Colonial Bank

DISASTERS AND MISHAPS – FINANCIAL

by James Oakley Wilson, D.S.C., M.COM., A.L.A., Chief Librarian, General Assembly Library, Wellington.

DISASTERS AND MISHAPS – FINANCIAL

New Zealand has been fortunate in that its financial frauds and disasters have been few. Many investors have suffered from over-optimism, gullibility, or plain bad luck, but on most occasions such losses have not been widespread. As early as 1868 the troubles of two life insurance companies in England, the Albert and the European, caused the Government to take steps to prevent such happenings in New Zealand. The result was the establishment of the New Zealand Government Life Insurance Office in 1869.

On three occasions businesses have failed under conditions sufficiently bad to merit the description of disastrous. They were the failure of the Colonial Bank, the Macarthur Investment Trust, and the Standard Insurance Co. crash.

Colonial Bank

The Colonial Bank was established in 1874 with its head office in Dunedin. When the Bank of Otago was taken over by the National Bank the promoters, mostly from Dunedin, set out to provide a New Zealand-owned bank which would in addition attack the virtual monopoly of banking that had been created in the North Island. The bank had an authorised capital of £2 million divided into 400,000 £5 shares, of which half were issued and paid up to £2 giving an actual capital of £400,000. The Bank had 30 branches, including one in London, and 10 agencies, and at one time had deposits of £2 million and advances of £1.75 million. The Colonial Bank was established too late to benefit from the boom of the early 70s, but it shared in the land boom of 1875–79 when bank advances financed the rise in the price of land. The failure of the City of Glasgow Bank in October 1878, partly caused by advances on the security of land in New Zealand and Queensland, drew attention to the dangers of such advances. The Glasgow failure brought some sense of reality to the economy, but did not prevent further advances on the same security. Along with the other banks, the Colonial Bank survived the eighties. It was never in a very strong position, but by various means during the 21 years of its existence it managed to pay an average annual dividend of 7 per cent. The slump reached its bottom in 1887 and 1888 and in the banking world caused heavy losses, or at the very least a depreciation in the value of the securities on which money had been advanced. The Bank of New Zealand suffered badly and in 1889 amalgamation was discussed between George Buckley, president of the Bank of New Zealand, and Hon. George McLean, chairman of the Colonial Bank. The latter, however, wanted a new institution shorn of the accumulation of assets which the Bank of New Zealand had obtained from its foreclosures.

In the following years the Colonial Bank tried to obtain a share of Government business, which did not improve matters. When the Government came to the assistance of the Bank of New Zealand in 1894 McLean favoured liquidation, leaving the Colonial Bank to take up its good business; but the Government believed that in this case more than one bank would close its doors. After the passing of the Bank of New Zealand Share Guarantee Act an agreement to amalgamate was drawn up and sent to the Colonial Treasurer, who amended several clauses. Just before the end of the session, however, a clause was added to a Banking Act to prevent amalgamation of the Bank of New Zealand with any other bank without Parliament's consent.

The Colonial Bank now had difficulties of its own to face. The half-yearly report of February 1895 said the bank was in a very strong position, but deposits had fallen by half a million during the Australian crisis, advances had had to be restricted, and earnings fell. In May it became clear that the bank was in trouble. Shareholders became anxious about the possibility of a call and the £2 shares dropped to less than £1 and then to 13s. 6d. The bank's balance sheet was presented to shareholders in September without reference to a dividend or the usual reference to bad debts. In the ensuing negotiations the Colonial Bank suggested that, in return for the whole business, the Bank of New Zealand should pay £300,000 in cash; further, that a suspense account of £100,000 against contingencies would be set up. Shortly after the negotiations began, however, a serious shortage was revealed in the account of the Ward Farmers' Association, the business of Hon. J. G. Ward the Colonial Treasurer, which owed the Colonial Bank about £87,000. This put the Bank of New Zealand in a very strong position and it was finally agreed that only the sound business of the Colonial Bank would be purchased. Officers of the Bank of New Zealand considered and classed the advances of the Colonial Bank amounting to £1,731,549. The first group, called “A”, were those which were fully secured and amounted to £926,197. The second were the “B” or “doubtful” accounts. The Bank of New Zealand was to manage, realise, and adjust these accounts on behalf of the liquidators of the Colonial Bank for two years, during which time it could, as it thought fit, take over such accounts. The “B” accounts amounted to £604,695 and the Colonial Bank provided a reserve of £327,205 for them. The Bank of New Zealand took them all over before the end of the two years, paying the liquidators £4,000 from the reserve. The “C” list of £89,382 was mainly the Ward Farmers' accounts and the Bank of New Zealand had three months' grace in which to make its decision. It did not take them over, though the smaller accounts seem to have been paid in cash. The “D” accounts, amounting to £102,274, were bad and doubtful debts and properties held against closed accounts. The liquidators are stated to have realised about 10s. in the pound on the whole of the list.

