PART III. THE CORPORATE FINANCES.

CHAPTER XX.

THE CORPORATE FUNDS.

§ 200. General.

"Corporate funds" is a general term applied to the moneys belonging to the corporation. Technically, the term "funds" includes securities as well as moneys, but used in connection with the treasurer's work it is customary to restrict its application to cash, sight drafts, checks and similar readily convertible paper. The general corporate securities, such as notes, time drafts, treasury stock, bonds, securities of other corporations, etc., are also usually committed to the treasurer's care but not under the designation "funds," the provisions regulating the matter usually employing the phrase "money and securities," in order to avoid any uncertainty as to their scope.

Whether or no the treasurer is responsible for the collection of moneys due the corporation, is a matter determined entirely by the requirements or practice of the particular corporation.

In the smaller corporations collections falling due in the ordinary course of business are within the usual province of the

treasurer. In the larger corporations they are not. In these all moneys as received are turned over to the treasurer, but his responsibility as to collections is limited to such special collections as may be specifically assigned to him.

§ 202. Status of Treasurer as to Corporate Funds.

In receiving and holding the corporate moneys the treasurer acts as the agent of the corporation. He must therefore safeguard them with all reasonable care, use them only on account of and for the benefit of the corporation and in accordance with its instructions. So long as he acts within these limits, he is not responsible for any losses which may occur.1

If, however, the treasurer fails to use reasonable care in his custody of the corporate funds, i. e., the care that a prudent man of business would exercise in regard to his own funds, he will be liable for any resulting losses. Also if he disburses, uses or invests the corporate funds without authority, he is again liable if losses result, but should gains be made, these gains belong to the corporation. In other words, any profits resulting from the use of the corporate funds while in the treasurer's care, belong to the corporation regardless of whether such use be proper or improper. If losses result from proper use of the funds, the loss is the corporation's; but if the use be improper, the loss is the treasurer's.

This same rule holds good where the treasurer privately employs corporate funds for his own benefit or account. If the transaction is discovered, the corporation can reclaim not only its funds but any resulting profits as well. If losses occur, the treasurer can be required to make these good and in addition in either case is liable to prosecution for embezzlement.

Such a condition occasionally occurs where the cashier or treasurer of an institution uses its funds for speculative purposes, expecting to replace the borrowed funds from the returns of the venture while any profits are to be retained as his

1 First Nat. Bank v. Bank, 77 N. Y. 320 (1879).

own private gain. Usually no profits are made and the discovery of the transaction involves the defaulting treasurer in disgrace and punishment. If, however, profits should be made, these profits are the property of the corporation and if retained by the treasurer, his offense is twofold. Not only has he used and risked the corporate funds improperly, but he has stolen the resulting profits.

$203. Custody of Corporate Funds.

The treasurer's responsibility for the corporate funds begins as soon as they are turned over to him and continues until they are surrendered to his successor or to some other properly authorized party.

Usually the corporate authorities designate a depositary and require the treasurer to deposit the corporate funds therein. If not, it would still, as a rule, be the duty of the treasurer to deposit the moneys coming into his hands, as an incident of the "reasonable care" properly required of him.

Just how soon funds should be deposited after their receipt is a matter to be decided by conditions. Usually a routine for handling the corporate moneys and securities is established and the treasurer is governed by its rules.

In the absence of any express provision or custom requiring daily deposits, small amounts of money might properly be held until a convenient time for depositing them, particularly if there were a suitable safe or vault at the treasurer's disposal in which such funds could be kept. If, however, material amounts of money were received by the treasurer during banking hours, he would ordinarily be grossly negligent if they were not deposited the same day. If received after banking hours, they should be kept in the safest place at his command until they can be deposited on the next banking day. The temporary receptacle for such funds would naturally be the safe or vault used by the corporation for the preservation of its books, papers and other valuables. Should the treasurer place

his funds elsewhere, a very clear and satisfactory explanation of his reasons for so doing would be necessary to save him from liability in case of any resulting loss.

In the larger or more active corporations considerable amounts of money are often kept over from day to day in the various funds, or for special purposes, but they are kept under such conditions of safety as to render the risk negligible. Also as this is done with intent, and with the knowledge and consent of all parties concerned, the treasurer is not liable even though losses occur.

The general rule that the corporate funds should be deposited promptly applies particularly in the case of checks. The check is merely an order for money and if the treasurer accepts this order and does not present it promptly for payment, he is himself liable for any loss occasioned by the delay.2

§ 204. Disbursement of Corporate Funds.

The disbursement of the corporate funds is usually made under carefully prescribed conditions, and the treasurer can hardly incur liability in the exercise of this duty save as a result of gross negligence or downright fraud.

Usually the by-laws provide generally that the corporate funds shall be paid out by the treasurer in accordance with the instructions of the directors, and also prescribe the exact signature to the checks by means of which payments are made, and require that the treasurer shall take all proper receipts and vouchers. If the by-laws are silent, the directors have full power to make such rules as to disbursements as they deem proper.

If neither by-laws nor directors' resolutions make any provision as to the details of disbursements, the treasurer may then use his discretion and need only observe the rules of ordinary business. These would undoubtedly require that pay

2 Smith v. Miller, 43 N. Y. 176 (1870); First Natl. Bank v. Bank, 77 N. Y. 320 (1879); See §§ 47, 224, 228, infra.

ments of importance be made by check whenever reasonably possible, and that receipts or vouchers be taken for all moneys paid out.

In no event has the treasurer authority to make payments on his own initiative. The matter is one that belongs to the directors alone and the treasurer has no right either to make a payment without their authorization or to refuse a payment when it has been directed by them.

3

The payments of corporate funds customarily made by the treasurer in practice without specific authorization are not in violation of this rule. Occasionally he will in an emergency or for special reasons, pay accounts without authorization of any kind, but he then relies upon the acquiescence or express ratification of the directors. Usually, however, his payments when not specifically authorized, are made under blanket instructions empowering the payment of large amounts made up of numerous small items. Or perhaps, certain routine obligations as the pay roll at the end of each week, will be paid as a matter of course under the implied authority of

custom.

The treasurer's responsibility for the correctness and validity of accounts paid, depends upon the conditions. If bills are ordered paid by the directors the treasurer ordinarily has no responsibility in the matter save for their proper payment, unless he is aware of doubtful or fraudulent circumstances connected with these accounts not known to the directors. If, however, under a general authorization he pays accounts which later prove to be false or fraudulent, he might be held for any resulting loss. To escape it he must show that he was unaware of and could not have been reasonably expected to discover the fraudulent nature of the accounts.1

8 See 88 9, 21.

See Chap. VII, "The Treasurer's Liabilities "; also § 213.