Levers J
IN CHAMBERS IN THE GRAND COURT OF THE CAYMAN ISLANDS CAUSE NO: 46 OF 2005 IN THE MATTER OF ING SECURITIES (JAPAN) LIMITED AND IN THE MATTER OF THE COMPANIES LAW (2004 REVISION) BEFORE: The Hon. Madam Justice Levers APPEARANCE: Counsel for the Petitioner: Mr. Colin McKie of Maples and Calder Heard: 23rd March 2005 JUDGMENT Levers J, The Petitioner petitions the Grand Court of the Cayman Islands seeking an Order of this Court pursuant to section 16 of the Companies Law (2004 Revision) confirming a reduction of the capital of the Company. Background The evidence before me is that the Company was incorporated as Baring Far East Securities Limited on 26 February 1985, and registered on 27 February 1985, as a company limited by shares. For various reasons, the Company had changes of names culminating on the 2 April 2002, as ING Securities (Japan) Limited. The registered office of the Company is situated and has been situated at Maples & Calder Corporate Services Limited, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands since 7 February 2004. The principal place of business of the Company is at The New Otani Garden Court, 4-1 Kioi-cho, Chiyoda-ku, Tokyo 102-0094, Japan. The Company was established to carry on the business of stockbroking and/or dealing with securities on its behalf and on behalf of others, and carry out the other objects set out in the Memorandum of Association of the Company. It was since incorporation principally engaged in the business of equity securities broking. Since 30 July 2004, the Company has ceased all operating activities and is, therefore, now dormant. By an Order of the Grand Court made on 3 June 1999, a reduction of the capital of the Company was duly confirmed. On 26 January 2000, the Company passed a Special Resolution by way of Written Resolution of the sole shareholder of the Company converting the authorized share capital of the Company from shares of £1 each to shares of JPY100 each at a rate of exchange of JPY174 to £1. On 28 March 2003, the Company passed the following Ordinary Resolutions by way of Written Resolution of the sole shareholder of the Company: (i) capitalising the reserve of JPY1,827,000,000 as set out in the balance sheet of the Company as at the date of the Special Resolution and applying the same to pay up in full 18,270,000 ordinary authorised but unissued shares of JPY100 each in the Company; (ii) increasing the authorised share capital of the Company by the creation of 52,000,000 ordinary shares of JPY100 each to rank pari passu in all respects with the then existing ordinary shares in the capital of the Company. On 12 November 2004, the Company repurchased 1,660,000 ordinary shares of JPY100 each from ING Baring Holding Nederland B.V. ("the Holding Company"). As at the date of this Petition, the Company's authorised share capital is JPY13,900,000,000 divided into 139,000,000 shares of par value of JPY100 each of which 135,239,559 are issued and fully paid and held by the Holding Company and the remaining 3,760,441 of which are unissued. The Articles of Association of the Company provide, inter alia, as follows: "28. The Company may by special resolution reduce the share capital and any capital redemption reserve in any manner authorised by law." By a Special Resolution by way of Written Resolution of the sole shareholder of the Company dated 4 February 2000, it was resolved: "THAT conditional upon the confirmation by the Grand Court of the Cayman Islands and with effect from the date upon which this resolution takes effect pursuant to the Companies Law (2004 Revision) of the Cayman Islands (the "Effective Date"): (a) the issued and paid-up share capital of the Company be reduced by cancelling issued and paid-up share capital to the extent of JPY66 on each of the existing shares of JPY100 each in issue on the Effective Date (the "Capital Reduction") so that each issued share in the Company on the Effective Date shall be treated as one fully paid-up ordinary share of JPY34 each in the Company (the "Adjusted Shares") and any liability of the holders of the Adjusted Shares to make any further contribution to the capital of the Company on each such Adjusted Share shall be treated as satisfied; (b) The credit arising from the Capital Reduction be set off against accumulated losses of the Company as at 29th September 2004; (c) Conditional upon the Capital Reduction taking effect all of the authorised but unissued share capital of the Company, being 3,760,441 shares of JPY100 each, be cancelled; (d) Conditional upon the Capital Reduction taking effect, clause 5 of the Memorandum of Association of the Company be amended by the deletion of its entirety and the substitution therefore with the following:
