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Facts for the times!
Railway finance
No .2«
By tfB" • Reprinted (by
permission) from the Pall Mall gazette.
No. 2.
RAILWAY FINANCE,
Reprinted (by permission) from " The Pall Mall Gazette
BY
" B."
"Tlie Times are out of joint."—Hamlet.
It
• | LONDON;
J PUBLISHED BY WATERLOW & SONS, 24, BIRCHXN LANE.
T 18B7.
MVAj wiv, Li. G„
Lorirsc'-.:
OF EOCi'• M tf-OHANlc
fiEZ ■ ir 1'
The following papers are reprinted from the Tall
Hall Gazette, in the hope of suggesting a definite
answer to a question, frequently asked just now,
and not generally very clearly answered. That
question is—What is the nature and extent of
legislation required, in order to restore confidence
to railway shareholders and soundness to railway
finance ?
Some persons say that Parliament ought not to
interfere. They declare that shareholders must look
after themselves; that they invest at their own
risk: and have only their own credulity to thank if
they lose their money.
These assertions are unjust: railway shareholders
have not been allowed to look after themselves:
they have been the victims of adverse legislation.
Parliament has been wrong in two particulars. Pirst,
it allowed railway companies to raise capital by
means of terminable debenture bonds—secondly,
after assuming to itself the sole power of determin¬
ing what new lines should be constructed, it has
been reckless in its decisions.
With regard to the first:—If any undertaking
other than a railway company were to invest in
permanent wrorks its whole capital, one-third of
that capital being borrowed money payable by in¬
stalments ; and if such undertaking relied neither
on profits nor on reserve capital, but solely on new
4
loans, for tlie means of paying each successive in¬
stalment ; what would be thought of its financial
position ? It is of course too late now to recall the
issue of railway debenture bonds, but Parliament
having sanctioned such a system ought to take care
that the laws which regulate it are at least free
from ambiguity.
The other allegation, that Parliament is in a great
measure responsible for the defects of rail way finance,
is supported by the second of these papers.
If it be true that Parliament caused the disease,
it ought certainly to apply the remedy.
I.
WHAT IS THE VALUE OE RAILWAY
DEBENTURES ?
A few months ago certain debenture holders of
the London Chatham and Dover Railway, alarmed
at the non-payment of interest on their bonds,
determined to exercise the powers of foreclosure,
which, as mortgagees of the undertaking, they
possessed. The Vice-Chancellor to whom their ap¬
plication was made, ordered a manager to take
charge of the defaulting railway for the Court of
Chancery, and appointed a receiver of the tolls and
moneys earned from day to day.
The Lords Justices of Appeal, before whom the
matter was subsequently brought, reversed the deci¬
sion of the Vice-Chancel] or, as far as regards the
appointment of a manager, and limited the action
of tlie receiver to certain specified portions of the
receipts. The reasons upon which this reversal was
founded were stated a few days ago by Lord Justice
Cairns in an elaborate judgment, which presents
many points of interest, but which, on one point
especially, has taken the non-legal portion of the
public quite by surprise, and will undoubtedly affect
injuriously the value of all railway securities. The
point in question is, whether the security of deben¬
ture holders extends to the surplus lands of a com¬
pany so as to entitle them to have a receiver ap¬
pointed for the moneys arising from the rents and
sale of such surplus lands.
The argument of the debenture holders was this :
—That the whole undertaking—in other words, the
capital, the borrowed money, the land, the proceeds
of sale of land, the permanent way, and the rolling-
stock of a company—is included in the security
offered by the debenture bond; therefore it was only
reasonable that certain surplus land which formed
an immediately available asset of the London Chat¬
ham and Dover Railway should at once be sold and
the proceeds paid into court for their benefit.
It is probable that a great number, possibly even
a majority, of those who have invested in railway
debentures would entertain a similar belief. Lord
Justice Cairns, while delivering a judgment which,
unless upset hereafter by the House of Lords, en¬
tirely demolished this theory, acknowledged and
deplored with great feeling the ambiguity of the
law which has rendered such an opinion possible.
" Although I have arrived," he said, " at the opinion
f)
" which I have expressed without hesitation, I can-
" not avoid feeling regret that securities such as
O O
" railway debentures, upon which so mnay millions
" of money have been invested, should have been
66 left at their creation in a state to admit of so
" much argument as that which had taken place in
" this case, and that their legal operation and extent
" should come to be defined, not at the time when
" they have been given as security, hut after diffi-
<c culties have arisen in their repayment."
Lord Justice Cairns pointed out that the terms of
a debenture bond set forth the particular under¬
taking upon which the security was given, and
pledged as security all the tolls and sums of money
arising upon or out of it. If the argument of the
debenture holders were admitted, it would follow
that the moment a company Dorrowed money the
mortgagees might impound not merely the surplus
lands as claimed in the case before him, but the
capital, the cash balances, the rolling-stock, and
even the money which they had themselves advanced.
It would thus depend on the caprice of debenture
holders whether the railway should be constructed
at all. But Parliament, in conferring great and
important powers over private property to a trading
company, does so on the avowed ground that a great
public benefit will accrue from the exercise of these
exceptional powers. It is obvious that the Legis¬
lature could never contemplate the possibility of
powers thus conferred on public grounds being
rendered nugatory. The term " undertaking " must
therefore be taken to mean the completed railway
7
from which alone returns of moneys or earnings can
accrue.
