RE FAR EAST HOLTELS AND ENTERTAINMENT LTD

HCMP 1124/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1124 OF 2007

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REASONS FOR JUDGMENT

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1.  This is a petition presented by Far East Hotels and Entertainment Limited (“the Company”) for confirmation of the reduction of its share capital, pursuant to section 59 of the Companies Ordinance, Cap. 32.

2.  The Company was incorporated on 20 October 1978 as a private company under its former name.  It was converted into a public company on 12 June 1979.  The issued shares of the Company are listed on The Stock Exchange of Hong Kong Limited (“the Stock Exchange”).

3.  The objects of the Company are broad, they include carrying on the business of proprietors and operators of amusement parks and managers of all kinds of entertainment related activities and to hold shares in other companies calculated to benefit the Company.  Over time, its principal activity has developed into one of acting as the holding company to a group of companies engaged in hotel operation, property letting, securities investment and trading, loan financing and other investment holding.

4.  The present authorised share capital of the Company is HK$750,000,000.00 divided into 750,000,000 ordinary shares of HK$1.00 each, of which 488,842,675 ordinary shares have been issued and are fully paid or credited as fully paid as at the presentation of the petition on 11 June 2007.

5.  As at the date of the petition, there are outstanding options for the subscription by the full time employees and executive directors of the Company of a total of 20,000,000 ordinary shares of HK$1.00 each in the authorised share capital of the Company granted pursuant to a share option scheme of the Company which expired in September 2005.

6.  By an ordinary resolution of the Company passed on 1 June 2007, the Company approved the adoption of a new share option scheme in full compliance with chapter 17 of the Rules Governing the Listing of Securities on the Stock Exchange.  No options have been awarded under this scheme as at the date of the petition.

7.  There is provision in the articles of association that the Company may, by special resolution, reduce its share capital, any capital redemption reserve fund or any share premium account in any manner and with, and subject to, any incident authorised and consent required by law.

8.  By a special resolution of the Company passed in accordance with section 116 at an extraordinary general meeting held on 1 June 2007, it was resolved that the paid-up capital be cancelled to the extent of HK$0.90 per ordinary share in issue on the date upon which this reduction takes effect and that the nominal value of each ordinary share in the authorised capital be reduced from HK$1.00 to HK$0.10.

9.  As a consequence, the capital will be reduced by HK$439,958,407.50.

10.  The capital reduction has two purposes.  The first is to reduce the nominal value of each ordinary share in the Company to an amount which is less than the price at which the Company’s shares have been trading on the Stock Exchange, thereby facilitating the ability to raise funds in the future through allotments of the shares.  The second purpose is so that the Company may apply HK$221,897,828.00 of the credit arising on the capital reduction in writing off the unconsolidated accumulated losses of the Company as at 31 March 2006.  As a result, the Company’s paid-up capital and reserves will more closely reflect the available net assets.  The balance of the credit arising from the proposed reduction that is not applied in writing off the unconsolidated accumulated losses will, as to HK$100,000,000.00, be transferred to a special capital reserve to be created, the application of which will be subject to such conditions as imposed by the court and, as to the balance, being HK$118,060,579.50, be credited to the share premium account and will also constitute capital of the Company.

11.  The reasons for and the effects of the proposed reduction were set out in a circular letter of the Company to the shareholders dated 4 May 2007, duly sent to all members of the Company and to its auditors.

12.  The proposed cancellation of issued and paid-up capital does not involve the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital or of any sum standing to the credit of the share premium account of the Company.

13.  The audited accumulated losses the Company seeks to write off represent losses accumulated by the Company since it last brought forward retained profits, as at 31 March 1999, over a seven-year period to 31 March 2006.  The Company is a holding company holding direct or indirect interests in over 25 subsidiaries.  For the most part, the subsidiaries are incorporated and operate in Hong Kong and are variously engaged in, principally hotel operation, property holding and investment, service apartment operation and securities trading and investment.  In addition to holding interests in subsidiaries, the Company holds interests in five associated companies.  For the most part, the associated companies are engaged in property-related activities.

