Re Sino-i.Com Ltd.

HCMP002427/2001

HCMP 2427/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2427 OF 2001

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Coram: Hon Yuen J in Court

Date of Hearing: 27 June 2001

Date of Judgment: 27 June 2001

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J U D G M E N T

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1.In this petition the Company seeks the court's confirmation of a proposed reduction of capital under Section 59 of the Companies Ordinance. Section 58 provides that a company limited by shares and having a share capital may, if so authorised by its articles, by a special resolution reduce its share capital in any way subject to confirmation by the court.

2.The first statutory requirement is that there should be articles authorising the reduction of capital. This is found in Article 50 of the Articles of this company.

3.The second statutory requirement is that there should be a special resolution resolving to reduce the share capital. On 3 May 2001 at an extraordinary general meeting of the Company, it was resolved that the authorised capital of the Company be reduced from HK$3,000,000,000 divided into 6,000,000,000 shares of HK$0.50 each to HK$600,000,000 divided into 6,000,000,000 shares of HK$0.10 each and that such reduction be effected by cancelling paid-up capital to the extent of HK$0.40 each upon each of the 3,914,504,877 ordinary shares in issue and by reducing the nominal amount of all the issued and unissued ordinary shares in the capital of the Company from HK$0.50 to HK$0.10 per share.

4.The third statutory requirement is that there should be confirmation by the court under Section 59 and Section 60 of the Ordinance. This involves the following considerations: first, the shareholders should be treated equitably, for example, as between shareholders of different classes or between different shareholders of the same class. In the present case, there is only one class of shares and all shareholders are equally affected.

5.There is, in this case, a share option scheme which the Company had devised for its employees. The auditors of the Company have, however, advised that pursuant to the rules of the share option scheme, the proposed reduction does not require any alteration to be made either to the subscription prices or to the number of shares to be subscribed for under the scheme. This is set out in a letter from Ernst and Young to the Directors of the Company dated 26 March 2001.

6.The second matter is that the shareholders in general meeting should have had the proposal properly explained to them so that they could exercise an informed judgment. For this purpose the court looks at the circular accompanying the notice of meeting at which the special resolution is to be proposed, see Re Thorn EMI Plc [1988] 4 BCC 698. In the present case I have read the circular and the proposal is clearly explained there. The special resolution passed is identical to that proposed in the notice.

7.The third matter is that creditors should be safeguarded. In the present case, the interests of creditors are provided for in that the credit arising from the reduction of capital will be kept in a special capital reserve account which will not be treated as realised profit and which will be treated as an undistributable reserve so that the reduction would not alter the underlying assets of the Company. The Company has further accepted that the undertaking will appear in all published financial statements, accounts and prospectuses of the Company.

8.I further note that in this case the Company has issued a convertible note for HK$204,000,000 which was issued in October 1997. This has matured but the note holder has not exercised its right to convert. At the summons for directions stage, the Company gave an undertaking to the court that it would give 14 days notice specifically to the note holder and to each of the beneficiaries under the share option scheme of the Company of 29 October 1999.

9.After the summons for directions and pursuant to that undertaking, the Company has duly specifically notified the note holder and the employees and ex-employees who are entitled under the share option scheme. In relation to the note holder, it has on 30 May 2001 confirmed in writing that it would not oppose the Company's reduction of capital. As for the employees and ex-employees, none has appeared today to make any submissions regarding whether the court should confirm this proposed reduction of capital. In the light of that protection as to specific notice to the note holder and to the beneficiaries of the share option scheme, the court has at the summons for directions stage dispensed with the settling of a list of creditors under Section 59(2).

10.The fourth matter which the court should consider is whether the reduction of capital is for a discernible purpose. In the present case there is an affirmation of an executive director of the Company which states that for the past year, the shares of the Company had been trading at prices ranging between HK$0.072 and HK$0.46 per share. During most of this period, the trading prices of the shares have fallen below their nominal value of $0.50. The reduction would facilitate future capital raised by the Company when suitable opportunities arise without the need for the Company to comply on each occasion with statutory procedures for the issue of shares at a price below its nominal value under Section 50. Needless to say, an ad hoc application on each occasion would be time consuming and a waste of resources.

11.In the present case, therefore, as in Re Tian An China Investments Company Limited [1998] 2 HKLRD 474 and Re Cheuk Nang Technologies Holdings Limited HCMP 1683 of 2001, the purpose of the application is to permanently reduce the nominal value of the shares now so as to facilitate the raising of working capital at any time as soon as the need arises. That purpose has been accepted in Tian An as a sufficiently discernible purpose within the meaning of that word in Thorn EMI.

12.In the circumstances, I am prepared to confirm the reduction and I approve the draft minute of order as amended and I would make an order in terms of the draft order as amended.

Representation:

Miss Mairead Rattigan, instructed by Preston Gates & Ellis, for the Company