GRAY, J.

From the foregoing facts, which the parties have stipulated as resuming the whole situation, it is apparent that our consideration of this appeal is, in no degree, embarrassed by any question of the power of the directors to increase the capitalization of this company in 1898, or to reduce it in 1904. In each case, we may assume, it was duly and legally effected and the only question is whether when, subsequently to the reduction of the capital stock in June, 1904, a distribution of the surplus profits was declared, the plaintiff, as a preferred stockholder, was entitled to be paid for arrears of dividends, payable during the years prior to the reduction, upon the 167 shares of preferred stock, of which she was then the actual holder, or upon the 250 shares of which she had previously been the holder.

When, in 1898, the capital stock was increased to 3,000 shares, or $300,000, the plaintiff became the holder of 250 shares of preferred stock and she received the six per cent dividends thereon down to July 1st, 1901. From that time down to June, 1904, the company made no surplus profits from its business; the capital had become impaired to the extent of upwards of $90,000 and no dividends had been declared to its stockholders. A reduction of the capital stock being then resolved upon, it was accomplished, so as to establish it at its former amount of 2,000 shares, or $200,000. Thereafter, the business prospered; so that, in the following six months, the earnings had so increased as to show a surplus of profits accumulated in the corporate treasury and the directors resolved to distribute them by way of a dividend. By their resolution, a payment was to be made of "the amount due to the preferred stockholders in full of dividends and accrued interest thereon to December 1, 1904, upon the $50,000 preferred stock of this company," etc., and a further dividend of one per cent was declared upon the common stock. The payment to the preferred stockholders, however, as to arrears of dividends being made upon the number of shares as reduced, the complaint of this appellant, in effect, is that the defendant has measured its obligation to its preferred stockholders, with respect to the past, by the amount of their present holdings; whereas its obligation upon that much of the preferred stock, which had been theirs prior to the reduction of the capital stock, had never been fulfilled, nor released.

In the charter and in the certificates issued to the preferred stockholders, it was stated, most explicitly, what was the nature of the preference, which was accorded to that class of stockholders; namely, to be paid "out of the surplus profits arising from the business of the corporation * * * a dividend equal to six per cent per annum on the preferred stock, payable in equal semi-annual payments, before any dividend shall be paid on the common stock; such dividend on the preferred stock shall be cumulative and in case of non-payment shall bear interest at the rate of six per cent per annum from the date when payable." This was a valid contract between the company and the preferred stockholders, which was binding upon all other stockholders. ( Kent v. Quicksilver Mining Co., 78 N.Y. 159, 180.) Each class of stock was a part of the whole capital stock and both classes were made by the charter alike, in all respects, except in the one respect that the preferred stock was entitled to have "the surplus profits arising from the business" appropriated, in first order, to the payment of six per cent dividends, cumulatively. Now this was as much an agreement of the common stockholders, as it was the agreement of the corporation and the right of the preferred stockholder was inviolable. It assured to him, in effect, that if the corporate earnings failed to show surplus profits sufficient to pay a dividend due on the preferred stock, to the extent of the default in payment and of the accruing interest thereon, there would be a specific charge upon all subsequent surplus profits gained by the company. In other words, the dividends agreed to be paid upon such shares of stock were a charge upon the profits of the company for all time and all arrears of such dividends, with accrued interest, were to be paid out of any moneys applicable to such payment before any payment should be made to the common stockholders. ( Boardman v. L.S. M.S.R. Co., 84 N.Y. 157; Sturge v. E.N.R.R. Co., 31 Eng. L. Eq. 406; Henry v. G.N.R. Co., 3 Jurist [N.S.], part 1, 1117.) This right, necessarily, survived the reduction of the capital stock, as to previous arrears of dividends; unless the obligation of the company had, in some way, been discharged. Concededly, it survived as to the preferred stock in its reduced amount and what was there in the action of reducing the capital stock, which was operative to cancel it as to the arrears of unpaid dividends upon the shares of stock which were retired, or cut off, by the reduction? The Stock Corporation Law, (Chap. 688, § 44), authorized the reduction to be made; but that statute and the proceedings under it could not affect any vested right, nor impair the force of any corporate obligation. Nor was it intended to accomplish any such thing; or any thing more than to authorize the holders of a majority of the stock, when the circumstances seemed to them to justify it, to increase, or to reduce, the amount of the capital stock. Its reduction left the affairs and obligations of the corporation just as they had been, with the sole difference of the lessened capitalization of the concern. There would still remain the obligation of the corporation upon any unperformed agreement; for no obligation was satisfied thereby. Its agreement to pay dividends on the preferred stock had not been fulfilled and, so long as the corporation was a going concern, this default created an indebtedness, which was payable whenever, in the future, it should accumulate surplus profits from the conduct of the business.

The preferred stockholders, as the result of the reduction of capital stock, would hold a less number of shares; but they would still be creditors for the arrears of dividends due by the company on the shares of preferred stock, which they had previously held. They may not have been creditors of the corporation, in a technical sense; but, as between themselves and other stockholders, they were as creditors, with demands to be fully paid certain arrears of dividends before any of the surplus profits should be appropriated to a dividend upon the common stock. The common stockholders held their shares of stock subject to that prior charge upon the net earnings. No acts of theirs could destroy that right and it, of course, in no wise, depended upon any declaration of the board of directors. Directors have a wide discretion in the management of the corporate affairs and their declaration of a dividend from surplus assets, when honestly exercised, will not be interfered with by the courts; but that does not mean that they have the power to discriminate in the division of the surplus to the impairment of any prior right thereto.

