RE CHINA LIGHT & POWER CO LTD

1997, No.MP3825

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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R E A S O N S

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1. By Petition dated 17 December 1997 ("the First Petition"), China Light & Power Company Limited ("CLP") sought -

a) the sanction of the Court to a Scheme of Arrangement dated 21 November 1997 ("the Scheme") under section 166 of the Companies Ordinance between CLP and the holders of its shares of HK$5 each; and

b) the confirmation by the Court of a reduction of the capital of CLP provided for in the Scheme.

2. It was an integral part of the Scheme that, prior to the Effective Date, China Light & Power Holdings Limited ("Holdings"), a company recently incorporated specifically to enable the Scheme to be carried into effect, presents a petition to the Court for confirmation of the reduction of its share premium account ("the Second Petition"). The Second Petition was filed on 30 December 1997 and a summons for directions therein, also issued on that date, came on for hearing immediately after the hearing of the First Petition. Upon the hearing of the summons for directions, the Second Petition was ordered to be placed in the List for hearing on 12 January 1998.

3. CLP and Holdings, being the Petitioners in respectively the First Petition and the Second Petition, were represented by the same leading counsel. Because of the interlinking of the Petitions, submissions made in the First Petition extended to aspects of the Second Petition.

4. The First and Second Petitions came on for hearing on 5 and 12 January 1998 respectively. Neither was opposed.

5. At the hearing of the First Petition, I granted the relief sought under section 166 of the Companies Ordinance and sanctioned the Scheme and confirmed the reduction of capital which it involved. At the hearing of the Second Petition, I confirmed the reduction of the share premium account of Holdings. Since the Second Petition is in a sense part of the Scheme, the reasons for sanctioning the Scheme and confirming the reductions of capital of CLP and Holdings are dealt with, compositely, below.

The First Petition

The Scheme

6. In essence, the Scheme seeks to superimpose a holding company, namely Holdings, above CLP. The mechanism to achieve that has the following features :

(i) the reduction of the capital of CLP by the cancellation of all its issued shares ("the Scheme Shares") on the Effective Date;

(ii) subject to such reduction of capital taking effect, the increase of the authorised share capital of CLP to its former amount of $13.75 billion by the creation of such number of new CLP shares as is equal to the number of Scheme Shares cancelled;

(iii) CLP to become a wholly owned subsidiary of Holdings on the Effective Date by applying the credit arising through the reduction of capital in paying up in full at par the new CLP shares to be allotted and issued to Holdings or its nominees; and

(iv) holders of Scheme Shares to receive one share in Holdings for every Scheme Share held.

CLP would thus become a wholly owned subsidiary of Holdings and CLP shareholders would become shareholders of Holdings.

7. Schemes involving this type of mechanism is not uncommon : see Re National Bank Limited [1966] 1 WLR 819 at 823C-F.

8. Pursuant to an Order of the Court dated 17 November 1997, a meeting of the shareholders of CLP was convened and held on 15 December 1997 for the purpose of considering and forthwith approving the Scheme. The meeting was duly convened and the resolution that the Scheme be approved without modification was duly passed. Of a total of 234 members present in person or by proxy, representing 1,364,232,049 shares, only two members holding 161,549 shares voted against the resolution. So at the meeting 99.988% of the votes cast were in favour of the resolution. This represented 54.82% of the issued share capital.

Reasons for the Scheme

9. These are explained in the second section of the Chairman's letter to CLP shareholders. The letter states that the business activities of CLP fall broadly into two categories. The first category is the core electricity-related activities in Hong Kong which are governed by the Scheme of Control ("SoC") Agreement with the Hong Kong Government governing the financial operations of CLP and the Castle Peak Power Company Limited ("CAPCO") in which CLP holds a 40% interest insofar as they related to electricity-related activities in Hong Kong. Under the SoC, CLP and CAPCO are obligated to supply adequate and reliable supplies of electricity to customers at the lowest reasonable cost. Tariffs chargeable are designed to recover operating costs but the annual return is suggested at 13.5% of CLP's and CAPCO's average net fixed assets relating to the electricity business in Hong Kong plus 1.5% on net fixed assets financed by shareholders' investments and acquired after September 1978. The second category comprises the CLP Group's electricity-related activities outside of the SoC, including power projects in China and other countries as well as the development of CLP's properties that are no longer required for electricity-related activities.

