17644
R
SIR,
No. 186.
(SOUTH AFRICAN RAILWAYS.)
LAW OFFICERS to COLONIAL OFFICE.
[Position of Bondholders of Selati Railway.]
Royal Courts of Justice,
ut.
May 13, 1903. We were honoured with your commands, signified to us by Sir Montagu Ommanney in his letter of the 25th April last, stating that with reference to our previous reports regarding the Selati Railway he was directed by you to invite our attention to certain further questions relating to the position of the bondholders.
That the Transvaal Concessions Commission reported as follows with regard to the bondholders:-
"55. Such being the history of the Company, it remains to be con- sidered how the Debenture holders and shareholders should be dealt with. No suggestion was made before us that the holders of Debenture bonds were in any way cognisant of the frauds perpetrated in connection with the origin of the Concession and the formation of the Company, and they hold an instrument by which the late Government 'guarantees and renders itself responsible for the repayment of the capital and the regular payment of the interest to the holder. The Special Commissioner of the late Government 'duly authorised to that effect,' countersigned the bond, and before the first issue was made wrote to the representative of the issuing house that the guarantee of the Government was 'independent of any default of the Com- pany in performing the terms of the concession,' a statement which he repeated in writing before the second issue.
.
"56. Under these circumstances it appears to us that the bondholders hold duly acquired and valid obligations of the Government of the late South African Republic, and though it may be well to repeat that there can be no duty on the new Government to place the Debenture holders in a better posi- tion than they held under the late Government before the outbreak of the war, we are compelled to recommend them, subject to this observation, to the favourable consideration of His Majesty's Government."
That the bondholders had obtained the following opinion of Counsel showing that His Majesty's Government should accept the liability of the late Government in this matter:-
Selati Railway-Opinion.
"We are of opinion that the obligations of the late Government of the South African Republic under the bonds in question, though not enforceable in any municipal Court against the Government which has now succeeded (see Cook v. Sprigg, 1899, A.C. 572), are such as ought, according to well- recognized principles of International usage, to be assumed by the annexing Power. Any question as to the extent of character of the liability so assumed should, in our opinion, be determined according to the same causus of construction and the same rules of law and equity as would have been applicable if the Government whose territory has been annexed had still been in existence. It follows that the question whether the present Govern- ment can, without violation of the principles of International usage above referred to, insist that the bondholders shall first exhaust their remedies against the Company before having recourse against themselves, must the late Government during its existence depend upon whether
In our opinion could legitimately have put forward that contention. the late Government could not have done so. Even assuming that the obligations of the late Government under the bonds were not greater than those of a surety, according to English law by which the rights in question must be determined, it is well settled that a creditor may at once sue the
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TLC.O. 885
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2
surety as soon as default has taken place, without first suing the principal debtor or having recourse to his securities.
"On payment the surety has the right to have a transfer of the securities and rights held by the creditor, but not until payment. See Ewart v. Lattow, 4 Macq. 983 re Lockey 1 Ph. 509 and Jackson v. Digby, 2 W.R. 540.
In our opinion, however, the late Government under the bonds were not merely in the position of sureties, but undertook a direct .obligation towards the bondholders, and made themselves responsible directly and as principals, for the payments to be made thereunder. The liability of the late Government under the bonds is, in our opinion, altogether independent We cannot con- of the concession or any default in performing its terms. ceive, therefore, how it could be legitimate in determining whether the liabi- lity under the bonds ought to be assumed, to take into account any breaches of the concession, more particularly as an express statement, by the Ministers then representing the late Government, to the effect that the bonds were independent of the Concession, was published with the knowledge and consent of such Ministers, in each of the prospectuses under which the bonds were offered for subscription, and as the bondholders have themselves in no way been parties to any violation of the terms of the concession.
December 2, 1902.
