RE COSMOS INSURANCE MANAGEMENT LTD

HCMP 652/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 652 OF 2006

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REASONS  FOR  JUDGMENT

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1.  This is an amended petition presented by Cosmos Insurance Management Limited (“the Company”) for confirmation of a reduction of its share capital under section 59(1) of the Companies Ordinance, Cap. 32.

2.  The Company was incorporated on 14 October 1993 under its former name. It had been engaged principally in property letting and investment holding in Shanghai, the PRC, until 22 June 2005, when Cosmos Services Company Limited acquired all the shares in the Company. By an ordinary resolution passed on 24 January 2006, the share capital was increased to the present value of HK$6,766,100.00, divided into 67,661 shares of HK$100.00 each, all of which are issued and have been paid up.

3.  After the acquisition of the Company by Cosmos Services Company Limited, the Company has commenced to carry on a new business in insurance brokerage. An agency agreement dated 27 July 2005 was entered into between the Company and The Tokio Marine & Fire Insurance Co. (HK) Ltd (“Tokio Marine & Fire Insurance”).

4.  There are provisions in the articles of association for reduction of the share capital by special resolution, subject to any conditions prescribed by law.

5.  By a special resolution duly signed by all the shareholders on 28 March 2006 in accordance with section 116B of Cap. 32, it was resolved that the capital of the Company be reduced from HK$6,766,100.00 divided into 67,661 shares of HK$100.00 each to HK$1,393,891.00 divided into 67,661 shares of HK$20.60 each, and that such reduction be effected by cancelling capital paid up or credited as paid up to the extent of HK$79.40 for each of the 67,661 shares issued and then by reducing the nominal amount of all the issued shares of the Company from HK$100.00 to HK$20.60.

6.  The reasons for reduction of capital are as follows.

7.  In July 1996, the Company acquired certain residential properties in Ming Shing Garden, Shanghai. The total purchase price of US$1,273,130.85 was raised from a loan made by the then shareholder of the Company, Itochu Hong Kong Limited (“Itochu”). The equivalent of the said sum in Hong Kong dollars at the time was HK$9,841,301.47.

8.  Thereafter, the said properties were let from time to time and generated rental income for the Company. However, the value of these properties had dropped considerably due to the fall in property prices. The value of these properties had decreased to HK$5,276,683.00 as at 1 April 2004. The Company then decided to take advantage of the small rebound in the property market of Shanghai after April 2004 and sold all the properties in November 2004 at the total sum of US$820,607.70, which was equivalent to HK$6,400,740.06. Taking into account the interest paid by the Company on the loan made by Itochu, the Company suffered a loss in the investment of US$693,476.85, equivalent to HK$5,409,119.43. After deducting various expenses and tax incurred and levied on the sale, the actual amount booked into the account of the Company was HK$6,343,298.00. As at 31 January 2006, the accumulated losses suffered by the Company amounted to HK$5,372,209.00.

9.  The capital of the Company and the accumulation of the net income (i.e. the rental income generated from the Shanghai properties and the proceeds after the sale together with the income from the insurance agency business after deducting operational expenses) could not cover the losses incurred in the Company’s investment in the real properties in Shanghai. These losses, which have been realised and should be regarded as permanent, have depleted most of the share capital, leaving a sum of HK$1,393,891.00. The directors are of the view that part of the paid-up capital which has been lost and is no longer represented by available assets should be written off and cancelled. The Company would then be in a better position to assess its performance in its new business of insurance brokerage more effectively. This would enable the Company to distribute future profits if it should be appropriate to do so.

10.  The proposed 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.

11.  According to the audited financial statements for the period from 1 April 2005 to 31 January 2006, the value of the current assets as at 31 January 2006 was HK$2,978,209.00 whilst the current liabilities were HK$1,584,318.00, which were trade debts all owed to Tokio Marine & Fire Insurance, the trading partner in the insurance brokerage business of the Company. The Company has no other creditor at present. Tokio Marine & Fire Insurance has been informed of the proposed reduction of capital and has no objection.

12.  At the hearing of the summons for directions on 16 May 2006, I made an order dispensing with the settlement of a list of creditors. The Company has complied with the directions on the advertisement of a notice of hearing of the petition.

13.  There are two shareholders of the Company. The proposed reduction of capital would affect them in the same way. Both have confirmed in writing they were aware of the reason for the reduction and they signed a special resolution that the capital be reduced as aforesaid. The credit arising from the proposed reduction would be used to eliminate an equivalent amount of accumulated losses, which should be treated as permanent loss. The reduction is for a discernible purpose and I am satisfied the interest of creditors would not be prejudiced.

14.  I have therefore made an order confirming the proposed reduction as per the draft submitted by counsel.