RE FUJI COPIAN (HK) LTD

HCMP 1011/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1011 OF 2004

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REASONS  FOR  JUDGMENT

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1.  This is a petition for confirmation of reduction of capital presented by Fuji Copian (H.K.) Limited (“the Company”).

2.  The Company was incorporated in Hong Kong on 11 May 1990 and changed its name to its present name on 5 July 1990.  Its principal business is the trading of data and word processing consumable supplies.

3.  The present authorised share capital of the Company is HK$8.5 million divided into 85,000 shares of HK$100.00 each, all of which had been issued and were fully paid up or credited as fully paid up.  There are only two shareholders, they are Fujicopian Company Limited (“Fujicopian Japan”), which was incorporated in Japan, holding 84,999 shares and Fuji Kako Company Limited, also incorporated in Japan, holding the remaining share.

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

5.  A special resolution was passed at a duly convened extraordinary general meeting on 22 December 2003, whereby it was resolved that the authorised and paid up capital is to be reduced from HK$8.5 million divided into 85,000 shares of HK$100.00 each to HK$1,955,000.00 divided into 85,000 shares of HK$23.00 each, and that such reduction is to be effected by paying to the shareholders HK$77.00 per share, in the total sum of HK$6,545,000.00.

The reasons for reduction of capital

6.  When the Company started doing business after it was acquired by the shareholders as a shelf company in 1990, its authorised capital was increased from HK$10,000.00 to HK$1 million.  In 1995, the Company decided to develop a production line in Mainland China to produce computer printer ribbons and its capital was further increased to HK$7 million.  In 1996, a further HK$1.5 million was invested to provide cash flow for the production line in China.

7.  In 1999, the major customers of the Company discontinued their operation in China and the demand for computer printer ribbons dropped abruptly.  As a result, the Company decided to cease its production line in China and close all its operations there.  After this, the Company only maintains a sales department in Hong Kong in the trading and selling of printer ribbons.

8.  The board of directors considered that the capital of HK$8.5 million is in excess of the wants of the Company and proposed to reduce the capital to HK$1,955,000.00, which would be more than sufficient for running the trading business in Hong Kong.

9.  As appeared from the minutes of the extraordinary general meeting, which was attended by the representatives of the two shareholders, the purpose of the proposed reduction of capital was explained to the meeting by the chairman.

The financial position of the Company

10.  It would appear from the audited accounts as at 31 October 2003 that the Company had maintained stable profits.  The profit for the financial year ended 2002 was HK$2,233,469.00 and the profit for the financial year ended 2003 was HK$2,360,837.00.  According to the balance sheet as at 31 October 2003, the accumulated profits were HK$2,924,860.00, making the capital and reserves in the total sum of HK$11,424,860.00.  The current assets as at 31 October 2003 were HK$13,144,596.00, of which cash and bank balances comprised HK$9,911,919.  Current liabilities were HK$1,756,490.00, made up of trading and other payables (HK$112,474.00), the amount due to Fujicopian Japan (HK$1,568,421.00) and the amount due to a fellow subsidiary, Fujicopian (USA), Inc. (“Fujicopian USA”; HK$75,595.00).  The net current assets were HK$11,388,106.00.

11.  It was noted in the financial statements as at 31 October 2003 that the Company had an employee eligible for long service payments on termination of employment or retirement, and if the contract were terminated as at 31 October 2003, the Company’s liability in this regard would be approximately HK$60,000.00.

12.  The Company had only current liabilities, which were purchase payables incurred in the purchase of products.  The purchases were made on credit payable on 30 or 60 days terms upon the arrival of goods.  The amounts payable to Fujicopian Japan and Fujicopian USA were incurred in the purchase of products from these companies.

13.  There is also adduced in evidence an unaudited payment schedule of purchase creditors as at 31 July 2004.  As at that date, the Company had made purchases from Fujicopian Japan of HK$9,503,106.00 from 1 November 2003 to 31 July 2004, with a payable balance of HK$2,625,815.00 as at 31 July 2004, which was scheduled to be paid in August and September 2004, as purchase payables are paid on credit terms of 60 days.  For the same nine-month period, the Company also made purchases from Fujicopian USA of HK$39,376.00 and there was no balance payable.  Further, the Company had made purchases from Palmetto Imaging Technology, LLC (“Palmetto”) of HK$396,384.00 during the same period with no balance payable.

No prejudice to creditors

14.  On 24 September 2004, I made an order dispensing with inquiries into and settlement of a list of creditors, having been satisfied that this is an appropriate case to direct that section 59(2) of the Companies Ordinance, Cap. 32 shall not apply, as there are sufficient safeguards in place for the protection of creditors, notwithstanding that the proposed return of capital would deplete assets of the Company available for the payment of debts.

15.  In this regard, I have taken into account the following matters.

16.  There is a letter from Fujicopian Japan dated 2 July 2004 confirming its support for this application, and agreeing that if on the date the proposed reduction of capital becomes effective there shall remain outstanding any debt or claim against the Company as if this date were the date of commencement of winding up of the Company, Fujicopian Japan shall subordinate its claim, if any, to other creditors of the Company.

17.  Next, there is a letter dated 14 June 2004 from Fujicopian USA stating it has no objection to the proposed reduction of capital.

18.  There is also a letter dated 8 June 2004 from Palmetto stating it has no objection to the proposed reduction of capital.

19.  I have considered the unaudited management accounts for the period from 1 November 2003 to 31 July 2004.  The net assets were HK$11,847,398.99, cash and bank balances stood at HK$10,611,756.60.  Of the current liabilities, trade creditors came up to HK$2.6 million odd, so Fujicopian Japan was the only substantial trade creditor.  Other liabilities were accrued expenses of HK$7,000.00 odd, provision for tax of HK$114,000.00 odd and deposits received of HK$12,000.00 odd.

20.  The undertaking of the Company to credit to a special non-distributable reserve fund of the Company the credit thrown up by the reduction of capital is quite meaningless in this situation as it was resolved by the special resolution that there is to be repayment to the shareholders of the paid-up capital thereby reduced.

21.  I have therefore exercised my discretion to confirm the reduction of capital as proposed.  There is no question the shareholders are not treated equitably, the proposals have been properly explained to them, the reduction is for a discernible purpose, and the interests of creditors have been safeguarded.  I have made an order in terms of the draft submitted as amended by deleting the undertaking of the Company.  I have also approved the draft minutes of reduction of capital and the draft notice of registration of the order.