RE CIL HOLDINGS LTD

HCMP 2799/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2799 OF 2002

____________

____________

____________________________________

REASONS FOR JUDGMENT

____________________________________

1. This is a petition to sanction a scheme of arrangement dated 28 November 2002 ("the Amended Scheme") under section 166 of the Companies Ordinance, Cap. 32, made between CIL Holdings Limited ("the Company") and the admitted creditors of the Company ("the Scheme Creditors"). Essentially, two matters arose for decision. The first relates to the effect of a vote for an adjournment of the meeting convened pursuant to an order of the court. The second relates to the jurisdiction and discretion of the court to sanction the Amended Scheme notwithstanding certain creditors are excluded from the Amended Scheme ("the Excluded Claimants") in that no meeting was convened for them. I decided both matters in favour of the Company at the conclusion of the hearing and these are the reasons for my judgment.

The Company

2. The Company was incorporated on 8 April 1993 under the Companies Act 1981 of Bermuda as an exempted company limited by shares. Its principal place of business is in Hong Kong. The shares of the Company are listed on the Stock Exchange of Hong Kong Limited.

3. The Company's activity is investment holding and its subsidiaries are principally engaged in property development in Mainland China, the manufacture and sale of multi-media products and the operation of convenience chain stores in the Philippines.

4. The present authorised share capital of the Company is HK$600 million divided into 60 billion shares of HK$0.01 each, of which 563,894,004 shares have been issued and are fully paid or credited as fully paid.

5. The Company is insolvent. The net current liabilities of the Company and its subsidiaries as at 30 June 2001 stood at HK$150,869,000.00. As at 26 November 2002, the Company was indebted to the Scheme Creditors in the aggregate sum of approximately HK$221.9 million. There are also liabilities to the Excluded Claimants, which I will look at separately.

Background to the Amended Scheme

6. A winding-up petition was presented against the Company by a creditor on 11 May 2001. The petitioning creditor was substituted by another creditor who in turn was substituted by yet another creditor. Since 29 April 2002, the winding-up petition was adjourned several times to allow the Company to propose to its shareholders and the Scheme Creditors a scheme of arrangement.

7. On 30 January 2002, the Company entered into a subscription agreement ("the Subscription Agreement") with Trade Honour Limited ("the Subscriber") and Mr Ke Jun Xiang. Mr Ke has an indirect interest in 5.3% of the issued share capital of the Company and is the sole shareholder of the Subscriber. By the Subscription Agreement, the Subscriber agreed to subscribe for 3.5 billion new shares in the Company for a consideration of HK$35 million, conditional upon, inter alia, the Company entering into a scheme of arrangement with its creditors and the scheme is to be sanctioned by the court. The net proceeds from the subscription of new shares would allow the Company to make payment to the Scheme Creditors so that the winding-up petition would be withdrawn or dismissed. The Subscriber would thereby obtain a significant interest in the Company as its single largest shareholder. So far as the existing shareholders are concerned, the proposed restructuring will result in a dilution of their interests in the Company. The extent of the dilution will vary depending on the extent that the Scheme Creditors elect to take shares in the Company rather than cash. I understand proceedings are brought in Bermuda for a sanction of the shareholders' scheme.

The court meetings

8. On 30 July 2002, the Company obtained a court order for a meeting of the Scheme Creditors to be convened. The court meeting duly took place on 4 October 2002. Shortly before the meeting, the Company became aware that one of its major creditors, Amsteel Corporation Berhad ("Amsteel"), was unlikely to vote in favour of the original scheme of arrangement dated 2 August 2002 ("the Scheme"), as Amsteel was reported to be undergoing its own debt restructuring process and required the consent of its own creditors before it can agree to the Scheme. At the meeting on 4 October 2002, Amsteel proposed an adjournment of the court meeting for 30 days or to such other date as directed by the court. The resolution to adjourn was put to vote and was carried on a show of hands.

9. Following the adjournment of the meeting, a number of other matters arose which had an impact on the Scheme and which required amendments to be made to it. The Company applied to court for an order to convene another meeting for the purpose of approving the Amended Scheme. An order was made on 26 November 2002.