Lord Justice Cairns had at an earlier period of
his argument pointed out that the surplus lands
were, for the most part, lands forced upon the com¬
pany under the Lands Clauses Consolidated Act by
owners who refused to have a severed part of a
tenement or field left upon their hands. This
description of surplus land the company are bound
to resell again within a certain time ; it thus be-
i
comes, either in the shape of land, or money
resulting from the sale of land, part of the autho¬
rised capital of the company.
It follows that the debenture holders, being
debarred from seizing the capital of the company,
and thus reducing it to an unfinished "under¬
taking'' incapable of gaining profits, are debarred
from seizing the surplus lands, which are a part of
the capital.
This decision may well create some dismay among
debenture holders. The feeling will hardly be
allayed by the significant remark of Lord Justice
Turner, who expressed his entire agreement with
the judgment and the reasons of his learned brother,
and observed that " there was no occasion for alarm
" at the nature of the security of the debenture
" holders of a railway company that is carrying on
" business at a profit, as the debenture holders have
" the first charge on the profits earned." How are
debenture holders to decide that point for them¬
selves ?
The truth is that the whole question of railway
8
debentures and tlieir value as Security requires to
be most carefully considered. It is not too much
1o say that no railway in Great Britain is in a posi¬
tion, when its bonds become due, to pay them off
out of the profits or out of funds in hand. Bonds
have hitherto been issued on the assumption that
when they become due it will be easy to borrow
money to pay them off, and so, by constant bor¬
rowing, to convert a nominally terminable into a
practically perpetual debt. But so great is now the
distrust of railway securities that this expedient
must no longer be relied on; and railway com¬
panies must compare notes very seriously and un¬
reservedly with the bondholders.
The original theory of a railway debenture has
long been lost sight of. It was at first assumed
that railroads would pay large dividends, and that,
although those dividends might fluctuate in amount,
and thus present a certain amount of risk, there
would always be the probability of a large profit.
It was thought that a quiet class of investors, who
would shrink from the risk and turmoil inseparable
from the position cf shareholders, would consent to
accept a small fixed profit in consideration of the
unexceptionable nature of the security offered—the
security, namely, of the whole earnings, and as was
generally (though, as it now appears, erroneously)
supposed, the whole available assets of the under¬
taking. Parliament sanctioned the issue of deben¬
ture bonds to the amount of one-third of the paid-
up capital. Under that regulation the system has
proceeded till some great railways owe on debentures
9
alone twelve or fourteen millions sterling which
come due at the rate probably of not less than
£4,000,000 a year. Looking at the earnings of even
the richest companies, it is impossible to suppose
that they can repay out of income such enormous
sums ; yet no railway, except a very few which have
actually or virtually declared themselves insolvent,
has failed as yet to provide for its debentures as
they fell due. The money has been raised either on
debentures authorised but not yet issued, or in some
instances by the expedient of borrowing " tem¬
porarily in excess " of the authorised debenture debt,
paying with the sum so borrowed the debentures
actually due, and when relieved of them, issuing
fresh debentures for the amount. Some companies
even persuaded Parliament to insert in the Acts
regulating their capital, clauses legalising loans con¬
tracted for the purpose of paying off bonds falling
due, whether such loans were in excess of the
authorised borrowing powers of the company con¬
tracting them or not. This absurd laxity produced
its natural effect. In process of time the tempta¬
tion to borrow not only temporarily but perma¬
nently in excess of what is called the parliamentary
borrowing powers became too strong for some of
the more extravagant companies. They did not
replace the sums borrowed, and the whole deben¬
ture issue of companies so in excess became ipso
facto illegal. Public confidence was rudely shaken
in all railway securities, the good and the bad alike;
Parliament took the matter up, and by an Act
passed last Session provided that every bond issued
10
•
should bear upon the face of it the declaration,
signed by responsible officers of the company, that
the bond so issued is not in excess of the authorised
borrowing powers. If a bomb-shell had fallen into
their board-room, directors of railways that had no
borrowing powers in reserve could not have been
in greater consternation. The only way open to
them for paying the vast sums constantly falling
due on expiring debentures was borrowing tem¬
porarily in excess; the declaration required ren¬
dered that course impossible.
But it is not only railways which have exceeded
their borrowing powers that are likely to experience
inconvenience. Many of the principal railroads in
the kingdom—perfectly solvent—with traffic re¬
turns daily increasing, and revenues ever augment¬
ing—have millions to pay daring the present year,
and rely solely upon being able to borrow money to
meet their obligations. If small sums were in
question, part of the debentures might perhaps be
renewed, and bankers might lend money for the re¬
mainder without security for a limited time. But
the sums are of enormous magnitude, and investors,
after the decision of Lord Justice Cairns, will at
least be not more likely than before to renew their
advances. This state of things is so widespread,
indeed so general in the railway world, that the
question must be firmly met. A panic which might
occur among debenture holders if the truth suddenly
burst upon them may be averted if the matter be
timely and accurately explained. Alarm indeed is
unnecessary: all the well-managed railways have
11
ample assets, the worst that could happen would be
some delay in realizing them. Distrust has un¬
doubtedly arisen owing to the reckless management
of certain lines ; but the greater number have been
conducted with a fair degree of prudence, though on
a yicious system, for which the Legislature is re¬
sponsible. Parliament has been as greatly in fault
as the railways. It has encouraged railway ex¬
tension far beyond what the actual requirements or
the state of trade in the country required. It has
allowed engineers and contractors to come before it
with fictitious capital, and with scarcely the pre¬
tence of enquiry it has authorised lines useless for
all purposes except that for which they were
designed, to set existing companies by the ears, and
stir up parliamentary contest in which the plunder—
for it can hardly be called by a milder name—should
be counted by tens of thousands. It has imposed
conditions with regard to borrowing powers, and
allowed them lightly to be broken. It has, by
unsystematic and even contradictory legislation
made the chances of bills before its committees so
uncertain as to tempt gamblers and speculators to
try their luck, and it has thus fostered a reckless
financial spirit among the railway world which is
*
now bearing its evil fruit. After doing all this,
after actually sanctioning by legislative enactment
breaches of its own law, it turns round and imposes
an iron rule, which no one can deny to be just and
right, which ought to have been imposed and adhered
to without relaxation from the very first, but which,
imposed suddenly when all the mischief is done, is
undignified if not absurd.
