Case Detail

HCA 3291/2003

[2018] HKCFI 2649

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

________________________

BETWEEN
	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)	Plaintiff
	and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2^nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3^rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

________________________

Before:

Hon Chow J in Chambers (Open to Public)

Date of Hearing:	27 November 2018
Date of Decision:	5 December 2018

_________________

D E C I S I O N

_________________

INTRODUCTION

1. There are before the court two summonses:

(1) the 5^th Defendant’s summons dated 27 July 2018 seeking a payment out of the full sum, or such other appropriate sum as the court thinks fit, from the money paid into court (and remained held in court) by way of Notices of Payment into Court filed on 31 March 2014, 5 October 2016, 19 December 2016 and 24 January 2017 respectively (“the Payment Out Application”); and
(2) the Plaintiff’s summons dated 6 September 2018 seeking leave to amend a Bill of Costs (“the 1^st Bill of Costs”) filed on 27 June 2018 for the purpose of the taxation or assessment of the Plaintiff’s costs pursuant to this court’s order dated 21 March 2018 (“the Amendment Application”).

THE AMENDMENT APPLICATION

2. The background facts relevant to this application have been set out in the court’s previous decision dated 21 March 2018 (“the Taxation Decision”) and will not be repeated here. The expressions and abbreviations as defined in the Taxation Decision will continue to be used in this decision.

3. Pursuant to the court’s order dated 21 March 2018 and a subsequent consent order dated 24 May 2018, the Plaintiff filed 5 sets of Bill of Costs dated 27 June 2018. The total amount of costs claimed by the Plaintiff against the 5^th Defendant under these 5 sets of Bill of Costs amounted to HK$10,287,289.72, with the 1^st Bill of Costs amounting to HK$6,720,284.32. The Plaintiff now seeks to amend the 1^st Bill of Costs by adding:

(1)  Part 3A, relating to that part of the order made by the Court of Final Appeal in FACV 15/2007 dated 14 November 2008 awarding to the Plaintiff 75% of its costs in the proceedings before the Court of Appeal in CACV 220/2005. The amount of costs claimed under this part comes to HK$1,795,899.37.
(2)  Part 3B, relating to another part of the said order of the Court of Final Appeal awarding to the Plaintiff 100% of its costs in the proceedings before that court in FACV 15/2007. The amount of costs claimed under this part comes to HK$2,076,683.00.
(3)  Part 27, relating to paragraph 3 of the order made by Mr Recorder P Fung, SC dated 10 March 2014 that the Plaintiff shall be entitled to the costs of the action to be taxed on the common fund basis, if not agreed. The amount of costs claimed under this part comes to HK$4,180,722.05.

4. The additional total amount of costs claimed against the 5^th Defendant under the 3 parts mentioned above (together with some further costs of taxation) comes to HK$8,103,166.42.

(i) Parts 3A and 3B

5. It is, in my view, plain that the Plaintiff is not entitled to tax the costs claimed under Part 3A and Part 3B under the court’s order dated 21 March 2018. This is because the order for taxation or assessment of costs was made for the purpose of ascertaining the Plaintiff’s entitlement against the 5^th Defendant under the First Instance Indemnity and CA Indemnity (see paragraph 35 of the Taxation Decision).

6. It will be recalled that:

(1) the First Instance Indemnity is a reference to paragraph 5 of the March 2014 Order, under which the learned Recorder ordered that “the 5^th Defendant do indemnify the Plaintiff in respect of any costs incurred by the Plaintiff which it will not have been able to recover from the 1^st Defendant” (see paragraph 35 of the Taxation Decision), and
(2) the CA Indemnity is a reference to paragraph 2 of the November 2014 Order, under which the learned Recorder ordered that “[t]he 5^th Defendant do indemnify the Plaintiff in relation to the costs of the appeal by the 1^st Defendant to the Court of Appeal against the Judgment of the Court of First Instance handed down on 18^th December 2013”.

7. As regards the scope of the First Instance Indemnity, paragraph 5 of the March 2014 Order ought to be read in light of paragraph 3 of that order, which states that “the 1^st Defendant do pay to the Plaintiff the costs of this action to be taxed on the common fund basis, if not agreed”. The reference to the “costs incurred by the Plaintiff which it will not have been able to recover from the 1^st Defendant” in paragraph 5 must, in my view, be read as a reference to the “cost of the action” which the 1^st Defendant is liable to pay to the Plaintiff under paragraph 3. That this is the correct reading of paragraph 5 of the March 2014 Order was confirmed by the learned Recorder in his Ruling on Costs handed down on 17 December 2014. At paragraph 9 of that Ruling, the learned Recorder stated as follows:

“I believe that the Plaintiff has misunderstood the effect of paragraph 5 of the March Order. Paragraph 5 of the March Order dealt only with the costs in the trial of the action. It did not deal with the costs of the Interim Payment Application which had not even been issued when the March Order was made. Furthermore, it only dealt with the costs incurred by the plaintiff in the lis between the plaintiff and the 1^st defendant.” [emphasis added]

8. My reading of the scope of the First Instance Indemnity is reinforced by the fact that the Plaintiff considered it necessary to apply separately for the CA Indemnity, as well as the CFA Indemnity referred to in paragraph 10 of the Taxation Decision, and those further, separate, indemnities were in fact granted by the court in the Plaintiff’s favour.

