CEMENT CO.'S AFFAIRS.

New Zealand Herald, Volume LVIII, Issue 17730, 15 March 1921, Page 5

CEMENT CO.'S AFFAIRS.

SUPREME COURT ACTION. SUM OF £190,000 INVOLVED. CASE FOR THE PLAINTIFFS. An action claiming £190.000 from certain directors of the Dominion Portland j Cement Company was commenced before j Mr. Justice Sim in th 9 Supreme Court. | yesterday. The plaintiffs, for -whom Messrs. C. P. Skerrett, K.C, and A. F. j Wright appeared, were Sir George Clifford, Dr. Edward G. Levinge, William M. Hamilton, of Christenurch, James Stevenson, of Flaxton. and George Thompson, | of Spreydon. The defendants were Vernon H. Reed (Mr. A. H. Johnstone), | Heathcote B. Williams (Messrs. M. Myers I and Morrison), and George Winstone. ' jun. (Mr. P.. McVeagh). Under originating summons the defendants were called on to show w v y they should not contribute the sum claimed for alleged misfeasance and breaches of trust while acting as directors of the company. No -witnesses were called, all evidencehaving been taken on affidavit. This and ! other documentary evidence covered an immense amount of paper, which bad been j bound into books to facilitate reference. The summons set out that the company I ' had been registered on December 9, 1912. ! | the nominal capital being fixed at I £250,000, divided into 250,000 £1 shares. j The first directors were Sidney J. Nathan, | Auckland, R. Heaton Rhodes, Christ- j j church, Claude Slack, Wellington, Heathcote B. Williams, Gisborne, and Nathaniel Wilson, Warkworth. On November 7, [ 1912, the prospectus was issued, the j public being offered 110,000 shares. Of the capital of the company, 60,000 shares | were allotted to certain vendors to the company as fully paid up in consideration ' of certain rights and properties. The remaining 80,000 shares had been held for future issue. The prospectus had stated that the company was being formed for the purpose of j taking advantage of an offer which, at the I instance of the vendors, the Whangarei Borough Council had executed, by which the company would have the right to receive hydro-electric power at a minimum price of £9 per horse-power per annum, that it would not be necessary for the company to erect a power-producing plant, and that the estimated cost of establishing the best and most up-to-date cementmaking machineiy capable of producing 60.000 tons of cement a year was £48.000 (lowest) and £65,000 (highest), and that for a further expenditure of about £35,000 the output could be doubled. On the faith of the prospectus 108,137 ordinary shares had been taken up. The directors had had no binding contract with the Whangarei Borough Council for the supply of hydro-electric power, and the directors, without consulting the shareholders, procured a license from the Government to utilise the Wairua waterfalls for the production of electric power. Contracts Entered Into. Referring to costs, reports from George Winstone, Jan., and W. J. Wilson, who were abroad, were quoted. One said the cost of the mill, apart from wharves, was estimated at £96,000, plus commission of £9600. In addition, the provision of the wharf, railway, offices, eta, was estimated to cost £21,500. The estimated cost for power-producing works and plant was £55,000, the- total therefore, being £182,100. At this time the capital of the company was only approximately £106,000. less £6500 preliminary expenses and brokerage. The directors had considered • this report, and authorised W. J. Wilson • to enter into contracts in America, which committed the company to liabilities for the construction of the mill and mill plant alone, amounting to about £107.000 The directors also entered into contracts and commitments for the construction of a power plant to the amount at least of the estimated cost. The directors did not inform the shareholders of the change in the whole scheme, of the great increase in the cost of the mill plant, nor of the financial position of the company. While the company was incurring liabilities of about £200.000 it had available only about £15,739, and the uncalled capital of the issued shares, the last amount of which could not be obtained until July, 1915. The directors were well aware that it was impossible to procure a further subscription of shares from the public, and in entering into the contracts mentioned were guilty of extreme rashness, im prudence, and recklessness, and that in consequence the expenditure incurred was of no advantage to the company, and the whole of the subscribed capital was lost. Increase of Capital. In circulars issued in September, 1913, and vin January, 1913, it was claimed, the contracts, liabilities, and the financial position of the company were wholly concealed. On December 17, 1914, the annual meeting, which should have been held in May', 1914, was held, and a resolution passed that the capital of the company should be increased by 100,000 seven per cent, cumulative preference shares of £1, and on February 27. 