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HCMP 1181/2008
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO. 1181 OF 2008
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IN THE MATTER of HONG KONG CSL LIMITED 香港流動通訊有限公司 |
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and |
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IN THE MATTER of Companies Ordinance, Cap. 32 of the Laws of Hong Kong |
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Before: Hon Kwan J in Court
Date of Hearing: 22 July 2008
Date of Judgment: 22 July 2008
Date of Handing Down of Reasons for Judgment: 24 July 2008
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REASONS FOR JUDGMENT
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1. This is a petition to seek confirmation of a reduction of the share capital of Hong Kong CSL Limited (“the Company”).
2. The Company was incorporated on 5 September 1980 under its former name. Its name was changed to its present name in 2001. Its present authorised share capital is $4,400,000,000.00, divided into 4,400,000,000 shares of $1.00 each, of which 2,537,388,443 have been issued and are fully paid. The Company is wholly owned by CSL Limited (“CSL”). The principal activity of the Company is the provision of mobile telecommunications services and products to customers in Hong Kong. CSL has also been operating a mobile telecommunications business in Hong Kong since 1997.
3. Both the Company and CSL are subsidiaries of Telstra Corporation Limited, an Australian corporation listed on the Australian Stock Exchange and is the largest provider of telecommunications services in Australia.
4. By a special resolution dated 24 June 2008, CSL as the sole shareholder resolved to reduce the capital of the Company from $4,400,000,000.00 to $1,862,611,558.00 divided into 1,862,611,558 shares of $1.00 each by cancelling and extinguishing all of the capital paid up on 2,537,388,443 shares and by returning to CSL such capital so cancelled and extinguished pursuant to and in accordance with the Implementation Deed entered into between the Company and CSL on 24 June 2008.
5. The sole purpose of the proposed reduction is to enable the full integration of the networks and services of the Company with that of CSL, pursuant to the Implementation Deed, by transferring the business and undertakings of the Company to CSL in the form of distribution in specie of the Company’s assets by return of capital and as dividends. The rationale for the integration is to obtain cost savings through improved operational efficiency, staff rationalisation and other reduction in costs, including information technology and corporate expenses.
6. On the date when the proposed reduction shall become effective, the Company will cease to conduct any of its day-to-day business for the provision of mobile communications services and products to customers or subscribers, as the 3 Mobile Carrier Licences, being the most important assets of the Company for the operation of its business, will form part of its assets and undertakings to be transferred or distributed in specie to CSL.
7. The Company is in a healthy financial position. Of the non-current and current assets, the most significant item for the purpose of these proceedings is liquid asset in the form of cash and cash equivalents. As at 31 May 2008, cash and cash equivalents amounted to $960,036,000.00, made up of a fixed deposit of $113,122,000.00 pledged to a bank for issuing a performance bond for the Company and cash in banks of $846,914,000.00. By 20 June 2008, cash in banks was increased to $1,250,981,343.00, resulting mainly from a further advance of $300 million by CSL.
8. As for liabilities, current liabilities amounted to $1,369,464,000.00 as at 31 May 2008. Adjustment should be made to three of the components by discounting $76,020,000.00 (being liability associated with the 3 Mobile Carrier Licences which will be transferred to CSL) and $206,345,000.00 (being an amount due to CSL and was capitalised by the issue and allotment of shares in the Company, credited as fully paid) and adding $41,020,000.00 (being the provision of two months’ tax liability up to the end of July 2008). Thus, the total current liabilities to be taken into account in these proceedings amounted to $1,128,099,000.00.
9. Non-current liabilities amounted to $886,789,000 as at 31 May 2008, made up of “other liabilities” of $764,667,000.00 and deferred tax liabilities of $122,122,000.00. The “other liabilities” will be transferred to CSL on the date of the reduction as incidental to the transfer of the 3 Mobile Carrier Licences. As for the deferred tax liabilities, the Inland Revenue Department has acknowledged that the Company would not be liable for this item on the distribution of its assets and undertakings to CSL by way of a return of capital.
