XCHRX RE ALBATRONICS (FAR EAST) CO. LTD.

HCMP 1934/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1934 OF 2001

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DECISION

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1. This is an application by the Liquidators of Albatronics (Far East) Co. Ltd ("the Company") for directions on the following question:-

"whether under s.166 of the Companies Ordinance, the Court can sanction a scheme of arrangement whereby the existing shareholders of the Company will exchange their shares in the Company for shares in a new company (formed for the purpose of obtaining a listing on the Hong Kong Stock Exchange pursuant to the Introduction Procedure under the Exchange's Listing Rules) even if there has not been a meeting of shareholders at which a majority in number representing three-fourths in value of the shareholders present and voting agree to such scheme".

The Company

2. The Company was wound up in 1999 under s.228 CO. It has admitted claims in the total sum of about $530m. The realised assets of the Company up to April 2001, after the costs of the liquidation, amount to less than $45m. Preferential claims have been satisfied, but only a small interim ordinary dividend has been paid to creditors so far.

3. The Company has been listed on the Hong Kong Stock Exchange since 1994. However, trading in the Company's shares has been suspended since July 1999.

4. The current position is that the Exchange has threatened to cancel the listing status of the Company unless there is a valid proposal for resumption of trading. A proposal has been submitted by the Liquidators as a result of negotiations with a third party. The Exchange has extended the deadline for de-listing to 10 August 2001.

Introduction proposal

5. The proposal is for what is commonly called a "back-door" listing of the third party. One of the methods of listing provided in the Stock Exchange Rules is by way of "Introduction" (which according to counsel, is unique to Hong Kong). The relevant rules provide as follows.

"7.13 An introduction is an application for listing of securities already in issue where no marketing arrangements are required because the securities for which listing are sought are already of such an amount and so widely held that their adequate marketability when listed can be assumed.

7.14 Introductions will normally be appropriate in the following circumstances:-

...

(3) where a holding company is formed and its securities are issued in exchange for those of one or more listed issuers. Any reorganization by way of scheme of arrangement or by any other means whereby securities are issued by an overseas issuer in exchange for the securities of one or more listed Hong Kong issuers and the listing of the latter issuer or issuers is withdrawn at the same time as the securities of the overseas issuer are listed must first be approved by a special resolution of the shareholders of the listed Hong Kong issuer or issuers".

6. The proposal being negotiated by the Liquidators is for such an Introduction listing. To implement this proposal, the shareholders of the Company would be required to exchange their shares in the Company for some of the shares in a new company to be formed by the third party. The new company would be listed and the Company de-listed. The shares in the Company, having been de-listed, would then be disposed of by the third party transferring them to the Liquidators for a nominal consideration to be held on trust for the Company's creditors.

7. Nam Tai Electronics Inc. ("Nam Tai") is a substantial contributory of the Company. It holds about 50% of the shares in the Company, which shares would, as part of the Liquidators' proposal, be exchanged for shares in the new company. However it would appear that Nam Tai has itself been negotiating with another third party with a view to effecting a rival Introduction listing to that proposed by the Liquidators.

8. It is not for the Court at this stage to consider the relative merits of the proposals. In any event, the Liquidators say that the Stock Exchange is only prepared to consider their proposal and not Nam Tai's proposal. What is of concern to the Liquidators is that there is at least a risk that at a meeting to be called under s.166 CO to sanction a scheme to implement their proposal, Nam Tai might use its holding to block the scheme.

9. I note that it has not been suggested by counsel for the Liquidators that there should be more than one meeting and one class of shareholders (including Nam Tai) voting at that meeting.

The Application

10. The above matters have given rise to the present application. Directions are sought by the Liquidators as to whether a court can sanction a scheme of arrangement to implement the Liquidators' proposal even if the three-fourths majority set out in s.166 CO is not achieved.

11. The matter first came before me in a slightly different form by way of an ex parte Originating Summons issued by the Liquidators. At the commencement of that hearing on 3 May 2001, solicitors acting for Nam Tai appeared and asked to intervene if its interests might be affected.

12. After being briefly addressed (in the absence of Nam Tai's solicitors) by senior counsel then appearing for the Liquidators, I declined to deal with the ex parte Originating Summons except for one uncontroversial aspect and invited the Liquidators to issue and serve on Nam Tai an inter-partes summons in the present form, which they have done.