12
II.
CONTRACTORS' LINES.
The correspondence which has been published
between Lord Redesdale and Mr. Erance upon the
subject of railway finance forms a curious chapter
in the history of railway enterprise. Mr. Erance
described himself at the Bar of the House of Lords,
and on the title-page of his pamphlet " Lord
Redesdale and the New Railways," as a railway
contractor. In the capacity of apologist for the
class to which he belongs, he states] with curious
frankness the real manner in which what are called
contractors' lines are made. Nothing could more
clearly show the class of enterprise fthat jhas been
fostered by our reckless system of legislation than
the facts stated by Mr. Erance.
Lord Redesdale wrote a letter to the Times, dated
8th of January, in which he says :—" The system
es of contractors' lines has broken down, and money
" can no longer be proeured in that way to the
<c extent it has been, but it may be found as well as
" formerly for well chosen lines, placed under
" efficient and honest direction." This statement
provoked the ire of Mr. Erance, who wrote a pamphlet
to prove, first, that Lord Redesdale] ought not to
write to the Times about matters which might here¬
after come before him in a quasi-judicial capacity—
a point upon which we express no opinion; and
secondly, that the greatest public benefactors of
modern days have been the railway contractors.
13
Without their aid, argues Mr. Prance, half the rail¬
roads which have been constructed during the last
few years would never have been made. The public
convenience demanded the construction of new
lines, and the only way to satisfy that requirement
was to allow contractors to finance them as they
could. To those who look upon railways as subject
to the same laws as other mercantile enterprise, the
obvious answer to this assertion would seem to be
that those who require a given object must pay for
it; that there is abundant capital in England to
construct any work which affords a reasonable pros¬
pect of remuneration: and that if capital cannot be
attracted to a given nndertaking, it is 'prima facie
probable that a proper interest on outlay cannot
reasonably be anticipated. If these axioms of com¬
merce be agreed to, the corollary would follow that,
if those who wanted a given line will not pay for it
themselves, and cannot find others to make it for
them, they ought to go without it rather than make
it by unfair means. Such, however, by no means
appears to be the view of those who have for some
years back worked our railway extension. Si possis
recte has been their motto—if possible by bona fide
share capital—si non, quocumque modo.
The term " contractor's line " is probably better
known to the public than its exact meaning. To
understand it, we must go back a little to the early
history of our railway system. The first railways
were constructed with capital raised during what
was called the railway manias of 1836 and 1815.
But there came a period of collapse in 1846, and
H
the losses on shares were so severe that the confi¬
dence of the public was destroyed; profits on ordi¬
nary shares were almost nil; shareholders' lines
were no longer constructed. The smaller companies
were amalgamated with others, and in a short time
hundreds of independent companies merged into
eleven great trunk lines, which divided almost the
whole of England between them. New lines, when
they were made at all, were ct financed," to use the
modern term, by amalgamations, leases, guarantees,
and preference stocks. About 1858 the great com¬
panies had exhausted their funds; they made
treaties with each other, keeping each to its own
territory, and endeavouring each to develop its own
system. But the public were not satisfied. Every
town wanted a railway direct from its own market¬
place to the metropolis. Railway contractors, a class
created by the great railway development of the
previous twenty years, also determined that there
should be no cessation of the system of railway con¬
struction by which they had become rich. The
public wanted new lines,but would not come forward
as shareholders. The great companies opposed the
proposed lines in Parliament, and spent untold sums
in defending their monopoly. Under these circum¬
stances the contractors gradually elaborated a system
of financing by which they first found the money
for the works and then constructed the line.
The great art of making a good contractor's line
was to project it in such a manner that one of two
rival companies, each anxious for the integrity of
its own " territory " and eager to invade that of a
15
rival, was sure to take it up. Even if neither did so
at first, it was easy when once the new line was
constructed to compel' one or other to come to terms.
But to do this the assistance of Parliament was
necessary, and it was here that the recklessness of
our legislation was most signally exhibited. A
company once authorised by Parliament, and having
conferred upon it compulsory powers, to dispossess of
their lands and houses, individuals whose property
]ies in the track of the projected line, ought in
justice to receive some consideration from the legis¬
lature. The only ground on which interference with
the rights of private property can be justified is that
private interests must yield to public requirements.
On the faith of the deliberate decision of Parliament
that such and such a railway was necessary and
ought to he carried out under Parliamentary sanc¬
tion, enormous investments of capital have been
made. The main lines of the kingdom, so author-
•
ised, are planned with a sufficient regard to public
interests. It is certain that if left to themselves
sufficient traffic would pass over them to en¬
sure to their shareholders considerable profits. The
trunk lines once made, public convenience demands
that some minor lines, connecting outlying districts
with the main thoroughfares, should be sanctioned
by Parliament. It may be taken for granted
that any extensions, planned by hostile projectors,
will diminish the profits of the main line, first
by the amount added to its capital stock,
secondly, by increasing the working expenses.
