RE COMMERZ (EAST ASIA) LTD

HCMP 1616/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1616 OF 2006

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REASONS FOR JUDGMENT

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1.  This is a petition of Commerz (East Asia) Limited (“the Company”) for confirmation of a reduction of its share capital pursuant to section 58 of the Companies Ordinance, Cap. 32.

2.  The Company was incorporated under its former name on 22 November 1994.  Its authorised share capital at present is DEM 80 million divided into 80 million ordinary shares of DEM 1 each, all of which are issued and fully paid.  Save for one share, all the shares are held by Commerzbank Aktiengesellschaft (“Commerzbank”).  The remaining share is held on trust for and beneficially owned by Commerzbank.

3.  The Company was established as a wholly owned subsidiary of Commerzbank to carry on money-lending business.  It was used to book loans to customers.  By virtue of Commerzbank’s internal policy decisions, Commerzbank has stopped booking new loans through the Company and since 2005 has been gradually transferring existing loans from the Company to the Hong Kong branch of Commerzbank.  The loans in the Company had been reduced to about €21 million as at the date of the petition on 11 August 2006 and since then the said sum has been transferred to the Hong Kong branch of Commerzbank.

4.  Pursuant to the internal policies of the Commerzbank group, the Company pays charges to Commerzbank in respect of the use of the capital.

5.  The directors of the Company consider that the current share capital of DEM 80 million is in excess of the needs of the Company and that it would be in the best interests of the Company to reduce its share capital and to repay the credit arising in cash to the shareholders of the Company.  This would reduce the charges payable to Commerzbank in respect of the use of the capital.

6.  There is provision in the articles of association to reduce the share capital by special resolution.

7.  By a written resolution dated 8 August 2006, the Company passed a special resolution that the capital be reduced to DEM 2 million divided into 2 million shares of DEM 1 each by cancelling 78 million paid-up shares and repaying to the holders of the 78 million shares the sum of €0.51129 per share, which is equivalent to DEM 1.  The amount proposed to be repaid is €39,880,620, equivalent to DEM 78 million.

8.  The proposed capital reduction was initiated by the head office of Commerzbank at Frankfurt, Germany as a policy of the Commerzbank group.  Commerzbank as the sole beneficial shareholder of the Company fully understands the proposed capital reduction.

9.  The Company has no intention to make any further loans and its principal business in future will be its involvement in three defeasance transactions.  Under these transactions, the lessee transfers his ownership of assets to a special purpose vehicle (“the lessor”), which acts as the conduit for the financing.  The Company provides part of the financing to the lessor for this purpose and obtains the funding to make the loan from Commerzbank, London branch on exactly the same terms.  The Company’s asset under the defeasance transactions (i.e. the loan to the lessor) matches exactly its liability pursuant to those transactions (i.e. the Company’s debt to Commerzbank, London branch).

10.  In respect of each loan by the Company to the lessor, a matching sum was paid by the lessee to Commerzbank, London branch as payment undertaker.  Pursuant to the payment undertaking agreement (“PUA”), specified portions of the amount of the lessee’s deposit with Commerzbank, London branch are paid to the lessor on specified dates, in reduction of the lessee’s obligations to the lessor under the applicable lease.  The lessor is obliged to repay parts of its loan from the Company on the same dates and in the same amounts as payments under the PUA.  The loan and security agreement granted the Company a security interest in the lessor’s rights under the PUA.

11.  The only risk of non-payment borne by the Company is the insolvency of Commerzbank, but as the Company’s funding is from Commerzbank, London branch, it owes the same amount to Commerzbank, London branch, and there would be a set-off.

12.  Commerzbank, the sole creditor of non-current liabilities, and one of the creditors of current liabilities, is the parent company and it has resolved that the Company’s capital should be reduced.

13.  According to the unaudited accounts of the Company as at 26 September 2006, current assets exceed current liabilities to produce a net current asset position of €42 million.

14.  Leaving aside the matching interest payments and receivables under the defeasance arrangements, as at 26 September 2006, the Company’s cash or cash equivalent assets of a minimum of €43 million were adequate to enable all current creditors (of about €1.18 million) to be paid, for the proposed return of capital to be paid (of €39,880,620), and to allow a margin of €2.4 million (which is two times the total amount of the liabilities to creditors excluding Commerzbank).

15.  At the hearing of the summons for directions on 19 September 2006, I made an order that the provisions in section 59(2) shall not apply as regards any class of creditors of the Company, having been satisfied that the interests of creditors are safeguarded.

16.  There is no opposition to the petition.  As I am satisfied the creditors of the Company would be adequately protected in this situation, and the capital reduction is for a discernible purpose, I have made an order to confirm the proposed reduction as per the draft submitted.