Re Canada Land Ltd

HCMP 3032/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3032 OF 2004

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Before: Hon Kwan J in Court

Date of Hearing: 7 March 2005

Date of Judgment: 7 March 2005

Date of Handing Down of Reasons for Judgment: 9 March 2005

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REASONS  FOR  JUDGMENT

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1.This is a petition for confirmation of reduction of share capital by Canada Land Limited (“the Company”) under section 59(1) of the Companies Ordinance, Cap. 32. The background facts may be stated as follows.

2.The Company was incorporated on 25 February 1972. In recent years, the principal activity of the Company and its subsidiaries is investment holding of joint ventures in Gaungzhou, China. The group is involved in property development and the operation of a tourist attraction project.

3.The present issued and fully paid up capital of the Company is HK$147,375,000.00, divided into 98,250,000 ordinary shares of HK$1.50 each. The shares of the Company were listed on the Australian Stock Exchange on 28 July 1994.

4.There is provision in article 18 of the Articles of Association that the Company may by special resolution reduce its share capital.

5.At the extraordinary general meeting held on 11 October 2004, a special resolution was passed that the capital of the Company is to be reduced from HK$147,375,000.00 divided into 98,250,000 shares of HK$1.50 each to HK$12,772,500.00 divided into 98,250,000 ordinary shares of HK$0.13 each, and that such reduction is to be effected by cancelling paid-up capital which has been lost or is unrepresented by available assets to the extent of HK$1.37 each in respect of such ordinary shares.

6.Prior to the passing of the special resolution, capital to the extent of HK$134,602,500.00 and upwards had been lost or was unrepresented by available assets.

7.The purpose of the reduction is to reflect that part of the capital has been lost as a result of both operating and investment losses, and assets of reduced or impaired value. The reduction does not involve diminution of any liability regarding unpaid capital or the payment to any shareholder of any paid-up capital.

8.A circular letter was sent out to members of the Company with the notice of the extraordinary general meeting, explaining the purpose of the proposed reduction, which is to truly and accurately reflect the value of the Company’s paid-up capital in the light of the Company’s available assets. The effect of the reduction is to write off the accumulated losses of the Company, so that the Company would be in a better position to pay dividends as and when the directors consider appropriate in future. The special resolution was passed by a majority of over 99% of the votes.

9.The audited accounts of the Company for the year ended 31 March 2004 showed that the Company had accumulated losses of HK$129,152,431.00. In October 2004, to take into account changes from the 2004 audited accounts up to 31 October 2004, two adjustments were made to the provisions in respect of two wholly owned subsidiaries, Champion Wins Enterprises Limited (“Champion Wins”) and Kwong Mile Services Limited (“Kwong Mile”). The total accumulated losses in October 2004 following the adjustments amounted to HK$134,602,500.00.

10.The accumulated losses may be categorised as follows:

