RE ALBATRONICS (FAR EAST) CO. LTD.

HCMP 894/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 894 OF 2002

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REASONS FOR JUDGMENT

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1. This is a petition brought by the liquidators of Albatronics (Far East) Co. Ltd. ("the Company"), which is in creditors' voluntary liquidation, under section 166 of the Companies Ordinance, Cap. 32, to seek the sanction of the court to a scheme of arrangement between the Company and its shareholders ("the Shareholders' Scheme") and a scheme of arrangement between the Company and its creditors ("the Creditors' Scheme"). The objective of the exercise is to realise the listing status of the Company as being the only valuable asset available. The Schemes involve an exchange of the shares in the Company with an investor, J.I.C. Technology Co. Ltd. ("Newco") to facilitate a "back-door listing" of the shares of Newco on the Hong Kong Stock Exchange by way of introduction under Chapter 7 of the Listing Rules of the Stock Exchange. At the end of the hearing, I made an order sanctioning the Schemes and these are the reasons for my judgment.

The Company

2. The Company was incorporated in Hong Kong in 1987 and its shares have been listed on the Stock Exchange since 1994. The Company and its subsidiaries were principally engaged in the trading and distribution of semi-conductors and compact disc mechanisms and the design, manufacture and trading of electronic products. It was put into creditors' voluntary liquidation on 20 August 1999 and the liquidators were appointed the same day with a committee of inspection.

3. Trading in the shares of the Company has been suspended since 2 July 1999. It was put into the third stage of the de-listing procedure by the Stock Exchange on 7 August 2000 and the Stock Exchange has conditionally agreed to approve the extension for the cancellation of the listing of the Company's shares until 31 May 2002 to give the Company an opportunity of implementing the Schemes.

4. The present capital of the Company is HK$100,000,000.00 divided into 1,000,000,000 ordinary shares of HK$0.10 each, 400,002,000 of which have been issued and are fully paid or credited as fully paid. Nam Tai Electronics, Inc. ("Nam Tai") is the majority shareholder, holding 50.1% of the existing shares.

The financial position of the Company

5. According to the Statement of Affairs submitted by the directors to the liquidators on 20 August 1999, the total estimated value of the Company's realisable assets as at that date was HK$22,509,547.00. Out of this amount, a substantial portion of about HK$20 million were properties mortgaged to secure certain creditors' claims. The total liabilities as disclosed in the Statement of Affairs amounted to HK$517,684,707.00.

6. As at 12 April 2002, the liquidators have received a total of 32 proofs of debt totalling approximately HK$517,572,302.00. Of that amount, the liquidators have admitted to proof claims of approximately HK$436,582,130.00, of which amounts totalling HK$93,958.00 have been admitted as preferential claims.

7. In the course of the liquidation, the liquidators realised a number of assets which were considered by the directors to be unrealisable. As a result, the actual value realisable or realised on assets held by the Company as at 20 August 1999 was materially higher than the estimated realisable value in the Statement of Affairs. The total receipts of the liquidators as at 12 April 2002 amounted to HK$54,935,017.00. Total payments as at that date, including two interim dividend distributions, amounted to HK$51,656,107.00. Other than the listing status of the Company, the liquidators are not aware of any asset belonging to the Company that is capable of realisation.

8. A first interim ordinary dividend of 6% of total admitted ordinary claims of creditors was declared in December 2000. A second interim ordinary dividend to creditors of 2.68% of total admitted ordinary claims of creditors was declared in January 2002. The only outstanding matter affecting the quantum of the final dividend to creditors is the possible implementation of the Schemes. It is estimated by the liquidators that further ordinary dividends of approximately 0.8% of total admitted ordinary claims of creditors may be declared. This estimate excludes the potential benefits of the Newco shares estimated by the liquidators to be equivalent to a further dividend to creditors of 1.4% of total admitted ordinary claims of creditors to be received by the creditors upon the implementation of the Schemes.

