RE TARGET SONIC LTD

HCMP 5572/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5572 OF 2003

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J U D G M E N T

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1. By this petition, the Company seeks the Court's confirmation of a reduction of its share capital under s. 59 of the Companies Ordinance (Cap. 32) ("the Ordinance").

2. By s. 58 of the Ordinance, a company limited by shares and having a share capital may, if so authorised by its articles, by special resolution reduce its share capital in any way subject to confirmation by the Court. This provision gives rise to three statutory requirements.

3. The first of these is that there should be articles authorising the reduction of capital. In this case, Article 32 of the Company's Articles of Association, which was introduced by special resolution of the Company passed unanimously by all its shareholders on 19 November 2003, provides this authorisation. Prior to that date, the power would have been found in Article 47 of Table A, which applied to the Company and formed part of its articles.

4. The second statutory requirement is that there should be a special resolution resolving to reduce the company's share capital. On 12 December 2003, it was resolved by all the members of the Company that the authorised capital of the Company should be reduced from HK$38,100,000 divided into 38,100,000 shares of HK$1 each to HK$28,100,000 divided into 28,100,000 shares of HK$1 each and that such reduction should be effected by cancelling 10,000,000 of the issued shares in the share capital of the Company. Of the shares to be cancelled, 813,784 were registered in the name of Sadao Yamamoto, 1,230,684 in the name of Taiwan Shoko Co. Ltd, 7,874,060 in the name of Shokosha Co. Ltd and 288,472 in the name of Shindo Co. Ltd.

5. The third statutory requirement is that there should be confirmation by the court under ss. 59 and 60 of the Ordinance. The court will be required to be satisfied of four matters before confirming a reduction of capital. I deal with these matters below. These factors were identified in Re Ratners Group Plc [1988] 4 BCC 293 which has been followed on many occasions in Hong Kong.

6. The first matter is that the shareholders should be treated equitably. In the present case, there is only one class of shares and only four shareholders, all of whom have consented to the reduction by voting in favour of it. I therefore consider that this requirement is satisfied.

7. The second matter is that the shareholders should have had the proposal properly explained to them so that they could exercise an informed judgment when voting on it. In the present case, I am satisfied that this was more than adequately done by the circular to shareholders and notice of extraordinary general meeting, both dated 20 November 2003, which explained the reasons for, and the form of, the proposed capital reduction.

8. The third matter is that the creditors' interests should be safeguarded. This factor is of primary concern to the court, as demonstrated by ss. 59 and 60 of the Ordinance. In the present case however, it is clear from the audited accounts of the Company for the years ended 31 January 1997 to 31 January 2003 and the management accounts of the Company prepared up to 30 December 2003 that the losses which are proposed to be written off by means of the capital reduction are all trading losses which are permanent in nature, and which exceed the amount of the proposed reduction. In these circumstances, there is no question of the creditors' interests being prejudiced by a possible return of capital to the Company's shareholders.

9. The fourth matter is that the reduction of capital should be for a discernible purpose. The credit arising from the reduction of capital in this case will reduce the accumulated shareholders' deficit of the Company so as to bring forward the time when the Company will be in a position to distribute future profits by way of dividend. This is a recognized purpose under s. 58(1)(b) of the Company Ordinance.

10. It therefore seems to me that proper grounds for a reduction have been made out, and I shall therefore confirm the capital reduction and approve the minutes proposed to be registered, subject to one minor amendment.