Re Principal Insurance Co (Hong Kong) Ltd
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HCMP 1770/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1770 OF 2007 ______________________
______________________ Before : Hon Kwan J in Court Date of Hearing : 23 October 2007 Date of Judgment : 23 October 2007 Date of Handing Down of Reasons for Judgment : 25 October 2007 __________________________________ REASONS FOR JUDGMENT __________________________________ 1.This is a petition presented by Principal Insurance Company (Hong Kong) Limited (“the Company”) to seek confirmation of a reduction of its share capital, pursuant to section 59 of the Companies Ordinance, Cap. 32. 2.The Company was incorporated on 11 July 1996 as a private company. Since its incorporation, it has been carrying on insurance business. Its principal activities have been the provision, administration and management of retirement schemes under Class A, Class G and Class H of Part 2 of Schedule 1 to the Insurance Companies Ordinance, Cap. 41, and provision of provident fund activities under the Mandatory Provident Fund Schemes (“MPF Schemes”) in Hong Kong. Although the Company was at one time also authorised to carry on Class I business, it has ceased to do so since 15 August 2007. 3.Since 20 May 2005, the Company has authorised share capital of HK$612,000,000.00, divided into 61,200,000 ordinary shares of HK$10.00 each. The present paid-up capital is HK$526,344,990.00, divided into 52,634,499 shares of HK$10.00 each, all of which are held by Principal International (Asia) Limited (“PIAL”) from 31 August 2006 as a result of the restructuring of subsidiaries in Hong Kong. The change in shareholder was approved by the Insurance Authority. 4.The Company is an indirect wholly owned subsidiary of Principal Financial Group, Inc., a listed company in the United States, which, through its subsidiaries and associated companies, carries on business in more than 250 locations, serving 17.6 million customers in insurance, retirement and mutual fund, and asset management. The stockholders’ equity of Principal Financial Group, Inc. was US$7,861 million as at 31 December 2006. 5.By a special resolution dated 12 September 2007 duly signed by PIAL as the sole member of the Company, it was resolved that the authorised share capital of the Company be reduced from HK$612,000,000.00 to HK$230,000,000.00 divided into 23,000,000 ordinary shares of HK$10.00 each, and that such reduction be effected by (i) reducing paid-up capital to the full extent of HK$10.00 per share on 29,634,499 shares out of the 52,634,499 shares in issue and by cancelling such shares, and (ii) cancelling the 8,565,501 unissued ordinary shares of HK$10.00 each. 6.The purpose of the proposed reduction is to eliminate the accumulated losses of the Company to the extent of HK$296,344,990.00 out of its accumulated losses of HK$326,431,992.00 as at 31 December 2006, and to enable the Company to resume the payment of dividends. 7.The proposed reduction does not involve either the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital. 8.Between the years ended 31 December 1996 and 31 December 2004, the Company suffered losses in the aggregate of HK$402,700,441.00. From the year ended 31 December 2005 onwards, the Company was able to generate profits from its business with the result that as at 31 December 2006, the accumulated losses were reduced from HK$402,700,441.00 to HK$326,431,992.00. According to the unaudited management accounts made up to 30 June 2007, the accumulated losses were further reduced to HK$304,324,037.00. 9.All the losses were in the nature of operating losses and were attributable to these matters:
10.The aforesaid accumulated losses are by their nature permanent losses, since they represent development costs and ordinary operating expenses incurred by the Company, both of which are non-recoverable by the Company. 11.Under section 8(3) of Cap. 41, the Insurance Authority shall not authorise a company to carry on insurance business unless certain conditions in relation to the value of the assets of the company are satisfied. From mid November 2006, the Company has been discussing with the Insurance Authority with a view to obtaining its authorisation on the proposed reduction of capital. Extensive enquiries were made by the Authority on the proposed reduction and its possible ramifications on the business plan and financial position of the Company. The Company has obtained the consent of the Authority on 18 April 2007 to the proposed reduction subject to five conditions, namely:
12.The requirements as to paid-up capital, solvency ratio and solvency position have all been met by the Company. According to the analysis prepared by the chief actuary of the Company, based on the amounts reported in the management accounts, both before and after the proposed reduction of capital, the solvency ratio is 406.5%, well above the statutory requirement of 150%. 13.The financial position of the Company is apparently sound. As appeared from the audited financial statements made up to 31 December 2006, the Company had no significant contingent liabilities. 14.As at 30 June 2007, the Company was indebted to its intermediate holding company, Principal International, Inc. (“PII”) and fellow subsidiaries in the aggregate of HK$12,281,002.00. The Company has procured the written consent of PII and the fellow subsidiaries to the proposed reduction of capital, and to postpone their debts to those of the non-consenting creditors. 15.The Company has retained sufficient liquid assets in the form of cash and cash equivalents which amounted to HK$648,524,442.00 as at 30 June 2007. The amount was substantially more than the liabilities to non-consenting creditors as at that date, which comprised “derivative financial instruments” (HK$287,675,534.00), difference between “financial assets” and “investment contract liabilities” (HK$10,751,950,669.00 less HK$10,864,888,981.00 = HK$112,938,312.00), and “other payables and accruals” (HK$53,078,391.00). 16.I accept the Company’s contention that it is unlikely that creditors would be adversely affected by the proposed reduction. It is not necessary to require any undertaking from the Company in the circumstances. 17.At the hearing of the summons for directions on 9 October 2007, a direction was made that section 59(2) shall not apply as regards any class of creditors of the Company. 18.Directions made for the advertisement of a notice of the petition have been complied with. There is no opposition to the petition. 19.The proposed reduction was approved by the sole shareholder of the Company and is for a discernible purpose. It does not appear to me that the interest of creditors would be prejudiced by the proposed reduction. I have therefore confirmed the proposed reduction of capital and made an order in terms of the draft submitted.
Ms Linda Chan, instructed by Messrs. Baker & McKenzie, for the Petitioner |