RE CHINA EVERBRIGHT INTERNATIONAL LTD

HCMP 306/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 306 OF 2004

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REASONS FOR JUDGMENT

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1. This is a petition for confirmation of reduction of capital presented by China Everbright International Limited ("the Company") by reducing part of its share premium account, under sections 48B(1) and 59(1) of the Companies Ordinance, Cap. 32. At the conclusion of the hearing, I made an order confirming the proposed reduction in terms of the draft submitted with a minor amendment and these are the reasons for my judgment.

The Company

2. The Company was incorporated on 10 July 1961 as a private company and its name was changed to its present name on 26 October 1993. It ceased to be a private company by a special resolution passed on 19 February 1973. The issued shares of the Company are listed on The Stock Exchange of Hong Kong Limited.

3. The present authorised share capital of the Company is HK$500 million divided into 5 billion ordinary shares of HK$0.10 each, of which 2,548,311,700 ordinary shares have been issued and are fully paid or credited as fully paid. As at the date of the petition, there is standing to the credit of the share premium account the sum of HK$2,817,279,541.00. Article 44(d) of the Articles of Association permits the Company to reduce its share premium account in any manner by special resolution, subject to any confirmation required by law.

4. The Company is a diversified holding company, which, through its subsidiaries, operates major businesses in, inter alia, infrastructure investment, environmental protection, property investment and development, securities trading. Its geographical focus is in Mainland China and Hong Kong, and since the onset of the Asian financial crisis the Company has encountered difficult trading conditions and suffered significant losses in its various areas of activity.

5. In summary, as shown in the unaudited management accounts of the Company for the nine months ended 30 September 2003, the accumulated losses of the Company stood at HK$2,372,172,824.00. It is proposed that such accumulated losses be entirely eliminated by reducing the amount standing to the credit of the share premium account up to the extent of the accumulated losses, from HK$2,817,279,541.00 to HK$445,106,717.00.

6. The purpose for the reduction is to eliminate the accumulated losses so that the Company would be in a position to consider making distributions to its shareholders out of its future profits. In view of the magnitude of the losses and the economic downturn, the directors consider that a significant amount of the accumulated losses represent a permanent loss of the assets of the Company and it is unlikely for them to be set off by profits in the near future. The Company would remain unable to distribute dividends as long as the accumulated losses exist. The elimination of the accumulated losses as proposed should give flexibility to the directors as regards the dividend policy of the Company.

The special resolution

7. On 8 January 2004, the shareholders were sent a circular dated the same date ("the Circular") containing a letter from the board of directors to the shareholders, a notice convening an extraordinary general meeting of the holders of ordinary shares, and a form of proxy for voting at the meeting. The Circular set out in detail the reasons for the proposed reduction of the share premium account.

8. At the extraordinary general meeting held on 2 February 2004, a special resolution was passed unanimously to carry out the reduction of the share premium account as proposed.

The summons for directions

9. At the hearing of the summons for directions on 17 February 2004, I made an order dispensing with the settlement of a list of creditors upon an undertaking given by leading counsel, which I am satisfied would give the necessary protection to the creditors of the Company. I should also mention that a number of creditors have consented to the proposed reduction of the share premium account. At the time of the hearing of the summons for directions, the total debts or claims of the creditors who have not consented to the proposed reduction are only in the region of HK$5.6 million. Given the amount of cash of over HK$48 million as set out under the heading of "Cash at bank and in hand" of the management accounts as at 30 September 2003, the Company should have more than sufficient funds to cover such outstanding indebtedness.

10. The directions given as to the advertisement of the notice of the petition have been complied with. There was no opposition to the petition. Notwithstanding that, an application for confirmation of reduction of capital is not ordinary adversarial litigation, the court still has to be satisfied that sanction should be granted in all the circumstances.

The legal principles

11. The principles upon which the court will sanction a reduction of the share premium account are similar in all respects to those upon which the court will sanction the reduction of share capital (Re Ratners Group plc (1988) 4 BCC 293 at 295). They are well established in various authorities (Re Ratners Group plc; Re Thorn EMI plc (1988) 4 BCC 698 at 701; Re Ransomes plc [1999] 2 BCLC 591; Re Cheuk Nang Technologies (Holdings) Ltd [2001] 4 HKC 571 at 573A to H and 574A to C) and are as follows:

(1)	the shareholders should be treated equitably;
(2)	the shareholders in general meeting should have had the proposal for reduction properly explained to them so that they could exercise an informed judgment on the proposal;
(3)	the creditors should be safeguarded; and
(4)	the reduction should be for a discernible purpose.