13. Counsel for Nam Tai has appeared at the hearing of the present application, but has taken the position that the question posed is academic because the Stock Exchange would not allow a listing of the type referred to without approval of the Company's members. Having said that, counsel proceeded to make submissions on two recent Hong Kong judgments dealing with similar proposals (which judgments are discussed below).

14. Counsel for the Liquidators says that the Stock Exchange might waive the requirement for shareholders' approval if it is considered that the judgments are to the effect that shareholders' approval was not required. In the light of that, I have taken the view that the question is not purely hypothetical and that the Court could determine this question under the liquidators' powers to apply to Court under s.255 CO.

Rhine and Yaohan

15. The judgments referred to are Re Rhine Holdings Ltd (in liquidation) [2000] 3 HKC 543 and Re Yaohan Hong Kong Corp Ltd (in liquidation) [2000] 3 HKC 554, [2000] 4 HKC 488 (C.A). The schemes in both cases involved an exchange of shares in the companies in liquidation to effect an Introduction listing for a third party investor, as in this case.

Rhine

16. In Rhine, the liquidators applied to Court for validation of a transfer of shares under s.182 CO as part of the scheme proposed to be made in Bermuda, being the place of incorporation of the company. The judge was dissatisfied with the apportionment of the consideration between the shareholders and the creditors. In response to this, the liquidators submitted that the exchange of shares did not involve any disposition of the assets of the Company as the shares were the assets of the shareholders.

17. The judge held that since the only reason for the exchange of shares was to enable the investor to take advantage of the Introduction mechanism for listing, the ability to facilitate or the facilitation of a listing of the investor's company was a corporate asset.

18. However, as that asset could only be realized with the co-operation of the shareholders, there was a "case for some form of `sweetener' or token consideration to be provided to the shareholders in return for their co-operation having regard to the fact that their shares have no intrinsic value and certainly no value that the shareholders on their own can realize" (at 550).

19. As I understand it, the "co-operation" refers to the shareholders' approval of the scheme.

Yaohan

20. In Yaohan, the application was for the Court's sanction to a scheme of arrangement under s.166 CO. It would be noted that when the matter came before the Court, the shareholders had already voted in favour of the scheme.

21. The judge was dissatisfied with the apportionment of the consideration between creditors and shareholders. In the judge's consideration of the explanatory statement, the issue was raised, amongst others, whether the liquidators had been correct in informing the committee of inspection and the creditors that the realization of the value of the listing status could not be achieved without the shareholders' approval.

22. The judge held (at pp559 - 560) that even if the shareholders had voted against the scheme, the court would nevertheless have had the power to approve it. The reason was that the shareholders had no interest in the matter because on a distribution of assets, there would be no assets available for that class. In so holding, the judge referred to the decision of the English Court of Appeal in Re Tea Corporation Ltd [1904] 1 Ch 12.

23. In Tea Corporation, the assets of the company in liquidation were to be transferred to a third party for shares in a new company. The scheme was approved by the debenture stockholders, the unsecured creditors and the preferential shareholders, but not by the ordinary shareholders. However if the company's assets had been converted into money, there would have been no surplus for the ordinary shareholders. Consequently it was held that as the ordinary shareholders had no interest in the assets, the court could sanction the scheme notwithstanding the fact that they had not approved it.

24. Returning to Yaohan, although the judge considered the apportionment of the consideration between the creditors and shareholders to be unfair to the former, an order was given sanctioning the scheme upon an undertaking from the liquidators to pay part of their own profit costs and legal disbursements for the benefit of the creditors. The undertaking was obtained from the liquidators because the judge took the view (on the basis of Tea Corporation) that they had not given a proper explanation of the true legal position to the creditors.

25. The liquidators appealed against the order requiring that undertaking. The Court of Appeal dismissed the appeal, holding that the liquidators could not be allowed to take the benefit of the order on the basis of giving an undertaking and yet appeal from it later, without first asking the judge to relieve them of the undertaking (at p496).

26. One other issue which arose on the appeal was the court's jurisdiction in sanctioning a scheme. It was argued by counsel for the liquidators that as long as the statutory requirements were fulfilled and there was no unfair discrimination against minority shareholders, the Court had no jurisdiction to consider any other matters. That argument was rejected by the Court of Appeal.

27. The Court of Appeal, in rejecting this argument, affirmed the decision in Rhine that the listing status was an asset of the company (at p498).

