RE SINO-I TECHNOLOGY LTD

HCMP 597/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 597 OF 2005

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REASONS FOR JUDGMENT

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1.  This is a petition presented by Sino-I Technology Limited (“the Company”) under sections 48B(1) and 59(1) of the Companies Ordinance, Cap. 32, seeking confirmation of reduction of share capital and of the share premium account.

The background

2.  The Company was incorporated in Hong Kong on 16 March 1948 under its former name and was converted into a public company on 5 June 1964. The Company adopted its present name on 18 July 2003. Its shares are listed on the main board of The Stock Exchange of Hong Kong Limited.

3.  The principal activities of the Company and its subsidiaries are in the field of information technology and property investment and development.

4.  The present authorised share capital of the Company is HK$3,000,000,000.00 divided into 30,000,000,000 shares of HK$0.10 each, of which 19,914,504,877 shares have been issued and are fully paid up or credited as fully paid up.

5.  As at the date of the petition presented on 22 March 2005, there is standing to the credit of the share premium account the sum of HK$472,735,499.93, which has arisen because of the issuance of the shares of the Company at a premium.

6.  There is provision in the Articles of Association of the Company permitting the reduction of its share capital by special resolution.

The proposed reduction of capital

7.  The proposed reduction is to reduce the nominal value of each of the shares of the Company from HK$0.10 to HK$0.01 and to cancel part of the balance standing to the credit of the share premium account in the amount of HK$433,541,062.55. The credit arising from the capital reduction will be applied to effect a distribution in specie to the Company’s shareholders of the shares of HK$0.01 each (“the South Sea Shares”) in the capital of South Sea Holding Company Limited (“South Sea”) which are held by the Company’s wholly owned subsidiaries, in the proportion of 15,756 South Sea Shares for every 10,000 qualifying shares in the Company.

8.  The purpose of the reduction is to alter the corporate structure of the Company and South Sea, such that South Sea will no longer be a subsidiary of the Company but will allow the Company’s shareholders to hold a direct stake in both South Sea and the Company.

9.  The commercial and economic reasons behind this re-organisation are to allow the Company’s share price to better reflect its financial performance. Prior to the re-organisation, South Sea has a larger asset base than the Company and the share price of the Company suffered from this corporate structure.

The extraordinary general meeting

10.  The shareholders of the Company were sent a circular dated 23 March 2004 in English and Chinese dated containing a letter from the board of directors to the shareholders, a letter from the independent director, a letter from an independent financial adviser, a notice dated 23 March 2004 convening an extraordinary general meeting of the holders of ordinary shares on 16 April 2004, and a proxy form for voting at the extraordinary general meeting. The circular set out in detail the reasons for the proposed reduction of capital and the distribution in specie. On the advice of the independent financial adviser, the independent director advised the shareholders that in his view the terms and conditions of the proposed reduction and distribution are fair and reasonable.

11.  At the extraordinary general meeting held on 16 April 2004, the shareholders of the Company passed unanimously an ordinary resolution to approve a subscription agreement in connection with the subscription by a wholly owned subsidiary of the Company of convertible loan notes of South Sea and a special resolution to effect the proposed reduction of capital.

12.  The procedural requirements and the directions made for the advertisement of the notice of presentation of the petition have all been complied with.

The applicable legal principles

13.  The principles upon which the court will sanction a reduction of share premium account are similar in all respects to those upon which the court will sanction the reduction of share capital (Re Ratners Group plc (1988) 4 BCC 293 at 295). A convenient summary of these principles is found in Re Cheuk Nang Technologies (Holdings) Ltd. [2001] 4 HKC 571 at 573A to H and 574A to C. Further, as stated in Practice and Procedure of the Companies Court by Boyle & Marshall, 1997 ed. at para. 4.11.3, in considering whether the reduction should be confirmed, the court will not substitute its view for that of the shareholders who have voted in favour of it. The function of the court is to decide whether it is a proposal that shareholders, having regard to their interests as shareholders, could reasonably approve.

14.  I turn to consider each of the matters that the court will take into account before confirming a reduction of capital.

15.  Firstly, I am satisfied all the shareholders have been treated equitably in the proposed reduction. All the shareholders who attended the extraordinary general meeting in person or by proxy have voted in favour of the special resolution.

16.  Secondly, I am satisfied that by the circular, the shareholders have been given a proper and sufficient explanation of the proposal to enable them to exercise an informed judgment how they should vote at the extraordinary general meeting.

17.  Thirdly, the reduction of capital, which is for the re-organisation of the corporate structure of the Company and South Seas, is for a discernible purpose. “Discernible” for this purpose means “something which is demonstrated by evidence to the court and is something sufficiently solid and near in expectation to be a real prospect” (Re Thorn EMI plc (1988) 4 BCC 698 at 701).

18.  Fourthly, the interests of creditors are sufficiently protected. This is particularly important in this instance where the reduction does involve a return of paid up capital, in the form of South Sea Shares, to the shareholders of the Company. I have made an order on the hearing of the summons for directions that section 59(2) shall not apply as regards any class of creditors of the Company, having regard to the fact that the Company has informed all its creditors of the proposed reduction and has obtained consents in writing from practically all of them. As for three creditors that have not provided written consent, their small liabilities have all been settled. The small numbers of new creditors as at the date of the hearing of the summons for directions have all been paid.

19.  I have also considered the audited financial statements of the Company as at 31 December 2004. The latest management accounts, for the period from 1 January to 14 June 2005, were placed before the court at the hearing of the petition. According to the management accounts, the Company has net current assets of HK$100.3 million and net assets of HK$3.26 billion.

20.  For the above reasons, it is appropriate to confirm the reduction of capital as per the special resolution. I have therefore made an order in terms of the draft submitted as amended and approved the minute set forth in the schedule to the draft order.