RE SHOUGANG CONCORD INTERNATIONAL ENTERPRISES CO LTD

HCMP 1224/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1224 OF 2005

____________

____________

__________________________________

REASONS  FOR  JUDGMENT

__________________________________

1.  This petition was presented by Shougang Concord International Enterprises Company Limited (“the Company”) on 14 June 2005 for confirmation of reduction of capital by cancellation of the share premium account and the capital reserve account, pursuant to sections 58(1) and 58(1A) of the Companies Ordinance, Cap. 32.

2.  The Company was incorporated on 10 September 1985 under its former name and was converted into a public company in April 1991.  Since then, its shares have been listed on the main board of The Stock Exchange of Hong Kong Limited.  It adopted its present name in July 1993.  The principal activities of the Company are investment holding and, through its subsidiaries, manufacture and installation of kitchen and laundry equipment, chartering of vessels, hiring of floating cranes, manufacture, sale and trading of steel products, electricity generation and property investment.  All of the subsidiaries have nominal issued share capital and their working capital was financed from advances by the Company or, where the Company’s investment in the project is not wholly owned, from other shareholders.  Most of the subsidiaries are single purpose companies.

3.  The present authorised capital of the Company is HK$2 billion divided into 10 billion ordinary shares of HK$0.20 each, of which 4,646,251,215 ordinary shares were issued and credited as fully paid up as at 31 March 2005.  As at that date, there was standing to the credit of:

(1)	the share premium account the sum of HK$1,412,855,741.98, which has arisen due to various issuance of the shares of the Company at a premium accrued pursuant to section 48B of Cap. 32; and
(2)	the capital reserve account the sum of HK$1.8 billion, which was created through the reduction of the share premium account of the Company on 29 November 1993 as approved by the court and could normally be applied and reduced for the same purposes as a share premium account.

4.  There is provision in the articles of association that the Company may by special resolution reduce its share capital, any capital redemption reserve fund or any share premium account in any manner authorised and subject to any conditions prescribed by law.

5.  By a notice dated 20 May 2005 contained in a circular sent to the shareholders, the Company convened an extraordinary general meeting on 13 June 2005.  By a special resolution passed at that extraordinary general meeting, it was resolved that the share premium account and the capital reserve account of the Company be cancelled.

6.  The Company proposes to apply the credit of the capital reserve account of HK$1.8 billion and part of the share premium account in the sum of HK$1,120,201,029.67 towards the elimination of its accumulated losses, which amounted to approximately HK$2,920,201,029.67 as at 30 June 2004 (“the Accumulated Losses”).  The balance of the credit arising on the capital reduction, of approximately HK$293 million, will be transferred to a special capital reserve to be created by the Company, subject to such conditions as may be imposed by the court.

7.  The Company has incurred further losses of HK$17,206,286.42 during 1 July 2004 to 31 March 2005 (“the Further Losses”), which it does not propose to eliminate at this stage.  The Further Losses were not related to the Accumulated Losses and were unknown when evidence was prepared for the affirmation in support of this application.

8.  No repayment on the Accumulated Losses has been made since 1 July 2004.  Such losses had been accumulated since 1998.  These losses were mainly attributable to (1) operating losses; (2) loss on diminution of value in subsidiaries; and (3) loss on disposal of interest in an associated company.

9.  As I have mentioned, the purpose of the proposed reduction of capital is to apply such amounts of the credit arising as may be necessary to eliminate the Accumulated Losses.  This is designed to ensure that the Company will have a capital structure that would permit the payment of dividends, as and when the directors consider it appropriate in the future.  The Further Losses would be taken into account under Part IIA of Cap. 32 when any future distribution of profits may be considered and a proposed dividend is calculated.

10.  The capital reduction does not involve either the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital or of any sum standing to the credit of the share premium account and the capital reserve account.  Save for the related expenses, the assets of the Company would not be affected.

11.  On 12 July 2005, an order was made dispensing with the settlement of a list of creditors and directions were given for advertising the notice of hearing of the petition.  The directions have been complied with.  No objection was raised by any one at the hearing of the petition.

12.  The jurisdictional requirements for confirmation of the proposed reduction are satisfied.

13.  There is no question of inequitable treatment of any of the shareholders, as the proposed reduction only applies in respect of the share premium account and the capital reserve account, not to any paid-up share capital or any shareholding of its members.

14.  The shareholders were given a proper explanation of the proposal for reduction in the circular despatched to them on 20 May 2005.  I am satisfied they would have sufficient material to enable them to exercise an informed judgment how they should vote on the resolution.

15.  As to whether the interests of all existing creditors are safeguarded, the issue here is whether the Accumulated Losses to be eliminated are permanent in nature, in the sense that they are not necessarily irretrievable but must not be either temporary or balanced in whole or in part by gains on other assets.

16.  Detailed evidence was filed to explain the individual items of losses sought to be eliminated, the nature of the losses, when the losses were provided for or written off.  The approach was to treat any item of loss as non-permanent if there is a possibility that the item may be recovered in future.  A breakdown of the Accumulated Losses is as follows:

(1)	HK$91,998,966.17 being the losses incurred from operations, they represent all the Company’s income less expenses for the general operations of the Company and had been reflected as realised losses in the audited financial statements;
(2)	HK$2,755,579,395.76 being the losses on diminution of value in subsidiaries, they are losses incurred after the disposal by the Company’s subsidiaries of their material assets, i.e. the amount written off or provided for (i) the investment costs in the subsidiaries and/or (ii) the amount of the advances made to the subsidiaries.  These subsidiaries had incurred significant losses and their accounts were in net liabilities position; some of them had been dormant or struck off.  The directors are of the view that there is no prospect for the Company to recover its investment in, and advances to these subsidiaries; and
(3)	HK$72,622,667.74 being the losses on disposal of an associated company, the losses realised had been recognised as a loss on disposal of an associate and reflected in the annual report of the Company for the financial year ended 31 December 1999.

17.  In respect of the losses on diminution of value in subsidiaries, I do not propose to analyse if each item of loss should be regarded as permanent, save to point out that not all were realised in sense of a disposal loss, as in some instances provision was made for an impairment in value, and not all of the subsidiaries were struck off.  I do not find it necessary to do so as the Company has offered an appropriate undertaking by counsel which I am satisfied should give adequate protection to the interests of existing creditors.  The special capital reserve to be created pursuant to the undertaking will have credited to it the surplus credit of the proposed reduction of approximately HK$293 million, any future recoveries by revaluation of the fixed assets in respect of which there has been depreciation giving rise to operating losses which may not be clearly permanent in nature, and all net recoveries from advances to subsidiaries (not just the amounts written off and provided for in respect of the particular advance) which may be recoverable in the future (as in Re Capital Asia Ltd. [1999] 2 HKC 854).  The undertaking provides for the cap on the size of the special capital reserve account to be automatically lowered in relation to fresh capital coming in and on disposal of the fixed assets and realisation of the advances.  The full terms of the undertaking are as set out in the schedule annexed to this judgment.

18.  Lastly, I am satisfied that the proposed reduction is for a legitimate and discernible purpose.

19.  For the above reasons, I have made an order in terms of the draft submitted.

Schedule

AND UPON the Company by its counsel undertaking that:-