RE CNT SECURITY GROUP LTD

HCMP 2227/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2227 OF 2013

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D E C I S I O N

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1.  I have before me a Petition issued by the Company to sanction a reduction in its share capital. On 24 January 2014 I made an order dispensing with settling a list of creditors. The purpose for reducing the share capital of the Company is conventional, namely, to create a credit which can be used to write off accumulated losses.

2.  It is well established that this is a proper purpose for reducing a company’s share capital.  I am satisfied generally that the 4 criteria with which the court is primarily concerned before sanctioning a reduction of capital are satisfied in the present case, mainly:

(1) The shareholders are being treated equitably;

(2) The reduction has been properly explained to shareholders prior to them being called upon to vote on a resolution to approve the proposed reduction of capital;

(3) The reduction is for a discernable purpose; and

(4) The creditors are sufficiently safeguarded.[1]

3.  One matter has arisen on which comment may be helpful, although I anticipate there will be far less reductions of capital petitions as a consequence of the introduction of the new Companies Ordinance Cap 622. It is this.  The Company has offered the normal type of undertaking to the court which provides that in the event of a recovery being unexpectedly made of bad debts, those recoveries will not be treated as forming part of the Company’s assets which can be distributed by way of dividend out of profits, until such time as all creditors recorded in the books of the Company at the date the reduction of capital becomes affective have been paid.

4.  Historically, this was done by the undertaking providing that such recoveries would be paid into a share premium account.  As a consequence of the provisions of section 135 of the New Ordinance which provides that companies will no longer have a nominal value, Mr D’Souza, who appeared for the Company, suggested that the Company’s accounts will no longer show a share premium account, and therefore it is more appropriate that any such receipts are created to a special nominated capital reserve although the treatment of any such sums would be restricted in the same way as would normally be provided in such undertakings.  I agree that this is the appropriate mechanism to adopt.

5.  I will therefore make an order approving the reduction of capital which will contain a schedule including the undertakings by the Company.  Those undertakings are in the following form:

(1) The Company undertakes that in the event of the Company making any future recoveries in respect of the loan made by the company to Mr Tsui Tsin Tong, which has been recorded in the accounts of the Company as at 31 December 2011 as an expense, all such recoveries in the sum of HK$14,270,000 (the “Limit”), will be credited as a special reserve under its shares capital in the accounting records of the Company (“Special Capital Reserve 1”) and that so long as there shall remain outstanding any debt or claim against the Company, which if the date on which the reduction of capital becomes effective (the “Effective Date”) was the date of the commencement of the winding up of the Company, would be admissible to proof in such winding up and the persons entitled to benefit of such debts or claims shall not have agreed otherwise, such reserve shall not be distributable and shall not be treated as realised profits for the purpose of sections 291 and 297 of the Companies Ordinance (Cap. 622) PROVIDED THAT:-

(1)   The Limit may be reduced by the amount of any increase, after the Effective Date, as a result of the payment up of the share capital by the receipt of new consideration or capitalisation of distributable profits if such increase is not used to reduce the Limit; and

(2)   In the event that the amount standing to the credit of Special Capital Reserve 1 exceeds the Limit after any reduction of the Limit above, the Company shall be at liberty to transfer the amount of any such excess to the general reserves of the Company and the same shall become available for distribution or to use any such excess to offset the accumulated losses of the Company, as the case may be.

(2) The Company undertakes that it will credit as a special reserve under its share capital in the accounting records of the Company (“Special Capital Reserve 2”) the amount of HK$893,333 (representing the amount by which the proposed capital reductions exceeds the total accumulated loss of permanent nature as at 31 December 2013) (the “Amount”) and that so long as there shall remain outstanding any debt of or claim against the Company which, if the Effective Date was the date of the commencement of the winding-up of the Company, would be admissible to proof in such winding‑up and persons entitled to benefit of such debts or claims shall not have agreed otherwise, such reserve shall not be distributable and shall not be treated as realised profits for the purpose of sections 291 and 297 of the Companies Ordinance (Cap. 622), PROVIDED THAT:-

(1) The Amount may be reduced by the amount of any increase, after the Effective Date, as a result of the payment up of the share capital by the receipt of new consideration or the capitalisation of distributable profits if such increase is not used to reduce the Limit; and

(2) In the event that the Amount of Special Capital Reserve 2 is so reduced pursuant to proviso (1) above, the Company shall be at liberty to transfer the amount of any such reductions to the general reserves of the Company and the same shall become available for distribution.

(3) The Company undertakes that, for so long as the undertakings set out above remain effective, it will cause or procure its auditors to report by way of note or otherwise a summary of the undertakings in its audited financial statements or in the accounts of the Company published in any other form.