The shareholders of the 'original line are bound
to submit to this if it is proved that a public
benefit will ensue greater than the inconvenience
inflicted upon them. But they may reasonably
complain if Parliament, before it interferes with
their property, does not take due care that an ade¬
quate public benefit will result. If, therefore, the
extensions proposed to Parliament are such that no
one, if left to himself, would dream of constructing
them as a commercial speculation—if they interest
the public so little that no one is willing to take a
shilling's worth of their stock—the legislation which
sanctions such lines may fairly be characterised as
reckless interference with the rights of private pro¬
perty. Parliament might from the first have left
the matter alone; there would then have been free
trade in railways, and every one would have taken
such care as he could of himself. Government, as
in Belgium, might have taken railroads entirely
into their own hands—it could then have done
whatever it pleased subject only to Parliamentary
sanction. But when Parliament decided upon ex¬
ercising a general supervision, it was bound by
every principle of equity to take due care that its
interference was not wanton or vexatious.
To apply this principle to contractors' lines:
parliamentary legislation was really so reckless that
the most flimsy reasons were deemed sufficient to
justify the authorisation of new lines. Parlia¬
mentary committees allowed themselves to be de¬
ceived by the most open violations of the regulations
they had themselves invented to secure fair play.
Subscription contracts, which wrere designed to test
* 37
the solvency of parties proposing to construct new
railways, were admitted without question when they
were notoriously mere waste paper. Mr. France men¬
tions one such contract, evidently without seeing
that he is proving the rottenness of a whole system,
not of one point only of that system, and that his
own case in favour of contractors is governed by parity
of reason, and stands or falls* with the system he is
demolishing. The line of which he speaks was the
Slrfewsbury and Welshpool, but that is of no
moment. I well remember," writes Mr. France,
" how the counsel for the Great Western revelled
" in the dissection of that subscription contract.
" Counsel, on these occasions, aim at being witty,
<c and an analysis of a list of nonentities, with any
" number of thousands opposite their names, was
" treated by our lamented friend Mr. Serjeant
cc Wrangham just as he would treat a good joke,
6< producing considerable merriment, and in which
" the committee could not help occasionally joining.
" In fact the whole affair of the subscription con-
" tract was treated as a burlesque, and such it un-
" doubtedly was."
Subscription contracts were at length abolished,
but other plans equally illusory, were substituted.
The main point we want to enforce is that no
difficulty was ever thrown in the way of utterly
fictitious enterprises, and that parliamentary autho¬
rity, which over-rides every other kind of title
known to the English law, thus lent itself to the
invasion of rights conferred by itself.
It has often been made a matter of complaint
that the great companies resisted the extension of
railway exterprise ; that they were selfish ; that but
for their opposition every town in England would
long ere this have had its railroad. Have those
who echo this language—we do not say the con¬
tractors who originate it, for they know its import
full well—ever paused to inquire what is its real
meaning ? It is, in plain English, that the contrac-
2
18
tors' lines are lines which, on commercial principles,
ought never to have been constructed; that they
cannot be built, or worked when built, except at a
loss ; that those interested in them, the inhabitants
of the towns to which they run, and the travellers
who use them, would not become shareholders and
construct them with their own money; that it was
necessary, in order to* get them worked at all, to
force existing railroads, by means of vexatious
powers freely conferred by Parliament, to assfime
the responsibility of them to the detriment of their
own dividends. We have no hesitation in saying
that Parliament has, by its reckless legislation,
fostered a system which cannot be defended on
sound commercial principles. Any contractor who
came before it with a wild scheme and a fictitious
subscription contract, obtained his act, and inflicted,
under the guise of conferring a public benefit, a
grievous wound to the prosperity of some existing
corporation, which deserved at least to be protected
by Parliament from vexatious or fraudulent attacks
upon its prosperity.
Mr. Prance, in his late pamphlet, gives an ac¬
count of the making of a contractor's line. It must
be remembered that the object of Mr. Prance's
letter was to prove that since nobody would come '
forward to make railways, contractors must be
looked on as public benefactors, because they did
what nobody else would do. " Those who conclude,"
says Mr. Prance, 44 that the issue of nominal capital
" is an index to the actual cash cost are certainly
" not among the initiated. It is not my business
44 to inform them; because I conceive that those
44 who are not pecuniarily interested have no more
" right to ask a contractor what margin he or his
" friends retain than they have to ask an insurance
" office out of which individual insurer they expect
" to make most profit." All this is quite true as
regards those who are not pecuniarily interested;
but is it equally fair to keep investors, who actually
19
do find the money, equally in the dark ? Mr.
Prance tells us how the Shrewsbury and Welshpool
line was constructed. 44 The entire purchase money,"
he says, 44 for the purchase of the land and the
" construction of the railway was provided by the
44 contractor's party. Prior to the work being
44 actively commenced a working agreement was
44 entered into with the London and North Western,
44 and under a rebate arrangement included in that
44 agreement it- was supposed that the public might
44 take up some of the shares. But even this was
44 illusory, for ordinary investors could discern no
44 absolute guarantee, but a contingent one only,
44 and this class of investors will not purchase the
44 ordinary shares of a new railway unless guaran-
44 teed. The result was that when the London and
44 North Western came to purchase the line out and
44 out, which they did when it proved a success,
44 they found that they had to make that purchase
44 not from the public, but from the contractors'
44 friends." 44 This is the basis," he says further on,
44 on which the bulk, if not all, of the contractors'
44 lines are now made ; and I do not see what there
44 is in it to excite so much of your lordships'
44 wrath."
