The corporate form of business lends itself to exploitations of many kinds. The public is usually victimized, but sometimes the stockholders suffer through a breach of trust on the part of officers—as for example, the granting of contracts or the payment of exorbitant salaries to the detriment of the large body of stockholders. Another form of exploitation is the diversion of profitable business to some other corporation controlled by the untrustworthy officers. Then again the officers may buy up unprofitable ventures and sell them to the corporation at a large profit. The juggling of accounts may cover up fraud and exploitation. The profits may be sacrificed for the purpose of squeezing out the minority stockholders, or contracts may be made with a subsidiary whereby it takes most of the profits, or the profitable features of the corporation may be sold to a new company. These modes of freezing out the minority are naturally promoted by the majority stockholders. Whatever may be the means used, these various methods of exploitation may lead to insolvency, their ultimate effect depending upon the condition of the company and the extent to which they are carried on.
Unavoidable causes which may lead to the impairment or complete loss of a corporation’s assets are the disruption of the organization and its earning capacity through fire or earthquakes or other natural causes; or new inventions may kill the demand for its product; or improvements in machinery and equipment may render obsolete a large capital investment.
Methods of Liquidation
There are several forms of procedure in case liquidation is found advisable or necessary, and in general there are three courses open, viz.: bankruptcy, voluntary dissolution, and receivership.
Bankruptcy. This perhaps is the most common method. It is of two kinds—voluntary and involuntary. If voluntary bankruptcy is contemplated, the debtor files a petition in the federal court for his district, stating the number and amount of his debts and the amount of his assets. Creditors are then served with the notice and copies of the petition. Further proceedings are similar to those in involuntary bankruptcy. Involuntary bankruptcy proceedings may be brought if the debts are not less than $1,000 and an act of bankruptcy has been committed.
The following are legal acts of bankruptcy:
1. To convey, transfer, conceal, or remove, or to permit to be concealed or removed, any part of the debtor’s property with intent to hinder, delay, or defraud his creditors.
2. To transfer while insolvent any portion of the property to one or more creditors with intent to give preference to them.
3. To make a general assignment for the benefit of creditors, or being insolvent to apply for a receiver or trustee for the property.
4. For the debtor to admit in writing his inability to pay his debts and his willingness to be adjudged a bankrupt on that ground.