§ LORD REDESDALE
rose to call the Attention of the House to the fictitious Character of the financial Arrangements for 818 the Construction of Railways by almost all new Companies and by many already established, and to the Manner in which Public Interest and those of Landowners, Railway Proprietors generally, and of the Holders of Railway Companies' Mortgages and Debenture Stocks are thereby affected; and to move. That the Report from the Select Committee to whom the Cork and Youghal Railway Bill was referred be printed. Those of their Lordships who remembered the circumstances attending the days when railway companies were first established were aware of the facility with which capital was acquired by them, and they would further remember that in the years 1845 and 1846 when speculation was indulged in almost to madness, the money required for railway concerns was obtained easily to a very large amount. Since then matters had gone on from bad to worse in respect to the actual production of the capital before the Bills were obtained; and at last the practice had reached such a pitch that he believed it was his duty to call the attention of the House and of the public to it; for he was convinced that, unless some change were effected everything connected with railways would be involved in the greatest possible difficulty. It was necessary first to consider the causes which had led to this state of things, and then whether it was in the power of legislation to apply any remedy to them. At the early commencement of these undertakings railways were commenced with a subscription for a considerable proportion of the amount required to construct them; and up to the time of what he might call the great railway mania these subscription contracts were, practically, very substantial things. Of course, they might have been sometimes entered into by persons who went beyond their means, and no doubt in some cases there were questionable signatures of persons who, for the sake of appearance, put their names down for amounts they could not pay up; but, nevertheless, as a whole, the subscription contract was a bonâ fide transaction. Up to 1845, 1846, and 1847 subscription contracts, except in particular instances, were still realities to a large extent among all those companies which were what might be called respectable rather than speculative; and there was still a very considerable amount of good subscription. But, after that time, speculation reached an extent that had hardly ever been known before or since, and the amount that was called for and the 819 number of schemes started became so immense that subscription contracts were in many instances great frauds, and in some cases they were proved to be so. At the same time, it was difficult to do anything even upon proof; persons put down their names, concerns were unsuccessful, and there was comparatively little notice taken of the matter. These things, however, cast a great slur upon the system of subscription contracts. At last they came to be carelessly executed; in a great many cases fraudulent practices were followed; the names of persons who never possessed the means of fulfilling the large engagements they bound themselves to were put down; the contracts came to be justly considered no security at all for the solidity of the company which was started, and Parliament, and those who were concerned in the business connected with Railway Bills, became so thoroughly disgusted, that subscription contracts were given up altogether, and, after much consideration, it was ordered that there should in all cases be a deposit of 8 per cent upon the estimated coat of the railway, which deposit was not to be withdrawn except under bond on the completion of the line, or upon the expenditure of more than half the capital subscribed. It was always intended by Parliament that the deposit should form a bonâ fide part of the capital of the company and should be part of the money available for the construction of the line. But this had entirely ceased to be the case; and, in point of fact, the deposit would be found now in no instance to form part of the capital for the construction of the line. The deposit was money borrowed merely for the purpose of meeting the requirements of Parliament, and instead of being a security for the stability of the company, it was a test only of the respectability or credit of one person or so connected with the scheme. It was no test whatever of the respectability of the company or of its competence to perform its engagements; it was, in fact, rather an impediment than otherwise to the completion of the line, because it was a sum of money borrowed at an enormous rate of interest, bringing a heavy charge upon instead of assistance to the concern. The result was that, except in the cases of lines promoted by established companies having good credit, and able to raise money upon fair terms, almost all the schemes proposed to Parliament were what were called "contractors' schemes," 820 got up by a contractor, an engineer, a lawyer, and a Parliamentary agent. In such cases the contractor practically obtained the money required, there being very little, if any, bonâ fide subscription; and, indeed, it had become almost impossible to ask anybody for a subscription, because a subscriber had hardly the remotest chance of getting any return for his money. The work being carried on upon credit, the contractor took shares in payment; he was obliged generally to dispose of those shares pretty much for what he could get for them, and, therefore, it was necessary either that he should receive the shares at a very considerable discount, or else that he should be allowed to charge a much larger sum than represented the value of the work he contracted to do. Take the case of a railway started under what were called favourable circumstances, and supported to a certain extent by the district through which it was to run. Perhaps it was to cost £300,000, or it was proposed to raise that amount of capital; £25,000 was subscribed by the landowners of the district through which the railway was to run, and the line, therefore, came before Parliament with the advantage of being a landowners' line, and the concern was supposed to be quite respectable. The work was commenced; in a year or two, £100,000 having been expended, the company was short of money, and then there was a Bill for additional capital—say £100,000—to be raised by preference shares, into which also the un-subscribed ordinary shares were converted. The result was that persons who had paid up their ordinary shares