COMPANY'S CAPITAL.

New Zealand Herald, Volume LVII, Issue 17594, 6 October 1920, Page 8

COMPANY'S CAPITAL.

MOTION FOR REDUCTION. f >. ■ ' - - ; ISSUE OF > DEBENTURES. i."' ; "-^" : ."-■>/v A - v% Pk;*x? SUPREME COURT APPLICATION. ■ An ' interesting { matter in -regard to the finances -'of companies qam.9 before; Ms. Justice ;Salmond "the Supreme Court yesterday, an '■ application . was Made by it O. - Clark,-! limited, earthenware pipe manufacturer* t (Mr. J. Stahtoh), far confirmation of a resolution: to reduce the capital of the company from £67,030 -to £10,000. ;T:.* : ,'_'.* His Honor, after perusingthe papers, said there* riere some difficulties. The first* was- that the resolution did not specify the numbers of the shares to be cancelled.. : < The Second was; that the .proposal was to convert paid-up capital into debentures. , I Supposing the'' ebftreholders refused the debentures? he asked. "••/-,.'*' Mr. Stanton said •he was afraid they would have no option, and he quoted twc recent English decisions, in which similar schemes had been approved by the Court) even in : the face of ""opposition b#. some shareholders. In the; present instance , the shareholders were quite satisfied. ' 'His Honor: * The resolution ? ip to issue the debentures on - such > terms as the company may. decide, and you say the shareholders are prepared to take them! Counsel: Yes. ; ..,"«=" ' Hits Honor said the debentures might be at 1 per cent, ox 20 per cent. ."■ Mr; Stanton: That is so. It is a mattes between the company and the shareholders. -■' ■•*'•" * „-■ . His Honor: And the creditors.

Position of Creditors. I t "•: - ■ . ■ 1 Mr. Stanton the position was such « hat the creditors did not care -what "was € lone. All the secured creditors were satis- tf led with the position.., ~ ; t His. Honor: Do .they realise the ppos- t ion? If this company .were overflowing „ srith money it might be -quite a proper E procedure, but you must remember that , ihe transforming of shares into debentures ij s a pretty serious operation.. It is turn- { ing. shareholders hito creditors tod as such { they are entitled to'put their hands on. J the assets of the company, which they , would have no' right to do as shareholders, j What is the reason for the proposal? ?- ] Counsel said that—about ten years ago { there was considerable litigation oyer pre- , ference v shares s anct the company .was j framed at that time to* meet the conflict- 5 i,ng views of shareholders. Since then the j opposing element had gone and it was how , felt convenient* to have a' large part of j the company's capital . in_ debentures* ,It } was really* a reconstruction scheme and , one of the'benefits to the company would , be in regard to taxation, because the large . shareholders would have _to , bear their , own burdens in regard to income tax-and , the small ones would carry;only.their pro- , portion. -....-■• <? ■ His Honor That is the real reason: , Some reconstruction was necessary and the , income tax was a consideration in deciding to go in for debentures. , Assets and liabilities. In reply to the Judge, Mr. Stanton said last year's balance-sheet showed) that after providing for liabilities there were surplus assets amounting to £23,618. Many of the book assets' were reallyworth a great deal more than was shown in the balancesheet. ; His Honor said he could not take that into consideration. 7 The company swore that the net assets were £23,000, and it proposed to return paid-up capital to the amount of £46,000, It, was the method propOsed i to -be followed which seemed ,to b-3 the matter for criticism. The. company already had 15,500 A debentures and 2000 B debentures, and it proposed' to have a total of '£63,500 worth with a total paidup capital of £10,000 and total assets Worth £49,000.,* . >■ '-n- ' Mr. Stanton said it might seem strange ■ on paper, but it' was satisfactory to the shareholders arid creditors. »-. , -A ,-v ■ His Honor said he did not think that was "the question. It might be true-that at present the"fdebentures ; were held by shareholders, -but he did not know about the'future. ,! The transforming shares into debentures was in effect merely a method of returning paid-up capital, and the company had to show that the financial , position justified this. >-■' - • Counsel said it was a liability which the company would control. It would not put itself in a position to be liable -to pay the debentures, except upon reasonable and satisfactory terms. His Honor said that that was another objection. x The company asked permission to issue debentures on such conditions as the directors might decide. - • •" Mr. Stanton said every shareholder was abundantly satisfied. - Intention and Legal Effect. His Honor: If that were a satisfactory answer the consent of the Court -would not be needed. Are not public interests involved? Counsel said the company had been advertising the proposed reduction for three months. His Honor:, The public would only know a reduction had been._considered. and approved as equable and proper by this Court. The total liabyiMes under tho scheme would be £63,500, and the total Assets £49.000. Is "not that an insolvent company? * Mr. Stanton said it would be if the debentures were liable, to be foreclosed at the will of the holders. His Honor : So they are. Mr. Stanton: That is not the intention. His Honor:. It may not be the interftion, but it is the legal effect. You cannot issue debentures without conferring rights upon debenture holders. '. ." < Mr! Stanton : They will Be' fraraed\so as to prevent the company • from v being made bankrupt or insolvent, f] -/"-'• " His Honor: I cannot say that.,. Mr. Stanton-: It is true we are transferring £46,000 shares into debentures, but they are debentures to shareholders, and not to outsiders. His Honor: There are no such things as debentures to shareholders. A debenture holder is a liability shown on the company's balance-sheet. . If this is done your company -would be shown to be wholly and totally insolvent. I do not see how you can ask the Court to do what will put the company into that position. Mr. Stanton said all the A debentures, and 500 of the 2000 B debentures were held by shareholders. In England the practice was for the Court to accept the ! scheme if the shareholders and -creditors were satisfied their interests were protected. ! His Honor: I do not propose to decide the matter to-day.