SURPRISE MOVE

New Zealand Herald, Volume LXXII, Issue 22071, 29 March 1935, Page 12

SURPRISE MOVE

McARTHUR ASSETS TOTAL LIQUIDATION i ; PKOTECTINGr INVESTORS ACTION IN CONCEET BOTH ,SIDES OF TASMAN [BY TETjKGRAPH-—press association] I: WELLINGTON, Thursday A long statement on the position of the Investment Executive Trust of New Zealand, „Limited, and its allied companies, and on the course to be adopted in dealing with them, was made by the Minister of Finance, Mr. Coates, in the House of Representatives late to-night. The statement was completely unexpected, and, like other reports on the McArthur companies, took the House by surprise. The . Minister stated that unless the New Zealand and New South Wales Governments acted in concert to put all the companies into liquidation, there was every prospect of one of two things happening. One was that the position rising from companies' transactions might be consolidated, and that the debenture-holders of the Investment Executive Trust would receive nothing in respect of the money so diverted, and the other was that the debentureholders might be involved in expensive litigation in endeavouring; to follow thoir property through "these devious transactions." The Guiding Principle ■ - The Governments of New Zealand, New South Wales and the Commonwealth had agreed on • a scheme, with the guiding principle of the best interests of the debenture-holders of the trust companies. It was 'desirable, said Mr. Coates, in the interests of the debenture-holders, that a statement should be, made. He summarised the effect of the previous l<§gislatioh, pointing out that up to the present the Governments of New South Wales and New Zealand had- protected the assets of mil the companies by placing them in the hands of receivers, and conducting investigations by inspectors. As to the future, two possible courses would seem "to be open. One was to use the processes of the existing law to put the companies into liquidation, the other to devise special legislation to deal with the matter on the ground tjiat the ' position is an unprecedented one and that, the existing law would be ineffective. The- same problem was faced by the (Jovernment in New South Wales and by the Commonwealth Government. i ■ Best Advice Taken

- The question thus pised had beenj very seriously considered by the Governments with the aid" of the best legal and accountancy advice available. The result that the Governments in question had all decided with the unanimous approval of their advisers to adopt the course of meeting this unique position by special legislation. •"Referring the large volume containing the inspectors' reports, which lie tabled, Mr. Goates stated that there were many involved and questionable transactions, adding it was most important for the debenture-holders in the Investment Executive Trust to note that the result of a series of transoptions was to fix their relative rights according to the mere accidental effects and results of these transactions. All the Governments' advisers in New Zealand and New South Wales, both legal and accountancy, were unanimous in believing' that these considerations would inevitably tend to defeat and

break down any attempt to reconstruct , and carry on the affairs of the companies. It was their unanimous belief that an atteinpt to straighten out these transactions by the application of the existing laws of the two States would result in expensive and wasteful litigation, which might easily dissipate the funds of the'debenture-holders. - ' Transfer of Records *' Furthermore the debenture holders Of the Investment Executive Trust should note carefully that although they were persuaded to subscribe to a purely New Zealand concern with a New Zealand board of directors, their books and records and their securities were, without their consent, transferred to the State of New South Wales, from which State the directors of the Investment Executive Trust attempted to administer the affairs of the company. Inquiries in neither/New South Wales nor Now Zealand could get a complete history of the transactions involved. This state of things would seem to have been design- < edly brought about by the directors, whose transactions had been so roundly condemned, but while it hampered, it did not preclude full inquiry. If, however, a new phase of inquiry / should involve reference- to the courts under existing laws,, there was presented a good opportunity to use the difficulties inherent in these facts to support technical legal objections and submissions. It might be promised for a start, for instance, that any appeal to existing law on either side of the Tasman would be strenuously fought by direcis more certain," said Mr. Ctoates, " than that if any appeal is made under existing law to the Supreme Court of New Zealand or to the Supreme' Court of New South Wales, the fullest possible advantage will be taken of the difficulties created by tuo inter-State nature of the problem produced by these directors. Difficulty Over Evidence

. ° '<lf the Court in New Zealand, for instance, is asked to deal with a transaction. which originated in Auckland, but which was carried to fruition in New South Wales, it may he expected that objection would be raised immediately to the admissibility even of ftwoni' testimony of McArthur himself in relation to the whole of this transaction before the Royal Commission in Sydney, and it is probable that our I Court would have to uphold the objection. If so the matter could not be proceeded with further without the expensive procedure of endeavouring to take this evidence over again m South Wales under a commission appointed/ by the Supreme Court of New Zealand. Conversely, if it should be sought to act in New Sowth Wales before the Supreme Court of that State, objection would bo raised to the aditiVisibility of any evidence taken in New Zealand. . "However logically relevant it might be, or however well it might bo authenticated, the next act of jugglery, and probably a successful act, would be to compel the Courts to keep within the letter of tho rules of evidence and existing law to protect the original ..jugglery. "Since the closing of the Royal Commission . in Sydney, there is evidence " that McArthur has been busily engaged trying to consolidate the position preated by these transactions with his own assets," added the Minister. " Cerlain operations are being conducted in Brisbane and a trust company in being

