Re HVB CAPITAL ASIA LTD.

HCMP 150/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 150 OF 2002

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JUDGMENT

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1. In this petition, the Company sought the Court's confirmation for a reduction of capital under s.59 of the Companies Ordinance.

2. Section 58 provides that a company limited by shares and having a share capital may, if so authorized by its articles, by special resolution reduce its share capital in any way subject to confirmation by the Court.

3. The first statutory requirement is that there should be articles authorizing the reduction of capital. This is found in Article 53 of this Company's articles which provides that the Company may by special resolution reduce its share capital in any manner allowed by law.

4. The second statutory requirement is that there should be a special resolution resolving to reduce share capital. On 19 December 2000 it was resolved by the only 2 members of the Company that the authorised capital of the Company be reduced from an aggregate of DM15m and JPY 15b (i.e. JPY15,000m) to JPY 15b and that such reduction be effected by cancelling paid-up capital of 15m shares of DM1 each and returning the paid-up capital (i.e. DM15m) to the shareholders.

5. The third statutory requirement is that there should be confirmation by the Court under s.59 and s.60 of the Ordinance. In Re Ratners Group plc (1988) 4 BCC 293, Harman J set out a number of matters with which the Court would require to be satisfied before confirming a reduction of capital. This case has been followed in a number of cases in Hong Kong, including Re Lippo China Resources Ltd [1998] 1 HKLR 20 and my previous decision in Mitsui Hi-Polymer (Asia) Ltd HCMP 5509/01.

6. The first matter is that the shareholders should be treated equitably i.e. as between shareholders of different classes, or between different shareholders of the same class. In the present case, there is in effect only 1 shareholder, Bayerische, who holds all the shares save for 1 JPY share and 1 DM share held by Abraxas Ltd which are held beneficially by Bayerische.

7. The second matter is that the shareholders should have had the proposal properly explained to them so that they could exercise an informed judgment. In the present case, for reasons set out above, it is obvious that the shareholders were aware of the effect of the resolution.

8. The third matter is that creditors should be safeguarded. This is of primary concern to the Court, as shown in s. 59 and s.60 of the Ordinance. In the present case, however, the reduction was technical only, in that it followed an increase of capital resolved upon by the shareholders 4 days before the special resolution for reduction, with both the increase and reduction in capital being part of Bayerische's plan to expand its operation in Japan, increasing its investment portfolio in JPY for which a change of share capital to JPY (rather than part DM and part JPY) was considered necessary or desirable.

9. By the resolution for increase in capital, new capital of JPY15b was injected into the Company, being after conversion substantially more than DM15m, the capital which was reduced. As at December 2000, the date of the special resolution, the creditors were therefore safeguarded. The audited financial statements of the Company for the year ended 31 December 2000 showed that it had a surplus of assets (consisting substantially of cash and bank balances) over liabilities.

10. One matter that had raised my concern was that, notwithstanding that the special resolution for reduction was passed in December 2000, the present petition was not presented until December 2001. (By reason of the Court's diary, the summons for directions was heard only in March 2002 and the petition was fixed for hearing today).

11. No reason has been given on affidavit for the 1-year delay in presenting the petition, but I am told by counsel for the Petitioner that that was due to personnel changes within the Company and in any event, I am satisfied that creditors continue to be safeguarded as the updated management accounts as at April 2002 still shows a substantial surplus of assets over liabilities, with current assets at JPY32.2b and current liabilities of JPY21.5b, and total assets of JPY33.1b and total liabilities of JPY21.8b .

12. The sum of DM15m equivalent to JPY0.8b has been paid to the ultimate holding company, but has been shown in the audited financial statements as an amount due from the ultimate holding company pending the Court's approval of the share capital reduction.

13. The April 2002 management accounts do not, however, reflect this sum of JPY0.8b, but according to counsel for the Petitioner, the only effect of introducing this figure back into the April 2002 management accounts would be to increase the current assets by JPY0.8b and this does not affect the integrity of the other figures shown in the April 2002 management accounts. This will be deposed to in an affidavit from a director of the Company to be filed within 2 weeks.

14. The fourth matter set out in Re Ratners is that the reduction of capital should be for a discernible purpose. I accept that the change of investment portfolio from DM-based investments to JPY-based investments, with the consequential DM-denominated share capital being replaced by the injection of JPY-based capital, rendered the original DM15m (i.e. JPY0.8b) capital in excess of the business needs of the Company, and therefore it can be returned to the shareholders.

15. In the circumstances, grounds for a reduction having been made out, I am prepared to confirm the reduction and approve the minute proposed to be registered, but my order is to date only from the date when the affidavit referred to above has been read and accepted by the Court.