10. Hence, there remained only the current liabilities in the adjusted amount of $1,128,099,000.00 for which creditor protection is required.
11. Deducting the adjusted current liabilities from the total bank balances of $1,250,981,343.00, there would remain a balance of $122,882,343.00. This excess amount, which represents about 10.89% of the adjusted current liabilities, should be a reasonable margin of safety to cover contingencies and movements in the cash current account. The margin of safety usually required by the court for protection of creditors in a reduction of capital in excess of the wants of a company provided for in section 58(1)(c) is 10%.
12. In the more common situation where cash is returned to shareholders in a reduction of share capital, the safety margin of 10% of liabilities would mean deducting from the liquid assets the liabilities of the company and the proposed return of capital in cash. Here, the safety margin of 10.89% does not include the amount proposed to be returned to CSL in the reduction of capital, as the Company is obliged under the Implementation Deed to distribute to CSL assets in specie instead of cash when the reduction takes place.
13. To ensure that no cash will be returned to CSL so as to protect the interests of the creditors of the Company, the Company has offered an undertaking to the court that cash at its bankers of $1,128,099,000.00 will be applied for the discharge of its adjusted current liabilities subject to 2 qualifications:
(1) in view of the considerable size of the designated amount of cash, it was proposed that it might be correspondingly reduced if the Company has discharged any of the liabilities as a result of payment by CSL or others, or, with the consent of the relevant creditors, the liabilities were transferred or novated to a third party, or there was assumption of the liabilities by a third party; and
(2) simultaneous with the reduction in (1), a proportionate amount equal to 10.89% of the amount so reduced might also be removed from that part of the fund provided as margin of safety.
14. Further, the Company also gave an undertaking to the court that the 3 Mobile Carrier Licences will be transferred or assigned to CSL on the date when the proposed reduction shall become effective.
15. The full terms of the undertakings, which I have accepted, are set out in the annexed schedule.
16. I am satisfied that the interests of creditors should be adequately protected in these circumstances. An order was made at the hearing of the summons for directions on 11 July 2008 to dispense with the settlement of a list of creditors. Directions given for advertisement of a notice of the presentation of this petition have been complied with.
17. All the criteria for the exercise of the discretion to sanction a reduction of capital have been satisfied. I therefore granted the application and made an order in terms of the draft submitted.
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(S Kwan)
Judge of the Court of First Instance
High Court |
Mr Winston Poon, SC, instructed by Messrs Mallesons Stephen Jaques, for the Petitioner
SCHEDULE
(1) the Company by its Leading Counsel undertaking that the cash and cash equivalents so standing to the credit of the Company at its Bankers (other than the sum of HK$113,122,000 that has been designated as security for the issuance of a performance bond by Standard Chartered (Hong Kong) Limited in favour of the Telecommunications Authority) shall be applied towards the settlement or discharge of the aforementioned liabilities of the Company as at the date when the proposed reduction of capital shall take effect PROVIDED ALWAYS that
(a) the amount of the cash and cash equivalents of the Company may be reduced by an amount equal to the aggregate of (i) the total amount of such liabilities settled or discharged or otherwise transferred by the Company from time to time (whether by way of repayment or, with the consents of the relevant creditors or in accordance with any contractual or statutory provisions, novated or otherwise transferred to, or assumed by CSL Limited or other entities); and (ii) 10.89% of the amount of such liabilities so settled or discharged or otherwise transferred; and
(b) upon the settlement or discharge or transfer in full of the aforementioned liabilities of the Company the balance of the cash and cash equivalents standing to the credit of the Company at its Bankers may be treated as realized profits distributable to its member
(2) the Company by its Leading Counsel further undertaking that Mobile Carrier Licences numbered 077, 087 and 092 issued respectively on 22 October 2001, 12 January 2006 and 30 September 2006 by the Telecommunications Authority in favour of the Company will be transferred or assigned to CSL Limited on the date when the proposed reduction shall become effective
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