12. There is only one class of shareholders in this instance, and they had unanimously voted in favour of the resolution. There is no question that they had not been treated equitably. I am also satisfied that the proposed reduction had been sufficiently explained to the shareholders in the Circular and that the purpose of the reduction, as mentioned earlier, is for a discernible purpose.

13. I turn to consider creditor protection in this instance.

The losses and the undertaking given

14. In compliance with the duty to make full and frank disclosure in an application of this nature, the Company has, by its director Philip Fan Yan Hok, given a detailed account and analysis of how the losses have arisen, since the financial year ended 31 December 1998 (when a net loss in the books of the Company first arose), up to the nine-month period ended 30 September 2003. The auditors of the Company have examined certain financial information in the final draft of Mr Fan's affirmation and read the explanations provided of the reasons for the gains or losses. They have confirmed that they are not aware of any such gains or losses recognised by the Company which are not in accordance with the Company's accounting policies applicable at the relevant time. They have reviewed the management accounts for the nine-month period ended 30 September 2003 and confirmed that nothing has caused them to believe that the accounting policies used in the preparation of these accounts are not consistent with those used in the preparation of the audited financial statements for the year ended 31 December 2002.

15. As stated earlier, the total accumulated losses amounted to HK$2,372,172,824.00. Of the aggregate amount, it is recognised that HK$1,762,999,500.00 or a part of it may possibly be recoverable by the Company in future by reason of the writing back of provisions or other recoveries and is regarded as non-permanent loss. The balance of the accumulated losses, in the sum of HK$609,173,324.00, is treated as permanent loss, by a process of elimination. The major types of permanent loss incurred by the Company included administrative expenses and realised losses on disposal of subsidiaries and other assets which are losses that could not be recovered.

16. The Company has undertaken an extensive creditor ascertainment and quantification exercise and has obtained consents from a number of its creditors to the proposed reduction. As I have mentioned, the total debts of or claims against the Company of the non-consenting creditors are estimated in the region of HK$5.6 million. To safeguard the interest of creditors, the Company has given an undertaking to create a special reserve upon the reduction. No specific amount has been ear-marked to the special reserve, as it is designed to protect creditors in circumstances where there is any future recovery of loss by way of write-backs of provisions and where there is hidden value of the Company in the form of distributable profits available in subsidiaries or associated companies or from the other financial assets or distributions therefrom. The undertaking offered by the Company has followed the form of undertaking accepted in In Re Grosvenor Press plc [1985] 1 WLR 980 as modified in Re Goldbond Group Holdings Ltd, HCMP No. 1891 of 2003 and Re Swank International Manufacturing Co. Ltd, HCMP No. 2580 of 2003. It will be recorded by way of a note in summary form in the audited financial statements of the Company and in its published accounts or prospectuses, so long as the undertaking shall remain effective.

17. By the undertaking, for so long as there shall remain outstanding any debt of or claim against the Company which, if the date on which the proposed reduction ("the Effective Date") were the commencement of the winding up of the Company, would be admissible to proof in such winding up and the person entitled to the benefit thereof shall not have consented to the reduction of the share premium account or agreed otherwise, the Company shall credit to the special reserve:

(1)	any amount arising by reason of a release of any provision taken into account in establishing the accumulated losses of the Company of HK$2,372,172,824.00 shown in the management accounts of the Company for the nine-month period ended 30 September 2003; or
(2)	any amount received by the Company as profit by way of distribution from a corporation which was a subsidiary or an associated company of the Company at the Effective Date which is made by such subsidiary or associated company out of profits available for distribution prior to the Effective Date or any dividend paid to the Company in respect of any liquidation of such subsidiary or an associated company commencing prior to the Effective Date.

18. The special reserve in the undertaking includes the following features:

(1)	The amount credited to the special reserve shall not at any time exceed HK$1,762,999,500.00. This limit is set by the amount of the losses which are not permanent in nature.
(2)	The amount standing to the credit of the special reserve may, and the limit of the special reserve will automatically, be reduced by any increase in the paid-up share capital or share premium account of the Company resulting from the issue of shares (other than for the purposes of any redemption or purchase by the Company of its own shares) for cash or other consideration or by way of the capitalisation of distributable profits or reserves. The limit of the special reserve will also be automatically reduced upon the liquidation, disposal or other realisation, after the Effective Date, of a subsidiary, associated company or certain other assets resulting in the provision made in relation to such subsidiary, associated company or assets becoming permanent.

19. I am satisfied that the above undertaking should give sufficient protection to the creditors of the Company.

20. I note also that the proposed reduction of the share premium account does not involve the diminution of any liability in respect of unpaid capital, or the repayment to the shareholders of any paid-up share capital.

21. For the above reasons, I have sanctioned the proposed reduction of the share premium account.