RE VALUE CONVERGENCE HOLDINGS LTD

HCMP1639/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1639 of 2003

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J U D G M E N T

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1. This is a petition by Value Convergence Holdings Limited for confirmation of a reduction of its share capital and the cancellation of its share premium account.

Background facts

2. The background facts leading to this petition may be summarised as follows.

3. The Company was incorporated on 24 September 1999 under the name of Sparkle Enterprise Limited under the Companies Ordinance as a private company limited by shares. Its name was subsequently changed to iAsia Technology Limited on 14 January 2000. On 14 March 2001, the Company went public and its shares have since 9 April 2001 been listed and traded on the Growth Enterprise Market of the Hong Kong Stock Exchange. It adopted the present name on 13 January 2003.

4. At the date of its incorporation, the Company had an authorised share capital of HK$10,000 divided into 10,000 ordinary shares of HK$1 each. On 1 August 2000, the authorised share capital was increased to HK$1,000,000,000 (1 billion) by the creation of an additional 999,990,000 ordinary shares of HK$1 each. On 14 March 2001, each of the issued and unissued shares of HK$1 each was subdivided into 10 shares of HK$0.1 each. Immediately after the subdivision, the authorised share capital of the Company remained unchanged but it was divided into 10,000,000,000 (10 billion) ordinary shares of HK$0.1 each. As at the date of the petition, 2,381,549,999 ordinary shares were issued and fully paid up or credited as fully paid up. No further ordinary shares have been issued since then.

5. As at 14 April 2003, there were also outstanding options granted under the pre-IPO share option plan and the share option scheme of the Company adopted on 14 March 2001 and 29 November 2001 respectively entitling the holders thereof to subscribe for an aggregate of 145,771,209 ordinary shares of the Company. Since the date of the petition, no options have been granted.

Reduction of capital

6. Article 62(b) of the Company's Articles of Association provides that "the Company may by special resolution reduce its share capital, any capital redemption reserved fund or any share premium account in any manner authorised and subject to any conditions prescribed by law".

7. By a special resolution passed in the extraordinary general meeting on 9 April 2003 ("the EGM"), the Company resolved to carry out the reduction of capital and the share premium account. The reason underlying the reduction is that the Company has incurred substantial investment and trading losses over the past financial years. According to the unaudited balance sheet as at 31 March 2003, the Company has suffered an accumulated loss of HK$136.5 million, of which HK$101.5 million comprises losses in investments in group companies, net trading losses, its administrative expenses and trade debts written off. Of these losses :

(1) About HK$72.9 million represents debts due from a wholly owned subsidiary of the Company, Global Financial Services Group Limited, arising out of its acquisition of CFN Hongkong Limited together with its subsidiaries. The investment has suffered significant losses and the amounts due from the subsidiary to the Company has been written off. The companies acquired are moribund and are in the process of being wound down.

(2) About HK$34.6 million represents the accumulated net trading losses of the Company resulting from the substantial general operating and administrative expenses since the inception of the Company. The losses were however not offset by the revenue generated by the Company.

(3) About HK3.9 million are trade debts.

8. It is the Company's case that these losses are permanent in nature and are irrecoverable. The Company's auditors are of the same view : see their letter issued to the Company's board dated 7 May 2003 exhibited as "KCFH-9" to the affirmation of its director, Mr Henry Ko dated 7 May 2003 in support of the petition. Such losses should be written off. This is the first reason for the reduction of capital. The second reason is that the Company's shares are trading substantially below the par value, which makes the raising of further capital tremendously difficult. The reduction is therefore necessary to enable further capital to be raised in the future, if and when necessary.

Explanation to shareholders

9. By a circular despatched by post on 13 March 2003 ("the Circular"), notice of the EGM was given to all the Company's shareholders. The Circular also set out the proposed reduction of share capital and cancellation of the share premium account. At the EGM, the proposed special resolutions were passed unanimously.

The creditors' position

10. Although the present petition arises out of the loss of the Company's capital, it is the Company's case that the reduction does not prejudice the Company's creditors as there is no intention of repaying to the Company's shareholders any capital.

11. According to the unaudited balance sheet as at 31 March 2003, the current assets of the Company (HK$7.2 million) are sufficient to meet its current liability (HK$1.6 million) due to outside creditors. The Company undertakes to create a special capital reserve for the protection of its current creditors: see paragraph 17 of Mr Ko's affirmation. The undertaking is couched in these terms :

"that forthwith upon the proposed reduction of capital and cancellation of share premium account of the Company taking effect, an amount equal to the credit arising therefrom, namely HK$123,758,200.14 on the assumption that (i) the issued shares of the Company at the date when the proposed reduction becomes effective remain at [2,381,549,999] in number and (ii) the share premium account of the Company at the date when the proposed reduction becomes effective remain at HK$45,878,129, will be credited to a special capital reserve account in the books of account of the Company and that such special capital reserve in the books of account of the Company will not be treated as realised profits, and shall be treated as an undistributable reserve of the Company for the purposes of Section 79C of the Companies Ordinance (or any statutory modification or re-enactment thereof) until and unless the creditors of the Company as at the date of the sanction of the reduction of capital ('the creditors') are fully settled, provided for by the Company or the remaining creditors and each of them do consent by which time the said special capital reserve account will be cancelled and provided that prior to the cancellation of the said special capital reserve account :

(a) The company may apply it in paying up unissued shares of the Company to be issued to members as fully paid bonus shares; and

(b) The audited accounts of the Company will contain a note recording this Undertaking."

12. There are two potentially contingent creditors arising out of the guarantees given by the Company in relation to the businesses of its subsidiaries. They have no objection to the present application.

13. None of the shareholders or creditors appears today.

The legal principles

14. The law relating to applications of this sort is well established. The Company must first satisfy that requirements imposed by section 58 of the Companies Ordinance, Cap.32, namely, (1) the articles of association authorises a reduction of capital; and (2) the Company has passed a special resolution to that effect. These statutory requirements are clearly satisfied here.

15. In considering whether a reduction of capital should be sanctioned, the court needs to be satisfied that (1) the shareholders are treated equitably; (2) the proposal had been properly explained to the shareholders in general meeting so that they could exercise an informed judgment; (3) the creditors are safeguarded; and (4) the reduction of capital should be for a discernable purpose: see Re Cheuk Nang Technologies (Holdings) Ltd [2001] 4 HKC 571. I will consider these criteria in turn.

16. There is only one class of shareholders. They are obviously treated equitably. The first criterion is met.

17. By virtue of the Circular and the EGM, I am satisfied that the proposal had been properly explained to the shareholders. The second criterion is also met.

18. I am also satisfied that the creditors are safeguarded. The Company's current assets far exceed its liabilities due to the outside creditors. The creditors' position is further enhanced by the Company's undertaking.

19 .Lastly, I am satisfied that on the evidence before me, the Company has suffered permanent losses in the region of HK$111.4 million, according to the latest figures available. The reduction of capital will not alter the underlying assets of the Company and it is necessary to write them off and to reduce the nominal value of the shares to facilitate the raising of capital in the future. This is indeed a discernable purpose : see Re Tian An China Investments Co. Ltd [1998] 2 HKLRD 474, Re Cheuk Nang Technologies (Holdings) Ltd [2001] 4 HKC 571 and Re Yoshiya International Corporation Ltd, HCMP3720/02, unreported, Kwan J (15 October 2002).

Conclusion

20. For these reasons, I will sanction the proposed reduction of capital and cancellation of the share premium account. I will make an order in terms of the draft order with the undertaking incorporated in its preamble.