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HCMP2685/2003
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO.2685 OF 2003
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IN THE MATTER OF SHOWA LEASING (HONG KONG) LIMITED
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IN THE MATTER OF THE COMPANIES ORDINANCE, CAP.32
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Coram: Deputy High Court Judge Poon in Court
Dates of Hearing: 16 September and 13 October 2003
Dates of Judgment: 13 October 2003
Date of Handing Down Reasons for Judgment: 20 October 2003
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REASONS FOR JUDGMENT
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Introduction
1. This is a petition for confirmation of a reduction of capital by Showa Leasing (Hong Kong) Limited ("the Company"). At the conclusion of the hearing on 13 October 2003, I allowed the petition. These are my reasons.
The Company
2. Incorporated on 24 October 1974, the Company had an initial share capital of HK$300,000 divided into 30,000 ordinary shares of HK$10 each. Over the years, its share capital had been increased gradually. As at the date of petition, that is, 24 June 2003, the Company had a share capital of HK$88,881,000 divided into 8,888,100 ordinary shares of HK$10 each, of which 8,868,770 ordinary shares had been issued and were credited as fully paid up. The Company carries on the business of lending, mortgages and investments.
Reduction of capital
3. Article 42 of the Company's articles of association provided that the Company may be special resolution reduce its share capital and any capital redemption reserve fund in any manner and with, and subject to, any incident authorized, and consent required by law. By a special resolution passed at the extraordinary meeting on 30 May 2003, it was resolved that the capital be reduced to HK$33,116,000 divided into 3,311,600 shares of HK$10 each and that such reduction be effected by cancelling the paid up capital by HK$55,765,00 divided by 5,576,600 ordinary shares of HK$10 each.
4. The reduction was necessary because as at 31 December 2003, the Company, adversely affected by the Asian financial crisis and the poor economic situation in Hong Kong, suffered accumulated losses to the extent of HK$59,459,598. The deficit in the profit and loss account of the Company is mainly attributable to (a) losses in respect of disposal of investments; (b) provisions for doubtful debts; and (c) trading losses for the financial period from the year ending December 1998 to the year ending December 2002. The Company's directors believed that part of the paid up capital of the Company which had been lost and was no longer represented by available assets should be cancelled.
Creditors' position
5. The Company has three major creditors, namely, Roseona Bank Limited, the Mitsubishi Trust and Banking Corporation and Mizuho Corporate Bank Ltd. The total sum due to these creditors as at 31 March 2003 amounted to about HK$362 million. The Company has established banking relationship with these creditors over 10 years. It submits annually its audited report to them for the purpose of reviewing the facilities granted to the Company. They all know of the present petition and none of them have any objection.
6. At the direction hearing on 1 August 2003, I dispensed with the settlement of creditors and directed that notice of the hearing of the petition proper be advertised. At the hearings on 16 September and 13 October 2002, none of the creditors appeared.
Requirements
7. Sections 58 to 61 of the Companies Ordinance, Cap. 32 require that the Company articles should permit the reduction of the capital and that there should be a special resolution to reduce the capital. These statutory requirements are clearly met here.
8. In exercising my discretion to sanction the reduction, I need to be satisfied with four criteria :
(1) the shareholders are treated equitably;
(2) the reduction proposals are properly explained;
(3) the creditors are safeguarded; and
(4) the reduction is for a discernible purpose.
See In Re Lippo China Resources Limited [1998] 1 HKLRD 20.
9. On the evidence before me, the two criteria are clearly met.
10. As to the third criterion, Mr Wong, counsel for the Company, submitted that the main issue is whether the losses, represented by the sum sought to be reduced, are permanent. The bulk of the losses in the sum of HK$55,724,174 was sustained in 1999. Prior to and including 1999, the Company was making an operating profit but sustained a net loss by reason of bad debt provision. Since 2000, the Company, whilst being able to recoup part of the bad debts for which provisions were previously made, has sustained net losses because of operating losses. The management accounts for the period up to 30 June 2003 show that the Company is still sustaining losses in 2003. Mr Wong submitted that the Company's primary position was that the losses represented by the sum sought to be reduced should be regarded as permanent. He pointed out that the sum sought to be reduced left a buffer of [HK$59,359,596 HK$55,765,000 =] HK$3,594,596 to protect its creditors in the event of further potential recovery of bad debt provisions. He was however prepared to advise the Company to give a suitable undertaking to protect the creditors.
11. In the course of submissions, I pointed out to counsel that since the Company had been able to recoup part of the bad debts in the past, there was doubt if the provisions made for bad debts which constituted part of the losses should be regarded as permanent losses. Mr Wong then applied for an adjournment to seek instructions if the Company was prepared to give a suitable undertaking. At the adjourned hearing on 13 October 2003, an undertaking was given to the court. A copy of the undertaking can be found at the Annex to this judgment.
12. With the undertaking, I am satisfied that the creditors are safeguarded : see In re Grosvenor Press [1985] 1 WLR 980.
13. On the fourth criterion, it is well settled that reduction is for a discernible purpose if the losses are no longer represented by available assets : In re Jupiter Investments (Cambridge) Ltd [1985] 1 WLR 975. On the evidence before me, I am satisfied that this last criterion is also met.
14. For the above reasons, I confirmed the reduction subject to the undertaking.
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(J. Poon)
Deputy High Court Judge |
Representation:
Mr Jonathan Wong, instructed by Messrs Darin Leung & Partners, for the Petitioner
Annex
Undertaking
The Company by its counsel undertakes that any sum received by the Company representing recovery and/or write backs of provisions, which were made on or before 31 December 2002, in respect of doubtful debts and/or diminution in value of investments (whether by reason of a realization or repayment of the whole or any part or the payment of dividends or interest or otherwise howsoever) up to a maximum amount of HK$55,765,000 will be credited to a special reserve which (a) shall not be treated as realized profit of the Company and (b) shall be treated as an undistributable reserve of the Company for the purposes if Section 79C of the Companies Ordinance Cap. 32 (or any statutory modification or re-enactment thereof) for so long as there shall remain outstanding any debt of or claim against the Company which would be admissible to proof in a winding-up of the Company commencing on the day on which the reduction of capital takes effect and the persons to whom such liabilities are due shall not otherwise agree.
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