RE SHIROKIYA HONG KONG LTD

HCMP 1176/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1176 OF 2009

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REASONS   FOR   JUDGMENT

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1.  This is a petition presented by Shirokiya Hong Kong Ltd 白木屋香港有限公司(“the Company”) for the confirmation of the proposed reduction of its share capital pursuant to section 58 of the Companies Ordinance, Cap. 32.

2.  The Company was incorporated on 5 May 2004.  Since its incorporation, it has been principally engaged in the business of investment holding and the operation of Japanese restaurants in Hong Kong.

3.  At all material times, the Company has only one shareholder, which is Monteroza Co., Ltd. (“Monteroza”).  The major shareholder of Monteroza is Teruhiro Oga, holding 55.5% of its shares.  He is the sole director of the Company.  Monteroza was founded in 1983 and this company and its subsidiaries (collectively “the Group”) operate over 1,400 restaurants in Japan.  Shirokiya is a well-known brand name for a chain of Japanese restaurants.  In 2004, the Group decided to expand its restaurant business in Hong Kong and Mainland China and thus established the Company.  The Company has a wholly owned subsidiary, Shouki Food & Beverage (Shanghai) Co., Ltd., which was incorporated as a wholly foreign owned enterprise under the laws of the PRC.

4.  The present authorised share capital of the Company is $54,983,900 divided into 54,938,900 ordinary shares of $1 each, all of which were issued and fully paid.

5.  There is provision in the articles of association that the Company may by special resolution reduce its share capital.

6.  By a special resolution of the Company duly passed as a written resolution in accordance with section 116B of Cap. 32 on 29 May 2009, it was resolved (1) to reduce the issued share capital from $54,983,900 divided into 54,983,900 shares of $1 each to $1,500,000 divided into 1,500,000 shares of $1 each and that such reduction be effected by cancelling paid-up capital to the extent of $53,483,900 and cancelling 53,483,900 shares of $1 each; and (2) subject to and forthwith upon such reduction of capital taking effect, the authorised capital be maintained at its current amount of $54,983,900 divided into 54,983,900 ordinary shares of $1 each with 1,500,000 shares issued and fully paid up and 53,483,900 shares unissued and unpaid.

7.  The proposed reduction of capital represented capital which is lost permanently and unrepresented by available assets of the Company.

8.  Ever since the opening of the Japanese restaurants in Hong Kong and in Mainland China, the Company has been making significant losses, especially in respect of its investment in Shanghai.  In the financial year ended the 31 December 2007, the Company decided to wholly write off its investment in Shanghai.  In the financial year ended 31 December 2008, the operation results of the Company have stabilised.

9.  The Company has produced its audited accounts for the last three years, the audited accounts of its subsidiary in the PRC for the last three years, and the latest audited financial statements of Monteroza for the year ended March 2008.  Consolidated financial statements of the Company have not been prepared.  Under the laws in Japan, there is no requirement for a non-listed company like Monteroza to prepare audited group consolidated financial statements.  The audited financial statements of the PRC subsidiary have not been qualified.  The audited accounts of the Company have been qualified, as the Company did not prepare consolidated financial statements required by the Tenth Schedule to Cap. 32 and the Hong Kong Accounting Standard 27.  The management of the Group did not see the need to prepare consolidated accounts for the Company as the finance of the Company and its subsidiary has been sourced mainly from the Group without the support of outsiders like banks.

10.  As seen from the latest management accounts of the Company as at 31 March 2009, the accumulated losses have reached over $53 million.  Of this amount, about $32 million was attributable to the Hong Kong operations and about $21 million was attributable to the Shanghai operations by the subsidiary.  All the losses were mainly caused by operations, as revenue generated was insufficient to cover the costs of rental, salaries, food consumption and utilities expenses.

11.  In the opinion of the director of the Company, the proposed reduction of capital could help the Company to start afresh and concentrate on reviving its restaurant business in Hong Kong and in Mainland China.  The Group would continue to support the operations of the existing restaurants in Hong Kong and Shanghai and seek to attain a balance budget for the two operations in 2009.  Furthermore, the Group has a plan to apply for listing of the shares of Monteroza in the stock exchange in Japan.  In reducing capital which has been lost in the course of the operation of the Company, there would be no further need to incorporate such losses when preparing the consolidated accounts for the Group, which would be required if and when Monteroza is a listed company.  The capital reduction would allow the financial picture and forecast to be depicted in the prospectus for the listing to reflect the then existing operations and would not be clouded with permanent losses sustained by the overseas operations in Hong Kong and Mainland China in the past.

12.  The proposed reduction of share capital does not involve any payment to the Company’s sole shareholder or involve the diminution of the liability of the sole shareholder in respect of unpaid share capital.

13.  To fully protect the interests of the creditors of the Company, the Company has provided an undertaking to the court in these terms as a condition for approving the proposed reduction of share capital:

(1) the Company will, within 14 days after the date of the order to be made, set aside in a designated bank account of the Company an amount equal to $2,000,000, to guarantee any claim outstanding or debt owed by the Company (other than the debt owed to the Group) within the period from 31 March 2009 to 31 December 2009; and

(2) the Company shall maintain the said designated account for a period of two years from the date of the order.

14.  The management accounts of the Company as at 31 March 2009 showed current liabilities of approximately $2.33 million.  This would appear to be more or less covered by the current assets as at that date which stood at $2.3 million.  The figure for current liabilities was made up of three items: notes payable and accounts payable of $593,489.81, accrued expenses of $1,364,493.20, and other current liabilities of $368,432.11.  The notes payable and accounts payable consisted of trade creditors.  The other items of accrued expenses and other current liabilities consisted of salary and Mandatory Provident Fund payments to Hong Kong employees, audit fee provisions and advance payments from the head office.  The salary and MPF payments to Hong Kong employees in respect of March 2009 were settled in early April.  The accrued expenses owed to the head office represented the continual support from the parent company.

15.  There has been no significant change in the financial status of the Company since March to June 2009, as seen from the latest management accounts as at 30 June 2009.

16.  With the undertaking given above, which will be financed by the shareholder of the Company, the position of the creditors should be adequately protected.  The Company would have sufficient working capital to meet current liabilities as they fall due.  There would be continual support from its parent company, a substantial corporation in Japan.  I am satisfied it would be appropriate to dispense with the settlement of a list of creditors of the Company and have made an order accordingly at the hearing of the summons for directions on 14 July 2009.  Directions given for the advertisement of a notice of the petition have been complied with.

17.  There is only one shareholder of the Company.  The proposed reduction is for a discernible purpose and the interests of creditors would be sufficiently safeguarded.  I have therefore confirmed the reduction of capital and made an order in terms of the draft submitted.