RE FIRST TECHNOLOGY INTERNATIONAL (H.K.) CO LTD

HCMP 1749/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1749 OF 2005

____________

____________

______________________

J U D G M E N T

______________________

1.  This is a petition presented by First Technology International (H.K.) Company Limited (“the Company”) under section 50 of the Companies Ordinance, Cap. 32, seeking an order to sanction the issue and allotment of its ordinary shares at a discount.

2.  The Company was incorporated on 28 March 1991 under its former name as a private company.  Its ultimate holding company is First International Computer Inc., a listed company incorporated in Taiwan.

3.  The present authorised share capital is HK$120 million divided into 120 million ordinary shares of HK$1 each, of which 62 million shares were issued and fully paid up and the remaining 58 million shares are un-issued.

4.  The Company has been carrying on the business of trading of telephone sets since its incorporation, but has suffered loss from the operation.  It has two subsidiaries, one in the People’s Republic of China and one in Taiwan.  It would appear from the audited financial statements of the Company for the year ended 31 December 2003, that the purchase and sale of goods conducted by the Company were done with its subsidiaries.

5.  By an ordinary resolution passed at an extraordinary general meeting of the Company on 27 July 2004, it was resolved that subject to the sanction of the court under section 50, 58 million ordinary shares of HK$1 each in the capital of the Company are to be issued at a discount of not more than 60% to par value, which shall rank pari passu with all other shares on issue to such person or corporation, provided, inter alia, that the shares shall be issued within 3 months or other period as ordered after the date of sanction by the court, and that the shares be first offered to existing shareholders in proportion to their shareholdings, and if the offer is not accepted by any existing shareholder, the shares not taken up may be issued on terms not more favourable to other shareholders.

6.  It is expected that the amount of capital to be raised in this manner would be in the region of HK$23.2 million.  The fund raised by the new issue would be used to repay most of the short-term borrowing and the balance would be kept in the Company for working fund and for business development.

7.  Section 50(1) provides that subject as provided in this provision, it shall be lawful for a company to issue at a discount shares in the company of a class already issued, provided that:

(a)	the issue of the shares at a discount must be authorised by a resolution passed in general meeting of the company, and be sanctioned by the court;
(b)	the resolution must specify the maximum rate of discount at which the shares are to be issued;
(c)	not less than 1 year must at the date of the issue has elapsed since the date on which the company was entitled to commence business; and
(d)	the shares to be issued at a discount must be issued within 1 month after the date on which the issue is sanctioned by the court or within such extended time as the court may allow.

8.  The required resolution referred to in section 50(1)(a) and (b) has been passed.  The requirement in section 50(1)(c) is also complied with.  The Company has asked for time to comply with the requirement in section 50(1)(d), I will come to this later.

9.  Section 50(2) provides that where a company has passed a resolution authorising the issue of shares at a discount, it may apply to the court for an order sanctioning the issue, and on any such application the court, if, having regard to all the circumstances of the case, thinks proper so to do, may make an order sanctioning the issue on such terms and conditions as it thinks fit.

10.  The general rule is that “the amount subscribed which is to make the shareholder a partner in the concern must be paid and by no expedient nor indirect arrangement can the company evade the obligation of possessing the capital which the legislature has enjoined shall be the capital upon which it is to trade” (Randt Gold Mining Co. v New Balkis Eersteling [1903] 1 KB 461 at 465, per Halsbury LC).  Although section 50(2) has now made it possible for the court to sanction the issue of shares at a discount, this provision stipulates that sanction is to be granted, “if, having regard to all the circumstances of the case, it thinks proper so to do”.  It is further provided that the court has power to grant sanction “on such terms and conditions as it thinks fit”.

11.  It seems to me that a sufficient case must be made out for the court to exercise its discretion to sanction the issue of shares at a discount.  A proper explanation should be given why it was proposed to raise capital in this way, how the discount was arrived at, and whether there would be proper protection for creditors.

