Re Yoshiya International Corporation, Ltd.

HCMP 3720/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3720 OF 2002

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REASONS FOR JUDGMENT

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1. This is a petition by Yoshiya International Corporation Limited ("the Company") for confirmation by the court of a reduction of the share capital and the cancellation of the share premium account, under section 59(1) of the Companies Ordinance, Cap. 32. On 25 September 2002, at the hearing of the summons for directions, I made an order dispensing with the settling of a list of creditors under section 59(2) and gave directions for the advertisement of a notice of the hearing of the petition. The directions have been complied with.

The Company

2. The Company was incorporated on 4 August 1972 in Hong Kong as a private company under the name of Lee On Realty and Enterprises Limited. By a special resolution passed on 24 August 1972, it was converted into a public company. The shares of the Company were listed on the Far East Exchange Limited and the Kam Ngan Stock Exchange Limited and have since 2 April 1986 been listed on the Stock Exchange of Hong Kong Limited. Its name was changed to its present name on 29 October 1987.

3. The principal activities of the Company are property and investment holding and its subsidiaries are engaged in property investment, tourism and the provision of interior design service in Hong Kong, mainland China, Japan and Malaysia.

The share capital

4. The initial authorised share capital of the Company was HK$50 million divided into 50 million shares of HK$1.00 each. The share capital was increased several times so that by December 1993, the authorised share capital was HK$300 million divided into 300 million shares of HK$1.00 each.

5. In January 1997, the Company applied to court for confirmation of a reduction of capital on the grounds that as at 30 November 1996, the Company had suffered accumulated losses to the extent of HK$147,647,598.46 and that the shares of the Company were then trading at prices below its nominal value of HK$1.00 per share.

6. On 20 January 1997, the court made an order confirming the reduction of capital. Accordingly, the authorised share capital was reduced from HK$300 million to HK$120 million divided into 300 million shares of HK$0.40 each and that such reduction be effected by cancelling paid up capital to the extent of HK$0.60 upon each of the 193,094,197 shares then in issue and by reducing the nominal amount of all the shares, both issued and unissued, in the authorised share capital of the Company from HK$1.00 to HK$0.40 per share. Upon the reduction of capital taking effect, and by a special resolution passed on 30 December 1996, the authorised share capital was increased to HK$300 million by the creation of an additional 450 million shares of HK$0.40 each. The end result was that the authorised share capital of the Company was HK$300 million divided into 750 million shares of HK$0.40 each. On 18 April 2001, an ordinary resolution was passed to approve an increase in the authorised share capital from HK$300 million to HK$900 million by the creation of 1.5 billion shares of HK$0.40 each.

7. Hence, the present authorised share capital is HK$900 million divided into 2.25 billion shares of HK$0.40 each, of which 482,399,556 shares have been issued and are fully paid up.

The special resolutions

8. At an extraordinary general meeting of the Company held on 2 September 2002, the members passed inter alia these special resolutions:

(1) Subject to the capital reduction as in (2)(a) below becoming unconditional and effective, the sum of HK$250,951,819.00 standing to the credit of the share premium account of the Company as at the date thereof be reduced and cancelled and the directors be authorised to apply such reduced and cancelled amount against the accumulated losses of the Company as at the date upon which the capital reduction becomes unconditional and effective ("the effective date").

(2) Subject to and conditional upon confirmation of the capital reduction by the High Court, the filing with and registration by the Registrar of Companies of a copy of the order of the court and a copy of the minute approved by the court, and the Listing Committee of the Stock Exchange granting the listing of and permission to deal in the new ordinary shares of HK$0.01 each in the share capital of the Company,

(a) the authorised share capital of the Company be reduced from HK$900 million divided into 2.25 billion ordinary shares of HK$0.40 each to HK$22.5 million divided into 2.25 billion ordinary shares of HK$0.01 each and that reduction be effected by cancelling issued and paid-up capital to the extent of HK$0.39 on each existing ordinary share of HK$0.40 each of the Company in issue as at the effective date and by reducing the nominal value of all the unissued shares as at the effective date from HK$0.40 each to HK$0.01 each; and

(b) the directors be authorised to apply the credit arising from the capital reduction towards the elimination of the balance of the accumulated losses remaining after the reduction of the share premium account of the Company and the remaining balance arising from the capital reduction will be retained in the capital reduction reserve account of the Company to be applied in such manner as the directors consider appropriate.

9. The special resolutions were passed in accordance with section 116 of Cap. 32. A printed circular setting out the details and reasons for reduction of capital was served on all holders of ordinary shares and the auditors of the Company on 5 August 2002. Article 63(B) of the Articles of Association provides 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.

10. As in the reduction of capital in 1997, ordinary resolutions were passed on 2 September 2002 for the increase of capital conditional upon the capital reduction becoming effective and unconditional. It was resolved by these ordinary resolutions that the authorised share capital be increased from HK$22.5 million to HK$122.5 million by the creation of 10 billion shares of HK$0.01 each.

Reasons for the proposed reduction

11. There are two reasons for the proposed reduction. The first is to write off permanent trading and investment losses suffered by the Company. The second is to reduce the nominal value of the shares of the Company to a figure more closely in line with the Company's currently traded share price so as to facilitate the raising of capital by the issue of shares if and when the need should arise.

