BOND COMPANIES

Evening Post, Issue 36, 12 February 1935, Page 10

BOND COMPANIES

PROVISIONS OF BILL

MINISTER EXPLAINS

PROTECTION FOR HOLDERS

QUESTIONS ANSWERED

A explaining the provisions of the Companies (Bondholders Incorporation) Bill, which is to be proceeded- with during the session to be .... resumed; tomorrow, was issued by the • Minister/ of Finance (the Rt. Hon. J. G. Coates) today. The .Bill was introduced into the House, of Representatiyes' in November last, but consideration was. postponed until, this year. "The.Bill 'arises out of the report of the Companies Promotion Commis- ... .sion and as a remedy for the legal difficulties encountered by existing bondissuing companies to which attention has;.been, drawn in the report of the Companies Promotion Commission," states the memorandum. . "These difficulties cannot be adequately overcome by the machinery of the Companies Act. The .present Bill is an attempt to dispose of these difficulties. . "There are probably about forty to .;- fifty bond-issuing companies incorporated and operating more or less actively in New Zealand at the present "time. It would seem that many' of these companies, particularly when for-' , mulating their realisation schemes, did not realise that such large numbers of the public would favour this type of ;. investment,- or, consequently, the ex- ! tent to which the planting operations would grow. • '.■:■■■■■ '"The appointment of a trustee was no doubt a reasohabble element in a scheme for protecting the bondholders -during the period—necessarily a long period—whilst the trees were growing. .. When,-however, the directors of the company seek to take practical steps towards milling operations and other activities for realising, the company's assets, they.find, that there are serious in the way, primarily due to the facts that the trustees have . limited" powers" of realisation and that the bondholders whose interests they represent are a widely dispersed and unincorporated body. '.' A COMBINATION. _ * "In the case of some of the compan-ies-.a combination of; the different bond •' issues is desirable, as it, would; be uneconomical to plan and create several similar operating' plants where one could do.the necessary work and the existing trust deeds do not provide satisfactory machinery for any such combination. There would seem to be no need to traverse the whole of these difficulties or even to enumerate them. • They are indicated in the preamble to : the Act in the following words:— ; Whereas on account of the fact that the bondholders are not incorporated, and of the fact that the powers of the trustees; acting on their behalf .'• ~. are limited, difficulties have, arisen or may arise in connection with the realisation of such land or produce: And whereas it is expedient that provision should be made for the removal of such difficulties. "It -was on such considerations that the! Commissioners came to the, conclusion that there was no practical method;■ of. enabling.; any of- the companies. to: approach, commence, and carry out their major realisation schemes, except by incorporating the '-~- bondholders arid converting their bonds.into shares.; The Commissioners were helped to this conclusion by the fact that the '• directors, and legal advisers of several: of the companies and of i bondholders appeared before them and announced that they had come to the same conclusion, and asked the assistance of the Commission to procure legislation to enable them to overcome the legal difficulties created by the peculiar, circumstances surrounding their trusts and. their bodies of beneficiaries. -Other companies had endeavoured, as a measure of self-help, to procure the incorporation of their ■ bondholders only to find it impossible to procure unanimity, and they were riot prepared to run the risk of commencing operations whilst there was even, a small, body of dissentients or non-co-operating bondholders. They "therefore joined with the -•first-men-' ■; tipried; companies in appealing; to the Commission to recommend and endea- ■ your to procure the passing of legislation to clear away the difficulties. THE BILL'S OBJECT. "The Companies (Bondholders Incorporation). Bill is , the outcome of , these considerations and: negotiations. Its object" is to provide a machinery for facilitating the incorporation of bondholders in.companies incorporated .in New Zealand. It is necessary, if this ;.:, is,to be done on an equitable basis, that there should be some independ- ■■'-' ent. scrutiny ofthe.basis of incorporation, : of" the basis of substitution of ■ shares for bonds, and of the terms and ;;-'■ conditions on which the newly-incor- :'-; poratedtbody of bondholders is to ■ carry 'out the projected realisation, scheme.' ' '...■■ . "The Bill seeks to provide these features and / elements by the setting-up of'a Commission to be called the Bondholders' Incorporation Commission. .The Bill provides, firstly, that every bond- . issuing company shall within three ■"-.- iribnths after the passing of the Act deliver .a statistical statement to the - .Registrar of Companies, giving information on certain points on which the Bondholders' Incorporation Commission will require information. .This requirement should procure for the Commission as a starting-point a comprehensive list of bond-issuing companies. "The^next step is that the Commis-sion-may order : that a scheme be submitted providing for the incorporation ■of the bondholders of any given com- ,- pariy,. on the basis, that each bondholder will receive a share or shares for. his bond or bonds, and that existingrights amongst bondholders will be preserved relatively amongst them in their new character of shareholders as nearly as possible. This scheme, when , submitted, together with any modifica- . tion or further proposals suggested by •: interested parties, will be carefully • considered, by the Commission, which will, settle: the terms -on which the bondholders are to be incorporated. The. Commission will not necessarily be bound by the scheme or proposals submitted to it, but it must proceed on. the. basis that the incorporation is designed thereby to convert the bonds into shares without altering the rights of the parties more than is absolutely . necessary to enable the conversion to .be. effected.' Steps prescribed by the •Bill will then be taken resulting in the ■'.;•' due incprpdratiori of the company. It : should be .noted that this company will .. be a new company, quite distinct from the bond-issuing company. Its capital will be the bond capital subscribed by ; the .bondholders, but converted into shares and stated as share capital. Its directors will be representatives of the bondholders, ■ and its memorandum and articles of association will contain such provisions as are necessary to procure the effective realisation of the project ' and assets in which the bondholders (now.shareholders) are interested. A REALISATION SCHEME. "After the statutory, meeting of ■■'' shareholders has been held, the direc- ' tors' of the new company may formu-