10. The directors consider that a re-organisation will address the different characteristics of the SoC and non-SoC business as the latter has been growing, particularly in recent years. Other utility companies in Hong Kong have also introduced holding company structures in line with practices in countries such as the United States and the United Kingdom. The Chairman's letter went on to say as follows -

" The Directors believe that the Group Reorganisation will bring considerable benefits to the CLP Group. In particular, it will:

(i) provide a clear delineation between the SoC business and non-SoC business, resulting in a better understanding of the overall business by investors and customers;

(ii) enable CLP Holdings to develop its non-SoC business in a number of areas, including power projects in China and elsewhere, as well as property development, separately from the SoC business;

(iii) further develop distinct management teams dedicated to the SoC business and non-SoC business; and

(iv) provide CLP Holdings with increased flexibility to invest its cash resources, including the funds received from the share placement to CITIC Pacific completed in March 1997, and raise finance for projects undertaken in the non-SoC business."

11. The pre and post reorganisation corporate structure is illustrated by means of a chart which is unnecessary to reproduce here. In brief, Holdings is to acquire all of the non-SoC business from CLP with the exception of CLP's 49% interest in Hong Kong Pump Storage Development Company Limited ("PSDC"), an associated company of CLP at book value. CLP will retain its SoC business which will include its 40% interest in CAPCO and its investment in PSDC which has the right to use certain pump storage capacity of the Guangzhou Pump Storage Power Station until 2034. The existence of various agreements prevents PSDC from becoming a subsidiary of Holdings.

Overseas shareholders

12. Clause 4 of the Scheme provides that where the directors of CLP are advised that the allotment and issue, or transfer, of Holdings' shares to a holder of Scheme Shares may be prohibited by any relevant law or so prohibited except after compliance with conditions regarded by the directors of Holdings or CLP regarded as unduly onerous, then such shares in Holdings are to be sold and the net proceeds accounted for to the holder of Scheme Shares in full satisfaction of his rights to Holdings' shares which he would otherwise have become entitled under the Scheme. So, where such advice is received in relation to any particular overseas jurisdiction, the shareholders resident there will be forced to have their shares in Holdings sold. Although it may be open to shareholders whose shares are compulsorily sold to immediately repurchase Holdings' shares with the net proceeds, such a course may have limited appeal at this particular juncture, given the financial crisis affecting Southeast Asia in particular and the volatility of the stock market world-wide. Moreover the transaction costs will have to be borne by these shareholders.

13. There is evidence that as at 19 September 1997, CLP had shareholders resident in 25 overseas jurisdictions. Advice was not obtained from jurisdictions in respect of every jurisdiction in which the shareholders were resident. The jurisdictions deemed material were Australia, Canada, Malaysia, Singapore, the United Kingdom and U.S.A., a determination made by the directors of CLP by reference both to the aggregate number of shareholders resident in them and in terms of the perceived level of development of the local securities regulatory framework. Advice was obtained from foreign legal counsel in those material foreign jurisdictions as to whether the allotment of Holdings' shares to shareholders in CLP would require any specific compliance with relevant securities laws or regulations. Having regard to advice taken which is summarized in the affirmation of John Stirling Gale dated 31 December 1997, the net effect is that no overseas shareholder will in fact be affected by Clause 4 of the Scheme. Accordingly, no question arises as to the fairness of the Scheme vis-à-vis overseas shareholders.

14. In the course of his submissions, Mr Sykes, Q.C. for CLP, referred to Clause 4 as being for the protection of CLP rather than its shareholders; that it is legitimate protection for a company issuing shares having shareholders in overseas jurisdictions. Even if that be so, it does not follow that the Court is precluded from considering the impact of the provision on overseas shareholders in assessing the overall fairness of the Scheme.

