Mr. CAHAN:

I have no objection to the amendment. The words "executor, administrator, tutor" and so on are mentioned in the alternative. The matter was discussed, and we were under the impression that the expression "such capacity" referred to the particular capacity in which the person acted, namely either as executor, administrator, tutor, or any other capacity indicated in the section. However if the hon. member thinks that the word "any" clarifies the section, I have no objection. Personally I do not think it clarifies it. -

Mr. HANSON (York-Sunbury):

I would

ask What is the necessity for the use of the word "collateral" before the word "security" in line 44. That is a limiting phrase.

Mr. CAHAN:

The word "collateral" was

not introduced by me. It has been used in the Companies Act, and specific definitions have been given by the courts of the word "collateral." The term "collateral security" is thoroughly defined I think in law and in fact, and after a very lengthy consideration we decided to retain that phrase. There was one advocate who objected to the change, and I have no doubt that he has instructed my hon. friend in regard to the matter, but I cannot accept his view because collateral security is a .term clearly defined and clearly understood.

Mr. BUTCHER:

Why the change in subsection 2? It seems >to me that subsection 62 of the present act affords greater protection for creditors than does this amended section.

Mr. CAHAN:

The old subsection 2 read

as follows:

(2) Where the reduction does not involve either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, the Secretary of State may, if he thinks expedient, dispense altogether with the addition of the words "and reduced."

The words "and reduced" were formerly used for the protection of the creditors of the company but my hon. friend will notice that where there is no diminution of any liability in respect of unpaid share capital the creditor is protected, and where there is no re-payment to any shareholder of any paid-up share capital the creditor is protected. The company has the same assets as before, and in such cases it has always been the practice of the department not to insert the words "and reduced," because the creditors have exactly the same security for its debts and liabilities due to them as they had before the reduction of capital. But these are the only excepted cases, and we have made a short exception which certainly covers the cases in which the Secretary of State has discretion to dispense with the words " and reduced." We have in the practice of the

Dominion Companies Act

department many regulations which are not expressed in specific terms, which it is difficult to express in a statute, but in case of every reduction of capital the Secretary of State demands from the applicant a statement of its accounts verified by an auditor and verified also by affidavit, so that it is easily seen from the documents so submitted whether the interest of the creditor is prejudiced or not, and in every case in which there is any possibility of the interest of the creditor being prejudiced we insist on having it brought to the notice of the creditor and the receipt of a waiver from the creditor over the creditor's signature before we exercise the discretion which is vested in .the Secretary of State in subsection 2. I think that is about as near accuracy as we can reach.

Mr. BUTCHER:

I will read subsection 4:

Where a proposed reduction of capital involves either the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital, the Secretary of State may, if having regard to any special circumstances of the case he thinks proper so to do, direct that this section shall not apply as regards any class or any classes of creditors.

What relation is there between shareholders and creditors in this subsection?

Mr. CAHA.N: That has to do again with the reduction of capital. If any reduction of capital is proposed that involves a reduction of the assets of a company which would prejudice the rights and interests of the creditor, then the Secretary of State must intervene. This section as now submitted is taken from the English act. If a creditor or any class of creditors is thoroughly secured, it gives the Secretary of State a discretion in those special circumstances to direct that notice, et cetera, to creditors shall not apply. I have simply followed in this amended section the English act where the courts have found that if creditors were amply secured it was not necessary to go through the form of giving notice.

Mr. CAHAN:

I wish to delete the marginal note, Mr. Chairman, and substitute the words "supplementary letters patent confirming reductions," which is more accurate. As the marginal note is not subject to amendment by

[Mr. CahanJ

resolution of the house I am simply calling attention to it, and I would ask the officials of the house to change the marginal note accordingly.

Mr. OOOTE:

I do not know whether this is the correct section on which to direct this question to the minister. I am not very familiar with this bill, and have not had much time to devote to it. I should like to ask the minister just what supervision does the department exercise over the capital structure of companies that are incorporated. It seems to me that that is where many investors get into trouble, putting their money into stock or securities of companies that are overcapitalized. I have received many complaints lately from the shareholders of one company. I must admit I do not know whether it is incorporated under the dominion act or not. The company in question is Burns and Company Limited. The shareholders have invested in about seven million dollars of preferred shares of this company, and they are going to lose practically all the money that they have put into those preferred shares. Would the minister be good enough to give us an idea of the supervision exercised over the capital structure of companies that are being incorporated?

Mr. CAHAN:

Mr. Chairman, I have

spent many anxious hours over the question of the capitalization of companies by the terms of the original application and the issue of letters patent whereby the capital structure is limited in the first place, and secondly with regard to increases of capital which arise under section 48. The proposed capital of the company is indicated by the applicants in the petition to the department for incorporation by letters patent. How a department can ascertain whether any restriction should be placed upon the capital asked for is one of the most difficult questions in connection with the administration of the Companies Act. A company may be undertaking a work of construction, it may be a factory, a hydro electric station or some other engineering work and I assure the hon. gentleman that it is impossible for the department to revise the estimates of construction or the estimates of the probable outlay on the engineering work so as to determine with any degree of reliability that the amount of capital asked for in the petition is greater than the work necessitates. That would make necessary having an official in the department who could enter into almost every material

Dominion Companies Act

detail of the proposed undertaking and who is prepared to insert in the letters patent an expression of his own opinion which is contrary to the expert opinions of those engaged by the applicants to give them reliable estimates of the amount of capital required.

