RE GOLDBOND GROUP HOLDINGS LTD

HCMP 1891/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1891 OF 2003

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REASONS FOR JUDGMENT

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1. This is a petition of Goldbond Group Holdings Limited ("the Company") for confirmation of reduction of capital under section 58 of the Companies Ordinance, Cap. 32.

2. On 27 May 2003, I have given directions to dispense with the settlement of a list of creditors and for advertisement of the hearing of the petition. The petition was duly advertised. No creditors or shareholders have appeared at the hearing. I have made an order confirming the reduction of capital on the Amended Petition and these are the reasons for my judgment.

The Company

3. The Company was incorporated in Hong Kong on 10 March 1964 under the name of Island Dyeing and Printing Company Limited and changed its name to Can Do Holdings Limited on 13 October 1999. After the presentation of the petition herein, its name was changed to its present name on 9 May 2003.

4. The authorised share capital of the Company is HK$2,671,000,000.00 comprising the following:

(1) 400,000,000 redeemable "A" convertible preference shares of HK$0.25 each (all of which are issued and credited as fully paid);

(2) 284,000,000 redeemable "B" convertible preference shares of HK$0.25 each (all of which are issued and credited as fully paid); and

(3) 10,000,000,000 ordinary shares of HK$0.25 each (of which 3,314,880,000 are issued and credited as fully paid).

5. There is no material difference between the rights of the A and B convertible preference shareholders.

6. The Company was principally engaged in dyeing and printing business since its incorporation until about 1995 when it ceased such operations. Thereafter, the principal activities of the Company have been property development, investment and investment holding.

7. Under Article 53(e) of its Articles of Association, the Company has power to reduce its capital by special resolution.

The proposed capital reduction

8. The Company proposes that the reduction of capital should take place as part of a capital reorganisation. The proposal is to

(1) reduce the capital by cancelling HK$0.24 in respect of each ordinary and preference share, thereby reducing the nominal amount of each ordinary and preference share to HK$0.01 each;

(2) sub-divide each authorised but unissued ordinary share of HK$0.25 into 25 shares of HK$0.01 each;

(3) increase the authorised ordinary share capital to restore it to its original amount of HK$2,500,000,000.00 by the creation of not less than 79,557,120,000 new ordinary shares of HK$0.01 each; and

(4) consolidate every 10 ordinary shares of HK$0.01 each arising from the capital reduction, sub-division and capital increase (including authorised but unissued ordinary shares) into one consolidated share of HK$0.10 each, and every 10 preference shares of HK$0.01 each arising from the capital reduction into one consolidated preference share of HK$0.10 each.

9. It is proposed that the credit of HK$959,731,200.00 arising from such reduction of capital will be used to eliminate the accumulated losses of the Company as at the date when the capital reduction becomes effective, to the extent permitted by the court. The accumulated losses of the Company as at 31 May 2003 are HK$904,855,000.00, of which HK$878,037,000.00 are regarded as permanent losses by the Company. Thus, the proposed capital reduction will exceed the accumulated losses as at 31 May 2003 by HK$54,876,200.00.

10. Because of the different classes of shareholders and Article 8B of the Articles of Association which provides for the conversion and redemption rights of the convertible preference shareholders, the Company rightly took the view that there should be amendments to the Articles of Association in order to achieve equitable treatment of all its shareholders. The proposed capital reorganisation would involve a variation to the number of shares and the nominal value of the shares, so the rights of the convertible preference shareholders would be varied to their detriment by the capital reorganisation, unless amendments were made to the conversion prices and the redemption value in the Articles. Besides, if no amendments were made to Article 8B, its terms would be difficult, if not impossible, to implement, as they would be inconsistent with the revised capital structure of the Company.

The extraordinary general meeting

11. On 19 March 2003, a circular was despatched to the shareholders of the Company containing details of and reasons for the proposed reduction of capital and amendments to the Articles of Association. The circular also set out the notice convening an extraordinary general meeting on 11 April 2003.

