INQUIRY URGED.

Star (Christchurch), Volume LXVI, Issue 20403, 6 September 1934, Page 10

INQUIRY URGED.

Strong Criticism of Company. HANDLING OF FUNDS. CHARGE OF EXTRAVAGANCE AND MISMANAGEMENT. (“ Star ” Parliamentary Reporter.) WELLINGTON, September 6. “ We are writing and submitting this second interim report because we arc of opinion that an investigation should be made forthwith of the affairs of New Zealand Redwood Forests. Ltd., and other companies referred to in detail hereafter, these being companies associated through common directors and shareholders or through reciprocal transactions with either New Zealand Redwood Forests, Ltd., or certain companies named in the Companies (Special Investigation) Act,” stated the members of the Companies Commission, Mr J..S. Barton, Professor 11. Belshaw and Mr F. E. Graham. In describing New Zealand Redwood Forests, Ltd., and the history of its formation, the Commission explained that it was necessary to set out the salient features in the constitution of this company, because later in the report a comparison would be made between various statements in the prospectus and the actual facts as disclosed to the Commission by the ■transactions themselves. Redwood Forests was one of a number of companies which came under the generic description of land utilisation companies, raising the bulk of its capital by the issue of so-called bonds or debentures. In September, 1925, it issued the prospectus of a debenture issue of 6000 profit-participating forestry debentures of £35, from each of which, the prospectus stated. £2l fully' paid up was to be set aside to provide an investment fund and realisation reserve in accordaance with the terms of the trust deed, with the New Zealand Insurance Company as trustee for the debenture holders : £4 10s per acre to reimburse the companies for the actual cost of 6014 acres freehold land; the balance of the proceeds to be applied to establishing nurseries, planting and all incidental purposes, the company undertaking to plant in forest trees at least one acre for each fully paid debenture. It sought to raise £210.000 from the public, and pointed out that debenture holders must look to the proceeds of the forest for the return of this money. The debenture holders were given the right to elect one director, and George William Hutchison, public accountant. Auckland, was announced in the prospectus as the first director representing the debenture holders. The prospectus contained a statement that New Zealand Redwood Forests had purchased three valuable properties close to Putaruru. on the Auck-land-Rotorua railway, with approximately’ six miles of railway frontage, the purchase price being £27.065. of which £15,075 had been paid. The prospectus also stated that J. W. S. M’Arthur, one of the vendors, had been allotted 16,150 shares in the company; that the Selwyn Timber Company, another vendor, had been allotted 12,500 shares, while the directors had allotted 30.600 paid up to 10s. It was estimated, according to the prospectus, that the preliminary expenses would amount to £IOOO. “ Hard to Classify.” The Commission described the nature of the contracts between the company k ' and the bondholders as not being debentures in the ordinary' sense of the term; they were, in fact, rather hard to classify'. They were not evidence of a debt unconditionally or necessarily due by New Zealand Redwood Forests, Ltd. No reference was made in the prospectus to brokerage. “ Nevertheless,” says the report, “ the company has made substantial payments by way of the expenses of debenture issue, brokerage and commission. and has paid these out of debenture money', treating these payments as a first charge upon the debenture moneys as received. These payments amount in the aggregate to many theu- f e sands of pounds, being, according to Q the evidence submitted to us, over 15 per cent of the debenture money re- j ceived. This wrong use of debenture j n funds is, perhaps, the most potent il single factor in bringing the company d *° present position. That position n is that the company cannot carry out its existing obligations to its debenture holders without the assistance of funds s - secured by the sale of further debenn tures.” r - Financial Position Desperate. ' Under the heading of “ Extravagance n and Mismanagement." the Commission I- states; “During 1928 and 1929 the c Redwood Company’s financial position , became desperate. The balance of the purchase money had fallen due, as had s the mortgage on the land. Neither the Redwood Company nor the Scltj wyn Company could raise the money, t ; the mortgagee was threatening to cxer- >.! cise his powers of sale, the bank had :l| stopped the company’s credit and the | wages of the workmen at the comr| pany’s nurserv were in arrears, y i “It is true that lapses of debentures ;. by the non-payment of instalments ,_i were heavy and this was a substantial ( j contributing cause of the trouble. On ; the other hand, however, substantial t j sums paid by debenture holders in ■ Australasia and India seemed tJ have been wasted by extravagance. mis- , management and unjustifiable pavi ments. whilst heavy brokerage had I , been made a first charge upon the ! 1 debenture holders' money." | Exemplifying the practices referred . ! to. the Commission showed that | although £133 in rates had been paid | by the Redwood Company to the Sel- , wyn Company, the latter had not paid ! them to the County Council, so the Redwood Company had to pav again. The payment of M’Arthur’s personal I liability, including expenses incurred : j in India, was traversed by the Comi ! missioners. who stated that earlv in • | 1928 M’Arthur went to India to open 1 j a debenture-selling campaign, and he was there for about one year. He I there launched a personal libel action j against a firm of brokers who attacked ! the methods adopted on behalf of the j Redwood Company. He cabled to | I New Zealand for authority to bring I this action in the company's name. This was refused, the directors were - opposed to it and the company’s soliei- f tors advised against it strongly. The 1 directors cabled accordingly. M'Arthur < cabled in reply, “Am consequently * ' maintaining a private suit.” Some ! months later M’Arthur cabled., request- ( J ing money for the purposes of the

