RE CHEUK NANG TECHNOLOGIES (HOLDINGS) LTD.

HCMP 1683/01

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1683 OF 2001

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JUDGMENT

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1. In this petition, the Company, which at the date of the petition was known as Cheuk Nang Technologies (Holdings) Limited, but which has since changed its name to Cheuk Nang Holdings Limited, seeks the Court's confirmation to a proposed reduction of capital under s.59 of the Companies Ordinance.

2. Section 58 provides that a company limited by shares and having a share capital may, if so authorized by its articles, by special resolution reduce its share capital in any way subject to confirmation by the Court.

3. The first statutory requirement is that there should be articles authorizing the reduction of capital. This is found in Article 63(B) of the articles of the Company.

4. The second statutory requirement is that there should be a special resolution resolving to reduce share capital. On 26 March 2001, at an Extraordinary General Meeting of the Company, it was resolved that the authorised capital of the Company be reduced from HK$1,000,000,000 divided into 10,000,000,000 shares of HK$0.10 each to HK$10,000,000 divided into 10,000,000,000 shares of HK$0.001 each and that such reduction be effected by cancelling paid-up capital to the extent of HK$0.099 upon each of the 3,232,987,170 ordinary shares in issue and by reducing the nominal amount of all the issued and unissued ordinary shares in the capital of the Company from HK$0.10 to HK$0.001 per share.

5. I should also mention that at the same time, the Company also resolved that forthwith upon the reduction of capital taking effect, the authorised share capital of the Company be increased to its former amount of HK$1,000,000,000 by the creation of such number of new ordinary shares of HK$0.001 each, the aggregate nominal value of which is equal to the amount by which the capital of the Company has been reduced.

6. The third statutory requirement is that there should be confirmation by the Court under s.59 and s.60 of the Ordinance. In Re Ratners Group plc (1988) 4 BCC 293, Harman J set out a number of matters which the Court would require to be satisfied before confirming a reduction of capital.

7. The first matter is that the shareholders should be treated equitably e.g. as between shareholders of different classes, or between different shareholders of the same class. In the present case, there is only one class of shares and all shareholders are equally affected.

8. The second matter is that the shareholders in general meeting should have had the proposal properly explained to them so that they could exercise an informed judgment. For this purpose, the Court would look at the circular accompanying the notice of meeting at which the special resolution is to be proposed (Re Thorn EMI plc (1988) 4 BCC 698). In the present case, I have perused the circular and the proposal is clearly explained. The special resolution passed is identical to that proposed in the notice.

9. The third matter is that creditors should be safeguarded. This is of primary concern to the Court, as shown in s. 59 and s.60 of the Ordinance. In the present case, the interests of creditors are provided for in that the credit arising from the reduction will be kept in a special capital reserve account which will not be treated as realised profit and which will be treated as an undistributable reserve, so that the reduction would not alter the underlying assets of the Company. Payment out of the funds would be restricted to defined circumstances. The undertaking to this effect (based on the principles in Re Grosvenor Press plc [1985] 1 WLR 980 with additional provisoes that do not detract from the principles) will appear in all published financial statements, accounts and prospectuses of the Company. In light of that protection, the Court has dispensed with the settling of a list of creditors under s.59(2).

10. The fourth matter is that the reduction of capital should be for a discernible purpose. In the present case, there is an affirmation of the Chairman of the Board of Directors of the Company stating that the Company's main focus is on property investment and development. By reason of the downturn in this area of business, funding from financial institutions is more difficult or expensive. Accordingly, working capital may have to be raised by way of equity financing, by way of rights issues or placements.

11. For the past year however, the shares in the Company have been trading at lower than the par value. The par value being HK$0.10, the shares were, as at the latest practicable date before the notice of meeting, trading at less than half the par value, and on the date of the affirmation, trading at about a third of the par value. There is no evidence that market sentiment would improve in view of the present economic climate and a deterioration cannot be ruled out.

12. Realistically, therefore, it would be necessary for the Company to seek the sanction of the Court under s.50 of the Ordinance to issue shares at less than the par value for each issue of shares.

13. In the present case, as in Re Tian An China Investments Co Ltd. [1998] 2 HKLRD 474, the purpose of the application is to permanently reduce the nominal value of the shares now so as to facilitate the raising of working capital at any time as soon as the need arises. That purpose has been accepted in Tian An as a sufficiently "discernible" purpose within the meaning of that word as explained by Harman J in Thorn EMI.

14. Although the reduction of the nominal value of the shares is substantial, the par "value" is not equivalent to the worth or value of the shares (Practical Share Valuation, 2nd ed. p.73 § 4.06), and the Ordinance leaves the extent of the reduction to be determined by the Company (British and American Trustee and Finance Corporation v Couper [1894] AC 399, H.L., at 411-2).

15. In the circumstances, I am prepared to confirm the reduction, I approve the draft minute of order and I would make an order in terms of the draft Order.