RE I-CHINA HOLDINGS LTD

HCMP 580/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 580 OF 2004

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(Heard Together)

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REASONS FOR JUDGMENT

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1. This is a petition presented by I-China Holdings Limited ("the Company") acting by its provisional liquidators for sanction of a scheme of arrangement with its creditors under section 166 of the Companies Ordinance, Cap. 32. At the conclusion of the hearing, I have made an order sanctioning the scheme and granted leave to Seapower Finance Limited, the petitioning creditor in HCCW No. 1321 of 2002 ("the Petitioning Creditor") to withdraw the petition to wind up the Company conditional on the issue of a closing notice in the restructuring agreement made with Wai Kee Holdings Limited ("the Investor"). These are the reasons for my judgment.

The Company

2. The Company is an investment holding company incorporated in Bermuda on 14 May 1990 and listed on the Main Board of the Stock Exchange of Hong Kong Limited. It was registered in Hong Kong under Part XI of the Companies Ordinance, Cap. 32 as an oversea company on 28 June 1990. Until 9 October 2000, the Company was registered under the name of Seapower International Holdings Limited. The latest audited financial statements of the Company, as at 31 March 2003, indicated that the main business operation of the Company and its subsidiaries ("the Group") is the car rental business of Trinity Rent A Car Limited ("Trinity").

3. Since 15 January 2002, the shares of the Company have been suspended from trading by the Stock Exchange. On 17 February 2003, the Stock Exchange informed the Company that it has been placed in the third and final stage of the delisting procedures.

4. On 3 December 2002, the Petitioning Creditor presented its petition in HCCW No. 1321 of 2002. On 5 December 2002, the Hong Kong court appointed provisional liquidators for the Company, giving them power under paragraph 4(g) of the order "to consider and, if thought to be in the best interests of creditors of the Company, enter into any agreements necessary or desirable to effectively restructure the affairs of the Company including, as deemed appropriate, to draft, with a view to implementing, a scheme of arrangement to be entered into between the Company and its creditors, and to call meetings of shareholders and/or creditors and to do all things necessary to facilitate such actions ...". On 8 January 2004, the Bermuda court appointed the same individuals and another as the provisional liquidators with powers similar to those granted by the Hong Kong court.

5. On the basis of their investigations, the provisional liquidators consider the value of the Group's assets from which recoveries may be made by a liquidator for the benefit of unsecured creditors is uncertain and at best minimal. The listed status of the Company's shares is the only material realisable asset identified by the provisional liquidators. It was apparent to them that the best way to maximise recoveries for creditors was by means of a restructuring which realises value from the listed status of the Company's shares. The provisional liquidators received a total of seven written proposals from potential investors and determined that the restructuring proposal submitted by the Investor is likely to provide the best return.

The restructuring proposal

6. On 20 November 2003, the restructuring agreement with the Investor was entered into. The key elements of the restructuring proposal may be stated as follows:

(1) The Investor is to acquire a controlling interest in the Company from the issue and allotment to the Investor by the Company of (a) 5,987,000,000 new shares representing approximately 94.8% of the total enlarged share capital of the Company immediately after completion of the restructuring proposal; and (b) 3,000,000,000 preference shares, in consideration of HK$22 million ("the Subscription Proceeds") and the transfer of all of the Investor's interests in Top Tactic Holdings Limited and its subsidiaries (which represent the entire construction business of the Investor) to the Company for a consideration of HK$60 million of new shares.

(2) The Subscription Proceeds will be paid to the scheme administrators and, after deducting the costs of the winding-up petitions in Hong Kong and Bermuda, the restructuring costs (to the extent that they exceed HK$7,870,000.00 which the Investor has agreed to contribute for this purpose), the preferential claim amounts and a reserve for the costs incurred in connection with the scheme as from the effective date, a cash dividend ("the Cash Dividend") will be available for distribution to the Scheme Creditors (that is, any person other than a person with a preferential claim, to the extent of its preferential claim amount, and other than a secured scheme creditor, to the extent of its secured claim amount, with the benefit of a claim against the Company on or before the effective date).

(3) 200,000,000 new shares of the Company will be made available for distribution to the Scheme Creditors ("the Creditor Share Allocation"). They will receive the Creditor Share Allocation or the proceeds of sale thereof. In addition, the Investor has agreed to grant a put option in respect of the Creditor Share Allocation, which may be exercised within 90 days of the second anniversary of the closing date.

(4) The entire interest of each company in the Group, except for Trinity, will be transferred to a nominee of the scheme administrators for the benefit of the Scheme Creditors for HK$1.00 on or before the closing date. Any net recoveries made in relation thereto will be available for distribution as further cash dividends to the Scheme Creditors under the scheme. The business of Trinity will continue to be carried on by the Investor through the Company.