found the original capital exceeded by one which had precedence in the receipt of dividend. Hence, now-a-days, nobody would come forward to subscribe to scarcely any railway company. People said, "Get the line made; it does not matter who makes it." Yes; but the line constructed under this system would cost a great deal of money; and there was no security for the making of a line which would prove of the greatest convenience to a district and most suit the requirements of the inhabitants; on the contrary, it was very much the practice to select a route which would be most disagreeable to existing interests, and not the best one in connection with lines already made, but rather one which it would be the interest of some existing company to buy, in order to prevent the line falling into other hands. The result was that many lines were not laid 821 down in the best manner with a view to public convenience, and the existing lines were forced, year after year, into a large unnecessary expenditure. Moreover, these new schemes involved the established companies in enormous expenditure in Parliamentary contests. Before a Select Committee of the House of Commons, in 1864, Mr. Stewart, secretary of the London and North-Western Railway, stated that in that Session there had been introduced 161 Bills effecting the London mid North-Western Railway, and that there were no fewer than sixty of these that the company had been compelled to oppose. Their Lordships would readily see what a large waste of money such proceedings would occasion. Next, these speculative lines. Started with a view to the advantage of the promoters rather than of the public, became embarrassed, and then the established companies were compelled to buy them up, often on terms far above their real value. A very curious case was given by Mr. Stewart in his evidence—a scheme which might be quoted the more freely, because it was by no means a bad scheme in many respects, and there was nothing unusual or improper in the manner of its promotion The scheme was for a line projected by a contractor from the Uttoxeter Station of the North Staffordshire Railway to the Stafford Station on the North-Western Railway, it was opposed principally by the landowners of the district and by the two companies owning the lines it was to join—the North-Western and the North Staffordshire; and it was admitted by the promoters of the Rill that the scheme would not pay 2 per cent, and would not be carried out unless Parliament granted the powers asked for in the Bill, which were running powers over the lines of the other companies, and power to use their stations. Mr. Stewart stated that the North-Western had just expended £80,000 on their station at Stafford, and pointed out the injustice of allowing the pro posed line to make use of it without paying anything for it. He (Lord Redesdale) would not say that the line did not deserve some consideration on public grounds, because the Bill was passed by a Committee by no means inexperienced, which granted more or less of the powers asked for; but the line was an extraordinary one on account of the advantages it obtained. The line was only twelve miles long; it was to cost £130,000; and there were borrowing powers for £40,000. The Bill was 822 passed four years ago; the line was not yet completed. In 1865 the company came to Parliament for power to raise £50,000 additional capital; and he believed the line was to be opened in the course of the present summer. At a meeting of the company held on the 12th of March last it was reported that the completion of the line had been delayed by circumstances over which the directors had no control. The sudden death of the partner of Mr. Field, the contractor, and the necessity of making fresh arrangements with his representatives, had seriously retarded the progress of the works which were then being pushed forward with the utmost energy. At this meeting the directors were empowered; to vest in Mr. Field the additional share and debenture capital authorized to be raised in consideration of his undertaking to complete the line, erect permanent instead of temporary stations, and discharge all the liabilities of the company. But what was the state of the company from the beginning? In reality it began with no company at all; and it was not until the Bill had passed and the line was started that steps were taken to find subscribers, The Directors circulated an advertisement, in which they stated the enormous advantages they had got under their Act, and that they had got a contractor to complete the line in eighteen months. Those statements, of course, made a great difference in regard to the receipts, and in this way they sought to obtain the subscribers of the capital. Now, he thought it was clear that none of the original subscribers were ready to take the additional capital, when it is announced that the whole of that capital was transferred to the contractor in order to enable him to complete the line and relieve the company from all engagements. He could not say whether the capital would cover all the expenses, but he inclined to think that it would. Now this was, in its way, a respectable company. The contractor was a man of great respectability, and be was of opinion that this was by no means a bad case. It showed, therefore, what the best cases were. But all their Lordships who had had any experience of railway concerns were aware of the extent to which many companies carried proceedings of an objectionable kind. Some schemes which had been brought before their Lordships' House bad shown transactions of a character which certainly did not reflect much credit upon the persons who had the 823 management of those concerns. Last year occurred the Hartlepool case, in which the borrowing powers were carried to an extent that excited a great deal of astonishment, and was much condemned. But he wished to direct their Lordships' attention to the last case which had occurred. The facts were embodied in a Report which had been laid upon the table a short time ago, and afforded a good illustration of the manner in which the affairs of some railways were conducted. He was alluding to the case of the Cork and Youghal Company, which was established a long time ago, and ought to have ceased to exist long ago, but, in consequence of a practice which had become a great deal too easy, it continued to carry on its operations by repeatedly obtaining from Parliament an extension of time. At last it fell almost into a bankrupt state; but, in spite of this, it was taken up by some speculators and was started