12. At the meeting on 11 April 2003, the special resolutions for the reduction of capital and for amendment of the Articles were duly passed without amendment. Pursuant to Article 8B.10, the convertible preference shareholders were entitled to vote at the same meeting as the ordinary shareholders rather than to have a separate meeting. In any event, the sole holder and beneficial owner of all the convertible preference shares, Classic Charter Limited, has provided letters of consent to the proposed capital reorganisation and the proposed amendments to the Articles.

The law

13. For the court to confirm a reduction of capital, it is a requirement under section 58 of Cap. 32 that (1) the company's articles of association should permit the reduction of capital; and (2) there should be a special resolution resolving to reduce the capital. These requirements have been met.

14. The court will exercise its discretion to confirm a reduction of capital where the following criteria are satisfied:

(1) the shareholders are treated equitably;

(2) the reduction proposals are properly explained;

(3) the creditors are safeguarded; and

(4) the reduction is for a discernible purpose.

(Re Lippo China Resources Ltd [1998] 1 HKLRD 20 at 23J to 24A).

Equitable treatment of shareholders

15. By the proposed reduction of capital, the same amount is to be written off from each of the shares in each of the three classes of shares.

16. As between the different classes of shares, the Company has amended its Articles to avoid prejudice to the convertible preference shareholders in the context of their conversion and redemption rights so as to achieve equitable treatment of all shareholders. I am satisfied that with the amendments to the Articles, the capital reorganisation has no impact on the rights of the convertible preference shareholders, and that the ordinary shareholders are not affected in the event their shareholdings are diluted upon the exercise of any conversion rights by the convertible preference shareholders.

Proper explanation of proposals

17. I have considered the circular despatched to shareholders on 19 March 2003 and am satisfied that the proposals for reduction of capital have been properly explained.

Adequate protection for creditors

18. As stated above, the accumulated losses suffered by the Company as at 31 May 2003 amounted to HK$904,855,000.00. The Company has filed very detailed evidence giving an explanation of how it has sought to categorise the accumulated losses as either permanent or non-permanent losses in the following manner:

(1) to identify in relation to each financial period the expenditure or losses recorded by the Company;

(2) to consider the nature of the expenses or losses made in each such period, with a view to establishing whether there is any prospect, however remote, of recovery of such items in future; and

(3) to treat as permanent in nature only those expenses or losses in relation to which there appears to be no prospect of recovery, all other expenses or losses being treated as non-permanent in nature.

19. On this approach, the Company considers that of its accumulated losses as at 31 May 2003, HK$878,037,000.00 are permanent in nature.

20. I accept that the creditors of the Company should be adequately protected if

(1) only losses which are permanent in nature are set off against the credit arising out of the reduction of capital (In re Jupiter House Investments (Cambridge) Ltd [1985] 1 WLR 975);

(2) insofar as any losses to be set off against the credit arising are not permanent in nature (in the sense that there may be some prospect of recovery), the Company is prepared to give an appropriate undertaking to place any identified subsequent recoveries in a special capital reserve account which will be maintained for so long as pre-capital reduction creditors remain unpaid and do not consent to the reserve being dispensed with (In re Grosvenor Press plc [1985] 1 WLR 980);

(3) in so far as any losses to be set off against the credit arising are not permanent in nature (in the sense that they have been accrued but not yet paid), the Company is prepared to give an appropriate undertaking to create, in its accounting records, a special capital reserve account in the amount of the unpaid accruals, which will be maintained for so long as pre-capital reduction creditors remain unpaid and do not consent to the reserve being dispensed with, and may be reduced on each occasion when the accruals are actually paid; and

(4) the Company is prepared to undertake to credit the surplus credit (HK$54,876,200.00 in this instance) to a separate special capital reserve account which it will create in its accounting records.

21. The Company has provided undertakings in the above terms and a copy of this is annexed to this judgment.

22. It will be noted that the undertaking in paragraph 1 in respect of recoveries of non-permanent losses in not in the standard form in Grosvenor Press in that it is in respect of recovery of identified assets with a limit on the size of the special capital reserve to be created by reference to the provisions made in respect of such assets and there is provision for the reduction of the limit in specified circumstances. I was given to understand by Mr Barma, SC that an undertaking in substantially this form was accepted by Chu J in Re China Bio-Medical Group Limited, HCMP No. 3378 of 2002, although no reasoned judgment was delivered.