(5) In consideration of the Company making available for distribution to the Scheme Creditors the Cash Dividend, the Creditor Share Allocation and any realisations from the companies in the Group transferred to a nominee of the scheme administrators as aforesaid, the claims of the Scheme Creditors will be discharged and waived.

7. The Investor has given an undertaking by counsel to the court that it shall be bound by the scheme and shall execute all documents and do all acts and things as would be necessary for the purpose of giving effect to the scheme.

8. As at 9 March 2004, the aggregate of the claims of the Scheme Creditors is approximately HK$599 million. If no further claims are received and if all known claims should become admitted claims, the Scheme Creditors will receive a minimum return of approximately 3.5% of their claims pursuant to the scheme.

9. In the event that the Investor's restructuring proposal is not completed, an alternative proposal is unlikely to be forthcoming. The Stock Exchange is likely to delist the Company's shares and the Company would probably be wound up. If the Company is wound up, the provisional liquidators have opined that the unsecured creditors are not likely to receive a dividend from the winding up.

10. The provisional liquidators have formed the view that it is necessary to have respective schemes of arrangement sanctioned by the Hong Kong court and the Bermuda court to ensure that all creditors of the Company are bound, since the Company's principal place of business is in Hong Kong and all known claims against the Company as at the date of this petition are in respect of debts incurred in Hong Kong. The Bermuda court has sanctioned the scheme of arrangement placed before it on 8 April 2004.

11. On 9 March 2004, I made an order that a meeting of the creditors of the Company be convened in Hong Kong to consider the proposed scheme and gave directions for the publication in Hong Kong and Bermuda of the notice of the court meeting, and for the service of the scheme documents on each of the creditors. These directions have been complied with. On 2 April 2004, the court meeting was convened and the resolution approving the scheme was duly passed by all nine Scheme Creditors with total claims of HK$402,174,305.00 who attended and voted by proxy.

Sanction of the scheme

12. I first consider if there was compliance with the statutory requirements. I am satisfied that the court meeting was duly convened with the order made on 9 March 2004 and the statutory majority approving the scheme was achieved at the meeting. I have considered the scheme documents and it seems to me that the creditors were given a sufficient explanation of the scheme.

13. There was only one class of creditors in the court meeting. This class excludes the Investor. The scheme affects all creditors with a claim against the Company, other than preferential creditors (to the extent of its preferential claim amount) and secured creditors (to the extent of its secured claim amount). Preferential creditors can vote only to the extent of the non-preferential part of their claims. Secured creditors are entitled to vote on and participate in the scheme to the value of their unsecured claim or to release their security interest and have their entire claim treated as unsecured. I am satisfied that the class of creditors at the meeting was properly constituted.

14. I turn to the merits of the scheme. The known claims of the Company include those of intra-group creditors of approximately HK$9,347,000.00. To ensure that external scheme creditors (and not the Company) receive the benefit of amounts that would flow back to the Company if all Group companies were wound up and their assets distributed to their creditors, the provisional liquidators have produced a "Group Liquidation Scenario" which is based on a distribution of the Cash Dividend and the Creditor Share Allocation and assumes a hypothetical liquidation and immediate distribution of the assets of every Group company on the effective date. All the Scheme Creditors which are Group companies have agreed to distributions in accordance with the Group Liquidation Scenario, the purpose of which is to achieve the same result as would be achieved in a liquidation of the Group but without the costs or delay.

15. I have stated earlier the estimated return to the Scheme Creditors under the scheme compared with the situation of a nil return that is likely to happen in a winding up.

16. I am satisfied that the scheme is such that an intelligent and honest man, being a member of the class concerned and acting in respect of his interest, might reasonably approve.

17. For the above reasons, I have made an order in terms of the draft submitted to sanction the scheme.

18. I should also mention that there was an intended application of the provisional liquidators contingent on the sanction of the scheme, seeking leave to compromise the action between China Merchants Bank as the plaintiff, the Company as the 1st defendant and Seapower Consortium Company Limited as the 2nd defendant in HCA No. 7266 of 2000, under section 199 of Cap. 32. As I have informed the provisional liquidators that they do have power to enter into the proposed settlement pursuant to paragraph 4(g) of the order made on 5 December 2002 set out earlier, they did not proceed with the application.

19. I have also made an order upon the application of the Petitioning Creditor to withdraw the petition to wind up the Company and for the petition to be dismissed, and a consequential order that the provisional liquidators be discharged and released, conditional upon and with effect from the issue of a closing notice under the restructuring agreement with the Investor. I have provided that these orders will lapse in the event that the closing notice is not issued within 30 days of the making of such orders and that the scheme administrators and/or the provisional liquidators are to file affirmations to apprise the court of the progress within the stipulated time.