When the defendant's directors met, in December, 1904, to act upon the question of dividends, their duty was, in dividing the surplus profits, to apply them, in first order, to the satisfaction of the debt to the preferred stockholders for arrears of dividends on the whole number of their shares, which were outstanding during the three years prior to July, 1904, before the capital stock was reduced. For the purpose of such a dividend, however, only such surplus as represented the profits of the business could, legally, be availed of, and this brings us to consider the question of the disposition of the surplus of capital, left upon the reduction of the capital stock, which the appellant claims to be equivalent to surplus profits and, hence, to be applicable upon the company's debt to the preferred stockholders for arrears of dividends. As it has been stated, the capital of the defendant had become impaired, by June, 1904, to the extent of $90,861.85, and this necessitated the reduction as then effected. The reduction to $200,000, thus, left the sum of $9,138.15, which was an excess, or surplus, of capital. Whether it consisted in funds, or in property, we are not informed and it is not material to our consideration. We may assume that the directors could have converted it into cash and have distributed it by way of dividends; but the preferential right of the preferred stockholders did not reach to a distribution of that which was capital, nor create any charge upon capital. That which constitutes the capital stock of a corporation belongs to all of its stockholders, proportionately to their holdings. It is divided into shares and each share represents the holder's proportionate interest. ( Jermain v. L.S. M.S.R. Co., 91 N.Y. 492.) Upon dissolution, or in liquidation, it entitles him to share ratably in the assets. If the directors had undertaken to divide this surplus of capital, it was apportionable, only, among all the stockholders ratably. The statute contemplated nothing else than that. Indeed, it is inferable, perhaps, that the only authorization to dispose of such corporate property is to return it to the stockholders. The statute reads, (Stock Corporation Law, § 46), "If the capital stock is reduced, the amount of capital over and above the amount of the reduced capital shall, if the meeting or consents so determine or provide, be returned to the stockholders pro rata, at such times and in such manner as the directors shall determine." But, assuming that the directors in their discretionary management of the company's affairs, concluded, and were empowered, to distribute this surplus of capital, the preferred stockholders would have no legal, or equitable, claim upon it in satisfaction of past due and unpaid dividends. That was not the contract. Their only right would be to share in such a distribution ratably with the common stockholders. ( Strong v. Brooklyn C.T.R.R. Co., 93 N.Y. at p. 435.) The charter and the contract made them alike in all respects except as to dividends. Dividends, as the rule, are not payable out of the capital of a corporation; but only from the surplus profits arising from the business carried on and that was the contract here. When the property of a corporation has accumulated in excess of its chartered capital, the excess may be regarded and dealt with as constituting a surplus of profits. For a fuller discussion of such questions, I may refer to the cases of Kent v. Quicksilver Mining Co., ( 78 N Y 159, 179); Williams v. Western Union Telegraph Co., (93 ib. 162, 188, 191, 192); Strong v. Brooklyn C.T.R.R. Co., (93 ib. 426, 433, 435) and Beveridge v. N.Y.E.R.R. Co., (112 ib. 1). In the present case, it must be borne in mind that the $9,138.15 remained in the corporate accounts, after the reduction of capital stock, as a portion of the former capital and it was, in no sense, like an excess of property, which had been accumulated in the conduct of the business beyond the fixed capital. It did not represent "surplus profits arising from the business;" it was not within the intendment of the agreement with respect to dividends on the preferred stock and its distribution, when made, could only be legally effected by dividing it among all the stockholders ratably and without preference. (See Seeley v. N.Y. Exchange Bank, 8 Daly, 400; affd. on opinion below, 78 N.Y. 608, and Cook on the Law of Stock, etc., § 278.)

I have, therefore, reached the conclusion as to this surplus of capital, left on hand after the reduction of the capital stock from $300,000 to $200,000, that it was not applicable to the claim of the preferred stockholders for the arrears of unpaid dividends. I am, equally, clear in the conclusion that, in making the distribution of the surplus profits arising from the conduct of the business, the directors were obliged to apply them, in first order, towards the satisfaction of all claims, which the preferred stockholders, at any time, held against the company, based upon arrears of unpaid dividends and the stipulated interest accrued thereon. Such was the express obligation of the corporation; which, so far as the record shows, has never been discharged or released.

I advise the reversal of the judgment appealed from and that the plaintiff appellant have judgment against the defendant respondent entitling her to be paid, from the surplus profits arising from the corporate business, the annual dividends of six per cent per annum in arrears upon her 250 shares, or $25,000, of preferred stock up to June 25th, 1904, and on her 167 shares, or $16,700, of such stock thereafter, with interest at the rate of six per cent per annum from the date when each dividend was payable until the date of payment, before any dividend is paid upon the common stock, with costs to the appellant in both courts.

CULLEN, Ch. J., HAIGHT, VANN, WILLARD BARTLETT and CHASE, JJ., concur; EDWARD T. BARTLETT, J., dissents.

Judgment accordingly.