In the end the total good assets, including goodwill, buildings, and the accounts to be purchased, amounted to £2,643,190, and the liabilities, £2,509,284. The difference, £133,906, was to be paid in cash. The agreement was laid before Parliament during October and approved a week later after a debate on political lines. The Colonial Bank closed its doors on 18 November 1895 and that night handed its books and cash over to the Bank of New Zealand, which provided service without interruption. The liquidation of the Colonial Bank assets not taken over was long and costly as they had to be dealt with through the Courts. The shareholders felt that they could have been handled more advantageously, but times were not good, and the losses were great.

Though a good deal of publicity was given to the investigation of some of the accounts, the liquidation of the Bank generally was wrapped in some mystery. One statement was made in 1897; thereafter, no report was made until 1905 when final dissolution was sought. Shareholders received a total of 11s. 1¾. per share, and in all they received £111,454 for the 484,980 shown as the value of their interest in the bank on 31 August 1895, plus £75,000 paid for the goodwill.

The Ward Farmers' Association went into liquidation, the Hon. J. G. Ward being declared bankrupt in July 1897. He was in a most unhappy position and the Rt. Hon R. J. Seddon became responsible for overseeing the negotiations. The Bank of New Zealand gained from the new business the amalgamation brought in and from the ending of competition. There was undoubtedly mismanagement in the Colonial Bank, but it was not alone in that respect. Though the shareholders lost heavily, if the amalgamation had not gone through, the bank would probably have been forced under. The bank's troubles led in part to the suicide of Hon. W. J. M. Larnach in Parliament Buildings on 12 October 1898. Larnach, in addition to other financial troubles, had lost heavily through the Colonial Bank. He had been one of the promoters and on the board for most of the 21 years. Such was his faith in it that he had sold other shares in order to buy more of the bank's when the price had fallen.

McArthur Investment Trust

In New Zealand the first investment trusts were established about 1930. They had originated in the United Kingdom during the late part of the nineteenth century and provided a means whereby investors large and small could spread risks and receive an efficient and economical handling of their investments. The pooling of moneys so received gave a large amount of capital which could be spread over a range and number of securities beyond the scope of the average investor. These trusts were of various types, but in New Zealand at the time the two principal were the British or management type and the contractual type. In the former the debenture capital did not exceed the share capital, and in addition the debenture holders' security was the total assets of the company. In the second the debenture was merely a contract to pay over from investments a certain proportion of the net revenue derived from the investment of the debenture funds. There was no liability on the share capital, though in certain circumstances repayment of the debentures could be required.

