LAW-OF COMPANIES

New Zealand Herald, Volume LXIX, Issue 21296, 24 September 1932, Page 12

LAW-OF COMPANIES

NEED FOR REMODELLING MANY WEAKNESSES IN ACT PROTECTION OF THE PUBLIC A number of shortcomings in the Companies Act which, it is claimed, requires immediate revision, were pointed out yesterday by legal authorities. For several years tho Act has been in course of remodelling by an advisory committee comprising two members of the legal profession and two of the accountancy profession sitting in Wellington. It was expected thatf the draft would be ready for submission to Parliament last year, but tho final session went by without its appearance. "Tho chief weakness of the New Zealand Act is that the public is inadequately protected regarding tho making public of all transactions surrounding a company flotation," eaid Mr. W. 11. Cocker, president of tho Auckland branch of the Economic Society of Australia and New Zealand. "There is a further abuse in that tho law allows shares to be hawked round from door to door—a privilege which is not permitted in England. Tho parchasers of bonds are even less protected than the purchasers of shares, inasmuch as the law applicable to a share prospectus does not apply to a bond prospectus. Need to Define Securities "Furthermore, and this is one of tho chief dangers, bonds can be drawn, and are frequently drawn, in such a way as to lead inexperienced investors to think they aro obtaining much greater security than they really are. For that reason I would endorse Professor H. Belshaw's suggestion that the law should require every bond to have an endorsement upon it, in a form prescribed by Statute, indicating what is tho" nature of the security. I believe there is a definite social evil in certain shortcomings in the Companies Act and, therefore, I cordially agree with Professor Belshaw's suggestions. There is urgent need for drastic action," Mr. Cocker said that among tho matters needing attention was tho question of debentures and debenture-holders and the rights of receivers. Those matters were very important, but were dealt with very scantily in the Act, leaving a great deal of vagueness.' The functions of receivers when administering assets under debentures had at present to be gathered in the main from th 3 general law and their rights in respect of a company's property were not at all well defined. Duty o! Directors "One thing that is needed," added Mr. Cocker, "is that persons of standing in the community who aro asked to lend their names to a prospectus in the capacity of directors should adopt the same frankness in connection with tho statements made in the prospectus as they ' aro accustomed to do in their own businesses." Yet it appeared to be true, in many cases, that persons approaching a third party with a request for financial assistance regarded themselves as under a much greater obligation to disclose thft real state of aSairs than they did when i issuing a prospectus. Mr. Julius Hogben, who has long been an advocate of company law reform, said tho Companies Act ought to require a prospectus to set out full details of a proposal. At present this requirement was only imposed in New Zealand upon proposals dealing with shares and debentures. In fact, the term "bond" should not permitted except when it gave siibstan-' tial security over named assets, which was what the public imagined a bond should be. Small Type in Prospectus "The practice frequently adopted of placing in small type at tho end of a prospectus the information required by Statute is a misleading one," said Mr. Hogben. "The details which a company is compelled to furnish by. law. should, in my opinion, be set out in at least the same kind of type as the remainder of the prospectus, and preferably this information should bo placed at the beginning of the prospectus. Such a procedure would not prejudice a good proposition, and it would save investors who might otherwise bo enticed into a bad one. "The law should also be strengthened to prevent the issue of so-called 'confidential' circulars, which omit tho information that by Statute is required to be given in tho prospectus. This does not mean that a legal convass among subscribers should be prohibited, but unfortunately, the practice is common of broadcasting circulars of this nature as if they were prospectuses. The law-fehould impose a penalty on anyone who issues an invitation to take shares without complying fully with tho Act."

The omission of any penalty, other than a civil liability, for making a mis-state-ment in a prospectus was a shortcoming that also needed remedying. Any person making a questionable statement should be liablo for criminal proceedings. Companies' Liability

There had been bond issues in New Zealand, said Mr. Hogben, in which companies assumed no obligation other than a liability for the amount of the bond. The weakness of many so-called bond issues was that if a company defaulted the bondholders' only'security was to have the company wound up and hope that the assets would be sufficient to pay tho debts, including the bonds. A feature of tho English legislation which could well be copied by New Zealand was the prohibition of house-to-house canvassing, continued, Mr. Hogben. It was only too evident that at present many people who took shares or bonds in a company were persuaded not by any appreciation of tho merits of a proposition, but by tho glib tongue of an enterprising salesman.

"The chief thing needed is to protect the public against unfair issues," he concluded, "but as a matter of fact, there is also an obligation upon people who give credit to exercise a little more care than they sometimes do. The public could very ■well protect itself by declining to subscribe to any proposition which does not have its prospectus at least approved by a recognised Slock Exchange."