late their realisation scheme and apply to the Commission for assistance to resolve any difficulties that may arise in connection with their proposals. Such difficulties might arise where groups of bondholders may decide to combine or where the rights of different sets or issues of bonds have to be adjusted,/or where the rights of dissentients may call for settlement or where any existing contract may re* quire modification. The Commission in such cases will hear the applicants and the bondholders (now shareholders) or any representative of such bondholders, or any other person interested, and will examine all documents with a view to seeing that the proposed scheme of realisation is a fair and equitable adaptation to the new circumstances of the scheme originally put; to the bondholders. (now shareholders). The Commission may, if it thinks necessary, order meetings of the shareholders (the original bondholders) to be held or postal ballots to be conducted for the purpose of ascertaining the wishes or procuring the acquiescence of the bondholdershareholders. "When the Commission is satisfied that the scheme has been sufficiently discussed and that it is _an N equitable scheme, it will approve it and make an order making the scheme operative. The scheme will then be binding on the company and on all shareholders. If, however, a dissentient body of bondholders should object to taking shares in the new company, such persons may demand to be left as bondholders under their rights as originally created by the bonds. There is power for the Commission to cut them out of the shareholding scheme and to apportion an appropriate part of the company's land or products to such body of bondholders for the preservation of their rights under the . original bonds. This means that whilst no man v'ill be dragooned into becoming a shareholder against his will, it will be impossible for a small minority to wreck a scheme that the great majority of bondholders has approved of. - v. "The cost of the Commission: and of the above procedure is to be borne by the companies • that receive the benefits of its provisions, and the Commission, has power to make a levy and to make charges on all the companies accordingly. NO STATE RESPONSIBILITY. "It is important to note, and- the Bill enacts a declaration to the effect that the State, by introducing this legislation for the protection and benefit of bondholders, undertakes no responsibility for any of the projects in' connection with which the bonds have been issued, nor does it give any warranty or assurance; It passes no judgment on the commercial prospects of land utilisation projects. These remain purely a'matter between the bondholders arid the company they originally contracted with, and the Government has never takenand.now takes no responsibility in the matter. It merely enacts a special statute to clear awayMegal difficulties that: Have developed and to which reference has already been made. ' , "It may^ be desirable to add a few words as to "the position of bondholders who are domiciled in Australia and other countries beyond the Dominion of New Zealand. It is a fact that \in the case of some companiesa fairly large,proportion of their bondholders are domiciled overseas. The present position of these bondholders is that they share with the New Zealand bohdholders'ail the defects of fee instruments known as bonds and all the difficulties arising, out of the fact that their assets. are in the hands of trustees who are unable effectively to carry on a business.; In addition, however, they suffer the disadvantage that ori : any attempt to enforce or protect .their rights they must act from a point outside the jurisdiction" of New. Zealand Courts. Their rights are fixed'by New Zealand law and they are foreign creditors of New Zealand companies: "The Companies (Bondholders Incorporation) Bill benefits these .overseas bondholders, in,two .ways..Firstly, by converting them into shareholders it-secures to them the..privileges7 and rights of shareholders in a company, and these rights (the rights.of members) are much more easily, capable of ascertainment and exercise than are the rights of bondholders (the rights of creditors). Secondly, the Bondholders Incorporation Commission' may be relied upon to guard carefully the interests of overseas bondholders and to take all necessary steps to see that they are kept advised of all terms and details of realisation schemes and that their views and wishes are iascertained. In some cases it will probably be necessary; to encourage a measure of concerted action by groups of overseas bondholders, and the Commission may be relied on to recognise such needs and to "facilitate the process.' ;';■'.. ■'.■.' / ■'■.'■ ./',.' ..:'..- .-..- '.;"■: . -.-■ "The Bill in question relates only to companies incorporated in New Zealand, for! the reason that it is only, those companies that are amenable to our laws to the extent required by' the Bill., : /./ : , .■ ."...„ QUESTIONS AND ANSWERS "Certain questions relating to the Bill have been; submitted since the publication of its main provisions. We append them, with official answers: "Question. No. 1: Why is provision made in this Bill for the setting-up of a Commission ;to ■ deal with matters that presumably could be dealt with by the Supreme Court? - "Answer: The problems to be dealt with by the tribunal are of a very special nature. They affect only a limited class of the community, and they affect the rights of that class peculiarly. This consideration suggests the wisdom of a special tribunal. Further, the affairs of one large company, which is waiting the enactment of the Bill, will'probably occupy the attention of the tribunal exclusively for some months. That fact: alone is a sufficient: answer to this question. Again, the Bill originated in discussions with the legal advisers of the companies and bondholders, and they have unanimously asked for this tribunal. "Question No. 2: Why is 'it proposed that: the Commission shall sit in camera? ' :; : -■..-- ..;■;:;• .:;-■;?:;■&-::;;•;,■' "Answer: Because the applicant companies and the bondholders will re-, quire to discuss matters involving the disclosure and consideration of their most intimate accounts and projects. They are of no interest to the public, and it might be embarrassing to have them made available to competing companies. Furthermore, it is believed that a sitting in .camera will-best, promote the spirit of friendly negotiation and compromise which will be necessary at many pointsi .; "Question No. 3: Why relax the rules of evidence and enable the Commission to act on unsworn testimony and admit documents and .matters that would not be legally admissible in. a Court of law? [■ '"Answer: Because it is a special tribunal, created to deal with emergency legislation designed to meet problems affecting the peculiar rights and interests of certain classes of the community. Such a provision is common in such cases. See, for instances, section 68 of the Destitute Persons Act; section 100 of. the. Magistrates' Court Act, section 82 of the Industrial Conciliation and Arbitration Act, and section 23 of the Hawke's Bay Earthquake Act -:.'-.':' -. ■■ ;. "Question No. 4: Why is it provided that there shall be no review of or appeal against the orders of the Commission? "Answer: Once again the answer is that such a provision is usual in the case of a special tribunal created to deal with special problems. There is no appeal against a Magistrate's de-

