RE WAH NAM GROUP LTD. (IN LIQUIDATION)

HCMP 2518/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2518 OF 2002

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REASONS FOR JUDGMENT

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1. This is a petition brought by the liquidators of a listed company, Wah Nam Group Limited (In Compulsory Liquidation) ("the Company"), on 14 August 2002 seeking the sanction of the court to a scheme of arrangement between the Company and the shareholders ("the Shareholders' Scheme") and a scheme of arrangement between the Company and its creditors ("the Creditors' Scheme"), under section 166 of the Companies Ordinance, Cap. 32.

2. The purpose of the exercise is to enable the liquidators to realise the listed status of the Company and to sell a core asset of the Company, being the investment of one of its wholly owned subsidiaries, Wah Nam Infrastructure Investments Limited ("WNII"), in three joint ventures which own toll roads and toll bridges in China.

3. It is not necessary to give a lengthy judgment on this petition, as I have given a decision on 2 July 2002 in HCCW No. 166 of 2000 ("the Decision"), on an application of the liquidators for directions whether the court could sanction the Shareholders' Scheme without the need for any meeting of creditors to be summoned by the court under section 166(1) to obtain agreement to such scheme by the statutory majority. In the Decision, I have answered that question in the negative and gone into matters relevant to the anticipated application seeking sanction to the scheme at some length, including the history of the matter, the financial position of the Company, and the Restructuring Agreement ("the Restructuring Agreement") between the liquidators and the investor Leading Highway Ltd ("the Investor"). The judgment on this petition should be read with the Decision. I will merely give an update of the information and recapitulate a few important matters.

Financial position of the Company

4. To date, the liquidators have received 59 proofs totalling HK$1,227,943,292.66. The liquidators have admitted to proof 19 claims totalling HK$87,429,446.45, of which HK$28,000.00 are preferential claims.

5. The total receipts of the liquidators to date are HK$1,163,769.11. Total payments to date are HK$716,740.13. Cash at bank is HK$447,028.98.

6. Other than the listed status, the principal assets of the Company are its shareholding in WNII which holds interests in the three joint ventures valued at RMB34.1 million, and moneys previously paid into court of approximately HK$32.55 million.

Principal terms of the Shareholders' Scheme

7. On the closing date for the Shareholders' Scheme, all existing shares of the Company will be transferred to the new company, Wah Nam International Holdings Limited ("Newco"). In consideration of this transfer, Newco will allot and issue 42,764,373 fully paid shares in Newco to the shareholders in the ratio of 1 Newco share for every 50 shares of the Company.

Principal terms of the Creditors' Scheme

8. On the closing date for the Creditors' Scheme, the Investor will procure that HK$14 million held by the escrow agent be paid, on behalf of Newco, to the liquidators for the benefit of the creditors in part consideration for the listed status. As the balance of the consideration for the listed status, Newco will allot and issue 32,073,279 fully paid shares in Newco to the liquidators for the benefit of the creditors. Pursuant to a put option agreement between the Investor and the liquidators dated 16 July 2002, within ten business days of the closing date, the liquidators may exercise the option to sell the creditors' shares in Newco at HK$0.05 per share. On the closing date, the Investor will procure that HK$34 million held by the escrow agent be paid, on behalf of Newco, to the liquidators for the account of WNII, in consideration for the Company procuring WNII to transfer WNII's interests in the joint ventures to a subsidiary of Newco.

The transactions to be implemented

9. The restructuring proposal of the Company contemplates the implementation of the Shareholders' Scheme, the Creditors Scheme as well as these transactions:

(1) The Investor will subscribe for 400 million Newco shares at par (HK$0.10) at a cost of HK$40 million. These will be issued and allotted by Newco on closing.

(2) The Investor will subscribe for convertible unsecured loan notes in the total amount of HK$18 million (due three years from closing, 2% per annum coupon, convertible at par).

(3) The Investor will bear the costs and expenses of implementing the restructuring, capped at HK$8 million, held in escrow and released in stages.

