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These bonds have been held to be perfectly legal and binding when given for debts actually and bonâ fide owing by the company, nor does it seem that it would be at all practicable to prohibit them : they are, in fact, fully recognized by an Act passed last session, enabling debenture holders to take precedence of these bonds in the claim for payment.*

But the clause fixing the proportion of loan capital is evaded in other ways. To increase the loan capital is one means of altering the proportion, to decrease the share capital is another. This is done when shares are issued at a depreciation, or made to have a nominal value which is less than their real value; debentures are then brought out to the amount of one-third of the nominal share capital, and these debentures, therefore, bear a much higher proportion to what the capital is really worth. Debenture-holders are thus placed in a false position, for while they are led to suppose that they have at their back a sum of money equal to three times that which they have advanced, they may suddenly find that a large portion of that sum never existed but in name.

But the parliamentary proviso, which limits the borrowing powers, is partly answerable for this result; for it is that very proviso which has taught debenture-holders to take a false view of their position, and to rely upon the share capital as their security, whereas they ought to rely only on the earnings, which are unaffected by the financial operation of issuing depreciated shares. It has now been distinctly laid down by the Court of Chancery, that their only claim is on the receipts. They have no power to seize any portion of the rolling stock, or the fixtures, or even the surplus land ; and their only remedy is to get a receiver of the income appointed by the Court. Whether the making of a line may have cost 100,0001., or whether a nominal sum of 100,0001, has been assigned to an undertaking which really cost only 50,0001., is immaterial as affecting the annual value of the completed work, which is determined solely by what it earns.

Debenture-holders have thus had, from their ignorance of the law, a delusive security placed before them, and the limitation clause in the Act of Parliament has helped to induce them to rely upon the delusion.

These two processes, namely, Lloyd's bonds and the issuing of depreciated, or to a great extent nominal, shares, have been

* It must be carefully borne in mind that a railway company cannot borrow on a Lloyd's bond. If it does, the bond is void. Lloyd's bond is merely a certificate or acknowledgment of indebtedness, with an engagement to pay interest on the debt. But if there is no debt bonâ fide owing when the bond is given, but the bond is given for a contemporaneous loan, the bond is clearly void. That is the practical objection to capitalists lending money on Lloyd's bonds, for it is possible that they were not duly issued, and if so they are void as being ultra vires.


the principal features of the 'financing' of the so-called .contractors' lines.' The false value given to debenture security by these means has in great part contributed to the long-continued success and subsequent failure of the system; for the debentures have often been the main stay of this sort of lines, representing, in fact, the one grain of wheat in the bushel of chaff, or rather the one coin of gold against a mass of paper. The process has generally been somewhat as follows:-A company starting without any subscribed capital wherewith to pay for works, if, indeed, it may have had enough to meet preliminary expenses, agrees with its contractor that he shall receive payment in shares, which are accordingly allotted to him as rapidly as possible, until the amount nominally paid away is equal to half the original proposed share capital. Then debentures are brought out, their issue being thus rendered legal according to the terms of the act. These are placed at once, or as soon as possible, with bonâ fide holders; although no attempt has been made so to place the shares, which the contractor can only make use of by obtaining a loan on them from some financial company, to the amount perhaps of about a third of their value. Having thus obtained money enough to meet his most pressing needs, he goes on taking shares as before, until the whole of the authorised issue is exhausted. In this case, the money spent on the undertaking at this stage will be represented by half the nominal capital, and one-half of it will consist of debentures; while, unless the original estimate was double what it ought to have been, it necessarily follows that the line will be only half made. Here is therefore an unfinished undertaking mortgaged to its full value. The contractor must then continue the work, receiving payment in Lloyd's bonds or some similar acknowledgment of indebtedness, or else application must be made to Parliament for further capital, unless by this time the public can be induced to take up the shares at a value exceeding that of the advance made by the financial company upon them. Most frequently the shares have been in the first instance divided into ordinary and preference, the latter being, of course, first disposed of, the contractor probably guaranteeing interest on them during the construction of the line. Should a company thus managed succeed in completing its line, and should the contractor (not having failed in the meantime) at last get all the shares off his hands, the result will be an unwieldy concern with a share and debenture capital both amounting to about twice what they ought to have been. It is true that the former is only apparently doubled, for the shares never really were at their nominal value, and the latter consequently stands at a much higher proportion than the


law intended. But the loss, though partly apparent, is also partly real, for much must have been consumed in interest during the construction of the line; much in premiums to discount and finance companies, in commissions on bringing out' shares, and in all the necessary expenses of a system so complicated and involving so much risk. It may safely be affirmed that if a contractor's line should at last yield a profit, it would from the beginning have earned at least twice as much in the hands of bonâ fide proprietors.

