RE SUN MOTOR INDUSTRIAL CO LTD

HCMP 1486/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1486 OF 2008

----------------------

----------------------

------------------------------------------------

REASONS FOR JUDGMENT

----------------------------------------------

1.  This petition was presented by Sun Motor Industrial Company Limited (“the Company”) on 7 November 2008, seeking sanction of the court to a scheme of arrangement with the scheme creditors pursuant to section 166 of the Companies Ordinance, Cap. 32.  The scheme creditors are all unsecured creditors of the Company with non-preferential claims as at the effective date of the scheme.

2.  The Company was incorporated in Hong Kong on 27 August 1991.  Its immediate holding company is Bestip Development International Limited (“Bestip”), a company incorporated in the British Virgin Islands.  Bestip is in turn a wholly owned subsidiary of Sun Motor International Inc. (“SMII”), a company incorporated in the State of Wyoming of the United States and the shares of which are listed in the OTC Bulletin Board in the United States.  Apart from the Company, there are other companies held by SMII through Bestip.  I shall refer to SMII and its subsidiaries as “the Sun Motor Group”.

3.  The nominal capital of the Company is $501,000 divided into 1,000 ordinary shares of $1.00 each and 500,000 non-voting deferred shares of $1.00 each.  The amount of the total nominal value of shares issued and paid up is $501,000.00.

4.  The Company’s principal activity is the trading of electric motors for electrical appliances.  Since 2001, the manufacturing production of the Company was carried out in the Dongguan Precision Metal Plant in Mainland China.

5.  Due to the significant surge of copper prices since March 2006, the Company had been incurring losses for the years ended 31 March 2006 and 31 March 2007.  As a result, it ran into cashflow problem and financial crisis.  Since June 2007, the Company had insufficient funds to buy raw materials to continue its production in the Dongguan Precision Metal Plant.

6.  Since February 2008, the major fixed assets in China necessary for the continued operations of the Company and the Dongguan Precision Metal Plant have been subject to freezing orders granted by the court in Dongguan in favour of certain creditors in China.

7.  On 26 February 2008, a creditor Tai-I Copper (Guangzhou) Company Limited presented a petition to wind up the Company in HCCW No. 66 of 2008.

8.  The problem is aggravated by the fact that there is an imbalance of the quantity of bonded raw materials imported by the Company into China and the quantity of finished goods exported by the Company out of China after processing in China.  If the issue on customs could not be rectified before the next audit or examination to be carried out by the General Administration of China Customs (“the GAC”), the Company could be subject to the levy of customs duty and penalty under the customs law in China.  In addition, the fixed assets of the Company at the Dongguan Precision Metal Plant could not be freely transferred or sold by the Company and they would probably be seized by the GAC in the worst-case scenario.

9.  On 6 March 2008, Kin Yat (HK) Holdings Limited (“Kin Yat HK”), a subsidiary of Kin Yat Holdings Limited (“Kin Yat”; a company listed on the Main Board of The Stock Exchange of Hong Kong Limited), signed a letter of intent with Bestip for the acquisition of all the fixed assets of the Company and of the Sun Motor Group.  Since then, Kin Yat HK has been giving financial support to the Company pursuant to a bridging loan agreement dated 10 April 2008.  On the same date, Smart Electric Motor Company Limited (“Smart Electric”), also a subsidiary of Kin Yat, entered into a subcontracting agreement with the Company with a view to settling certain long outstanding liabilities due to employees, the landlord and the government authorities to re-activate the operations of the Dongguan Precision Metal Plant so that finished goods could be exported from China and the imbalance of import and export records of the Company could be rectified.

10.  On 13 May 2008, Smart Electric issued a term sheet to the Company proposing to acquire all the fixed assets of the Company (“the Fixed Assets”) at the gross consideration of $65 million in cash.  The net consideration payable by Smart Electric would be net of (1) all outstanding balances of approximately $6 million in respect of the Fixed Assets that were acquired by the Company through hire purchase arrangements; and (2) all other outstanding liabilities due by the Company and/or Dongguan Precision Metal Plant to Kin Yat and its subsidiaries (collectively “the Kin Yat Group”).

11.  According to the audited financial statements of the Company for the year ended 31 March 2007, the Company had assets under the heading of “property, plant and equipment” at a net book value of $1,847,063.00.

12.  In addition, there are other fixed assets held by Hysan International Investment Limited (“the Trustee”), an indirect wholly-owned subsidiary of SMII, as the trustee for the benefit of the Company pursuant to a declaration of trust executed on 4 August 2008.  By the declaration of trust, it was stated that the Trustee had plant and equipment at original costs of RMB 225 million odd shown in the audited financial statements of the Trustee for the year ended 31 March 2007, that based on information provided by the Trustee out of the aforesaid assets plant and equipment in the sum of RMB 196,737,536.54 are located at the Dongguan Precision Metal Plant (“the PRC Assets”), and that the PRC Assets were acquired by the Company either in cash or under various hire purchase arrangements or lease agreements, and were intended to be held by the Trustee for and on behalf of the Company since the acquisition of the relevant PRC Assets.

