IN THE MATTER of the Companies Ordinance (Chapter 32)


Coram: Deputy High Court Judge Poon in Court

Date of Hearing: 8 July 2003

Date of Judgment: 8 July 2003

Date of Handing Down Reasons for Judgment: 10 July 2003





1. This is a petition by Nissho Iwai Hong Kong Corporation Limited (“the Company”) for confirmation of a reduction of its share capital,pursuant to section 58 of the Companies Ordinance, Cap.32.

2. On 24 June 2003, I gave directions to dispense with the settlement of a list of creditors and for advertisement of the notice ofhearing of the petition, which was duly done. At the hearing on 8 July 2003, none of the creditors or shareholders appeared. Afterhearing leading counsel, I allowed the petition and made an order in terms of the draft order with one minor amendment. These aremy reasons.

The Company

3. Incorporated in Hong Kong on 8 May 1981, the Company has an authorised share capital of HK$712,400,000, divided into 712,400,000shares of HK$1 each. All the shares have been issued and are fully paid up. All but two of the issued shares are held by Nissho IwaiCorporation. The remaining two shares are held by the two directors of the Company, Messrs Kazuhiko Tsutsui and Tetsuya Wada, ontrust for Nissho Iwai Corporation. In other words, Nissho Iwai Corporation is the sole beneficial owners of all the shares.

Proposed reduction of capital

4. Article 51 of the Company’s Articles of Association enables the Company to reduce its share capital, any capital redemption reservefund or any share premium account by special resolution. By a special resolution dated 30 May 2003 passed by all the shareholdersunanimously, the Company proposed to reduce its share capital to HK$346,000,000 by cancelling and extinguishing 365,800,000 sharesof its issued shares held by Nissho Iwai Corporation.

5. The reasons for the proposed reduction are explained in the affirmation of Mr Tetsuya Wada filed on 16 June 2003 thus.

6. The principal shareholders of the Company’s ultimate holding company, Nissho Iwai-Nichimen Holdings Corporation, a Japanese listedcompany, include UFJ Bank, Limited and Mizuho Corporate Bank, Limited, also control companies in Japan. These two banks are alsothe main financiers of the Company. It has for many years been the policy of the Company’s immediate holding company, that is, NisshoIwai Corporation, that the Company should maintain a substantial long term shareholding in the shares of the parent companies ofthese two banks. Pursuant to that policy, shares in UFJ Holdings, Inc. and Mizuho Holdings, Inc. were acquired by the Company between18 December 1986 and 1 March 1996. With the exception of an immaterial disposition of a small number of such shares, these shareshave been held by the Company ever since their acquisition. The acquisition cost of these shares was in excess of 7.5 billion Yen(equivalent to some HK$513,115,313 on the exchange rates ruling at 31 December 2000). However, since 1996, the market value of theseshares has declined steadily and steeply. Their current value is only some HK$31,504,431.

7. Until 31 December 2000, the above shareholding was carried in the Company’s balance sheet at cost as it was considered to be a long-terminvestment. However, with effect from the year ended 31 December 2001, the Company changed its accounting policies to record thevalue of this shareholding at market value. This was done in order that the balance sheet would better reflect the Company’s actualfinancial position, as a result of requests from the Company’s bankers, who were coming under pressure to monitor the real valueof their loan portfolios. At the same time as this change was made to the Company’s accounting policies, further capital of HK$365,800,000was injected into the Company by its holding company, in order to cover the loss of asset value arising from the substantial declinein the value of this shareholding.

8. The change of accounting policy resulted in the need to create an investment revaluation reserve, to act as a balancing item on thecapital side of the Company’s balance sheet. This reserve reflects the extent to which the Company’s net assets are less than itsshare capital and accumulated profit. As at 31 December 2001, this reserve stood at a negative figure of HK$389,720,000. As at 31December 2002, the deficit had increased to HK$433,540,000.

9. The Company’s bankers have recently come under further pressure to assess the quality of their loan portfolios and are now expectedto classify their debtors according to the likelihood of default. The size of the investment revaluation reserve is in excess ofthe Company’s retained profits. If this remains the case, there is a risk that its status as a debtor will be downgraded. The Companywill find it more difficult to raise loans commercially, so that the level of its banking facilities would be restricted, and higherinterest rates likely to be charged. This would be detrimental to its business and profitability.

10. The Company therefore decided to reduce its capital and apply the credit arising from such reduction to the investment revaluationreserve, thus significantly reducing the size of the negative balance in such reserve, to a level where the Company’s accumulatedprofits will be more than adequate to cover the reduced negative balance. The Company hopes that this will leave the Company’s balancesheet in a state which will cause less concern to its bankers, with the benefit that it will continue to enjoy banking and creditfacilities on the terms which it does at present.