with an authorized capital of £500,000. The company was now in fact bankrupt, and then the Bill now before their Lordships was introduced for winding up the concern and selling it to the Great Southern and Western Company of Ireland for £315,000. which appeared to be an ample price for it. The Report stated that in addition to the capital of £500,000 the directors had raised, by means of Lloyd's bonds, the sum of £206,000, and that they had allowed to be put into circulation by Mr. Lewis, the financier of the directors, the sum of £165,000 in the shape of Lloyd's bonds, which were to be given in exchange for old Lloyd's bonds, but which old bonds were never returned to the directors, and also the sum of £30,000 of mortgage debentures, under similar circumstances; making in the whole a total of £926,000 as a claim against the company. The directors now repudiate the bonds given to Mr. Lewis which were to be given in return for the old bonds; but it was owing to their culpable neglect that these new bonds were placed in circulation, and with the knowledge of Mr. Lewis' improper conduct they continued him as a director and in their confidence. Mr. Lewis became bankrupt in 1865, and then ceased to be a director. The Committee remarked that these Lloyd's Bonds did not appear to have been given, with one trifling exception, directly to contractors and others in payment for work done, but to Mr. Lewis to raise money upon as he best could for the purpose of the directors. None of the directors, of whom Sir Cusack 824 Roney was chairman, had appeared before the Committee to explain these matters, and the Committee had been unable to ascertain how much money had been received by the company from the putting in circulation the Lloyd's Bonds which were negotiated by Mr. Lewis with various finance companies. Now, it might be supposed that such proceedings as these were of rare occurrence. Still, it was a necessary consequence of there being practically no company at all and the directors being merely the nominees of those who were raising the money for the purpose of constructing the line. In many companies, indeed, there was no real direction at all. The contractor was obliged to have a company and directors to enable him to raise the money; but in many cases persons were qualified as directors by shares given to them by the contractor himself for that purpose, and of course did whatever he bade them. The nature of Lloyd's Bonds was, no doubt, by this time pretty clearly understood by their Lordships. They were a species of security invented by a very ingenious gentleman, who discovered a method of evading a special Act of Parliament which had been passed for the purpose of preventing railway companies from issuing any securities except those which they were authorized by Parliament to issue. These bonds enabled companies to raise almost any amount of money; and the result of course was very great embarrassment, while, unfortunately, it was very questionable whether the holders of them would not he placed on an equality with, even if they did not take precedence of, mortgagees of the company who held their security under the Parliamentary authority. Now, this was a very great evil, both in itself and because nothing was more important than that the security of railway mortgages and debentures should be put on a secure foundation. As long as these practices were allowed it was obvious that such investments could not be so perfectly secure as it was desirable that they should be. One of the largest companies now in existence had applied to him yesterday to sanction the payment of dividends out of capital in order to enable them to raise capital to complete certain works which they had on hand. There was then considerable danger with regard to the general security of railway property, and it was important that it should be placed on a sound foundation. All sorts of little tricks were now going on. There was the case of a contractor's line 825 —a branch line with a capital of £100,000, but which the line it proposed to join was not disposed to take charge of. The contractor accordingly made a certain number of the persons in his employ shareholders, and called a meeting, at which he announced that the line was completed, that it would no doubt be a profitable scheme, and he engaged to work the line for five years, and guarantee the share holders 5 per cent for their money. All this was proclaimed in the country and London newspapers, and the effect was that it raised the value of the shares, and an extension line was announced, the cost of which—another £100,000—was to be raised by preference shares; the consequence was that the preference shares were all taken up; the contractor obtained what he wanted—credit for his capital—which enabled him to obtain money on very fair terms; and whether or not that line paid 5 per cent after the time to which his guarantee extended was no concern of his. He believed, however, that the system was coming pretty nearly to a break-down, Their Lordships had, no doubt, seen the announcement of the failure of a very largo contractor who owned a great number of the Welsh lines, and he believed me of the most respectable of his class; and they had also read of the failure of one of those finance companies, the transactions of which ought to teach the public a lesson as to the way in which money was advanced, lie believed it would be found that other finance companies, established for the purpose of bolstering up this system, would find themselves in a very doubtful position. One evil of the system was increased cost of construction. In a case which bail come under his notice a railway company had been obliged to give between £60,000 and £70,000 more for a line than the sum for which it could have been constructed if they had provided that railway accommodation themselves. It might be said that if the system which he was con derailing were stopped, no more railways would be made. He believed the effect of stopping it would be to give a check to the construction of railways for a year or so until a sounder system was introduced; but ho also believed that it would lead to the schemes propounded being more carefully prepared in order to secure public support. At all events, the present system was injurious to railway companies, to share holders, and to landed proprietors. The owners of land were kept in great uncer- 826 tainty as to the manner in which they were to be treated. It had been proved in evidence that some parties had been kept waiting for three years without receiving any certain