15. Since, in the events that have happened, no overseas shareholders will in fact be affected by Clause 4, because no advice has been received by the directors of Holdings or CLP as provided in that clause, no issue now arises from the operation of Clause 4. Any question that might have arisen has been rendered academic.

Clause 10 of the Scheme

16. It reads as follows -

"10. CLP Holdings shall, prior to the Effective Date, present a petition to the Court for confirmation of the reduction of its share premium account referred to in paragraph (F) of this Scheme pursuant to section 59 of the Companies Ordinance and the holders of CLP Holdings Shares allotted and issued, or transferred, pursuant to Clause 3 of this Scheme shall be deemed, for themselves and their successors in title in relation to such CLP Holdings Shares, to have approved and consented to such reduction of the share premium account of CLP Holdings."

The presentation of the Second Petition is thus made an integral part of the Scheme. Moreover, CLP shareholders on becoming holders of Holdings' shares pursuant to the Scheme are deemed to have consented to the reduction of Holdings' share premium account.

17. This provision is the unusual feature of the Scheme. Its raison d'etre is to address the two technical problems which arise as a result of the creation of a holding company.

18. First, the effect of section 48B(2) of Cap.32 is that Holdings is required to create a share premium account because of its acquisition of the issued share capital of CLP under the Scheme. Section 48B(2) reads :

" (2) Where shares are issued for a consideration other than cash and the value of the consideration, as estimated by the directors having regard to all relevant information, is in excess of the amount credited as paid up on the shares so issued, the shares shall be deemed to have been issued at a premium equal to the difference between the value so estimated and the amount credited as paid up on the shares so issued."

19. The share premium is the difference between the market value of CLP shares in issue on the Effective Date less the aggregate nominal value of Holdings' shares issued to CLP shareholders under the Scheme. Based on the market value of CLP shares at the close of business on 2 January 1998, the share premium account is of the order of $92 billion. In fact their market value as at 5 January, the day before the Effective Date (at $41.60 per share) was a little less and the share premium account upon the Scheme taking effect came to $91,072,512,000.

20. The existence of a large share premium account will create a very unsatisfactory consolidated balance sheet for Holdings because of "goodwill" arising on consolidation. This is the excess of the value of CLP shares over the fair value of the tangible assets acquired. See Re Lippo China Resources Limited, 1997, MP 4195 at pp.7-9.

21. In its balance sheet, Holdings' investment in CLP will have to reflect the market value of the CLP shares. At $41.60 per share, their market value is just over $103.5 billion. As at 30 September 1997, the audited consolidated shareholders' funds of the CLP Group came to $39.297 billion. Between that date and 5 January 1998 (the date preceding the Effective Date), it is estimated that profits of $1.6 billion will have been generated. Therefore, as at the Effective Date, the consolidated shareholders' funds will amount to $40.897 billion. The difference between Holdings' original investment in CLP of approximately $103.5 billion and CLP's net assets represents goodwill on consolidation. Thus the goodwill arising will be approximately $62.6 billion.

22. One of the purposes of the Second Petition is to eliminate the value of the goodwill so arising against the share premium account of Holdings. As to the practice of eliminating goodwill arising on consolidation, see Re Ratners Group plc (1988) BCC 293 at 294 and Re Lippo China Resources Limited (supra) at pp.7-9.

23. Second, Holdings will not be able to treat the profits earned by CLP prior to the acquisition by Holdings as available for distribution by way of dividends to Holdings' shareholders. This is the effect of para.18 of Schedule 10 to Cap.32. The relevant provisions read -

"18.(4) Where group accounts are not submitted, there shall be annexed to the balance sheet a statement showing -

(a) ......

(b) the net aggregate amount, so far as it concerns members of the holding company and is not dealt with in the company's accounts, of the subsidiaries' profits after deducting the subsidiaries' losses (or vice versa) -

(i) for the respective financial years of the subsidiaries ending with or during the financial year of the company; and

(ii) for their previous financial years since they respectively became the holding company's subsidiary;

(c) the net aggregate amount of the subsidiaries' profits after deducting the subsidiaries' losses (or vice versa) -

(i) for the respective financial years of the subsidiaries ending with or during the financial year of the company; and

(ii) for their other financial years since they respectively became the holding company's subsidiary;

so far as those profits are dealt with, or provision is made for those losses, in the company's accounts;

(d) ..........

or, in so far as the information required by this sub-paragraph is not obtainable, a statement that it is not obtainable:

Provided that the Financial Secretary may, on the application or with the consent of the company's directors, direct that in relation to any subsidiary this sub-paragraph shall not apply or shall apply only to such extent as may be provided by the direction.

