RE MIYAMA DYEING CO LTD

HCMP 1021/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1021 OF 2004

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REASONS FOR JUDGMENT

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1. This is a petition to seek confirmation for reduction of capital by Miyama Dyeing Co., Limited ("the Company") under section 59 of the Companies Ordinance, Cap. 32. I have granted the relief sought at the conclusion of the hearing and these are the detailed reasons.

The Company

2. The Company was incorporated on 29 November 1988 under a different name. Its name was changed to its present name on 10 January 2003. Its principal activity is the provision of dyeing services.

3. The original authorised share capital was HK$1,000.00 divided into 1,000 shares of HK$1.00 each. As at 21 April 2004, the authorised share capital is HK$31,500,000.00 divided into 3,150 shares of HK$10,000.00 each, all of which have been issued and are fully paid up.

4. The immediate holding company of the Company is Miyama Hong Kong Company Limited ("Miyama Hong Kong") holding 3,149 shares, and the remaining share is held by Jokan Limited. The ultimate holding company of the Company is Miyama Company Limited, a company incorporated in Japan.

The special resolution

5. There is provision in the Articles of Association for reduction of the share capital by special resolution.

6. At an extraordinary general meeting held on 26 March 2004, a special resolution was passed unanimously to reduce the capital from HK$31,500,000.00 divided into 3,150 shares of HK$10,000.00 each to HK$6,300,000.00 divided into 3,150 shares of HK$2,000.00 each, and that such reduction be effected by reducing the par value of the ordinary shares of the Company from HK$10,000.00 each to HK$2,000.00 each and cancelling HK$25,200,000.00 of the paid-up capital which has been lost, or is no longer represented by available assets.

7. The object of the proposed reduction is substantially to reduce the adverse balance on the accumulated profit and loss accounts of the Company which as at 31 March 2003 stood at HK$25,359,140.00 according to the last audited accounts. Prior to the passing of the special resolution, an amount of HK$26,610,044.00 had been lost or was no longer represented by available assets, according to the unaudited management accounts for the ten months ended 31 January 2004. The latest unaudited management accounts as at 31 May 2004 showed total accumulated losses of HK$27,894,030.00. There has been no material change in the financial position of the Company since then.

8. The proposed reduction does not involve the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital or of any amount standing to the credit of any share premium account.

9. At the hearing of the summons for directions on 18 May 2004, an order was made dispensing with settlement of a list of creditors and directions were given for the advertisement of the notice of petition, which have been complied with. No objection has been received from any creditor and none has appeared at the hearing of the petition.

10. There is no doubt that the shareholders would be treated equitably in the proposed reduction, there being only one class of shareholders. Further, detailed reasons for the proposed reduction of capital were set out in the circular dated 1 March 2004 giving notice to convene the extraordinary general meeting so that the shareholders had a sufficient explanation for the proposed reduction to make an informed decision on the resolution.

11. I need consider only two matters in detail: firstly, if there is a discernable purpose for the proposed reduction; and secondly, if there is adequate protection for the creditors.

Discernable purpose

12. According to the Income Statement Analysis prepared by the auditors of the Company based on the annual audited financial statements from the year ended 31 March 1994 to the year ended 31 March 2003, the Company suffered accumulated losses of HK$25,359,000.00. The accumulated losses consisted of two categories, trading losses which cannot be recovered, and expenses necessarily incurred which cannot be recovered. All the accumulated losses are realized and permanent losses. There is evidence from a director of the auditors of the Company confirming this. He has personally reviewed the audited accounts and relevant audit working papers for the ten-year period.

13. It is apparent from the Income Statement Analysis that the Company had been suffering trading losses for the last ten years. I was given to understand that the Company's business further deteriorated as a result of the Asian financial crisis. Prior to the purchase of the shares of the Company by its present holding company in December 2000, the Company's operation was only maintained by funds advanced by Jardin Corporation of Japan, which was then the majority shareholder of the Company. Even at the time of the acquisition of the shares in the Company by the present holding company, it was intended that an application for reduction of capital should be made so that the Company could start on a healthy footing and be in a position to pay dividends to its parent company. The directors had hoped to turn the business around and reduce the accumulated losses. However, they have not succeeded and a further injection of capital from the parent company is required.

14. The parent company has made it a condition for further injection of capital that the Company should seek a reduction of its capital which is not represented by available assets, so that the Company will be in a position to pay dividends to shareholders if and when its financial position improves with an injection of capital. To attract further investment from its holding companies, the board of directors consider it in the best interest of the Company to seek a reduction of capital to cancel any paid-up capital which is lost or not represented by available assets.

15. I am satisfied that the proposed reduction is for a discernable purpose.

Protection of creditors

16. According to the latest management accounts, as at 31 May 2004, the Company has total liabilities of HK$12,494,113.00. Out of the said sum, HK$12,324,830.00 is due to Miyama Hong Kong. The balance of HK$169,283.00 is due to third party creditors. The Company has obtained consent in writing to the proposed reduction from two of its current external creditors, Ming Kee Hong Cleaning Products Company and Emori & Co. (HK) Ltd, and from Miyama Hong Kong. The total claims of the consenting external creditors amounted to HK$59,855.00. The total claims of the external creditors that have not given their consent amounted to HK$109,427.90.

17. The protection offered for the protection of creditors is two-fold.

18. Firstly, the Company is to give an undertaking to establish a capital reduction reserve account up to the amount of HK$12,494,113.00, being the full amount of the total liabilities as at 31 May 2004 in these terms:

"The Company undertakes that out of the capital by which the Company now seeks to be reduced, a sum of HK$12,494,113.00 will be credited to a capital reduction reserve in the books of account of the Company which (a) will not be treated as realised profits and (b) shall be treated as an undistributable reserve of the Company which shall not be distributable UNTIL and UNLESS the creditors of the Company as at the date of sanction of the reduction of capital ("the creditors") are fully settled, compromised, provided for by the Company or the remaining creditors and each of them do consent by which time the said Capital Reduction Reserve Account will be cancelled and PROVIDED that prior to the cancellation of Capital Reduction Reserve Account the audited accounts of the Company will contain a note recording this Undertaking."

19. Secondly, the Company has offered to set up a trust account and deposit into this account the sum of HK$200,000.00 specifically for the purpose of settling its indebtedness to all the external creditors as at 31 May 2004. I was told by counsel that a separate bank account has been opened and the money has been deposited. The further undertaking is in these terms:

"The Company further undertakes that it will set up a trust account and deposit a sum of HK$200,000.00 with Mizuho Corporate Bank, Limited, Hong Kong branch ... under the account number Miyama Dyeing Co., Ltd. - No. 2 Account ... and the said deposit in the said account can only be withdrawn, utilized and/or applied to settle the Company's indebtedness to its creditors (except the Company's holding company) standing at the sum of HK$169,283.00, the breakdown of which is set out in exhibits 3 and 4 of the Affirmation of Yamaguchi Kiyotaka dated 3 June 2004, until and unless all the Company's creditors (except the Company's holding Company) as at the date of the Order herein are all paid, settled and/or compromised."

20. On the basis of the above undertakings, I am satisfied there is adequate protection for the creditors of the Company.

21. For the above reasons, I have made an order in terms of the draft submitted to me as amended.