10. The second court meeting took place on 13 December 2002. Amsteel informed the meeting that it still did not have the approval of its creditors to vote in favour of the Amended Scheme and suggested an adjournment of 7 days and that the reconvened meeting should take place on 20 December 2002. This proposal was put to the Scheme Creditors present at the meeting and was carried by the votes of all those present and voting by a show of hands.

11. Unlike the previous occasion when the Scheme Creditors voted to adjourn the meeting, the Company did not seek another order from the court to reconvene the meeting on 20 December 2002 and just went ahead with it. A notice of the reconvened meeting was advertised in one English newspaper and one Chinese newspaper on 17 December 2002. In the notice, the Scheme Creditors were informed that duly executed proxy forms previously submitted for the purpose of the second meeting on 13 December 2002 would be treated as valid for all purposes of the reconvened meeting and any one wishing to revoke or amend proxies and/or to appoint or change a proxy was invited to resubmit a new form of proxy.

12. On 20 December 2002, the reconvened meeting was held. It was attended in person or by proxy by 27 Scheme Creditors whose indebtedness represented in aggregate HK$194,910,506.15. The resolution that the Amended Scheme be approved was put to vote. None of the Scheme Creditors present abstained from voting. 22 Scheme Creditors with an aggregate indebtedness of HK$180,378,994.72 voted in favour and 5 Scheme Creditors with an aggregate indebtedness of HK$14,531,511.43 voted against the resolution. The votes against accounted for 7.5% of the total indebtedness of the Scheme Creditors present and voting in person or by proxy. The statutory majority under section 166(2) was achieved.

The vote to adjourn the meeting

13. I turn to consider what is the effect of the vote for an adjournment of the meeting on 13 December 2002, specifically whether the vote for an adjournment was in effect a rejection of the Amended Scheme so that if the Company should wish to place the same before the Scheme Creditors again for their approval, they would need to obtain a court order to convene a meeting to comply with the requirement in section 166(1).

14. Mr Harris, who appeared for the Company, drew my attention to In Re Waxed-Papers, Ltd (1937) 8 TLR 676, a decision of the English Court of Appeal. It was held in that case that the power of voting conferred on the holder of the proxy was not confined to that of voting for or against the proposed scheme of arrangement, but was wide enough to enable the holder to use the proxy for the purpose of voting on any incidental matter which might arise before the main question for which the meeting was convened was considered, and that the proxy could be used to vote on a resolution to adjourn the meeting. In giving their judgment, Slesser LJ and Romer LJ had used language that is open to the interpretation that a vote for an adjournment is in effect a vote against the scheme (at 677: "In my opinion, to vote for an amendment proposing the adjournment of the scheme for a short or a long period is in effect to vote against the scheme"; "We are entitled to consider this matter as though the amendment that further consideration of the scheme of arrangement should be adjourned would have the effect of, as it well might, of destroying the scheme of arrangement altogether").

15. Mr Harris submitted that if it were indeed meant by the judges that a vote for an adjournment is in effect a vote against the proposed scheme, this would appear to be inconsistent with other parts of the judgment of Slesser LJ in which he stated that "it must be conceded that, if the meeting is adjourned, the proxy could be used to vote on the substantive resolution at the adjourned meeting." Moreover, a finding that although the powers of the proxy would extend to voting on a resolution to adjourn a meeting, the effect of a vote for an adjournment is a deemed rejection of the resolution proposed at the meeting would be inconsistent with the principle that an adjourned meeting is a continuation of the former meeting (see Shackleton on the Law and Practice of Meetings, 9th ed., para. 6-17; Scadding v. Lorant (1851) 3 H.L. Cas. 418 at 447).