(5) Sub-paragraph (4)(b) and (c) shall apply only to profits and losses of a subsidiary which may properly be treated in the holding company's account as revenue profits or losses, and the profits or losses attributable to any shares in a subsidiary for the time being held by the holding company or any other of its subsidiaries shall not (for that or any other purpose) be treated as aforesaid so far as they are profits or losses for the period before the date on or as from which the shares were acquired by the company or any of its subsidiaries, except that they may in a proper case be so treated where -

(a) the company is itself the subsidiary of another body corporate; and

(b) the shares were acquired from that body corporate or a subsidiary of it;

and for the purpose of determining whether any profits or losses are to be treated as profits or losses for the said period the profit or loss for any financial year of the subsidiary may, if it is not practicable to apportion it with reasonable accuracy by reference to the facts, be treated as accruing from day to day during that year and be apportioned accordingly."

24. English provisions parallel to those of section 48B and para.18(5) of the 10th Schedule to Cap.32 have been held to have that effect. See Shearer v. Bercain Ltd. [1980] 3 All ER 295. On the effect of section 56(1) of the Companies Act 1948, being the English counterpart to section 48B(2), Walton J. held (at 311b) -

"... on its face s 56(1) clearly envisages a premium arising on an issue of shares otherwise than for cash. In general, it is the duty of the directors to issue shares in their company for the best equivalent they can obtain, and in a very large number of cases that will mean that they will be able to issue them at a premium, and consequently must do so. The amount of the premium must therefore in all cases be a matter of interest and concern to the directors. That being so, there can be no possible ground for the legislature having made such a ludicrous and totally unworkable distinction between cases where there is a stated and cases where there is no stated premium, and distinct from the factual position whether shares have or have not actually been issued at a premium."

The learned judge summarised the effect in these words (at 311e-f) :

"... Shortly put, whatever is purchased with capital in the shape of shares itself, or an equivalent amount, is itself to be treated as capital. That is the intent of s 56, and, in my judgment, it achieves that end."

25. Then in dealing with the English counterpart to para.18(5) of the 10th Schedule, the learned Judge remarked (at 311j-312a) -

" There is, however, yet another provision in the 1948 Act, somewhat like the celebrated (but apocryphal) provision regarding the marriage of the Town Clerk of Leeds, tucked away in para 15 of Sch 8 to the 1948 Act. Schedule 8 is dealing with accounts, and para 15 is in Part II of the schedule, dealing with the position where the company is a holding or subsidiary company."

After setting out the relevant provisions, the learned Judge went on to hold (at 312e-j) :

" The question here is simply: are the words 'for ... any other purpose' completely general, or are they limited in some, and if so what, manner? ... [Counsel for the Crown] suggested that 'for ... any other purpose' meant 'for any other purpose in the accounts of the holding company'. Moreover, he submitted that all that sub-para (5) provided was that the profits in question were not to be treated as revenue profits. Be that so: they were still profits, which the company was free to distribute as it thought fit. Finally he submitted that no consistent purpose was to be discerned in those two sub-paragraphs of Sch 8, and that there was no corresponding provision in para 17 of the same schedule.

To this last point counsel as amicus curiae retorted unanswerably that para 17 was dealing with consolidated accounts, and that the place to which one had to look to discover whether or not sums were distributable by way of dividend was the holding company's own accounts. He also said that whether the Board of Trade had power to amend Sch 8 or not was immaterial; it had to be construed as it stood. Counsel as amicus curiae further submitted that, although this was indeed an odd place to find a general provision of this nature, there was no doubt at all as to what it did, in terms, provide; and that it cannot possibly have been intended to leave the pre-acquisition profits available for distribution as dividend. What would be the point of a provision which merely robbed them of their character of revenue profits? What conceivable purpose could it serve?