We would not presume to translate this account
into plain English, but we may point out how in
other parts of England contractors' lines have been
made. The process bears some analogy to that
described by Mr. Prance. A line is required which
no company would think of making as a mere com¬
mercial speculation, but which, if made, would
damage the interest of, say, the Great Northern, or
the Midland, according as it fell into the hands of
the one or the other. It is only a few miles in
length ; it can be made very cheaply ; for it is to
be a contractor's line, and is made to sell, not to
work. The company that finds it most incon¬
venient must lease or buy it, finish it, strengthen
the bridges, improve the permanent way, find the
20
rolling stock, furnish the stations, and open it for'
public traffic. The line itself can be made, we will
assume, for £300,000. A board of directors is
assembled, and the contract for making the line is
given to a contractor for £500,000, at which price
the nominal capital of the line is authorised by
Parliament. Borrowing powers to the amount of
one-third of the capital are to be exercised when the
■whole of the capital shall have been subscribed for
and half of it paid up. The contractor subscribes
at once for the whole £500,000, which is placed in
the names of his nominees. These go to a finance
company, and pledge the stock, backed by the con¬
tractor's personal guarantee, for what they can get,
probably about half its nominal value, £250,000.
This sum is paid to the credit of the company at their
bankers. The bank-book will then show that the
whole capital has been subscribed for and half of it
actually paid up. Upon this evidence a magistrate
certifies that the requirements of Parliament have
been complied with ; debentures to the amount of
one-third of the capital, viz., £166,000 can then be
issued. The capital, if such it can be called, has now
played its part. Other securities, vast quantities
of which are always passing through the hands of
a great contractor, are substituted as security for
the £250,000 advanced, and the whole capital of
£500,000 is available for issue to the public, at such
discount as wrill float it in the market. Mr. Prance
says truly that " investors will not take ordinary
"sharespart of the £500,000 is therefore placed as
preference stock, bearing five and a half or six per
cent, interest, in the hands of persons who are per¬
fectly unconscious that the ordinary stock, over
which they hold a nominal preference, does not
exist at all. "We have purposely avoided confusing
the narrative of an imaginary transaction with
complications such as a real affair would have to
"encounter. Minor expedients, such as issuing stock
at a discount, acceptance by contractors of Lloyd's
21
bonds, &c., grease the wheels of this complicated
machinery for trading* with fictitious capital. It
will be seen that the only persons who have put
actual value into the concern are the preference
shareholders, who have subscribed on the faith of
an ordinary share capital that does not exist, and
the debenture holder, who has a mortgage on the
profits of the line. As such a line was not built for
the purpose of earning profits, the worth of the
debenture bond may be easily estimated.
Parliament must necessarily devise some means
for giving such lines into the hands of debenture
creditors. Having authorised, by virtue of its
supreme authority, the creation of a vast amount
of fictitious capital, the Legislature is bound by
every consideration of honour and expediency to
neglect no opportunity of repairing the consequence
of its own neglect.
Ill
WHAT OUGHT TO BE THE PRINCIPLE OP
RAILWAY LEGISLATION ?
The Government are at least entitled to the credit
which attaches to courage and promptitude. Hardly
a day was allowed to elapse after the meeting of
Parliament before Sir Stafford Northcote brought
forward the proposal of Her Majesty's Ministers
with regard to railway finance. We fear that, how¬
ever much we may appreciate their good intentions,
the scheme described by Sir Stafford Northcote is a
failure. The Minister frankly enough acknowledged
that he was hardly sufficiently acquainted with the
subject to explain it fully to the House, and he in¬
vited members to abstain from discussion till they
had the Bill itself before them.
Of course it would be impossible under present
circumstances to enter into details, but it can hardly
be doubted that in a speech which occupies two
columns of the Times, Sir Stafford Northcote must
have laid down at least the principle upon which he
22
desires the Legislature to proceed. Sir Stafford
stated as an axiom that the interests of the public
only, as distinguished from those of creditors or
shareholders, were fit subject of legislation. 44 They
44 must look upon railways as undertakings which
44 had been especially favoured by Parliament, not
44 for the sake of shareholders, creditors, or other
44 persons interested in them, hut as undertakings to
44 which great facilities had been given because they
44 were considered important to the communications
44 of the country; wherefore they had a right to say
44 We will take care that these undertakings shall be
44 so conducted as to be really of advantage to the
44 public." Upon this he argues that it is manifestly
for the interests of the public that railways should
he in the hands of solvent managers, and proceed^
to invent an elaborate machinery by which the affairs
of what he called insolvent companies shall be in¬
vestigated and controlled.
