RE HONG KONG CONSTRUCTION (HOLDINGS) LTD

HCMP 1477/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1477 OF 2005

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REASONS   FOR   JUDGMENT

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1.  This is a petition presented by Hong Kong Construction (Holdings) Limited (“the Company”) for an order that the proposed reduction of its share capital and cancellation of its share premium account be confirmed.

2.  The Company was incorporated as a private company on 12 October 1973 under its former name Kumagai Gumi (Hong Kong) Limited. Since 29 May 1987, the shares of the Company have been listed on the main board of The Stock Exchange of Hong Kong Limited. It is a holding company. The Company with its subsidiaries are principally engaged in construction, property development and property investment in Hong Kong and Mainland China. Recently, its business has been extended to investments in toll road and wind power stations.

3.  The present authorised share capital of the Company is HK$3,500,000,000.00 divided into 3,500,000,000 ordinary shares of HK$1.00 each, of which 2,328,409,272 have been issued and are fully paid or credited as fully paid. The amount standing to the credit of the share premium account was about HK$987.7 million as at the date of the petition on 19 July 2005.

4.  There is provision in the articles of association for reduction of the authorised or issued share capital, any capital redemption reserve fund or any share premium account or other distributable reserve in any manner authorised and subject to any conditions prescribed by law.

5.  At an extraordinary general meeting of the Company on 18 July 2005, these special resolutions were passed:

(1)	the amount standing to the credit of the share premium account as at the effective date be reduced and cancelled and the directors be authorised to apply such reduced and cancelled amount against the accumulated losses of the Company as at the effective date;
(2)	the issued share capital of the Company be reduced by HK$2,305,125,179.28 from HK$2,328,409,272.00 divided into 2,328,409,272 ordinary shares of HK$1.00 each to HK$23,284,092.72 divided into 2,328,409,272 ordinary shares of HK$0.01 each, and the authorised but unissued share capital be reduced by HK$1,159,874,820.72 from HK$1,171,590,728.00 divided into 1,171,590,728 ordinary shares of HK$1.00 each to HK$11,715,907.28 divided into 1,171,590,728 ordinary shares of HK$0.01 each; and the directors be authorised to transfer the credit arising of approximately HK$2,305.1 million as a result of the reduction of the issued and paid-up capital to the capital reduction reserve account and apply part of the amount of approximately HK$813.6 million to set off the remaining balance of the accumulated losses and the balance of the amount of approximately HK$1.491.5 million in the capital reduction reserve account be applied in such manner as the directors should consider appropriate.

6.  The purposes of the proposed reduction of capital are three-fold:

(1)	to reflect the accumulated losses of HK$1,801,300,000.00 as at 31 December 2004, all of which are permanently lost or unrepresented by available assets, so as to bring in line the Company’s capital with its available assets;
(2)	to permit the writing down of the nominal value of the Company’s shares from HK$1.00 per share to HK$0.01 per share, to more closely reflect their market value which stood at about HK$0.50 per share on 18 July 2005. The Company would then be able to issue new shares in future to raise equity capital from the market in order to finance its business development; and
(3)	to eliminate the accumulated losses thereby bringing forward the time when the Company may consider paying dividends on its shares.

7.  The proposed reduction does not involve the diminution of any liability in respect of unpaid share capital, or the payment to any shareholder of paid-up share capital.

8.  Detailed evidence was filed to explain the nature of the losses, how they were incurred, and how they were categorised as permanent and non-permanent losses. A helpful summary of this is given in income statement analysis covering the period from 1999 to 2004. Since 1999, the Company has accumulated permanent losses of HK$3,548,452,000.00, and part of which had been set off by the revenue generated by the Company over the years. The substantial part of the permanent loss was incurred due to the down turn in the construction industry in the past seven years and the huge loss suffered by the Company as a result of its failed investment in the Yangpu project in Hainan province. The audited financial statements recorded accumulated losses of about HK$1,801,300,000.00 as at 31 December 2004. I am satisfied these losses should be regarded as permanent.

9.  As of 30 June 2005, the Company owed to unsecured and trading creditors sums totalling about HK$444.7 million. Following the implementation of the reduction, HK$1,491.5 million will be credited to a capital reduction reserve account to be applied as the directors consider appropriate. To safeguard the interests of unsecured creditors, the Company has offered an undertaking in these terms:

“The Company undertakes that out of the capital by which the Company now seeks to reduce, a sum of about HK$1,491,500,000.00 will be credited to a capital reduction reserve in the books of account of the Company to be designated as Capital Reduction Reserve Account which will not be treated as realised profits and shall be treated as a reserve of the Company, which shall not be distributable UNTIL and UNLESS the creditors of the Company as at the date of the sanction of the reduction of capital (“the Creditors”) are fully settled, provided for by the Company or the remaining Creditors and each of them do consent by which time the said Capital Reduction Reserve Account will be cancelled and PROVIDED that prior to the cancellation of Capital Reduction Reserve Account:
(a)	the Company may apply it in paying up unissued shares to be issued to members as fully paid bonus shares; and
(b)	the audited account of the Company will contain a note recording this Undertaking.”

10.  On 30 August 2005, at the hearing of the summons for directions, an order was made for the settlement of a list of creditors to be dispensed with, upon the aforesaid undertaking.

11.  There is no question that the shareholders are treated equitably in the proposed reduction, there being only one class of shareholders and all are affected in the same way by the consequences of the proposed reduction.

12.  The proposed reduction was properly and adequately explained to all shareholders in a detailed circular dated 24 June 2005 for convening the extraordinary general meeting for the purpose of passing the special resolutions.

13.  The position of unsecured creditors would be adequately protected by the undertaking given by the Company.

14.  Lastly, the purposes for the reduction are all discernable purposes.

15.  I have therefore confirmed the proposed reduction of capital as sought and approved the minute of the order.