I agree with counsel as amicus curiae. The words 'for ... any other purpose' are quite general, and I cannot see how they can be confined in any manner to the purposes of the holding company's accounts. I cannot myself envisage anything in particular to which that could refer."

27. Mr Sykes Q.C. said that these problems were so fundamental that the law was changed not only in England but also in other jurisdictions such as Singapore and New Zealand. But in Hong Kong the law has not been changed.

28. The problems set out above can be resolved by the reduction of the share premium account. In addition, it will enable Holdings to write off preliminary expenses and the expenses of the Scheme. Whilst capital duty which is a significant proportion of the estimated costs of the Scheme of $370 million can be written off against the share premium account pursuant to section 48B(3)(b)(ii), the balance cannot and will have to be treated as realised losses and must be covered by distributable profits before Holdings can pay a dividend.

29. As regards the reduction of the share premium account, it is proposed that it be reduced to an amount equivalent to CLP's stated share premium account of $13.708 billion less an amount equivalent to the expenses of the Scheme and other preliminary expenses. The amount becoming available upon such reduction is to be applied :

(i) to eliminate goodwill on consolidation by writing down the investment of Holdings in CLP so that it is, so far as possible, equal to the book value of the consolidated net assets of CLP as at the Effect Date;

(ii) to write off the expenses of the Scheme and other preliminary expenses; and

(iii) to make available the balance as distributable reserves of Holdings.

This is set out in the Chairman's letter, the explanatory statement as well as Recital (F) to the Scheme.

30. The objective, assuming that the reduction of the share premium account is confirmed, is to replicate a balance sheet for Holdings that is substantially the same as that for CLP immediately prior to the Effective Date. Set out below is the pro forma balance sheet for Holdings, using updated figures available at the hearing of the Second Petition :

HOLDINGS

Pro forma balance sheet

		HK$m
Capital Employed
Investment in subsidiary
- initial value		103,514
- write down		(62,617)
			40,897
Current assets
- cash at bank			325
Current liabilities
- due to Companies Registry		(273)
- due to CLP for costs		(27)
		(300)
- due to Belleterre		(370)
			(670)
			40,552 ======
Share capital			12,442
Share premium			13,363
Reserves
- from reduction		77,709
- costs expended		(45)
- costs accrued		(300)
- write down investment in CLP		(62,617)
			14,747
			40,552 ======

(Belleterre mentioned above is a company incorporated in the BVI and a wholly-owned subsidiary of CLP which advanced $370 million to Holdings on 24 December 1997 principally to cover the capital duty liabilities of Holdings under the Scheme.)

31. With such a balance sheet for Holdings, the position of CLP immediately before the Scheme and the position of Holdings immediately after the Scheme may be summarised as follows :

			CLP	HOLDINGS
Shareholders funds @30.9.97			39,297	-
Undistributed profits to 5.1.98			1,600	-
Shareholders funds @6.1.98			40,897 ======	40,552 ======
Represented by
Share capital			12,442	12,442
Share premium			13,708	13,363
Reserves
	@30.9.97	13,147
	plus to 5.1.98	1,600
			14,747	14,747
			40,897 ======	40,552 ======

The Court's functions

A. Schemes of arrangement

32. The Court is invited to sanction the Scheme. In Re Dorman, Long & Company, Limited [1934] Ch.635 Maugham J. held (at p.655) that -

"It is plain that the duties of the court are two-fold. The first is to see that the resolutions are passed by the statutory majority in value and number ... at a meeting or meetings duly convened and held. The other duty is in the nature of a discretionary power ..."

He went on to say (at p.657) as follows -

"In my opinion, then, so far as the second duty is concerned what I have to see is whether the proposal is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve."

(1) Compliance with statutory requirements

33. As regards the first ground, there appears to be four separate considerations, namely :

(i) the classes of members or creditors must be properly constituted;

(ii) the meetings were duly convened in accordance with the directions given by the court hearing the originating summons;

(iii) members or creditors have been given a sufficient explanation of the Scheme and its effects and sufficient information to enable them to make a reasonable judgment as to how to vote at the meeting; and

(iv) the requisite majority (i.e. a simple majority in number representing three quarters in value of those present and voting in person or by proxy at the meeting) has voted in favour of the Scheme.