28. However on the question whether shareholders' approval was essential, the Court of Appeal held only that the judge was justified in concluding that the creditors of Yaohan had not been informed as to what the judge had meant in Rhine of a token consideration for voting at the meeting (at p498). The Court of Appeal did not question the judge's holding that shareholders' approval would not have been required, but it did not deal with the point why, if that were the case, any consideration, of whatever amount, should be payable to the shareholders for them to vote at the meeting to approve the scheme.

Question in this case

29. This has led to the posing of the stark question in the present case whether the Court can sanction a scheme without the statutory votes from the shareholders.

30. As analysed above, the judgment of the Court of Appeal in Yaohan is silent on this point. Whilst the judge's judgments in Rhine and Yaohan command the highest respect, there is difficulty in applying those judgments.

31. The "listing status" as an asset has not been defined conceptually. It is accepted by both counsel at this hearing that the "listing status" is not a chose in action that the Company can assign. Nor is it attached like goodwill to any part of the Company's business, such that if that business is transferred, the listing status would be transferred with it.

32. Therefore where, as in the present case, the ability to facilitate listing is implemented by the exchange of the shares in the Company with the third party, it is difficult to see how shareholders' approval is not essential when it is their property which is to be disposed of.

33. The shares may well lack any value in the absence of a back-door listing, but as a matter of property, the shares remain the shareholders' property even after liquidation. The shareholders of a company are not trustees of the shares for the company's creditors and they owe the creditors no fiduciary duty. That is why, as recognized in Rhine and Yaohan, their "co-operation" to vote at the meeting is required. Therefore, unless there is a statutory majority of shareholders voting in favour of the scheme, it is difficult to see how, in law, their shares could be made available for exchange.

34. It matters not for how brief a period the third party needs to hold the Company's shares to effect listing of the new company's shares and the de-listing of the Company's shares. The fact remains that for the implementation of the Introduction proposal, it is the shares in the Company that have to be exchanged.

35. This is different from the situation in Tea Corporation. In that case, what was being transferred to the new company were not shares in the liquidated company, but simply its assets of tea estates in Ceylon. Although the ordinary shareholders were given shares in the new company, they were not required to divest themselves of their shares at all. Therefore, it is not surprising that when (a) the ordinary shareholders had no part to play in implementing the scheme and (b) they would not have obtained anything from a distribution of the company's assets in any event, the Court held that they had no interest in the assets and could not object to the scheme. This was the situation in the other English authorities to which I have been referred (Re Brownfields Guild Pottery Society (1898) WN 80, Re Oceanic Steam Navigation Co Ltd. [1939] 1 Ch 41).

36. That is not the case here when the transfer of the shares is the key to the implementation of the back-door listing. That is not to say, however, that the shareholders would then have a free hand in negotiating the consideration for their shares as the Liquidators fear. After a company is wound-up, leave of the Court would be required (under s.182 in a compulsory liquidation and s.232 in a voluntary liquidation) for any transfer of shares. As demonstrated in Rhine, the Court may in the exercise of its discretion on such an application require a fair distribution of the proceeds to be effected before granting leave.

Further submission on construction of s.166(2) CO

37. As a further submission, counsel for the Liquidators has also contended as a matter of construction of s.166(2), that where a company is wound-up, it is sufficient that the requisite majority of the creditors agree in order that a scheme be sanctioned, and if sanctioned, the scheme would be binding on all creditors "and also ... on the liquidator and contributories of the company". As I understand the submission, this would be irrespective of whether there may be any distribution to the contributories.

38. Section 166(1) provides:-

"Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the court may, on the application in a summary way of the company or of any creditor or member of the company, or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the court directs".

Section 166(2) provides:-

"If a majority in number representing three-fourths in value of the creditors or class of creditors, or member or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class or creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company".

39. It would appear to me that when ss.(1) and ss.(2) are read together, s.166 is clear in its application to all companies (including companies being wound-up) whenever a compromise is proposed with its creditors, or an arrangement is proposed with its members. The reference in ss.(2) to the compromise being binding on contributories of the company is simply to reflect the fact that when a company is in the course of being wound-up, both the liquidators and the contributories would be bound by the compromise. I am therefore unable to accept this submission of counsel for the Liquidators.

Directions

40. In the light of the matters set out above, the question posed by the Liquidators in the Summons should be answered in the negative.

41. As for costs, I consider that it was proper for the Liquidators to have issued this summons in order to ascertain their position with regard to the proposal and I would make an order nisi that the costs of both parties to the summons be costs in the liquidation.