RE YAGINUMA CO. (HONG KONG) LTD.

HCMP 3642/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3642 OF 2001

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REASONS FOR JUDGMENT

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1. In this petition, the Company sought the Court's confirmation for a reduction of capital under s.59 of the Companies Ordinance. At the end of the hearing, I gave an order in terms of the draft as amended and said that I would give my reasons in writing later. I do so now.

2. Section 58 provides that a company limited by shares and having a share capital may, if so authorized by its articles, by special resolution reduce its share capital in any way subject to confirmation by the Court.

3. The first statutory requirement is that there should be articles authorizing the reduction of capital. This is found in Article 47 of Table A which applies to this Company and forms part of its articles.

4. The second statutory requirement is that there should be a special resolution resolving to reduce share capital. On 4 July 2001, it was resolved by the only 2 members of the Company that the authorised and issued capital of the Company be reduced from 7,543,813 ordinary shares in the Company at a total nominal value of HK$7,543,813 or at a nominal value of HK$1 per ordinary share to 528,067 ordinary shares at a total nominal value of HK$528,067 or at a nominal value of HK$1 per ordinary share and that such reduction be effected by cancelling paid-up capital to the extent of 7,015,746 ordinary shares at a total nominal value of HK$7,015,746 or at a nominal value of HK$1 per ordinary share. The resolution also provided for the cancellation of both shareholders' shares equally (they are virtually equal shareholders, the only difference being 1 share out of the 7,543,813 issued shares).

5. The third statutory requirement is that there should be confirmation by the Court under s.59 and s.60 of the Ordinance. The following matters should be considered, following Re Ratners Group plc (1988) 4 BCC 293, an authority which has been referred to in a number of Hong Kong cases.

6. The first matter is that the shareholders should be treated equitably i.e. as between shareholders of different classes, or between different shareholders of the same class. In the present case, there is only 1 class of shares and only 2 shareholders, who are affected in the same way.

7. The second matter is that the shareholders should have had the proposal properly explained to them so that they could exercise an informed judgment. In the present case, the only 2 shareholders of the Company have expressed their support for the application, which is part of a share transfer agreement between them.

8. The third matter is that creditors should be safeguarded. There are no general or trade creditors in the present case, as the acquiring shareholder has injected funds which have been used to pay off all general and trade creditors. The only two creditors left were the shareholders themselves and they have waived their loans to the Company.

9. The fourth matter is that the reduction should be for a discernible purpose. The Company has suffered accumulated losses over the years since it started operations and the accumulated loss is now, even after the waiver of the shareholders' loans, slightly in excess of the amount of capital reduced. The losses are permanent in that they are irrecoverable trading losses due to the high cost of sales. The credit arising from the reduction of capital will reduce the accumulated shareholders deficit so that thereafter the Company would be in a position to distribute future profits (if any) by way of dividend. This is a recognised purpose under s.58(1)(b) Companies Ordinance.

10. In the circumstances, grounds for a reduction having been made out, I confirmed the reduction and approved the amended minute proposed to be registered.