See generally Boyle and Marshall on Practice and Procedure of the Companies Court (1997 Edn.) at 3.6.6.

34. In the present case, no issue arises as to the correct composition of the classes of members or creditors since only members holding CLP ordinary shares of $5 each are involved. There is evidence that the requisite meeting was duly convened and passed by the requisite majority.

35. So far as the third consideration is concerned, "the extent and quality of the information required to be supplied depends on the facts of each particular case." See Re Heron International N.V. [1994] 1 BCLC 667 at 672i.

36. In the present case, pared to its essentials, the two Petitions are designed to interpose a holding company which will have a balance sheet akin to that of CLP immediately prior to the implementation of the Scheme. The costs of the Scheme which are not insignificant (estimated to be $370 million) are to be paid out of monies otherwise forming part of distributable reserves. Put shortly, the shareholders are asked to bear the cost of the exercise, since the distributable reserves of Holdings will be less than the distributable reserves of CLP prior to the Group reorganisation, the difference being the expenses of the Scheme and the preliminary expenses. Those matters form the guts of the Scheme.

37. Consent must mean "informed" consent. Implicit in this is that all material information be disclosed to the shareholders. The amount of costs attributable to each share or the estimated costs is plainly material information.

38. It is said that the costs are de minimis. But whether they are to be so regarded must be a matter for the shareholders who, after all, are to foot the bill for the reorganisation, the ostensible benefit being of a rather intangible kind, namely, the rationalisation of CLP's businesses. Only they are qualified to pass judgment on whether the costs involved, amounting to 10% of the aggregate dividends declared by CLP for the year ended 30 September 1997, are inconsequential.

39. Neither the explanatory statement nor the Scheme itself contained any information about expenses other than that they will be Holdings' liability to be written off against the share premium account. Only in the Chairman's letter is there any reference to the estimated costs of the Scheme (i.e. $370 million) "equivalent to approximately $0.15 per CLP share". Had the explanatory statement also contained this information, the costs to be borne by each share would undoubtedly have been more effectively brought home to the shareholders. I say this because the composite document ("the Circular") circulated to shareholders, similar to prospectuses and the like may be described as "heavy" reading and not readily comprehensible to the uninitiated. Regrettably they are usually notable for length, verbosity and obfuscation rather than for brevity and clarity. The single reference to estimated costs lies buried in the Circular, the English version of which runs to almost 140 pages.

40. The estimated expenses of $370 million include $49 million which, at the hearing on 5 January, was represented as being the aggregate amount of professional fees but in respect of which no breakdown was provided. Leading counsel submitted that it is not appropriate for the Court to second guess the reasonableness or otherwise of the fees incurred. It was further urged that the duty of scrutinising the reasonableness or otherwise of the level of fees falls upon the directors. But it is not a question of any second guessing on the part of the Court : rather, that information ought to be provided to the shareholders who are paying for the exercise. In my judgment, it is information that would assist a shareholder in determining whether, in the light of all relevant information, to give or withhold his consent. Moreover, it is precisely the absence of any mechanism for independent scrutiny and challenge (such as the taxation procedure) that makes full disclosure so much more important. It would have been different had the directors sought to obtain a general mandate from the shareholders to be the sole arbiters of what fees are reasonable and to incur such fees as they deem appropriate for the purposes of the reorganisation.

41. There is another respect in which the treatment of costs in the Circular requires comment. At the hearing of the First Petition, the Court's attention was not drawn to the fact that a significant part of the $49 million of fees was a contingency provision. At the hearing of the Second Petition a week later, when the final figures became available, the Court sought an explanation for the apparent decrease in costs from $370 million to $345 million, $3 million of which was attributable to the lower share price. It then emerged that the $49 million included a significant contingency and that this was referred to in the affirmation of Mr Dickson Leach dated 30 December 1997 filed in the Second Petition. As noted above, this was not referred to at the hearing of the First Petition notwithstanding queries raised as to the breakdown of the $49 million.