12.  The Company’s accumulated deficit as shown in the audited accounts of the Company for the year ended 31 December 2003 amounted to HK$3,969,131.00, with current liabilities of HK$5,978,696.00.  For the year ended 31 December 2004, the audited accounts showed that the accumulated deficit had increased  to HK$15,137,365.00, with current liabilities of HK$14,521,053.00.

13.  The current liabilities of the Company consisted mainly of a short-term borrowing from an associated company of HK$11,698,350.00, and notes payable of HK$2,311,096.00.  The Company does not have long-term liabilities.  The Company said it is in need of funds to continue its operations, to pay its short-term borrowings and to develop its business.

14.  As at the date hereof, the Company has the following shareholders:

Wu Chung Pao – 1 share

Sinoca Enterprises Co. Ltd – 29,999,999 shares

Formosatek Pte Ltd – 27,480,000 shares

Penningdale International Ltd – 4,520,000 shares

15.  The directors are of the view that it is necessary to raise further long-term funds of around HK$25 million.  The Company has considered various options:

(a)	to raise long-term loan from a financial institution;
(b)	to issue further shares to existing shareholders; and
(c)	to allot shares to new investors.

16.  Option (a) was rule out.  It is difficult to borrow a long-term loan from a bank as the Company has no fixed assets for security.  Besides, the existing shareholders are unwilling to provide personal guarantee or security.

17.  As for option (b), the existing shareholders are not willing to subscribe for additional shares at par value.  Since the Company was and is still suffering losses and the expected return on capital is not so attractive, they think that the market value per share should be less than the par value.

18.  For option (c), the Company has approached potential investors.  Some of them indicated that after reviewing the accounts, they would only be willing to subscribe for the shares at a price of HK$0.40 per share, a discount of 60% of the par value.  On the same terms and basis, two of the existing shareholders would also be prepared to subscribe for part of the new shares, whilst the two remaining shareholders would waive their rights to subscribe.

19.  To raise the sum of HK$23.2 million, the Company may (i) issue 23.2 million shares at par value; or (ii) issue all the remaining 58 million un-issued shares at HK$0.40 per share, at a discount of 60% of the par value.  The first method is simpler, the second method would require sanction by the court.  The Company has chosen the second method, because the new investors have insisted on an issue of shares at the discount of HK$0.40 per share, being their estimated market value of the shares.  More importantly, if the new shares were issued at par, the new investors would be allotted with a lesser number of shares with the money they are prepared to pay for the new shares, and this would affect the percentage of their shareholding in the Company.

20.  It was submitted that this application would not prejudice the existing shareholders, the future share subscribers or the creditors of the Company, and that issuing shares at a discount would be an effective way to raise further capital for the Company.

21.  I am satisfied that a sufficient case is made out for the court to sanction the issue of shares at a discount in this instance.  Further, the Company is willing to offer these undertakings for the protection of creditors:

(1)	to publish a notice of this order within 14 days hereof in a Chinese newspaper and an English newspaper circulating in Hong Kong; and
(2)	to put a note in all its audited accounts in future disclosing the issue of shares at a discount and giving particulars of the discount allowed on the issue of the shares.

22.  I will exercise my discretion to give sanction on the basis of the above undertakings, which will form part of the order.

23.  The Company said it has difficulty to comply with the time specified in section 50(1)(d), for the shares to be issued at a discount within 1 month after the date of sanction by the court, as the two existing shareholders who are willing to subscribe and the potential investors are overseas companies, and their subscriptions have to be approved by their respective boards of directors.  They would also need time to arrange payment of the subscription money and by stages.  It is estimated that the allotment of all the subject shares would take at least 3 months to complete.  I will grant an extension of time that the shares to be issued at a discount must be issued within 3 months from this order.

24.  I also order a sealed copy of this order be delivered to the Companies Registry for registration within 10 days hereof, and that this order shall not take effect until such copy of the order has been delivered.