gone, and further than it ought ever to go, to declare that the bondholders under the first mortgage have acted altogether with that degree of watchfulness and circumspection requisite to enable them to demand the advantages of bona fide purchasers. They seem to me to be very much in the category of the officers, and all to have been guilty either of fraud or gross negligence.

XIII. And it would be going further than any case has ever gone, under such a lame show of equity on the part of the plaintiffs, to postpone the claims of the bondholders under the second mortgage, when there is not the shadow of proof that they had any knowledge, or any means of knowledge, of the existence of any prior claim of an encumbrance upon the property of the company. It has been decided that uncertain equities, resulting from doubtful constructions, are not such as to bind a bonâ fide purchaser having notice thereof.33

I conclude therefore, gentlemen, in all sincerity, and I believe in all justice and "impartiality," that you are bound to disregard the claim of the plaintiffs under what they call the first mortgage; and that in doing so you will be sustained by the ultimate decision of the court, affirming the decision of the Chancellor dismissing the bill.

There are many other grounds, upon which, if they stood alone, I should have great confidence that the court must decide against the claims of the plaintiffs upon those only. But these probably may be presented to the court by your counsel, and I have confined myself to such views as seemed to me most obvious and most decisive of the case, as I have always done in similar cases. And I should certainly be surprised, if they should not in the main be sustained by the court in disposing of the

case.

33 2 Eden, 344; Parker v. Brooke, 9 Vesey, 588.

*SECTION III.

What Defences allowed the Company, in regard to borrowed

Capital.

1. Where the transaction is illegal no estop- | 5. But where the money has come to the use pel will preclude its defence.

2. Company may contract, beyond present

powers, on future contingency of obtain

ing enlarged powers.

3. Company cannot allege their own fraud

in defence.

6.

of the company, or the shareholders have recognized the debt, it must be repaid.

If the debenture-holders are to be equally entitled, one cannot get advantage of the

rest.

4. Debentures issued without authority can- 7. Debenture holders preferred to judgment

not be enforced by shareholders aware of

creditors.

the irregularity, nor even by their bonâ 8. Transfer of debentures through forgery in-
fide transferees.
valid.

§ 236. 1. It is obvious that securities for capital borrowed, by railway and other companies of that description, with large capital, and intended in some sense to serve the purposes of safe investment, must be given strictly within the powers of the company and for the purposes of its creation. And where it is the purpose of those making the advance of capital to such company, as well as of the company to perpetrate a direct violation of the charter, or any other specific illegality, to the detriment of the shareholders or the public, it will afford a sufficient defence to the company itself, upon the most familiar general principles applicable to the subject. And even an estoppel, by deed or of record, will not enable the creditor so to conclude the company, who stand in some sense in a fiduciary relation as quasi trustees for the shareholders and the public, as to escape the real question involved in the transaction.1

1 Hill v. Proprietors of Manch. & Salford Water-Works, 2 Barn. & Ad. 544. But unless some fraud is alleged to have been attempted to be perpetrated upon the shareholders, the estoppel will be enforced. See also Doe v. Ford, 3 Ad. & Ellis, 649.

But the mortgagor is estopped from setting up a prior mortgage to defeat the present action. Doe v. Penfold, and Doe v. Horne, 3 Q. B. 757. As to where time is of the essence of contracts, for the conversion of one security into others, see Campbell v. The London & Br. Railw., 5 Hare, 519. And the converse of this rule was applied in the case of Madison, &c. Plank-Road Company v. Watertown & Portland Plank-Road Co. Here the plaintiff corporation,

2. Where the company agreed to sell shares to a party, on condition that as soon as they were paid in full they would give debentures in exchange for the shares, if they should then be in a condition legally to do so, the contract was held to be illegal, and a decree of specific performance was refused, on the ground that the company were not at the time authorized to raise money in that mode. But where the trustees, under turnpike acts, having power to borrow money on mortgage of the tolls and toll-houses of the company, executed such a mortgage to their clerk, to whom they were indebted for costs, and recited in the deed that it was given for moneys advanced, it was held valid.3

*

which was created for the purpose of building a plank-road, guaranteed the payment of a loan of money made to the defendant corporation, for the purpose of enabling it to build its road, the completion of which would be advantageous to the former; and on default of payment of this loan such guarantor paid the amount thereof; and it was held that this guaranty being unauthorized, the payment created no liability on the part of the defendant corporation, for whose benefit it had been made. The guaranty and payment having been made by the plaintiff corporation, the defendant was held not to be estopped from setting up the want of power to make the contract of guaranty. Madison, &c. Plank-Road Co. v. Watertown & Portland Plank-Road Co., 7 Wisconsin R. 59.

