BANKING COMMITTEE.
A MINORITY REPORT. [Evening Post.] In the small hours of yesterday morning, at the meeting of the Banking Committee, the following minority report was duly proposed by Mr Geo. Hutchison as an amendment to the motion for the adoption of the report presented to the ®? u . se y es terday. The Premier and Minister for Lands, we understand, on a point of order, insisted that the amend, ment should not be received, as it dealt with matters outside the order of reference, and the Chairman rejected the amendment. As the matters outside what the Committee has ruled to be the reading of the order of reference are of the utmost moment to the countiy, Mr Hutchison’s very able report will be read, we doubt not, with intense interest : More than three months ago, says Mr Hutchison, your Committee was set up, and more than ten weeks have elased since their first meeting—a lapse uf time which might imply an exhaustive enquiry ; but although there have been ample opportunities for dealing with the whole cf the matters understood to have been referred, your Committee have been chiefly engaged in a laborious attempt to evade the chief issue—namely, the true history of the connection between the banking legislation of the last two years and "those responsible for its introduction. Other matters chiefly the past and present of the Bank of New Zealand, have been investigated at tedious length. Unsatisactory in many respects as the result of he enquiry must be, four subjects appear to claim particular attention, and may be lealt with under separate heads :
I. BACK’S BALANCES. The business of the Bank of New Zealand included two other companies transacting business not properly within the sphere of banking. The Auckland Agricultural Company was formed | in 1881 to relieve the Bank from certain customers whose properties were purchased with funds provided by the Bank. The Estates Company was rornied some years later to the Bank from certain properties taken over from customers. In neither case was there any real change; except in the shape of increased expenses. The formation of the Estates Company was nothing better than an ingenious device for raising money on debentures at ruinous rates. To obtain the temporary use of £1,125,000, as much as £308,000 has been paid in charges and expenses of various kinds Within the last six years the losses in the Bank and its associated companies have exceeded £3,000,000, besides a probable deficiency of another £1,000,000 in realising the properties taken over by the colony under the legislation of last year. During the time when most of these losses occurred the directors of the Bank continued, with the inter-, mission of only one year, to distributa dividends. lu 1888 the directors openly ignored the requirements of the Bank’s deed of settlement by publishing a. oalauce-sheet which announced a profit without making any allowance for bad or doubtful debts. lu the same year a Shareholders’ Committee reported a scandalous position of affairs, but no interruption was permitted to occur in the steady flow of dividends. A reduction of capital was made so far as to write down the nominal amount from £1.000,000 to £700.000, and to write off £500,000 from, what was called the reserve fund, while a further subscription of capital was obtained to the extent of £150,000. About the same time the directors appear to have become impressed with the personal dauAjr they were incurring, for in 1889 they jromoted and succeeded in getting passed in Act of Parliament which authorised
...ie payment of dividends out gof what might appear to be the current business of the Bank, apart from the administration of the assets transferred to the Estates Company. Extraordinary as was such a power, the Act contained a still more extraordinary provision, by which the authority for the declaration of such dividends was made retrospective so as to cover anything done since the Ist of Octo-. uer, 1888.
