SOME TRANSACTIONS

Evening Post, Volume CXVIII, Issue 58, 6 September 1934, Page 6

SOME TRANSACTIONS

A TRIP TO INDIA

PAYMENT V EXPENSES

The most lengthy part of the Commission's'report dealt in detail with some of the transactions carried out by the -companies in the group. "Dealing first with New Zealand Redwood Forests, Ltd., the - Commission stated that the debenture scheme set out in the description o± tha New Zealand Eedwood Forests, Ltd., was varied in the year 1930. .A proposal was put to the debenture holders in February of that year. A letter above the name of W. McArthur, chairman, was sent to each debenture holder, briefly setting out the details of a proposed reconstruction scheme, which was more fully described in a circular which accompanied the letter. The circular stated that. the reconstruction scheme was put 'forward because recent developments had, shown that certain advantages would follow the acquisition and planting of a larger acreage than the 6014 acres originally purchased; and, further, that it had been proved that profitable by-products of redwood trees could be manufactured. '''The scheme, in brief, was that the company should acquire.further parcels of 'land' and plant them in redwoods," stated the report. "The debenture holders were asked to surrender their existing interest-bearing debentures and accept under the new scheme in place thereof two non-interest-bearing debentures in respect of each of which an acre of trees would be planted and maintained. If adopted, this scheme woilld'double the area to be planted, and give to each of the original debenture holders two debentures for each one originally subscribed for. As already pointed out, the original debentures', entitled the .Holders'to interest, whilst' the new debentures' were jto be