R. B. HALDANE.
H. H. ASQUITH. FELIX CASSEL."
That in reply to the question whether His Majesty's Government were bound to accept liability for the debentures, we stated in our opinion of the 27th_of February, 1902,* that it was a matter of International usage, adding that His Majesty's Government might, in accepting such liability, annex any reasonable terms and conditions to enable them to get possession of the fund in Court or other assets. That though our opinions had never laid down anything so distinct as was laid down in the opinion of the bondholders' Counsel, they agreed that it would be in accordance with International usage that the obligations of the South African Republic (with respect to these bonds) should be assumed by His Majesty's Govern-
ment.
That it did not, therefore, appear to be possible to repudiate the liability. That the practical question rather was what conditions could be annexed to the acceptance of it. That the condition which it would seem might be fairly annexed, apart from requiring the bondholders to help His Majesty's Government to get possession of the trust fund, which would, of course, be preliminary to any settle- ment, was that His Majesty's Government should not place them, as the Concessions That this principle was Commission said, in a better position than before the war. accepted in our opinion on the 18th of February last.t
That with regard to the bondholders' position before the war, he was to observe that they had a direct guarantee as regards both capital and interest from the South African Republic, similar, in fact, to that of the N.Z.A.S.M. bondholders to whom His Majesty's Government admit liability in full. That the debentures of the Selati Company were, according to Art. 25 of the Concession to be "guaranteed direct to the holders by the South African Republic with an annual interest of 4 per cent.,' and "they will be redeemable by the Government at par at any time the Government may think proper," and that in the prospectus of the debenture issue of 1893 atten- tion was called to this right. That having the direct guarantee of the Government independent of the default of the Concessionary Company the debentures were, in point of fact, equivalent to a Transvaal Government Stock, and that as the South African Republic continued to pay on them long after stopping payment on the shares, they were evidently so regarded by the investing public. That it was now suggested that His Majesty's Government would be justified in declining to pay off the bonds at par, as that would be paying more than the market value before the war, which was an equitable measure of the bondholders' position at that time, and that they should take as the basis of payment the average of, say, the last three years before the war, which would give a figure some points under par. That as
• No. 131.
↑ No. 179.
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regards the rate of interest, it was suggested that the guaranteed rate of 4 per cent. should be paid pending the paying off of the bonds, as that was the rate actually received by the holders before the war and was not, like the face value of the £100 bonds which stood in the market below par, a paper value. That no interest would, of course, be paid in respect of any period before the date of the annexation of the Transvaal.
That the principle underlying the above proposal was that the definite written obligation of the South African Republic did not necessarily descend to the present Transvaal Government in precisely the same form, not being a legal obligation enforceable in the Courts of the Transvaal or Great Britain. That if it did, the superior credit of a British Administration would probably invest the bonds with a higher value than they in fact had in the time of the South African Republic. That the obligation was rather that of International law or equity, and was an obligation not to fulfil the letter of a contract but merely substantially to save the creditors of the late Government from loss, when His Majesty's Government by annexing have taken the place of that Government.
That he was to request that we would take these papers into our consideration and advise whether, in our opinion, His Majesty's Government were bound to pay off the bondholders at par, or whether they were entitled to pay them off at a price based on the actual market value of the shares before the outbreak of war?
What rate of interest should be paid pending the repayment of the capital? We have taken the matter into our consideration and, in obedience to your commands, have the honour to
Report-
That, in our opinion, His Majesty's Government is not bound to pay off these bonds at par as this might be giving a value added by the fact of the conquest. The face value of the bonds before the war is the standard. On this the quotations are not perhaps conclusive, and it may be a question whether as a matter of policy the par value should not be given as it does not appear that the difference would be very great.
(2) We do not see upon what principle any other rate of interest than that provided by the bonds, viz., 4 per cent., should be paid.
We have, &c.,
The Right Honourable
Joseph Chamberlain, M.I'..
&c.. &c..
&c.
R. B. FINLAY. EDWARD CARSON.