RE SUMIDEN WIRE PRODUCTS HONG KONG CO LTD

HCMP187/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.187 OF 2010

----------------------

----------------------

-------------------------------------------------------

REASONS  FOR  JUDGMENT

-------------------------------------------------------

Introduction

1. This is the Company’s application for reduction of its share capital.  On 15 March 2010, after hearing counsel, I allowed the application.  These are my reasons for so doing.

The Company

2. The Company engages in the business of dealing and manufacturing steel wires.  It was incorporated on 10 May 1994, with an authorized capital of US$1,000, divided into 1,000 ordinary shares of US$1 each.  On 14 July 1994, the Company passed an ordinary resolution to increase the capital to the present amount of US$5,400,000 by creating 5,399,000 ordinary shares of US$1 each.  All the newly authorized share capital had since been paid up.

Circumstances giving rise to the reduction of capital

3. The Company is and was at all material times a wholly-owned subsidiary of Sumitomo Electric Industries, Ltd (“SEI”), a Japanese company specializing in manufacturing of copper wire products.

4. On 1 February 2010, SEI passed a special resolution :

“That, subject to confirmation by the court of the Hong Kong Special Administration Region (‘Hong Kong’), the capital of the Company be reduced from US$5,400,000, divided into 5,400,000 ordinary shares of US$1.00 each, to US$300,000, divided into 300,000 ordinary shares of US$1.00 each, and that such reduction be effected by cancelling paid-up capital to the extent of US$1.00 upon each of the 5,100,000 issued ordinary shares of US$1.00 each (‘the Proposed Reduction’).

That alternatively in the event that the court of Hong Kong does not confirm the Proposed Reduction, the capital of the Company (subject to confirmation by the court of Hong Kong) be reduced from US$5,400,000, divided into 5,400,000 ordinary shares of US$1.00 each, to US$604,363 divided into 604,363 ordinary shares of US$1.00 each (‘the Alternative Proposed Reduction’), and that such reduction be effected by cancelling paid-up capital to the extent of US$1.00 upon each of the 4,795,637 issued ordinary shares of US$1.00 each.”

5. The circumstances giving rise to the proposed reduction may be summarised as follows.

6. In 2005, the Company was owned by SEI and another Japanese company, Sumitomo Corporation (“SC”) as to 78% and 22% respectively.

7. The Company had a 90% owned subsidiary in the Mainland, called Sumiden Wire Products (Guangzhou) Company Limited (“the Subsidiary”).  Its principal activity was manufacturing of steel wire products.

8. The Subsidiary traded at a substantial loss.  For the financial year of 1 January 2004 to 31 December 2004, its accumulated loss amounted to RMB¥39,650,178.04.  SEI therefore decided to sell it to Suzuki Metal Industry Company Limited (“SMI”), a well-known Japanese metal manufacturer.  But SMI agreed to the sale only if the Subsidiary was shown to have a positive retained earning.

9. SEI and SC then came up with a proposed scheme as described in the Note of Directors’ Meeting of SEI on 29 November 2005.  In gist :

(1)     SEI and SC would extend loans of US$4,500,000 and US$1,200,000 to the Company.

(2)     The Company would then extend a loan of US$5,100,000 to the Subsidiary.

(3)     The Company would eventually waive the loan to the Subsidiary.

(4)     The Subsidiary should then make use of the loan from the Company to wipe off its retained loss.

(5)     The Company would dispose of its shareholding in the Subsidiary to SEI and SC.

The scheme had since been implemented in full.

10. On 1 November 2005, the Company entered into an Uncommitted Line Agreement with the Subsidiary, by which the Company would extend a loan not exceeding US$5,100,000 to the Subsidiary.  The Company obtained US$4,500,000 from SEI and US$1,200,000 from SC.  On 30 November 2005, the Company remitted US$5,100,000 to the Subsidiary.  On 5 December 2005, the Company resolved to waive the loan of US$5,100,000 to the Subsidiary so that it could enjoy a positive retained profit.  On the same day, the Subsidiary passed a resolution to apply the loan of US$5,100,000 to make up its loss.

11. As US$5,100,000 (equivalent to RMB¥41,361,000) had been waived by the Company, the Subsidiary no longer suffered any retained loss. 

12. By the Equity Interests Transfer Agreement dated 10 March 2006, the Company transferred its 70% and 20% shareholding in the Subsidiary to SEI and SC for US$4,719,240 and US$1,348,354. 

13. On 22 March 2006, the Company issued invoices to SEI and SC for payment.  On 27 March 2006, the Company, SEI and SC entered into an agreement to set-off their respective payment obligations against one another under the Uncommitted Line Agreements and the Equity Interests Transfer Agreement.

14. As a result of the Company’s waiver and writing-off of the loan to the Subsidiary, it suffers a permanent and irrecoverable loss of US$5,100,000.

15. The Company therefore sought to reduce the share capital by US$5,100,000 by cancelling paid-up capital to the extent of 5,100,000 shares of US$1 each; or alternatively to reduce the share capital to US$604,363 by cancelling paid-up capital of 4,795,637 issued ordinary shares of US$1 each by reference to the Company’s accumulated loss in 2009 being HK$37,070,273.

16. It is the Company’s case that the proposed reduction does not involve diminution of any liability in respect of unpaid capital or payment to any shareholder of any paid-up capital or of any amount standing to the credit of any share premium account.

Sanctioning the reduction

17. According to Section 58 of the Companies Ordinance (Cap.32), a company limited by shares and having a share capital may, if so authorized by its articles, by special resolution reduce its share capital in any way subject to confirmation by the court.

18. The requirements on formality have already been met.  Article 45 of the Articles of Association of the Company authorizes reduction of share capital in these terms :

“The Company may by special resolution reduce its share capital, any capital redemption reserve fund or any share premium account in any manner prescribed by law.”

And the special resolution to reduce the share capital of the Company was passed by SEI, the sole manner of the Company, on 1 February 2010.  The Company in turn passed the requisite resolution for reduction on the same day.

19. Before sanctioning a reduction of capital, the court must be satisfied with four matters :

(1) The shareholders should be treated equitably.

(2) The shareholders should have had the proposal properly explained to them so that they could exercise an informed judgment when voting on it.

(3) The creditors’ interests should be safeguarded.

(4) The reduction of capital should be for a discernible purpose.

All these requirements are met here.

20. First, as SEI is the sole member of the Company, the question of equitable treatment of shareholders does not arise.

21. Second, SEI had actively participated in the scheme leading to the need of reduction of share capital of the Company.  SEI well knew what was going on and must have made an informed decision in voting to reduce the Company’s capital.

22. Third, the total liabilities of the Company as at 31 December 2009 are HK$42,680,641.  The creditors who have consented in writing to the reduction of share capital of the Company represent a total of HK$42,064,917.43.  What remain outstanding are accrued tax payable and part of the accrued expenses.  But the assets of the Company of HK$47,093,471 far exceed such liabilities.  So the creditors’ interests have been safeguarded.

23. Fourth, the reduction of share capital is clearly for a discernible purpose.  It is essentially a re-distribution of the resources within the same group of companies to enable the disposal of the Subsidiary resulting in a permanent loss of the paid-up capital to the Company.

24. For these reasons, I allowed the application.