Re Mizuno Corporation of Hong Kong Ltd

HCMP 2108/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2108 OF 2007

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Before : Hon Kwan J in Court

Date of Hearing : 14 December 2007

Date of Judgment : 14 December 2007

Date of Handing Down of Reasons for Judgment : 18 December 2007

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REASONS  FOR  JUDGMENT

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1.This is a petition to seek confirmation of the proposed reduction of capital of Mizuno Corporation of Hong Kong Limited (“the Company”), pursuant to section 59 of the Companies Ordinance, Cap. 32.

2.The Company was incorporated on 8 September 1992.  Its principal business activity is to act as a sales agent of sportswear and materials.  It is part of a group of companies, whose ultimate holding company is Mizuno Corporation, a company incorporated in Japan and is listed on the Tokyo Stock Exchange.  The Mizuno group manufactures and sells on a worldwide basis a wide variety of sports equipment and sportswear, and maintains a production base in the Peoples’ Republic of China.

3.As at the date of presentation of the petition on 27 October 2007, the authorised share capital of the Company is HK$65,000,000.00 divided into 65 million ordinary shares of HK$1.00 each, of which 63,784,000 shares have been issued and are fully paid up or credited as fully paid up.  Mizuno Corporation holds 63,783,998 shares in the Company.  The Company has been a subsidiary of Mizuno Corporation since October 1992.

4.There is provision in the articles of association to reduce the share capital by special resolution, subject to any incident authorised, and consent required, by law.

5.On 1 August 2007, an extraordinary general meeting of the Company was held at which a special resolution was duly passed as follows: the authorised share capital be reduced from HK$65,000,000.00 divided into 65 million ordinary shares of HK$1.00 each to HK$32,500,000.00 divided into 65 million ordinary shares of HK$0.50 each; the nominal value of each existing share be reduced from HK$1.00 to HK$0.50 by cancelling paid-up capital to the extent of HK$0.50 on each of the issued shares and by reducing the nominal value of all the issued and unissued shares from HK$1.00 each to HK$0.50 each; the credit arising from such reduction of capital be transferred to the distributable reserve of the Company and be distributed to the members on a pro rata basis in the proportion of the shares held by each.

6.The board of directors considers the total paid-up capital is in excess of the needs of the Company and can no longer be usefully employed in the business.  The reduction is designed to adjust the relation between the capital and assets of the Company, and to ensure that the Company will have a capital structure that would permit the payment of dividends as and when the directors consider it appropriate in future.

7.The share capital of the Company was greatly expanded in the 1990s when the Mizuno group was expanding into China.  Two companies were established in Mainland China as direct subsidiaries of the Company, namely, Shanghai Mizuno Corporation Limited (“Shanghai Mizuno”) and Mizuno China Corporation.  Both were and are principally engaged in the production and sale of sport products.

8.According to the audited financial statements as at 31 December 2006, the equity of the Company was HK$168,253,056.00, representing share capital of HK$63,784,000.00 and retained profits of HK$104,469,056.00.  The annual turnover was HK$45 million, the annual profit before tax HK$8 million, and total assets were HK$428 million.  Total current liabilities stood at HK$262 million, of which HK$261 million was due to Mizuno Corporation; total liabilities due to third parties were HK$1,140,361.00, made up of trade creditors of HK$538,643.00, and sundry creditors and accrued charges of HK$601,718.00.  The net assets were HK$168 million.

9.Towards the end of 2006, the management of Mizuno Corporation decided to re-organise the group and to hold the two subsidiaries in the Mainland directly, rather than through the Company.  On 25 December 2006, the directors of the Company resolved to dispose of the Company’s investments in these two subsidiaries to Mizuno Corporation for JPY 4,040,000,000.00, which represented a profit to the Company.  The sale was completed in early January 2007.  As a result, the amount due to Mizuno Corporation, previously booked under current liabilities in the sum of HK$261 million odd, being purchase money deposited with the Company in advance of the completion, was fully settled and paid.

10.The Company is now principally engaged in providing quality control service for the Mizuno group and acting as its sales agent.  Its principal source of income is service fees received, in the form of commission, for quality assurance services to other group companies and factories producing goods for the Mizuno group.

11.The Company has no plans of expansion in the coming years.  After taking into account the turnover and corresponding operating costs, the board is of the opinion that the present share capital is considerably more than the future needs and that a share capital of HK$32,500,000.00 would be sufficient, now that the two subsidiaries have been sold to Mizuno Corporation.

12.The total cash and bank balances to the credit of the Company, according to the management accounts as at 31 October 2007, are in the aggregate of HK$72.3 million.  It is proposed that the return of capital be effected by transferring HK$31,892,000.00 out of the Company’s bank accounts to the distributable reserve of the Company for subsequent distribution to the members.

13.According to the management accounts as at 31 October 2007, total liabilities were HK$666,604.99, and were made up of accruals of HK$154,830.44 (which were paid in full on 21 November 2007), accounts payable of HK$506,770.75, and expenses payable to Mizuno Corporation of HK$5,003.80.  The accounts payable included amounts owed to four suppliers of Shanghai Mizuno in the aggregate of HK$404,995.81, for which the Company is awaiting settlement instructions from Shanghai Mizuno.

14.The proposed reduction involves payment to the shareholders of paid-up capital.  As the Company would appear to have more than sufficient cash to cover the distribution to shareholders and to pay its outstanding creditors, I am satisfied that the proposed reduction is not likely to cause any prejudice to creditors.  For the further protection of creditors, the Company by its counsel offered an undertaking in the usual form to set apart to a separate capital reserve the sum of HK$1,140,361.00, being total liabilities due to third parties according to the audited financial statements as at 31 December 2006, which sum shall not be distributed or parted with without the consent of all the creditors or until all the creditors have been paid or satisfied.

15.At the hearing of the summons for directions on 27 November 2007, an order was made that section 59(2) is not to apply as regards any class of creditors of the Company and the settlement of a list of creditors was dispensed with.  The directions given at that hearing for advertisement of a notice of the presentation of the petition have been complied with.

16.The shareholders are treated equitably in the proposed reduction.  The shareholders were obviously aware of the reasons for the proposed reduction.  The interests of creditors would be sufficiently safeguarded for the reasons mentioned above, given the strong financial position of the Company.  I am satisfied that the reduction is for a discernible purpose.  I have therefore made an order in terms of the draft submitted and approved the minute of order.

Mr Paul H M Leung, instructed by Messrs Alvan Liu & Partners, for the Petitioner