THE EXAMINATION OF THE DIRECTORS.

Otago Witness, Issue 2103, 14 June 1894, Page 5

THE EXAMINATION OF THE DIRECTORS.

(By Oub Special Repoutbk.) Monday, April 9. Mr Paul having left the witnesses' table, the appearance of Mr Mundella in his place was the sensation of the morning. The Right Honourable Anthony James Mundella, M.P., President of the Board of Trade and a member of the present Cabinet, is a big man with a large spreading white beard, almost white, and hair partly grey, partly white. He has a large Jewish hooked nose, dark eyebrows, deep-set eyes, and high forehead. His mouth is almost hidden, but his well- coloured face and general expression complete a markedly fine stamp of a man. Whether Mr Mundella is of pure Jew blood I cannot say, but the less pleasing characteristics of the Jewish face are not noticeable in his. Making a guess, I should say that there was a mixture of English blood with the Portuguese-Jew, the aristocracy of the Hebrews.

' Having bowed to the judge, a salute which apparently escaped his lordship's notice, Mr Mundella took his seat in an easy attitude facing the body of the court. Mr Bray began the examination, and rapidly put the witness through the details of his first connection with the company. Witness resigned his seat on the board of directors upon his appointment to the Board of Trade in August 1892. Questioned as to his knowledge of the prospectuses for debentures, witness said that he had never heard them questioned till 1879 ; had always objected to the existence of two boards, one in London and one in New Zealand, as being a scource of danger. Knew counsel's opinion was taken as to the alteration of borrowing powers, but never saw it till it was before the official receiver. Never understood there was anything wrong in the prospectus, but solicitors advised some words were ambiguous, and believed they were altered accordingly. Did not think that anyone had a suspicion that the debenture-prospectuses were misleading. Knew of the alteration of "on " into " by." Certainly had no idea (much stress on this word "idea") that anything not strictly accurate was in the prospectus; the directors desired to conform (much stress on "conform") to the best legal phraseology. " I have been a business man from my childhood." This somewhat naive remark, dangerously near being a " bull," created some amusement at the expense of the Cabinet Minister. Mr Mundella has a fine deep, musical speaking voice, as might be expected from his fine physique ; but he mouths his words just a trifle too unctuously. One can't help thinking that if the right honourable gentleman in the box were not a Cabinet Minister he would readily make his living as a minister of some other denomination, or even rise to be a right reverend in the Established Church. To return to the examination. The right hon. gentleman, who now becomes plain " witness," again stated, with firmness, that he considered the word "upon" in the prospectus was not misleading, because applications for the debentures of 1879 came from leading financiers and eminent firms (a highly commercial phrase this) of solicitors and agents in England and Scotland. omitted any mention of Ireland, which is pardonable when one thinks how much time the witness is condemned to spend in the House of Commons ) The views of the witness as to the use of the word " upon" brought on this dialogue :—: — The Judge : You are aware that the word " upon" is in fact altered iv the amended form. (Yes, m'lud). May I ask you what purpose was served by that alteration ? Mr Mundella : I am not an expert in legal phraseology, m'lud ; but when advice is given by counsel I consider it my duty to obey it. The Judge : When you saw the alteration mads did you ask yourself what the meaning of the change was ? Mr Mundella : I understood that the word " upon " was not happily chosen, and Mr Hollams said " by " was better. The Judge: Didn't you ask yourself what difference of meaning was conveyed by " by " which was not conveyed by the word "upon" ? Mr Mundella : I did not. The Judge : You were in a judiciary position. Is this very slight alteration sufficient to explain itself ? Mr Mundella : If the alteration had csme on Mr Hollams's recommendation I should have at once adopted it. Ifc was never intended to give any security to the '88 debenture issue. The colonial board had supreme power, to which witness always objected, and took the first opportunity of cutting down, which was done in February 1891. The colonial board was composed of directors of th« Bank of New Zealand. When it was found those gentlemen mismanaged the tank witness said it was time to see if they had mismanaged the Loan Company as well. Toe witness was then taken at great length through drafts of prospectuses and the alterations in them, and assured tho judge that the form used was such as was commonly used by the most eminent companies. The whole object of the Schroder conversion was to get rid of the danger of terminable debentures. A crisis might arise and if the colony were in discredit the company had only got land instead of money to meet debentures falling due. Was absent during whole of Schroder's negotiations. Never saw any letters flaid to be brought up to the board by Mr Paul from old debenture-holders, or Mr Pauls answers. Thought Larkworthy's report very serious. He was responsible for it. On principle witness didn't consult Dods, who was a junior officer to Mr Larkworthy. Knew that Mr Russell disputed Mr Larkworthy's report, but also knew that Mr Larkworthy had a strong animus against certain directors ; thought the

