RE TEST-RITE PRODUCTS (HONG KONG) LTD

HCMP 134/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 134 OF 2006

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REASONS   FOR   DECISION

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1.  This petition was presented by Test-Rite Products (Hong Kong) Limited (“the Company”) to confirm a reduction of its share capital.

2.  The Company was incorporated on 30 December 1980 as a private company under its former name.  Its authorised capital at present is HK$26 million divided into 260,000 ordinary shares of HK$100.00 each, all of which have been issued and are fully paid.  259,999 of the shares are held and registered in the name of Test-Rite International Company Limited (“Test-Rite International”) and the remaining share is held and registered in the name of Upmaster International Company Limited.  The shares of Test-Rite International are listed on the Taiwan Stock Exchange.  The Company has been engaged in trading business.  The products involved include car accessories, bathroom accessories, tools and giftware.

3.  There is provision in the articles of association for reduction of the share capital by special resolution.

4.  By a special resolution of the Company dated 10 January 2006 resolved upon in writing and signed by or on behalf of all the shareholders, it was resolved that the capital of the Company be reduced from HK$26 million divided into 260,000 shares of HK$100.00 each to HK$1 million divided into 10,000 shares of HK$100.00 each and that such reduction of capital be effected by cancelling and extinguishing the 250,000 shares of HK$100.00 each which have been issued and are fully paid and standing in the name of Test-Rite International.

5.  The purpose of the proposed reduction is to reduce and write off the accumulated shareholders’ deficit in the sum of HK$25 million.  As at 31 October 2005, capital to the extent of HK$25,235,837.67 had been lost, due to operating losses.  The Company made substantial losses in 2003 (HK$37.9 million) and 2004 (HK$3.7 million), because of a very sizeable drop in sales turnover resulting from the negative impact of SARS, and significant increases in office expenses in Mainland China and staff salaries.

6.  The Company has adduced the audited accounts for the years ended 31 March 1989 to the year ended 31 December 2004 and the unaudited management accounts from 1 January 2005 to 31 October 2005.  The accumulated losses incurred are in the nature of trading losses and operating expenses.  It is asserted that the shareholders’ deficit proposed to be eliminated in the sum of HK$25 million should be regarded as a permanent loss.

7.  Further evidence has been filed to explain a provision of HK$689,567.00 for the diminution in value of investment securities in 2000.  The Company had disposed of all investment securities in the following year, so the situation has crystallised and no write-back for the said provision will occur in the future.

8.  As for the provision of bad debts, the bad debts written off in the years 1999 to 2005 were insignificant compared with the sales turnover for the periods in which the accounts receivable were incurred.  The Company had been engaged in trading in a variety of products until recently.  Its clients were worldwide, including countries in South America.  Some of the accounts receivable had remained outstanding for a very long time and the Company would find debts that were not recoverable as the debtor was in liquidation or were not worth pursuing.  The Company has resolved not to pursue long outstanding balances, taking into account the relatively small sums involved and the disproportionate expenses in instituting proceedings overseas.  In any event, the Company is prepared to offer an undertaking in the usual form in the event any future recoveries should be made in respect of the net amount of bad debts written off between 1999 and October 2005 in the total sum of $867,275.00.

9.  The Company’s need for capital is significantly reduced because of the change in the nature of its business and the diminution in scale of its trading business.  The holding company in Taiwan, Test-Rite International, has decided to conduct the group’s trading business under a different group entity.  In recent months, the Company has become more of a servicing company for other group entities and units, especially those operating in the Mainland.  As a result, the number of people employed has been reduced to about 20 and its turnover has dropped from that of a high-volume trading income to a low-volume management fee income.

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

11.  The Company has obtained a letter from its bank creditor, Citibank NA, Taipei branch, in November 2005 to the effect that the bank would have no objection to the proposed reduction of capital.  The Company has no other creditor on its books.

12.  At the hearing of the summons for directions on 10 May 2006, I made an order dispensing with the settlement of a list of creditors.  The directions for advertisement of a notice of the hearing of the petition have been complied with.

13.  The requirement of equitable treatment of shareholders in the proposed reduction of capital is clearly satisfied.  The interest of the only creditor would appear to be safeguarded, as most of the accumulated losses should be regarded as permanent losses and the Company has offered an undertaking to the court as mentioned earlier.  I am satisfied the reduction is for a discernible purpose.

14.  I have therefore confirmed the proposed reduction of capital and made an order in terms of the draft submitted.