13.  The PRC Assets were installed in Dongguan for the use of the Dongguan Precision Metal Plant pursuant to a processing trade contract entered into on 11 May 2001 by the Company and an entity in China, by which the parties agreed to form a joint venture to carry out the business of processing with supplied material in Dongguan for 20 years.

14.  The Fixed Assets to be acquired by Smart Electric include assets under the heading of “property, plant and equipment” at a net book value of $1,847,063.00 in the financial statements of the Company for the year ended 31 March 2007, and the PRC Assets held by the Trustee.  The PRC Assets are the only significant realizable assets of the Company.

15.  On 9 July 2008 and 21 August 2008, Smart Electric confirmed in writing that the proposed terms of the acquisition of the Fixed Assets in the term sheet would remain unchanged.

16.  One of the prerequisites of the acquisition of the Fixed Assets of the Company by Smart Electric is that the winding-up petition has to be withdrawn or the relevant scheme of arrangement between the Company and its scheme creditors has to be approved by scheme creditors and sanctioned by the court under section 166.

17.  In summary, the restructuring proposal involves the acquisition of the Fixed Assets of the Company at the gross consideration of $65 million in cash.  The net consideration payable by Smart Electric will be net of the two items aforesaid in respect of outstanding balances of the Fixed Assets acquired by the Company through hire purchase arrangements and outstanding liabilities due by the Company and/or Dongguan Precision Metal Plant to the Kin Yat Group for all purposes of preserving the Fixed Assets.  The amounts to be deducted from the consideration under these two items will be capped at $29.8 million.

18.  Of the outstanding liabilities due by the Company and Dongguan Precision Metal Plant to the Kin Yat Group, approximately $10.1 million was lent and $1.6 million will be lent for the settlement in full of debts due to creditors in China of $24.4 million.  Should such debts remain unsettled, these creditors have every right to seize the PRC Assets and apply to the courts in China for the disposal of such assets, irrespective of the outcome of the scheme of arrangement.

19.  Smart Electric has confirmed that it will proceed with the acquisition of the Fixed Assets notwithstanding the existing freezing orders in China against the PRC Assets and the risk of seizure of the assets by the GAC in relation to the customs issue.  Smart Electric agrees not to insist on the Company to fulfil the condition of ensuring the PRC Assets to be free from any threat of seizure by the GAC.

20.  The net consideration payable by Smart Electric, together with the proceeds if any recovered from the accounts receivable or debts due from the Sun Motor Group, and any sale proceeds of other assets of the Company, will constitute the scheme funds which will become available to pay cash dividend in respect of the admitted claims of the scheme creditors.  The estimated scheme fund as at 29 August 2008 amounted to $27,551,662.04 and the estimated recovery to the scheme creditors would be approximately 5.2%.

21.  If the scheme of arrangement is not approved and implemented, the net consideration payable by Smart Electric would not otherwise be made available to the scheme creditors, the Company would not be able to rectify the customs issue, the PRC Assets would probably be seized by creditors in China and sold by the court in public auction or seized by the GAC, leaving no assets available to the general creditors of the Company.

22.  On 22 November 2008, the Company and the Trustee entered into an agreement for the sale and purchase of the Fixed Assets with Smart Electric.  Completion of this agreement is conditional upon the fulfilment of various conditions in addition to the conditions precedent to the scheme.  As the preservation costs of the Fixed Assets by Smart Electric have been capped at $29.8 million, the additional conditions in the agreement for sale and purchase would not have any impact on the estimated scheme fund.

23.  At the hearing of the summons for directions on 26 August 2008, leave was given to convene a meeting of the scheme creditors for the purpose of considering and, if thought fit, approving the scheme, and directions were made regarding the publication of the notice of the meeting and service of the scheme documents on them.

24.  On 10 October 2008, the meeting was duly convened in accordance with the said order.  Creditors present and voting at the meeting held an aggregate amount of indebtedness of $392.8 million odd, out of estimated total liabilities of $530 million.  50 votes were cast in favour of the resolution; they represented total indebtedness of $368.7 million odd, which was 93.86%.  17 votes were cast against the scheme, representing total debts of $24.1 million, which was 6.14%.

25.  The statutory requirements for the sanction of a scheme of arrangement have all been complied with.

26.  The class of creditors in the scheme was properly constituted, being all unsecured creditors of the Company with non-preferential claims.

27.  The court meeting was duly convened in accordance with the directions given on 26 August 2008.  The scheme creditors had been given a sufficient explanation of the scheme and its effects to enable them to make a reasonable judgment how to vote at the meeting.  A majority in excess of the statutory requirement had approved the scheme at the meeting.  There are no grounds for thinking that those who voted in favour was acting otherwise than in good faith for the benefit of his interest as a member of the class of creditors.

28.  I am satisfied that an intelligent and honest member of the class concerned could reasonably approve the scheme.  I have therefore made an order sanctioning the scheme on the usual undertaking given on behalf of the Company and of Smart Electric to be bound by the scheme.