Re ABN AMRO Securities (Japan) Ltd.

HCMP 2695/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2695 OF 2002

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J U D G M E N T

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1. This is a petition of ABN AMRO Securities (Japan) Limited ("the Company") for an order confirming reduction of share capital under section 59(1) of the Companies Ordinance, Cap. 32. The reduction is to be made in two ways, by cancelling the share premium account and by cancelling part of the issued shares.

2. At the hearing of the summons for direction on 30 July 2002, I made an order dispensing with the settlement of the list of creditors and gave directions for advertisement of a notice of the hearing of the petition in various newspapers. The directions have been complied with.

3. The relevant evidence in support of the petition may be summarised as follows.

4. The Company was incorporated in Hong Kong as a private company on 21 October 1983. There are only 3 registered shareholders, Tebema B.V., ABN AMRO (Hong Kong) Nominees Limited and ABN AMRO Securities (Japan) Holding Limited. All three are indirect wholly owned subsidiaries of ABN AMRO Bank N.V. Although the Company is incorporated in Hong Kong it has been carrying on business in Japan in the sale and trading of fixed income instruments, sale and brokerage of derivatives and foreign equity and brokering of loans, among other things.

5. The present authorised capital of the Company is comprised of HK$180 million (equivalence to ￥3,394,690,000 as stated in the books of the Company) divided into 18 million ordinary shares of HK$10.00 each and ￥9 billion, divided into 100,000 ordinary shares of ￥70,000 each and 200,000 ordinary 'A' shares of ￥10,000 each, all of which have been issued and are fully paid.

6. It is provided in Article 10 of the Articles of Association that the Company may by special revolution reduce its share capital or share premium account in any manner and with and subject to any incident authorised and consent required by law.

7. By a special revolution dated 2 July 2002 resolved upon in writing and signed by all the registered shareholders, it was resolved as follows:

(1) the sum standing to the credit of the share premium account be reduced from ￥2,540,156,000 to nil;

(2) 18 million ordinary shares of HK$10.00 each and 50,000 ordinary shares of ￥70,000 each and 150,000 ordinary 'A' shares of ￥10,000 each in the issued share capital be cancelled; and

(3) the credit in the books of the Company of ￥10,934,846,000 arising form such reduction of share premium account and cancellation of issued shares be applied as follows:

(a) ￥8,624,400,000 be applied in writing against the accumulated losses of the Company which was of this amount as at 31 May 2002; and

(b) the balance of ￥2,310,446,000 be placed in a non-distributable account of the Company to be designated as "Legal Capital Reserve".

8. The reason for the reduction of capital is because the Company proposes to change its trading rights with the Tokyo Stock Exchange ("TSE") from the "General Trading Right" to the "Government Bond Future related Trading Right" and the "Equity Index related Trading Right". In order to make this change, it is necessary for the Company to acquire a trading right and a clearing right of TSE and to do so, the Company must meet minimum financial criteria prescribed by the regulations of TSE which include the following requirements:

(1) the issued share capital of the company must be more than ￥300 million;

(2) the net assets of the company must be more than ￥2 billion; and

(3) the net assets of the company must be larger than its issued share capital.

9. The purpose of the proposed reduction of capital is to reorganise the Company's capital and write off the accumulated losses, so that its net assets would exceed ￥2 billion and that its net assets would be greater than its issued share capital.

10. I am satisfied that the reduction is for a discernible propose. I am also satisfied that the mechanics of the reduction do not involve reduction in the net assets of the Company save for the costs associated with this application, nor do they involve the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid up capital.

11. As for the accumulated losses as at 31 May 2002 proposed to be written off in the sum of ￥8,624,400,000, an account of how the losses were incurred from its incorporation in 1983 has been given in an affirmation made in support of an earlier application of the Company for reduction of the share premium account in 1997 and in the supporting affirmation of the present application. In summary, the losses were attributable to the fact that the operating expenses exceeded the revenue.

12. With the exception of one item, I am satisfied that the losses are permanent. The exception relates to "foreign exchange losses". This item comprises both realised and unrealised foreign exchange gains or losses recorded by the Company. Realised gains or losses arise when foreign currency denominated assets or liabilities have been settled, generally in the course of securities trading. Unrealised gains or losses arise from the revaluation of foreign currency denominated assets or liabilities at the year end of the Company. These assets and liabilities largely comprise bank deposits and amounts due to or from other group companies.

13. According to the profit and loss statement of the Company for the years ended 31 December 1997 up to 31 December 2001, the total loss attributable to both realised and unrealised foreign exchange losses amounted to ￥789,178,000. It has not been possible to identify what proportion of this is attributable to unrealised foreign exchange losses.

14. It is recognised by the Company that in the situation where the loss to be written off may not be permanent because it arises by virtue of a revaluation of an asset, provision must be made to ensure that if the loss is reversed and the actual or potential profit realised, this would be available to creditors. The Company has proposed to do this by placing part of the credit that will arise in the books of the Company by virtue of the cancellation of capital and the reduction of the share premium account, which will not be set off against accumulated losses (i.e. ￥10,934,846,000 - ￥8,624,400,000 = ￥2,310,446,000), in a non-distributable account designated as "Legal Capital Reserve".

15. An undertaking is offered by the Company regarding this reserve in the designated account in these terms:

"The Company undertakes that of the total sum of ￥8,394,690,000 by which the capital of the Company is now sought to be reduced, a sum of ￥2,310,446,000 will be credited to a special capital reserve in the books of account of the Company to be designated 'Legal Capital Reserve' which

(a) will not be treated as realised profits; and

(b) shall be treated as a reserve of the Company, which shall not be distributable, provided that the Company may apply it in paying up unissued shares of the Company to be issued to members as fully paid bonus shares

and that the audited accounts of the Company will contain a note recording this undertaking."

16. I am satisfied that the undertaking offered would give adequate protection to the creditors of the Company. It is appropriate to confirm the reduction of capital proposed by the Company. I make an order in terms of the draft submitted as amended which contains the above undertaking by the Company regarding the special capital reserve, confirming the reduction of capital and approving the minute in the schedule to the draft order. I also give consequential directions on production of this order to the Registrar of Companies for registration and for advertisement, pursuant to section 61 of the Companies Ordnance.