(4) On the closing date, the Investor will loan HK$2 million to Newco as working capital.

(5) The listing of the existing shares of the Company will be cancelled and the Newco shares will be listed on the Stock Exchange of Hong Kong by way of introduction.

(6) As soon as practicable after the closing date, the Investor shall procure Newco to transfer all the shares of the Company to the liquidators for HK$1.00.

(7) Upon completion of the restructuring, the Investor will hold 84.24% of the shareholding in Newco, the balance of 15.76% will be in public hands (i.e. held by the shareholders and creditors of the Company). There would be changes in the percentages upon exercise of the put option or the conversion of the loan notes. Pursuant to the placing agreement entered into by the Investor, the Investor must place sufficient of its own shares in Newco to satisfy the requirements of the Listing Rules to maintain that a minimum of 25% of the issued share capital will be held by the public.

10. Thus, the funds to be provided by the Investor in the total sum of HK$58 million would be allocated as follows: the consideration for the listed status at HK$14 million; the consideration for WNII's interests in the joint ventures at HK$34 million; costs and expenses at HK$8 million; and working capital for Newco at HK$2 million.

11. As set out in the explanatory statements provided to the shareholders and creditors, there are a number of conditions precedent to be fulfilled for the successful implementation of the restructuring proposal. I understand from Mr Bartlett, who appeared for the liquidators, that with the exception of those conditions that require approval from the regulatory authorities in Hong Kong and the authorities in China (in respect of the transfer of WNII's interests in the joint ventures), all the conditions precedent to give effect to the transactions contemplated by the restructuring proposal have been satisfied. I am also given to understand that there ought to be no risk involved in satisfying the outstanding conditions and that indication has been received from the Stock Exchange that the long stop date (i.e. 31 August 2002, by which the shares of the Company will be de-listed) may be extended for a short period.

12. Mr Bartlett was also instructed by Newco to offer an undertaking to the court that subject to the fulfilment of all conditions precedent to closing, Newco undertakes to be bound by the Shareholders' Scheme and to execute and do, and procure to be executed and done, all such documents, acts and things as may be necessary to be executed or done by it for the purpose of giving effect to the Shareholders' Scheme.

Compliance with procedural requirements

13. In view of the Decision on 2 July 2002, the liquidators have re-considered and revised the scheme documents and amended the originating summons they issued in these proceedings. On 12 July 2002, I made an order on the amended originating summons for the Company to convene shareholders and creditors meetings to consider, and if thought fit, approve the respective schemes and I gave consequential directions.

14. On 21 August 2002, I made an order on the liquidators' application under section 182 of Cap. 32 to the effect that notwithstanding the presentation of the winding up petition on 23 February 2000, any transfer of shares in the Company or alterations in the status of the members of the Company made after the commencement of the winding up shall not be void. This is because the shareholders, as defined in the prospectus, are those whose names appear on the register of members as at the final record date, being the business day immediately preceding the date on which the Shareholder's Scheme and the Creditors' Scheme are to become effective under section 166(3) of Cap. 32. There were transfers of the shares after the commencement of the winding up, as trading in the shares of the Company was not suspended until 20 July 2000.

15. Regarding the orders made on 12 July 2002, they have been fully complied with. There is only one class of shareholders and one class of creditors. Notices of the scheme meetings were published in the newspapers as directed, on 18 July 2002, being 21 clear days before the scheme meetings. The requisite documents were served by post on the known shareholders and the known creditors, also on 18 July 2002. In the case of the shareholders, they were sent the prospectus and for the creditors, they were sent the prospectus and the composite document. In each case, the shareholders and the creditors have been given sufficient explanation of the respective scheme and its effect. In compliance with section 166A(1)(a), there is a statement regarding any material interests of the directors of the Company, and the effect thereon of the arrangement, in so far as it is different from the effect on the like interests of other persons. Of those directors who have responded to the liquidators' inquiry, none have disclosed any different interest in the Schemes other than the fact that they are shareholders and/or creditors.

