In re RCR Electronics Manufacturing Ltd.

1998, No.MP 569

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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Reasons Handed Down : 25 March 1998

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R E A S O N S

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1. This amended petition seeks the sanction of the court of a scheme of arrangement ("the Scheme") under section 166 of the Companies Ordinance between RCR Electronics Manufacturing Limited ("the Company") and the unsecured creditors of the Company to whom debts are owed under contracts governed by Hong Kong law and who are defined in the Scheme as "Scheme Creditors".

Background

2. The Company has been an indirect wholly owned subsidiary of Recor Holdings Limited ("Holdings"), an exempted company incorporated in Bermuda whose shares are listed on the Stock Exchange. The Recor Group suffered audited losses for the period ended 31 March 1996 and has continued to incur losses. Trading in its shares was suspended as of 28 August 1996. The Company ceased trading when a winding-up petition was presented by one of its former employees on 18 March 1997. According to the Statement of Affairs, the Company's assets were valued at $22.9 million but its liabilities as at 19 March 1997 were some $199 million which have since been revised to $197 million.

3. The object of the Scheme is to discharge the Company's indebtedness to the Scheme Creditors who are defined as -

"All unsecured creditors of the Company other than the PRC Creditors and the Foreign Creditors, including Secured Creditors of the Company to the extent that the amount of their claims exceed the value of their security."

It is proposed that a dividend of 20￠ in the dollar be distributed to the Scheme Creditors without placing the Company in liquidation. The funds are to be provided by Holdings from subscription monies to be received from an investor, Hoverton, for 500 million shares of 10￠ each in the parent at $0.12 per share. Hoverton will thus acquire a controlling interest in Holdings and indirectly, the Company. The Scheme Creditors do not include PRC Creditors and Foreign Creditors who are entering into separate arrangements with other subsidiaries of the Recor Group once the Scheme becomes effective.

The Scheme

4. In brief, this provides for the provision by Hoverton of such amount as may be deemed necessary by the Scheme Administrator for the purpose of distributing dividends to the Scheme Creditors. Within 14 days of the Scheme coming into effect, the Scheme Creditors will be notified of the "Cut-Off Date" by which they shall have proved their debts owed by the Company by submitting to them a Notice of Claim and supporting documents. Upon adjudication of these claims, any Scheme Creditor dissatisfied with the adjudication may apply to an independent accountant who shall act as an expert to uphold or vary the determination and whose decision will be final and conclusive. A dividend of 20% shall be paid on adjudicated claims and the Scheme shall terminate once distribution to all the Scheme Creditors have been completed or at the latest by 30 September 1999. Finally, all Scheme Creditors are precluded from commencing proceedings or taking action against the Company in respect of their claims while the Scheme is effective.

Court meeting

5. A court meeting of the Scheme Creditors was convened for and held on 16 March 1998 pursuant to an order dated 16 February 1998. A print of a composite document dated 19 February 1998 consisting of the Scheme and an Explanatory Statement as required by section 166A, together with a proxy form, was served on each of the Scheme Creditors. The Explanatory Statement goes into considerable detail as to the background for the Scheme, the financial status of the Company, the proposed restructuring and, as set out in Appendix II to the Scheme document, the expectation that a Scheme Creditor could properly entertain under different scenarios depending on the validity or otherwise of fixed charges, floating charges, recovery of PRC assets, as well as assets subject to fixed and floating charges. The range is between 0￠ and 4.8￠ in the dollar.

6. The meeting voted overwhelmingly in favour of the Scheme : 96.81% of the Scheme Creditors present representing 99.75% of the amount of claims voted in favour.

7. The Scheme debts amount to just over $124 million.

The court's discretion

8. I am satisfied on the evidence that the class of unsecured creditors within the definition of Scheme Creditors has been properly identified and constituted. The Scheme was properly explained in the Explanatory Statement, the meeting was duly convened and the resolution passed by the requisite majority.

9. There remains the question whether, overall, the Scheme is one that the court should sanction. The relevant test, notwithstanding the result of the court meeting, is whether the Scheme is one which, as an intelligent and honest man, a member of the class concerned and acting in respect of his interest might reasonably approve of : see Buckley on the Companies Act (13th Edition) 1957, page 409, cited with approval by Plowman J in In Re National Bank Limited [1966] 1 WLR 819 at 829. I have no hesitation in coming to an affirmative conclusion. Accordingly, I would sanction the Scheme.

(Doreen Le Pichon)

Judge of the Court of First Instance
High Court