CHAPTER XXXIX

INSOLVENCY AND BANKRUPTCY

INDIVIDUALS, firms, or corporations which are not able to pay their debts when due, or whose liabilities exceed their assets, are said to be insolvent. Under the Federal law, any person in a condition of insolvency may be declared a bankrupt if he so desires. His assets, with the exception of certain exempt property, are turned over to a trustee representing the creditors, and divided proportionately among them, all creditors except those whose claims are preferred or secured receiving the same fractional part or per cent of the amount due them. 313. Bankruptcy Proceedings. The creditors of any insolvent person except a wage-earner" earning less than $1,500 per year, or a person engaged chiefly in farming or tillage of the soil," may institute bankruptcy proceedings against him, if he has done one of the following acts:

a. Transferred or concealed any of his property with intent to delay payment or to defraud his creditors.

b. Transferred property to one creditor for the purpose of giving him an advantage over the other creditors.

c. Allowed one creditor to obtain a preference through legal proceedings.

d. Made an assignment of all his property to a trustee for creditors. e. Admitted in writing his inability to pay his debts, and his willingness to be adjudged a bankrupt.

After a debtor has "gone into bankruptcy" and made a settlement by turning over his assets, he is legally discharged from his indebtedness. Any resources which he may possess at a later time cannot be taken in further payment of debts settled in bankruptcy.

Illustration of a Settlement in Bankruptcy. On October 20, 1922, J. D. Murphy was declared a bankrupt, and a trustee was elected by the creditors to take over his assets, convert them into cash, and pay the creditors. Mr. Murphy filed the following schedule of assets and liabilities at book values:

The trustee sold the real estate to the holder of the mortgage for

$5,800 in excess of the mortgage.

2,000.00

2,146.80

364.00

7,685.25

8,146.30 $20,740.35

12,017.00

364.00 7,685.25

8,146.30 $18,342.35

The receiver will be able to pay 18,342.35 or 65.5% of the liabilities.

Each creditor will receive 65.5% of his claim. of this settlement is, "Mr. Murphy paid 65

The common expression cents on the dollar."

Written Work

1. Fred Helms made an assignment to his creditors, turning over the following assets to a receiver:

The receiver is able to realize $2,000 on the merchandise. The store property is old and no depreciation has been deducted on Mr. Helms' books. The receiver is able to sell it for only $2,400. He collects all of the accounts receivable with the exception of $212.50.

The receiver pays the wages, $95; the expenses of the receivership, $75, and his own fee of $100, which is allowed by the court. The remaining cash is distributed among the creditors.

How much does each creditor receive?

CHAPTER XL

CORPORATIONS, STOCKS, AND BONDS

THE method and the advantages of organizing a business as a corporation may be shown by an illustration.

William Austin has $50,000.00 which he wishes to invest in a factory for manufacturing carriages.

George Fox has $30,000.00, and he is willing to join Austin in the organization of a carriage manufacturing business.

Austin and Fox believe that a capital of $100,000.00 is necessary for the successful operation of a business such as they wish to organize, but together they are able to invest only $80,000.00. In order to obtain the remaining $20,000.00, they may take one or more persons into partnership, or they may organize a corporation.

314. Partnership and Corporation Contrasted. The disadvantages of a partnership are:

a. Each partner is personally liable for the debts of the partnership. b. Partners frequently have difficulty in withdrawing from a partnership.

Unless at the time of organizing a partnership a definite date is set when the partnership may be dissolved, no partner can withdraw from the business without the consent of the other partners. The law does not permit a partner to sell his interest in the partnership without the consent of the other partners.

c. The death of a partner dissolves the partnership.

The advantages of a corporation are:

a. Each member (stockholder) of the corporation is liable for only the amount he agrees to contribute to the capital of the corporation. His private resources cannot be taken for the debts of the corporation.

b. Any stockholder may sell his interest in the corporation without the consent of the other stockholders, and without dissolving the corporation.

c. The death or bankruptcy of a stockholder does not dissolve a corporation.

d. By the method of selling shares of stock (to be explained later), an individual may invest a small amount of money in a large corporation. The capital of the railroads and other large corporations is usually furnished by thousands of stockholders. Partnerships of such a size would be unwieldy and impracticable.

Considering these advantages, Austin and Fox decide to incorporate, and after complying with the legal requirements they prepare a subscription list on which to receive subscriptions to the capital stock.

Subscription List

The Eclipse Carriage Company

We, the undersigned, hereby subscribe for the number of shares and the amount of the Capital Stock of the Eclipse Carriage Company set opposite our names, agreeing to pay for the same on June 1, 1921.

315. Terms Used. The Capital Stock of a corporation is the amount of capital authorized by the charter.

Shares. The capital stock is divided into shares of equal size, usually having a nominal or face value. Shares may be of any denomination within the limits fixed by law; $100.00 par value is customary.

When the stock has been subscribed (and, in some states, paid in) a meeting of the stockholders is held, at which meeting a board of directors is elected to manage the business.

At this meeting each share owned by a stockholder entitles him to one vote. (How many votes should Austin have?) By this method