9. Although the proceedings in (i) the Court of Appeal in CACV 220/2005 and (ii) the Court of Final Appeal in FACV 15/2007 arose out of the underlying action in the Court of First Instance, those proceedings are separate from the first instance action. The costs incurred in the appeal proceedings cannot be regarded as forming part of the costs of the action itself. Ms Audrey Eu, SC (for the Plaintiff) argues that the Plaintiff is entitled to be indemnified by the 5^th Defendant in respect of the costs of the proceedings in the Court of Appeal and Court of Final Appeal under the Wallersteiner principle. The fact of the matter, however, is that the Plaintiff has neither applied for, nor obtained, any order that it shall be indemnified by the 5^th Defendant in respect of those costs. I should make it clear that this statement is not intended to be an encouragement to the Plaintiff to now belatedly apply for further indemnities to covers the costs of the proceedings in Court of Appeal and Court of Final Appeal. Since there is no relevant application before me, I shall refrain from expressing any further views on the merits of such application.

10. It is also clear that the costs claimed by the Plaintiff under Part 3A and 3B cannot be recovered under the CA Indemnity. Ms Eu has not argued otherwise.

(ii) Part 27

11. On the other hand, the costs claimed by the Plaintiff under Part 27 would, prima facie, fall within the scope of the First Instance Indemnity. Two principal points have been raised by the 5^th Defendant in objection to the proposed amendment to add Part 27 to the 1^st Bill of Costs.

12. First, Mr Edward Chan, SC (for the 5^th Defendant) argues that given (i) the Plaintiff’s entitlement to costs against the 1^st Defendant and 5^th Defendant under paragraphs 3 and 5 of the March 2014 Order respectively are both to be taxed on the common fund basis, and (ii) the Plaintiff has already taxed and recovered its costs against the 1^st Defendant, the Plaintiff would not be entitled to recover any extra costs from the 5^th Defendant, and thus there would be no reason to allow the amendment. However, as pointed out by Ms Eu, as between the Plaintiff and the 1^st Defendant, there could be applications in the course of the action in respect of which (i) the Plaintiff failed to obtain a costs order in its favour, or (ii) the Plaintiff may even have been ordered to pay the 1^st Defendant’s costs. It does not necessary follow, however, that the Plaintiff would not be entitled to be indemnified by the 5^th Defendant in respect of the costs that it incurred in those applications under the First Instance Indemnity. Whether the Plaintiff would be so entitled will have to be determined on a case by case basis, but the position is not, I believe, as simple as suggested by Mr Chan.

13. Second, it is said that the amendments are “in substance commencing new taxation proceedings against the 5^th Defendant, in breach of the Unless Order” (ie the court’s order dated 21 March 2018 as supplemented by the further order dated 24 May 2018). In my view, the Plaintiff complied with the Unless Order on 27 June 2018. I accept that the Plaintiff’s failure to include Part 27 in the 1^st Bill of Costs lodged on 27 June 2018 was an oversight on the part of the Plaintiff’s solicitors. I do not consider that the 5^th Defendant will suffer any prejudice arising out of the amendment which cannot be compensated by an appropriate order of costs.

14. In all, I grant leave to the Plaintiff to amend the 1^st Bill of Costs by the addition of Part 27, but not Parts 3A and 3B, to the bill.

THE PAYMENT OUT APPLICATION

15. There is currently sitting in court the total sum of HK$57,399,164.92 (as at 12 September 2018) which it cannot be disputed was paid into court for the benefit of the 5^th Defendant. It is also indisputable that the money in court belongs to the 5^th Defendant, being the fruits of this multiple derivative action brought by the Plaintiff on behalf, and for the benefit, of the 5^th Defendant. That being the position, the 5^th Defendant is, prima facie, entitled to be paid the money now in court.

16. On behalf of the Plaintiff, Ms Eu has raised a number of objections to the 5^th Defendant’s application for payment out of the money in court.

