THE BANK IN COURT

Dominion, Volume 6, Issue 1830, 16 August 1913, Page 14

THE BANK IN COURT

QUESTION OF CAPITAL. THE POWER TO AUGMENT IT. LEGAL INTERPLAY. SUMMARY OF SECOND DAY. Tho Chief Justice. (Sir Robert Stout), together with their Honours Justico Edwards And Justice Chapman, continued the hearing yesterday in the Supreme Court of tlio application for an orijfinatiiigr summons in connection with tlio Bank of Now-Zealand, tho Court being asked to 7)iake a declaratory OTder as to certain matters connected with tho powers of shareholders'. Tho plaintiffs wore Sidney KirfccaJdie and Charles Prendergast Kniglit, and the defendants wero 'the Bank of New Zealand and tlio Attorney-General. Mr. C. P. Skerrett, K.C., Air. C. B. Mo-rison, K.C., and Mr. Watson represented plaintiffs; Sir John Findlay,- K.C., and 'Mr. 3t. Wateon appeared for the bank; and the SolicitorGeneral (Jlr. J. W. Salmond) repiesented tho Attorney-General. . The Directors' Case. Sir John Findlay, in opening on behalf of the bank directors, said that Mr. Kkerl'ott had 1 told tho Court how in 1901 the bank was in financial difficulties, and in 1905 the bank again caino to the Legis-' laturu for financial assistance. Jlr. Skerrett intended to point out that in 1901 tlio bank was on tho verge of liquidor tion, and appealed tot tho Government to avert a national disaster, and that with that object the Government assisted tho bank to the extent of ,£2,000,000. But it was useful to remember that that disastrous condition was brought about by the shareholders. Since 18lil, when the Bank of Now Zealand Act was passed, new capital was created on various occasions, and was almost entirely lost. In 1894 the State took control of the derelict institution, and by tlio Act of that year the head office was removed to Wellington, and of tho new board tho president was eOrcted by the Governor-in-Council, and had the power of veto. The Governor-in-Council also nominated tho auditor, whose salary and remuneration was also paid by the bank. Section 15 of tliat Act gave complete coutrol to the State, and it was hard to conceive wider powers of control than wero given by tliat section, -which give the State power to compel tho directors to

cany out the policy which the Colonial Treasurer thought fit. So that the bank bagan in 1894 with an entirely new control, in consideration of the services rendered by tho State to tho bank, and tho Act of that year established a partnership in the management, and later in the capital. A Unique Alliance. The Chief Justico: The bank really became a civic Stato institution—hardly a partnership. Sir John Findlay replied that it was really a dual control. The alliance between tile State and tho shareholders was unique in the history of that bank or probably any other bank in Australasia.' The Act of 189-1 disclosed a,clear intention on the part of the Legislature that the power of raising, and probably of squandering, new capital Should 110 longer continue, and that the' consent of the Stato should be obtained. Tho State now hod as much capital in the bank as tho shareholders. The State had 75,000 i!G 13s. 4il. preference shares and tho shareholders had 150,000 ;S3 6s. Bd. shares, whilst the State had lent to the institution ■upon which it' ; Was receiving 4'per cent interest.

The Chief Justico: That is only guaranteed. The Government lias .£500,000 in shares and the shareholders have iIaOO.OCO in shares, but they guarantee another .£500,000 of uncalled capital and the Government • guarantee'J6l;ooo,ooo. ' Sir John Findlay, continuing, said that Jlr. Skerrett had sugEested that fresh capital should now be issued at par- and that tliey should restrict the issue to the ordinary shareholders and so put tho whole of tho profit in their own Dockets.

The Chief Justice; He suggests that it should bo done through the directors.

State Interests in Jeopardy. ' Sir John Findlay argued that it would be a startling thine to find that the State's interests stood in such jeopardy as that as 1 soon as the shareholders cot a certain number of 'directors on the board *to concur with such a step as that. There was more than a pnerc guarantee,™ 1891; there was the beginning of that dual control, and the consent of. the State to the creation of fresh capital was irresistible. It was a fair inference from the nature of the* control that the power of the shareholders to pass a resolution with the concurrence of tlio directors should no longer exist. Before 1894, by virtue of the Banking Act of 1593. the shareholders had power to control as much fresh capital as they liked and upon passing the necessary resolution the board should carry it out, and if they refused—though the Courts would not interfere—the. remedy lay with the shareholders themselves who could remove the directors and appoint those who would curry out their resolution. A Futile Resolution. Supposing 'that resolution were carried at the present time the result would bo that the directors, if they refused to give effect to it, could not be compelled by the Courts to carry it out nor could the majority on the board be removed by the shareholders' so the passing of the resolution would be entirely futile. If thf> shareholders passed such a resolution and the four directors appointed by the Stato said that it, was not in the interests of the institution that such capital should be raised there was no power'to compel tlio board to raise it. A new control/had been created which shut out the powers of the shareholders to Taise fresh capital. That was fixed by Statute and could only be altered by Statute. Prior to 189t the bank had not issued any preference . shares, but, the Act of that year contemplated two classes of shares, guaranteed and ordinary, the latter being the shares issued previously by the bank. The A shares were to. have the preference. to the ordinary fihares upon which only a reserve liability remained. Every. change which, had taken place—and a largo number had taken place—had always been by arrangement with the Legislature, who never, contemplated the issue of any shares without their consent. There was a bargaiji between the bank and the Stats, _ under which tlio State was given an interest in tlio institution preferentially to that held by the ordinary shareholders, and Section 10' laid down plainly the terms