When increases in capital are required, under section 48-frequently the increases are so small that their necessity is obvious-we ask for the best estimates which can be given as to the application of this proposed increase in capital and the necessity for its issue. Having obtained that and the proper certificates from auditors and others, we are forced to rely largely upon the opinions and the certificates of auditors and the sworn statements of officials which are submitted to us. Beyond that we have no agency in the department which can be expected to give more reliable information than that given by the applicants on behalf of the company and that contained in the certificates of the engineers and agents which they have retained for the purpose of advising them.

Mr. COOTE:

I should like to illustrate

the case I am trying to put to the minister by referring to Burns and Company Limited. The securities of this company were sold for the purpose of purchasing and taking over the business of P. Burns and Company. The capital structure of the old company is shown here with 83,078,000 in first mortgage bonds and $3,943,000 in preferred stock, a total of 87,021,000. The capital structure of the new company shows $7,000,000 in first mortgage bonds and 86.900.000 in preferred stock, a total of 813,900,000. It will be apparent that the bonds were increased by 127 per cent and the preferred stock by 74 per cent. Certain extraneous assets belonging to the old company were not taken over. The increase averaged almost 100 per cent in preferred stock and bonds of the new company as compared with the old. As I say, I do not know whether this company was incorporated under the dominion act and it may be that I am taking up this matter in the wrong place. If so, the minister will correct me but, if not, I should like him at some stage of the discussion of this bill to advise the committee whether any steps are being taken in the drafting of this new bill to prevent occurrences such as those which took place in connection with this company. I might say that the preferred shareholders have had their equity almost wiped out. In the new company the management is confined to the holders of three management shares without

any par value. Although there is a total capital involved of nearly $14,000,000, the preferred shareholders have no say whatever in the management of the company. I should be glad if at some stage of the bill the minister would indicate what action if any is being taken to prevent such occurrences.

Mr. CAHAN:

I thank the hon. gentleman. I can make a statement on this section although there is another section which is very material and -relevant. My acquaintance with the particular company to which he refers is due to the fact that the company applied recently to have its letters patent amended under an order of the judge who had presided over the meetings held to consider the reconstruction of the company. From my examination of the statements and accounts which were presented I know that there were and are probably very material grounds for the complaint made by the hon. gentleman. In order that such conditions may be prevented so far as possible, we have provided in this bill, in another section dealing with prospectuses, that any company issuing shares or purporting to issue shares for sale must issue a prospectus, which prospectus must be in the hands of every person who buys a single share of stock from the company or its underwriter and which also provides that, if .there is any material misstatement in that -prospectus, the company issuing it shall be responsible. In regard to the conditions under which the prospectus shall issue and the information which must be disclosed therein, we have gone the limit in compelling a company organized for the purpose of taking over a pre-existing company to give complete information with regard to the financial .condition and the operating -profits and losses of the pre-existing company so that every -purchaser may have before him a most complete and detailed statement of the existing conditions for his own information. When we deal with prospectuses I shall be very glad to have any suggestion from the hon. gentleman or other -hon. members of the committee. This bill is not a partisan bill, its object is to protect the public so far as it is within the legislative jurisdiction of this parliament so to do and at the same time to permit companies whose undertakings are above reproach and criticism to carry out such undertakings in industry and commerce for the benefit of the whole country.

Mr. NEILL:

Will the minister allow me a question .there? He stated that under certain circumstances of -misrepresentation the issuing company would be held liable. Would

Dominion Companies Act

that company be criminally liable? If not, they could easily evade their civil responsibility by setting up a straw company.

Mr. CAHAN:

There are sections of the

criminal code which make directors who issue false statements liable. However, in the matter of criminal jurisprudence I shall have to submit to the more experienced judgment of my hon. friend the Minister of Justice, though I may say that if this discussion is postponed until we deal with the representations that must be made by a company issuing its shares, and the nature and extent of the information which must be disclosed, I shall be able to justify the statement which I now make to hon. gentlemen, that I know of no act in a British country in which the provisions are more stringent than those incorporated here.

Mr. COOTE:

Will the prospectus to be

issued under the new act, in connection with any company whose capital structure is being reorganized, require those issuing the prospectus to state the capitalization of the old company as well as the capitalization of the new? If not, will the minister consider making provision in that respect?

Mr. CAHAN:

All the material facts necessary to allow an intelligent reader of a prospectus to determine the actual financial condition of the old company must be disclosed, and if on further examination of these sections the hon. gentleman has any suggestions to make I shall be most happy to consider them.