information as to whether their land was to be taken. This sort of thing prevailed all over the country. Complaints had reached him on the subject from private individuals, whose representations were entitled to every attention. With a better system, if the scheme was a good one, I the money would be easily found, and directly the Bill passed arrangements made for taking the necessary land. There was another point to which he wished to advert, It would be very desirable that shareholders should pay a little more attention to the way in which their affairs were managed. This year the Caledonian, the North-Western, and the Glasgow and South-Western Companies promoted schemes the share capital of which amounted to £11,000,000. This staggered persons somewhat; and a meeting of the shareholders of all three companies was held to consider the matter A representation was made to the companies, which led to the abandonment of some of them to the amount of several millions sterling. Power was given to railway companies to amalgamate without Parliament knowing the terms on which the amalgamation was to be earned out. If the directors were obliged to submit the terms of the amalgamation to Parliament, it would be open to any shareholder to object and appear before Parliament. This would lead to greater caution us respect of amalgamations. If be could advise shareholders, he would say, "On no account, if you can avoid it, allow a contractor to have the slightest influence in the direction" At present, in too many instances, contractors exercised an enormous influence on railway Boards. Another advice he would; give them was to reduce the number of directors If there were too many men; on a Board, the business of a company would not be attended to with the closeness which characterized the proceedings of a small and efficient Board. Directors were paid something small for their attendance, and enjoyed some privileges as regarded travelling on the line. That was all they got in the way of remuneration. Now, nothing was more expensive than amateur management. If be could make his voice heard by railway companies, be would advise them to have the direction reduced in number, and to pay the directors well. If 827 they did that, they would secure men who would give their whole time to the interests of the company, and the company's affairs would be managed in a satisfactory manner. One great disadvantage arising from having a large body of directors was that it lessened responsibility. If the number was small, any particular connection or influence prejudicial to the interests of the company would be soon discovered if it operated in the board room. It was obvious that a small line worked by one of the great companies and with its shares at a very low ebb might sell itself to great advantage to the large companies. One never knew how far speculation might go; but it was quite conceivable that a contractor holding a very large amount of shares, possibly having the whole of those of the smaller line in his hands, might find means to influence several of the directors in the larger concern parting with some of his shares to them and making a handsome profit himself out of the remainder. With such large bodies of directors it was impossible for shareholders to exercise adequate supervision over their actions; and anybody who knew how railway business was conducted, how much was done by the secretary and traffic manager, must feel persuaded that large bonds were unnecessary. The largest company, he felt convinced, might be efficiently directed by six or eight men. With that number of directors, all well paid, and devoting their whole time to the management of the affairs of the concern intrusted to them, improvements would be made that would change the whole system of the railway world. That was his private opinion, formed as the result of much experience; and the shareholders of the various companies could act upon it or not, as they might think expedient. With regard to what Parliament had in its power to do to improve the existing state of things, he believed that something might be done towards making deposits really available for the construction of the line. The Committee of the House of Commons appointed to inquire into the subject recommended the adoption of measures with that end in view; but their Report came at the end of the Session, and when the proposal was made the various interests affected found means very easily to put it aside; with what success the proposal might be renewed he was, of course, unable to say, but in such a matter he held that their Lordships, equally with the other House 828 of Parliament, had a responsibility from which they could not escape. And although he was desirous on all occasions to act as much as possible in concert with the other House of Parliament, and although the Standing Orders of both Houses had been brought practically into uniformity, he did not see why upon some occasions they should be afraid to take the lead in suggesting improvements. After Easter, therefore, he should certainly propose certain Standing Orders with regard to deposits, allowing ample time for their Lordships, for the other House of Parliament, and for the public to consider the effect of those Standing Orders before seeking to have them adopted. Once they were adopted, they would become binding on suitors before Parliament whether the other House adopted them or not. At the same time, any example set by one House which might prove advantageous for the public interest would very soon, no doubt, be followed by the other—so that practically they would be acting in concert. He regretted that the subject had not been in abler hands to place before their Lordships; but, having greater facilities for obtaining knowledge upon questions connected with Private Bill legislation than many of their Lordships, he had felt it his duty to bring this matter under their attention. In the discharge of the duties of his office unopposed Bills to a very large number were left in his hands, practically, to be dealt with as he felt to be right; and naturally any suggestions or counsel from their Lordships would be invaluable to him in the discharge of such responsible duties. Their Lordships, unless informed of the exact state of the case, would naturally feel great hesitation in adopting any new regulations such as the circumstances when explained seemed to render advisable. He trusted he had said enough to put their Lordships in possession of the facts, and to convince them that he had not needlessly intruded upon their time.
