RE MANDARIN RESOURCES CORPORATION LIMITED

1988, No. M.P. 2594

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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1. By a petition presented on the 23rd December 1988, Mandarin Resources Corporation Limited (the company) seeks an order for confirmation of a reduction of the share capital of the company and for the cancellation of its share premium account. The object of the application is a step that is intended to lead to a capital reconstruction of the company.

2. The company was incorporated on the 24th November 1972 under the name Skylab Enterprises Limited which name was changed to the present name in 1973. The main activity of the company in the mid-1970s was in the investment of shares on the stock exchange in Hong Kong and other parts of the world. Subsequently the company diversified into other activities. The present share capital of the company is $200,000,000 divided into five hundred million shares of 40¢ each of which 293,250,000 shares have been issued and are fully paid. Although the company is listed on the Hong Kong stock exchange, trading in its shares has been suspended since November 1986. The amount standing to the credit of the share premium account is $640,000.

3. As at the 30th June 1988, the accumulated losses amounted to $104,991,919.

4. By a special resolution passed on the 15th December 1988, it was resolved pursuant to section 116 of the Companies Ordinance that :-

"A.    the authorised capital of the Company be reduced from HK$200,000,000 divided into 500,000,000 ordinary shares of HK$0.40 each (of which 293,250,000 shares have been issued and are fully paid or credited as fully paid), to HK$97,362,500 divided into 206,750,000 ordinary shares of HK$0.40 each and 293,250,000 ordinary shares of HF$0.05 each and that such reduction be effected by cancelling paid-up capital to the extent of HK$0.35 upon each of the 293,250,000 issued ordinary shares of HK$0.40 each and by reducing the nominal amount of each such share from HK$0.40 to HK$0.05;

B.    the share premium account of the Company amounting to HK$640,000 be cancelled;

C.    forthwith upon such reduction of capital taking effect :-

(i)    each of the 206,750,000 unissued ordinary shares of HK$0.40 each be subdivided into eight ordinary shares of HK$0.05 each and that every twenty of such shares of HK$0.05 each resulting from such sub-division be consolidated into one new ordinary share of HK$1.00;

(ii)    the 293,250,000 issued ordinary shares of HK$0.05 each be consolidated in such manner that every twenty of such shares registered in the name of each shareholder shall constitute one new ordinary share of HK$1.00 provided that any fractions of shares that arise from and upon such consolidation be aggregated and sold for the benefit of the Company;

(iii)    the capital reserve account of the Company amounting to HF$6,000,000 be reduced by HK$1,714,419; and

(iv)    the capital of the Company be increased to its present amount of HK$200,000,000 by the creation of 102,637,500 new ordinary shares of HK$1.00 each."

The purpose of the reduction of the share capital and cancellation of the share premium account is to reduce the accumulated losses to which I have referred which will result in a more accurate balance sheet.

5. On the 3rd January 1989, I made an order pursuant to section 59(2) of the Companies Ordinance to dispense with the settlement of a list of creditors for the proposed reduction of share capital and cancellation of the share premium account does not involve either a diminution of any liability or repayment of capital to any shareholders.

6. An undertaking was also given by counsel at the hearing with regard to the reserve that will arise upon the reduction becoming effective so that no part will be capable of distribution to the shareholders of the company, together with appropriate undertakings in connection with various litigation that is being conducted on behalf of the company.

7. The petition, for confirmation of the reduction, came before me for hearing this morning when it was opposed by counsel appearing on behalf of Dah Yung Leasing Pte. Ltd. and Dah Yung Trading Pte. Ltd. (Dah Yung), and counsel on behalf of Metropolitan Nominees Ltd (Metropolitan). Mr Remedios who appeared for Dah Yung requested an adjournment of the hearing of the petition for a period of 28 days in order to obtain instructions as to the stance to be adopted by his clients whilst Mr Chan, on behalf of Metropolitan, submitted that when the special resolution was passed at the extraordinary general meeting held in December, it did not truly reflect the views of all the shareholders.

