Re Interform Ceramics Technologies Ltd.

HCMP 808/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 808 OF 2001

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J U D G M E N T

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1. This is an application by petition that a scheme of arrangement be sanctioned by this Court.

2. The Company in the present case was incorporated in Bermuda in 1994. It is listed in the Hong Kong Stock Exchange, but trading in the shares of this Company has been suspended since September 2000.

3. The authorised capital of this Company was $200 million divided into 2,000 million shares at $0.10 each. The issued share capital was in the amount of about HK$93 million.

4. From late 1997, the Company has been adversely affected by a number of factors. According to the petition, these included a downturn in the construction industry in Hong Kong, high debt levels and interest costs and the lifting of import tax exemptions on machinery for Sino-Foreign joint ventures and foreign owned enterprises in the PRC.

5. For the year ended 31 March 1998, the loss suffered by the Company was in the amount of $461 million; in the year following that, the loss had risen to $829 million. The turnover has diminished from $918 million in past years to the present turnover of only $177 million.

6. In September 1998, there was a Standstill Agreement which the Company entered into with "participating creditors" in order to find a third party investor. However, the Standstill Agreement was terminated in September 2000 and the participating creditors appointed receivers.

7. According to the evidence filed in the Court by the receivers, it has been estimated that if the Company were to be wound up, the dividend that would be payable to unsecured creditors would be nil.

8. An investor has now been found, being a BVI company by the name of Oasis Star. A restructuring agreement was signed by financial creditors who required a Scheme of Arrangement to be proposed in Bermuda.

9. However, some creditors did not take part in the Bermuda Scheme and could not be compelled to do so because their contract was not governed by Bermuda law. The creditors in question is a company by the name of Showa and three other leasing companies. Showa has since presented a petition to wind up the Company. The unsecured amount apparently is about HK$1.9 million, which is only 0.2 of 1% of the total unsecured debts of the Company. On 18 April 2001, the petition was heard by the Master who adjourned the petition to 2 May 2001.

10. In relation to the Scheme, on 28 February 2001, I had given directions as to the holding of a meeting of unsecured creditors. On 19 March 2001, that meeting was held and the only modification to the Scheme made at the meeting was for the deletion of a number of conditions precedent which apparently had already taken place and which were therefore redundant.

11. At the meeting, 43 creditors attended and the voting was that 40 creditors voted in favour of the Scheme, 2 against and 1 abstained. In terms of value, the creditors voting in favour of the Scheme amounted to some 99.6% in value of the total indebtedness of the Company, with those voting against holding 0.39% of the value.

12. It would appear that there was a dispute as to the entitlement of certain persons to attend and vote at the meeting. Apparently, what had happened was that there was a Labour Tribunal Award which was entered against two defendants, one of which was the Company in question, although the receivers' position is that these were employees of subsidiaries and not employees of the Company itself.

13. However, even if one were to add the number of employees who were successful in the Labour Tribunal, and assumed that all of these persons voted against, the result would still be that there would still be a majority voting in favour of the Scheme and the value held by the opponents to the Scheme would still only be 0.49%.

14. Accordingly, it is clear to me that section 166(2) of the Companies Ordinance has been satisfied.

15. A further question is whether this Court should sanction the proposed Scheme. It would appear from the papers that the Company is in a rather unfortunate position. There is a total unsecured indebtedness of some $991 million.

16. What is proposed in the Scheme is that there should be a reduction of capital in order to write off accumulated losses and an increase in share capital, with a capital injection from the investor by way of a cash injection of $90 odd million and the injection of an asset being a controlling stake in a company called AII Shanghai at some $250 million for the shares in the Company.

17. As far as the unsecured creditors are concerned, the only cash payment that would be given to them would be $1 million to be shared prorata. Given that the total indebtedness to unsecured creditors is $991 million odd, that represents only 0.1% and it would be right to say, I think, that the recovery would be merely token. However, I have to pitch that against the alternative, and the alternative according to the evidence before me is that if this Company were to be wound up, there would simply be a nil dividend and that would be even less than the very small recovery that would be made by the unsecured creditors under the present Scheme.

18. As far as Showa is concerned, it has security over the leased assets and that would not be prejudiced by this Scheme. As far as the other leasing companies are concerned, one actually voted in favour of this Scheme, one abstained, and one did not attend the meeting.

19. There has been no opposition to this petition by any other creditors. I do not know how many of the persons sitting in Court today are employees and who claim to be creditors of the Company. However, none of them has come forward to provide any evidence or to even indicate to me that they are opposed to the Scheme.

20. As far as the shareholders are concerned, it would appear that there are no payments or other "sweeteners" to the shareholders at the expense of the unsecured creditors.

21. Accordingly, in light of the fact that if this Company were to be wound up, there would only be a nil dividend, I would give my sanction to the Scheme.