1915, the directors by notice informed the shareholders that the capital was to be so increased. When calling the general meeting for December 17, 1915, the directors also issued a' circular to shareholders bearing the date of December 8, 1914, which stated in substance that the erection of the mill haS been proceeded with, and that it would be fully equipped for the manufacture of i ' ! cement by • the middle of the then next year; that the Fuller Engineering Com- j pany, supervising the erection of the mill, • stated that it would be equal to the best i in any part of the world ; that the direc- I tors considered it advisable, to provide j i also for the manufacture of hydrating lime ! and hydraulic lime, and so machinery had > been installed for that purpose; that the : , first section of the wharf had been oom- , pleted; that the second section, which • would give accommodation for oceangoing vessels, would be completed within three months; that the North Island Main Trunk line to Wba- [ ngarei passed through the property; • that the work in connection with the har- . nesting of the Wairua Falls and the transE mission of power to the works was being t carried out to the entire satisfaction of i the directors; that the prospects for the . future were very bright, many inquiries f having been received from Australia for i large quantities of cement; that the direc- £ tors thought that by putting in a better . mill than was originally intended, there--3 by greatly reducing the cost of production, the proposition would be greatly en--1 hanced through increased dividends; and i that the shareholders would be asked to . sanction the issue of the 100,000 preferb ence shares, .50,000 of which would be 3 offered for subscription to the present t shareholders. Allegations by Plaintiffs. It was claimed that the statement that '» machinery had been installed for the e manufacture of hydrating lime and hyf draulin lime was false, and on January 27. 1915. a farther circular was issued to " shareholders, urging them to take up fur--3 ther shares, and pointing out the advanf tages of their so doing. On May 7, 1915, a prospectus was is- -• sued. * offering to public subscription • 30,000 preference shares of the 100,000 3 issue. In this prospectus it was cont tended, misrepresentations had been made, g in that the value of the assets were Y grossly overstated, that the estimated cost • of constructing the mill and works, and r the cost of the hydro-electric installation ■ were grossly underestimated, s On July 9, 1915, the directors resolved • that the secretary should write to all i applicants for preference shares describe ing the financial position of the company, r and asking them whether in the circumi* stances, they desired to have the shares r allotted to them, but it was alleged this h had not been done and the shares were in fact, allotted. Owina to lack at

>■ ■■ * capital, the directors borrowed certaia advances from the Bank of New Zoaland on the security of the assets, and seenred, it was believed, by the guarantee ot certain of the directors. On March. 31, 191 a. the sum of £35,209 was owing to the bank. The next annual meeting snou,d have been bekl in Mav, 1915 bo* was not held, nor the report and baJancosheet presented, until January 10, 1916, <->n July 15, 1915, the company. b«ing m desperate need of capital borrowed from ce.rt.am debenture-holders the sum of £110.000 on mortgage of the whole of tho then existing assets, one of th 9 conditions being that the mmpanv should [ issue 22,000 boons debentures of £1 each, | part of which should be a premium to I the lenders. The debentures then U>talJ=xl I — 13_.CQ0. The directors did not inform the shareholders of the raising of this sum j until the report presented oh January 10. I In the following year the directors had obtained another advance of £29,300. On March 16, 1917, sben the annual meeting. which should have been held in May. 191b. was held, an extraordinary general meeting wai also held to dj-cuss a pmposal t°_ raise further capital to the extent of £36.030 in order to avoid the otben»i.»e seemingly in.-vit.able coirse of pom;; into liquidation. No further information was vouchsafed to the shareholders as to the financial position of the company. In r .p. ne- tion with the raising of' this £36.000, it was proposed that the shareholders and. their friends sboald take up £24,000, and the debenture-holders the balance <f £12.000. The shareholders fc"* ;.p £20.200. and the debent'ire-nolders, the institution of proceedings for t!m compulsory liquidation of the -ompanv, paid the shareholders the £120.200 they had subscribed. On Oot-obcr 23. 1917 a circular was Issued to shareholders informing them that it would be necessary to wind op the company in cinmmstani.es which showed lha.t the shareholders' capital was pntireiv lost. On January 18. 1918. the assets were! purchased by the receiver of the debentureholders for £137.750. Tho assets not covered by the security realised £626. According ;,. the summons tho plant and works had cost over £205.000. transport plant £1563. wharf, etc., £16,17b, furniture £235. 