The capital of the Company is JPY4,598,145,006 divided into 135,239,559 shares of nominal or par value of JPY34 each provided always that subject to the provisions of the Companies Law (2004 Revision) as amended and the Articles of Association the Company shall have power to redeem any or all of such shares and to sub-divide or consolidate the said shares or any of them and to issue all or any part of its capital whether original, redeemed, increased, or reduced with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions whatsoever and so that unless the conditions of issue shall otherwise expressly provide every issue of shares whether stated to be Ordinary, Preference or otherwise shall be subject to the powers on the part of the Company hereinbefore provided. (e) The Directors of the Company and Lars Kramer, Chief Financial Officer for Wholesale Asia of ING Bank, be and are now hereby authorised generally to do all things appropriate to effect and implement any of the foregoing." As at September 2004, the Company had accumulated operating losses of approximately US$102,445,417.71. The evidence indicates that as the Company has now ceased all such operating activities, those losses are not recoverable and consequently part of the paid-up capital of the Company has been permanently lost and is no longer represented by its available assets. The purpose of the proposed reduction of the capital is to enable the Company to bring it's paid-up share capital more into line with its net assets. The proposed reduction of capital 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. The reasons for the proposed reduction of capital in this application are relevant and important. It is suggested that as a result of a proposed tax regime to be brought into effect in Japan, by reducing the amount of the share capital by means of the proposed capital reduction, the Company can substantially reduce its capital tax liability for the year ending 25 March 2005. The Company's Activities The Company established the Tokyo Branch to conduct securities business in Japan in May 1986 under licenses granted and registered by the Ministry of Finance and subsequently, the Financial Services Agency of Japan. On 31 July 2004, the Company transferred its equity brokerage business to Macquarie Bank Limited ("MBL") pursuant to a Sale and Purchase Agreement dated 8 March 2004 entered into between ING Bank N.V. and MBL. Under that Sale and Purchase Agreement, MBL assumed the liabilities of the Company's equity brokerage business as a going concern. The evidence shows that the Company has no ongoing liability to MBL under the said Sale and Purchase Agreement, since any potential liability would be met by the Company's ultimate parent, ING Bank N.V., the signatory to the said Sale and Purchase Agreement. Thereafter, the Company surrendered the relevant securities and business licenses to the regulatory authorities in Japan and ceased to conduct any business activity in Japan or elsewhere. The securities business carried on by the Company in Japan as the Tokyo Branch, and which was sold to MBL, was the sole business carried on by the Company. On 25 February 1995, Nick Leeson, a trader employed by Barings Futures Singapore Pte Limited ("BFS") was arrested for securities fraud in Singapore. BFS was a sister company of the Company and both entities were part of the Barings Group of companies. Leeson had been trading Nikkei 225 Futures Contracts in the Tokyo, Osaka and Singapore futures market, so-called "arbitrage trading", through an account with the Tokyo Branch of the Company. The Company not only processed trade offers from BFS but also deposited the margin calls necessary for future trading on behalf of BFS, which meant that the Company was advancing money to the Tokyo and Osaka futures exchanges on behalf of BFS. In addition, the Company, for the purposes of hedging position risk, held a short position in the Singapore futures market through BFS which had a marked-to-market valuation of approximately JPY 20 billion profit at that time. Upon the discovery of the huge loss incurred by BFS as a result of Leeson's unauthorized trading activity, BFS was declared insolvent and subsequently went into liquidation on March 11, 1995. As a consequence, the Company's receivable due from BFS for the margins deposits made on behalf of BFS (over JPY 46 million) and the unrealized profit on the short position in the Singapore futures market (over JPY 20 billion) turned out to be uncollectible and had to be written off. The write off resulted in the Company having a significant negative retained earnings status which required it to file a suspension of business report to the Japanese Ministry of Finance. The Company was temporarily put under special liquidation status (the Japanese equivalent procedure to a temporary insolvency process) under the supervision of Tokyo District Court on March 3, 1995. There