RE CHINA DEVELOPMENT CORPORATION LTD

HCMP1317/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1317 OF 2003

---------------------------

---------------------------

------------------------

J U D G M E N T

------------------------

Background

1. This is a petition by China Development Limited ("the Company") for confirmation of a capital reduction, pursuant to sections 58 and 59 of the Companies Ordinance, Cap.32 of the Laws of Hong Kong.

2. The Company was incorporated on 29 September 1987 under the name of Uratina Company Limited with a share capital of HK$10,000 divided into 10,000 shares of HK$1 each. Over the years, its name had undergone several changes and eventually, on 9 July 1997, the present name was adopted. By various special resolutions passed in different years, the share capital had been increased. As of the date of the petition, the authorized share capital is HK$1,600,000,000.00 divided into 4,000,000,000 ordinary shares of HK$0.40 each, of which 1,490,642,334 ordinary shares have been issued and are credited as fully paid up. Since 3 May 1998, the company shares have been listed on the Hong Kong Stock Exchange.

3. Under Article 64(B) of the Articles of Association, the Company may, by special resolution, reduce its share capital in any manner authorized and subject to any conditions prescribed by law. On 13 January 2003, a circular was despatched to the company shareholders containing, inter alia, the details of and reasons for the proposed reduction of capital. The circular also gave notice convening an extraordinary general meeting ("EGM") of the Company on 6 February 2003.

4. On that day, the EGM was held and three special resolutions with these effects were passed :

(1) Subject to and immediately prior to the reduction of capital contemplated in the second resolution taking effect, the share capital of the Company comprising 4,000,000,000 shares of HK$0.40 each be consolidated into 400,000,000 shares of HK$4 each.

(2) Immediate following the shares consolidation, the other share capital of the Company be reduced from HK$1,600,000,000 divided into 400,000,000 consolidated shares of HK$4 each to HK$4,000,000 divided into 400,000,000 shares of HK$0.01 each, and that such reduction be effective by cancelling paid-up capital to the extent of $3.99 upon each of the consolidated shares in issue on the date on which the petition for the confirmation of reduction is heard by the court and by reducing the nominal amount of all the issued and unissued consolidated shares in the share capital, and the credit arising as a result of the capital reduction contemplated, subject to any conditions which the Company may impose, be applied towards the elimination of the accumulated losses of the Company as at 30 September 2002, as shown in the audited accounts of the Company for the year ended 30 September 2002.

(3) Subject to and forthwith upon the capital reduction taking effect, the authorized share capital of Company be increased to its former amount of HK$1,600,000,000.00 by the creation of such number of new shares of HK$0.01 each the aggregate nominal amount of which is equal to the amount by which the capital of the Company is reduced pursuant to the second resolution and such new shares to rank pari passu in all respects with the then existing shares of the Company.

Reasons for reduction

5. It is the Company's case that it proposes the capital reduction as part of a capital re-organisation involving a consolidation of the share capital; the share reduction and then, an increase in the authorized share capital to restore it to the original amount. This can be readily seen by the special resolutions passed at the EGM.

6. The reasons advanced for the reduction of capital are these. Firstly, the Company's shares have been traded below their nominal value for some time. For the 12-month period immediate prior to the day of the petition, the price at which the shares have been traded ranged from HK$0.01 to HK$0.75 per share. The Company believes that a reduction of the nominal value of the shares would facilitate future capital raising or as acquisition. Secondly, as at 30 September 2002, the Company had incurred accumulative losses of about 981,000,000. The deficit is mainly attributed to losses suffered by the Company in respect of disposal of subsidiaries and investments, provisions for doubtful debts and trading losses for the financial period from 29 September 1987, that is the date of incorporation, to 30 September 2002. The Company considers that of a set of accumulative losses, losses amounting to about 642,000,000 are permanent in nature. The categorization of the accumulative losses in the permanent and non-permanent in nature, can be seen in the 1st affirmation of Kot ka-lam filed on 9 April 2003. In the course of submissions, Miss Ismail, counsel for the Company, has taken me to the relevant evidence. Having read the evidence and considered Jupiter House Investment (Cambridge) Limited [1995] 1 WLR 975, I am satisfied that the losses are indeed permanent in nature. According to the 4th affirmation of Mr Kwok, filed on 5 May 2003, the Company has made further losses, but that does not affect the position of the accumulative losses. The third reason given by the Company is this. It believes that part of the paid-up capital which has been lost and is no longer represented by available assets should be cancelled. It is proposed that a credit of about 594,000,000 arising from the proposed reduction of capital will be used to eliminate such accumulative losses to the extent as permitted by the court.

7. It is also the Company's case that the proposed reduction of capital does not involve either the dimunition of any liability, in respect of unpaid capital for the payment to any shareholder of any paid-up capital. Pursuant to directions given on 15 April 2003, settlement of a list of creditors was dispensed with and the petition was advertised on 5 May 2003. No creditors or shareholders have indicated that they wish to appear at today's hearing, in fact, none of them appears today.

The law

8. I now turn to the law. The requirements laid down by the Companies Ordinance in sections 58 to 61 are :

(1) The Company's Articles should permit the reduction of the capital.

(2) There should be a special resolution resolving to reduce the capital.

(3) There should be a confirmation of capital reduction by the court.

The first two requirements are, of course, met already; the third awaits my decision.

9. In exercising my discretion to confirm a reduction of capital, I need to be satisfied that the criteria laid down by the authorities are met. In Re Lippo China Resources Limited [1998] 1 HKLRD 20, Le Pichon J (as she then was) followed the relevant English authorities and laid down four criteria :

(a) the shareholders are treated equitably;

(b) the reduction proposals are properly explained;

(c) the creditors are safeguarded; and

(d) the reduction is for a discernable purpose.

10. On the first criterion, there is only one class of shareholders and the proposed capital reductions affects all the shareholders equally, by writing off the same amount from each of the shares of the Company now issued. On the second criterion, I am satisfied that the circular sent to the shareholders in connection with the capital reduction has already explained the proposals properly and adequately. On the third criterion, I accept Miss Ismail's submissions that the creditors of the Company will be adequately safeguarded because any losses which are permanent in nature are set off against the credit rising from the capital reduction. On the fourth criterion, namely, the reduction is for a discernable purpose, I am satisfied that on the evidence before me, the purposes to be achieved by the reduction are discernable purposes. The principal reason for the capital reduction is to facilitate the Company, which has been making losses, to raise in the future, capital and acquire assets, if and when necessary. The authorities have clearly established that this is a recognized discernable purpose. Likewise, to cancel part of the paid-up capital which has been lost permanently, and no longer represented by available assets, is also a recognised discernable purpose.

11. In the circumstances, I am satisfied that both the statutory requirements and the criteria laid down by authorities are met. I will therefore confirm the reduction of the capital and make an order in terms of the minutes of order with the amendment that in the recital, a new paragraph "(EE), the 4th affirmation of Kot Ka-lam filed on 19 May 2003" be added after paragraph (E).