The Colonial Bank, as a concern parchased lay the Bank of New Zealand under the legislation of last year, also presents some features which call for special notice, the balance-sheet made up to the 31st August, 1895, was taken as the basis of the contract of purchase of that Bank by tue Bank of New Zealand, or, in other words, by the colony. That balancesheet represented a net profit earned for the previous half-year amounting to c! 9,980 after “allowing for. bad and doubtful debts.” The Hon George M’Lean, M.L.C., who was Chairman of Directors at the time, and who had held that position for more than ten years previously, stated that, until the subsequent proceedings to liquidate the Bank, he was not aware of the provision in the deed of settlement which made it compulsory on the Directors to deduct from tire gross profits not only all debts due to the Bank which appeared to be bad. but also all such as appeared to be of a seriously doubtful character. What seems to have been done was to deduct from the estimated gross profits for the half year a round sum of £SOOO without reference to any particular amounts. Within a few days after signing the balance-sheet the Chairman of Directors knew the losses amounted to considerably more than -5000, and later on he knew the deficiency had increased to a serious extent, but meetings of shareholders were afterwards held and no mention was made of anything affecting the figures appearing in the balance-sheet. in explanation, the Chairman or Directors, in his evidence before the Committee, stated that as no proposal was made to deal wit'll the balance shown us profit, no explanation of the altered condition of affairs was considered necessary. It will be observed that such an excuse ignores the duty of the directors to present as far as possible the true position of affairs to the shares holders, while the representations of this particular balance-sheet had an unusual importance as put forward at a time when, the Colonial Bank was negotiating for a sale of its business to the Bank of New Zealand, which was powerless to effect ai purchase whiihout the assistance of tho taxpayers of the colony. The Chairman of tho Committee directed that no question should be recorded or answered dealing with the details of that balance-sheet. In this way evidence was suppressed regarding a draft for £30,000 purchased a day or two before the date of the balance-sheet and credited to the Ward Association as against warrants for oats wlncu never existed. Other evidence in the same direction was also ruled outs us not being within tho order of reference. It was, however, impossible to disguise the fact that a balanee-shee^
which showed a net profit of £19,080, and which represented a subscribed capital of £4OO 000 and £65,000 of a reserve fund as both intact, was within two months treated by the directors themselves as containing among the reputed assets no less than £102,274 that could not be considered proper to be taken over, besides other amounts of so doubtful a character that £327,305 had to be left in the bands of the purchasing hank as cover for pos sible deficiencies. The gravity of the matter is not lessened when such representations are sought to be justified by the Hon George M’Lean expressing himself to the shareholders as late as January last in the following terms Suppose J. had come and said with a poor mouth, ‘ The capital must be written down ’ Then I venture to say the probability is that the Bank would not have been open for three days. And where would the shareholders have been then ? Instead of receiving a good amount for your shares, the probability is you would have been paying calls.” This aspect of banking is made more serious from the endorsement given by the President of the Bank of New Zea-
land, who sought before the Committee to excuse the former directors of the Bank of New Zealand from blame when declare ing dividends, if they thought a different course would have brought down the
Bank. If such considerations are to be allowed to control Bank directors, thou the doubt wbicli has deservedly fallen on their balance sheets must increase to absolute discredit. No now legislation is required to make penal any fraudulent misrepresentations as to the financial position of joint stock companies. It is only necessary for the Crown to put the present law in motion if, on a full iuvesti- ' gation of all the facts, there appear to be sufficient to justify a prosecution. lI,—THE PURCHASE OF THE COLONIAL BANK. The contract of purchase already referred to had to be laid before Parliament for approval, which was deemed to he expressed if no resolution of disapproval was passed by either House within 10 days. The text of the agreement between the two Banks, as laid before Parliament, was scarcely so full as to permit of its | true bearings being understood at the time. The debate on the contract took place