12. Since the Company's first reduction of capital in 1997, the businesses of the Company had continued to deteriorate as a result of the Asian financial crisis. The accumulated losses for the year ended 31 July 1997 to the year ended 31 July 2001amounted to HK$268,504,714.00. These losses resulted from the Company's trading and investment losses in respect of its interests in subsidiaries and are considered by the directors to be permanent. The losses are of two kinds, realised and unrealised losses. Realised losses include administrative and trading expenses and losses due to the disposal of the Company's interest in the subsidiaries and other investments. As for unrealised losses, provisions have been made by the Company for diminution of the value of its landed properties and for the funds advanced to its subsidiaries in acquiring such properties. The provision for impairment loss on interest in subsidiaries would become realised losses upon disposal of the Company's interests in the subsidiaries. As at 31 July 2001, such provisions amounted to HK$93,284,719.00. Out of this amount, and according to the information of the auditors of the Company, HK$80,274,390.00 would be unrealised losses.

13. The up to date management accounts of the Company for the year ended 31 July 2002 showed accumulated losses of HK$342,803,603.58.

14. Given the accumulated losses, it would appear that a substantial part of the paid up capital has been lost and is no longer represented by available assets.

15. Further, the shares of the Company have been trading at prices below the nominal value of HK$0.40 per share for some time. The highest closing price of the shares on the Stock Exchange in August 2001 was HK$0.28 and the lowest closing price in August 2002 was HK$0.095. The closing price of the shares on 11 September 2002 was HK$0.08 per share. Under section 50 of Cap. 32, a company may not issue shares at a discount to the nominal value of the shares unless, inter alia, the issue is authorised by a resolution of the members of the company and is sanctioned by the court. To facilitate the raising of equity capital in future without resorting to section 50, the directors would like to bring the par value of the share capital more in line with the currently traded price of the shares.

16. It is proposed to apply the entire credit of HK$250,951,819.00 in the share premium account and part of the credit in the sum of HK$17,552,895.00 arising in the books of account of the Company as a result of the cancellation of the paid up capital to the extent of HK$0.39 per share upon each of the 482,399,556 issued shares towards the elimination in the same amount of the deficit of the Company shown in the books of account as at 31 July 2001.

17. The remaining balance arising from the proposed reduction, in the sum of HK$170,582,931.00, is to be retained in the capital reduction reserve account, subject to the undertaking referred to below. An undertaking is called for in this instance, as part of the loss to be written off is unrealised loss.

18. The proposed reduction does not involve either the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid up capital.

The creditors' position

19. The Company has a total liability of HK$53,164,058.69 as at 31 August 2002. This consists of HK$3,064,058.69 owed to current creditors and HK$50,100,000.00 owed to contingent creditors.

20. Of the current creditors, debts of HK$547,763.63 owed to 7 creditors will be settled by the Company. The remaining sum of HK$2,516,295.06 is owed to Fortis Bank. Fortis Bank and all the contingent creditors have provided letters to Company stating that they have no objection to the proposed reduction of capital.

21. The undertaking in relation to the capital reduction reserve account, to be given by the Company for the protection of the creditors, is in these terms:

"The Company undertakes that out of the capital by which the Company now seeks to be reduced, a sum of HK$170,582,931.00 will be credited to a capital reduction reserve in the books of account of the Company to be designated as Capital Reduction Reserve Account which will not be treated as realised profits and shall be treated as a reserve of the Company, which shall not be distributable UNTIL and UNLESS the creditors of the Company as at the date of the sanction of the reduction of capital ("the creditors") are fully settled, provided for by the Company or the remaining creditors and each of them do consent by which time the said Capital Reduction Reserve Account will be cancelled and PROVIDED that prior to the cancellation of Capital Reduction Reserve Account:-

(a) the Company may apply it in paying up unissued shares of the Company to be issued to members as fully paid bonus shares; and

(b) the audited accounts of the Company will contain a note recording this Undertaking."

The principles

22. I go to the principles that the court will require to be satisfied for sanctioning a reduction of capital. They are well established (see Re Ratners Group plc (1988) 4 BCC 293 at 295; Re Cheuk Nang Technologies (Holdings) Ltd. [2001] 4 HKC 571 at 573A to H and 574A to C).

23. Firstly, the shareholders should be treated equitably in the proposed reduction. There is only one class of shareholders in the present case. This requirement is clearly satisfied.

24. Secondly, the shareholders in general meeting should have had the proposals properly explained to them so that they could exercise an informed judgment on the proposed reduction. I have read the circular sent to the shareholders on 5 August 2002 and the notice of the extraordinary general meeting with the proposed resolutions. I am satisfied that the proposals have been sufficiently explained to the shareholders. The special resolutions passed are identical to those proposed in the circular.

25. Thirdly, the creditors of the Company should be safeguarded. I have already set out the position of the creditors. It is proposed that the remaining balance of the credit arising from the capital reduction is to be retained in the capital reduction reserve account subject to the undertaking I have mentioned. The idea is that there is to be a reserve account which will not be distributable save in the circumstances as defined in the undertaking. This is similar to the undertaking in Re Grosvenor Press plc [1985] 1 WLR 980 and the form of undertaking in Atkin's Court Forms, 1995 issue, Vol. 9, page 97.

26. Lastly, the proposed reduction should be for a discernible purpose. Here, the purpose of the reduction is two-fold, to write off permanent losses and to reduce the nominal value of the shares so as to facilitate the raising of capital as and when the need arises. I am satisfied these are discernible purposes (see Re Tian An China Investments Co. Ltd. [1998] 2 HKLRD 474; Re Cheuk Nang Technologies (Holdings) Ltd., supra.)

27. In my judgment, this is an appropriate case to sanction the proposed reduction of capital. I have ordered that upon the undertaking of the Company as recorded above, the reduction of the share capital and the cancellation of the share premium account as resolved by the special resolutions be confirmed. I have also approved the draft minute of the reduction and made consequential directions under section 61.