It is strange that one ordinarily so clear-headed as
Sir Stafford Northcote, should not perceive that his
proposition is founded upon a mere confusion of
ideas. The public, by which Sir Stafford Northcote
means the travelling public, who use a given railway,
have no more interest in the financial stability of
the company which conveys them than Sir Stafford
himself has in the capability of the cabman who
drives him down to the House to pay his rent. If
the railway conducts the public safely and punctually
to its destination, and the cabman successfully ac¬
complishes the perilous navigation of Parliament
Street, both have performed their contract, and may
pardonably resent any inquiry into their private
concerns. We grant that if any railway were in
such a state of insolvency that its permanent way
was allowed to fall into decay and its rolling stock
to become unsafe—if its officials were unpaid and
negligent, its trains unpunctual or less frequent than
heretofore—or if there were any symjffoms of a
collapse which would cause the line itself to be shut
23
up, and travellers to be deprived of the advantage
of a highway—then, indeed, a case would have been
made out for interference on behalf of the public;
and Sir Stafford's elaborate machinery, objectionable
as it is, might possibly be better than nothing, inas¬
much as it would, at whatever expense of hardship
and ruin to individuals, replace the public in pos¬
session of a right. But it has never been pretended
that any line is in danger of such collapse. The
London Chatham and Lover Hallway itself has
never yet caused a through passenger to the Con-
. tinent to miss the Calais packet, nor does the
Canterbury lawyer complain that he is unable,
through the laches of the company, to find his way
to Westminster Hall, The Great Eastern Bailway,
which declares its own financial position to be
44 exceptional/' so exceptional that, according to the
Times, there were only £3. 7s. 2d. left to divide
when all accounts were paid, among the ordinary
shareholders, only required for working expenses a
little more than 50 per cent, of its receipts; so that
had it been necessary for the accommodation of the
public, it could have afforded to expend nearly
double the amount that it actually did expend in
conveying passengers and goods. Of course the
creditors of the line would in that case have suffered
as well as the shareholders, but there would have
been no need, as far as the public are concerned, to
call in the aid of Sir Stafford Nortlicote, inasmuch
as the public has all it is entitled to demand when
it is conveyed from place to place at prices fixed by
Parliament.
If, then, the public is, as Sir Stafford Northcote
assumes, the only body for whose advantage Par¬
liament ought to care, no case is made out tor any
legislation at all, and the Bill which he has intro¬
duced need not be proceeded with. But the case is
such that argument upon it cannot by possibility be
confined within the narrow limits which Sir Stafford
, Northcote would impose upon it; indeed, he himself
speedily loses sight of his own proposition, and
24
plunges into the vexed question of the relative pre¬
cedence and rights of judgment creditors, debenture
holders and shareholders in a very helpless and be¬
wildering manner. These points, which are, indeed,
the real points at issue, the gist and marrow of the
question—must, he says, he settled; hut he inti¬
mates, with a faint effort to catch hold of his slip¬
pery principle, they must he disposed of, because it
is contrary to the interest of the public that they be
kept in abeyance. We agree with him in thinking
that they must be settled, but we do not agree with
him in thinking that the public have anything to do
with the matter, except so far as they are interested
in seeing the national faith kept with multitudes
who have invested their savings in railways on the
faith of legislative enactments slovenly in theory
and wholly illusory in practice.
Having got hold of a wrong principle to start
with, Sir Stafford Northcote's further reasoning is
necessarily faulty. It is most desirable that a
speedy and efficacious tribunal should be constituted
by which questions of railway finance should be de¬
cided. Sir Stafford Northcote finds that machinery
in the Board of Trade. With extraordinary logic
he argues that because the Court of Chancery is
prevented by the state of the law from entering
npon judicial investigations, for which it is em¬
inently fitted, therefore the duty of investigating
such questions should be devolved upon a tribunal
which knows nothing whatever of law. One would
think that the obvious course would be to re¬
move the restriction and empower the Court of
Chancery, strengthened if necessary by an addi¬
tional Vice-Chancellor, to deal with railway cases ;
but though Sir Stafford admits that the Court of
Chancery would be fully able to deal with the
question, he doubts the policy of calling in its as¬
sistance. "No doubt," he said, "if that court pre-
" pared a scheme it would be so contrived as to do
" substantial justice between shareholders, deben-
25
44 ture holders, and other creditors; but the court
44 would not be the best machinery for framing a
44 scheme which would also consult the interest of
44 the public."
We have already shown that the public have
nothing to do with the matter. The only persons
concerned are those who have invested money in
railway undertakings. Surely they have a right to
demand that their case, involving legal questions of
the utmost nicety, should at least be argued by
lawyers before a legal tribunal, and not be brought
up for judgment before the Board of Trade. We
are disposed to do full justice to gentlemen in the
public offices, they are for the most part clever and
hard-working men, but there are four hundred mil¬
lions of money invested in railways, and no one can
tell how many millions of that amount are, or will
be in dispute ; even the Board of Trade might break
down under the unaccustomed pressure of judicial
responsibility.
There is one point in Sir Stafford Horthcote's
speech which we hardly venture to construe ac¬
cording to the strict meaning of the words. Yet it
seems evident, either that he has fallen into the
mistake of confusing a shareholder in a company
with the creditor of a company, or that he has made
a proposal which on reflection he would be unable
to justify. His scheme provides that, under cir¬
cumstances to be set forth in the Bill, such as want
of funds to carry on the concern, pay the creditors,
&c.,44 it should be lawful for a certain number—two
44 or three creditors or shareholders of a company—
44 to present a petition to the Board of Trade praying
44 that the Board would order an investigation into
44 the circumstances of the company."
How if it were granted that the Board of Trade
is the best tribunal for railway causes, it would be
reasonable to allow creditors who could not obtain
their money to put its machinery in action; but is
it necessary or right that such a power should be
26
extended to shareholders ? A shareholder is not a
creditor, but a partner. Already a single share¬
holder may obtain the appointment of a committee
of investigation, and institute a most searching
inquiry into the affairs of his company, provided lie
can, at a general meeting called for the purpose,
obtain the concurrence of a majority of the share¬
holders there present in person or by proxy. The
plan is very simple and is often adopted; it works
well,because people are generally vigilant and stern in
their requirements where their own property is con¬
cerned. Does Sir Stafford Northcote propose to
abolish that mode of action, and confer on " a eer-
te tain number, two or three shareholders of a com-
" pany," the power of bringing the railway in which
they are partners under the ken of the Board of
Trade, without regard to the wishes of their co¬
partners? If he does, he will put into the hands of
shareholders, who may disagree with their directors
or their co-partners, an engine of annoyance so
tremendous that railway enterprise will become im¬
possible, to the great detriment of the public, in
whose interest Sir Stafford's proposal is avowedly
conceived.