In 1933 there were complaints about one of the trusts. Indeed, in October 1932 a legal action had been taken which resulted in the return of debenture moneys. Consequently when a commission was set up early in 1934 to inquire into the promotion, financial methods, control, and operation of companies, the question of the financial structure and regulation of financial investment and trust companies was included. The Commission was asked to report in April, but nothing was heard until the night of 8 August 1934 when an interim report of the Committee was laid on the table of the House. This outlined the activities of the Investment Executive Trust of Auckland and a group of interlocking companies organised by John William Shaw McArthur. It detailed the activity of the groups of companies and believed that a case had been made for the investigation of the group. It was stated that, while all the other companies concerned had assisted the Commission in their inquiries, the group had refused bluntly to cooperate. In addition it appeared that without proper authority the directorate and the financial and administrative control had been transferred to Sydney. As a result of the report the Companies (Special Investigations) Act was passed through both Houses of Parliament and became law before midnight. Similar legislation was passed by the State Parliaments of New South Wales, Victoria, and South Australia, while the Commonwealth Government issued a special order authorising each State to conduct an investigation into the affairs of the company and its subsidiaries. Queensland refused to cooperate and for some time provided an area where McArthur could operate. There were 14 New Zealand companies in the first two lists and two Australian, while a month later 12 more New Zealand companies were added. In New Zealand four public accountants were appointed inspectors to investigate the companies and in New South Wales a Supreme Court Judge, Mr Halse Rogers, conducted the investigation as a Royal Commissioner holding a public inquiry.

Reports were produced in March 1935 and revealed a long tale of dishonesty and sharp dealing. McArthur had been a timber merchant for many years, operating a business called the Selwyn Timber Co. (capital £50) which by 1930 was in liquidation with debts of £19,240 and assets of £405. He had registered the Investment Executive Trust in 1929, but it was not until early 1931 that it began to sell debentures through brokers, receiving 90 per cent of the proceeds.

The Government was about to proceed against McArthur for moneys owing by the Selwyn Timber Co., but at the last possible moment the account was paid and he avoided bankruptcy. Later Justice Rogers stated that in its early stages the money received through the sale of debentures was devoted to McArthur's own purposes and that the first £60,000 subscribed was used for the salvage of his assets. To cover the transfer he floated a company, Sterling Investments, which issued debentures to the trust for cash. Companies for all types of activity were formed, most with more or less the same directorates and owing money to others paid for in debentures. In January 1933 a similar company, the South British National Trust, was established in Sydney with a subsidiary in Canberra. These two companies were concerned with the main assets of the group, the old Daily Telegraph Building in Sydney, which by various means McArthur had purchased privately with trust funds and then transferred by other means to various companies in the group after its value had been suitably inflated.

One of the more interesting companies was Pacific Exploration. This company had a capital of £10,000 in 1 shares, Sterling Investments holding all but one share. The aim of the company was “to seek for and secure openings for the employment of capital in the Pacific or in any other part of the world”. The real object was the financing of the building of a luxurious yacht, Morewa.

The minimum of records of the various transactions of the companies seems to have been kept and the early Sterling Investment books were destroyed. At least they were never discovered. Between the various companies there were many and involved transactions which, Judge Halse Rogers concluded, were purposely designed to hamper inquiries. The involved nature of the capital dealings between the various companies can be shown from Farms and Farmlets, a small private land company. This owned all the shares in Sterling Investment and was in addition an unsecured creditor of Sterling for about £90,000. Just before the Government took action Sterling took over all the shares in Farms and Farmlets and so completed the circle. There was also a tangle over the ownership of the building in Sydney. McArthur's most adudacious action was in March 1935 when, through the Transport Mutual and General Insurance Co., he obtained a controlling interest in the Trustees, Executors, and Agency Co. of New Zealand, a company with £3 million in trust funds, largely deceased estates. McArthur told the Royal Commission that it would add to Investment Executive Trust capital a large amount of funds. Again, the Government had to pass special legislation to prevent the takeover. In April 1935, as a result of the report, legislation was passed empowering the Public Trustee to wind up the companies, in line with similar legislation in Australia. Some debenture holders were against this as they felt that, if the former directors were removed, the company could continue, but expert opinion held that the company affairs were too involved. The winding up took many years and was not completed till 1940. The trust building in Sydney was sold in 1937, two-thirds of the proceeds going to the shareholders of the Investment Executive Trust.