The principal terms of the Schemes and the restructuring proposal

9. The principal terms of the Shareholders' Scheme are as follows:

(1) on the date on which the Scheme is to become effective, all the existing shares of the Company will be transferred to Newco; and

(2) on or within six business days from the effective date, Newco will allot and issue to all the shareholders 4,444,465 Newco shares, being ordinary shares of HK$0.01 each, credited as fully paid, in the proportion of 1 Newco share for every 90 existing shares in the Company.

10. The principal terms of the Creditors' Scheme are as follows:

(1) on or within six business days from the effective date, Newco will allot and issue 44,000,000 Newco shares to the creditors or their nominees, credited as fully paid, in proportion to the amount of their claims admitted to proof in the liquidation of the Company as the liquidators may direct; and

(2) on or within six business days from the effective date, Newco will, on behalf of the creditors, issue to Nam Tai or its nominees 4,100,000 Newco shares credited as fully paid. These 4,100,000 Newco shares will be issued in full and final settlement of a deposit of HK$4.1 million which will have been paid by Nam Tai to the liquidators to cover certain costs and expenses in relation to the restructuring of the Company. The liquidators can thereafter apply the sum of HK $4.1 million in the statutory order of priority.

11. The restructuring proposal of the Company will involve the implementation of the Schemes and the following transactions:

(1) Newco will acquire from Nam Tai the entire issued share capital of J.I.C. Group (B.V.I.) Ltd. ("J.I.C."), a wholly owned subsidiary of Nam Tai, pursuant to a sale and purchase agreement between Nam Tai and Newco, in consideration for which (i) Nam Tai will receive 122,190,000 Newco shares, credited as fully paid up, (ii) Nam Tai will receive 598,420,000 non-voting non-redeemable preference shares of nominal value of HK$0.01 each in Newco ("the preference shares"), credited as fully paid up, and (iii) at Nam Tai's direction, and for the purpose of Nam Tai's reimbursement of Yu Ming Investment Management Ltd ("Yu Ming"), the sponsor to the proposed listing of Newco and the financial adviser to Nam Tai, for the provision of professional advisory services to Nam Tai in relation to the restructuring proposal, Newco will allot and issue 7,810,000 Newco shares, credited as fully paid up, to Yu Ming or its nominee;

(2) the listing of the existing shares of the Company will be cancelled and the Newco shares will be listed on the Stock Exchange by way of introduction; and

(3) upon completion of the restructuring proposal, Newco will transfer all the existing shares of the Company received by it or its nominee under the Shareholders' Scheme for a nominal consideration of HK$1.00 to the liquidators or their nominees to be held on trust for the creditors.

12. After the completion of the restructuring proposal, Nam Tai will hold 128,516,688 shares in Newco, being 70.4% of the shares, assuming no conversion of the preference shares. Upon exercise of all the preference shares at the conversion ratio, Nam Tai will hold 709,506,979 shares in Newco, being 92.9% of the shares.

13. The financial effects of the restructuring proposal relevant to the shareholders and the creditors may be stated as follows. Upon implementation of the proposal, the pro forma adjusted net tangible asset value of Newco will amount to approximately HK$108.3 million. This is equivalent to approximately HK$0.14 per Newco share, based on 763,534,756 Newco shares in issue and to be issued upon implementation of the proposal and assuming conversion in full of the preference shares. The shareholders will receive a total of 4,444,465 Newco shares representing 2.4% of the issued share capital of Newco as enlarged by implementation of the proposal following completion and approximately 0.6% of the issued share capital of Newco as enlarged by implementation of the proposal assuming conversion in full of the preference shares.

14. The proposed apportionment of Newco shares being issued to shareholders and creditors pursuant to the Schemes, based on the pro forma adjusted net tangible asset value of HK$0.14 per Newco share as stated above, is summarised below:

The above apportionment does not take into account the Newco shares that Nam Tai will receive separately in consideration of transferring the entire issued shares of J.I.C. to Newco.

