INTEREST ON LONDON LOANS

Otago Daily Times, Issue 22057, 13 September 1933, Page 6

INTEREST ON LONDON LOANS

SOUTHLAND POWER BOARD PAYMENT IN NEW ZEALAND CURRENCY (Per u'kited Press Association.) INVERCARGILL, September 12. By 11 votes to 1 the Southland Electric Power Board at its meeting today decided to rescind its former resolution to pay interest on its London loans in sterling, and later carried a resolution to the effect that it would pay in New Zealand currency, but would facilitate a test case regarding the matter if the bondholders desired. The question of interest payments was the main topic for discussion at the meeting, which was a protracted one, and several of the issues were considered in committee. The majority of the members agreed that the board was under no legal obligation to pay in sterling, and that if there had been a moral obligation to pay this had been nullified by the action of the bondholders in England in refusing to accept a lower interest rate as practically all other bondholders had done. It was stated during the discussion that the board’s decision would mean a saving of £20,625 to users of electric power in Southland,

Mr W. M'Chesney moved the following resolution—“ That seeing the contract between the London debenture holders and the board gives the board the option of paying interest instalments in New Zealand currency, and that the Minister of Finance (Mr J. G. Coates) advised the board to take steps to apply for a test case in London with a view to enabling the board to pay interest in New Zealand currency, and after having received the opinion of Sir Gerald Hurst, K.C., London, supported by the opinion of the board’s solicitor, Mr William Macalister, that the contract between the London debenture holders and the board enabled the board to pay interest in New Zealand currency, and as a result of the Government refusing the board the advantage of temporary financial arrangements in London (which was assured) and thereby saving exchange amounting to £20,000 per annum, the resolution of the board carried at a special meeting on August 4 agreeing to pay the September instalment of interest in sterling bo rescinded.”

“in asking the board to rescind the motion carried on August 4,” said Mr M'Chesney, “ I think it will be agreed that if the motion is rescinded it will be one of the most momentous decisions arrived at by the board since its inception. If it is not rescinded the board will have to find £20,625 as exchange on its interest payments. In the meantime provision is made for the payment of interest instalments in New Zealand currency. That is not disputed. It is the legal position. The board has had legal advice on the matter from Sir Gerald Hurst, and his opinion is that the board has a good case and should succeed. Furthermore, when the board first considered the matter Mr Coates advised it to have a test case.”

The chairman (Mr W. Hinchey): I don’t think you should say that Mr Coates advised the board to have a test case. Mr Coates raised that point when we were in Wellington, and said that he had not advised a test case. He had merely suggested one. Continuing, Mr M'Chesney said that the action of the board if it decided to rescind the motion would probably be called a default in some quarters, but in his opinion it was not a default. It was stated, he said, that the Prime Minister (Mr G. W. Forbes) gave a pledge that the board would make this payment in. sterling. If he did so let the Government make up the difference. The board’s trouble was caused by the Government raising the exchange rate, so the Government was responsible for the deficiency. Mr Coates had said that New Zealand’s credit would be damaged. If it were necessary for the Southland Electric Power Board to pay £20,000 as exchange to maintain the credit of the Dominion it was not the duty of the people of Southland to make the payment, It was the duty of the country. The motion was seconded by Mr J. T. Carswell, who said: “If we pay in New Zealand currency we have fulfilled our contract. We have only got to consider our legal obligations and there is no room for sympathy for the bondholders who can only receive exchange at the expense of the people of Southland.” Mr A. A. Mac Gibbon, who was the only one to oppose the resolution, expressed the opinion that Sir Gerald Hurst had never said they could pay in New Zealand currency. He had asked for a test case. As to asking the debenture holders to take action, that was cowardly. He objected to trying to “ beat” them.

Mr E. K. Sim said he would be sorry to embarrass the Government, but interest rates had to be brought down. The board had tried to get a reduction but could not, and in his opinion the only thing they could do was to take action along the liens proposed in the motion.

Mr Hinchey said the matter was a very serious one, but he knew members of the board had considered both sides of the question. It was the wish of the Government that the board should pay in sterling. The reason for that was mainly that the Government and local body debt in London was very large, and" the Government feared that the action of the board, if it paid in New Zealand currency, might seriously affect the credit of the Government and other local bodies. There was a lot of feeling about the matter up and down the country and many people would like to see the board carry the motion. That attitude was mainly due to the objection to the increased exchange. The Government should have taken steps to have interest reduced, but it had not done so. If interest had been reduced the board would not have been troubled. After the resolution had been carried the following motion was adopted without dissent —“The board, having been advised that as a matter of law the interest is payable in New Zealand currency resolves to make payment in New Zealand currency with an intimation to the debenture holders that the board is willing to facilitate a ruling being obtained later if they so wish.” “NEW ZEALAND’S EXAMPLE” LONDON COMMENTS. (From Oob Own Correspondent.) LONDON, August 8. Under the heading “ New Zealand’s Example,” the Sunday Times financial editor remarks:— ■ “ In these days, when contracts are honoured in the breach ns well as in the observance, a good impression has been created in the city by the decision to pay interest on Otago Harbour Board loans in sterling instead of in New Zealand currency, which would have meant a 20 per cent, loss to holders. A similar decision in the case of the Auckland Tramways loan is now awaited. The July interest was paid in New Zealand currency owing to the decision that this was the only legal method of payment. But the New Zealand Government has promised to introduce legislation to validate payment in sterling. By recognising this moral obligation, New Zea-

land has eet an example to other borrowers who have proved less scrupulous.’* AUCKLAND TRAMWAY ISSUE. The Daily Telegraph city editor wrote:— “ The Otago decision has naturally aroused the hope that the city of Auckland will revert to its practice of paying the interest on the tramway loan in sterling instead of in New Zealand currency, and that an adjustment will be made in respect of the July 1 interest payment. It should be recognised, however, that this question is not identical with that of the Otago Harbour bonds. “In the latter case the point at issue was whether the statutory reduction of interest on internal loans should apply to holders domiciled outside New Zealand. , While it was not the Dominion Government’s intention to apply the reduction to non-nationals, difficulties arose in cases where loans held by nationals had been sold to non-nationals after, and even before, the Bill was passed. That question has now been settled satisfactorily. “As regards the tramway loan, the question was whether the interest should be paid in English or New Zealand currency. Although the offer for sale was made in London, it was contended that the loan was an internal issue, and that the interest was payable in New Zealand currency. “ Whatever may be the legality of this contention, there would seem to be a strong moral obligation to continue the payment of interest in sterling. A few weeks ago the New Zealand Prime Minister promised that, where there was a moral, if not a legal, obligation on local bodies to meet obligations in London in sterling, the Government would introduce any legislation that might be needed to validate payments in sterling. Holders of the Tramway Loan naturally wish to see this promise fulfilled u soon as possible.”