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C. 72367/A/30 [No. 142A].
No. 6.
MESSES. PEAT, MARWICK, MITCHELL AND COMPANY to THE PERAK RIVER HYDRO-ELECTRIC POWER COMPANY LIMITED.
DEAR SIR,
I HAVE considered Messrs. Mayo, Elder, and Rutherfords letter to you of the 11th instant and also the Memorandum of the Financial Scheme,† your letter of the 3rd ultimo to the Under-Secretary of State for the Colonies and the Under-Secretary's reply of the 3rd instant. §
11, Ironmonger Lane, London, E.C.2, 11th December, 1930.
I have given particular consideration to the views expressed by Messrs. Mayo, Elder, and Rutherfords on the subject of the effect of the appointment of a Receiver and the disadvantages attaching thereto. I entirely concur in the views expressed by them. I believe it is the fact that in this country all undertakings for the supply of electric power to the public are operated under Special Acts governing their powers of supply and the Court rarely appoints a Manager of an undertaking operating under such Special Acts for the purposes of carrying out public services, e.g., water, gas and electric companies, as a sale by a Receiver and Manager would interfere with, and might be prejudicial to, the public interest.
Even in the case of ordinary industrial companies, the Court generally restricts the right of the Receiver to manage the undertaking, the Court's Order usually giving him power to manage for periods of say three or six months only, with liberty to apply for extension of such management period.
A Receiver appointed by the Court becomes personally liable for any contracts into which he may enter, subject, of course, to the right of indemnity against the assets. In view of this personal liability I cannot visualize any Receiver of the Perak Company entering into fresh contracts for the supply of current for a period extending over more than a few months.
A Receiver, as an Officer of the Court, is of course subject to the Court's directions,, and will not, as a rule, take any material step in connexion with the carrying on of an undertaking such as this, without first applying to the Court for permission to do so.
The effect of the appointment of a Receiver on the minds of the present consumers of current must be considered. It is very probable that such an appointment might have the effect of seriously disturbing the consumers' confidence as to the ability of the Company to continue to supply them in future without interruption, and it may be that existing consumers may take steps to make themselves entirely independent of outside supply.
Generally speaking, unless the Receiver is in a position to put forward and carry through a scheme of reconstruction almost concurrently with his appointment, it must be obvious that the appointment may have extremely detrimental effects on the interests of the Company and on all classes of security-holders and shareholders.
If the Receiver for any reason refuses to commit himself to contracts with possible new consumers, this may be interpreted as a breach of the concession and in short, the results following on the appointment of a Receiver may be such as to make a reconstruction as a going concern absolutely impracticable.
From the documents submitted to me, it appears clear that, based on Sir Arnold Gridley's estimates of output for the next few years, the net revenue arising in the three years to 31st July. 1933, will be inadequate to meet the service of the 5 per rent. Guaranteed Debenture Stock for Interest and Sinking Fund.
It also appears that approximately £150,000 is required (in addition to the cash at present in hand) to meet outstanding liabilities and to provide a small sum for working capital.
It therefore is apparent that it is necessary for the Company to raise at the moment a sum of not less than £250,000, and that unless the Treasury are prepared to provide temporary financial assistance, it would be difficult for the Company to raise this sum in any form other than that of a Prior Lien Debenture ranking in priority to all existing issues, including the 5 per cent. Guaranteed Stock.
Having regard to all the circumstances I suggest that the Prior Lien Issue should be for the amount of £400,000, £250,000 being issued immediately and the balance of £150.000 to be held in reserve in case of need. If this £250,000 could be raised
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on this basis, at a rate of interest of say 5 per cent., the position for the next three years to 31st July, 1933, would be as follows:-
£
Total net earnings for 3 years before any Interest charges (based on
the estimates of Sir Arnold Gridley)
250,000
Léss Interest on £250,000 Prior Lien Debenture 24 years
from 31st January, 1931, to 31st July, 1933
34,375
£215,625
Service of 5 per cent. Guaranteed Stock :-
Sinking Fund for 3 years
105,000
Interest for 3 years
187,500
£292,500
There is, therefore, a shortage of approximately £80,000 which would have to be found out of the £250,000 provided by the Prior Lien Issue, and the proceeds
of the Prior Lien Issue would, therefore, be utilized as follows:-
£
(1) Provision to meet the deficiency of net earnings to provide service for 5 per cent. Guaranteed Stock for 3 years to 31st July, 1933
(2) Amount required for present liabilities in excess of cash at
present in hand
80,000
120,000
50,000
£250,000
(3) Amount required for working capital
In view of the above, it will be obvious that if the creation of a Prior Lien is agreed to, it can only be made provided that a scheme of arrangement is carried through, providing for a moratorium for 4 years so far as the interest on the Federated Malay States Loan and 7 per cent. Participating Debenture Stock is concerned. It would also be necessary for the scheme to provide that the contribution to the Sinking Funds in respect of these two issues which are at present due to commence in 1934, should also be postponed say, for four years, until 1938.
I agree with the views expressed by Messrs. Mayo, Elder, and Rutherfords to the effect that in view of the position of the undertaking the Board would be failing in their duty to the various classes of security-holders, the unsecured creditors, and the shareholders, if they did not oppose the appointment of a Receiver at the present juncture without first calling meetings of these various bodies of interested parties and endeavouring to carry through a scheme of arrangement.
If, with the consent of the 5 per cent. Guaranteed Debenture Stockholders, a Prior Lien Issue on the lines mentioned above can be made in order to deal with the creditors and the service of the 5 per cent. Guaranteed Debenture Stock, the scheme of arrangement need only be between the Company, the Federated Malay States Government, and the 7 per cent. Participating Debenture Stockholders.
In the event of the issue of the suggested Prior Lien Debenture being opposed and there is no other means of raising the money, then, the Board should, in my opinion, submit a scheme of arrangement between the Company and its 5 per cent. Guaranteed Debenture Stockholders, the Federated Malay States Government and the per cent. Debenture Stockholders, leaving the responsibility of rejecting the scheme to these bodies. The Directors would then have done all that is within their power to preserve the Company's undertaking, and no suggestion of negligence could be made against them by the security-holders or the unsecured creditors and shareholders.
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Having considered the position of the various interests, I have drafted the Ileads
of a Scheme of Arrangement, and enclose it herewith for consideration.
I shall be pleased to discuss the matter in detail with your Board as soon as they have considered my recommendations.
Yours, &c.,
W. H. PEAT.
* No. 5.
† Enclosure 2 in No. 2.
‡ No. 2.
§ No. 4.
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