8. The company concedes that Metropolitan holds 6,356,000 shares as a nominee, but Metropolitan contends that it holds a total of 46,700,000 shares, the balance over and above the 6,356,000 relating to a forfeiture of shares by the company in June 1988. Metropolitan claims that its shareholding of 46,700,000 shares represents 15.92% of the total share capital of the company, but if this figure is reduced to the 6,356,000, it will only represent 2.16% of the share capital.

9. The company took proper steps last year to forfeit a total of 132,060,000 shares which had been allotted to shareholders in September 1984 and which it contends, were not paid for. The company's case is that the funds paid for the shares were the subject matter of a cheque kiting exercise.

10. Metropolitan has contended that those shares have in fact been paid for and I am told that a writ relating to this matter was issued against the company on the 7th January 1989.

11. Following the forfeiture of the shares, Metropolitan alleged that those shares had been purchased by two companies, Halwell Limited (Halwell) and One China Development Limited (One China). Halwell's shareholding represents 28.66% of the share capital and One China, 21.95% and that after a further acquisition, the total share capital held by the two companies amounts to about 51%.

12. Mr Michael Ng, a director of Metropolitan, in his affirmation of the 7th January states in paragraph 24 that the extraordinary general meeting approving the reduction of share capital was held after the purported forfeiture of the shares and that no notice of the meeting had been sent to the registered shareholders of the shares forfeited. He claims that the shares were wrongfully forfeited and that the company was not entitled to sell them to Halwell and One China as it would amount to a conversion of the shares. He goes on to say that the court should not approve a resolution purported to be passed at the meeting when nearly 50% of the members entitled to vote had been deprived of the right to attend and vote at the meeting.

13. Both applications today have been strenuously resisted by Mr Wright who appeared for the company. Mr Wright cited two recent decisions of Harman J. - Re Ratners Group plc (1988)4 BCC 293 and Re Thorn EMI plc (1988)4 BCC 698 with regard to the principles to be applied by the court upon an application to confirm a reduction of capital. In Re Ratners Group plc Harman J, said at page 295 :-

"The court has over the years established, ....... three principles upon which the court will require to be satisfied. Those principles are, first, that all shareholders are treated equitably in any reduction. That usually means that they are treated equally, but may mean that they are treated equally save as to some who have consented to their being treated unequally, so that ..... 'equitably' is the correct word, which I adopt and accept. The second principle to be applied is that the shareholders at the general meeting had the proposals properly explained to them so that they could exercise an informed judgment upon them. And thirdly that creditors of the company are safeguarded so that money cannot be applied in any way which would be detrimental to creditors."

14. Mr Wright also drew my attention to Article 35 of the Articles of Association of the company which deals with the forfeiture of shares. Article 35 reads :-

"35.    Any entry in the Directors' Minute Book of the forfeiture of any Share, or that any Share has been sold to satisfy a lien of the Company, shall be sufficient evidence as against all persons claiming to be entitled to such Shares that the said Shares were properly forfeited or sold; and such entry, the receipt of the Company for the price of such Shares, and the appropriate Share Certificate, shall constitute a good title to such Shares, and the name of the purchaser or other person entitled shall be entered in the Register as a Member of the Company, and he shall not be bound to see to the application of the purchase money, nor shall his title to the said Shares be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture or sale. The remedy (if any) of the former holder of such Shares, and of any person claiming under or through him, shall be against the Company and in damages only."

This provision clearly sets out the rights of those parties who consider that they are aggrieved by a claim in damages against the company.

15. No explanation has been given by either of the opponents today for the considerable delay that has occurred before objection has been put forward nor has any argument been placed before me as to how any prejudice will be suffered if the order for confirmation is made. All the statutory requirements have been complied with and no grounds have been advanced that would justify the court in refusing its confirmation to the reduction sought. The application for the adjournment on behalf of Dah Yung is refused whilst there is no merit in the argument that was presented on behalf of Metropolitan. The order sought is clearly in the best interests of the company and the shareholders.

16. Accordingly, I propose to sanction the reduction as prayed.