Compliance with the procedure

15. By an order made by the court on 9 April 2002, leave was given to the Company to convene a meeting of the creditors and a meeting of the shareholders on 10 May 2002 to consider and, if thought fit, approve the respective Schemes. Directions were given for the posting and advertisement of the notices of the meetings and the despatch of the Scheme document to each of the creditors and shareholders and they have been complied with.

16. The liquidators have considered whether Nam Tai should be regarded as a separate class of shareholder for the purpose of the Shareholders' Scheme pursuant to section 166 of the Ordinance. As the principle upon which the classes of creditors or shareholders are to be constituted is that they should depend upon the similarity or dissimilarity of their rights against the Company and the way in which those rights are affected by the Schemes, and not upon the similarity or dissimilarity or their private interests arising from matters extraneous to such rights, the liquidators have taken the view that Nam Tai's interests in the restructuring proposal could be considered as private interests and it would not be appropriate to regard Nam Tai as a separate class of shareholder for the purpose of the Shareholders' Scheme (see UDL Argos Engineering & Heavy Industries Co. Ltd. & Ors. v. Li Oi Lin & Ors. [2001] 3 HKLRD 634). The distinct interests of Nam Tai in the Shareholders' Scheme and the benefits that it will receive in the restructuring proposal are disclosed and explained in the Explanatory Statement and in a letter of Nam Tai to the shareholders and creditors, which formed part of the Scheme document.

17. Further, judicial guidance as to what constitutes an appropriate apportionment between creditors and shareholders of the consideration given for the realisation of the listing status of a company in liquidation, in circumstances where the shareholders have no real prospect of recovery in the liquidation, is described in some detail in the Explanatory Statement. In short, the court is of the view that the value of any consideration offered to shareholders in return for their co-operation should be no more than a "sweetener" or token in nature (see Re Rhine Holdings Ltd. (In Liquidation) [2000] 3 HKC 543 and Re Yaohan Hongkong Corporation Ltd. (In Liquidation) [2000] 3 HKC 554 and [2000] 4 HKC 488).

18. At the shareholders' meeting on 10 May 2002, the resolution submitted was that the Shareholders' Scheme be approved without modification. Nam Tai abstained from voting on the Shareholders' Scheme whilst indicating that had it decided to vote, it would have voted in favour of it. Five independent shareholders were present in person or by proxy and all voted in favour of the resolution. The total number of shares held by these independent shareholders were 29,605,000.

19. As for the creditors' meeting, eight creditors were present by proxy. Their admitted claims amounted in aggregate to HK$383,520,288.00. No one abstained from voting. All voted in favour of the resolution to approve the Creditors' Scheme without modification.

20. Thus, the requisite statutory majority approving the Schemes has been achieved in the meetings convened by the court. Under section 166, the majority required is a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members, present and voting either in person or by proxy.

Exercise of the discretion

21. In the decision at first instance of Yaohan, supra. at 561B, Le Pichon J (as she then was) intimated that a payment of "about 5%" of the consideration as apportioned to the shareholders in return for their co-operation would "almost certainly" fall within the description of a sweetener or token consideration. Here, the consideration apportioned to the shareholders in the Shareholders' Scheme is somewhat higher, being 8.46%, but would still qualify as a token consideration in my view in the present circumstances. I should point out that as the restructuring proposal is to be treated as a privatisation by scheme of arrangement pursuant to Rule 2.10 of the Hong Kong Code on Takeovers and Mergers, it must be approved by a majority in number of the independent shareholders representing 90% in value of the existing shares voted at a duly convened extraordinary general meeting of the independent shareholders. This is higher than the majority required under section 166.

22. I am satisfied that as an intelligent and honest person, a member of the class concerned and acting in respect of his interest might reasonably approve the Schemes. Accordingly, I have sanctioned the Shareholders' Scheme and the Creditors' Scheme and ordered the Company to deliver a sealed copy of this order to the Registrar of Companies. I have ordered the costs of the application to be paid from the assets of the Company.