FIRMS BREACH TRUST DEEDS

Press, Volume CXV, Issue 33929, 23 August 1975, Page 1

FIRMS BREACH TRUST DEEDS

(By

ADRIAN BROKKING,

our commercial editor)

The recent devaluation has put a number of large companies in a position where they are in breach of their debenture trust deeds, and legally should be placed in receivership.

This does not mean that these companies are even remotely in danger of bankruptcy, of course. But the amount needed to repay their overseas loans has gone up by about 17.5 per cent, and this changes their ratio of debt to assets. Companies that issue debenture stock to the public must maintain a minimum ratio between assets and liabilities — to protect the investors — and enter into a trust deed to that effect. The trustee for the debenture holders — usually one of the trust companies — is charged with the duty to see that this ratio is not exceeded. If there is a breach of the trust, then the trustee requires the company to rectify the situation, and if the company cannot do so, the trustee must place the company in receivership. Technical fault Many of our larger public companies have borrowed substantial amounts overseas, with . the encouragement of the Government. N.Z. Forest Products, our largest public company,

raised an overseas loan of SUS7Om in March this year. The amusing — if unforeseen and perhaps unwanted — consequence of the Government’s decision to devalue is that some of these companies are in technical breach of their debenture trust deed, even though these companies’ financial position has not changed otherwise. It is not so funny for the companies concerned, or for the trustees. They are being put to a lot of extra work. Some of the more modem trust deeds include a provision that a technical breach because of devaluation is not enforceable, unless the interests of debenture holders are otherwise prejudiced. Where such a provision does not exist, the companies concerned will have to take remedial measures. Legislation They could do that by revaluing some of their assets — if this is feasible — and to improve the ratio of assets to liabilities. In the cases where the debenture is held mostly by the large financial institutions, the trustee might contact these to see if they are prepared temporarily to acquiesce in the technical breach. But where the interests of

many small debenture holders are possibly being prejudiced, the company concerned would have to give satisfactory undertakings to remedy the breach. The Government might be prepared to bring down legislation, if needed, to allow companies to deal with the problem in other ways. Representations are also being made to the Government to make the foreign exchange losses tax-deductible.

Some of the finance companies, especially, stand to lose fair amounts from the devaluation. Making these tax-deduct-ible would probably mean that gains from revaluations in turn would be taxable.

And this argument itself is not without its irony: one large finance company recently made forceful representations to the Government that its profits from recent revaluations should be treated as capital gains.