iinii-liilri'Mt-benriiif;. As the debenture holders wum m-nttered and it was mil [iriiclu'iibli! i'or Iho greater number til' tlu'iii lo til I end n nw.'Ql.ing, they with Invited lo uhslkii tlit'ir existing 'lolii'iiltiiTK to two proposed assignees liMiiioil by Iho cuinpnny, Messrs. Kennel li .Seymour ('o.v, of! Ongnrot.o, near l'ulnriirii, runliolder, nnil William Lyull Windmill, of Anclilnnif, .solicitor, and mi Innlniiuoiit ul! u.si*l)»(iim;iit. dcMgiu'd i In cllui'l ilu< irmisl'oT of debentures for Ililn purpose wns i'iicldsiml .with tlie oil--1 ciilnr IcltiT. ll' I In; eclieini! were <:111- ' I'lcd, an (ilU'iiilion U'mh lo Ik' iiiiulc in Unit proportion of I lie (|i:l)i'ntui« money which, by tho original flohyiuo, was to bo held us itn in vent in out. i'unil midrftilim'ttimi reserve. Under the- original I Hi'-hruni!, I lie sum of £21. out- of each ftilly-nald debenture of £.').■) was to ho .liold by llu) trustees to provide itu investment fund and realisation (reserve; l'nit under the now scheme this was reduced to £7 per debenture, wliilivt tho oilier £H whs lo be vested in New Heulimd Kcdwood Forests, Ltd. A meeting of dclienlure holders was held on S(');tem)icr 11, .1.080, at which were present officers of tho Eodwolid Co., and of the New Zealand Insurance Co., Ltd., as trustee, coun.spl for .various parties, and about thirty debenture holder*'. There' wan a great deal of op position to tho scheme, and both before and at tho mooting many allegations detrimental to the scheme and its sponsors wero freely made. A resolution approving of the scheme was put to the' meeting, a .poll being taken. The resuit was that the resolution was carried; the votes exercised' by Messrs. Cox and Wiseman as assignees of .debentures ■ represented a total of £53,787, whilst all the remaining votes cast represented a total of £14,579. This resolution was, at a later date, after abortive litigation, acted upon. "Prior to this meeting, the New Zealand.lnsurance Co., Ltd., had stated that it was not prepared to continue) to act as trustee if the scheme were, carried. A new trust deed had therefore been prepared, and two reputable professional men in Auckland had been named therein as trustees. The New Zealand Insurance Co., Ltd., withdrew -from tho trust on the carrying of the resolution, and the new trustees took over, as the new trust fund, an amount equal to £7 per debenture of the. debentures originally subscribed for. The balance ■-of. the investment fund and realisation reserve reverted to the: company. PRELIMINARY EXPENSES^ "We refer in this interim report to two statements contained in the prospectus of this company relating to preliminary expenses, and estimating their total at £1000. The statutory report and balance-sheet filed with the Eegis trar of Companies show that by June, 1926, the preliminary expenses of the company had been paid to an amount of £5095, whilst-it was estimated that there was a further sum of £20.00 to be paid under this heading. It. is difficult to understand the necessity: for this expenditure, for ■ (with negligible exceptions) the only shares subscribed for were those allotted to the subscribers of the memorandum, and to the Selwyn Timber Co., Ltd., and. its nominees, in exchange for the land taken over by the Eedwood Co. We have evidence that this £7000, preliminary expenses, includes substantial payments to J". W. S. McArthur out of money paid in by debenture holders; and that. Mr. McArthur's claim to this money is in respect of travelling and other expenses incurred by him (prior to 'the formation of the Eedwood Co.) on visits to America and Australia to procure- information and make ■ arrangements preparatory to the formation of the company. There is 'no disclosure "of this alleged claim in the prospectus. "On the issue of the prospectus of New Zealand Redwood Torests,. Ltd., •the three parcels of land to be acquired wore subject to a mortgage of over £11,000, and J. W. S. McArthur was personally liable for this sum. There is no disclosure of this fact in the prospectus. LAND TRANSACTIONS. "(1) The three parcels of land described in the prospectus were all contiguous. In equity jhey were the property of the Selwyn Timber Co., Ltd. The interest of New Zealand Eedwood Forests, Ltd., in them was evidenced by three separate memoranda agreements for sale and purchase dated1 the same day as the prospectus. The land was fairly heavily encumbered, the parcels and boundaries to be conveyed to the Redwood Co. by the Beulah Co. were not defined, and the block in McArthur's name was Native land, the title to which required a great deal of legal work and consideration by the Native Land Court before any dealing with it could bo registered. - Nevertheless, the Eedwood Co. straightway exchanged cheques totalling over £15,000 with the Selwyn Timber Co., Ltd. These represented payments of instalments on the land on the one hand and payment of 10s per' share on about 31,000 shares of £1 each allotted to the Selwyn Timber Co., Ltd., and its nomi : noes, on the other hand. With no change in this position, other than the receipt of debenture-moneys, treeplanting on a large scale was undertaken, on this land, and a substantial amount of purchase-money was paid in cash to the Selwyn Co. to enable it to pay calls on shares held in Mr. McArthur's name. "(2) When Block 2, which was the land sold, by the Beulah Land Co., Ltd., was ultimately transferred to the Eedwood Co. in October, 1931, an area of over 100 acres was excluded from the total area of 2353 acres covered by the certificate of title. This area of about 100 acres was known as the 'Mill Site.' It was centrally situated in the whole area purchased, and strips giving access to it were also excluded from the area transferred to the. Eedwqod Co. The only means of identifying the land thus transferred, with the land purported to be described in the original memorandum of agreement, is by reference to the block survey number, and the total acreage agreed to be transferred. The selection of the portion to be excluded was apparently within the discretion of Mr. McArthur, who was managing director of both vender and purchaser companies. The part actually excluded was the most valuable of the whole, "because of the mill and equipment upon it. "It is stated in the prospectus that instalments totalling over £15,000 had been already paid on the land there described. Later there is an unrelated statement: 'The directors have allotted 30,600 shares paid up to 10s per share.' The justification for these statements is the exchanging of cheques between the Eedwood Co. arid the Selwyn Co. — a transaction which to.ok place over two months after the issue of the prospectus. EXTRAVAGANCE AND MISMANAGEMENT. "During 1928 and 1929 the Eedwood Co.'s financial position became desperate. The balance of purchasemoney had fallen due, as had the mortgage on the lands; neither the Eedwood Co. nor the Selwyn Co. could raise the money. The mortgagee was threatening to exercise his power of sale. The bank had stopped the company's credit, and wages of workmen at the company's nursery, were in ar r rears. It is true that lapses of debentures by non-payment .of instalments were heavy, and this was a substantial .contributing cause of the trouble. .On the other hand, however, substantial sums paid by the debenture holders in Australasia and India seem to have be.en wasted by extravagance, mismanagement, and ; unjustifiable • payments, whilst heavy brokerage had been, made the first charge upon the debenture

