RE VITELIC (HONG Kong) LTD.

HCMP 1084/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1084 OF 2001

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REASONS FOR JUDGMENT

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1. This was a petition for the Court's sanction of the reduction of capital of the Company. Section 58 of the Companies Ordinance 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.

2. The first statutory requirement is that there should be articles authorizing the reduction of capital. This is found in Article 41 of the Articles of the Company.

3. The second statutory requirement is that there should be a special resolution resolving to reduce the share capital. By a resolution of 23 February 2001, the two shareholders of this Company resolved that the authorized capital of the Company be reduced from $200m. divided into 2 million ordinary shares of $100.00 each to $32m. divided into 320,000 ordinary shares of $100.00 each, such reduction being effected by cancelling HK$168m. of paid-up capital of the Company which has been lost or which is no longer represented by available assets, and by reducing the number of issued ordinary shares of the Company to 320,000 ordinary shares, by cancelling 1,680,000 ordinary shares registered in the name of CMC Holding (Cayman) Company so as to reduce the shareholding of CMC Holding (Cayman) Company to 319,999 ordinary shares. The said CMC Holding (Cayman) Company is the majority shareholder of the Company holding all but one share of the Company.

4. The third statutory requirement is that there should be confirmation by the court under Section 59 and Section 60 of the Ordinance. As has been set out in a number of previous cases on the sections, there are basically four matters which the court would require to be satisfied about before confirming a reduction of capital.

5. The first matter is that the shareholders should be treated equitably, for example, 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. In fact, in the present case there is only one controlling shareholder, the one single remaining share being held on trust for the majority shareholder.

6. 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. In the present case there are only two shareholders and they are in control of the Company through directors appointed by them.

7. The third matter is that creditors should be safeguarded. In the present case there are two levels of protection. The first is that there is sufficient cash or the equivalent of cash in the Company but secondly, I have also required at the summons for directions stage that the Company should set aside a capital reserve account until all creditors at the date of the reduction have been paid off. I have made this specific requirement in the present case because it appears to me upon reading the financial statements that the Company had caused to be paid, in advance of other creditors, certain shareholder loans. I have been informed that this was necessary because the control of the Company has recently been transferred and that the previous shareholders required their shareholder loans to be repaid first. Be that as it may, that would still have been to the detriment of the other unsecured creditors because the shareholder loans in the form of loans from related companies were non-current liabilities.

8. The fourth matter is that the reduction of capital should be for a discernible purpose. In the present case the evidence is that the Company has suffered quite a substantial loss in the past few years and the purpose of reduction now is to reduce the capital loss so that new investors would be attracted to invest in the Company by the possibility of dividends being payable, and without a reduction of the capital, dividends would not have been payable. In the circumstances, since the evidence shows that there has been a permanent loss in this Company and since the evidence is that this Company having previously been operated for research and development purposes, is now intended to operate for the purposes of profit (which would require investments which would in turn look to the possibility of the payment of dividends), I am satisfied that there is a discernible purpose.

9. It is clearly desirable for the Company to be able to write off the permanent loss that it has suffered so as to put itself, with a clear balance sheet, in a position to resume payment of dividends out of any subsequent profits that may be made. This would enable the Company's capital structure to be reorganised so that it would provide a more realistic measure of the Company's net worth.

10. In the circumstances, there having been no appearance by any creditors, I was prepared to confirm the reduction and approved the draft minute of order before me.