This case must be determined by its own peculiar circumstances. We find no case so nearly like it that it may fairly be regarded as a precedent.
At the beginning of the yea,r 1884, the New York and New England Railroad Company, with a capital stock amounting to about $20,000,000, par value, and a funded debt of over $16,000,000, secured by mortgages, found itself embarrassed by a floating debt of nearly $2,000,000, for the immediate payment of which it had no means. To avoid suits and attachments, and if possible to prevent a fore*165closure of the mortgages, the property and affairs of the company were placed in the hands of a receiver. The receiver had in his possession the franchise and property of the company, subject to the mortgages, which had an earning capacity j and the possibility of the net earnings being ' more than sufficient to pay the interest on the funded debt, was the only source of means for the payment of the floating debt.
It was believed that the road would be able to earn enough to pay the operating expenses and fixed charges and also to pay the interest on the floating debt. Its present ability to do more was doubtful. In that state of things obviously the payment of the principal of the floating debt would have to be indefinitely postponed. It was not reasonable to suppose ’ that the affairs of the company could continue in that condition for any considerable time. It was necessary that some scheme should be devised by which the floating debt could be paid. In this emergency the act of 1884. was passed, which authorized the company, in addition to the then existing authority, to use the proceeds of the sales of the second mortgage bonds previously authorized, but not then issued, “ for the purpose of paying any present or future liabilities of said company, or to use said second mortgage bonds as collateral security for money borrowed for that purpose.” It also authorized the company, by consent of a majority in interest of the whole amount of its capital stock, to issue not exceeding fifty thousand shares of preferred stock of the par value of one hundred dollars each. The company had its option to resort to either one of the methods authorized; but it was not expected that both would be resorted to, nor was it practicable to do so.
The latter mode was adopted, and preferred stock to the number of nineteen thousand shares was sold for cash, with the avails of which the floating debt was paid. Dividends on the preferred stock to the amount of seven per cent., annuafly were to be paid from the net earnings of the com-'! pany; and the time during which the holders were entitled to such dividends commenced to run October 1st, 1885. *166Consequently from that day the net earnings were pledged to the payment of such dividends. The net earnings for the first six months, ending March 81st, 1886, were more than sufficient to pay three and a half per cent, on the preferred stock. The company is willing to pay this dividend, provided it can be legally paid.
The general statute provides that “ no corporation shall declare any dividend while its capital is impaired, and all officers who shall vote in favor of declaring such dividend, in case such dividend is declared, knowing or having the means of knowledge that such capital is impaired, shall be jointly and severally liable in an action on this statute for all losses resulting from said declaration of dividend, and be guilty of a misdemeanor.”
The ninth paragraph of the case as stated is as follows:— “ Said defendant company’s general balance sheet on March 31st, 1886, showed a balance of $704,095.45, charged to profit and loss account, which represents a deficiency in its earnings, as compared with its operating expenses and fixed charges, during a period prior to October 1st, 1885.” The question submitted is whether, until that deficiency is made good, any dividend can lawfully be declared and paid to the holders of the preferred stock.
The case further shows that the “ sum of $93,413.38 is now on hand in the treasury of the defendant, in cash, and there are no debts or liabilities now due and payable, which-the sum is needed to liquidate.”
Obviously, if the second mortgage bonds had been resorted to for the purpose of raising the necessary funds, no such question could have arisen. The holders of such bonds, whether holding them in fee or as collaterals, would have been creditors and clearly entitled to interest from the net earnings, regardless of any deficiency in the accounts. While this is by no means conclusive, yet it tends to show that it was the intention of the legislature that the net earnings should be pledged to secure those who might advance money to pay the floating debt. It was immaterial to the state whether the money was raised in the one form or in *167the other. The important thing to be done, in the interest of all concerned, was to raise money upon adequate security. We can hardly suppose that the legislature contemplated less security in one form than in the other. There is therefore some reason for believing that it was the will of the legislature that the holders of the preferred stock should have the same security that the holders of the second mortgage bonds would have had if such bonds had been issued under the act; and they certainly would not have been affected by the deficiency in the accounts. Nevertheless, if the holders of the preferred stock hold it as such stock is usually held, with no unusual or extraordinary rights and privileges, they must submit to the legal incidents of such stock; and among those incidents is this, that they are merely stockholders and not creditors; and that no dividends can be lawfully declared and paid to them but from net profits or surplus; and net profits or surplus ordinarily means what is left after making good the capital. It is unnecessary to cite authorities, for on this point we agree with the learned counsel for the common stockholders.
It was doubtless competent for the legislature in providing for an emergency like this, to authorize the issue of preferred stock upon such terms, within due constitutional limits, as it pleased. The vital question in the case then is, whether the legislature intended the issuing of ordinary preferred stock, or preferred stock the holders of which should be entitled to extra rights and privileges. We are of the ’ opinion that the latter was intended. The act, referring to the stock, says :—“ the holders of which shall be entitled to receive out of the net earnings of the company dividends of seven per cent, per annum, the same to be paid in semiannual instalments, in such sums as the directors of such corporation may determine; and if the net earnings of any year shall not be sufficient to pay said dividends, the same shall be cumulative and payable out of the net earnings of any subsequent year, but without interest; said dividends and accumulations to take priority over the dividends on all other stock of the company, until, in addition to said divi*168dends on said preferred stock, there shall be paid an equal dividend upon the common stock, after which any dividend declared by said company shaE be divided equaEy between said preferred and common stock.”