Lines of this sort had become so numerous, and, when once in operation, they have been found to be so completely beyond the control of Parliament, that attempts were made in the last Session to check them in the first stage, by reviving the abandoned system of 'subscription contracts,' and by requiring as a condition of passing a railway bill, that two-thirds of the capital for the undertaking should be promised beforehand. In former times, that is previous to the year 1858, contracts had always to be entered into and signed by persons undertaking to take shares in the project, to the amount first of one-half and afterwards of three-quarters of its estimated cost. The system was abolished principally in consequence of the difficulty of proving the bona fide value of the deeds, which, of course, depended entirely on the character and ability of the persons signing them, and the inquiries necessary to the proof of these points were of a particularly troublesome and inquisitorial nature. On the abandonment of these subscription contracts, the system of money deposits was made to take their place, the regulation now in force being as follows:-A sum equal to eight per cent of the intended capital has to be deposited with the Court of Chancery previous to the application to Parliament, to remain in the custody of that Court, in case the line is sanctioned, until one-half the capital is raised and expended on the undertaking. The object, whether of subscription contracts or deposits, is, of course, to afford a guarantee that the line will be made, and made within the time fixed by the Act. The forfeit of the deposit is the consequence of a possible abandonment before the completion of half the work, after which it is naturally supposed that the money already laid out is itself sufficient security. The object of insuring the speedy completion of the line is most desirable, especially in the interests of owners of property over whom compulsory powers are given; for injury is necessarily done to them by the exercise of such powers, and this injury is liable to be greatly increased by delay and uncertainty. The system of deposits cannot, however, be said to have failed of the purpose for which it was intended, inasmuch as no deposit has ever been forfeited. In


attempting to revive subscription contracts, Lord Redesdale had avowedly a further object, namely, to prevent such companies from coming into existence at all as might be supposed likely to adopt the above described ' financing.' The intention was not carried out, but a step was taken in that direction. It is in future to be a condition, that the deposit should be made in the names of subscribers or shareholders who are not to sell or transfer their portion of it so long as it remains in custody, and who must at the end of that time take shares to the amount named.

The effect of this will be by no means necessarily to prevent the growth of contractors' lines, but to place an additional obstacle in the way of all new companies. For they are put at this disadvantage : whereas the shareholders in any ordinary undertaking subscribe their money when it is wanted and not before, those in a railway, at least a certain portion of them, must produce the money, not only before it can be made use of, but some four or five months at least before knowing whether their undertaking will be allowed to have an existence at all. The deposit is made in January, but the Act cannot be obtained before May, June, or July, as the case may be, and during all this time they must lend their money on the chance of success in their application to Parliament. If successful, they must further allow it to be locked up for perhaps two or three years until half the line is made, for, whatever individual circumstances may require, the shares are not to be transferred until the release of the deposit. This system also creates a preference in favour of old as against new companies, for, in the case of an old company promoting a new line, the deposit is only required while the bill is pending, and the company then get it back on entering into a bond to complete the new work by the time specified under a penalty of 501. a day. The results, therefore of subscription contracts, if real, which they never used to be, or of subscribed deposits as now introduced, would be about the same in both cases: namely, as regards capitalists, to discourage them from investing in railways; as regards the old companies, to strengthen their monopolies; and as regards contractors' lines, only to restrain them in as much as they impede , all new projects, including this class among the rest.

And when we speak of contractors' lines as though they ought to be restrained, we do not mean lines in which shares are bonâ fide taken by contractors; but those in which, by means of a complicated system of nominal capital, issues at a rebate, and so on, the public are induced to subscribe in the form of debentures and preference shares, to which a fictitious value is attributed. It is nothing against a railway that a contractor should take shares in it, he being the person who is best able to understand its value;


nor is it any disadvantage that the man who constructs an important and difficult undertaking should have a pecuniary interest in doing his work well. It is because of the system of financing that has grown up in connection with them, that contractors' lines have acquired their present bad name, and have been to some extent the cause of the monetary crisis of last year. Since the panic of 1845 and 1846 the public have hardly ever ventured to take original shares, and they wait for the construction of even the soundest and most promising line; whereas preference shares, bearing guaranteed interest, and capable of immediate realisation, have generally found a ready market. Hence contractors have been enabled to start projects which would never have been undertaken otherwise, and they have repaid themselves for their advances afterwards, when, the railway being made and the profits brought fairly within view, the public became willing to invest in what they had previously feared to touch. Had this process continued, the contractors merely supplying the places left vacant by the timidity of other investors, and constructing railways at their own cost, a little in advance of what other capitalists would have done,—the country would have reaped an almost unmixed benefit; but, unfortunately, other forces caused the ball to roll too rapidly. The ingenuity of financiers, the ease with which debentures got taken through misapprehension of the true nature of their security, the facility with which, in unscrupulous hands, a system of depreciated issues and temporary loans unknown to shareholders gave fictitious values to the stocks brought out,all these means helped to float more and more lines year

after year,

till at last there came a crisis little less disastrous in its consequences than that of twenty years ago.

The control exercised by the Legislature has been clearly ineffectual to prevent the growth of this bad system of financing,' and indeed, by giving a delusive appearance of security to debenture loans, it has to some extent assisted in its development. Nor is it easy to see how this could be otherwise, inasmuch as Lloyd's bonds, when given as already explained, are acknowledged to be legal, and the ablest lawyers have stated their opinion that it is impossible by any laws so to interfere between debtors and creditors as to prohibit such arrangements, made between them by mutual

Nor can the incurring of debts to general and unsecured creditors be prevented, and the present condition of the London, Chatham, and Dover Railway shows that this very kind of debt, over which the Legislature has no power, is that by which alone the public are in danger of being interfered with in their use of the line. Since, then, the legislative restrictions are ineffectual in restraining bad companies, let us inquire what their effect is



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