FIFTEEN LOOPHOLES

Waikato Times, Volume 121, Issue 20279, 23 August 1937, Page 3

FIFTEEN LOOPHOLES

THE COMPANIES ACT. WIDI 800 PI FOR FRAUD. MR J. S. BARTON’S VIEWS. “Despite the amending legislation of 1933, I have definite evldenoe of fifteen separate serious loopholes for fraud In the Companies Act—loopholes for dishonest exploitation of the publlo,” said Mr J. 8. Barton, a well-known authority on oompany law, In a reoent address to the Wellington branoh of the New Zealand Boclety of Aocountants. “ The law Is very defective. It falls to protect and help persons capable of developing worth-while businesses, but leaves the way easy for malpractices of unscrupulous company promoters and exploiters of bogus underwriting agreements. ... I have a closely-packed stack of misleading prospectuses—a foot high—compilations of half-truths, suppressions and repressions.” There was no statutory definition of underwriting or brokerage. No Judge had faced the task of framing a universal definition of either operation, but gave Judgment in accordance with the circumstances of a particular case. There was a statutory limitation of 10 per cent, for underwriting commission, which had to be disclosed, but there was no statutory obligation for disclosures of brokerage (which could be paid out of oapital or revenue), and this, was a marked defect of the present Act. Many cases occurred In which agreements for underwriting really Involved an element of brokerage, which was not disclosed, so that there was confusion of the two functions. “ Aaaured of Good Rake-off.” In certain land-utilisation companies the directors were the promoters and vendors of the land, and were also secretly the proprietors of brokerage companies, and thus were in an assured position for a good ‘‘rakeoff’’ from the public. They worked on a principde of “heads I win; tails you lose.’’ Although the limit of 10 per cent, on underwriting included brokerage, this could be exceeded by the formation of subsidiary companies to handle the brokerage. Indeed, this scheming could be done with impunity. The statutory provisions for limited liability and the recognition of the separate corporate existence of subsidiary companies were sometimes abused. A man was legally entitled to form as many companies as he wished. One of his companies might consist of his wife and his typist, but a court could not refuse recognition of the separate entry of such a company. The way was wide open for the formation *of subsidiary companies with dummy shareholders an 1 dummy directors, behind whom the real operators could hide. The unorganised nature of the | money market in New Zealand, with i its scattered population, made dlftlcul- ! ties for honest operators and opporj tunities for dishonest schemers. The lack of a concrete organisation to I which the investing public could look ! for advice and guidance was responsible for a loss of public confidence, even in sound investment proposals. An Examining Committee. Finally. Mr Barton said, he felt, sure that necessary amendments of the Companies Act wpuld be made. Meanwhile there was a well-sponsored movement of professional and commercial men. with whom he had been asked lo co-operate, for the purpose of setting up a committee which would panics. lie would like to see the Society of Accountants taking a sympathetic and active interest in this very necessary campaign to narrow the scope for cunning, dishonest exploitation of the public. In England the Chartered Institute of Accountants was moving for a similar purpose. ! Mr .Tames Mclntosh, in moving n - vole of thanks to Mr Barton, remarked that abuses of the Companies Act ha i become a public scandal. He agreed that a suitable form of tribunal should he set up to consider and report on prospectuses—jT tribunal which would . not stifle new ventures and new ideas l for which a good case could he pre - sented. but lie felt that such procedure was a matter for legislation rather than private effort. He was surprised lat the apathy of the public, which i should he animated by the instinct of self preservation. The community I was under a big debt of gratitude to I Mr Barton for his able, earnest an 1 persistenL campaign for Hie amendment of company law.