were no concurrent proceedings (such as provisional liquidation) in the Cayman Islands. On March 9, 1995, the Baring Group as a whole was purchased by ING Group for the nominal sum of GBP 1.00 and GBP 600 million in debt. The Company received a capital injection of JPY 10 billion in the form of equity and ING Group guaranteed the repayment of the margin deposits provided by the Company to BFS. On the same day, the management of the Company together with representatives from ING Group met with major creditors. The meeting was successful in securing the consent from all the major creditors of the Company to finalize the special liquidation procedures. Thereafter, the Tokyo District Court sanctioned the cessation of the special liquidation procedures and the Ministry of Finance also gave approval to the Company to recommence operations after ING Group had agreed to buy the assets and liabilities of the business. The Company recommenced operations on March 10, 1995, and it was able to repay a loan of JPY 48 billion from its major bank lenders in full and return outstanding stock borrowings on March 15, 1995. On the same day, the Company returned all the outstanding unsettled monies, realized profit/loss and margins to its Japanese clients with 6% delinquent (i.e. overdue) interest. At that time, the Company had no foreign clients except for Baring Securities London which completed the settlement of all outstanding transactions in Japanese stocks with its foreign clients. The evidence shows that after the Leeson incident, the Company gradually settled back into conducting its securities business activities as a member of the ING Barings Group of securities entities. Subsequently, the 'Barings' name was dropped and the Company became known as ING Securities (Japan) Limited. In February 2004, ING Group announced that it had sold its Asian cash equities business to the Macquarie entity on 31 July 2004 after which it decided to cease operations. The Company has sent a notice of cessation of business to all its previous clients and placed a public notice in the National Gazette in Japan regarding the cessation of trading on 30 July 2004. As stated previously the proposed reduction of capital does not involve either diminution of value in respect of unpaid share capital or the payment to any shareholder of any paid up share capital. It is therefore unlikely that the Company has any outstanding liability. There is one potential liability that had to be dealt with which arises because the Company is a member of the Japanese Securities Welfare Pension Fund. In November 2004, ING was advised by the Director General of the fund that the Company's liability to the fund will be terminated when the fund is dissolved by resolution of the members. 1 In the circumstances it appears the Company will 2 have no liability to the Fund once it is 3 dissolved. And even if there is any potential 4 liability owed, the Company will be able to meet 5 any obligation out of the net assets of the 6 Company that will remain after the reduction of 7 capital is effected. 8 9 The Petitioner in seeking relief submits that the 10 Directors are satisfied that the amount of the 11 losses which is supposed to be set off against the 12 capital of the Company are permanent and that 13 therefore the Company's capital ought to be 14 reduced by an appropriate amount and that it is 15 for the benefit of the Company that the relief 16 sought by the Petition ought to be granted. 17 18 Counsel Mr. Colin Mckie for the Petitioner quite 19 properly submitted that full and frank disclosure was necessary for the purposes of this Petition and he brought the Court's attention to the case of in Re The Wallasey Brick & Land Company, WLR (10-2--1984) page. 20. In that case the Court refused to confirm a proposed reduction of capital under the English Companies Act where it appeared that the company had for the last five years ceased to carry on trade and another real object of the Petition was to enable the whole of the available assets to be distributed among the shareholders by the machinery of reducing the capital. In that case Kekewich, J., seems to state that in any petition an averment that the relevant Company is carrying on business was necessary in order to obtain the sanction of the Court to a reduction of the capital. Perhaps a good starting point is section 16 of the Companies Law: "The Court is satisfied with respect to every creditor of the company who under section 15 is entitled to object to the reduction, that either his consent to the reduction has been obtained or his debt or claim has been discharged or has determined, or has been secured, may make an order confirming the reduction on such terms and conditions as it thinks fit. (1) Where the Court makes any such order, it may - (a) if for any special