in the House of Eopreseutatives on the 25th October, when the Government ‘ were pressed to state what (if anything) 1 had been agreed to be paid for “good- 1 will.” No information was forthcoming, 1 and Ministers affected not to know. It is : now ascertained that three days before I the debate they were in possession of pre- •' cise information that the amount had bean > fixed at £75,000. _ ! The consideration paid by the pur- 1 chasing Bank was also affected by the ! landed property of the selling Bank being ; taken over at a “book value’ of £125,399—a figure admittedly £30,000 or - £35,000 more than is expected to be | realised. No objection could reasonably be taken 1 to the course pursued by the Banks in re- < ference to lists of accounts which were i the subject of purchase or liquidation only * so far as to admit of identification without 1 the necessity of disclosing their contents. | But the case may be considered different when special provision was made in re- 1 spect of accounts in which the Colonial Treasurer was interested It is now no longer possible to disguise the fact that ' an arrangement was come to by the two 1 Banks designed to put the account of the < Ward Association in such a position as < would probably ensure it being taken aver. The “C ” list was reserved for the ■ accounts of the Colonial Treasurer and i the Association of which he was tin managing director and the principal shareholder. For the purpose of making the account of the Association appear 1 solvent, it was stipulated by a clause in - the contract between the two Banks that ■ the Colonial Bank should guarantee the 1 whole of the accounts in the “ C ” list, amounting to £98,382, and (except as to ■ few items apparently introduced us a 1 blind) representing the indebtedness of the Ward Association to the Colonial Bank, provided that the Bank of New Zealand credited the accounts in the said i list with the sum of £55,230 representing *■ (except as to a few pounds) the amount of the Colonial Treasurer’s indebtedness to the Ward Association. This arrangement is described in the agreement (which suppressed all reference to names) as a “ writing off.” The same term appeared in the order of reference, an I would m the ordinary course have left no ©sense for not investigating the facts underlying such a peculiar arrangement, but tbs majority of the Committee at an early stage in the proceedings recognised that a full investigation might lead to inconvenient disclosures. Simultaneously the high contracting parties who had been engaged in arranging the terms of the “ C ” list appear to have arrived at a conclusion different from that expressed by them in the contract. Accordingly the curious and even amusing development was witnessed of those responsible for the wording of the clause, while admitting that its terms had been given effect to, with one accord declaring that there had been no “ writing off.” The majority of the Committee did not hesitate to reject all evidence that might test the value of such denial, and even went the length of expunging from the reporter’s notes all questions on the subject. The suggestion is that there was no “ writing oft because there had been no forgiveness by the Colonial Bank of the Colonial Trea- ; surer’* indebtedness, the fact being that on the day immediately following the date of the agreement the Colonial Bank obtained from Mr Ward a promissory note on demand for the amount he was owing to the Association. The value of this explanation is somewhat discounted when it is remembered that this form of payment has been described iu the course of proceedings in the Supreme Court as “ a worthless piece of paper.” There was still another reference equally obscure in the agreement between the two Banks as to other matters in which the Colonial Treasurer was concerned. It would appear that shortly before he left on his mission to England in January, 1895, he arranged fur the issue by the ■Ward Association of debentures to the extent of £50,000, £20,000 of which were taken I 'up by the Bank of Now Zealand under circumstances which, in the opinion of at least two of the directors, reflected on the President, who was himself a shareholder in the Association to which such favour was shown. Following this transaction was a draft for £SOOO. which was paid on presentation, but afterwards disputed and treated as a dopendancy. Both these items, although originating in the Bank of New Zealand, appear to have been considered appropriate subjects to be guaranteed by the Colonial Bank, and Guaranteed they were accordingly, -P
It is probable that the suppressions in the contract as laid before Parliament were necessary to secure its adoption, hut the degree of probability to be given to this view of the matter must be the measure of what was considered to be the risk of the sale and purchase being defeated had the whole truth been told.