42. According to paragraph 8 of the affirmation, fees as at 30 December were estimated to be $27 million. If so, the contingency would be $22 million. At the hearing of the Second Petition, the Court was provided with a summary showing the amounts forecast and actual liabilities. It showed a contingency of $27 million, estimated fees as at 30 December at $22 million, with actual fees being $27 million. In the light of Mr Dickson Leach's affirmation, it would appear that contrary to what the Court was told by leading counsel on instructions that the fees had increased by $5 million from $22 million to $27 million or 22% in the interim, the more likely scenario is that the entries under the forecast column for "Fees" and "Contingency" in the summary were erroneously transposed and that there was no change in the amount of fees during that 2 week period.

43. Be that as it may, all this merely reinforces the need for transparency and full disclosure of material information, a practice that can only be salutary. In my judgment, the Circular ought to have disclosed both the fact and the amount of the contingency.

44. Whilst CLP's approach to the costs issue is wrong and there are deficiencies in disclosure in the Circular, in all the circumstances, they are not so fundamental as to justify the withholding of the Court's sanction. The shareholders have not been misled although the information supplied to them left something to be desired. I hasten to add that this should not be taken by future applicants as an invitation to be economic with material information. They do so at their peril.

(2) Overall merits

45. As regards the second ground, the initial onus is upon the Applicant to establish the fairness of the Scheme. Much emphasis was put on the fact that it received strong voting support, a fact which may be thought sufficient to raise a strong inference of fairness. Gower has observed with characteristic perspicacity that "the court cannot readily investigate the indoor management of the company and therefore it tends to take refuge in the facile but fatal rule that

creditors or shareholders know best." The rule has its origins in Re English, Scottish and Australian Chartered Bank (1893) 3 Ch.385 where Lindley L.J. held (at 409) :

"If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the court can be."

As Gower noted, the rule "is based on the fundamentally false assumption that a vote of a meeting necessarily represents the informed opinion of the majority of members of the class concerned unprejudiced by any conflicting interests." See Gower's Principles of Company Law 4th Edn. at 712-3.

46. But no question of conflicting interests arises in the present case. Therefore, applying the test laid down in Re Dorman, Long (supra), I am satisfied that the proposal is such that "an intelligent and honest man ... acting in respect of his interest, might reasonably approve". Accordingly, it is appropriate to sanction the Scheme.

B. Reductions of capital

47. The applicable principles are set out in my decision in Re Lippo China Resources Ltd. 1997, MP 4195 where the relevant English authorities are reviewed. They are that -

(i) the shareholders are treated equitably;

(ii) the reduction proposals are properly explained in the Circular;

(iii) creditors are safeguarded; and

(iv) the reduction is for a discernible purpose.

Each of the four requirements being satisfied, there is therefore no reason not to confirm the reduction of capital which the Scheme involves.

The Second Petition

48. Since this also involves a reduction of capital, the principles set out above apply. So far as creditor protection is concerned, Holdings which was only recently incorporated, has no liabilities except liabilities for capital duty and for expenses. The expenses are owed to CLP. As noted above, Belleterre has advanced $370 million to Holdings principally to enable Holdings to discharge its capital duty liabilities. Both Belleterre and CLP have consented to the proposed reduction of Holdings' share premium account and for that purpose, they have agreed to postpone their respective debts. So the only creditor that needs to be protected is the Company Registry for capital duty. For this purpose, an undertaking was given at the stage of the Order on the summons for directions that if a dividend is declared before the Company Registry's debt is discharged, the dividend is to be paid out of funds other than those representing the advance from Belleterre and deposited with the Hongkong Bank.

49. As to the need for the "usual full undertaking" or the Grosvenor type of undertaking (considered in Re Lippo China Resources Ltd. at pp.4-7), I am satisfied that it is not appropriate since there is but one creditor and there is more than sufficient cash to cover that liability.

50. That the proposed reduction is for a discernible purpose has plainly been established and I need to say no more about this.

51. For those reasons, it is appropriate to confirm the reduction of the share premium account.