IN RE TIAN AN CHINA INVESTMENTS CO. LTD. AND OTHERS

HCMP2863-65/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

NOS.2863, 2864 AND 2865 OF 1998

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J U D G M E N T

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1. There are before me three petitions to confirm reductions of capital. The three companies concerned are Tian An China Investments Company Limited ("Tian An"), Sun Hung Kai & Co. Ltd. ("SHK") and Allied Properties (HK) Ltd. ("Allied"). These companies do not form part of a group but Allied holds 33.17% of SHK and in turn SHK holds 38.65% of Tian An.

2. The three petitions are similar and they can conveniently be dealt with together. In each case the nominal value of the shares is HK$1. There is, in evidence, the following data :

Tian An's shares have been trading at $0.185 to $0.92 per share since 13 October 1997;

SHK's shares have been trading at $0.44 to $1.09 per share since 8 January 1998; and.

Allied's shares have been trading at between $0.30 to $1 per share since 22 October 1997.

3. Under section 50 of the Companies Ordinance, a company may not issue shares at a discount save in accordance with the conditions set out in that section. If the present trend of share trading prices were to continue and any of these companies were to seek to raise capital by the issuance of new shares or by a placement, they will not be able to do so unless they were to comply with section 50.

4. The purpose of the application is to facilitate capital raising by the companies as and when the need arises. The directors of each of these companies believe that the current economic crisis affecting not only Hong Kong but all of Asia, has drastically affected the economy of Hong Kong resulting in substantial provisions having to be made in the financial statements of many business undertakings. They believe that the recession could conceivably be protracted and in those circumstances, they consider that the companies should place themselves in a situation in which they would be able to obtain an injection of further working capital when circumstances so require. Each of the petitions seek to reduce the nominal value of the shares from HK$1 to HK$0.20 per share. In each case, the articles provide for the reduction of share capital by special resolution. The requisite resolutions have been duly passed.

5. At the hearing on the summons for directions, the court expressed some concern as to whether the present petitions were put forward in order to circumvent the requirements of section 50. In each of the three applications, further affidavits have been filed. These explain that section 50 simply does not serve the purpose in the case of the companies where the market price for the shares has fallen below their par value and such companies are not at present intending to raise further capital. It is said that the time frame for a section 50 application is highly unsatisfactory in that it takes too long. For example, in a placement of shares, a potential placee will not accept the placement unless the placing shares will be allotted and issued to them within a very brief time - usually within a day or two. This is so in case of any unforeseen changes to economic conditions and market prices in respect of the placing shares becoming unstable, and this also applies to underwriters of a rights issue. Apparently, they also consider that the time frame for a section 50 application impracticable as no underwriter will shoulder the market risks involved in the time frame involved.

6. In addition, if there are to be multiple issues, there will have to be multiple section 50 applications, and inevitably this will result in a duplication of costs. More importantly, each of these companies say in evidence, through their respective directors, that there is no present intention to raise any funds and therefore there are no terms of issue that can be or have been established.

7. The reduction is meant to achieve a different objective, that is a permanent reduction in the nominal value of shares rather than permission to make a single issue of shares at less than par value.

8. The accounts of each of the companies show that there are net current liabilities. However, as appears from the management accounts, large amounts are owing to them from their respective subsidiaries. So at the present, the directors see no need to raise any funds, they merely wish to position themselves so that should the need arise, they would be able to consider the different alternatives for fund-raising that would be open to them and act quickly. This could be by way of equity or debt, depending on the circumstances at the time, but essentially it is to preserve the perceived flexibility that they would have if the nominal share value were reduced.

9. It was further submitted by Mr Poon who appears for all the petitioners that when an object may be achieved through two different statutory provisions, the applicant is not restricted to invoking one rather than the other. He relies for this proposition on Re National Bank Ltd. [1966] 1 WLR 819 at 829G-830A.

10. It is clear that the court's discretion to confirm a reduction of capital depends on the satisfaction of the four criteria set out in In re Thorne EMI Plc. [1988] 4 BCC 698 at 701 and applied in Re South China Strategic Ltd. [1997] HKLRD 131 at 133E-D and Re Lippo China Resources Ltd. [1998] 1 HKLRD 20 at 23I-24A.

11. The first consideration is the position of the shareholders. They are treated equally. Further, evidence has been filed in both the Tian An and the Allied applications to the effect that the proposed reduction of the capital of the company has absolutely no impact on the shareholders' interests in the company and there is no impact on the shareholders' funds per share before and after the proposed reduction of capital : see the affidavits of Roger Thomas Best filed in Tian An and Allied at paragraph 6. To similar effect is the affirmation of Colin Stuart Shaftesley filed in the SHK application which reads :

"8. ...The Adjustment Proposal as referred to in the Circular dated 20 May 1998 will have no effect on the underlying assets or financial position of the Company. In addition, the proposed reduction of capital will have no effect on the interests of the shareholders save to the extent that the special capital reserve may become distributable in the future or on the interest of the creditors. As may be further observed from the pro forma Balance Sheet, the capital employed in the Company and the shareholders' funds of the Company remain unchanged as a result of the proposed reduction of the capital of the Company."

12. The circulars which have been sent to the shareholders of each of the company adequately explained the proposal, so I need say no more on this score.

13. I now turn to consider the position of the creditors. Have their interests been safeguarded?

14. At the hearing of the summons for direction, the company, through its leading counsel, gave the usual undertaking. In essence, this provides that 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 of the capital of the company becomes effective were the date of the commencement of the winding-up of the company would be admissible to proof in such winding-up, and the persons entitled to the benefit of such debts and claims shall not have agreed otherwise, the credit thrown up by the reduction will be credited to a special reserve account and (i) will not be available for distribution as realized profits and (ii) shall be treated as an undistributable reserve of the company for the purposes of section 79(c) of the Companies Ordinance. Then there is a proviso that permits the application for payment out of these funds in certain restricted and well defined circumstances. Further, so long as the undertaking takes effect, a note of this will be made in the accounts of the company. The nature and rationale of the undertaking appears in Re Lippo China Resources Ltd. [1998] 1 HKLRD at 24E-25H.

15. So in essence the creditors of the company have the assurance that the credit thrown up will still be locked into the company and in that regard, I have to conclude that their interests are being adequately safeguarded.

16. Finally the question then arises whether the reduction is for a discernible purpose. I have already explained that the reasons set out as to why the company wishes to be able to position itself in the event that they need to raise funds through equity issues. In my judgment, the evidence does establish a discernible purpose : see Re Lippo Resources Ltd. at 25I. Further, I am satisfied that this is not a case where the purpose is to circumvent any statutory provision.

17. For these reasons, I will confirm the reduction of capital sought in each of the three petitions.

(Doreen Le Pichon)

Judge of the Court of First Instance
High Court