cision under section 100 of the Magistrates', Court Act, against an award of the Arbitration Court, against an order of the Hawke's Bay Adjustment Court, or against orders of a Magistrate or Judge under the Mortgagors Relief Acts. It may be pointed out, however, that under the Act we are now considering any party, may require the Commission to submit a,disputed question, of law to the Supreme Court for decision. "In many of .the questions tha\ will come before this Commission all that is wanted will be an independent decision of trustworthy men, given promptly and . being ""certain and conclusive. Many oi them will be like the question of the rule'of the road: it will not matter whether a right-hand rule or a left-hand rule is decided on so long as it is announced promptly and finally arid made binding on all parties. To allow a right of appeal to the ordinary civil Courts in such, cases, might, at the instance of a litigous minority, throw the door open to needless litigation which would often tend to waste the property which is at stake. "Question No. 5: Should not provision be made for Australian representation on the Commission? "Answer: This does not seem practicable^ Every argument for Austrai lian -representation-can be urged with greater force'for, say, Indian representation. It is believed that the Government can and will- appoint men who will command the confidence of all investors, and who will ;give full consideration to all interests. : "Question, No. 6; Is there not a danger that the bond-issuing companies, will gain.-cpntrpi,of,,the bondholders' companies? .'.'.,.*"' ■ -'■'.'. "Answer:. .11.the persons interested in the bond-issuing companies are alert and active; whilst the bondholders are apathetic^ and passive.; this .danger will obviously be present. The remedy, is equally obvious..The Commission can be trusted to see that all matters are. fully and,fairly put before the bondholders, with opportunity to consider [arid vote on them. . "Question No.. 7: Should not provision be made for Australian representation on the directorates. of the bond-1 holders' companies? "Answer: This is a; matter, not for this Bill, ■ but-for the memorandum arid articles of association of the respective companies,as drafted by the| parties and submitted to the Commission for approval. If it seems desirable and practicable in any given case, iit will be a'proper matter for negotia-i ,tion by the interested parties and the' Commission." : |