(1)	impairment loss of staff quarters owned by the Company in Guangzhou of HK$1,238,000.00
	This loss has resulted from a reduction in value of two staff flats.
(2)	share of loss of investment in U-Can Housing Development Limited (“U-Can”) of HK$22,472,765.00
	Under a joint venture agreement, the Company had to bear 100% of the losses of U-Can in a particular project. U-Can is dormant and in the process of being voluntarily wound up, with the liquidation due to be completed in February 2005. The net result is that U-Can is expected to repay to the Company approximately HK$27 million of the Company’s investment in that project. The Company has written off the remainder of that investment of HK$22,472,765.00.
(3)	share of loss of investment in Guangzhou Land Limited (“Guangzhou Land”) of HK$933,727.00
	Under a joint venture agreement, the Company was responsible for 65% of the operating losses made by Guangzhou Land. Guangzhou Land is dormant and is in the process of being wound up.
(4)	loss of value of investment in Guangzhou Land in respect of land use rights of HK$57,597,800.00
	Under the joint venture agreement, the Company was entitled to a share of 65% of the value of land use rights. Valuation of these land use rights has been carried out annually and annual valuation reflects that the value of the land use rights has decreased. The joint venture partner in China went into liquidation in 2003. The Guangzhou Land Bureau cancelled the land use rights granted to Guangzhou Land and the Company’s appeal against the decision to the court was not successful either at first instance or on appeal. So the land use rights no longer exist. The Company has reflected the loss of its 65% share of such rights in the balance sheet. The loss has been written off against the balance left in the asset valuation reserves account but that reserve fund has been depleted and there remains an excess loss of HK$57,597,800.00 which has been treated as an impairment loss.
(5)	loss of investment in Champion Wins of HK$4,863,662.00
	This was a loan by the Company to Champion Wins for its working capital. As the liabilities of Champion Wins have exceeded its assets, in October 2004 the Company has made a provision for the amount due.
(6)	loss relating to Kwong Mile of HK$13,745,876.00
	Kwong Mile is under liquidation. The Company’s investment in Kwong Mile of HK$7.2 million has been written off as irrecoverable loss. Further provision of HK$6,545,876.00.00 was made for amounts owing by Kwong Mile to the Company for costs incurred by the Company on behalf of Kwong Mile in respect of tax litigation, of which HK$5,450,069.00 was for tax and legal expenses incurred and the balance of HK$1,095,807.00 was an additional provision in respect of further estimated legal fees payable to the Inland Revenue Department under a costs order.
(7)	impairment loss of premises owned by the Company in Hong Kong of HK$10,929,819.00
	This resulted from downward revaluation of properties.
(8)	loss in respect of repurchase cost of share capital of HK$698,061.00
	Two million shares were repurchased by the Company between April 2001 and July 2001, resulting in the cancellation of these shares. As the Company had no retained profits at the time of the repurchase to offset the cost, the cost of repurchase was recorded as a loss to the Company.
(9)	the Company’s accumulated operating losses of HK$22,122,790.00
	The operating losses comprised two parts, HK$8,995,444.00 and HK$13,127,346.00. The first amount represented losses incurred before the financial year ended 31 March 2001, when Ernst & Young were the auditors of the Company. Ernst & Young had issued unqualified audit opinion on the accounts of the Company. The second amount represented losses incurred from the financial year ended 31 March 2001 to 31 March 2004, when the present auditors, HLB Hodgson Impey Cheng audited the accounts of the Company. The present auditors have filed evidence confirming that the operating losses in the accounts they audited were of a permanent nature. The Company’s operating expenses have exceeded its income in recent years. The main source of income is from charging management fees to a wholly owned subsidiary Cantravel Limited (“Cantravel”), which operates a tourist attraction in Guangzhou. The turnover of Cantravel was not sufficient for the management fees charged to cover the Company’s own operating expenses.

11.The Company accepted that items (1), (5), (7) and the provision for estimated legal costs liability of HK$1,095,807.00 in item (6) may be regarded as non-permanent losses. I agree that the other items may be regarded as permanent losses as they have all been realised.

12.The Company has offered an undertaking that any loss later recovered, to the extent of those items regarded as non-permanent losses up to an overall cap of HK$18,127,288.00, will be credited to a special capital reserve account which will not be treated as realised profits and will be non-distributable as restricted by section 79C of Cap. 32, for as long as any debt or claim which would be admissible in a winding up of the Company commencing on the date on which the reduction of capital takes effect remains outstanding, or without the consent of all relevant creditors. The undertaking is subject to the proviso that the amount standing to the credit of the special capital reserve may be reduced by the amount of any subsequent increase in the paid up share capital or the share premium account.

13.At the hearing of the summons for directions on 25 February 2005, I ordered that section 59(2) shall not apply as regards any class of creditors of the Company and gave no directions for the advertisement of a notice of the petition. There was no opposition to the petition.

14.The requirements for reduction of capital are satisfied. The reduction is for a discernible purpose and this was adequately explained in the circular letter sent to the shareholders giving notice of the extraordinary general meeting. In view of the undertaking, I am satisfied there should be sufficient protection for the existing creditors of the Company. I have confirmed the reduction and made an order in terms of the draft order.

Ms. Sue Myint, instructed by Clifford Chance, for the Petitioner