DOCTRINE: The holders of the preferred stock are entitled both to the par value of their stock and to the dividends
which have not been declared or paid but which would have been declared or paid if there had been surplus or net
profits of the corporation wisely applicable to such dividends during the periods when no dividends have been paid.
FACTS:
· The Big Lend Company was organized in 1901 to conduct a general real-estate business, to borrow and loan
money, and to buy and sell merchandise.
· The capital stock consisted of $10,000 divided into 100 shares of common stock of the par value of $100 each
· The capital stock was increased to $750,000 then later on it became $ 1,500,000, represented by 8500 shares of
common stock of the par value of $100 a share and provision was made for the issuance of 6500 shares of preferred
stock of the same par value.
· In 1921, the capital stock of the Big Lend Company consisted entirely of common stock.
· Also, Art. 6 of the AOI was amended:
"AMENDED ARTICLE VI
XXX
"(d) In the event of any liquidation, dissolution or winding up of the Corporation the holders of the preferred stock
shall be entitled to be paid in full the par value thereof, and all accrued unpaid dividends thereon before any sum
shall be paid to or any assets distributed among the holders of the common stock, but after payment to the holders
of the preferred stock of the amounts payable to them as hereinbefore provided, the remaining assets and funds of
the Corporation shall be paid to and distributed among the holders of the common stock.(important )
HELD: YES. Respondents are entitled under the provisions of subparagraph (d) to receive a sum equal to all accrued
unpaid dividends as well as the par value of their cumulative preferred stock in the liquidation of this corporation
before appellants shall be entitled to participate therein. JUDGMENT OF TRIAL COURT IS AFFIREMED.
The two classes of stockholders contracted between themselves with respect to the division of the assets in case of
liquidation. Their agreement was that the preferred stockholders should receive the par value of their stock plus an
amount equal to "all accrued unpaid dividends thereon" before any assets should be distributed to the common
stockholders.
It should be noted that the articles contain no condition to the effect that the surplus profits must be equal to, or greater
than, the total of all accrued unpaid dividends before such distribution could be made. The parties were contracting
with reference to a possible future liquidation, a situation where the statutory prohibition (Rem. Rev. Stat., § 3823)
against declaration of dividends out of capital had no application.
Therefore, the liquidating trustees have preference regardless of any consideration of profits or surplus.