formed there. Two of the assets so taken over from Sterling Investment Company, namely, the yacht and McArthur's property at Hillsborough, have been first mortgaged and later transferred to the Brisbane mortgagee and purchaser. . "C&veats against certain other properties have within the last ,two months been filed in public offices in Auckland in favour of the Brisbane Trust Company. It is quite clear that, unless tho New Zealand and New South Wales Governments act in concert to put nil the companies into liquidation, there is every prospect of one of two thing? happening. Tho first is that the position arising out of the transactions described aboyo will be consolidated and made impregnable and debenture-hold-ers of the Investment Executive Trust will receive nothing in respect of the sum of from £60,000 to £90,000 of their money so diA r erted. The other altorna* tive 'is that they will bo involved in expensive litigation in endeavouring to follow their property through these devious transactions. Legislative Scheme " Unless the Governments of New Zealand and New South YValos and Canberra can agree on a legislative scheme that will give to the honest debenturo holders of the Investment Executive Trust and the Southern Briti&a National Trust first call on the proceeds of the building, those debenture holders will find themselves thrown into competition, to a greater or less extent, with tho other ho dors of British. National Trust Debentures, issued as part of the profits of McArihiir and Alcorn on the sale of their Britiaa National Investment Trust "The Governments of New Zealand, New South Wales and Canberra have airreei lon a scheme which lias been approve! unanimously by their legal and accountancy advisers and by the inspectors appointed to inquire into the iNew Zealand Companies. The guiding P ru *" ciple accepted is that theinterestsof those members of the public of both countries who are debenture holders o the trust companies must be paramount and that tliev should receive the net proceeds of the building before any other claimant is recognised. The Minister, referring to McAithui s scheme of reconstruction, said the advisers of both Governments represented strongly, that they had no faith m the possibility of any adequate safeguard being devised that could guard against McArthur regaining control of the companies!. Organising Debenture Holders "1 am satisfied," .Baid Mr. Coates, "as to the bona-fides of certain men m New Zealand who have interested'themselves in seeking to organise the i\ew Zealand debenture-holders to move for their own protection, I am satisfied that they are genuinely working in what thny believe to bo the interests of New Zealand debenture-holders. In settling details of the proposed legislation, the Government will give lull consideration to any representation that may be made by these gentlemen or by any other debenture-holders or their representatives "The New South Wales Government took the view that, seeing that it is practically certain that nearly all, if not all, tho contracts to take debentures were induced by misrepresentation, the only fair basis is to put all deb6nture-liolders on an equal footing. This also will act as a measure of protection to the debenture-holders of the. Investment Executive Trust, most of whom, it is believed, could, with equal reason, claim that their debentures were taken up under misrepresentation." INSPECTORS' REPORTS INDIVIDUAL COMPANIES COMPLICATED POSITION VARIOUS- RECOMMENDATIONS ! * [bt telegraph—press association] WELLINGTON, Thujsday Reports of inspectors appointed under the Companies (Special Investigations) Act of last year to investigate y the affairs of the Investment Executive Trust of New Zealand, Limited, and other associated companies were tabled in the House of Representatives late to-night. Separate reports are made regarding 15 companies and there are 200 pages in the complete document. Owing to the lateness of the presentation of the reports, it is possible to give only a summary of the main recommendations. , . The inspectors state that in their opinion it is desirable that the Investment Executive Trust should be wound up. They did not think, however, that pressure should be exerted to enforce speedy realisation of the Trust Building in Sydney, unless at a satisfactory price. They thought that if liquidation proceedings were commenced by a petition to the Court, and jf such petition was opposed by the Investment Executive Trust, protracted and expensive litigation might ensue. "Justice ol the Oase" The inspectors quote tho following comment by Mr. Justice Halse Rogers: —"As the net result of transactions of McArthur and Alcorn is that they seem to have enriched themselves by some £IOO,OOO without risking a penny of their own and entirely through using money contributed by the public through tho trust companies, the justice of the case seems to require that they should be declared trustees of thosei profits for the benefit of the companies, and in view of legal difficulties it may be deemed advisablo to legislate for that purpose." The inspectors state: —"We say, with respect, that the justice of the foregoing comment is, in our opinion, undoubted." The inspectors say that if any special legislation is suggested in connection with tho winding up of the investment Trust they think consideration should be given to tho question of appointing an advisory board to assist: the liquidator. Continuing the inspectors say : "If McArthur and Alcorn are declared trustees of the profits made by them, the question will arise as to the parties for whom they are to be declared trustees. The whole position is extremely complicated. The principal claimants on any such trust fund would doubtless be, directly or indirectly, the Investment Executive Trust and the Southern British National Trust. Perhaps the most equitable way in which to divide any such trust fund would be in proportion, to the debenture capital subscribed to each company respectively Question of Legal Advi(s " If on winding up there is any shortage of funds with which to pay tho debenture holders out of the investments, etc., of their respective series, the funds subscribed by them, then in our opinion the debenture holders rank, under the terms of clause 1 of their debentures, as unsecured creditors lor auy shortage, pari passu with other un secured creditors. . ~ "Tho statements made in various prospectuses undoubtedly induced persons to give credit to the company. If a liquidator is appointed we consider he should seek legal advice as to whether any of such statements constitute falso pretences and that, if he is so advised, he should take appropriate action. We further consider that any liquidator appointed should seek legal advi<!o as to whether certain actions of the directors of tho Investment Executive Trust, more particularly those actions relating to the financing and purchasing of tho Trust Building, constitute misfeasance, or breach of trust on the part of McArthur, Altforn and lor other directors of the company.

