In re Receivership of International Radiator Company

• Court: Court of Chancery of Delaware
• Writing for the Court: THE CHANCELLOR
• Citation: In re Receivership of International Radiator Company, 92 A. 255, 10 Del.Ch. 358 (Del. Ch. 1914)
• Decision Date: 20 October 1914
• Parties: IN the Matter of the Receivership of INTERNATIONAL RADIATOR COMPANY

92 A. 255

10 Del.Ch. 358

IN the Matter of the Receivership of INTERNATIONAL RADIATOR COMPANY

Court of Chancery of Delaware, New Castle

October 20, 1914

EXCEPTIONS to claim filed by Benjamin E. Harris. The facts are stated in the opinion of the Chancellor.

Exceptions to the claim of Knight disallowed and claim is allowed.

Marvel Marvel and Wolcott, for the claimant.

Charles F. Curley, for the receiver.

OPINION

THE CHANCELLOR

This claim is for $ 7,500 for damages based on the failure of the company to comply with an agreement with Harris, whereby Harris in April, 1913, gave to the company his notes aggregating $ 5,000 in payment for 1,000 shares of stock of the company, of par value of $ 10, which shares the company agreed to sell for him to net him $ 7.50 per share, to be paid to him on or before August 1, 1913. The notes were given to the company, and the proceeds thereof by a discount thereof were received by it. The stock was not sold, and the notes were paid by Harris. In substance, for $ 5,000, the company agreed to pay $ 7,500 from the proceeds of the sale by it of shares of its capital stock subscribed for by Harris. The legal effect of the agreement is, of course, that in case it was unable to sell the shares of stock it would buy them back, and the claim filed by Harris is necessarily based on this principle.

It may be considered doubtful whether the corporation had a right to make such a contract, even if solvent, and if the rights of creditors were not affected. Subscriptions to capital stock should not be made subterfuges to borrow money under unusual terms, nor should countenance be given to sales made by a corporation of shares of its capital stock in such irregular ways, especially where the advantage is disproportionately in favor of the purchaser. But when at the time the bargain is made the rights of creditors of the company are, or would be affected by it, then clearly such an agreement is unenforceable against the assets of the company in the hands of a receiver subsequently appointed by reason of insolvency.

The undoubted weight of authority is that a corporation, without express authority, and when not prohibited by their charter or by statute, may buy its own shares, provided they do so in good faith, without intending to injure its creditors and without in fact injuring them. 4 Thompson on Corporations, § 4075 (contra, § 4076). A corporation cannot purchase its own shares of stock when the purchase diminishes the ability of the company to pay its debts, or lessens the security of its creditors. 5 Thompson on Corporations, § 6177.

The claim is further affected by the statute in Delaware. By the General Corporation Act under which the company was incorporated, the company could not use its funds or property to purchase shares of its own capital "when such use would cause an impairment of the capital of the corporation". At the time when the agreement was made with Harris, and at the time the receiver was appointed, the capital stock of the company was about $...