasized none the less that even that doctrine gave creditors no right to insist upon full payment for shares unless they had "exhausted their remedies at law."

Nevertheless, the creditors, if their claims are unpaid, might well insist that shareholders contribute full value for their shares on the grounds that the incorporation statute has been violated: i.e., on the grounds of the statutory-obligation theory. All this, of course, is on the assumption that the corporation is solvent. An insolvent corporation is in a different position; and here, perhaps, the trust fund doctrine has greater cogency. As the United States Supreme Court once said:

Solvent, it [the corporation] holds its property as an individual holds his, free from the touch of a creditor who has acquired no lien; free also from the touch of a stockholder who, though equitably interested in, has no legal right to, the property. Becoming insolvent, the equitable interest of the stockholders in the property, together with their conditional liability to the creditors, places the property in a condition of trust, first, for the creditors, and then for the stockhold- ers. Whatever of trust there is arises from the peculiar and diverse equitable rights of the stockholders as against the corporation in its property and their conditional liability to its creditors. It is rather a trust in the administration of assets after possession by a court of equity than a trust attaching to the propety, as such, for the direct benefit of either creditor or stockholder.

The Rights and the Remedies of Corporate Creditors

While both shareholders and creditors provide capital for corporate enterprises the relation of creditors to the corporation and its assets is different in many important respects from that of shareholders. Creditors possess certain general rights and remedies which may be invoked in pursuit of their claims. And likewise these too may be refined and extended by contract. There is one notable difference, however: creditor-debtor relations between persons in the absence of special contract are, in general, not unique simply because one (or both) of the "persons" happens to be a corporation.

That is to say, creditor-debtor relations in no sense spring from the existence of the corporate form; they would exist, at least in their simpler forms, had the corporation as we know it never developed. The concept and implications of stock ownership, on the other hand, are, in a very real sense, directly associated with and dependent upon the presence of the corporate form. If only the ordinary rights of creditors were involved there would be no reason to include here a special chapter dealing with creditors' rights. It so happens, however, that the application of the time-honored principles of creditor-debtor relations to corporations has brought about important extensions of the basic ideas and practices commensurate with the marked complexity of the modern business corporation. While the underlying philosophy has persisted, its application to involved situations has led to forms and procedures that are unique in important respects: the idea of receivership, for instance, is simple enough; but an understanding of the basic idea itself gives but a faint suggestion of what receivership may mean for a large corporation.

Again, since corporations, unlike real persons, may attain perennial existence, there are not the same obstacles to very long-time creditordebtor relations. It would be unusual for real persons to draft a contract calling for the repayment of a large principal sum a century hence, yet such distant due dates are a commonplace among corporate debtors. Furthermore, legal ingenuity has developed a means whereby a corporation through a bond indenture may deal with a number of identically situated creditors as if they were one. Indeed, the relative permanency of corporate existence and its associative character have permitted an enormous ramification and elaboration of the simpler creditor-debtor relations between real persons. And it is mainly these which give corporate creditor relations the status of a special study within the broader field.
It is helpful, notwithstanding, first to take cognizance of the underlying position of creditors respecting debtors' property in the absence of special contract.