'in addition, tho company had expended on farm account £11j9, preliminary expenses £6497. doposit on water license £500. It had incurred liabilities in respert of landed properties to the extent of £62.289, of v.hich £60.000 was paid by the issue of paid-up shares. The document concluded that by reason of the gross negligence, incompetence, rashness and recklessness of tho directors named, bv their breaches of duty in concealing the financial position the expenditure of the company had been wholly wasted, and that the whole of the share capital, amounting to £188,960, had been lost. Address by Plaintiff's Counsel. Opening his address, Mr. Skerrett said the action was brought under section 254 of the Companies Ac* in respect of the alleged misfeasance by directors causing loss to the company. The real dispute was not as to facts, but the proper inferences which should be drawn from the factsHe laid strong emphasis upon tho reference in the original prospectus to the matter of hydro electric power, which was to be obtained from the Whangarei Borough Council. The statement, ho said, was a most deceptive one. As to the estimated cost of erecting tho works, the lowest estimate for a plant, which could produce 60,000 tons of cement pw year, was given at £48,000, and the highest at £64,000. Neither amounts included the cost of a power plant, because it waa not required. In addition, £25.000 was required and contemplated. It was stated that the capital was expected to bo £170,000. Two vital points, he continued, were that shares had been invited upon the distinct and positive assertion that capital would not be required for producing power, and that the cost of the works would be in the region of £68,000. The directors, he proceeded, had never obtained an independent estimate of their own. All the estimates and reports had been obtained, not by the directors, but prior to the formation of the company bv the promoters and vendors, and not one. of them was capable of estimating the costs. " Unsatisfactory Arrangement." Referring to the Whangarei Borough Council's power scheme, Mr". Skerrett said the company's arrangement had been of a very unsatisfactory kind, seeing that the ratepayers had not yet voted on the loan proposal. It had been admitted at an eariv date that it was known the loan would not be carried, and also that the estimates had not been verified by the Government electrical engineer. A serious question was as to whether there was enough water going over the falls in dry weather. The scheme fell througn, and the directors, without consulting the shareholders and before nearly 30,000 of the shares applied for had been allotted, altered the whole scheme, determining to find their own generating plant and to supply power to the Whangarei r n??!U Council ' not at the estimated cost of £45,000, but at a cost of about £55 000 Iney hnd beer, adrised that they should have a capital of £170.000, plus £25 OCO working capital, yet they blindly determined to proceed with the expenditure of £55,000. Dealing with the issue of the prospectus offering £110,000 shares, counsel said that brokers were employed throughout the country, and shares were taken up in .small lots. By December 11 1913 a total of 106,817 had been applied 'for. £he action, he interposed, was not ov individuals for misrepresentation, or for fraud, but it was a matter of the gravest i moment that some of the shares were ap- | plied for upon the supposition that no capital would be required for the producI tion of electric power. Mr. Reed in his J affidavit had said the directors had been ! assured by their solicitor that there was jno necessity for consulting the share- • holders, but the directors must take the j risk of a.-ting on such advice. Another I excuse was that it would have given . | information to rivals. This was no j justification. The first information of the change in | the scheme was given in September, ISI3. continued Mr. Skerrett, but the circular was " a calculated deception," no estimate of cost being given. The intention was to raise this money by debentures, but they failed, and failed before they embarked on further extravagances. Raising of Funds by Debentures. The directors, proceeded counsel, wanted, at least £200,000 and the most they had was £42.784 paid-up capital, which had been reduced bv payments to ; £15.739. They had £64,000 nncafled ! capital payable over a period. The mill I was not to be complete until the end of I 1915, and if money was to be borrowed, i two years' interest had to be provided. ! The "position was not communicated to I the shareholders, the circular in regard to 1 Fullers' contract to construct the mill j giving no estimate of cost, but much information about the qualifications of the engineers. Dealing with the raising of money by debentures, taken up by directors and their friends, counsel said it was not business to rely upon what was not ~> legal obligation, and added that a totally inadequate sum had been found to keep the company on its feet and savo the face of the directors. The issna of preference shares failed, only 20,251 being taken up. In July, 1915, the position was so desperate that an issue of £110,000 worth of debentures was arranged, those taking them being R. B. Williams, A. B. Williams, R. H. Rhodes, G. Winstone, E. V. Riddiford and E. L. Riddifcrd. Later the de-benture-holders guaranteed an advance of £70,000 by tho Bank of New Zealand. Counsel asserted that as a result of the subsequent amalgamation the debentureholders were not likely to lose much. Tho extraordinary thing was that a company with a capital which had never exceeded £130,000 had spent about £400,000. Tha plaintiffs, it was explained, held ordinary and preference shares and they could divide any sum obtained on judgment, either in respect to ordinary shareholders or preference shareholders. Mr. Skerrett will resume „his addsfiy, XtbJs mospnina