report, therefore, a matter for investigation. The tendency of the colonial board was to be too greedy for business. Elder, at Melbourne, was overtrading, but they could not control him. The witness, speaking solemnly, said, 11 It never occurred to me for one moment to call Dods to support his principal." A little later the witness protested that counsel was doing him a gross injustice if he suggested that he was a party to any concealment. After further examination on the subject of the dealings with Mr Larkworthy's report, witness was taken to the matter of the report to the annual meeting in '92. He was distinctly in favour of Sir Thomas Paine's paragraph being inserted. It would have been injurious to go to the shareholders, without futther investigations, and make a statement of such an alarming character as Mr Larkworthy's. Was absent in December 1890 and January 1891, and had nothing to do with the 1891 accounts. When witness got back from the Continent found the colonial board had lent money to Mr Russell and the London board agreed because they had no alternative.

It would have been injurious to the Loan Company if the Land Company had failed. If Russell failed the Land Company would fail. The board therefore acted as they did in order to keep the Land Company going, not so much with regard to the prudence of the investments, though they were not doing an imprudent thing. Had best assurances from Battley that the Land Company would prove a success. Here the Judge remarked : "It was a condition of that success that Russell should be financed." The Witness : " I admit that." Witness went on to say that all loans were made by the colonial board, and that he knew nothing of the negotiations between the colonial board of the Loan Company and the Land Company, as he was absent six months till June 1892 ; was assured by co-directors that they had taken good care and had dealt pretty hardly with tho Land Company. Would gladly have taken in 1891 half what his Land Company shares had cost him. They could have no market value as they were not issued to the public. They might still be worth par. Did not know that the £390,000 Land Company shares were shown in the balance sheet as "advances on wool, current accounts, &c." Did nob know it was there ; balance sheets were prepared by Mr Larkworthy and by Mr Paul and pub before the board in printed form. The Judge: It seems an odd head. Not wool or produce advances ? Doesn't seem to be office furniture ? Two wrongs don't make a right.Mr Mundella repeating that the directors relied upon the permanent staff and the auditors as to the form of the balance sheets, the Judge humorously remarked that even in commerce the government must justify the executive. The witness went on to say that he thought it might have been better to show the shares under the heading of " Stock and share investments." The price of the Land Company's shares was left to Mr Battley and Mr Russell. As to Elder withholding Barker's report, the witness could not conceive an officer of a company having power to delay reports. In answer to questions by the judge, witness said the company was no doubt short of money from 1890 to 1893, owing to overtrading. Witnesß and co-directors were constantly protesting to the Auckland board against the doubtful expedient of drawing on London and discounting the draft, albhough some big houses do so aud say they are justified by the course of exchange. Terminable debentures were dangerous. The judge having asked Mr Mundella if he could conceive ib possible that any old debenture-holder would hesitate to convert if they had known they were unsecured and what the financial condition of the company was, Mr Mundella enlarged upon the extraordinary condition of Australia at that time. Ninety-seven millions went, there was a financial cyclone, and profits diminished to nil. — (The Judge, testily : " I know that.") Land shrunk enormously, and the same thing happened in every solicitor's office in England. The Judge : Still, that doesn't answer my question, Mr Mundella. Can you consider what a debenture-holder would have done if he had been informed ?

Mr Mundella : Your question is a hypothetical one, to which it was difficult to answer yes or no. It depended on circumstances. The Judge : I'm not going to trouble you any more. So fur as my opinion is worth anythißg with regard to my question, if ib does not answer itself ib isn't worth putting. After this passage, in which the judge spoke very incisively, there was extraordinary silence and attention in the court for a few moments. One of her Majesty's judges snubbing one of her Majesty's Cabinet Ministers, ex cathedra, is, happily, a performance not *"o be witnessed by her Majesty's more humble subjects every day of the week even in London, where there is so very much to be seen for nothing. The rest of the afternoon's entertainment was dull, comparatively speaking, although his Lordship graciously sat an hour and a-half later than usual so as to enable the right honourable witness to get away from the particularly uncomfortable seat which he had been occupying all day, and to exchange it for a much less disagreeable seat on the Treasury bench of the House of Commons, where, by a strange transformation, the witness would sit much above the judge.

