RE FORTUNE DRAGON MOTORS LTD.

HCMP 1219/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1219 OF 2002

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J U D G M E N T

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1. In this petition the Company seeks the Court's confirmation for a reduction of capital under section 59 of the Companies Ordinance.

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.

5. On 22 March 2002 there was an extraordinary general meeting of the members of the Company at which all members were present. I should note at this stage that present was a company called "Ekpac China Limited" which is the holder of all the non-voting deferred shares. All the members present and voting unanimously agreed that short notice would be given and it was further noted that the non-voting deferred shareholder was present even though it was not entitled to vote.

6. At that extraordinary general meeting, a special resolution was passed that subject to confirmation by the Court, pursuant to Article 47 of Table A all 7,500,000 non-voting deferred shares of HK$1.00 each which is lost and unrepresented by available assets be reduced to the value of HK$0.373333 each. Thereafter every 75 non-voting deferred shares was to be consolidated into 28 non-voting deferred shares, making 2,800,000 non-voting deferred shares of HK$1.00 each.

7. The effect of that is that the non-voting deferred shares became of the value of $2.8 million. In effect, it is a reduction of the Company's capital by $4.7 million.

8. The third statutory requirement is that there should be confirmation by the Court under section 59 and section 60 of the Companies Ordinance. The first matter that the Court takes into account is that the shareholders should be treated equitably, that is as between shareholders of different classes or between different shareholders of the same class. In the present case, the reduction affects only some of the shareholders, it affects only the non-voting deferred shares. However, there is an affidavit by a director of Ekpac, the holder of the non-voting deferred shares, to the effect that that shareholder is agreeable to and fully supports this special resolution.

9. The second matter is that the shareholders should have had the proposal properly explained to them so that they could exercise an informed judgment. This is clearly the case from the affidavits, including that of the director of the holder of the non-voting deferred shares that I have referred to.

10. The third matter is that creditors should be safeguarded. In the present case the reduction is for the purpose of the writing-off of permanent losses. The losses are permanent in that they are irrecoverable trading losses. This is shown by the affidavit of the accountant, who has shown that the large "administrative charges" which have been referred to in the accounts were part of the trading losses, and he has further explained that what had been billed as "central costs recharge" was in effect services provided by the holding company for administrative support and accounting services. However, after 1998 when the administration of the Company changed, the Company recruited its own staff and therefore this accounted for the difference in nomenclature between the previous "central costs recharge" and the present "administrative expenses". It would appear from the affidavit that the loss of HK$4.7 million was due to an accumulated deficit. The accumulated deficit was due to sales of accumulated stock at a low selling price due to the economic crisis. The business of this Company was the distribution of motor vehicles and it is apparent that the motor vehicle market was affected by the economic downturn.

11. The fourth matter set out in Re Ratners Group PLC, the locus classicus of guiding principles in the reduction of capital, is that the reduction of capital should be for a discernible purpose. It is clear that the purpose of the present application is to reduce the accumulated deficit on the Company's profit and loss account so as to bring forward the time when the Company may be in a position to pay dividends and to bring the Company's share capital in line with its available assets.

12. In the circumstances, grounds for a reduction having been made out. I confirm the reduction and I approve the Minute proposed to be registered with amendments as indicated by me.