§ EARL RUSSELL
said, their Lordships, he had no doubt, would be of opinion that the noble Lord the Chairman of Committees had rendered great service to the House by placing before it in so clear and intelligent a manner questions growing out of the subject with which he possessed amore minute and accurate knowledge than any other of 829 their Lordships. The statement made by the noble Lord was one that required the most serious consideration at their Lordships' hands, Possibly the principles which the noble Lord had laid down might, on examination, prove most suited to attain the end in view; but he apprehended that the mure convenient course would be, as the noble Lord had suggested, to place upon the table as soon as possible any Resolutions which their Lordships hereafter were to be invited to sanction.
§ THE DUKE OF CLEVELAND
desired to convey his thanks also to the noble Lord the Chairman of Committees, whose great experience and official knowledge had enabled him to place before their Lordships so clear and able a statement. He was enabled entirely to confirm what had been said by the noble Lord with regard to fictitious deposits, and believed that the time would come when something must be done if they wished to stop the evils which had already arisen and must continue to arise under the present system. A great mistake had been made in abandoning altogether the subscription contracts. These were given up under the impression that they had become altogether fictitious; but under proper restrictions it would have been possible to render them at once more stringent and more beneficial. What was needed was the appointment of some public officer charged specially with the supervision of these matters, whose duty it would be to see that the requirements in each case were not evaded, lie felt convinced, with his noble Friend, that the time had arrived when Parliament should really take this subject into consideration, and devise some more effectual means of preventing the system of levying black mail upon old established companies by the formation of new lines got up by contractors. The interest of these contractors lay not in the quality of the work, but in the work itself. With the assistance of experienced actuaries they ascertained what amount of stock could be floated in London, and of tins they acquired a sufficient quantity to pay themselves remuneratively for the outlay—of course, at the ultimate expense of the line which was unfortunate enough to be called into existence under these circum stances. The result was that lines were projected and made which were not in them selves of a remunerative character, but which proved an obstruction to the making of other lines more beneficial to the shareholders and the public.
§ LORD EBURY
said, he was enabled to corroborate much of what had been stated by the noble Lord the Chairman of Committees, having had painful experience in his own person of some of the evils which had been described. One of the greatest evils tending to decrease the profits of railway companies was the persistency with which the directors opposed schemes projected in opposition to their own. If the money spent in litigation between railway companies were expended in making new lines, the result would be attended with increased convenience to the public and profit to the shareholders of both undertakings. The London and Brighton Company, in which he was a shareholder, was threatened with much opposition from the London, Chatham, and Dover Company; he, therefore, wrote to the Chairman of the Brighton company asking him not to spend his money in litigation on that account, because ho believed the Brighton company could not now carry its very large traffic, and it was to the advantage of the public and the profit of the shareholders that a new line to Brighton should be made by some one. With respect to the Boards of Directors, he regretted that it had become too much a habit of late to seek for titled persons to conduct railway companies—and, what was worse for Members of the House of Commons—with the hope that their influence in the Legislature might be used in behalf of the company with which they were connected. He trusted the noble Lord who had introduced the subject to their Lordships would pursue it further, and that his action would lead to a satisfactory result.
§ THE MARQUESS OF LANSDOWNE
rose to endorse the views of the noble Lord the Chairman of Committees; and remarked that it was evidently to the interest of agents, contractors, and others interested in the proceedings before Parliament to invent as many new schemes as possible. It was quite time, in his opinion, that these men were kept within bounds
§ THE EARL OF WINCHILSEA
said, ho was of opinion that legislation was more called for upon this subject than upon many questions which were now demanding the attention of the Government, He trusted that Her Majesty's Government would give consideration to the subject, and would bring forward a well adjusted scheme, such a one as would tend to the national advantage.
§ Motion agreed to. (Parl. Paper, No. 63.)