RE MILES (HONG KONG) LTD.

HCMP 5854/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5854 OF 2001

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REASONS FOR JUDGMENT

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1. This is a petition to confirm the reduction of share capital of Miles (Hong Kong) Limited ("the Company"), under section 59(1) of the Companies Ordinance, Cap. 32. The background to the application may be given as follows.

Background matters

2. The Company was incorporated in Hong Kong on 1 November 1965 with an authorised share capital of HK$20,000.00 divided into 2,000 ordinary shares of HK$10.00 each. It was incorporated to promote the export and overseas interests of the Miles group of companies controlled by Miles Handelsgesellschaft International mbH, a company incorporated in Germany ("the parent company"). It does not actively engage in any form of manufacture or sale on its own account.

3. Over the years, the Company had passed several ordinary resolutions by which its authorised share capital was increased. By December 1992, the share capital was increased to HK$36 million divided into 3 million shares of HK$10.00 each. This was because of the increase in financing of production of fabric for an associated garment factory, the significant increase of direct dealing with one of the customers in Germany and the establishment of a branch office in Bangladesh.

4. By the end of 1996, the Company gave up production in its associated garment factory but retained its function as a buying agent for the German customers. In addition, it was decided to establish the branch office in Bangladesh under the name of the Group's subsidiary in Singapore for tax reasons. With the sanction of an order made by the court on 21 July 1997, the share capital was reduced to HK$16,200,000.00. Upon the reduction of capital taking effect, an ordinary resolution had been passed to increase the capital to the former amount of HK$36 million divided into 8 million shares of HK$4.50 each, by the creation of 4,400,000 additional shares of HK$4.50 each, ranking pari passu in all respects with the existing shares.

5. Of the 8 million shares, 3,450,000 shares were issued to the parent company and 150,000 shares were issued to an individual who held them on trust for the parent company. All the issued shares are fully paid up. None of the remaining 4,400,000 shares have been issued, as the Company did not have occasion to have recourse to additional capital for its business.

6. As from 30 June 1999, the Company has ceased all business activities. This is because the parent company had decided to use the subsidiary in Singapore, Alster International Trading Company Pte. Ltd ("Alster"), to handle the buying activities instead. Alster has since established a branch office in Hong Kong and the Company had transferred the tenancy of the property which is its registered office to Alster by way of a surrender agreement with the landlord in April 1999. The buying activities of the Company have since been handled by Alster or other branch liaison offices in Asia.

7. Since June 1999, the Company is in a dormant state and the only reason for its existence is to retain the corporate membership debenture of a golf and country club.

The ordinary and special resolutions

8. There is provision in the Articles of Association of the Company for a special resolution to be passed for reduction of its share capital.

9. On 20 June 2001, two resolutions were passed by written resolutions of all the shareholders as ordinary resolutions. Firstly, it was resolved to cancel the unissued 4,400,000 ordinary shares of HK$4.50 each, forming part of the authorised capital of the Company. Secondly, it was resolved that upon such cancellation of unissued shares taking effect, the capital of the Company, comprising 3,600,000 fully paid ordinary shares of HK$4.50 each, be consolidated into 150,000 shares of HK$108.00 each.

10. By a special resolution passed by the written resolutions of all the shareholders on 9 July 2001, it was resolved that forthwith upon such cancellation of the unissued shares and upon such consolidation of shares as stated in the above ordinary resolutions, the capital of the Company is to be reduced from HK$16,200,000.00 divided into 150,000 shares of HK$108.00 each, all of which are issued and fully paid, to HK$150,000.00 divided into 150,000 shares of HK$1.00 each fully paid, and that the reduction is to be effected by returning to the holders of the said shares paid up capital to the extent of HK$107.00 per share, and by reducing the nominal amount of all the said shares from HK$108.00 to HK$1.00 per share.

The summons for directions hearing

11. On 6 November 2001, the petition herein was presented seeking confirmation of reduction of capital as per the special resolution. On 16 November 2001, a summons for directions was issued seeking dispensation of settling a list of creditors and other directions relating to the hearing of the petition. This came before me on 22 November 2001. I adjourned the hearing for directions initially to a date in January 2002. Later, on the application of the Company, this was adjourned sine die with liberty to restore.

12. The adjournment was necessitated because I was not prepared, on the evidence then available, to make an order dispensing with the settling of a list of creditors. In this instance, the reduction of capital would involve a return of capital to the shareholders. According to the supporting affidavit made by a director, the Company has closed all its bank accounts and ceased all banking facilities except for one current account with a credit balance of HK$28,833.50 as at the date of the affidavit on 12 November 2001. According to the director, the current account is kept for settling the expenses relating to these proceedings and to receive repayment of loans by its subsidiaries. It was asserted that the current expenses of the Company are wholly negligible and are discharged as they arise and that the Company has no outstanding liabilities of any kind which might be provable in a liquidation, other than for current expenses, not exceeding in the aggregate HK$150,000.00, being the amount to which the capital is proposed to be reduced.

13. The accounts of the Company then placed before the Court were prepared only up to 31 December 2000. More recent financial statements, such as management accounts, were not provided. I was not satisfied on the available evidence that the interests of creditors would be fully protected to justify an order dispensing with settling a list of creditors and indicated to counsel that the Company should put forward one of the means as set out in The Hong Kong Civil Procedure 2002, Vol. 1, para. 102/5/34, to ensure that the interests of creditors would not be prejudiced in any way.

