In the Matter of Auscott Ltd

[1998] FCA 607

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 3077  of  1998

IN THE MATTER OF AUSCOTT LIMITED

AUSCOTT LIMITED
ACN 008 436011
Applicant

JUDGE:	EMMETT J
DATE:	27 MAY 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

HIS HONOUR: I have before me an application pursuant to section 195 of the Corporations Law for confirmation of a reduction of capital by Auscott Limited (“the Company”).

I am satisfied that the Company has complied with all of the formalities for the convening of a general meeting and the passing of a special resolution for the reduction of its capital.  Its paid up capital is $108,000,000 divided into 216,000,000 shares of 50 cents each.  There is effectively only one shareholder of the Company, namely J.G. Boswell Company, an American corporation.  While there are five shareholders, that corporation is the registered owner of 215,999,996 shares and is the beneficial owner of the other four issued shares.

The resolution for reduction of capital provides for its reduction to $28,000,000 divided into 56,000,000 shares of 50 cents each.  The capital is intended to be returned to J.G. Boswell Company.  However, the return is to be funded by a loan of $75,000,000 by J.G. Boswell Company to an Australian Investment Trust which will in turn lend that sum to the Company on a long term basis.

In order to comply with a class order of the Australian Securities Commission, the Company and its subsidiaries have executed deeds of cross guarantee.  Accordingly it is appropriate for the purposes for which I am considering these matters to consider the consolidated accounts of the Company. The consolidated accounts as at 30 June 1997 indicated that the Company's total shareholders equity was in excess of $136.5 million.

However, when the matter first came before me, I expressed some concern at the proposal.  The concern derived from pro forma accounts which have been prepared for the purposes of this application. A pro forma consolidated balance sheet as at 30 June 1998, after taking account of the reduction of capital, showed total current assets of $93.922 million and total current liabilities of $108.244 million.  My concern was that, in accordance with a rule of thumb often applied for the purposes of determining solvency, the Company was apparently insolvent.

The business of the Company is the production, marketing and processing of raw cotton.  The Company has been very profitable since 1993.  Its net profits after tax for the past five years have been as follows:

1993	$7,255,638
1994	$2,648,626
1995	$7,552,716
1996	$12,362,515
1996	$11,805,574

The Finance Director of the Company has estimated that its profit for the year ending 30 June 1998 will be $11,381,000 after tax.

The Company's business depends principally on cotton farming and ginning.  Accordingly, its income flows from the time of harvesting cotton, from April to July, to the ultimate sale of the cotton, which occurs between April and November.  The Company brings to account for the purposes of each financial year that portion of the crop sold and delivered up to the end of the financial year.  That comprises approximately 60 per cent of the prior year’s crop and 40 per cent of the current year's crop.

The Company’s principal banker is Australia and New Zealand Banking Group Limited (“ANZ Bank”).  The Company’s current facilities with ANZ Bank include a Multi Option Funding Facility (“the Facility”), which is presently drawn to the sum of $40,614,496.  The Facility is shown in the pro forma balance sheet as a current liability.  However, part of the funds drawn under the Facility has been used by the Company for the financing of a new cotton gin costing approximately $20,000,000. 

ANZ Bank takes the view that the Company’s drawings on the Facility which have been used to finance the construction of the gin are represented by the real property plant and equipment comprising the gin. The Facility has been in place for about six years and Auscott has always met its obligations under the facility during that time.  ANZ Bank is satisfied, therefore, that, notwithstanding the apparent excess of current liabilities over current assets, there is no serious risk that the Company’s obligations under the Facility will not be met. 

In addition, the finance director of the Company gave evidence before me that, having regard to the relationship which exists between the Company and ANZ Bank, the Company treats the Facility as a long term facility, notwithstanding that, in compliance with relevant standards, it treats the Facility as a current liability in its accounts.  I am satisfied, therefore, that, in considering the financial position of the Company, I should not regard the pro forma balance sheet as indicating that the Company is in any way insolvent.

In exercising the jurisdiction which is conferred on the Court by section 195 I am required to have regard to the interests of the members, the creditors, and the public generally. In this case the interests of the members are served adequately by approving what they have asked for. As I have said, there is effectively one member of the Company. I do not consider that there is any relevant interest of the public other than to ensure that I do not permit a company which is likely to be unable to pay its future debts to continue to trade. I am satisfied from the evidence before me that if the reduction is approved there will be no prejudice to the public.

The final matter concerns the interests of the creditors and in particular the application of the Company to waive compliance with section 195(3). Section 195(3) provides that where the proposed reduction of share capital involves either diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid up share capital, the Court is required to settle a list of the creditors entitled to object and the amounts of their debts. However, under section 195(4) the Court may, having regard to any special circumstances of any case, direct that all or any of the provisions of section 195(3) are not to apply in respect of any particular class of creditors.

The purpose of section 195(3) is to enable a list of creditors to be settled and to ensure that those creditors are notified and, if need be, to ensure that their debts are provided for expressly by the company following the reduction of capital. It is not uncommon for Courts to give a direction under section 195(4) in circumstances where the Court is satisfied that there is no risk to creditors by reason of the reduction of capital.

I have evidence from the Company's bankers and from the Australian Tax Office indicating that there is no objection from that quarter to the proposed reduction of capital.  However, there are two other classes of creditors who could be affected by the reduction.  The first class of creditors is ordinary trade creditors.  I have evidence before me that satisfies me that those creditors are paid by the Company within 30 days and I am satisfied that there are adequate funds available to ensure that the current creditors in that category will be paid.

The other class of creditors comprises growers who supply cotton to the Company for ginning.  Those growers become creditors as cotton is delivered to the Company.  As their cotton is ginned and subsequently sold by the Company the growers are paid.  The growers may, therefore, be creditors for upwards of 6 months from the beginning of the harvest season until the end of the selling period.  Having regard to the evidence to which I have referred above, I am satisfied that there will be ample funds available to ensure that the liabilities to current grower creditors will be met.

The pro forma balance sheet, even after the reduction is effective, shows that as at 30 June 1998 there will be total shareholders funds of in excess of $44.5 million. In the circumstances, I am satisfied that special circumstances have been made out such as to justify waiving compliance with section 195(3).

My attention has been drawn to the fact that there was not a complete compliance with Order 71 Rule 14(15)(b) which requires that the Australian Securities Commission be given copies of the affidavits intended to be relied upon.  I have seen evidence from the Commission that it does not wish to be heard in relation to the question of waiver of the compliance with those rules. 

Accordingly, I am satisfied that it is appropriate to direct that the failure to comply would not stand in the way of making an order.  In the circumstances I make orders in accordance with the short minutes of order which I have initialled, dated with today's date and placed with the papers.

I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Associate:

Dated:             27 May 1998

Counsel for the Applicant:	C.J. Birch
Solicitor for the Applicant:	Blake Dawson Waldron
Date of Hearing:	27 May 1998
Date of Judgment:	27 May 1998