RE HONG KONG CABLE TELEVISION LTD

HCMP 3072/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3072 OF 2004

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REASONS  FOR  JUDGMENT

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

2.  The Company was incorporated on 28 April 1992 and changed its name to the present name on 29 October 1998.  It is a private company ultimately owned by The Wharf (Holdings) Limited.  The principal activity of the Company is the development, establishment and maintenance of a cable television network and other telecommunication services, as permitted by the terms of its licences from the government of Hong Kong.

3.  The present authorised capital of the Company is HK$4,677,266,000.00, divided into 4,677,266,000 ordinary shares of HK$1.00 each, all of which have been issued and are fully paid or credited as fully paid.  Save for one share held by Wharf (Nominees) Limited on trust for Cable Network Communications Limited (“Cable Network”), all the other shares are held by the latter.

4.  There is provision in the Articles of Association that the Company may by special resolution reduce its share capital.

5.  By a written resolution of the Company dated 19 November 2004 signed on behalf of all members of the Company in accordance with section 116B of Cap. 32 and article 76 of the Articles of Association, it was resolved that conditional on the capitalisation of certain indebtedness owed by the Company to Cable Network being effected in full, and on the capital reduction becoming effective on the registration of the confirming order and the minute, the issued share capital of the Company be reduced from 4,427,266,000 shares of HK$1.00 each to 750,000,000 shares of HK$1.00 each by cancelling paid-up capital to the extent of HK$1.00 per share upon each of 3,677,266,000 issued shares registered in the name of Cable Network.

6.  On 19 November 2004, an explanatory memorandum on the proposed reduction of capital was provided to the registered shareholders of the Company.

7.  Prior to the passing of the written resolution, there was a deficit in the profit and loss account of the Company which amounted to HK$3,677,266,000.00 as at 30 September 2004.  It was considered that part of the paid-up capital had been lost and is no longer represented by available assets, and that such capital should be cancelled, and by way of cancellation of paid-up capital to the extent of HK$1.00 per share upon each of 3,677,266,000 issued shares registered in the name of Cable Network.

8.  Pursuant to the written resolutions of the Company dated 19 November 2004, 3,427,266,000 shares in the authorised capital of the Company were issued to Cable Network in lieu of repaying indebtedness in the aggregate amount of HK$3,427,266,000.00, representing shareholders’ loans immediately due and payable by the Company to Cable Network.  Such indebtedness was capitalised by applying the same, on behalf of Cable Network, in paying up in full 3,427,266,000 authorised but unissued shares of HK$1.00 each, which shares were allotted and issued, credited as fully paid up, to Cable Network.

9.  It was proposed to apply the cancelled capital of the credit of the said amount arising in the books of account of the Company towards the elimination of the accumulated deficit of the Company.  Any balance of the credit arising from such reduction of capital, if any, would be transferred to a special reserve to be created, such special reserve to be available to be used by the Company for such purposes as may be approved by the court.

10.  The elimination of the accumulated deficit was designed to ensure that the Company’s balance sheet would more accurately reflect its available assets and that the Company would have a capital structure that would permit the payment of dividends as and when the directors should consider appropriate in future.

11.  The proposed cancellation of issued and paid-up capital did not involve diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital.

12.  The losses to be written off were made up of: (1) accrued operating losses incurred by the Company during the relevant financial period; (2) accrued provisions made by the Company during the relevant financial period against, inter alia, bad debts, obsolete inventory, and diminution in value of certain assets of the Company; and (3) depreciation in value of assets owned or held under finance and operating leases by the Company.  The losses in (2) and (3) were losses of a non-permanent nature.

13.  Detailed evidence was adduced of the losses sustained from the financial period ended 31 December 1992 to the financial period ended on the latest management accounts date being 30 September 2004, showing the amount of losses and how they were classified as permanent and non-permanent losses.  As mentioned, the accumulated losses up to 30 September 2004 amounted to HK$3,677,266,000.00.  Of this amount, non-permanent losses amounted to HK$1,958,524,266.00.

14.  The auditors of the Company have confirmed that the financial information set out in the latest management accounts had been properly extracted from the books and records and nothing came to their attention that would cause them to believe that the latest management accounts were not, except as to the extent as disclosed in note 1(a) thereon, prepared in conformity with the Company’s audited accounts for the year ended 31 December 2003.  They also confirmed that the net results and movement of accumulated losses, as disclosed in the Company’s supporting affirmation, agreed with the audited accounts and the latest management accounts.

15.  For the protection of creditors as at the effective date of capital reduction, the Company has proposed an undertaking in these terms:

“Forthwith upon the proposed reduction of capital taking effect,

(i)      any future recoveries in respect of assets owned or held under finance and operating leases against which charges to depreciation have been made as at 30 September 2004, over and above their written down value as at 30 September 2004, up to an aggregate amount of HK$1,668,456,266; and

(ii)     any future recoveries or reversals of provisions made by the Company in respect of the assets referred to in the Schedule hereto (the ‘provisioned assets’) up to the respective aggregate amounts set forth against the relevant provisioned assets,

will be credited to a special capital reserve (the ‘special capital reserve’) in the accounting records of the Company and that, for so long as there shall remain any debt of or claim against the Company outstanding as at the effective date of the reduction of capital (the ‘effective date’) which, if such date were the date of the commencement of the winding up of the Company, would be admissible in proof against the Company and the persons entitled to the benefit thereof shall not have agreed otherwise, such reserve

(i)      shall not be treated as realised profits; and

(ii)     should the Company become a listed company, be treated as an undistributable reserve of the Company for the purposes of Section 79C of the above-mentioned Ordinance or any statutory re-enactment or modification thereof

PROVIDED ALWAYS that:

(1)     the Company shall be at liberty to apply a special capital reserve for the same purposes as a share premium account may be applied;

(2)     any amount standing to the credit of the special capital reserve (if any) may be reduced by the aggregate of any increase in the issued share capital or in the share premium account of the Company resulting from an issue of shares for cash or other new consideration or upon a capitalisation of distributable reserves after the effective date and the Company shall be at liberty to transfer the amount of any such reduction to the general reserves of the Company and the same shall become available for distribution;

(3)     the limit in respect of the special capital reserve may be reduced after the disposal or other realisation of any of the assets the subject of the undertaking by the amount of the charge to depreciation or the provision made in relation to such asset as at 30 September 2004 less such amount (if any) as is credited to the special capital reserve as a result of such disposal or realisation; and

(4)     in the event that the amount standing to the credit of the special capital reserve exceeds the limit thereof, after any reduction of such limit pursuant to proviso (3) above, the Company shall be at liberty to transfer the amount of any such excess to the general reserves of the Company and the same shall be available for distribution

AND the Company by its counsel undertaking, for so long as the aforesaid undertaking shall remain effective:

(1)     to publish or cause to be published or procure its auditors to record by way of note or otherwise a summary of the aforesaid undertaking in its audited financial statements or in the accounts of the Company published in any other form; and

(2)     to publish or cause to be published in any prospectus issued by or on behalf of the Company a summary of the aforesaid undertaking.”

16.  On the summons for directions on 3 December 2004, an order was made under section 59(2) to dispense with the settlement of a list of creditors.  Directions given on the advertisement of a notice of the presentation of the petition have been complied with.

17.  I am satisfied on the established principles that the shareholders are treated equitably, the proposed reduction has been properly explained to the shareholders, the reduction is for a discernible purpose and the interests of creditors are safeguarded with the undertaking given by the Company.

18.  I have therefore confirmed the proposed reduction of capital and made an order in terms of the draft submitted.