We dissent, then, from almost every proposition
of Sir Stafford Northcote's Bill, so far as it has
been explained to us. We are decidedly of opinion
that our legislation must aim. at settling the con¬
flicting rights and claims of creditors and sliare-
o o
holders, whose interests Sir Stafford expressly ex¬
cepts and sets aside. But the question what is to
be done is beset by a preliminary difficulty. Our
present law is of so faulty a nature that we are
caught between the horns of a dilemma. Any
legislation which we may adopt must provicle
machinery for administering the affairs of insolvent
companies. Such companies must be sold for the
benefit of their creditors or the management of them
must pass into their creditors' hands. " The com-
" pany," to whom for public objects Parliament has
entrusted great powers, will thus cease to exist, and
27
\
will be replaced by a body of persons other than
that to which, after due investigation, the manage¬
ment of a public highway has been entrusted. If, on
the other hand, matters are left as they are, for the
first time in our history the shield of Parliament will
be held up between bankrupts and their creditors ;
and persons who have hypothecated their property
will be allowed to remain in the enjoyment of their
estates though unable to pay the mortgages.
There can, however, be little doubt that the first
evil, even if it should occur, will be considered the
least of the two. But it has not yet occurred. The
London Chatham and Dover Bailway has earned
all along sufficient to pay its judgment creditors—
those who supplied it with iron, oil, coal, and neces¬
saries required from day to day in the working of the
line; so that the creditors would have no right to fore¬
close. The bondholders, though unpaid, have as yet
no right to foreclose ; no law now passed could alter,
ex post facto, the value of the security on which
they made their advances. Lord Justice Cairns did
not declare that the machinery was wanting
for seizing the assets upon which the debenture bonds
were secured, but he said that, owing to the state of
the law, the security offered by those bonds was not
so good as the bondholders supposed it to be. The
Legislature could not be called upon to interfere,
even though the bondholders who lent on insuffi¬
cient security should lose their money. It can only
be expected so to amend the law that future bond¬
holders shall not be placed in a like position.
Parliament, therefore, may proceed undeterred by
the fear that it will thrust the management of any
existing railway into incompetent hands. An atten¬
tive consideration of three main questions will
suggest the nature of the alterations to be made :—
1. What has rendered fresh legislation necessary at
this moment ? The inability of some railway com¬
panies to pay their engagements, and the discredit
which their misfortunes or crimes have brought on
all railways, the good and bad alike. 2. What are
28
the main points upon which popular distrust has
been excited ? hirst, the fact that it is possible to
evade the law regulating the power of railways to
borrow on mortgage. Secondly, that the mortgage
when given has been found not to convey the secu¬
rity which those who took it were led to expect;
Thirdly, the inability of the law courts to give relief
to creditors of railways who claimed their protection.
3. Why is the law, which is quite strong enough to
protect other creditors, incapable of protecting the
creditors of railways ? Because railways are ex¬
pressly exempted by Act of Parliament from the
action of the law which regulates the administration
of the assets of other bankrupt companies.
Having before us the principle upon which our
legislation should be based, and the points upon
which the law requires amendment, it can hardly
be a matter of any great difficulty to decide upon
the manner in which the amendments shall be
effected.
IV.
EAILWAY LEGISLATION.
Since it has become evident that Parliament must
do something in the way of amending its railway
legislation, a thousand financial nostrums, some con¬
taining elements of worth, a few offering really
valuable suggestions, and many altogether wild and
unpractical, have been offered for its consideration.
. Mr. Dudley Baxter in a paper read before the
Statistical Society, proposes that a sinking fund
shall be instituted to purchase for the State a portion
of the railway capital, and that the proceeds shall
be applied towards paying off the National Debt.
Mr. Livesey, in a pamphlet called " A Einancial
Scheme for the Belief of Bailway Companies," pro¬
poses that the railway companies should form them¬
selves into an association, and under Parliamentary
sanction become jointly and severally bound for
each other to the extent of all their loan capital,
and that a general stock be raised on their united
security to be called the Bailway Consolidated
29
Stock. Money, lie thinks, could be raised on the
joint credit of all the railroads at a cheaper rate
than on the unassisted credit of one. Upon the
first of these schemes it is sufficient to remark that
before the State purchases any portion of the railway
capital it had better see that railway finance is put
on a sound and healthy footing, so that the capital
to be purchased shall represent actual ^alue : that
before thinking of paying off the National Debt, it
will be advisable to do all that can be done by
legislative means to enable railways to meet their
own debts. With regard to the second scheme,
there is no obvious inducement for shareholders to
assume any share of the liabilities of other companies
than their own. In the very improbable event of
Parliament promoting and carrying out such a scheme
of consolidated liability, it would he necessary—first,
to examine the financial position of any railway which
might wish to join the association, and then to take
such legislative steps as might be necessary for
placing it on a sound basis.
