RE BEAUFORTE INVESTORS CORPORATION LTD

HCMP 584/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 584 OF 2008

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REASONS   FOR   JUDGMENT

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1.  This is a petition to sanction a scheme of arrangement dated 18 April 2008 (“the Scheme”) between Beauforte Investors Corporation Limited (“the Company”) and all its unsecured creditors with non-preferential debts other than the investor mentioned below to the extent of her loans (“the Scheme Creditors”).

2.  The Company was incorporated in Hong Kong on 27 January 1954 under its former name.  Its shares were listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEx”) on 1 March 1954.  Its name was changed to its present name on 14 January 1993.  The present issued share capital of the Company is HK$140,553,600.00 divided into 351,384,000 shares of HK$0.40 each.  The principal activity of the Company is investment holding.

3.  The Company is not at present under any process of winding up, whether compulsory or voluntary, but it has suffered net liabilities of approximately HK$4.4 million as at 30 June 2007.  Trading in the shares of the Company was suspended on 4 July 2006 at its request upon discovery of the dissipation of a main asset of one of its subsidiaries in the circumstances mentioned below.

4.  The Company wholly owned and still owns Ocean Pearl Investments Limited (“Ocean Pearl”), which acquired Grand Noble Group Limited (“Grand Noble”) on 6 August 2002.  Until 11 July 2006, Grand Noble owned a property in Jinan City, Shandong Province, China (“the Jinan Property”), which was valued at HK$237 million as at 31 December 2005.

5.  On 19 October 2004, Ocean Pearl as vendor and True Honest Limited (“True Honest”) as purchaser entered into an agreement by which Ocean Pearl was to sell to True Honest the shares in Grand Noble at HK$270 million, of which HK$250 million was to be paid by True Honest by a promissory note, subsequently extended to be due on 29 June 2005.  The Promissory Note was secured by a charge of the shares in Grand Noble to the Company (“the Share Charge”).

6.  True Honest defaulted in making payment under the promissory note.  So the Company took steps to enforce the Share Charge and resumed its ownership of Grand Noble in July 2005.  In the audited consolidated financial statements of the Company and its subsidiaries for the year ended 31 December 2005, the Jinan Property was included in the assets and represented 73% of the net asset value of the group.

7.  On 4 July 2006, the Company discovered that the Jinan Property had been dissipated and would be put up for auction on 7 July 2006.  Upon investigation, the Company found that the Jinan Property had been subject to various protection orders granted by the Qingdao Intermediate People’s Court to secure sums allegedly due to Shandong Laigang Construction Company Limited (“Shandong Laigang”) by Grand Noble.  After three attempts to sell the Jinan Property by way of auction had failed, the Qingdao court awarded the Jinan Property to Shandong Laigang on 11 July 2006 to satisfy the debt allegedly owed by Grand Noble.  The Company made an announcement regarding this incident on 31 July 2006.

8.  In November 2006, the Company instructed lawyers to lodge an application with the Qingdao court to set aside the judgment in favour of Shandong Laigang in respect of the Jinan Property on grounds of jurisdiction. 

9.  In the financial statements for the year ended 31 December 2006, the Company made a provision of HK$237 million to write off the value of the Jinan Property.  Despite an increase of 206% in the group’s turnover from the preceding year, the loss attributable to shareholders for the year was HK$326.8 million, an increase of 315% compared to the preceding year.

10.  According to the unaudited balance sheet of the group for the first six months in 2007, the amount of non-current assets was HK$0.1 million and that of current assets was HK$0.4 million, whereas net liabilities were HK$4.9 million.  There was therefore a negative shareholders’ fund of HK$4.4 million.

11.  On 28 May 2007, Huang Wenxi (“the Investor”) acquired 26.77% of the issued shares in the Company and has become a substantial shareholder.  She was appointed an executive director and has advanced money to the Company to support its working capital.