16. The shareholders meeting and the creditors meeting were held on 12 August 2002 and the creditors' meeting was adjourned, at the request of the creditors, to 13 August 2002. Notice of the adjourned meeting of creditors was published in two newspapers on 13 August 2002. The chairman of each of the meetings has reported to the court the results of the voting. There is overwhelming support for the Schemes.

17. For the shareholders meeting, ten shareholders have attended in person or by proxy. They held about 15% of the issued shares. 90% in number and 99.99% in value of those present and voting have voted in favour of the Shareholders' Scheme.

18. For the creditors meeting, 16 creditors have attended in person or by proxy. No claims were rejected for voting by the liquidators save that the claims in damages of the two petitioning creditors were not admitted to vote, with the agreement of these creditors, and that they were allowed to vote and did vote in favour of the Creditors' Scheme in respect of the rest of their claims. The claims of these 16 creditors amounted to 44.55% of the total claims. Inter-company debts took up 47.23% of the total claims. The liquidators did not vote as creditor on the basis of the inter-company debts. 100% in number and value of those present and voting have voted in favour of the Creditors' Scheme. They include those creditors who have previously indicated that they might vote against any scheme to implement the Restructuring Agreement, as mentioned in the Decision.

19. I am satisfied that the requirements of sections 166 and 166A have been duly complied with, and that I have jurisdiction to make an order to sanction the Shareholders' Scheme and the Creditors' Scheme.

Exercise of the discretion

20. In paragraphs 41 to 44 of the Decision, I have considered the proportion of the consideration to be received by the creditors for the listed status with the proportion of the consideration to be received by the shareholders, on an indicative comparison based on the "net asset value" of the shares of Newco (instead of the "net tangible asset value") as proposed by the liquidators. It was submitted that the "net asset value" would be the appropriate basis of valuation where the company has significant intangible assets, as in the present case, owing to the fact that the interests in the joint ventures to be acquired by Newco are to be treated for accounting purposes as intangible assets.

21. The approach adopted by the liquidators in the valuation of the shares of Newco based on "net asset value" was not accepted by those whom I described as the dissenting creditors, for the reasons given in paragraph 45 of the Decision. The liquidators do not agree with the alternative methods of valuation proposed by the dissenting creditors for the reasons set out in paragraph 46 of the Decision. Since these creditors have withdrawn their opposition and have voted in favour of implementing the Restructuring Agreement, it does not seem appropriate I should attach significance to their previous stance on this issue.

22. I will accept the liquidators' methodology of valuation of the shares of Newco. On that basis, the value of the consideration apportioned to the shareholders is 8.75%. I accept that the consideration paid to the shareholders as an inducement to transfer their shares to Newco to facilitate the listing of the shares of Newco on the Stock Exchange by way of introduction is within the range of token consideration approved in the cases giving guidance on this subject. Further, the balance of the sale proceeds for the interests of WNII in the joint ventures, after WNII has discharged its own debts and liabilities, will go to the creditors and it is estimated that the balance would be in the range of HK$11,719,000.00 to HK$15,509,000.00. The liquidation of the Company will continue. Further realisations, including the moneys paid into court, will be for the benefit of the creditors.

23. In the circumstances, it would be appropriate to sanction the Shareholders' Scheme and the Creditors' Scheme. The Schemes have been vigorously tested and challenged by the dissenting creditors who are represented in the committee of inspection. They have now voted in favour of the Creditors' Scheme. I am satisfied in each instance that an intelligent and honest person, as a member of the class concerned, acting in his interest, might reasonably approve of it.

Order

24. I have made an order, upon the undertaking given by Newco through counsel in the terms as set out earlier, that the Shareholders' Scheme and the Creditors' Scheme be sanctioned and that an office copy of the order be delivered to the Registrar of Companies for registration. I have further ordered that the costs of the petition be in the costs of the liquidation.