H.—27,

This was to facilitate the handling of cash received for the sale of debentures of New Zealand Redwood Forests, Ltd., in India by Palmer and Co., of Bombay, who have since that date acted as selling-agents for the Sterling Co. in India. At a meeting of directors held on 20th February, 1931, the managing director reported that he had completed negotiations with New Zealand Redwood Forests, Ltd., to purchase 1,066 debentures, being " the remainder of that company's first issue of 8,000 debentures." Advances were to be made by the New Zealand Redwood Forests, Ltd., " on account of preliminary expenses, travelling-expenses, and printing, and certain of these advances had been expended." Nine of the Redwood debentures had already been sold at £35 each. It was accordingly resolved :— " That the managing director's actions be and are hereby approved. " That the company purchase the remainder of the New Zealand Redwood Forests, Ltd., first issue of 8,000 debentures of £35 at the agreed price of £25 each and that these be resold at the nominal value less any agreed discounts to cash purchasers." At the next directors' meeting, however, held on 19th June, 1931, it is recorded that— " As no agreement has been entered into between the company and New Zealand Redwood Forests, Ltd., for the purchase of debentures in the latter company it was resolved :— " ' That the resolution of February 20th, 1931, which reads as follows— " ' That the company purchase the remainder of the New Zealand Redwood Forests, Ltd., first issue of 8,000 debentures of £35 at the agreed price of £25 each, and that these be resold at the nominal value less any agreed discounts to cash purchasers be rescinded.'" The above are the only references to the sale of the Redwood debentures contained in the minutebook. Apparently the Sterling Co. at this time ceased to be actively interested in the sale of the debentures in New Zealand, but continued its endeavours to dispose of them in India, particularly so since September, 1933, when new terms for the acquisition for disposal by the Sterling Co. of Redwood debentures were agreed upon between the companies. New Zealand Redwood Forests Ltd., is one of the companies whose affairs are being investigated under the provisions of the Companies (Special Investigations) Act, 1934, and a separate report will be made by the Inspectors appointed in that regard. That report will give particulars of the bond-selling operations. The accounts relative to the Sterling Co. in the books of the New Zealand Redwood Forests, Ltd., do not agree with the corresponding accounts in the books of the Sterling Co., and reconciliation and adjustment are necessary. (b) Transactions undertaken on behalf of Mr. J. W. S. McArthur. From about June, 1931, until the end of the year 1932 the principal activities of the Sterling Co. were directed towards the protection of certain assets belonging to Mr. J. W. S. McArthur. The assets consisted principally of properties and shares and debentures in companies. In 1931 Mr. McArthur was being pressed by creditors for payment of debts which he professed inability to meet. In a letter dated 25th September, 1931, and addressed to Mr. V. R. Meredith, Crown Solicitor, Auckland, who was claiming on behalf of the State Forest Service in respect of a guarantee by Mr. J. W. S. McArthur of a debt due by the Selwyn Timber Co., Ltd. (in Liquidation), Mr. McArthur stated, inter alia:— " Forcing the claim on the part of the Crown would involve me in bankruptcy. " From this statement" (financial statement enclosed with letter) "it is plain that if I am forced into bankruptcy at the present time, my creditors will get practically nothing." A copy of this letter and statement enclosed is appended to this Report as Exhibit " E." In order to protect certain of his assets from his creditors Mr. J. W. S. McArthur transferred them to the Sterling Co. Later, when his financial position improved, he obtained the retransfer of these assets to Wynwood Investments, Ltd., a company in which he held 9,900 shares out of 10,000 issued, and also all the debentures, £40,000. Details of these-transactions are given in section 12 of this report. (c) Association with Investment Executive Trust. The Sterling Co. was also utilized to assist the Investment Executive Trust by— (a) Making advances against Investment Executive Trust debentures. The Investment Executive Trust notified its debenture-holders that an arrangement had been made with the Sterling Co. whereby they could obtain advances up to 75 per cent, of the face value of their debentures. As security the Sterling Co. retained the debentures and also took a mortgage over them. No interest was payable by the borrower, but the debenture-holders assigned to the Sterling Co. the whole of the income from the debentures during the currency of the advances. (b) Purchasing Investment Executive Trust debentures from dissatisfied debenture-holders, who, in a number of cases, had threatened legal action for recovery of money paid or securities transferred. Particulars of the largest transaction of this nature are given in section 15 of this report. (c) Purchasing Investment Executive Trust debentures on the open market through sharebrokers, in some cases at a discount. Miss M. Gregory, secretary of the Sterling Co., when examined on oath, told us that, although she could not state the reason for the purchase of these debentures, she thought it was " to keep the market up," and this would appear to be an adequate reason, since it would be difficult to sell new debentures at par if it were possible to purchase debentures in the same series on the open market at a discount.

50