23. I am persuaded that this adapted form of undertaking should give adequate protection to the creditors for these reasons:

(1) the undertaking will bite on any net recoveries from the assets specified in the undertaking;

(2) the limit on the size of the special capital reserve to be created is arrived at by reference to the provisions made in respect of such assets. This seems to be right in principle. Since the permanent losses are not recoverable, the only possible reduction of the losses eliminated by the credit arising from the capital reduction will arise from any recovery of the non-permanent losses in respect of such assets;

(3) the undertaking also provides for the limit to be automatically reduced in relation to fresh capital coming in, and on the disposal of the assets specified in the undertaking so as to turn the unrealised (and for this reason non-permanent) losses in relation to such assets into permanent losses, where such disposal does not result in a recovery of the entire amount of the provision which has been made (and thus of the non-permanent losses in respect of which the Company's capital has been reduced). This is also acceptable.

24. Separate undertakings are given in respect of accrued but unpaid liabilities as at 31 May 2003 in paragraph 2 of the undertakings and in respect of the surplus credit by which the capital reduction exceeds the total accumulated losses as at 31 May 2003 in paragraph 3.

25. All of the undertakings contained provisos that would permit the release of amounts standing to the credit of the reserves to be created under them in specified circumstances where the creditors' interests will have been otherwise safeguarded. There is also an undertaking that for so long as the undertakings remain effective, a summary of the undertakings will be published in its audited financial statements and in any prospectus to be issued by the Company.

26. I am satisfied that the interest of the creditors should be sufficiently protected by the measures taken.

Discernible purpose

27. There are three reasons for the proposed reduction of capital.

28. Firstly, the Company's shares have been traded below their present nominal value for some time. The Company believes that a reduction of the nominal value of the shares would facilitate future capital raising or asset acquisition.

29. Secondly, the Company has suffered accumulated losses and considers that part of the paid-up capital has been lost, and as it is no longer represented by available assets, it should be cancelled.

30. Thirdly, if the accumulated losses are substantially eliminated, the Company considers that the capital reduction will bring forward the date upon which the Company will be a position to declare a dividend out of future distributable profits.

31. All these are established to be discernible purposes (Re Tian An China Investments Co. Ltd [1998] 2 HKLRD 474 at 476B to I, 478C to D; Re Cheuk Nang Technologies (Holdings) Ltd [2001] HKEC 461; Re East Sun Button International Ltd [2001] HKEC 1524).

Conclusion

32. For the above reasons, it would be appropriate to confirm the reduction of capital in this instance and I have made an order in terms of the draft submitted with minor alterations.

SCHEDULE OF UNDERTAKINGS

AND UPON the Company by its Counsel undertaking that:

1. in the event of its making any future recoveries in respect of the assets identified in the First Schedule hereto, in respect of which provision for diminution in value or depreciation was made in the accounts of the Company between 1st April 2001 and 31st May 2003, beyond their written down value in the Company's management accounts as at 31st May 2003, all such recoveries beyond that written down value up to an amount of HK$16,906,000 ("the limit"), will be credited to a special capital reserve in the accounting records of the Company ("Special Capital Reserve 1") and that so long as there shall remain outstanding any debt of or claim against the Company which, if the date on which the proposed reduction of capital becomes effective ("the effective date") was the date of the commencement of the winding up of the Company, would be admissible to proof in such winding up and the persons entitled to the benefit of such debts or claims shall not have agreed otherwise, such reserve shall not be treated as realized profits for the purposes of section 79B of the Companies Ordinance (Cap. 32) and shall (for so long as the Company shall remain a listed company) be treated as an undistributable reserve of the Company for the purposes of section 79C of the Companies Ordinance (Cap. 32), or any statutory re-enactments or modifications thereof

PROVIDED that:

(1) the Company shall be at liberty to apply Special Capital Reserve 1 for the same purposes as a share premium account may be applied;

(2) the limit in respect of Special Capital Reserve 1 may be reduced by the amount of any increase, after the effective date, in the paid up share capital or the amount standing to the credit of the share premium account of the Company as the result of the payment up of shares by the receipt of new consideration or the capitalization of distributable profits;

(3) the limit in respect of Special Capital Reserve 1 may be reduced upon the disposal or other realization, after the effective date, of any of the assets identified in the First Schedule hereto by the amount of the provision made in relation to such asset as at 31st May 2003 (which amount is set out in the First Schedule hereto) less such amount (if any) as is credited to Special Capital Reserve 1 as a result of such disposal or realization; and

(4) in the event that the amount standing to the credit of Special Capital Reserve 1 exceeds the limit thereof after any reduction of such limit pursuant to provisos (2) and/or (3) above, the Company shall be at liberty to transfer the amount of any such excess to the general reserves of the Company and the same shall become available for distribution.

