SINKING FUNDS

Poverty Bay Herald, Volume LIX, Issue 17909, 13 October 1932, Page 11

SINKING FUNDS

POWER BOARD ACTION CHANGE OF TRUSTEES EFFECT OF NEW LEGISLATION The legislation foreshadowed in today’s isisue on the question of sinking funds vitally affects the interests of the Poverty Bay Power Board, and of Ibis district. The hoard at an early stage anticipated the position, and obtained from its solicitors an opinion on the question of its rights in respect of sinking funds. The opinion is given below. Acting on the advice given, the board appointed Messrs. 11. K. Maude, W. Hamilton Irvine, and C. A. Smith as its new commissioners, and made prompt request upon the Public Trustee for payment over to them of the funds held in hand. The hoard’s sinking funds are so arranged as to provide for repayment of the whole loan at maturity, and the effect of the reduction of interest from the Public Trustee to 4 per cent, will mean a shortage of £30,000 in the funds at maturity, a loss which will, of course, fall upon the district. The seriousness of the position, it is stated, is increased by the fact that the interest ■ received by the Public Trustee from mortgages has been in no case reduced below 5 per cent., and m some cases stands at a higher figure. The reduction in the pay-out to 4 per cent, thus means that over one-fifth of the total moneys received are absorbed. Further, it is explained on behalf of the board, it is felt that the common fund of the Public Trust Office, holding, as it does, sinking funds which are liable to repayment on the appointment of new commissioners, should he so invested as to permit of repayment when required, and that the necessity for the proposed legislation indicates a serious position, and one likely to involve the Power Board in loss, if the funds are not withdrawn.

The hoard is taking steps to-day to protest against the proposed legislation, and particularly to see that the rights which have already accrued to it by the action taken should not now be withdrawn by Parliament. SOLICITORS’ OPINION The opinion secured by the Power Board is as under:— “We arc asked to advise upon the following question: The board has at various times raised loans from a number of ■different lenders, and lias appointed the Public Trustee as sinking fund commissioner for .such Joans. On June 2-1 last, the hoard passed a. resolution removing him from office, and appointing three ol its own members in bis stead. On the same day the Public Trustee was notified, and lie was requested to release the funds held on the. board's behalf, as the bfiard was in a position to make a favorable re-investment immediately. Sonic correspondence took place between the board and the Public Trustee, and on August 9 the latter intimated his refusal to meet the board’s request in respect of three loans, totalling £164,195, claiming that under the sinking fund deeds relating to these loans his appointment was made irrevocable, and staling at the same time that the position regarding the remaining loans was still under consideration. ’ “Until the making of this claim by the Public Trustee, the board was unaware Of any such clause in any of the deeds. These documents had been prepared by the lenders’ solicitors, and handed' to the board for execution. The attention of the board was never at any time called to the clause in question,' and the board was at no time aware that it had made an irrevocable appointment. “Apart from..any question of the security of the capital investment, the matter is of the greatest importance to the board, for as against the 4 per cent, received from the'Public Trust (J'lliee, rates bearing from to 5J per cent, can be obtained -by the re-purchase of the board’s debentures, or the purchase of other securities. The total saving involved by tbo appointment of the new commissioners amounts to approximately £30,000. All the lenders have consented to the change. Wo are, asked to advise whether in these circumstances the Public Trustee can successfully resist it. THE CRITICAL QUESTION “The critical question appears to us to be this—in what character does the Public Trustee hold his appointment as sinking fund commissioner? Both lender and Iwrrower desire his retirement. Can lie insist on holding his position against their will? The answer to this question is to be found in an examination of the first portion of section 40 of the Local Bodies Loans Act, 1926, which states: (1) The local authority shall appoint commissioners, within or out of New Zealand, to whom they shall pay all moneys so appropriated as a sinking fund or for the repayment of debentures as hereinbefore provided ; and such commissioners shall invest such moneys, together with all interest and profits accruing therefrom, in such securities as the local authority from time to time directs; (2) the local authority may, in its discretion, remove or suspend any commissioner appointed under this section, or under the corresponding provisions of any former Act, and reappoint or reinstate him, or appoint another in his stead, and may appoint another in the place of any deceased, absent, or otherwise incapacitated commissioner.’

“It has been held by the Court of Appeal in Mayor of Wellington v. Wellington City Improvements Loan Sinking Fund Commissioners, 12 Gaz., 242, that the sinking fund commissioners constituted under the Act are trustees under the Trustee Act, .1908. The general Jaw applicable to trustees therefore follows, and the board can invoke the rule that the court has a general jurisdiction to remove trustees and substitute others where the, welfare of the beneficiaries ai«l of the trust estate requires such a remedy.

“Wo think it is clear beyond rjDoslion that it is to the interests' of the trust estate that the change of appointment should lie made. In the first place, the hoard will receive a. return bearing from s<s to 5jJ per rent., as against the 4 per cent, paid by the Public Trustee oil investments in the common fund. In the second place the change will secure the safety oi the capital investment. The reduction of the rate paid by the Public Trustee.--to 4 per cent., when the minimum rate of interest payable under tiio National Expenditure Act is 5 per cent, means, upon an assumed investment in the common fund of, £30,000,000, a reduction in interest of £300,000. This sum, calculated with interest at 5 per cent., represents a capital of £6,000.000, which would prime facie appear to be either lost or dormant. Whatever meaning is attachable to section 35 of the Public Trust Ollicc Act, 1908. and to the so-called hStatc guarantee’ which (hat section is supposed to create, it is obvious that at a time when the Stale has been compelled to seek a reduction of the commitments under its own contracts, it will not be wise to expect :t to meet obligations of a collateral character. We think, therefore, that on the grounds of the disability to which the investment in the common fund lias become subject in respect of both interest and security of capital, an application to the court for the removal of the Public Trustee as sinking fund commissioner would succeed.

“Wo think, further, that construing ' section 40 (2) of the Local Bodies Loans : Ait, 1926, on the lines of the above judgment of the Court of Appeal, any , agreement amounting to an irrevocable appointment of a. sinking fund cummis- ( sioner would he held by the courts to be ' ultra vires In our view that particular ; clause is nugatory, the* board being unable to contraet itself out of its statutory power and duty under section 40. A,claim to this effect, can be conveniently joined with any action that might re- i quire to ha taken under the preceding paragraph. “We should also point out, as an alternative view, that if the Public Trustee did not hold his appointment in the capacity of trustee, hut held it for his own benefit, the position would then he that the matter of the. various sinking fund deeds would he a subject of eon tract between the Public Trustee and the hoard, and on the facts stated above, the 1 oard would he entitled to obtain rectification of the deeds by cutting out the clause making the appointment irrevocable. Rectification of a contract can always he obtained if it does not express what was actually agreed upon ' between the parties, and as the. attention of the hoard was never drawn to the clause in question, and its consent to such clause was never intended to ho given, the court would have the necessary material before it fo reform the ] contract by striking out that particular ('

clause. “We think, therefore, that there is no justification in law for the attitude taken up by the Public Trustee. We recommend Unit all further payments of sinking fund moneys should bo made to the new commissioners appointed by the hoard, and that a demand should be made on the Public Trustee for repayment of the moneys at present held by him, to he followed, in the event of refusal, by action on the lines set out above.—Yours, etc., Burnnrd and Bull.'’