His Lordship had a few more questions to put to witness, and proceeded thus :—: — The Judge : Ab the beginning of 1890 Mr Thomas Russell's liability to the Loan Company and Land Company was over £100,000. Are you aware that, as a result of the action of the Loan Company, and that, moreover, before the Loan Company was in liquidation, Russell owed no company anything ? Mr Mundella : I was not aware of it. But if it is so I assume that property was given equivalent to the indebtedness. The London directors told the colonial board to make themselves secure. I regret that any loan was made to Mr Russell. I think it is a wrong thing for a director to be a debtor to his own company. If I had known that such a loan was to be made I should have opposed it. It will be remembered that Mr Mundella was absent when the London board acquiesced in the proposition of the colonial board. If £300,000 cash had been put by the Loan Company into the Land Company it would have been a rash investment, but that was not done. The Land Company only took over unproductive and derelict lands of the Loan Company, and was doing well with them ; the Loan Company took payment in the shares as equivalent to £300,000. The judge having no further questions to put, the court rose, and so did Mr Mundella, who bowed respectfully to hia Lordship, and descended from the level of the bench into the court. Tuesday, April 10. Sir James Fergusson, M.P., formerly Governor of South Australia, New Zealand, and Bombay respectively, and subsequently Postmastergeneral in the Salisbury Government, was czamined on the 10th inst. by Mr Bray on behalf of the official receiver. He said that from 1876 to 1880 and from 1885 to the winding up he had been a director of the Loan Company, and he held 542 ordinary shares, with £2

10s paid up, and 100 sixth-issue shares, fully paid. He took 100 sixth-issue shares to help this issue off, and so did his colleagues. It was not convenient for him to pay them in full, and the Loan Company lent him the uncalled portion, for which he paid £5 per cent, interest. He was still a debtor for the amount.

Sir James remembered the opinion of counsel being received that the prospectus as originally drafted did promise to give " security," and that steps were taken to rectify this. But he could not recollect details or who did the different things involved. He did recollect asking whether it could be possible that people thought there would be a mortgage. He knew that Mr Thomas Russell had been a solicitor in New Zealand, and Mr Russell took an active part as director in the management of the company's affairs, and Sir James implied, though he said he could not remember explicitly, that Mr Russell must have had a good deal to do with the arrangements.

The ex-Governor was closely pressed as to the precise course taken by the directors when the need of an alteration in the prospectus was pointed out to them by counsel. He said that as far as he recollected the facts the directors ordered a new form to be prepared which should be in accordance with the opinion of counsel. He presumed that the new form was drawn up on those lines, and that if the solicitors pronounced it to fulfil the requirements of that opinion of counsel the directors would acquiesce iv it as a matter of course.

He never understood that opinion to mean that the directors were, to point out specifically to debenture-holders that they had no "charge" on the company's assets. Being shown & circular to debenture-holders intimating that the old debentures would be paid off at maturity, and enclosing form of application for fresh debentures, Sir James freely admitted that there was nothing to tell the holders that they had no charge. "Certainly not," he said ; " why should there be ? There was no reason to believe that anyone thought he was secured. Ido not know and have yet to learn that any person did think there was a charge on the assets." Therefore, he argued, it was not at all incumbent on the directors to insist oa a fact so patent. Even the deed of 1888, he stated, did not give any charge, but metely afforded increased facilities of recovery. In short, there never was the remotest intention of giving a charge or of conveying the idea that one existed. On the contrary, there was the strongest objection, for business reasons, to placing any specific charge on the company's assets, and he did pot see how anybody could have thought otherwise. As to the issue of a fresh prospectus after 1879 (after the word " by " had been substituted for " upon "), with the word " on " inserted in place of "by," he was surprised to learn that this had been done. He knew nothing about it, and did not recognise the handwriting of the word "on "in the draft prospectus shown to him, nor did he recollect that such an alteration had ever been proposed or discussed. So this remained unexplained.

