RE GUANGNAN (HOLDINGS) LTD

HCMP 2273/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2273 OF 2005

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REASONS  FOR  JUDGMENT

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1.  This is a petition presented by Guangnan (Holdings) Limited (“the Company”) for confirmation of reduction of the share premium account, capital redemption reserve, capital reserve and capital.

2.  The Company was incorporated on 12 March 1982 under its former name.  It is an investment holding company.  Its shares are listed on the main board of The Stock Exchange of Hong Kong Limited.  Its subsidiaries are primarily engaged in the manufacturing and sales of tinplates and related products, the development and leasing of properties, and the distribution of live and fresh foodstuffs and foodstuffs trading.

3.  The authorised share capital is HK$1,500,000,000.00, divided into 15,000,000,000 ordinary shares of HK$0.10 each, of which 9,015,832,859 shares have been issued and are fully paid up or credited as fully paid up.  There is only one class of shares of the Company that is in issue.

4.  As at the date of the petition on 20 October 2005, the amount standing to the credit of the share premium account was about HK$1,747,098,000.00, the amount standing to the credit of the capital redemption reserve was about HK$971,000.00, and the amount standing to the credit of the capital reserve was about HK$48,157,000.00.  The credit standing in the share premium account arose as a result of the issuance of shares of the Company above its par value from 1994 to 2004.  The credit standing in the capital redemption reserve arose as a result of the repurchases of the Company’s shares in the market by the Company, following which such shares were cancelled.  As for the capital reserve, this was created following an issue of warrants by the Company in 1997.  All such warrants were either exercised during the exercise period or had lapsed in 1998.

5.  There is provision in the articles of association that the Company may by special resolution reduce its share capital, any capital redemption reserve fund or any share premium account in any manner authorised and subject to any conditions prescribed by law.

6.  On 12 August 2005, a special resolution was duly passed at an extraordinary general meeting to this effect:

(1) the entire aggregate amount standing to the credit of the share premium account, the capital redemption reserve, and the capital reserve would be eliminated and the total credit arising therefrom would be applied to set off against an equal amount of the accumulated losses of the Company;

(2) the nominal value of each existing share of the Company would be reduced from HK$0.10 to HK$0.05, by cancelling paid up capital to the extent of HK$0.05 on each of the issued and paid up shares and by reducing the nominal value of all the issued and unissued shares from HK$0.10 each to HK$0.05 each.  Part of the credit arising would be utilised to set off the remaining amount of the accumulated losses of the Company, after the completion of the transactions contemplated in (1) above, and the balance of such credit would be transferred to a special capital reserve to be created in the books of account of the Company; and

(3) following completion of the transactions contemplated in (1) and (2) above, every ten issued and unissued reduced share of nominal value of HK$0.05 each would be consolidated into one new share of nominal value of HK$0.50 each.

7.  The proposed reduction does not involve the diminution of any liability in respect of unpaid share capital, or the payment to any shareholder of paid-up share capital.

8.  As at 31 December 2004, the Company suffered accumulated losses in the aggregate sum of HK$2,139,578,045.00.  The accumulated losses, which have been expressed as a net figure, consist of HK$3,264,296,957.00 of permanent and realised losses not represented by the present available assets of the Company, HK$377,735,416.00 of non-permanent losses and HK$1,502,454,328.00 of profits.

9.  In summary, the purposes of the proposed reduction of capital are as follows:

(1) It is to reflect the Company’s accumulated losses of capital, which are the net permanent losses and are unrepresented by available assets, so that the Company’s capital would be brought in line with its available assets.

(2) It is to permit the writing down of the nominal value of the Company’s shares, from HK$0.10 per share to HK$0.05 per share, so that the Company would be placed in a better position to raise capital through the Stock Exchange to facilitate the future development of the Company.  During the last 52 weeks, the share price of the Company had ranged from HK$0.16 to HK$0.096.

(3) It is to eliminate the accumulated losses thereby bringing forward the time when the Company may be in a position to consider paying dividends on its shares.  The existence of the accumulated losses is prejudicial to the general body of shareholders.  The Company has not paid any dividend since 1999.