holders' money. We exemplify these practices as follows: —

"(1) Double-payment of, Bates.—ln November, 1!)28, the Matamata County Council threatened to sup for £133 for rates iluo on oiic of tlio blocks. It transpired that the amount of these" rules had been, duly paid by the Eedwond Co. to the Kelwyn Co,, but that coin puny hud not paid them to the ! rating lu-.thorily. The Kcdwood Co. hu;l to pay iignin. . I "(-2), Payment of McArthur's Per'.snnal Liability.--Knrly in 1928 J. \V. H. M.c Arthur went to India to open a rtdienhirc-solJing campaign, and he was i i here for about one year. He there iiuunche'd li'purs.mal libel action against v linn of brokers■ who attacked the methods adopted on behalf of the Bedwood Co. He cabled to New Zealand for authority to bring this action in the company's name. This was refused. The directors were opposed to it, and the company's solicitors advised against it strongly. The directors cabled accordingly. McArthur cabled in reply, 'Am consequently maintaining private suit.' Some months later, .McArtlmr cabled requesting money for purposes of the action, and the directors cabled refusing the request, find adding 'Case proceeded with, in opposition board's instructions, therefore nil costs your personal liability,' The action was abortive, and the costs were over £5000.; "On McArthur's return he procured the passing of resolutions by the directors; these ratified his action and agreed to pay the costs;out of tlie company's funds. This. seems to be a payment, ultra vires of the company, of the costs of an action to which it -was not a party. "(3) First Instalment of McArthur's India Expenses.—When Mr. Me Arthur was instructed to visit India, the directors of the company voted him the sum of £400 to cover his expenses. That sum was very greatly exceeded, and we have evidence that no proper accounts were ever submitted, by Mr. McArthnr to. show the'details of this expenditure, but that he simply retained what he required out of the proceeds of debentures sold in India. . "(4) Second Instalment, .McArthur's India Expenses.—ln addition to his expenditure from debenture-moiieyj::--Mr, McArthur, whilst in India, procured remittances from the Selwyn Timber Co., Ltd., amounting to over £1000 for Ms travelling and personal expenses. A. demand for refund was made by his co-directors of the Selwyn Co. after his return, and McArthur stated that it was 'clearly the liability of-the Redwood Co.' The directors of that company refused to recognise the. liability, but after the change of directors, hereafter .referred to, the amount wa3 paid by the -Redwood Co." , TWO LOTS OF EXPENSES. '"(5) India Travelling Expenses-paid by Selwyn Co.—During the year ■' in which Mr. McArthur was absent from New Zealand, he was wholly on the business of the Bedwood Co. He nevertheless drew from the Selwyn Co. a sum of over £1000 as 'salary and travelling expenses.' This is in addition to the sum of £1000 refeired to in paragraph (4) above. The Eedwood Co. is interested in this matter, for in 1929 neither McArthur nor the Selwyn Co. were able to pay the calls due on their. Eedwood shares levied at the instance of the bank. "(<5) Selling-costs In India.—The costs of selling the company's bonds hi India (including, McArthur's expenses) were very heavy. We have evidence that at a point of time when the total amount actually paid by the debenture holders in India had reached approximately £30,000, the amount -remitted to XoW Zealand was less' than that part of the amount paid wliich was to go to the trust fund: ' ■ ' ";. • . "If this,is so, it means that the whole of those' constituent parts of the de-Tjcnture-inoney which were to be allocated to purchase of land and planting and maintenance of forest had been dissipated in selling-costs and expenses. " (7) Misapplication of Investment Fund. —On.. June 6, 1928, in response to a cable which the secretary in Auckland had sent, under pressure from the bank, Mr. McArthur cabled the, sum of £1000 from India to reduce the bank overdraft. This was-..remitted without comment or instructions, and it was some months later tha.t the direc; tors found, on checking Indian statements, that the money belonged to the investment fund and .realisation reserve —i.e., the trust fund. , "(8) Directors' Instructions Ignored. After Mr. MeArthur's .return from India he was unable to pay the calls due on his shares in the company, arid his seat on the board was liable to be vacated if these calls were not paid "by March 31, 1929, He asked that payment of the balance of purchase money on the block of land of which he was nominal vender should be made by the company so that, he might pay the calls therewith. Accordingly, the directors passed a resolution on March: 28, 1929, authorising the payment. The resolution concluded, 'And that the secTetary be authorised to instruct the company's solicitors/ to 'prepare the necessary transfer,and that upon the same being executed a cheque for the nmouht .required be handed to' Mr. McArthur.' No transfer was executed, and none could have ,been executed, for no such dealing with the (Native) land was then possible. Nevertheless, Mi-. McArthur procured' the and paid the calls before the end of the month. ,■ - , • ' "■ :'.. ■