14.  The Company’s losses for the seven-year period comprised the following: 

(1)	administrative expenses;
(2)	finance costs;
(3)	losses arising on the deregistration of dormant former subsidiaries;
(4)	loss on disposal of securities;
(5)	provisions relating to subsidiaries;
(6)	provision for the diminution in value of an associated company;
(7)	provision for a deposit paid in respect of a proposed additional interest in a subsidiary; and
(8)	provision for long service awards or severance payments.

15.  The directors have regarded the losses in (1), (2), (3) and (4) as losses of a permanent nature to the Company.  Losses in respect of items (5), (6), (7) and (8) have been regarded as non-permanent.

16.  A large part of the Company’s audited unconsolidated accumulated losses as at 31 March 2006, being HK$163,600,000.00 represented an aggregate impairment loss in respect of the Company’s 45% interest in an associated company, Bolan Holdings N.V., a company with interests in a historical theme park in Sydney, Australia.  To date, Bolan Holdings N.V. has not informed the Company of alternative plans for the site of the theme park, which was closed in 2003.

17.  The balance of the Company’s audited unconsolidated accumulated losses reflected other provisions made by the Company in respect of its advances to its subsidiaries, and in small part, to its operating losses as the holding company of a wider group of companies.

18.  Of the credit of HK$439,958,407.50 arising on the capital reduction becoming effective, HK$221,897,828.00 is to be applied to write off the audited accumulated losses as at 31 March 2006.  Of the balance, the Company has proposed to transfer HK$100,000,000.00 to a special capital reserve to be created, as mentioned below, for the purposes of writing off any additional losses of the Company incurred after 31 March 2006.  As to the remaining HK$118,060,579.50, this is to be credited to the share premium account and this sum, together with the HK$100,000,000.00 to the extent not applied in writing off additional losses, would continue to represent capital of the Company.

19.  As there are accumulated non-permanent losses to be eliminated, for the protection of creditors, the Company has provided the usual undertaking to the effect that any recovery or profit derived from the investments against which provisions have been made by the Company up to the amount of the reduction, in the aggregate of HK$221,897,828.00, shall be kept in a non-distributable account designated as a special capital reserve account, unless the creditors of the Company existing at the date when the reduction becomes effective shall have either been paid off or consented to the distribution from the account, but that the amount in the non-distributable account may be reduced to the extent that the paid-up capital or share premium account is subsequently increased by an issue of shares for cash or other new consideration or capitalisation of distributable profits.

20.  The above undertaking is modified in one respect, so as to permit the Company the flexibility of utilising the sum of HK$100,000,000.00 credited to the special capital reserve for writing off any further audited losses which may be incurred by the Company after 31 March 2006.  In the case of any future non-permanent losses which may, from time to time, have been written off against such HK$100,000,000.00 reserve, any recovery from the Company’s investments in respect of which such losses were recorded (up to HK$100,000,000.00 or the amount of such written-off losses, whichever is less) will, likewise, be re-credited to the same special capital reserve for the protection of the creditors existing at the date when the proposed reduction becomes effective.

21.  There is no objection in principle to use the special reserve to write off future losses, which may not prove to be permanent, provided that the usual undertaking is also to apply in this situation as in the writing off of past losses (Re PCCW Limited, HCMP No. 1699 of 2004, 5 August 2004, paragraph 11).  The form of the undertaking provided by the Company and accepted by the court is set out in the schedule annexed hereto.

22.  At the hearing of the summons for directions on 4 July 2007, I have ordered that the settlement of a list of creditors be dispensed with. Directions for advertisement of a notice of the presentation of the petition have been complied with.

23.  The reduction of capital affects all shareholders equally.  The purposes of the reduction have been adequately explained in the circular letter to all shareholders.  I am satisfied that the purposes for the reduction are discernible purposes.  The interests of creditors would appear to be sufficiently safeguarded by the undertakings offered to the court.

24.  I have therefore made an order in terms of the draft submitted.