10.  All these are valid and discernible purposes for a reduction of capital.

11.  There is only one class of shareholders and all shareholders will be equally affected.  Prior to the holding of the extraordinary general meeting on 12 August 2005, a circular dated 15 July 2005 was served on all members, providing details of the capital reorganisation as per the proposed special resolution and giving the reasons for the proposed reduction.  The circular was cleared and approved by the Stock Exchange.

12.  The major losses of the Company came from the non-operating losses, the main items of which included:

(1) provision for transaction costs for restructuring;

(2) loss on disposal of long-term/short term investments;

(3) loss on disposal of investment in subsidiaries;

(4) bad debts from subsidiaries;

(5) provisions/write back of diminution in value of investment in associates;

(6) bad debts/recovery of bad debts from associates;

(7) impairment losses on properties/investment properties; and

(8) bad debts/recovery of bad debts.

13.  The Company has filed detailed evidence giving an explanation, breakdown and analysis of the losses that the Company suffered in each of the above categories for the financial years ended 31 December 1998 to 31 December 2004.  The auditors had reviewed the matters in relation to the financial information of the Company as contained in the evidence; they confirmed that they are not aware of any provisions or impairment losses made which are not in accordance with the Company’s accounting policies applicable at the relevant time as set out in its annual reports.

14.  The accumulated losses incurred were mainly due to the huge losses suffered by the Company after 1997.  In particular, the Company suffered substantial losses in the financial years 1998 and 1999 of about HK$3,084,402,686.00.  In those two years, the Company made provisions for bad and doubtful debts and diminution in value of investments due to the sudden collapse of the economy, which put the recoverability of the debts into serious question.  The Company also suffered a loss of about HK$101,471,249.00 in the financial year ended 31 December 2001.  As at 31 December 2004, many of the provisions have materialised and the losses have become permanent.

15.  The permanent losses were incurred due to the Company’s investments in its subsidiaries, which, as a result of the Asian financial crisis, have proved to be unsuccessful investments.  Such losses in investment, after being disposed of and realised, are permanent losses of the Company.

16.  Further, due to its huge losses, the Company had to go through a corporate restructuring to rescue itself from liquidation and in this process, some of the Company’s debts were waived and the Company disposed of some of its subsidiaries and associates, which resulted in further permanent losses.

17.  I agree with the categorisation of permanent and non-permanent losses by the Company.

18.  The Company has produced its latest interim results for the six months ended 30 June 2005.  On a consolidated basis, the Company has a total current asset position of HK$515,998,000.00 with cash and cash equivalents standing at HK$236,950,000.00, and a current liabilities position of HK$195,865,000.00.  The Company’s current assets position, on a consolidated basis, would appear more than enough to cover its current liabilities position.  The total amount that the Company itself owed to its unsecured and trading creditors as at 30 June 2005 stood at HK$34,948,000.00.

19.  The total amount that the Company itself owed to its creditors as at 30 November 2005 has been reduced to HK$20,566,192.25.  Otherwise, there is no material change in the financial position of the Company since the hearing of the summons for directions on 15 November 2005.

20.  Following the implementation of the transactions contemplated in the special resolution, there will be approximately HK$107,439,597.95 of “excess” capital.  Pursuant to the special resolution and as described in the circular issued to shareholders dated 15 July 2005, the Company will transfer this amount to a capital reduction reserve to be created in the books of account of the Company.  To protect the interests of creditors prior to the sanction of the reduction of capital, the Company has given an undertaking that the said amount to be credited to a capital reduction reserve will not be treated as realised profits and shall not be distributed until and unless the creditors as at the date of the sanction of the reduction are fully settled, provided for by the Company, or the remaining creditors and each of them does consent, by which time the capital reduction reserve account will be cancelled.  The undertaking is subject to the provisos that the Company may apply the sum in the capital reduction reserve account in paying up unissued shares to be issued to members as fully paid bonus shares (which merely preserves the right under section 48B(3)(a)), and that the audited accounts of the Company will contain a note recording the undertaking.

21.  I agree that having regard to the undertaking, creditors would not be prejudiced by the proposed reduction of capital, which is largely based on a demonstrated permanent loss of capital.

22.  At the hearing of the summons for directions, an order was made to dispense with the settlement of a list of creditors.  The directions given on the advertisement of the petition to confirm reduction of capital have been complied with.  The Company has not received any objections to the proposed reduction.

23.  I have therefore sanctioned the reduction upon the undertaking aforesaid and approved the draft minute submitted.