action and the directors cabled refusing the request and adding:, “The case was proceeded with in opposition to the board’s instructions. Therefore, * all costs your personal liability.” The ■ action was abortive and the gosts were over £SOOO. On M’Arthur’s return he procured the passing of resolutions by the directors. These ratified his actions and agreed to pay the costs out of the company funds. This seems to be payment ultra vires of the company of costs of an action to which it was not a party. Heavy Expenses. “ When M’Arthur was instructed to visit India the directors of the company voted him £4OO to cover expenses," states the report. “ That sum was very greatly exceeded and there is evidence that no proper accounts were ever submitted by M’Arthur to show ; the details of this expenditure but that : he simply retained what he required 1 out of the proceeds of debentures sold in India. In addition to his expendi- , ture from debenture money M’Arthur, - whilst in India, procured remittances > from the Selwyn Timber Co., Ltd., : amounting to over £IOOO for his travell ling and personal expenses. A demand 1 for a refund was made by his co- - directors of the Selwyn Company after ; his return and M’Arthur stated that it : was ' clearly the liability of the Red- , wood Company.’ The directors of that company refused to recognise liability, but after a change of directors the amount was paid by the Redwood Company. “ During the year in which M’Arthur was absent from New Zealand he was wholly on the business of the Redwood ConijDany. He, nevertheless, drew from the Selwyn Company over £IOOO as ‘ salary and travelling expenses.’ This is in addition to £IOOO for personal expenses. The Redwood Company was interested in this matter, for in 1929 neither M’Arthur nor the Selwyn Company were able to pay calls due on their Redwood shares levied at the instance of the bank. The costs of selling the company’s bonds in India (including M’Arthur’s expenses) were very heavy. There is evidence that at the point of time when the total amount actually paid by debenture holders in India had reached approximately £30,000 the amount remitted to. v New Zealand was less than that part of the amount paid which was to go to the trust fund. If this is so it meant that the whole of those constituent parts of the debenture money which were to be allocated to the purchase of land and the planting and maintenance of the forest had been dissipated in selling-costs and expenses. Belonged to Trust Fund. “ On June 6, 1928, in response to a cable message, which the secretary in Auckland had sent under pressure from the bank, M’Arthur cabled £IOOO from India to reduce the bank overdraft. This was remitted without comment or instructions, and it was some months later that the directors found, on checking the Indian statements, that the money belonged to the investment fund and the realisation reserve—the trust fund. “ After M’Arthur’s return from India he was unable to pay the calls due on his .shares in the company and his seat on the board was liable to be vacated if these calls were not paid by March 31, 1929. He asked that payment of the balance of the purchase money on a block of land of which he was the nominal vendor should be made by the company so that he might pay the calls therewith. Accordingly the directors passed a resolution on March 28, 1929, authorising payment. The resolution concluded, ‘ and that the secretary be authorised to instruct the company’s solicitors to prepare the necessary transfer and that upon the same being executed a cheque for the amount required be handed to M’Arthur.’ “ No transfer was executed and none could have been executed for no such dealing with (Native) land was then possible. Nevertheless* M’Arthur procured a cheque and paid the calls before the end of the month.” A CIRCULAR ISSUED. Copies Received by Members of Parliament. Per Press Association. ! WELLINGTON 7 . September 5. Copies of “A Message to Debenture ! Holders,” issued by the Investment J Executive Trijst of New Zealand. Ltd., were received by members of Parliament. including Ministers, to-day. An attached circular states: “The Minister of Finance, yielding to pressure brought to bear upon him by our opponents, has effected a stranglehold on the Trust, by refusing to allow it to pay interest to debenture holders.” Later the circular states, “The only remedy for a political evil is a political 1 cure. I suggest you write to the mem- j ber of Parliament for vour district at once, and ask him if he will put the enclosed questions to Mr Coates and demand an answer.” Nineteen questions are then set out. Presumably copies of the circular and I “message” have been sent to members in anticipation of debenture holders in the Trust acting on the advice given. The circular is signed by YV. A. Pilkington. chairman of the Trust, while the message is signed by W. M’Arthur. managing director of the Trust. Solicitor to Issue a Statement. Per Press Association. | AUCKLAND. September 6. i The inspectors appointed to investigate the affairs of the companies j named in Parliament last night, began j their work this morning. No other information is available, the inspectors j being officers of the Court. A lengthy statement by Mr M. 11. ' I-Dmpson, who was mentioned in the Commission's second report, was issued to-day, and is being posted to all newspapers. (Earlier reports appear on Page 15.)