Thus the intention is clear that the annual net earnings shall be pledged for the payment of the dividends on the preferred stock for that year and any arrearages for previous years ; thus securing to the holders of that stock payment of such dividends in full for every year before any dividends can be paid to the holders of the common stock.
The term “net earnings” may be, and often is, the equivalent of surplus or net profits; but we think it is not used in that sense here. As we haye noticed, it- is net earnings for a Hmited time, and not the net earnings for the whole period of time the corporation has existed. The latter may properly be caEed surplus or profits. To ascertain the surplus on-the 31st day of March, 1886, the state of the whole account must be considered, including of course the amount charged to profit and loss prior to October 1st, 1885 ; but to ascertain the net earnings for the six months ending March 31st, it is only necessary to deduct from the gross earnings the operating expenses for that time, including repairs and a proportional part of the fixed charges. That in view of the circumstances is a reasonable interpretation ; for it must be presumed that the legislature intended measures that should be effectual to give relief to the company. Now if it had been intended that a prior deficiency of nearly three quarters of a million should be considered in determining the net earnings, we think the legislature would have said so in express terms, or in language sufficiently broad and comprehensive to include such a deficiency. Had it done so it is highly probable that the stock would not have been taken, and thus the object of the legislature would have been defeated. As the language of the act wEl admit of the interpretation we have given it, and will make it more effective than any other construction, it seems to us that it is the more reasonable one.
Again. The act is an enabling one; it is also special, *169applying only to this corporation and to those who may contract with it as therein prescribed. Its sole purpose being to authorize the making of certain contracts, it becomes important to inquire how the parties immediately concerned understood and applied it. Manifestly it should be enforced as both contracting parties understood it at the time, if the language used will fairly bear the meaning they gave to it, and especially if the act as thus construed is not contrary to public policy. ' We see nothing in it which contravenes public policy. True, the policy of the law will not permit corporations, while they continue in business, to distribute them capital among stockholders in the form óf dividends ; and it is not the privilege of preferred stockholders thus to consume the common stock. We do not intend so to construe this act as to allow that to be done in the case of this corporation. Hence we limit the decision to the deficiency which existed at the time of issuing the preferred stock. Should a deficiency hereafter come into existence it wül stand upoma very different footing. The present fieiency existed and was known to the legislature when the act passed; the company with knowledge of its own condition entered into this contract; the common stockholders thus virtually said to subscribers to the preferred stock— “ The present deficiency in the accounts shall be no obstacle to your dividends.” Good faith requires that this understanding should be carried into effect. That we have correctly interpreted this transaction is apparent from the terms of the contract as contained in the certificates of stock.' An examination of the certificate will show us clearly how the contracting parties construed the act. The material part is as follows:—“ These shares of preferred stock are part of an issue not exceeding fifty thousand shares of one hundred dollars each, represented by certificates differing only in the year of issue. The holder of this certificate is entitled to seven per cent, annual dividend out of the net earnings of the company from the first day of October in the year above written, payable semi-annually and cumulative, without interest, before a dividend is paid *170upon the common stock or upon subsequent issues of preferred stock. To entitle the holder hereof to a full annual dividend, this-certificate must be surrendered at the time the last instalment of the same is paid, and exchanged for a certificate of the next year’s issue.”
There are three peculiar features of this certificate. In the first place, it is issued only for one year. Whenever a full dividend for one year is paid, it must be surrendered, cancelled, and a new one issued for the succeeding year. In this respect, and so far as dividends are concerned, it is a mere certificate of indebtedness. The object of this is not very apparent, but was probably designed to promote convenience in keeping the accounts. The stock account will show what dividends are paid in full and what are in arrears. This was considered desirable on account of the second peculiar feature of the certificate, winch is, that dividends are cumulative. Ordinary preferred stock payable from the surplus, or net profits, takes its chances with common stock; and if, from any cause, a dividend fails, it is gone. But here the agreed dividend, however long payment may be deferred, keeps its place as a lien upon the net earnings, and must be paid in full before any payment can be made to the holders of the common stock. In this respect the preferred dividends closely resemble the interest on bonds. This evinces an intention that the holders of preferred .stock shall have special advantages. In form stock is sold and issued, and the purchasers become stockholders, but in substance, as to dividends, they have the advantages of creditors. Then, in the third place, the dividends are to be paid from the net earnings from a given time—October 1st, 1885. At that time this deficiency existed, but as it did not represent a debt calling for immediate payment, the legislature said to the company—“You may raise money in either one of the two ways indicated, by pledging your net annual earnings as security, and whichever way you may adopt the apparent deficiency shall not affect the security.”
The company accepted the proposition and embodied it *171in the certificates of stock. We cannot doubt that the parties to the contract so understood it. Clearly it should be enforced as the parties intended it. Otherwise we shall substitute for the contract which the parties did make, one which they did not make. In that event one party will surely be defrauded.
The Superior Court is advised that the company may lawfully declare and pay the proposed dividend.
In this opinion the other judges concurred.