An extraordinary feature of the transaction is that no papers whatever have been preserved that would indicate tin 1 coarse of the negotiations or the steps by which the purchase was arranged. Not oven the final draft of the agreement was produced. Everything iu the way of writing had been carefully destroyed. All those immediately engaged speak of the purchase of the Colonial Panic, even at the cost of over £IOO,OOO, as advantageous to the Bank of New Zealand, but no independent testimony has been given or probably is available, on the point. lII.—THE FUTURE OF THE BANK OF NEW ZEALAND. The colony is now interested in the capital of the Bank of New Zealand to the extent of £2,500,000, besides an indefinite deficiency on properties taken over for realisation. To safeguard the interests of the colony it is necessary that those entrusted with its management should command the confidence and respect of the public. It cannot bo considered reassuring that the two chief executive officers—the President and the General Manager —have together been intimately associated with the misfortunes of the Colonial Bunk, and previously with the Oriental Bank, which bad also to go into liquidation. Neither does the manner of the selection of these officers tend to remove the objection that naturally arises from their former associations, while the opinion of two of the directors goes far to confirm the impression that Mr Watson and Mr Mackenzie should not both continue in the service of the Bank,
IV.—THE POLITICAL CONNECTION. “ The circumstance leading up to ” the banking legislation, and “ which have since transpired,” were subjects specially re ferred to the Committee to enquire into and report upon The majority of the Committee however, were content to accept the disclaimer of the late Colonial Treasurer as to his having personally bouefitted from the legislation he carried through, and the majority resisted every attempt to ascertain the true character of its dealings with the banks in whose interests such legislation was passed. In the circumstances, direct testimony was not to be expected, but from the character of the incidental evidence, and to some extent from that refused, conclusions may be drawn which have all the strength of reluctant admissions. It is certain that the colony would have been spared much suffering if, in 1894, the Golouial Treasurer had been in a position M independence. When the Bank of Now Zealand threatened to close its doors and so bring down other institutions uu -
less the colony came to its rescue, ii found the Colonial Treasurer sensitive to any crisis of the kind. The Bank was represented by Mr John Murray, who had been specially deputed by the directors in Loiidoii.to approach the Government, His first application was made just five days before the legislation was hurried through which pledged the credit of the colony for 22,000,000 to the Bank. It is doubtful
whether, if the demand had been met with a request for precise and fidl information, it would have been ever heard of outside the Cabinet. The entire absence of accounts to justify such a demand should have been sufficient to throw sus pinion on the sufficiency of the remedy proposed; and probably no one would suggest that if the demand had been for £5,000,000 in the first instance that Parliament would have consented on any terms. The only statement of accounts submitted was tbat for the year ending :31st March previous. This, so far from confirming the representations of Mr Murray, indicating that the Bank was in a most flourishing condition. The balance sheet showed a profit of over £41,000 for the preceding twelve months. That, with the usual quarterly return made up to the same date, such as re'' quired from ail banks, ol the average business done in the colony, was all the Government had before them in support of Mr Murray’s assurance that a guarantee of £2,000,000 would be more than sufficient. The two positions were contradictory. What would seem the reasonable and prudent course to have taken in such an emergency was to reply that without clear proof that the assistance was absolutely essential, that the colony was safe in granting what was demanded, and that it would be sufficient, the public credit would not be pledged for any private intention, Such a clear and straight course was passed by, and a dark and crooked path was entered on instead. Had Mr Murray’s 1 overtures been met with the criticism of ordinary caution, he w’ould probably have retired to evolve some different .scheme, which might have resulted in reconstruc tion so as to preserve the good business of the Bank, and have left the rest to be realised. The Government, however, appear to have been in no mood to have been exacting, Mr Murray may not himself have known the full extent of disaster tbat bad for years been uccumualting against the bank. But it is clear that the Colonial Treasurer did not disclose to Parliament all that was disclosed to him. Mr Murray had warned him “ tha|: enormous depreciation had taken place in the values of the Estates Company’s properties,” and that “ there was a big bole to fill there.” The representations of the Colonial Treasurer to the House of Eepresentatives contained only a passing allusion to the position of the Estates Company, which was the most serious feature of the business of the Bank, Ho assured the House that the relief proposed was “adequate” and “ sufficient to prevent the recurrence of such a crisis,” and, further, that the security of the paid-up capital and reserve fund with the liability of the shareholders was “adequate