In re Commerz Securities (Japan) Co. Ltd.

HCMP1061/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1061 OF 1998

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Reason Handed Down : 11 June 1998

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R E A S O N S

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1. This is a petition presented on 9 March 1998 by Commerz Securities (Japan) Company Limited ("the Company") pursuant to section 59 of the Companies Ordinance, for an order confirming the reduction of the capital of the Company. At the hearing, I made an order confirming the reduction of capital. The reasons appear below.

2. The Company, a special participant member of the Tokyo Stock Exchange ("the TSE"), applied to obtain full membership so as to be allowed to deal with securities business of all kinds instead of being limited to dealing with Japanese Government Bond Futures. An essential requirement is that the Company must achieve a net capital ratio of over 100% and show no deficit in its profit and loss account. As at 31 December 1998, the profit and loss account of the Company showed a deficit of DM33,920,051. This deficit had to be cleared if the Company's application for full membership of the TSE was to proceed. Accordingly, the Company increased its capital at a premium for which no court approval was required for the purpose of netting off the deficit. The second stage was to reduce its capital subsequently so as to clear off all the deficits in the profit and loss account to enable the Company to satisfy the basic requirements of the TSE.

3. On 17 February 1998, one million new ordinary shares were issued at a premium, resulting in DM49 million being transferred to a share premium account. The share capital of the Company after such allotment was DM151,000,004 divided into 41,000,004 ordinary shares of DM1 each and 110,000 non-voting "B" ordinary shares of DM1 each with DM49 million standing to the credit of the share premium account.

4. On 2 March 1998, by special resolution, it was resolved that the issued share capital be reduced by cancelling 1,000,004 ordinary shares of DM1 each and that the share premium be reduced from DM49 million to DM16,079,953 and contingent upon such reduction of capital taking effect, all 110,000,000 non-voting "B" ordinary shares be converted to 110,000,000 voting ordinary shares of DM1 each. The purpose of the reduction of the Company's capital was to clear off the deficits so as to show no loss in the Company's account. The accumulated losses were to be written off by reducing the share capital and writing down the share premium account. In fact, there is no actual reduction of the Company share capital because of the earlier increase on 17 February. As noted above, the object of this exercise is to enable the Company to satisfy the requirements of the TSE.

5. The Company is a wholly-owned subsidiary of Commerzbank Atkiengesellschaft and is part of the Commerzbank Group based in Frankfurt, Germany.

6. At the hearing of the summons for directions on 16 March 1998, the Company sought an order dispensing with the settlement of a list of creditors pursuant to section 59(2). As at 31 December 1997, 96% of the debts were owed to affiliated companies from whom consents had been obtained to the proposed reduction and postponement to other creditors. The hearing was adjourned to enable updated management accounts to be filed and for revised letters of consent to be procured from the major creditors so that the postponement to other creditors would be effective until and including the hearing of this Petition rather than the date of the hearing of the summons for directions. At the adjourned hearing, however, the position had changed dramatically in that amounting owing to associated companies was no longer 96% of the debts but of a significantly smaller percentage. In those circumstances, the summons for directions was further adjourned to enable a guarantee to be provided. At the adjourned hearing on 18 May 1998, an order was made dispensing with the settlement of the list of creditors.

7. The applicable principles are set out in Re Lippo China Resources Limited [1998] 1 HKC 161. As no outside shareholders are involved, the court need only be concerned with the third and fourth principles therein set out. As explained above, the reduction is plainly for a discernible purpose. Therefore the only question that is left is whether the creditors are adequately safeguarded. In this connection, the guarantee provided by Commerzbank Atkiengesellschaft on 30 April 1998 plainly disposes of any concern.

8. In the circumstances, there is no reason why my discretion should not be exercised so as to confirm the reduction of capital.

9. Where on a petition for the reduction of share capital and the share premium account, the share premium account is written down or written off, no reference to the share premium account should be made in the minute. See Re Paringa Mining and Exploration Co. Ltd. [1957] 1 WLR 1143 and The Supreme Court Practice 1997 para.102/4/9. In this connection, I note that this was regrettably expressed in a shorthand way in Re Lippo China Resources Limited as "no minute of this reduction is necessary". This is inexact. For the avoidance of doubt, I confirm that there is to be no reference to the share premium account in the minute.

(Doreen Le Pichon)

Judge of the Court of First Instance
High Court