Next, as to the issue of the 1892 stock. Sir James said the directors were most reluctant even then to give any specific charge on the assets, but Baron Schroder insisted on a hypothecation as a condition of providing the sum required, and so, very unwillingly, the directors had to give way, as fresh working capital was urgently needed. But it was then resolved that all the debenture-holders should have an opportunity of placing themselves in the same position of security, and so the circular was issued inviting all to come in and participate in a general conversion scheme, which would give, them specific security. That, he thought, was clearly put to them. " But," said the Judge, " the board's circular does not state you have no charge but we will j give you one." No," replied Sir James, " because we never supposed they imagined that they had any." "Yet," rejoined the Judge, "you received not one. or two but a number of letters from debenture-holders distinctly saying that they believed and were led to believe they had security." " True," answered Sir James ; "but then the circular clearly implied the contrary, and offered as an inducement -to convert that the converted stock would carry a specific charge ; so the debenture-holders really had the matter plainly put before them, yet many would not convert." " Then," said the Judge, " did not that very fact suggest to you that they could not have realised their unsecured position, or they would certainly have been more eager to convert ? " "No," replied the witness ; "I could not understand why they did not all come in. Even old friends of my own who held debentures would not convert, although I strongly advised them to do so. My own son held £5000 wcith of the debentures, yet his trustees would not convert." "Yes," said Mr Justice Vaughan Williams, "but surely that shows they could not have understood that unless they did convert they would not only be unsecured creditors, but would have this new charge in front of them. I confess I cannot enter into your state of mind on this point. The case seems so plain." No better explanation was, however, obtainable. Sir James remembered something about the Boyd-Jameson and Hamilton-Kionear correspondence, but not about an injunction being threatened if the directors went on with the conversion as proposed. He thought that could not have been brought under his notice. "I suppose," said the Judge, "it was nob any fear of the debenture-holders in a body demanding their money back on the ground of having been misled, and so damaging the company's credit, that influenced the directors in still neglecting to explain clearly to the deben-ture-holders the position in which they stood ? " " Certainly not," said Sir James, "because we always supposed that they did understand their pojition, and were fully aware that they were unsecured." With regard to the Btrange reluctance of the board, as described by Mr Lark worthy, to receive that gentleman's report after his visit of inspection to the colonies, Sir James Fergusson said that the directors were expecting a special financial report from Australia, and were anxious to consider all the rival reports and statements together step by step. In reply to the judge, Sir James admitted that Mr Larkworthy was sent out in the company's interest, and that he did not take exception to that gentleman's figures, but said the directors did take exception to the conclusions at which Mr Larkworthy had arrived. With regard to his speech at the meeting of j February 7, 1890, Sir James said that by that time matters had already greatly improved, and he did not think amounts should be written off when there were good hopes of a property recovering itself. He did not remember having heard that the paragraph for the report supposed to have been drafted by Sir Thomas Paine had really been prepared by Mr Russell. As to the admission in that paragraph of losses sustained, he (Sir James) thought he must have gone very far indeed when he heard Mr Larkworthy afterward expressing concurrence with what he had said, seeing the views that gentleman had previously expressed. Ho should have thought it criminal, Sir James said, to conceal or deny the existence of ascer-

tained losses, but merely contingent deficiencies were quite a different thing. This was proved to be the case by the remarkable recovery that had taken place in certain cases that looked very bad at the time.

As to the suppression of that paragraph in bis speech, he was under the impression that al the end of the meeting he had handed his notes to a reporter by request ; and that the paragraph had thus been accidentally left out.

"Oh no, no, Sir James!" interposed the Judge, '■ I cannot allow you to take that burden on yourself. The report was sent direct to the printers by the officers ot the company." No further explanation was given.

Sir James admitted that the balance sheet of 1891 was misleading in regard to certain entries which were placed under many headings, bub he thought the responsibility for such matters rested with the auditors.

Mr Justice Vaughan Williams said: I am afraid eomo of the auditors thought the responsibility was on the directors ; but I hope that the Institute of Chartered Accountants will correct that view.