The consideration of these and all similar schemes
(for those which we have adduced are only specimens
of a numerous class) may safely be postponed till
Parliament has done the work that lies ready at its
hand. Mr. Watkin has brought in a bill which, as
far as it goes, is in the right direction. The bill
consists hut of four clauses. It is defined as a bill
for affording better security to the holders of rail¬
way debentures ; it proposes that the 64 undertaking"
of a railway—which was defined the other day by
Lord Justice Cairns as comprising the capital, the
borrowed money, the land, the permanent way, and
the rolling stock—shall be security for the payment
of interest or dividend on the debenture debts of
such railway. This, as we have said, is right as far
as it goes; but it does not go far enough. Por
what is called the great companies—and we suspect
that it was of the great companies only that Mr.
Watkin was thinking when he drew his hill—it will
be sufficient if followed up by legislation necessary
30
to give it full effect: but solvent companies only
can take advantage of it, and as a rule the great
companies only are solvent.
We pointed out in a former paper how great com¬
panies, with many millions of share capital held by
bona fide shareholders, with vast sums of money
borrowed on mortgage and invested in the improve¬
ment of the undertaking, with vast traffic ever
augmenting, and vast receipts ever increasing, might
yet, after the decision of Lord Justice Cairns in the
case of the London Chatham and Lover debenture-
holders, be in great straits for the means of paying
off debentures falling due, The ground upon which
that difficulty was anticipated was not that the
great companies were insolvent, or even badly
managed, but that the reckless conduct of some
railways had brought discredit on all; and at the
moment when public distrust was at its height, it
was found that the security offered by a debenture
w7as not what people supposed it to be. Lord
Justice Cairns pronounced that a railway debenture
was secured only on the profits of a line, not on its
capital or its plant: the profits were in most cases
ample to secure the interest of the debenture debt,
but where that debt amounted to manv millions,
it was obvious that yearly profits could not satis¬
factorily secure the principal. This being the state
of affairs, we expressed a doubt whether the public
would be willing to renew the debentures as they
fell due; and as there is no means of raising money
to pay them off except by the issue of fresh deben¬
tures, much difficulty might therefore arise. Mr.
Watkin's bill, if it passes into law, will remove this
difficulty. The great companies who have really
something to mortgage will gladly accept its pro¬
visions ; and people who now hold debentures which
have been pronounced of little worth will gladly
exchange them for a real first mortgage, thus
becoming possessed of a full instead of an insufficient
security. This will suit both parties. The railways
will obtain the renewal of the debentures, which
31
they might have had great difficulty in paying off,
and debenture-holders will breathe freely when all
doubt as to the nature of their security has been
dispelled. We must however add that, however
satisfactory an escape from present difficulty may
be offered by Mr. Watkin's bill, the question whether
the issue of debentures is a sound expedient of rail¬
way finance is entirely unaffected by it.
But there is a large class of railways to wdiich
Mr. Watkin's bill will bring no help. We speak of
contractors' lines, and small branch lines not made
by the greater companies. These lines have in
many instances been made without any real share
capital at all. They have been "financed" by con¬
tractors, who, by dexterous manipulation of securities
have managed to issue debentures unbacked by any
capital stock. They have been promoted and con¬
structed by engineers and contractors, not to work,
but to sell. The objects of those who undertook
them were attained when the enormous gains of
financing the undertaking were realised and the
profits on construction pocketed. Nothing then
remained in many cases but the debt. The line itself
was leased to some neighbouring company, which
furnished its stations, supplied its engines, carriages,
servants and workshops. Such railways have no
security to offer but the rent at which they are let.
Even this is in many instances hazardous, as it con¬
sists only of a rebate, or per centage on the receipts.
The debenture-holders of such lines are really the
rightful owners. It is is a mockery to offer them
the security of engines and carriages which roll past
their stations, but which do not in any way belong
to the line.
Eor cases like these further legislation is required.
The debenture-holders must be empowered to seize
all the available assets, and realise what they can.
Sir Stafford Northcote's bill provides that inspectors
shall be appointed by the Board of Trade. We have
already expressed our opinion that a public office
cannot with any propriety be called upon to exercise
ji^dicial functions; It seems the more unnecessary
to create a new machinery when there is one actually
in existence that is fully equal to the task. Lord
Justice Cairns, in the judgment we have so often
quoted, pointed out in effect the real difficulty which
prevented the action of the Court of Chancery
against an insolvent railroad was that Parliament,
the supreme court of justice in the kingdom, had
created a corporation which a subordinate court—
such as that of Chancery—had no right to pull to
pieces^ s Nothing, then, is wanting but to remove
the restriction, and to allow the Court of Chancery
to deal with insolvent railways as it would with any
other insolvent corporation.
It is possible that the Court of Chancery is already
over-burdened, and that the existing machinery of
the court would be insufficient for its new duties.
Even now, we are informed, cases are usually first
heard by the chief clerks, who give judgment ivith
the authority, but without the responsibility, of
judges. These gentlemen are usually attorneys, and
their view of the law is so far from satisfying the
minds of suitors that the Yice-Chancellors are con¬
stantly applied to for the purpose of setting their
decisions aside. The Yice-Chancellors, it is said,
are in the habit of supporting, wherever it is at all
possible, the decisions of their subordinates; and,
if we may believe the common talk of the legal
profession, the unsound law thus sanctioned is a
main cause of the large numbers of appeals now
made to the Lords Justices. If Mr. Watkin's bill
should become law, and instead of Sir Stafford
North cote's inconvenient plan, an additional Yice-
Chancellor were appointed to preside over a court
which should take special cognizance of railway
causes, and if, moreover, the existing provision
exempting railways from the ordinary action of the
law of insolvency were repealed, a most material
step would have been taken towards restoring rail¬
way finance to a sound condition.
^aylord Bros.
Makers
Syracuse, N. V
pAT, JAN. 21, 1938