TEST CASE

Southland Times, Issue 22042, 15 June 1933, Page 8

TEST CASE

PAYMENT OF INTEREST POWER BOARD EXPECTS SAVING WHICH CURRENCY? At Tuesday’s meeting of the Southland Electric Power Board it was decided to undertake a test case in the King’s Bench Division, London, to ascertain whether the board could make interest payments on its London loans in New Zealand currency. The board’s total indebtedness amounts to £l,500,000 and it is estimated that in the event of success a saving of £20,000 a year will be effected, with the exchange at its present level. The amount borrowed by the board is made up of two loans of £750,000 each. The first loan, which was raised in 1921, bears interest at the rate of 6 per cent, while the second, which was raised in 1924, bears interest at the rate of 5 per cent. Both loans have the right of redemption up to 1936, or any time after that up till 1954. The loans were raised in London, but the debentures were executed in New Zealand and the sinking fund is also established in this country. Interest is payable at the option of the payee in London or in New Zealand.

Before deciding to proceed with a test case in London the board had considered the judgment of the Appeal Court in the recent case of the Broken Hill Proprietary Ltd. v. Latham and others, and also the opinion of Sir Gerald Hurst, K.C., M.P., who took part in that case. Thereafter the board considered it was justified in paying in New Zealand currency, at the same time informing the debenture holders that in the event of dissatisfaction a friendly test case could be arranged. However, a request was received from the Minister of Finance that the board should take no action until the legality of payment in New Zealand currency had been settled by a test case. The board then decided to fall in with the Minister’s request. The test case will be undertaken in London by originating summons, and the Court will be simply asked to decide whether the payment of interest and redemption moneys falling to be made in London are to be made in sterling without allowance for differences in exchange or alternatively in New Zealand currency converted into sterling at the rate of exchange for transfers to London on the due dates for payment.

Apparently, the Southland Board is undertaking the test case on its own behalf, as no local body in Dunedin with loan commitments in London has been asked, as yet, to subscribe towards the cost of the case (reports the Star). , , , , “This is the first I have heard of the Southland Board taking steps to counteract the payment of exchange in London,” stated Mr L. W. Potter, secretary of the Otago Electric Power Board, when he was shown the Invercargill Press Association message. Under the National Expenditure Adjustment Act, authority was given local bodies to convert loans on which the interest was paid in New Zealand prior to January 31. Of the total loans of £291,000 raised by the Otago Board, the main one was of £151,000 in Australia, and the interest had always been paid in New Zealand. The board was therefore on side in converting, and the initial proceedings to convert were now being taken. The message was read with considerable interest by Mr H. C. Campbell, chairman of the Otago Harbour Board. Personally, he wanted to see just and right action taken all the time, and he was averse to London bondholders suffering. Of the board’s loans, £230,000 held in New Zealand was convertible. The board’s debentures stipulated that the interest was to be paid in sterling, so he presumed that if debentures were held in London the charges would have to be met in English currency. The decision of the Southland Board to undertake a test case followed a recent decision in one of the High Courts in London in the case known as the Broken Hill Proprietary v. Lathan and others, said a prominent financial authority. The purport of that judgment, the full text of which was not yet to hand, was that where an option created by the contract was payable either in Australia or in London the borrower had the right to pay in either place in the currency of the country in which the loan was domiciled —Australia in that case. Local bodies with commitments for loan repayments and interest charges on loans raised in London had been, for the past few months, very _ much concerned whether or not in their case the judgment above referred to applied or whether it could be distinguished, said the authority. The action of the Southland Power Board would very seriously concern the question of exchange on London, and the test case was being taken with a view to definitely determine the issue. The matter was of very great importance to all local bodies in New Zealand with London commitments. “If the judgment is upheld, it will almost wipe out London for further borrowing by local bodies,” said the financial expert. “That is, unless the bodies cover themselves in new contracts. The prestige of New Zealand local body security would be seriously attacked and diminished.” It is understood that counsel engaged by the Southland Board is the barrister who won the earlier case in the High Court.