RE RBS SECURITIES JAPAN LTD

HCMP 2313/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2313 OF 2007

______________________

______________________

___________________________________________

REASONS FOR JUDGMENT

___________________________________________

1.  This is a petition presented by RBS Securities Japan Limited (“the Company”) seeking confirmation of reduction of capital pursuant to section 58(1) of the Companies Ordinance, Cap. 32.

2.  The Company was incorporated on 24 June 1986 under its former name as a private company. Its present authorised capital is Japanese Yen 100,000,000,000 divided into 2,000,000 ordinary shares of Japanese Yen 50,000 each, of which 701,100 have been issued and are fully paid. The issued and paid-up capital is therefore Japanese Yen 35,505,000,000, divided into 710,100 ordinary shares of Japanese Yen 50,000 each. There is at present standing to the credit of the share premium account of the Company Japanese Yen 4,492,620,000.

3.  The Company is a wholly owned subsidiary of The Royal Bank of Scotland plc, a licensed bank incorporated in the United Kingdom and having a branch established in Hong Kong. The Company commenced to carry on the business of a securities company after its incorporation. Its principal activities are investing and trading in bonds, futures and other financial instruments.

4.  There is provision in the articles of association that the Company may by special resolution reduce its share capital or share premium account in any manner subject to any incident authorised, and consent required, by law.

5.  By a special resolution dated 16 November 2007 and signed by the sole member of the Company, The Royal Bank of Scotland, it was resolved that: (1) the amount standing to the credit of the share premium account in the sum of Japanese Yen 4,492,620,000 be reduced to Japanese Yen 36,239; and (2) the capital be reduced from Japanese Yen 100,000,000,000 divided into 2,000,000 ordinary shares of Japanese Yen 50,000 each to Japanese Yen 89,419,900,000 divided into 1,788,398 ordinary shares of Japanese Yen 50,000 each, and that the issued share capital be reduced from Japanese Yen 35,505,000,000, divided into 710,100 ordinary shares of Japanese Yen 50,000 each to Japanese Yen 24,924,900,000 divided into 498,498 ordinary shares of Japanese Yen 50,000 each, and that such reduction be effected by cancelling and extinguishing the 211,602 ordinary shares of Japanese Yen 50,000 each numbered 498,499 to 710,100.

6.  The reason for the reduction of the share premium account and share capital is that paid-up capital to the extent of Japanese Yen 15,072,683,761 and upwards had been lost or was unrepresented by available assets. The Company intends to make an application for a membership of the Tokyo Stock Exchange for futures trading and one of the requirements is that the applicant must not have accumulated losses in its books and accounts.

7.  The Company has produced its audited financial statements from 1997 to 2007 and its management accounts from 1 April 2007 to 30 September 2007. As appearing in the balance sheet as at 31 March 2007, the Company has accumulated losses of Japanese Yen 15 billion, which were attributable to losses carried forward and accumulated from the preceding years from 1997.

8.  Apart from the losses on disposal of fixed assets and the depreciation made by the Company, the accumulated losses were mainly operating and trading losses. Losses on disposal of fixed assets, depreciation and operating expenses were by nature permanent losses. As for trading losses, all such losses were in respect of closed or completed transactions except for a number of financial instruments which were marked to market price as at 31 March 2007 for profit and loss purpose and were still held by the Company as at 31 March 2007. The net result of omitting these financial instruments from the profit and loss account of 31 March 2007 would aggravate the amount of losses and the accumulated losses as at 31 March 2007 by a further sum of £1,029,000. There is produced a report of the factual findings of the auditors dated 26 November 2007 verifying the above position, having performed the procedures agreed with the board of directors on the allocation of non-permanent losses as at 31 March 2007.

9.  Based on the above, the directors consider the accumulated losses to be permanent losses.

10.  As there is only one class of shares in the Company, the proposed reduction of share capital does not involve any alteration or variation of the rights attached to any particular class of shares and there is no question of inequitable treatment of shareholders. The proposed reduction of the share premium account and the share capital does not involve the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital.

11.  The parent company has provided a letter of undertaking dated 11 December 2007 to indemnify any creditors of the Company as at the date of the reduction of the share premium account and the share capital taking effect for any losses which they may suffer as a result of such reduction, to the extent of the amount of the reduction.

12.  Further, for the protection of the creditors, the Company has offered an undertaking that in respect of accumulated losses which shall be eliminated upon the reduction becoming effect, if any part or amount of those accumulated losses shall be recovered by the Company in future, the part or amount recovered shall be credited and put into a special reserve account and shall not be treated as distributable profits of the Company unless the court shall direct otherwise.

13.  At the hearing of the summons of directions on 18 December 2007, an order was made to dispense with the settlement of a list of creditors. Directions given for advertising a notice of hearing of the petition have been complied with.

14.  I am satisfied that the proposed reduction is for a discernible purpose and that the interests of creditors have been adequately protected. I have therefore confirmed the reduction and made an order in terms of the draft submitted.