upon which that interest was acquired and held and showed that there could "be no alteration in the present capital without the consent of tine Stato as a party to tlmt bargain. Stato Interests Destroyed. Mr. .M'orison had contended that, not- • withstanding Section 10, the shareholders' hud power to raise any number of orepreference shares. By issuing such sharos at par they would destroy the interests of tlno State altogether. Tho bnnk for the last three years had been earning 15 per cent, interest, and for tho two years previously 12i, so that if there was n fresh issue of .£3,000,000 unless that new capital could earn 15 per cent, then tho interests of the State would Ire prejudiced to the extent to which that new capital earned less than 15 per cent. It was highly improbable that that ,£3,000,000 would earn so high an interest. If tho resolutions were passed and tho shares were limited to'the present holders of ordinary shares it was, as the SolicitorGeneral had pointed out, only a devico for taking from the State and putting into the pockets of tho shareholders a portion of tho dividend which tho Stat« now got and would continue lo get but for that issue. If tho shareholders were to have tho rights claimed there they could entirely alter the sMhamc and efl'ect of Section 10. The rights of tho shareholders to create fresh capital had been repealed by the Legislature and tho Act of 18D3 amounted to a bargain- between the Stato and the shareholders that the capital would continue as it then existed and to pay dividends as provided bv Section 10, and that no altera- , tion of that capital could bo made mth>

out the consent of the Stato. For these reasons he submitted that there was no power for the shareholders to raise capital without legislative authority. Mr. Myers's Argument. Mr. Myers, who followed on behalf of the batik, argued that whatever tho position was under the 1594 Acts certainly under tho Act of 1595 and sineo the right had been taken a way from the bank tu issue any new capital except _what tho legislation had specially authorised. Under Section 4 of the 1895 Act tlio directors—aiul no't the shareholders—wcro empowered to raise fresh capital. Alleged Fallacies Dealt With. Mr. Skerrett, replying to the arguments ot the Solicitor-General, Sir Jonn I'liullay, K.C., ami Mr. Myers, said that though he might Jiave failed lo make ins arguments clear tie hoped to show that thero were four fallacies m tlie arguments ot his learned friends. They had entirely disregarded tho admitted rulo that tiiey could not have on implied repeal of an existing statutory provision unless tlio sc-cond statute was necessarily inconsistent with the first. The two 'statutes must be sucli that they could not stand together, and could not by any reasonable interpretation harmonise. Thoy were told that there was a dual control of tlio bank by tho State and tho shareholder.;, and therefore, forsooth, the power of creating i'resli capital was taken away, ami that because the profit was pledged to the Stato the shareholders oo it Id not place fresh capital on the market. .Were those pertinent suggestions as to whether-there was impliea repeal or not? Tho second fallacy was that because the capital of the State was fixed that, therefore, that negatived on implied repeal. All that the State, did with respect to capital was to make .£3 Gs. fid. a reserve liability uncalled capital, instead of being reserve capital. Sir John Findlay went so far as to say that betauso in the Act of 1895 the capital of the bank.was recited that, there-lore, that negatived tlie express power written in tho Act of 1861 to incroaso the capital. Tho third objection, most relied upon by the SolicitorGeneral and Sir John Findlay, was most fallacious, as it did not involve the right to issue fresh capital. The other fallacy was that if the words in Section 10 of the 1593 Act "ordinary shares'" bo read as

"subsisting ordinary shares," that that negatived tho right to increase the capital by further ordinary shares, 110 would pass by tho question of dual control, w'hicli was not an argument to be addresseel to a Court ol' law. What is Dual Control? He. could not see what power dual control had to do with increase of capital. What did dual control mean? It meant that the State had imposed restrictions upon the statutory and other powers of the shareholders. It the shareholders ever had a power to increase the capital, that power still existed. Mr. Myers's observations 'had no relevance as to the creation of fresh capital, but lie would deal with that lator on.

Mr. justice Edwards: Mr. Skerrett wants to slay his enemies ono by one.

Mr. Skerre'tt, continuing, contended that the pow-cr to create fresh capital was exercisable by tiio directors appointed by the shareholders, and tho Government had no voting- power, except through tho president ot .tlio bank, until 18!)8, when the bunk was perfectly solvent. Section 47 rf the 1895 Act showed that tho State regarded their position as that of a mortgagee. Sir John E'indlay argued that the directors arid the Governor-in-Council could veto any resolution to increase capital, and that under tlie 1891 Act preference was. given to the guaranteed shares only over the ordinary shares, but lie now submitted that tho very contrary was tho case.

Tho Chief Justice; If you issuo fresh capital, can you issue tlio shares ■ with 6s. Bd. liability?

' ill-.' Skerrett; \Vo can issue them as they stand now. The Solicitor-General agreed that if they could issue fresh shares at all, they coukl be issued with the same liability as at present. On resuming after the luncheon interval, Mr. Skerrett continued his reply, stating that tho Solicitor-General had admitted tluit tho issue of shares would not affect or infringe the preferential rights of the Crown, but ho had sugpisttdi that there was no provision for that in the statute, and that it was contrary to tho 'statute. • His (Mr. Ske.rrett's) submission on that point was that Section 10 fixed only the rights and priorities of preferential shares, and that it was not intended, to define, fix, or determine the rights of ordinary shareholders. Tho whole purpose of Section 10 was to say how much interest in tho profits should be carved out of the rights of ordinary shareholders, and whatever was not so carved out remained to the ordinary shareholders. Tlio profits beyond the 10 per cent, paid on the preferonee shares belonged to the ordinary shareholders. On question 4 ho conceded that tlio shareholders could not direct 'the directors to call up tho uncalled liability of .£3 6s. Sd. per share, and on question 5 they were in agreement, and it was also admitted that the shareholders had the right to control the disposition of any new capital. This concluded the arguments, and the Chief Justice intimated that their Honours would tako time to consider their deqision. -