enough.” The investigation which any prudent business man would have felt it his duty to have first insisted on, and more especially the I precaution which any trustee was bound j to exercise, would have proved tbat the | whole of the Bank’s capital was lost, that 1 the reserve fund was a fiction, ami that the liability of the shareholders was a I desperate resort insufficient to cover | evcii ascertained deficiencies. The securI ity on which the colony was persuaded to guarantee £2,000,000 was a myth. The J | alternative to granting the assistance j : sought wus the threatened closing- of the ißank. This might have been very disastrous, but the course taken by the Go- . v eminent has certainly been most disastrous. Apart from the countless injuries j resulting from a hank having to apply to | the State for relief and the consequent*
public discussions of its affairs, which, particularly in this instance, included so much that was discreditable, the colony has already become pledged to hailin'* ties which iu 1894 would have been considered incredible, and, unfortunately, the bottom bas not yet been reached. The assistance in 1894 to the Bank of New Zealand was followed in the same year by assistance to tire Colonial Bank, This took the shape of a deposit of £l-10,000. The money was obtained from the Bunk of New Zealand as an investment of part of the money raised on the guarantee of the colony. _ It was re presented by Consuls inscribed to the Bank of New Zealand under an Act passed in the same session of 1894 to provide an investment (so it was said) for “ the thrift of the people.” In the following year, further assist tance was found necessary. The colony had to subscribe £500,000 for preferential shares and to guarantee any defici ency (estimated at over .-1.800,000) on the realisation of certain properties trails'* ferred to an Assets Board to which the Premier has appointed himself a director. The absorption of the Colonial Bank followed as an almost necessary consequencc. The negotiations for the purpose had begun immediately after the £2,000,000 guarantee in 1894, but the scheme found so little favour outside interested circles that public opinion speedily found expression in an Act prohibiting any dealing of the kind without the consent of Parliament. But although actual amalgamation or purchase was thus forbidden, negotiations proceeded, in the sure and certain hope of the end being achieved as soon as Parliament again assembled. Continuity was preserved in the person of Mr William Watson, who, from being Chief Inspector of the Colonial Bank at the beginning of the negotiations, became President of the Bank of New Zealand before their con elusion, and was thus able to take an active part on both sides of a transaction in which he continued to be interested as a slnunbokler in the Bank that was being relieved from virtual bankruptcy. It was fortunate for the colony that some of the directors of the Bank of Now Zealand who were appointed in 1894 brought to the criticism of the business of the Colonial Bank an amount of judgment—not to say suspicion—which was much required, and which undoubtedly resulted in a far better bargain for the colony than otherwise would have been possible. The evidence before the Committee justifies the conclusion that the Colonial Treasurer was not acquainted with the treatment that was being arranged by ■he two banks with regard to the ac counts in which he was personally in-t.-rested. He considers he has reason to feel grieved. This would imply that he expected better treatment, and possibly ho had a right to so expect, The out come of the purchase in some respects was admittedly not foreseen. That the Colonial Bank’s affairs should have to be wound up in the cold light of a Court far removed from Government influence, was one of those events the true meaning of which was not realised in time. The same power that could commit the colony to liabilities of several millions to enable one bankrupt institution to buy another must have been equal (if it had only forseen the consequences of the omission) to withdrawing from public view the deli - cate adjustments that are sometimes necessary in the course of liquidations. But the point was overlooked, as such things are apt to be. It is now proposed by the Ministry to repair the omission, and, under guise of giving the liquidators ;f the Colonial Bank and the directors of the Bank of New Zealand further powers as to the settlement of accounts still in suspense between them, to also give the liquidators authority to do that which on grounds of public morality and established principle of equity they have already been forbidden by the Supreme Court to exercise.
The connection of the Colonial Treasurer of the clay with the events referred to necessitated his resignation of the offices held by him in the Ministry. The two Ministers appointed on the Commitiee continued throughout the enquiry to take an active part in seeking to justify themselves by suppressing any evidence which might inculpate them. In the circumstances their attitude with regard to the Banking Legislation may be said to have been purposely left in an obscurity from which the public are at liberty to draw their own conclusions. ’ Gr. Huxciiisok. Gth October, 18915.
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Bibliographic details
Patea Mail, Volume IX, Issue 119, 14 October 1896, Page 2
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4,178BANKING COMMITTEE. Patea Mail, Volume IX, Issue 119, 14 October 1896, Page 2
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