" The suggestion has been made that the wishes of the debenture holders should be ascertained before any action is taken relative to liquidation. With this suggestion in the abstract it is impossible to do otherwise than agree. It must, however, be borne in mind that the problems are of so complicated a nature that it is extremely difficult for tho debenture holders in general to form a clear conception, of the issues at stake, and if any action is to be based on the expressed views of the debenture holders, we consider it important that steps should be taken to supply them with such information as may enable them properly to form an opinion." Reporting on the Sterling Investments Company the inspectors say that they are definitely of opinion that the company is hopelessly insolvent. They recommend that it should be wound-up. _ Regarding Wynwood Investments, Limited, it is recommended that the company should remain in the meantime under the control of tho Public Trustee as receiver. The winding-up of the Investment Securities Association is recommended Trust The inspectors exj)resa the opinion that New Zealand Shareholders' Trust Limited, has been utilised as a tool of tho Investment Executive Trust ior Carrying out a series of transactions which were not in tho interest ol the general body of debenture holders of tho Investment Executive Trust. The inspectors add that they are unable to seo any good purpose which can be served by the continued existence oi the New Zealand Shareholders' Trust, which, in their opinion, should bo wound up. ,_ , The winding up of the Pacific Exploration Company is also recommended. The inspectors "say that they see no good purpose likely to bo served by the continued existence of Farms and Farmlets, Limited. On the other hand, they see no benefit that would accrue to the debenture-holders of the British National Trust, the Investment Executive Trust and the Southern British National Trust by its liquidation. They, therefore, make no recommendation in connection with Farms and Farmlets. Limited. • Sale of Property The opinion is als<? expressed that the British National Investment Trust should be wound up. Tho inspectors think, however, that the liquidator ap~ pointed should not endeavour to force an early sale of property except at a satisfactory price. In order to effect tho best possible sale in tho interests of the debenture-holders of the British National Trust, the Southern British National Trust and the Investment Executive Trust, the liquidators in all companies should act in co-operation. Regarding the First Mortgage Freehold Security Company of New Zealand, the inspectors say that under certain conditions liquidation would probably be the wisest course, but the wishes of the debenture-holders should be ascertained after a full statement of the position has been laid before them, and if they desire the properties to be held a satisfactory system of control would have to be devised. Regarding V. B. Mclnnes and_ Company, the inspectors' report says in view of the relatively large amount of share capital subscribed by New Zealand residents it seems appropriate that New Zealand shareholders should be consulted regarding the company's future activities, or continued existence. The winding-up of Alcorn, Irower and Company is also recommended. Other Companies' Position As Financial Publications, _ Limited, is now in liquidation, the inspectors make no recommendation regarding it. As the Southern British National Trust is incorporated outside of New Zealand and is not carrying on business here, and as its affairs are being investigated, the inspectors have no recommendations to make regarding it. However, as the inspectors have recommended the winding-UD of the Investment Executive Trust, they express the opinion that if that advice is followed it woul<i be desirable in the interests of the debenture holdors in the Investment Executive Trust that th<j Southern British National Trust should also be wound up. Similar remarks are made by the inspectors regarding the British National Trust. The inspectors add: "In the event of the liquidation of the British National Trust, the value of the debentures * issued by that company is very directly connected with the value of "the Trust building, and we do not consider that on a liquidation that building should be sold at a low value merely to effect a sjjeedy realisation of the assets of the British National Investment Trust."