reason it thinks proper so to do, direct that the company shall, during such period, commencing on or at any time after the date of the order, as is specified in the order, add to its name as the last word thereof the words 'and reduced'; and (b) require the company to publish as the Court directs the reasons for reduction or such other information in regard thereto as the Court may think expedient with a view to giving proper information to the public, and, if the court thinks fit, the causes which led to the reduction. (2) Where a company is ordered to add its name the words "and reduced", those words shall, until the expiration of the period specified in the order, be deemed to be part of the name of the company." It seems to me therefore that the Court has the power to confirm the reduction and make an order doing so in appropriate cases. That being said, it would appear if I was to be bound by the case of Re Wallasey Brick & Land Company Ltd. referred to above that this application would not be permissible. However, the case of Re Great Universal Stores, Ltd and others [1961] All ER at page 252 is instructive. Roxburgh, J, in that case said, looking at the report in Re Wallasely Brick & Land Company Ltd.: "I am not all sure that Kekewich, J., intended to say anything of that sort. The court always has the discretion as regards reduction of capital and it may be that all that he was saying was that he, in the exercise of his discretion, refused to sanction a reduction in that particular case. If so, that has no relevance to any other case whatsoever. If however, he intended to go further than that, it seems to me that any such view is now completely out-dated and has been, indeed, ever since the decision of the House of Lords in British and American Trustees and Financial Corporation v Couper 1984 AC at page 399 which was given within a few months of the decision of Kekewich, J., namely on 16th April 1984. There is really no ground for suggesting that such averment is a sine qua non of the success of a petition. The facts in the particular case are entirely different and the only reason why I have dealt with this is because of the possibility that that sort of view should still be lingering in the text-books or somewhere else''. Roxburgh, J., granted and confirmed the reduction of capital in the case. The case of Re Jupiter House Investments Cambridge Limited is equally instructive. (1 WLR 1984 at page 975), where it was held confirming the reduction that where loss of capital was sought to be proved, that loss meant-in the context of section 66 (1) (b) of the Act of 1948 - permanent loss and not a temporary fall in the value of some capital assets; but that where the loss could not be proved to be permanent but the Company had given an undertaking which ensured that the lost capital was in fact recovered, it would not be distributed as dividends, the Court would in the exceptional circumstances confirm the proposed reduction. Another case of some applicability is Re Thorn EMI PLC [1989] BCLC pages 612. Harman, J., in the Chancery Division held: ``The Court had a discretion whether or not to confirm a reduction of a share premium account and would normally do so where: (a) the shareholders were treated equitably; (b) the reduction proposals were properly explained; (c) the creditors were safeguarded; and (d) the reduction was for a discernable purpose.'' I now turn to the question of paragraph 3(c) of the Order dated 15 February 2005: ``On or before 8 March 2005, notice of hearing of the Petition herein shall be published once in the following newspaper: (a) the Cayman Islands Gazette; and (b) Kampo (in Japanese).''' The evidence before me is that the publishing office of Kampo informed the ING staff that Kampo would not accept the Notice of the Petition for publication because it contained information extraneous to that required by Japanese law and regulations. In the premise a more limited announcement was published in Kampo and the full notice of the Petition was submitted in a mass circulation newspaper read by Japanese business people. It is my view that in the circumstances the announcement published in Kampo and the steps taken to advertise the Petition are sufficient compliance with section 3 (c) of the Order as the purpose of the Order has been achieved. In this case I intend to exercise my discretion and grant the order for the confirmation of the reduction of the share capital. There can be no question that the shareholders are not being treated equitably and the reduction proposals were properly explained as being for tax purposes, the creditors were safeguarded and the reduction was for a discernable purpose. For those reasons I allow the application for the reduction in share capital. Dated this 8th day of April 2005 Judge of the Grand Court