Witness : " The view we have always taken is that, if the auditors who are appointed by the shareholders for the purpose state, ♦We have examined the foregoing balance sheet, and hereby certify that it contains a full and fair statement of the accounts of the company,' the directors are justified in accepting that as satisfactory. Lastly Sir James was examined touching the transactions with tho Land Company. He declared- he never was a vendor of the Waikato Land Association. The price paid to the vendors was 30,000 shares of £20 each, credited with £20 as fully paid. He simply bought 1000 shares from Mr Thomas Russell for £3 6s 8d per share, but he was not a vendor to the Land company, and could not understand his being so described in one of the documents. He denied that Mr Lark worthy resigned on account of the transaction with the Land Company. In May 1891 Mr Russell owed the Loan Company £73,000, which was thought to be pretty well secured, and the return to him was part of an arrangement under which the old shareholders gave up a good deal. Referring to the figures in paragraphs of the official receiver's report, witness said that if they were correct the Land Company's shares were worth only half their original price. In 1891 about two-thirds of the shares had been given up or forfeited, and tkis increased the value of the shares. He had no recollection of a call being cancelled when the arrangement; with the Land Company was made. With reference to Mr Thomas Russe 1 !, Sir James said : " There is no doubt we were anxious to help Mr Russell. We considered his services were moat essential to us ia the colony. He was sent out to Australia in 1892 and again in 1893, and he could not well have gone if he had not been relieved in this way, but it was felt that; tfee company must get very ample security for the advance, and we thought we got a good equivalent. If this company is, after all, to be saved, it will be largely due to what Mr Ru6sell has done in tee last eight months. We saved Mr Russell because it was necessary for the Loan Company's position to save him." Mr Justice Williams : I cannot help feeling that, whatever Mr Russell may have done to save the boat from total loss, you enabled him to leave the boat first. You freed him from debts and liabilities which he could not possibly have met ; that was apparently the price of his saving the boat. Sir James Fergusson said that an independent valuation of the Waikato property was obtained, and that the directors satisfied themselves that £300,000 had been approximately spent on ib. The Loan Company had done the best it could with these great properties which had fallen into its hands. With regard to the Loan Company's stoppage, Sir James said that about £300,000 against produce to come Home would have averted it. The immediate cause was the company's Melbourne branches suspending payment, after which the London branches would not take, their acceptances against comiDg produce. " Wool on the sheep's backs, I suppose ? " said the Judge. "Yes," replied Sir James amid laughter. "If you had had marketable securities," asked Mr Bray, "instead of those £400,000 Land Company's shares, might you not have been saved ? " " Poßßibly," said Sir James. " Bub if we had not had those [shares wo should have had only properties which would not have been better." Examined by Mr Reid, Q.C , Sir James said : — The Loan Company was formed in alliance with the Bank of New Zealand. It had been in the earlier days the custom of (he the banks to lend money on land, which certainly was not banking business, and it led to great difficulties, besides that customers were liable to have their money called up. It was, therefore, thought desirable to form a company whose special business should be to lend money on land. The company, when it was first instituted was of a very high standing ; that I knew from being Governor of New Zealand. The primary responsibility L r investments was originally iv the colonial board. Thtir unfortuualo investments up to the period of 1889 were the main cause of ail the difficulties iv regard to estates. It is going toj fat to say these were due to the absence of inspection. The ( xfraordmary fall iv values wriH the chief cause of our troubles. From my oqi

knowledge of Australian and New Zealand properties, I can say that the fluctuations there are more rapid, both ways, than here—especially in Australia, where there are such vicissitudes of weather, iv New Zealand there id a more regular rainfall, but thero the tremendous fall ia prices is the trouble. Wnen-pronerly drained and consolidated the Waikato estateswill cairy more sheep per acre than the best Canterbury land. Any colonial man will appreciate what that means. Mr Russell had not the slightest interest in the business. Mr Justice Vaugban Williams : Surely you do not mean that. It was part and parcel of the scheme. Who was the author of tho scheme we shall, I suppose, know later on. Do you know whether Mr Russell was in any sense, its parent P Sir James Fergusson : I do nob know how far he was the author of it. I do not doubt that ho must have had a good deal to do with it. I have no reason to know it, but I should bo very much surprised if he had not. This concluded the examination. Mr Justice Yaugban Williams then said : "Sir James Fergusson, without expressing any opinion on the prudence or tho propriety of the transactions you have been referring to, I wish to say, as a judge sitting hero on this inquiry, how much obliged I feel to you for the frankness with which you have given your' evidenoe. It is extremely refreshing to hear evidenoe given in that way, aud you have not only given your evidence most frankly, but have most chivalrously taken your share of the burden upon yourself even when the circumstances were in your favour." Sir James Fergusson bowed, and said: "I am much obliged to your Lordship." Ho then retired. During the course of the proceedings th? judge requested that he might be supplied with information as to the financial basis on which the reconstruction scheme was constructed. He felt that he could not with propriety sanction the scheme unless ho were in possession of full particulars on this head. Mr Harold Brown (of Linklater and Co.) appeared later, and promised to supply Mr Alex. Young's figures next day. He added that he had convened a meeting of the Creditors' Committee for that afternoon to consider whether the evidence given during the examination now in progress had affected their views regarding the adoption of the scheme. He promised to report to the court their view on the matter.