In re Kosonic Industries Co. Ltd.

HCMP 2172/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANCEOUS PROCEEDINGS NO.2172 OF 1999

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Reasons Handed Down : 1 June 1999

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R E A S O N S

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1. This is a petition by Kosonic Industries Company, Limited ("the Company") seeking the sanction of the court to a scheme of arrangement ("the Creditors Scheme") under section 166 of the Companies Ordinance between the Company and its unsecured creditors to whom debts are owed under contracts governed by Hong Kong law and including secured creditors to the extent that the amount of their debts exceed the value of their security ("Scheme Creditors").

The facts

2. The Company is a wholly owned subsidiary of Kosonic International Holdings Limited ("Kosonic") which together with its fellow subsidiaries (together "the Group") are mainly engaged in the design, manufacture, marketing and distribution of consumer electronic products. Kosonic was incorporated in Bermuda and listed on the Stock of Exchange of Hong Kong Limited. In 1996, the Group ran into serious financial difficulties and became insolvent. Trading in the shares of Kosonic was suspended on 23 October 1996 and production activities ceased in the third quarter of 1997. At about this time, the Company's accumulated losses exceeded $547 million and there was a deficiency of shareholders' funds in excess of $526 million. The Company faced more than 50 sets of High Court and District Court proceedings and on 5 July 1997, a winding-up petition was presented against the Company. This has been adjourned from time to time pending the outcome of the Creditors Scheme.

3. The Creditors Scheme forms part of the proposal to rescue and restructure the Group ("the Proposal"). As appears from the Explanatory Statement, a main objective is to revive the business of the Group by segregating the operation of the Restructured Kosonic Group from the existing liabilities, both actual and contingent, of the Group.

4. The Proposal includes a Shareholders Scheme under which shareholders of Kosonic would exchange their holdings for shares in a new company incorporated in Bermuda, Sound International Limited ("SIL") which will replace Kosonic as the listed holding company of the restructured group pursuant to a Scheme of Arrangement under section 99 of the Companies Act of Bermuda. The exchange will be on the basis of two SIL shares for every five Kosonic shares. The Shareholders Scheme was sanctioned by the court in Bermuda on 21 May 1999, but its effectiveness is conditional on the Creditors Scheme being sanctioned.

5. Under the Proposal, there are also Debt Settlement Agreements to be made between SIL, the relevant companies within the Group including the Company (in so far as its indebtedness is governed by foreign law) and their respective creditors (other than the Scheme Creditors) whereby such creditors would be offered the opportunity to settle their debts on the same terms as those under the Creditors Scheme. It is part of the Creditors Scheme that if sanctioned, an application for the dismissal of the petition would be made within seven days of the transfer of the Scheme Funds by the Investor to the Administrator. The Company will in due course be wound up.

6. The restructuring is being funded by Sound Ocean International Limited ("the Investor") who after the restructuring will own approximately 60% of SIL with Scheme Creditors and other Group Creditors owning approximately 29%.

Creditors Scheme

7. The indebtedness to the Scheme Creditors is to be discharged in full by the distribution of a cash payment of HK$0.05 and the allotment of one fully paid SIL share of HK$0.10 for every HK$1 owed. The pro forma adjusted net asset value per SIL share after the completion of the proposal will be 10.1￠. In total, the Scheme Creditors will receive the equivalent of 15.1￠ per dollar of indebtedness. The funds with which to pay the Scheme Creditors are to be provided by the Investor which entered into a conditional heads of agreement with inter alia Kosonic for the rescue and restructuring of the Group including the Company.

8. The total amount of indebtedness owed to Scheme Creditors is approximately $440 million. All inter-company debts have been waived. Therefore companies within the Group were not participants so far as the court meeting was concerned. Interest in respect of debts owed to banks accruing on or after 7 January 1997 has also been waived, conditional upon the Creditors Scheme becoming effective. The Creditors Scheme will terminate when the Administrator notifies the Scheme Creditors that all distributions have been completed or the Investor fails to provide the funds required to pay the Scheme Creditors within three days of the Creditors Scheme becoming effective, or the latest by 31 March 2000.

Court meeting

9. Pursuant to an order made on 20 April 1999, the Company convened a meeting of the Scheme Creditors which was held on 17 May 1999. According to the chairman's report, those voting "for" and "against" the resolution approving the Creditors Scheme were as shown in the table below :

Although infelicitously phrased in paragraph 4 of the report, it would appear that the total number of Scheme Creditors who attended the meeting was 95. Three of them, whose claims amounted to $3,172,606 abstained from voting at the meeting. It is to be noted that to accurately reflect what transpired at the meeting, and to present a full picture to the court, the table ought to include a column showing the value and number of abstentions.

10. Each of the Scheme Creditors were sent a composite document consisting of a very detailed Explanatory Statement as well as the Scheme as required by section 166A together with a proxy form. Each Scheme Creditor was provided with a full explanation of the proposal including the Creditors Scheme, the financial position of the Company and of the Group. The Explanatory Statement showed the prospective liquidation dividend for unsecured creditors to be HK$0. An overwhelming majority of the Scheme Creditors (being over 99% in value and 97% in number) voted in favour of the Scheme.

Approval of the Creditors Scheme

11. I am satisfied that the statutory provisions have been complied with in that (1) the class of creditors has been properly constituted; (2) the meeting was duly convened in accordance with the court's directions given on the hearing of the originating summons; (3) the Scheme Creditors have been given a sufficient explanation of the Creditors Scheme and its effects and sufficient information to enable them to make a reasonable judgment as to how to vote at the meeting; and (4) that the requisite majority has voted in favour of the Creditors Scheme. As to the exercise of the court's discretion, the relevant test is that set out in Buckley on the Companies Act, 14th Edn. at 473-4 cited with approval by Plowman J in In re National Bank Limited [1966] 1 WLR 819, 829 and applied in In re RCR Electronics Manufacturing Limited, 1998, MP No.569. None of the considerations which would cause the court to differ from the meeting exists. Accordingly, I see no reason for not sanctioning the Creditors Scheme.