RE TOYOTA TSUSHO (HONG KONG) CO LTD

HCMP 1440/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1440 OF 2005

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REASONS  FOR  JUDGMENT

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1.  This is a petition for confirmation of a reduction of capital of Toyota Tsusho (Hong Kong) Company Limited (“the Company”) under section 59(1) of the Companies Ordinance, Cap. 32.

2.  The Company was incorporated on 1 June 1971 under its former name and changed its name to its present name on 17 June 1987.  It is one of the 170 odd members of a group of companies headed by the Company’s sole shareholder, Toyota Tsusho Corporation (“TTC”) in Japan.  TTC itself is listed in Japan and its major shareholders include Toyota Motor Corporation, which is the third largest automobile manufacturer worldwide and whose shares are listed in Japan, London and New York, and Toyota Industries Corporation, whose shares are also listed in Japan.

3.  The Company is one of the main regional subsidiaries of TTC and up to the end of 1999 traded in non-ferrous metals in the Asia Pacific region, in particular China, and in metal futures worldwide.  In 2000, it ceased futures trading and the non-ferrous metal business has been drastically reduced.  The Company is now engaged in trading in textiles, textile machinery, truck engines, chemical products, food and audio equipment.

4.  The present authorised capital of the Company is HK$155 million, divided into 1,550,000 ordinary shares of HK$100.00 each, all of which have been issued and are fully paid.  There is provision in the articles of association to reduce its share capital by special resolution in any manner allowed by law.

5.  By a special resolution dated 11 July 2005, TTC as the sole shareholder of the Company resolved to reduce the capital of the Company from HK$155 million to HK$37,372,900.00 by cancelling and extinguishing 1,176,271 out of the 1,550,000 ordinary shares of HK$100.00 each held by TTC.

6.  The primary purpose of the proposed reduction is to eliminate accumulated losses of the Company as at 30 June 2005 of HK$117,627,077.00 with the credit of HK$117,627,100.00 arising from the reduction, so as to bring its capital account more into line with its available assets.  As to the balance of HK$23.00 arising from the reduction, this will be credited to a special capital reserve.

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

8.  In the financial year ended 31 December 1999, the Company had to write off bad debts of HK$238,498,092.96, which resulted in an accumulated loss of HK$177,106,811.52 and a deficiency in shareholders’ funds of HK$174,106,811.52, thereby wiping out the entire paid up capital of the Company.  Whilst the accumulated losses had decreased over the years to HK$117,627,077.00 as at 30 June 2005, TTC had to inject HK$180 million as shareholder’s loan in March 2000 to keep the Company afloat.  HK$152 million of this loan was later converted into the paid up capital of the Company in June 2002 when a resolution was passed to increase its authorised share capital from HK$3 million to HK$155 million.

9.  The bad debts arose as a result of a massive fraud perpetrated by the then assistant general manager of the metal department of the Company and others between May 1995 and July 1999.  This former employee made a full confession to the management of his misfeasance in July 1999.  He had traded in metals on his own account with the Company’s funds, set up his own operations in China illegally importing and exporting metals and dealing directly with some of the Company’s customers in China.  In addition, he conducted futures trading in metals through the Company by using a company under his control and the accounts of two of the Company’s customers without authorisation.  With the assistance of the former employee, the Company had recovered part of the losses to the extent of US$6.5 million prior to the end of 1999 and another HK$1.6 million in the financial year 2000.

10.  A meticulous and detailed description of how the losses arose based on the ledgers and other accounting records of the Company was given in the supporting evidence of the Company, which I do not propose to recount.  Whilst the factual accounts or bases for the movement of funds among the customers’ accounts are unreliable, the movement of the funds itself, which led to the bad debts written off, as reflected in the accounting records of the Company is accurate and has never been challenged by the past and present auditors of the Company.

11.  The only question I need to consider is whether the loss of capital suffered by the Company is permanent, in the sense that it is “not a temporary fall in the value of some capital asset” and is “permanent so far as is presently foreseeable” (In re Jupiter House Investments (Cambridge) Ltd. [1985] 1 WLR 975 at 978H to 979A).

12.  After receiving legal advice and at the direction of TTC, the Company has decided not to take legal proceedings against the former employee.  Investigations have revealed that he has no assets in Hong Kong, the Mainland or Canada, where they are most likely to be found.

13.  The Company has also decided not to sue the customers or suppliers involved in the transactions of the former employee.  There is no reliable evidence against any of these alleged debtors in the Mainland and almost all had denied owing money to the Company.  The transactions described in the books and records may well be fictitious and the only other form of evidence the Company can rely on is the oral account of the former employee, who has refused to provide a signed affidavit and whose credibility is in serious doubt.  There is considerable doubt on the amount of the debts and how they can be proved in a court of law.

14.  Apart from the decision not to bring legal proceedings, the limitation period of six years has already expired or is about to expire.

15.  The directors consider that there is no prospect of further recovering any of the bad debts written off.  I accept in these circumstances that the accumulated losses as at 30 June 2005 may be regarded as permanent losses.

16.  At the hearing of the summons for directions, I accepted an undertaking from the Company to credit to a special capital reserve account (1) HK$23.00, being the difference between the amount of the paid up capital of HK$117,627,100.00 proposed to be cancelled and the accumulated losses of HK$117,627,077.00; and (2) all profits accruing between 1 July 2005, being the day following the latest date to which the management accounts of the Company were made up, and the date when the reduction of capital becomes effective.  The special capital reserve will remain non-distributable unless the creditors of the Company existing on the effective date of the reduction shall have either been paid off or consented to the distribution from the reserve, but that the amount of the reserve may be reduced to the extent that the paid up capital or share premium account of the Company is subsequently increased by an issue of shares for cash or other new consideration or capitalisation of distributable profits.

17.  In view of the relatively small amount in the special capital reserve and the very short duration of the undertaking, I did not think it necessary to require the Company to publish the undertaking in its prospectus or published accounts.  I made an order to dispense with the settlement of a list of creditors and gave directions for the advertisement of the notice for the hearing of the petition.  These directions have been complied with.  There was no opposition to the petition.

18.  No question arises that the sole shareholder is not treated equitably in the proposed reduction of capital.  It is for a discernible purpose and the interests of creditors are adequately protected.  I have therefore made an order confirming the reduction in terms of the draft submitted and approved the minute of the order.