14. The summons for directions was eventually restored for hearing on 11 October 2002. Additional evidence was filed by the Company.

15. The management account of the Company for the period from 1 January 2002 to 31 July 2002 was produced. Later, the audited financial statements for this period, when they were available, were also put in evidence. It would appear from these recent accounts that the Company is indeed dormant and it has been so since June 1999. The balance sheet as at 31 July 2002 showed accumulated losses of HK$29,823.00 and current liabilities of HK$8,000.00. The assets of the Company consist of the membership debenture, a debt due from the parent company as mentioned below and cash at bank. Net assets stood at HK$16,170,177.00.

16. Initially, it was decided that the return of capital of HK$16,050,000.00 would be effected by way of a set-off of the debt due to the Company from Alster. On 27 February 2002, the Company was informed by the parent company that Alster had transferred HK$16,050,000.00 to the account of the parent company and a remittance advice and account statement were enclosed. By a letter to the Company dated 28 February 2002, the parent company acknowledged that the parent company owes the Company the sum of HK$16,050,000.00.

17. By an ordinary resolution passed by the written resolutions of all the shareholders of the Company dated 22 July 2002, it was resolved that subject to and upon the court granting an order on the petition herein, the repayment of capital due to the parent company, which is the sole beneficial owner of all the shares in the Company, will be settled by way of set-off against the debt of HK$16,050,000.00 due and owing to the Company by the parent company. The board of directors of the parent company also passed a resolution on 22 July 2002 to like effect. There is a legal opinion given by a lawyer practising in the Federal Republic of Germany that the minutes of the board of directors of the parent company were properly passed at a meeting properly convened and conducted in accordance with the articles of association of the parent company.

18. In May 2002, the parent company deposited HK$100,000.00 into the bank account of the Company. On 25 July 2002, the parent company made a further deposit of HK$1,650,000.00. The deposits were intended to be held by the Company as a contingency fund to cover any contingent liability that might be found due and payable by the Company. By a letter from the parent company to the Company dated 2 August 2002, the parent company gave an undertaking that it would not call on the Company to repay all or part of the aggregate amount of HK$1,705,000.00 deposited by the parent company within six months of the date of the order confirming the reduction of capital.

19. It would appear from the financial statements subsequently made available that the Company has discharged all its liabilities and except for the deposits received from the parent company as contingency funds, the Company has no other creditors other than the amounts due to its lawyers and accountants for professional charges and the expense for business registration. The amounts due to such creditors have been set out in a projected cash flow statement from 1 January 2002 to 31 July 2003. It is envisaged that these expenses and charges would be settled in full by November 2002 and the amounts held by the Company as contingency fund would be more than sufficient for such purpose.

20. In those circumstances, and as I was satisfied that the interests of creditors would not be prejudiced, I made an order on 11 October 2002 dispensing with settling a list of creditors and gave directions for advertisement of a notice of the petition.

Confirming the reduction of capital

21. At the hearing of the petition, I need to consider a number of factors that must be satisfied before the court would confirm the proposed reduction of capital (see Re Ratners Group plc (1988) 4 BCC 293; Re Lippo China Resources Ltd [1998] 1 HKC 161 at 164).

22. Firstly, the shareholders must be treated equitably. There is no doubt that this requirement is met, as all the shares of the Company are beneficially owned by the parent company.

23. Secondly, the proposals for reduction of capital must be properly explained so that the shareholders could exercise an informed judgment in voting for the reduction of capital. Here, the proposal for reduction of capital was due to the parent company's decision to allow its Singapore subsidiary to take over the business activities of the Company. As the proposal for reduction of capital was initiated by the sole beneficial owner of all the shares in the Company, the requirement for proper explanation is clearly satisfied.

24. Thirdly, there should be safeguard for the creditors of the Company. I have already dealt with the financial position of the Company and its dormant condition since June 1999. At the hearing, the Company by counsel offered two undertakings. Firstly, upon the reduction of capital taking effect, the Company will forthwith set off the sum of HK$16,050,000.00 due from the parent company against the money proposed to be returned under the reduction of capital. Secondly, also upon the reduction of capital taking effect, the Company will forthwith settle all the outstanding amount due by the Company to its creditors, if any, including legal and professional advisers.

25. In view of the fact that the Company has been dormant for three years, that it has discharged all its liabilities save for the fees of its professional advisers and the business registration charges, that the contingency funds deposited by the parent company are more than sufficient for these liabilities to be met, and the Company's undertaking that such liabilities will be discharged forthwith upon the reduction of capital taking effect, it does not seem necessary to require an undertaking from the Company along the lines in Re Grosvenor Press plc (1985) 1 BCC 412, nor would I require the money deposited by the parent company as contingency funds to be held by the Company for a further period once the liabilities have been discharged pursuant to the undertaking given.

26. I am satisfied there is adequate safeguard for the creditors of the Company.

27. Lastly, the reduction of capital should be for a discernible purpose. Given the cessation of the business activities of the Company, the last requirement is also satisfied.

28. For the above reasons, I have made an order, on the undertakings of the Company mentioned above, confirming the reduction of capital as proposed by the special resolution passed on 9 July 2001 and made consequential orders under section 61 of Cap. 32 regarding the registration of the order and approved minute, and advertisement of the notice of registration.