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