16. I agree with these submissions. Firstly, I do not think the dicta of Slesser LJ and Romer LJ, read in their proper context, should have the wide effect as might be suggested. Slesser LJ was considering the situation if the proxy could be used to oppose a motion for an adjournment, and it was in this context that he said as a vote in favour of a resolution for an adjournment is in effect a vote against the scheme, those who wish to vote in favour of the scheme may, when they are authorised to use their proxies for that purpose, oppose by proxy such a resolution which will have the effect of preventing the scheme which is being put before the meeting being approved at that meeting. Romer LJ was approaching the matter in a similar vein.

17. Secondly, if Slesser LJ and Romer LJ had really meant that a vote for an adjournment would in effect be a rejection of the substantive resolution for all intents and purposes, there would be no adjourned business to be considered at the adjourned meeting, and that would be inconsistent with the principle that the adjourned meeting is a continuation of the first in which the original resolution which is deferred for consideration to the adjourned meeting could be considered and voted upon. It is clear from the other parts of the judgment of Slesser LJ that he did not intend this result which is contrary to principle.

18. For the above reasons, I hold that there is no impediment to the Company proceeding to hold the adjourned meeting on 20 December 2002 without seeking a new court order and that the resolution passed at the adjourned meeting is valid.

The Excluded Claimants

19. I come to the Excluded Claimants before I go into the details of the Amended Scheme.

20. According to the explanatory statement of the Scheme document, there are a total of 17 Excluded Claimants, of which 7 have claims of under HK$1,000.00 each. The claims of the Excluded Claimants are disputed by the Company. According to the accounting records of the Company, the total amounts of these disputed claims were approximately HK$58 million. However, the figures in respect of some of the disputed claims in the accounting records are materially less than the full amounts claimed by some of these claimants. In one instance, the stated figure in the accounting records was HK$27 million odd whereas the full claim of that Excluded Claimant amounted to HK$69 million odd. In another instance, an action was brought against the Company for HK$47 million and that has not been provided for in the accounting records. If the full amounts claimed by the Excluded Claimants are adjudicated in their favour, the aggregate liability owed to them is approximately HK$146 million.

21. The Company has, on previous occasions, attempted to settle many of these claims, but without any success. The view has been taken by the Company that these claims cannot be included in the Scheme as it is not practical to adjudicate or agree them.

22. The Scheme document and the amended version have been sent to the Excluded Claimants, but for information only, to ensure that they are aware of the Scheme and the Amended Scheme. It is specifically mentioned in the explanatory statement that it will be open to the Excluded Claimants to object to the Scheme and the directors of the Company can give no assurance that the disputed claims will not be admitted as debts of the Company and if and to the extent that any of these claims are admitted and the Company is unable to pay, it is recognised that the directors may be forced to allow the Company to go into liquidation.

23. When the petition first came before me on 4 March 2003, I gave directions that the Excluded Claimants should be informed of the current status of the Amended Scheme and they should be invited to attend the hearing and make representations if so wish. Of the Excluded Claimants, 5 have replied by letter stating that they have no objection to the Amended Scheme. None have attended the hearing of the petition.

The details of the Amended Scheme

24. The principal features of the Amended Scheme may be stated as follows:

(1) The Excluded Claimants shall be excluded from the Amended Scheme in respect of the disputed claims and none of them shall be eligible to vote or participate in the Amended Scheme in respect of the disputed claims.

(2) All preferential claims against the Company will be discharged in full in priority to the distribution in respect of the claims of the Scheme Creditors. All preferential creditors will be entitled to claim the non-preference balance, if any, of their claims against the Company as non-preferential Scheme Creditors.

(3) The total indebtedness of the Company owed to the Scheme Creditors will be discharged and the Scheme Creditors will, after adjudication, receive cash up to a maximum aggregate amount equal to the net proceeds from the proposed subscription of the new shares by the Subscriber, being HK$35 million less any costs, charges and incidental expenses, unless and to the extent the Scheme Creditors make valid elections to receive shares in the Company, credited as fully paid at par, at a rate of one share in discharge of every HK$0.05 of the valid claims of the Scheme Creditors in lieu of the cash payment which would otherwise be paid to them on an individual basis, as agreed or determined in accordance with the Amended Scheme. The cash payment to Scheme Creditors will be satisfied exclusively from the net proceeds of the proposed subscription of new shares by the Subscriber and will be distributed on a pro rata basis based on each of the Scheme Creditor's portion of the total indebtedness of the Company against those net proceeds. If and to the extent that the Scheme Creditors elect to receive shares in lieu of cash, the cash which would otherwise be paid to them shall be retained by the Company for its own benefit.

