RE CHINA AEROSPACE INTERNATIONAL HOLDINGS LTD

HCMP1938/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1938 OF 2005

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R E A S O N S   F O R   D E C I S I O N

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1. This is a petition by China Aerospace International Holdings Limited (“the Company”) for confirmation of reduction of capital as approved by a special resolution dated 25 August 2005 under Article 63(B) of the Company’s Articles of Association.

The Company

2. The Company was incorporated in Hong Kong on 25 July 1975.  It is a listed company and has the shared capital of HK$10,000,000,000.00 divided into 10,000,000,000 ordinary shares of HK$1 each of which 2,142,419,902 shares have been issued and are fully paid up.  The amount stands in the share premium account of the Company is HK$939,048,331.50.

3. The Company holds subsidiaries involved in a number of industries including the manufacture and distribution of printed circuit boards, plastic moulding products, LCD and intelligent battery chargers.

The capital reduction

4. The purpose of the capital reduction is to extinguish accumulated losses the Company has suffered.

5. As at 31 December 2004, the Company suffered accumulated losses to the extent of HK$2,266,101,000.  The deficit in the profit and loss account of the Company is primarily attributable to the following :

(1)	Substantial losses made by industrial manufacturing businesses of the Company with major operations in the Mainland markets in 1998, 1999, 2000, 2001 and 2002.
(2)	High interest expenses : the Company had substantial borrowing during 1998 to 2002.
(3)	Losses on investments in the Mainland : the return on certain investments in the Mainland, mainly, motor vehicles manufacturing, electronic products manufacturing and the property development, did not perform well, such investments incurred losses from 1999 to 2003.
(4)	Involvement in money lending and trading businesses encountered difficulties : the Company was involved in money lending business prior to 1998.  As a result of the Asian financial crisis and the severe downward adjustment in property prices, some of the borrowers could not repay their loans.  Provisions for such bad debts were made in accordance with the accounting policies of the Company and the Hong Kong Statement of Standard Accounting Practice (“SSAP”) No. 31 “Impairment of assets”.  In addition, the Company had incurred losses attributed to trading of electronic components in 1998 and 1999.
(5)	Fluctuation in the property market : market price of properties in Hong Kong fell sharply after 1997 and remained low until the end of 2003, impairment losses were made in accordance with the accounting policies of the Company and SSAP No. 13 “Accounting for investment properties” and SSAP No. 17 “Property, plant and equipment”.  In addition, the Company realized losses as a result of the disposal of some non-core properties assets.
(6)	Strategic investment in securities : the Company has strategically invested in a Hong Kong main board listed company.  In the financial year 2000, provision was made to reflect the difference between the purchase cost and market value of those shares in accordance with the accounting policies of the Company and SSAP No. 24 “Accounting for investments in securities”.

6. The Company’s directors consider that it is likely to be in the interests of the Company to conduct equity fund-raising exercises in the future when suitable market opportunities arise.  Further, they believed that in light of such accumulated losses, the Company’s capital represented by its share capital and share premium account has been lost, it would be in the Company’s interests to reduce its capital and cancel its share premium account in order to eliminate so far as possible accumulated losses, as this would be likely to improve the prospects of raising funds and declaring dividend in the future.

7. There is a further reason for reducing the capital.  Since July 2001, the closing prices of the Company’s shares have ranged from HK$0.187 to HK$0.81, which is below their nominal value of HK$1.00 each.  The closing price of the shares on the Stock Exchange on 25 July 2005 and 9 September 2005 were HK$0.355 and HK$0.37 per share respectively.  However under the Companies Ordinance, a company may not issue shares at a discount to the nominal value of such shares unless, among other things, the issue is authorized by a resolution of the shareholders and is sanctioned by the High Court.

8. The reduction is to be achieved by the cancellation of 90% of paid up capital attributable to each fully paid up and issued ordinary shares of HK$1 in the Company (2,142,419,902 shares) and HK$939,048,331.50 standing to the credit of the share premium account and the resulting credit being set-off against the accumulated losses.  The proposed reduction has been approved by the Hong Kong Stock Exchange.

Confirming the reduction

9. The principles upon which the court considers an application for reduction of capital are well settled.  In brief, the court must be satisfied that :

(1)     shareholders are treated equally;

(2)     the reduction is properly explained to shareholders;

(3)     the interest of creditors are safeguarded; and

(4)     the reduction is for a discernible purpose.

10. On the evidence before me, I am satisfied that the shareholders are treated equally and that they had been properly explained the proposed reduction and its effects.

11. I am also satisfied that no capital will be returned to members nor any liability in respect of unpaid share capital will be reduced.  Thus the creditors will not be prejudiced.  The creditors’ position is further safeguarded by various undertakings offered by the Company in respect of those losses which it intends to write-off against the credit arising from the reduction in share capital, which, if one were to err on the safe side, may be arguably non-permanent in nature.

12. Lastly, it has been well established that reducing share capital to extinguish permanent losses is a discernible purpose.

13. Thus each of the four criteria for reduction of capital is satisfied here.

14. I therefore allowed the application and confirmed the reduction sought.