RE JOYCE BOUTIQUE LTD

HCMP 248/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 248 OF 2005

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REASONS  FOR  JUDGMENT

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1.  On 4 March 2005, I confirmed a reduction of the share capital and share premium account of Joyce Boutique Ltd (“the Company”), and indicated that I would give my reasons for doing so at a later date.  This I now do.

2.  The Company was incorporated on 8 December 1970 with an authorised share capital of HK$100,000 divided into 1,000 shares of HK$100 each.  Following various changes to its capital structure, as at 28 January 2005, its authorised and issued share capital was HK$510,000, divided into 100 ordinary shares of HK$100 each and 5,000 non-voting deferred shares also of HK$100 each.  On 28 January 2005, the authorised share capital of the Company was increased to HK$1,000,000 by the creation of 4,900 ordinary shares of HK$100 each, 900 of which were issued the same day to the Company’s ultimate holding company, Joyce Boutique Holdings Ltd (“JBHL”) at a price of HK$100,000 each, resulting in the issued share capital of the Company being increased to HK$600,000 (divided into 1,000 ordinary shares of HK$100 each and 5,000 non-voting deferred shares of HK$100 each) and in a sum of HK$89,910,000 being credited to the Company’s share premium account.  All but one of the issued ordinary shares are now held by JBHL, the remaining ordinary share being held by Marco (Nominees) Ltd.  The non-voting deferred shares are held by Ms Joyce Elena Ma and Marco (Nominees) Ltd, each of whom hold 2,500 such shares.  The Company’s business involves the retailing of designer fashion garments and accessories.

3.  Article 57(B) of the Company’s Articles of Association provides that it may reduce its share capital and any share premium account by special resolution.

4.  On 1 February 2005, the Company passed a special resolution, in accordance with section 116B of the Companies Ordinance (Cap. 32) (“the Ordinance”), to reduce its share capital from HK$600,000 (divided as aforesaid) to HK$100,000 (divided into 1,000 ordinary shares of HK$100 each) by reducing paid up capital to the full extent of HK$100 on each of the 5,000 non-voting deferred shares, and cancelling such shares, and to reduce the sum standing to the credit of the share premium account by HK$86,332,215, from HK$89,910,000 to HK$3,577,785.  On the same day, the holders of the non-voting deferred shares, in accordance with Articles 6(A) and 6(B) of the Company’s Articles of Association and section 63A(1) of the Ordinance, consented in writing to and approved the passing of the said special resolution and to the abrogation of the rights and privileges attaching to the non-voting deferred shares affected by the resolution.

5.  According to the audited financial statements of the Company for the year ended 31 March 2004, there were accumulated losses on the Company’s profit and loss account of HK$86,832,215.  However, according to the Company’s unaudited management accounts as at 31 December 2004, the Company earned pre-tax profits of some HK$45,312,522 in the nine months to that date, reducing its accumulated losses to HK$41,519,693 as at 31 December 2004.

6.  According to the first affirmation of Mr Lee Wai Chung (“Mr Lee”), a director of the Company, filed in support of the petition, the purpose of the increase in share capital and issue of shares at a premium on 28 January 2005 was to enable the reduction in share capital and share premium account to be effected.  On this basis, it was suggested by the Company that these transactions should be regarded as being connected with such reductions, and taken into account in considering the overall effect on creditors of the Company.  So regarded, it was said, the position of creditors was not affected (and indeed was marginally improved) since the amount of the reductions in share capital and share premium account were less than the amount of the new capital which had been injected by JBHL.  Notwithstanding this argument, the Company has, as will be seen below, made proposals to safeguard the interests of its creditors.

7.  The proposed reduction of capital does not involve either the diminution of any liability in respect of unpaid capital, or the repayment to any shareholder of any paid-up capital.  However, as the result of the recent improvement in the Company’s financial position, the amount of the reduction of capital and share premium account will exceed its accumulated losses, so that when the credit arising from the reductions is applied to the accumulated losses, these will be eliminated and replaced by an accumulated profit of over HK$45,000,000 which will be available for distribution to the Company’s shareholders by way of dividend should the Company choose to do so.

8.  Further, while the Company has provided copies of its audited accounts from the years ended 31 March 1997 to 31 March 2004, from which the build up of the accumulated losses can be discerned, and has provided a brief explanation of the principal factors contributing to the losses suffered in any given financial year, it has not sought to provide a detailed analysis of the manner in which such losses arose, with a view to satisfying the court that the accumulated losses should be regarded as being losses that are permanent in nature.