The Law

11. In order to succeed in the petition, the Company must satisfy both the statutory requirements under the Companies Ordinance and the criterion laid down by authorities.

12. The statutory requirements are set out in section 58 of the Companies Ordinance :

(1) the company’s articles of association should permit a reduction of capital; and

(2) there should be a special resolution to reduce the capital.

These requirements have already been met.

13. The criteria laid down by authorities for the courts to confirm a reduction of capital are :

(1) the shareholders are treated equitably;

(2) the reduction proposals are properly explained;

(3) the creditors are adequately safeguarded; and

(4) the reduction is for a discernible purpose.

I will deal with them in turn.

Equitable treatment of all shareholders

14. The proposed reduction is to be effected by cancelling shares held by the majority shareholder, Nissho Iwai Corporation. It doesnot affect the rights of the other two individual shareholders because they hold their shares on trust for Nissho Iwai Corporation.This criterion is met.

Proposals properly explained

15. As noted, all the shareholders agreed upon the capital reduction. I am satisfied that this criterion is also met.

Creditors adequately safeguarded

16. It is the Company’s case that there is any realistic prospect of the value of the shareholding in increasing to such an extent thatthe investment revaluation reserve will have any positive value in the foreseeable future. In order to protect the interests of itscurrent creditors, the Company is willing to undertake that the investment revaluation reserve shall be a non-distributable reserve,so that any amounts that may in future stand to its credit shall not be distributable without the creditors’ consent or leave ofthe court. The undertaking can be found at the Appendix to this judgment.

17. Undertakings of like effect and in substantially similar terms have been judicially approved recently : see Re Goldbond Group Holdings Limited formerly known as Can Do Holdings Limited, HCMP 1891/2003, unreported, 27 June 2003, per Kwan J at paras.20-26. I am satisfied that the interests of the creditors are adequately protected by the undertaking. It will ensurethat no amount standing to the credit of the reserve should be available for distribution without the creditors’ consent or leaveof the court. Accordingly, the reduction will not involve either the diminution of any liability in respect of unpaid share capitalor the repayment to any shareholder of any paid-up share capital.

Discernible purpose

18. The purpose of the capital reduction is to reduce the size of the deficit in the investment revaluation reserve so as to improvethe financial position shown in the Company’s balance sheet. It is likely to result in the Company continuing to enjoy banking andcredit facilities on the present terms and to avoid the risk that facilities may be restricted or made more expensive. The reductionis also necessary for another reason. Owing to the substantial decline in the value of the shareholdings in UFJ Holdings Inc. andMizuho Holdings Inc., the Company’s capital is not fully represented by available assets. I am satisfied that the capital reductionin these circumstances will be for the benefit of the Company and is thus for a discernible purpose : see Re Raterns Group plc (1988) 4 BCC 293.


19. For the above reasons, I confirmed the reduction and made an order in terms of the draft order with a minor amendment concerningthe filing date of one of the affidavits in support of the petition.

(J. Poon)
Deputy High Court Judge


Mr Aarif Barma, SC, instructed by Messrs Lau, Wong & Chan, for the Petitioner



(1) that the amount of the proposed capital reduction, namely HK$365,800,000, will be credited to the Investment Revaluation Reservein the accounting records of the Company, and that so long as there shall remain outstanding any debt of or claim against the Companywhich, if the date on which the proposed reduction of capital becomes effective was the date of the commencement of the winding-upof the Company, would be admissible to proof in such winding-up and the persons entitled to the benefit of such debts or claims shallnot have agreed otherwise, no sums standing to the credit of the said Investment Revaluation Reserve (up to a limit of HK$365,800,000)shall, save with the leave of the Court, be treated as realised profits for the purposes of section 79B of the Companies Ordinance (Cap.32) or be available for distribution to, or distributed to, the shareholders of the Company; and

(2) in the event that the Company disposes of its shareholdings of 1,990 shares in UFJ Holdings, Inc. and 2,159 shares in Mizuho Holdings,Inc., or any part thereof for a consideration in excess of the value at which the shares sold were carried in the audited balancesheet of the Company for the accounting period prior to that in which such shares were sold, the amount of such excess shall be creditedto the said Investment Revaluation Reserve.


(a) the limit of HK$365,800,000 referred to above may be reduced by the amount of any increase, after the effective date, in the paidup share capital or the amount standing to the credit of the share premium account of the Company as the result of the payment upof shares by the receipt of new consideration or the capitalization of distributable profits; and

(b) in the event that the credit balance of the said Investment Revaluation Reserve exceeds the limit of HK$365,800,000, or such lesserlimit as may come into effect as a result of the operation of proviso (a) above, the Company shall be at liberty to transfer theamount of any such excess to the distributable reserves of the Company.