McArthur had managed to avoid legal proceedings until October 1935, when his extradition was sought. After the longest fight in Australian legal history he was finally sent to Wellington, where he was arrested in April 1936 and brought for trial three months later. Three charges of theft, amounting in all to £1,075, were dismissed. He was then charged with issuing false prospectuses and after a long trial was fined £500. A civil case by the Public Trustee for the return of the Morewa or £10,000 was won on appeal, when Sterling was awarded £8,931. Finally, the Public Trustee for the Investment Executive Trust received judgment for £19,340 for misfeasance. There was an appeal, disallowed in this case, but McArthur, though he threatened to do so, did not take the case to the Privy Council. Over £300,000 was distributed to the debenture holders, who eventually received 12s. 4d. for each £1 debenture.

It has not been possible to give more than the briefest outlines of the companies' activities—the parliamentary reports take 270 pages to do it—but it should be mentioned that the Investment Executive Trust had an authorised capital of £100,000. Actually 30,175 had been paid up, mostly through payments to the shareholders “for services rendered”. Only £7,563 was paid in cash, but the company intended to borrow £4 million on first mortgages. McArthur himself paid in £7 10s.

Standard Insurance

The Standard Insurance Co. began life in Dunedin in 1874 as the Standard and Marine Insurance Co. of New Zealand Ltd. It had an authorised capital of £1 million in 10 shares, but for many years only 15s. was paid up. It gained a name as a sound concern and regularly paid a good dividend, reaching 22½ per cent on paid-up capital in 1924. The firm's name was changed in 1922 and at the same time shares were split in £5 units paid up to 10s. by the capitalisation of reserves. Further splits altered the capital to one million £1 shares paid up to 10s., of which 6s. had been paid from reserves since 1956.

The report for 1959–60 showed an underwriting and investment profit of over £90,000, a drop of 5,000, but still healthy. Reserves stood at almost £590,000, with 713,000 for unexpired risks and a further £443,000 for unpaid and unadjusted risks. There was a premium income of £1 million, 70 per cent of which came from Australia or overseas, while a new seven-storey building costing £400,000 had been completed in Sydney. Shares had been sold at prices ranging from 34s. 6d. to 42s. and, generally, the 1,500 shareholders regarded the company as a sound investment. In November 1960 the directors were not so sure. Following normal insurance practice, to carry out the Sydney business of the Company the board gave a power of attorney to the manager, H. D. C. Wilson, so that policies, etc., would not have to be sent to the head office for signature. The Sydney office during 1957 guaranteed either as to solvency or as to the performance of contract a company called Production and Enterprises Pty. Ltd. The guarantees for considerable sums were reinsured. Owing to bad management this company had losses of £153,000, which were offset by borrowing under Standard guarantee. By late 1958 the Sydney office realised that it would have to face losses of £200,000, with a possible recovery of £60,000 from the plant. Some £50,000 was paid out and head office informed, with the result that instructions were given that no further financial bonds were to be issued. To avoid disclosing the total losses, Sydney decided to continue Production and Enterprises Pty. Ltd., but, owing to the burden of very high interest rates, further losses were made and the total amcunt rose to £(A.)263,000.

Production and Enterprises was one of about 30 companies in the Harp and Stuart “empire”. Legally they were not all the one group, but the two men had effective control, despite the fact that they had contributed little more than a few thousand pounds each in cash. The principal company was Harp and Stuart Credits Ltd., a public company which borrowed from the public through debentures, paying high rates of interest. Generally the group's financial activities were regarded doubtfully and strong criticism of the various companies appeared from time to time in the financial press. In a further attempt to save the situation Wilson agreed that Standard should guarantee £35,000 to be lent to another company in the group, International Shipping and Export Agency, formed to operate the s.s. Delfino, later the Woolambi, in shipping sheep to the United States. It was hoped that, from the resulting profits, sums would be paid to Production and Enterprises and so eventually reach Standard. Instead of profits there were losses which cost the company about £500,000. Wilson was compelled to issue more guarantees and, later, bonds for about £(A.)2,520,500 were issued to this company. It seems that none of these guarantees was notified to head office, Dunedin. Indeed, because of the instruction, repeated in February 1960, that no such bonds were to be issued, Wilson printed his own forms and issued the bonds without recording them in any way whatsoever or charging premiums or, indeed, without reinsuring the risks. Certain debentures and shares were, however, handed over as security for the advances, so that Standard became a shareholder in the Harp and Stuart group.

