RE WIRELESS INTERNETWORKS LTD.

HCMP 5550/01

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5550 OF 2001

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REASONS FOR JUDGMENT

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1. On 25 March 2002 I heard a petition for the Court's sanction under s.166 Companies Ordinance of a scheme of arrangement in respect of a company called Wireless InterNetworks Ltd (referred to as "Win").

2. At the end of the hearing, I sanctioned the scheme and indicated that I would hand down written reasons for my decision. I do so now.

Separate hearing from S Megga petition

3. The first issue was whether this petition could and should be heard separately from the petition for sanction of the scheme of arrangement in respect of S Megga Telecommunications Ltd. ("S Megga"), Win's principal operating subsidiary, the subject of HCMP 5551/01.

4. In S Megga's petition, employee preferential creditors are opposing the petition (there are no preferential creditors in the case of Win). The need to file further evidence as a result of the employees' challenge had led to an adjournment of the hearing on 1 March 2002, when these petitions were originally due to be heard.

5. On that occasion, Mr Scott SC appearing for Win requested that the Win petition be heard separately from the S Megga petition. Win was anxious to comply with the deadline imposed by the new investors of Win.

6. However, on that occasion, I did not think it right to hear the Win petition separately from the S Megga petition, because the success or failure of the S Megga petition might have had a bearing on the investors' desire to proceed with Win's restructuring proposal, which was the foundation of the scheme of arrangement.

7. Under Win's Restructuring Agreement with the new investors, it was a condition precedent that there should be a hive-down of assets from S Megga to another subsidiary in the Win group. Accordingly, if the S Megga scheme were not sanctioned, and S Megga had to be wound-up, the assets hived down might be subject to recovery attempts by future liquidators of S Megga. The new investors of Win might therefore seek to rescind Win's Restructuring Agreement on the ground that a condition precedent was not satisfied.

8. Although Win sought to argue that the new investors would proceed with its restructuring agreement notwithstanding the uncertainty about S Megga's future, there was then no evidence before me to show that the new investors were prepared to proceed notwithstanding a winding-up of S Megga with its consequential ramifications.

9. Accordingly, the hearing of the Win petition was adjourned on 1 March 2002 for Win to adduce evidence of the investors' position. The hearing of the S Megga petition was also adjourned for the filing of evidence in that petition.

10. On 25 March 2002, at the adjourned hearing of the Win and S Megga petitions, an application to separate the hearing of the two petitions had to be made again, because a point made in the S Megga petition in correspondence after the last hearing on 1 March 2002 led to that company having to ask for leave to file fresh evidence again.

11. On this occasion however, there was produced in the Win petition an affirmation from the new investors of Win, confirming that in the event the hive-down arrangement was successfully challenged by any liquidators of S Megga, the investors would still proceed with Win's restructuring and that the winding-up of S Megga would have no impact on the restructuring proposal.

12. Further, Mr Scott SC stated on instructions that the Security Trustee (acting on behalf of the Noteholders) was also prepared to waive the share capital of S Megga which would be transferred to them.

13. In light of that, and as Mr Chan Chi Hung counsel for the employee preferential creditors in the S Megga petition put forward no reason why the S Megga petition had to be heard together with the Win petition, I took the view that the Win petition could be heard separately.

Sanction of scheme

14. I come now to the petition itself. On the hearing of a petition for sanction of a scheme of arrangement under s.166(2) CO, the Court has to be satisfied:-

(1) that the class of creditors was properly constituted;

(2) that the meeting was convened in compliance with the Court's directions given under s.166(1);

(3) that a simple majority in number representing 3/4 in value of the creditors present and voting at the meeting, after proper explanation of the effects of the scheme, after consideration of the interests of the class and acting bona fide, have agreed to the arrangement; and

(4) that the arrangement was such that an intelligent and honest creditor might reasonably approve.

15. As to (1), in the Win petition, I am satisfied that it was sufficient to have only one class of unsecured creditors. There are no preferential creditors as in the S Megga petition. As for the Noteholders, applying the principles set out in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin and others [2001] 3 HKLRD 634, the test is whether they have similar legal rights against the company, not whether they hold divergent views based on their private interests not derived from their legal rights. The Noteholders were admitted to vote at the meeting as unsecured creditors to the extent of their excess indebtedness only, i.e. to the value of $23.2m only. I am satisfied that the fact that they would be receiving $38.2m under the Note Restructuring Offer did not give them different legal rights as to the excess indebtedness, such as would make them a separate class from the other unsecured creditors.

16. As to (2), it was clear on the evidence that the Court's directions had been complied with and that the meeting had been properly held.

17. As to (3), it was clear from the Scheme document exhibited that a proper explanation of the effects of the Scheme had been given to the unsecured creditors. At the meeting, 19 creditors with unsecured claims of about $27.4m were present and voted. Seventeen creditors with unsecured claims of about $26.7m (more than 97% in value) voted in favour of the scheme. There is no evidence to indicate that they did not have the interests of the class at heart, and there is no reason to doubt their bona fides.

18. As to (4), I was satisfied that the Scheme was such that an intelligent and honest creditor might reasonably approve. Win is a holding company. Serious financial difficulties have been experienced since 1997 when the group's financial and trading positions began to deteriorate. There was a restructuring exercise in 1999 and again in 2000.

19. Notwithstanding the restructuring, things did not improve and winding-up petitions were presented against S Megga and Win. The petition against Win has since been withdrawn.

20. Under the scheme for Win, there will be a cash payment of $3m from the investors, representing 8% of Win's indebtedness to its unsecured creditors. This is not a large sum, but in the absence of the scheme, these unsecured creditors are unlikely to get any recovery at all. All the assets of the company have been charged to the Noteholders to which Win is indebted in the sum of more than $63m.

21. It appears to me that in light of the above, the scheme was one which an intelligent and honest creditor might reasonably approve. I did not consider that the position of the Noteholders under the Note Restructuring Offer was ground for any exercise of discretion against approval of the scheme, and there were no other factors militating against approval. Accordingly, I gave an order sanctioning the Scheme.