RE SHOUGANG CONCORD CENTURY HOLDINGS LTD

HCMP 392/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 392 OF 2003

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J U D G M E N T

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1. I have before me a petition presented by Shougang Concord Century Holdings Limited ("the Company") for an order under section 59 of the Companies Ordinance, Cap. 32, seeking confirmation of a reduction of capital by writing down its share premium account in the sum of HK$149,098,345.19.

2. On 14 March 2003, I have given directions to dispense with the settling of a list of creditors as well as for the publication of the notice of presentation of the petition and this hearing. These directions have been complied with by the Company.

3. The Company was incorporated as a private company on 11 June 1991 and it was converted into a public company on 11 March 1992. Its present authorized capital is HK$100 million divided into 1 billion shares of HK$0.10 each, of which 765,372,000 shares have been issued and are deemed to be fully paid up and the remaining shares are unissued.

4. Up to the year ended 31 December 2001, the Company had a credit of HK$357,181,000.00 in its share premium account and an accumulated loss of approximately HK$149,099,000.00. The reduction of the share premium account by the amount that I have mentioned is for the purpose of eliminating the amount of the accumulated loss up to the year ended 31 December 2001.

5. Under Article 45 of the Articles of Association, the Company may, subject to the provisions of Cap. 32, by special resolution reduce its share capital, any capital redemption reserve and any share premium account in any way.

6. On 23 January 2003, a special resolution was passed in an extraordinary general meeting whereby it was resolved that the share premium account is to be reduced to the extent that I have mentioned and that the amount of the reduction be credited and applied in full towards the elimination of the full amount of the accumulated loss in the sum of HK$149,098,345.19 recorded in the accumulated loss account of the Company as at 31 December 2001. The extraordinary general meeting was properly convened by a notice dated 23 December 2002 which was accompanied by a circular explaining the reduction proposal.

7. The principles upon which the court would confirm a reduction of share capital were laid down in Re Ratners Group plc [1998] BCLC 685 and Re Thorn EMI plc [1989] BCLC 612. There is no question in this case that all the shareholders are treated equitably in the proposed reduction of the share premium account. I am also satisfied that the shareholders at the general meeting had the proposals properly explained to them in the circular so that they could exercise an informed judgment.

8. As I have mentioned, the purpose of the reduction of the share premium account is to eliminate the entire amount of accumulated loss as recorded in the accounts for the year ended 31 December 2001. The purpose of the exercise is so that the Company would be in a position to consider making distribution to its members from its future profits. I am satisfied that the reduction is for a discernible purpose.

9. The remaining requirement is that the creditors of the Company should be safeguarded. The proposed reduction does not involve reduction in the net assets of the Company save for the costs associated with the application, nor does it involve the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid up capital.

10. The question I need to be concerned with is whether the accumulated loss to be eliminated represented a permanent loss. The accumulated loss in the amount of HK$149 million odd was the outcome of continuing losses suffered by the Company as a result of the operating expenses exceeding the revenue from 1 January 1996 to 31 December 2000. The accumulated loss comprises the following items:-

(1) administrative expenses of approximately HK$4,318,000.00;

(2) finance costs of approximately HK$21,233,000.00;

(3) loss on disposal of fixed assets of approximately HK$411,000.00;

(4) depreciation of fixed assets of approximately HK$1,066,000.00;

(5) provision for diminution in value of investments of approximately HK$57,445,000.00; and

(6) provision for doubtful debts and writing off of bad debts of approximately HK$214,924,000.00.

11. The administrative expenses and finance costs had been incurred in the ordinary course of trading. The loss on disposal of fixed assets was also realised. As for depreciation of fixed assets, this was calculated on the straight-line basis by reference to the life of the assets in question, which mainly comprised furniture and fixtures, office equipment and motor vehicles. As for the provision for diminution in value of investments, this was made in view of:-

(1) the discontinuation of the Company's involvement in the operation of a jointly controlled company known as Shanghai Shenjia Ferroalloys Co. Ltd effective from May 1999, the provision made in this instance was in the sum of approximately HK$56 million;

(2) the writing off of the value in full of a golf club membership with a club which commenced liquidation in 1999; and

(3) the writing down of a golf club membership from the cost of acquisition at approximately HK$780,000.00 to the net book value of approximately HK$275,000.00, as the board considered that the market value of such membership is so low that the Company will not be able to sell or assign the membership to any third party at a price equal to or higher than its cost of acquisition in the foreseeable future.

12. Regarding the provision for doubtful debts and writing off of bad debts, this was made for the Company's subsidiaries, jointly controlled entities and associated companies. These were incurred where the relevant company was a cost centre or where the relevant company had incurred substantial losses and liabilities or where it had ceased operation, or where it was in the process of liquidation or was about to be liquidated.

13. I am satisfied that the accumulated loss to be eliminated represents realised losses of the Company and is unrepresented by

available assets. The proposed reduction does not, in my view, cause any prejudice to the creditors of the Company.

14. As the reduction of capital involves only the reduction of the share premium account, I would direct that no minute of reduction under section 61 is required to be registered in this instance. Under section 61(5), the minute is to be deemed to be substituted for the corresponding part of the Memorandum of Association. The provisions of the Memorandum of Association are prima facie unalterable under section 7, except in the cases for which express provisions are made in the Ordinance. If the minute for reduction is to be registered, the combined effect of sections 61(5) and 7 may make it difficult to be reconciled with the provisions in section 48B(3), by which the Company is expressly empowered to deal with the share premium account in various ways. The courts have, in the past, taken the view that the requirements in section 61 for the registration of the minute of reduction are not applicable in this situation (Re Paringa Mining & Exploration Co. Ltd [1957] 1 WLR 1143 and Re Lippo China Resources Ltd [1998] 1 HKC 161 at 169D).

15. For the above reasons, I make an order in terms of the draft submitted to me with the amendments that I have indicated to counsel.