9.  At the hearing of the summons for directions on 22 February 2005, the evidence showed that the Company’s aggregate liabilities as at 31 December 2004 were HK$423,034,128 and that the principal creditor of the Company at that date consisted of JBHL, which was owed some HK$356,469,845.  The balance of the Company’s liabilities were made up of HK$297,037 owed to a fellow subsidiary called Joyce Beauty (Hong Kong) Ltd (“Joyce Beauty”), HK$24,266,294 by way of provisions for long term contingent liabilities, and HK$42,000,952 owing to trade creditors, the bulk of which were due and payable within one month, and all of which were due and payable within three months.

10.  As the Company did not seek to establish that the losses which it had suffered were permanent in nature, and as there would, following the reduction of capital and share premium account, be accumulated profits available for distribution, notwithstanding the suggestion that the position of creditors was no worse than before if the increase and reduction of capital were regarded as connected transactions, the Company offered the following methods of protecting its creditor’s interests:-

(1)	it procured the agreement of JBHL, evidenced by a consent in writing dated 1 February 2005, to postpone its claims against the Company to those of all other creditors to whom debts were owed at the date on which the capital reduction became effective; and
(2)	it undertook to restrict the use of a sum equivalent to just under HK$70,000,000 deposited in a United States dollar fixed deposit account (no. 3670001) maintained with one of its bankers, the Hong Kong branch of Banca Intesa S.p.A., so that such sum could only be used for the purpose of discharging its liabilities to its other creditors, whose consent to the capital reduction had not been sought, and to meet the provisions which it had made for long term contingent liabilities.

11.  I accepted this undertaking, and made an order on the summons for directions dispensing with the settlement of a list of creditors.

12.  Since the hearing of the summons for directions, the Company has complied with the directions which I gave for advertising notice of the hearing of the petition.

13.  Prior to today’s hearing, the Company filed a further affirmation by Mr Lee with a view to providing information as to its liabilities that was as up to date as possible.  This evidence disclosed that as at 2 March 2005, apart from its debt to JBHL, the Company’s liabilities consisted of HK$24,721,350 in respect of the provisions made for long term contingent liabilities, and HK$41,963,111 owing to its other creditors, including Joyce Beauty and another fellow subsidiary, none of whose consent had been sought for the capital reduction and reduction in share premium account.

14.  A letter of instructions to Banca Intesa, making it clear that the use of the sums standing to the credit of the said account was to be restricted in the manner indicated above, and a copy of such letter countersigned by Banca Intesa confirming such instructions, were also produced.  As at 28 February 2005, the balance of such account was US$8,973,369.61, i.e. still just under HK$70,000,000, a sum which exceeds the aggregate of the Company’s liabilities to its other creditors and in respect of the said provisions by more than HK$3,000,000.

15.  When considering whether or not to confirm a capital reduction, the court will have regard to four main factors, namely:-

(1)	whether the shareholders are treated equitably;
(2)	whether the reduction proposals have been properly explained;
(3)	whether the interests of creditors are adequately safeguarded; and
(4)	whether the reduction is for a discernible purpose.
see Re Lippo China Resources Ltd. [1998] 1 HKLRD 20.

16.  In this case, although the effect of the capital reduction will be borne entirely by the non-voting deferred shareholders, leaving the interests of the ordinary shareholders unaffected, the first requirement is in my view nonetheless satisfied having regard to the fact that the former have consented to the capital reduction being effected in the manner resolved upon.  I am also satisfied that such consent was given on the basis of a proper understanding of the effect of the reduction, so that the second requirement is satisfied as well.

17.  As to the third requirement, having regard to the agreement of JBHL to postpone its claims to those of the other creditors of the Company, and of the arrangements which have been made to restrict the Banca Intesa fixed deposit account so as to provide a source of repayment for all other creditors and in respect of the provisions for long term contingent liabilities of the Company as at the date of this hearing, it is clear that this requirement has also been met.  Should the Company seek at some time in the future stage to have this undertaking released or varied, perhaps when such liabilities have been discharged and such provisions met or otherwise provided for or eliminated, it may do so by an application to the court.

18.  The fourth requirement is also satisfied in this case, as the reduction or elimination of accumulated losses and the consequent enabling of the Company to resume the declaration of dividends are both well recognised as discernible purposes in the context of reductions of capital and share premium account.

19.  As all other procedural requirements were met, I confirmed the reduction of the Company’s capital and of its share premium account, approved a draft Minute of Order and made an order in terms of the draft order which was submitted, subject to minor changes which I indicated to counsel for the Company.