RE KUMAGAI INTERNATIONAL LTD.

HCMP 2570/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2570 OF 2002

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J U D G M E N T

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1. This is a petition for confirmation of reduction of capital presented by Kumagai International Limited ("the Company") under Section 58(1) of the Companies Ordinance, Cap. 32 on 3 July 2002. On 9 July 2002, I made an order dispensing with settlement of a list of creditors of the Company and gave directions for advertisement of the petition. This direction had been complied with.

2. The Company is incorporated in Hong Kong on 20 June 1975 with an authorized share capital of HK$500,000.00 divided into 500 ordinary shares of HK$1,000 each. By various ordinary resolutions passed subsequently, the authorized share capital was increased to the existing capital of HK$370 million divided into 370,000 shares of HK$1,000 each, all of which had been issued and are fully paid up. Of the 370,000 shares, all except one is registered in the name of Kumagai Gumi Company Limited of Japan. The other share is held by an individual as nominee and in trust for the parent company in Japan. The Company is an investment holding company.

3. By a special resolution passed pursuant to Article 54(b) of the Articles of Association at an extraordinary meeting of the Company held on 2 July 2002, it was unanimously resolved that the capital be reduced from HK$370 million to HK$288 million divided into 288,000 ordinary shares of HK$1,000 each, by cancelling all the paid up capital to the extent of HK$1,000 per ordinary share upon each of the 82,000 ordinary shares numbered 288,001 to 370,000 that have been issued and are fully paid up. The reasons for the proposed reduction of capital would appear to be as follows.

4. According to the audited accounts for the year ended 31 December 1997, provision was made for the diminution in value of unlisted investments in the sum of HK$340,422,294.00. These unlisted investments and a breakdown of the provision made for the diminution in value was as follows:

(1) Kumagai Gumi Properties Limited ("KGPL"), incorporated in the United Kingdom - $139,130,399.00;

(2) Carryboy Property Limited ("Carryboy"), incorporated in Australia - $201,291,955.00.

5. With respect to KGPL, the liquidation of this company commenced in 1998 and approximately $1,597,507.00 was distributed to the Company from such liquidation. This sum was reflected as "gain on disposal of unlisted investment" in the audited accounts of the Company for the year ended 31 December 1998.

6. As for Carryboy, the provision of $201,291,955.00 was made in the audited accounts for 1997 in accordance with the opinion of the auditors because of the great loss resulting from Carryboy's business. The Company's shares in Carryboy were subsequently disposed of by the Company at a nominal consideration of A$1 in 1998.

7. The provision for the two unlisted investments in the 1997 accounts contributed to a large extent to make up the accumulated losses of $130,510,838.00 for that financial year.

8. In the 1998 audited accounts, there was loss incurred on the disposal of an associated company in the sum of $50,396,000.00. The loss was incurred when the Company assigned its loan in the face amount of $116,376,000.00 made to its associate company Kumagai Kam Lung Ltd for the sum of $65,980,000.00.

9. The accumulated losses referred to above were reflected in substance as the accumulated losses of $107,636,332.00 in the audited accounts for the year ended 31 December 2001.

10. According to the management accounts from January 2002 to May 2002, the Company has made net profit after tax of $25,340,279.79 in the first five months of 2002, thereby reducing the accumulated losses of $107,636,332.00 to $82,296,052.00. The Company proposed to write off this accumulated loss by cancelling paid up capital on the 82,000 ordinary shares as resolved in the special resolution.

11. I am satisfied that the amount proposed to be written off had been lost or is unrepresented by available assets and that such loss may be regarded as permanent.

12. The proposed reduction of capital does not involve either the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid up capital. It does not involve an alteration or variation of the rights attached to the ordinary shares.

13. The interest of the creditors are not unfairly prejudiced in any way by the reduction of capital. According to the audited accounts for 2001, the amount of current liabilities was $383,775.00 made up of accounts payable to the Company's auditors for professional fees of $270,000.00 and tax payable of $113,775.00. The amount of current liabilities is relatively small and I am satisfied the Company is able to pay, as I note from these audited accounts that the Company had cash and cash equivalents to the extent of $3,480,106.00 stated under "current assets" and as at 31 May 2002 the Company had cash at bank of over $28 million as stated in the management accounts.

14. I am satisfied that the reduction of capital is for a discernable purpose. In my judgment, it would be appropriate to grant the relief sought. I make an order in terms of the draft submitted confirming the reduction of capital and approve the minute set out in the schedule to the draft order.