The Madisonville and Franklin Railway Company issued certain bonds, and made them payable to the order of the Madison and Indianapolis Railway Company, for the purpose of completing the road of the former company. The bonds were delivered to the Madison Company, and were indorsed and guaranteed by that company, and sent to its agent in New York for sale. The agent, in his circular offering them for sale, represented that they were owned by the Madison and Indianapolis Company. Suit being brought against the company upon its guaranty, it was held that it was within the scope of the corporate powers of the Madison and Indianapolis Railway to sell and guarantee bonds held by it in the regular course of its business; and that, as the contract of guaranty was upon its face such a contract as the company had power to make, the fact that the contract in this case was made for a purpose not authorized by its charter, as for the accommodation of another company, could not affect the right of a bonâ fide holder without notice to recover upon it. Madison & Ind. Railw. v. Norwich Savings Society, 24 Ind. R. 457. And see Conn. Mutual Life Ins. Co. v. C., C. & C. Railw., 41 Barb. 9, where the subject is discussed and views are maintained corresponding to those held by the Indiana Court; Olcott v. Tioga Railw., 40 Barb. 177.

2 West Cornwall Railw. v. Mowatt, 17 Law, J. (Chan.) 366.

3 Doe v. Jones, 5 Exch. 16.

3. But the company cannot set up, in defence of a security properly executed by them, that it was, through fraud between other parties and among themselves, not executed and delivered to the party really entitled to receive it.1

4. Debentures of a business corporation issued by the directors without due authority, although under the seal of the company, cannot be enforced by members of the company who accepted them after being present at the meeting where the irregular issue of such debentures was sanctioned. And a boná fide transferee of such debentures from such shareholders will stand in no better position. Nor can strangers or their assignees enforce them, where they were accepted by the first holders with knowledge that the condition on which they were issued had not been fulfilled.5

5. But where the money advanced on such irregular securities had been applied by the directors for the benefit of the company, and the shareholders have acquiesced in the transaction, the company and the shareholders are precluded from disputing their liability to repay the advance. And where a payment of six per cent interest had been made upon the debentures without objection, it was held that although the holders could not recover upon the debentures, they were entitled to six per cent interest on the advances. 6

6. These debenture holders, by the act of parliament, were to be entitled pari passu. One who had obtained an additional mortgage was held entitled to no advantage on that account.6

7. As between debenture holders and subsequent judgment creditors, the former are entitled to priority of lien upon money paid into court as the avails of the sale of the property of the company.7

8. Where railway debentures had been transferred by means of a forged indorsement of two of the joint holders, the third, having the custody of them, having made the transfer by deed,

5

* Horton v. Westminster Improvement Comm'rs, 14 Eng. L. & Eq. 378. Magdalena Steam Nav. Co. in re, 1 Johns. Eng. Ch. 690; s. c. 6 Jur. N. S. 975.

De Winton v. Mayor of Brecon, 26 Beav. 533; post, § 239. 7 Furness v. Caterham Railw., 27 Beav. 358.

the signatures of two of the grantees being forged by him, and the purchaser acting bona fide and paying full value, and after his purchaser had been admitted on the books of the company, as the owner of the debentures, the transfer was set aside and the entry on the books of the company ordered to be cancelled.8

SECTION IV.

Right to issue preferred Stock.-Converting Loan into Capital.

1 The company may issue new stock, and | 3. Debenture holder in England not entitled give it preference, as a bonâ fide means

of borrowing money.

2. By English statutes, loan may be converted 4.
into capital. Terms of statute must be
strictly pursued. Courts of equity can-
not dispense with them.

to foreclosure.

Right of company to issue stock certificates bearing interest. Such interest cannot be paid in the bonds of the company. Ratification of such issue.

§ 237. 1. The company, where the capital is not limited in the charter, may from time to time issue new shares, and even give them a preference, probably, as a mode of borrowing money, where they have the power to borrow on bond and mortgage, as preferred stock is only a form of mortgage.1 But without the power to mortgage expressly given, the right of the majority to issue preferred shares, a majority of which they would themselves be entitled to hold, might be more questionable.2

8 Cottam v. Eastern Counties Railw., 1 J. & H. 243; s. c. 6 Jur. N. S. 1367.

1 Bates v. Androscoggin & Kennebec Railw., 49 Maine R. 491, where the question of the rights of holders of preferred stock is discussed very fully. There is nothing against law or public policy, say the court in Evansville, &c. Railw. v. Evansville, in the agreement of a railway company to allow interest on stock subscribed; 15 Ind. R. 395.

2 Where, under its articles of association, a company was empowered, at a special meeting, to increase the capital stock of the company by the issue of new shares, to be of such nominal value, and subject to such conditions in regard to the payment of calls and distribution of profits, as might be determined, it was held that this did not authorize the issue of preference shares. Moss v. Syers, 32 L. J. Ch. 711.

In Hutton v. Scarborough Cliff Hotel Company, 2 Drew & Sm. 514, it was held, that the court will, at the suit of dissenting shareholders, restrain the issue of preference shares in accordance with a resolution passed at a general meeting of the company.