2. it will create in the accounting records of the Company a further special capital reserve ("Special Capital Reserve 2") in the amount of HK$9,911,914.04 (representing the accrued but unpaid liabilities of the Company to its trade and other creditors, details of which are set out in the Second Schedule hereto) and that so long as there shall remain outstanding any debt of or claim against the Company which, if the effective date was the commencement of the winding up of the Company, would be admissible to proof in such winding up and the persons entitled to the benefit of such debts or claims shall not have agreed otherwise, such reserve shall not be treated as realized profits for the purposes of section 79B of the Companies Ordinance (Cap. 32) and shall (for so long as the Company shall remain a listed company) be treated as an undistributable reserve of the Company for the purposes of section 79C of the Companies Ordinance (Cap. 32), or any statutory re-enactments or modifications thereof

PROVIDED that:

(1) the Company shall be at liberty to apply Special Capital Reserve 2 for the same purposes as a share premium account may be applied;

(2) the amount standing to the credit of Special Capital Reserve 2 may be reduced by the amount of any increase, after the effective date, in the paid up share capital or the amount standing to the credit of the share premium account of the Company as the result of the payment up of shares by the receipt of new consideration or the capitalization of distributable profits;

(3) upon any of the said liabilities listed in the Second Schedule hereto being paid or otherwise extinguished, the amount of Special Capital Reserve 2 shall be reduced by the amount of the liability so paid or extinguished; and

(4) in the event that the amount of Special Capital Reserve 2 is so reduced pursuant to provisos (2) and/or (3) above, the Company shall be at liberty to transfer the amount of any such reduction to the general reserves of the Company and the same shall become available for distribution.

3. it will create in the accounting records of the Company a further special capital reserve ("Special Capital Reserve 3") in the amount of HK$54,876,200 (representing the amount by which the proposed capital reduction exceeds the total accumulated losses of the Company as at 31 May 2003) and that so long as there shall remain outstanding any debt of or claim against the Company which, if the effective date was the commencement of the winding up of the Company, would be admissible to proof in such winding up and the persons entitled to the benefit of such debts or claims shall not have agreed otherwise, such reserve shall not be treated as realized profits for the purposes of section 79B of the Companies Ordinance (Cap. 32) and shall (for so long as the Company shall remain a listed company) be treated as an undistributable reserve of the Company for the purposes of section 79C of the Companies Ordinance (Cap. 32), or any statutory re-enactments or modifications thereof

PROVIDED that:

(1) the Company shall be at liberty to apply Special Capital Reserve 3 for the same purposes as a share premium account may be applied;

(2) the amount standing to the credit of Special Capital Reserve 3 may be reduced by the amount of any increase, after the effective date, in the paid up share capital or the amount standing to the credit of the share premium account of the Company as the result of the payment up of shares by the receipt of new consideration or the capitalization of distributable profits; and

(3) in the event that the amount of Special Capital Reserve 3 is so reduced pursuant to proviso (2) above, the Company shall be at liberty to transfer the amount of any such reduction to the general reserves of the Company and the same shall become available for distribution.

AND UPON the Company by its Counsel further undertaking that, for so long as the undertakings set out in the previous paragraphs hereof remain effective, it will:

(1) cause or procure its statutory auditors to report by way of a note or otherwise a summary of the undertakings in its audited financial statements or in the accounts of the Company published in any other form; and

(2) publish or cause to be published in any prospectus issued by or on behalf of the Company a summary of the undertakings.

FIRST SCHEDULE

SECOND SCHEDULE

[giving details of accrued but unpaid liabilities of the Company to its trade and other creditors; not produced]