In November 1960, when the Sydney manager refused to take the sick leave he had been granted, the assistant general manager and the auditor went to Sydney. They investigated first of all some of the bonds issued in 1957 and found irregularities, as well as the fact that some of these bonds (reinsured) had been replaced without authority by unrecorded bonds which were not reinsured. During a weekend a thorough search was made of the office and carbon copies of finance guarantee bonds issued to the International Shipping and Export Agency and Harp and Stuart Credits Ltd., amounting to approximately £(A.)2,500,000, were discovered in an unused staff locker. Together with the reinsured bonds, these in all amounted to £(A.)2.9 million.

About the time of these disclosures the economic situation in Australia was far from good. Harp and Stuart Credits tried to borrow by debentures with little success, and some of the group had to default on interest payments. The first concern of the Standard directors was to see what could be done to keep the Harp and Stuart group afloat, whatever its name. So long as the group survived, there was hope of saving Standard; hence, in the first few weeks Standard was forced to advance about £(A.)1,200,000 to International Shipping and other companies in the group to meet interest payments. Indeed, at this stage the board seems to have had every expectation that Standard could survive. There were considerable resources in the Harp and Stuart group, but they were not liquid, nor were Standard's reserves, while cash was the prime need. The shareholders still had a liability of 10s. but confidence in the company would go if a call was proposed. Late in 1960 the New Zealand Insurance Co. had suggested a merger, but this had been refused. In February Standard suggested the matter be reopened, but after reconsideration this offer was in turn refused, though New Zealand Insurance did purchase the Sydney building for £(A.)505,000 cash. Other insurance companies approached would not help either. The New Zealand Government was asked to guarantee Standard's policies as sound but, after at first being favourably inclined, it decided that the cost would be too great.

Silence about the company's financial condition was broken on 9 March when it was announced that, because of abnormal claims arising indirectly out of the Australian economic situation, the interim dividend usually paid in March would not be made, even though the company had had a record premiun income. Australian curiosity was aroused, brokers became suspicious, and some policies were cancelled. On 4 April Standard filed a petition for the winding up of three companies of Harp and Stuart, stating that it was owed over £(A.)1 million. At the same time the National Insurance Co. announced that it had agreed to take over the liability for Standard policies, other than finance and performance bonds, as from 1 April. The National also purchased Standard's goodwill and agreed to employ the staff. On 13 April the directors applied to have the company wound up and after a meeting of shareholders the Chief Justice gave an order for this to be done on 24 May 1961. Evidence was given that the surplus of assets at that time was £43,000, plus uncalled capital and goodwill of £650,000. Against this there were demands of £1,363,000, a deficiency of £670,267. A week earlier an order had been made for the winding up of the company in New South Wales.

Even in 1964 the actual losses were not definite. In April 1962 the liquidator made a call of 10s. per share to meet the liability of £696,706 owing to the National as its share of the premiums when it agreed to reinsure the risks continuing after 31 March 1961. At that time there was a deficit of £1,155,473, but the last of the finance bonds were to fall due in June 1965. Nothing had been received from the Harp and Stuart group. During inquiries Standard stated that Wilson had guaranteed loans of £(A.)3,388,000 to International Shipping and nine other companies in his 10 years at Sydney, most of which had not been reinsured. Standard issued a writ against Wilson for £(A.)2 million, but Wilson filed a counter claim and later the action was discontinued with Standard paying costs.

In June 1964, however, the liquidators took proceedings against Wilson in the Sydney Equity Court. On 23 July he was found guilty of malfeasance involving nine transactions, and was ordered to pay £(A.)211,848 to the assets of the company by way of compensation. At the same time the Supreme Court ruled that the guarantee bonds signed by Wilson without authority were enforceable.

by James Oakley Wilson, D.S.C., M.COM., A.L.A., Chief Librarian, General Assembly Library, Wellington.

DISASTERS AND MISHAPS – FINANCIAL 22-Apr-09 James Oakley Wilson, D.S.C., M.COM., A.L.A., Chief Librarian, General Assembly Library, Wellington.