If there is jurisdiction to sanction the Amended Scheme

25. If a meeting is not properly convened for a class of creditors whose legal rights are affected by a proposed scheme to approve it, the court would have no jurisdiction to sanction the scheme (UDL Argos Engineering & Heavy Industries Co. Ltd & Ors. v. Li Oi Lin & Ors. [2001] 3 HKLRD 634 at 647E to 648B). I was referred to authorities which establish that if the rights of a class of members or creditors of a company introducing a scheme are not affected by the scheme, their consent to the scheme is not required (In Re Tea Corporation, Limited [1904] 1 Ch. 12 at 23 to 25; In Re Oceanic Steam Navigation Company Limited [1939] 1 Ch. 41 at 47; In Re British & Commonwealth Holdings Plc. (No. 3) [1992] 1 WLR 672 at 678C to 679H). The question here is whether the Excluded Claimants' legal rights are affected by the Amended Scheme.

26. I should point out first of all that the proposed scheme in this instance is not to facilitate a form of "back door" listing of the shares of a new company, as in Re Albatronics (Far East) Company Limited [2001] 3 HKC 223. The listing status, which is an asset of the Company, is not disposed of. In a back door listing, all new assets would be placed in the new corporate vehicle leaving any unknown liabilities with the subject company. In this situation, creditors excluded from a scheme which adopts this structure may well be prejudiced as they would be left with claims against a valueless entity. In the present situation, the Company remains the listed vehicle and it is to continue in business. Under the Amended Scheme, the existing assets of the Company will not be depleted by the payment of funds to Scheme Creditors in that any funds paid to them will be provided exclusively out of the net proceeds of the subscription of new shares by the Subscriber. The disputed claims of the Excluded Claimants will not be affected save that on a pro-forma basis, the net assets of the Company will be increased, so that the pool of net assets available to satisfy the disputed claims, if and when admitted, will be increased.

27. It does not appear to me that the legal rights of the Excluded Claimants will be affected as the Company undergoes no change of status if the Amended Scheme is sanctioned. Their legal rights against the Company will remain the same being choses in action against a listed company not in liquidation. In the event any Excluded Claimant should proceed to wind up the Company after the Amended Scheme is sanctioned and implemented, the recovery of the Excluded Claimants would be enhanced as the Scheme Creditors would all have compromised their claims pursuant to the Amended Scheme. I accept the Company's submission that there is no requirement for the Excluded Claimants to be allowed to vote on the Amended Scheme at the court meeting.

28. I am satisfied that all the statutory requirements have been complied with. The meeting held on 20 December 2002 for the Scheme Creditors is a properly constituted meeting. The Amended Scheme was approved by the requisite majority and the result of the meeting fairly reflected the views of the creditors concerned.

If the discretion should be exercised to sanction the Amended Scheme

29. The court has an unfettered discretion whether to sanction a scheme but is likely to do so where the arrangement is such as an intelligent and honest man, being a member of the class concerned and acting in respect of his interest, might reasonably approve. I do not propose to set out the possible financial effects of the Amended Scheme on the net tangible assets per share and the estimates of the returns that might be achieved on a liquidation of the Company in different scenarios, which have been analysed in some detail in one of the appendices to the Scheme document. No doubt, those who approved the Amended Scheme have taken the commercial view that it will be in the interests of all not to put the Company in a position where it is forced into liquidation.

30. The court should be slow to differ from the meeting in this instance.

Order

31. For the above reasons, I have made an order sanctioning the Amended Scheme on the undertaking of the Subscriber to be bound by the terms thereof and to do such acts and execute such documents as are necessary to give effect to the Amended Scheme.