12.  On 22 October 2007, HKEx placed the Company in the third stage of the delisting procedures.

13.  The Investor has put forward a rescue proposal under which she would acquire a controlling interest in the Company and offer a return to the creditors for them to discharge and release their claims against the Company.  To this end, the Company and the Investor entered into a subscription agreement dated 1 February 2008 (“the Subscription Agreement”) on these principal terms:

(1)     the Investor will subscribe and the Company will allot and issue 420 million new shares of the Company (“the Subscription Shares”) at a price of HK$0.40 per Subscription Share for a total consideration of HK$168 million (“the Subscription Monies”) on the completion date as defined;

(2)     the interest-free loans owed and to be owed by the Company to the Investor (defined as “the Subscriber’s Loans” in the Subscription Agreement) may, at the discretion of the Investor, be fully set off from the Subscription Monies;

(3)     a sum of up to HK$6 million out of the proceeds from the subscription of the Subscription Shares will be used to settle the claims of the Scheme Creditors in the Scheme, which amounted to approximately HK$4.64 million as at 22 May 2008, with any remaining balance to be used for the general working capital of the Company; and

(4)     completion of the subscription is conditional upon, inter alia, a proposal for the resumption in trading of shares of the Company on HKEx having been approved in principle by HKEx and the Scheme becoming effective.

14.  The net proceeds from the subscription is expected to be approximately HK$152.65 million, after fully setting off the Subscriber’s Loans and deducting the amount reserved to settle the claims of Scheme Creditors and HK$1 million for the costs of the Scheme.  The Company intends to apply the net proceeds towards financing the acquisition of suitable businesses in future and for general working capital of the group.

15.  On 16 April 2008, the Company through its financial advisors submitted to HKEx a proposal for the resumption in trading of its shares and the proposal is pending approval.  The implementation of the Scheme is a condition precedent of the subscription which in turn forms part of the resumption proposal.

16.  The purpose of the Scheme is to clear off all the non-preferential and unsecured creditors of the Company upon completion of the restructuring.  The essential elements of the Scheme may be summarised as follows:

(1)     on the effective date of the Scheme, the Scheme administrators shall instruct the Company to transfer HK$6 million to the Scheme trust account;

(2)     with effect from the effective date, each of the Scheme Creditors discharges and waives all of its claims against the Company in consideration of the right to participate with each of the other Scheme Creditors in the distribution of the funds from time to time credited to the Scheme trust account (“the Scheme Funds”) on the terms of the Scheme;

(3)     all Scheme Creditors shall be invited to file their notices of claim with supporting evidence and the notices of claim will be examined by the Scheme administrators who will decide whether to admit or reject the claims or require further evidence.  Any Scheme Creditor dissatisfied with the decision may refer the matter to an adjudicator for determination and such determination shall be final, conclusive and binding on the Company and such Scheme Creditor; and

(4)     the Scheme Funds will be distributed to the Scheme Creditors on a pari passu basis and rateably among them as determined by the Scheme administrators.

17.  All the Scheme Creditors are expected to be fully repaid under the Scheme.

18.  There are few tangible assets under the control of the Company.  The group did not have significant turnover for the six months ended 30 June 2007 due to shortage of funds.  If the Scheme is not approved and implemented, the Subscription Monies and the Scheme Funds will not become available for distribution to the creditors.  This means that in the worst scenario, the Company will be placed into insolvent liquidation, resulting in little or no return to the creditors.  Also, the resumption proposal will be rejected by HKEx and the shares will be delisted.

19.  On 15 April 2008, an order was made by Poon J giving leave to the Company to convene a meeting of the Scheme Creditors to consider and, if thought fit, to approve the Scheme.  Directions given for advertisement of the notice convening the meeting and despatch of the Scheme document with an explanatory statement to each of the Scheme Creditors have been complied with.

20.  The meeting was duly convened on 8 May 2008.  The Scheme was approved without modification by 9 out of 10 Scheme Creditors present in person or by proxy representing 87.93% in value of the total indebtedness.

21.  There is only one class of creditors for the Scheme.  The Scheme Creditors have been given an adequate explanation of the Scheme in the explanatory statement to enable them to make an informed judgment how they should vote.  The requisite majority has voted in favour of the Scheme.  The statutory requirements have all been satisfied.

22.  The restructuring of the Company would appear to represent the best available option to the Company’s creditors and shareholders.  I am satisfied that the Scheme is such that intelligent and honest members of the class concerned, acting in respect of their own interests, might reasonably approve.

23.  I have therefore sanctioned the Scheme and made an order in terms of the draft submitted.