RE MITSUI HI-POLYMER (ASIA) LTD.

HCMP 5509/01

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5509 OF 2001

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REASONS FOR JUDGMENT

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1. In this petition, the Company sought the Court's confirmation for a reduction of capital under s.59 of the Companies Ordinance. At the end of the hearing, I gave an order in terms and said that due to constraints of time, I would give my reasons in writing later. I do so now.

2. Section 58 provides that a company limited by shares and having a share capital may, if so authorized by its articles, by special resolution reduce its share capital in any way subject to confirmation by the Court.

3. The first statutory requirement is that there should be articles authorizing the reduction of capital. This is found in Article 47 of Table A which applies to this Company and forms part of its articles.

4. The second statutory requirement is that there should be a special resolution resolving to reduce share capital. On 28 September 2001, it was resolved by all the members of the Company that the authorised capital of the Company be reduced from HK$301,080,000 divided into 301,080,000 shares of HK$1 each to HK$89,691,732 divided into the original number of shares of HK$0.2979 each and that such reduction be effected by cancelling paid-up capital to the extent of HK$0.7021 upon each of the 301,080,000 shares issued and then by reducing the nominal amount of all the issued shares of the Company from HK$1 to HK$0.2979 per share.

5. The third statutory requirement is that there should be confirmation by the Court under s.59 and s.60 of the Ordinance. In Re Ratners Group plc (1988) 4 BCC 293, Harman J set out a number of matters which the Court would require to be satisfied before confirming a reduction of capital. This case has been followed in a number of cases in Hong Kong, including Re Lippo China Resources Ltd [1998] 1 HKLR 20, to which Mr Barma, counsel for the Company, referred.

6. The first matter is that the shareholders should be treated equitably i.e. as between shareholders of different classes, or between different shareholders of the same class. In the present case, there is only 1 class of shares and only 2 shareholders, who would be affected in the same way.

7. The second matter is that the shareholders should have had the proposal properly explained to them so that they could exercise an informed judgment. In the present case, the only 2 shareholders of the Company are within the Mitsui group of companies.

8. The third matter is that creditors should be safeguarded. This is of primary concern to the Court, as shown in s. 59 and s.60 of the Ordinance. In the present case, however, the reduction is for the purpose of writing off of permanent losses.

9. The losses are permanent in that they are irrecoverable trading losses. As deposed to in the affirmation of Mr Shiro Asahina filed 16 October 2001, the Company had entered into an Export Sales Agreement ("the Agreement") with a supplier, Bangkok Polyethylene Public Co Ltd ("BPPC") in 1992. Under the Agreement, the Company was entitled to buy, for a period of 15 years, polyethylene at a price fixed by reference to BPPC's production costs.

10. The Agreement involved the payment by the Company of a front-end fee of US$15.75m. (which was non-refundable) and a deposit of US$25m (which was refundable over a period of time). These payments were funded by finance from banks and a related company. The front-end fee and the interest payments were amortized over the period of the Agreement.

11. In the period of years since the Agreement, however, there was a substantial fall in the market price of polyethylene produced in other Asian countries, with the result that the cost from BPPC was no longer competitive. The Company therefore suffered serious trading losses from the sale of BPPC products.

12. The Company eventually entered into a variation of the Agreement to move from a cost-based price to a market-value based price. This variation was effected by an agreement in April 2000. The consideration the Company had to pay for the variation was to give up the front-end fee and the payment of US$4m. compensation to BPPC. The front-end fee, the interest payments and the compensation are therefore permanently lost to the Company.

13. I have been taken through the profit and loss accounts in detail by Mr Barma, and I am satisfied that the accumulated losses and shareholders' deficit for the year up to 31 August 2001 is in excess of the amount proposed to be written off by the intended reduction of capital. Apart from the losses due to trading losses over the years, the loss of the front-end fee and interest payments and the compensation paid to BPPC, there have also been administrative expenses which cannot be recovered.

14. The fourth matter set out in Re Ratners is that the reduction of capital should be for a discernible purpose. The credit arising from the reduction of capital will reduce the accumulated shareholders deficit so that thereafter the Company would be in a position to distribute future profits (if any) by way of dividend. This is a recognised purpose under s.58(1)(b) Companies Ordinance.

15. In the circumstances, grounds for a reduction having been made out, I confirmed the reduction and approved the minute proposed to be registered.