17. First, Ms Eu submits that the court can, and should, allow “pro rata direct recovery by the company’s innocent shareholders” in the circumstances of the present case. Ms Eu’s submission is based on some US jurisprudence which, with no disrespect to senior counsel, I do not propose to examine in any detail because I consider it to be clear that under Hong Kong law, the court has no power to order the company’s funds to be distributed to its shareholders directly. It is a fundamental principle of company law in this jurisdiction that a company and its shareholders are separate legal entities, and the properties of the company do not belong to the shareholders. This principle was affirmed by the Court of Final Appeal in FACV No 15 of 2007 (see paragraph 47 of the judgment of Lord Millet NPJ, with whom the other members of the Court of Final Appeal agreed), and it was precisely because of this principle that the Court of Final Appeal further affirmed the principle against recovery of “reflective loss” and held that the Plaintiff was not entitled to bring a single derivative action on behalf of the 3^rd Defendant to recover the loss arising from the loss suffered by the 5^th Defendant in the present case (see paragraphs 85 to 88 of the judgment of Lord Millet NPJ). To make an order for pro rata direct payment of the damages recovered on behalf of the 5^th Defendant to its shareholder(s) would, effectively, be permitting recovery of “reflective loss” through the back door. In passing, I should mention that Ms Eu suggests that somehow the applicable law should be BVI law instead of Hong Kong law. I am unable to see why the question of whether the court can make an order for pro rata direct payment of the damages to the company’s shareholders should be governed by BVI law. In any event, no relevant evidence of BVI law on this issue has been adduced, and thus one assumes that it is the same as Hong Kong law.

18. I would also point out that there will be considerable difficulties in carrying out any order for pro rata direct payment of the damages to the Plaintiff and other shareholders of the 3^rd Defendant, this being the ultimate form of relief now proposed by the Plaintiff. This is because the 5^th Defendant is wholly owned by the 4^th Defendant, which in turn is wholly owned by the 3^rd Defendant. The order sought by the Plaintiff would therefore not be distribution of the damages to the “innocent shareholders” of the 5^th Defendant, but to the shareholders of the shareholder of the 5^th Defendant. However, the 3^rd Defendant is a public company with public shareholders and, presumably, creditors. Before any distribution can be made, it will be necessary to fix an appropriate date for establishing entitlement to participate in the distribution of damages (which Ms Eu suggests should be the date of the wrongdoing by the 1^st Defendant), and ascertain the identities of the shareholders of the 3^rd Defendant as at that date. A scheme will have to be devised for the distribution of the damages, and regard has to be had to the interests of the secured and/or unsecured creditors of the 3^rd Defendant (and of the 4^th Defendant, if any) as at the date of the wrongdoing as well as at the date of the distribution. The sort of exercise to be undertaken will likely be costly, and the costs involved could well be disproportional to the amount at stake.

19. Lastly, I consider that for the Plaintiff to seek an order for pro rata direct payment of the damages to it would be quite inconsistent with the Plaintiff’s professed purpose of bringing this action for the benefit of the 5^th Defendant.

20. Second, Ms Eu argues that it would be a breach of the BVI Order for the 5^th Defendant to use the money in court to repay the loans which the 5^th Defendant obtained from the 3^rd Defendant to finance various steps taken by it in this action, the details of which have been set out in paragraph 8 of this court’s previous decision handed down on 19 March 2018 in relation to the Plaintiff’s Third Disclosure Application against Reed Smith Richards Butler. It is important to note, however, that the 5^th Defendant is not asking the court to sanction any use of the money which it may receive. All that the 5^th Defendant is seeking is an order that it should be paid money which indisputably belongs to it. The use of the money is a separate issue. Generally speaking, it is no part of this court’s function, and certainly not in the context of this derivative action, to micro-manage the 5^th Defendant’s affairs, including how it may lawfully apply its funds. If is it said that the 5^th Defendant’s proposed use of the money may involve a breach of the BVI Order (as to which it is not necessary for me to come to any conclusion), it is open to the Plaintiff to seek appropriate directions from the BVI court which seems to me to be the more appropriate forum to resolve this issue. For this reason, it is not necessary for me to consider the expert opinion of Millet QC on BVI law, save to mention that it has not been suggested, and cannot sensibly be suggested, that the BVI Order has the effect of prohibiting the 5^th Defendant from receiving money belonging to it.

21. Third, Ms Eu argues that there are various unresolved issues (i) concerning the indemnities against the 5^th Defendant, or (ii) arising out of an application for judicial review brought by the Plaintiff against the SFC.

22. In so far as outstanding proceedings relating to the indemnities against the 5^th Defendants are concerned, there are, I am told, the following matters:

(1)  There is an application by the Plaintiff to the Court of Appeal seeking leave to appeal against the Court of Appeal’s judgment on costs handed down on 20 April 2017 rejecting the Plaintiff’s application that the 5^th Defendant should pay the Plaintiff’s costs incurred in resisting the 5^th Defendant’s appeal against an order made by the learned Recorder on 26 November 2014 (relating to interim payment) on the indemnity basis. I am told that the Court of Appeal’s decision is currently pending notwithstanding the fact that the relevant notice of motion was filed on 11 May 2017. Although the application for leave to appeal has been put forward as involving a point of principle (namely, whether, in relation to the scope of indemnity in a derivative action, it is necessary that the steps taken by the Plaintiff were for the benefit of the company, or whether it is sufficient that the costs incurred were part and parcel and/or a necessary or reasonable step in the execution of the Plaintiff’s duties vis-à-vis the company), ultimately the issue to be determined is whether the costs which the Court of Appeal awarded in favour of the Plaintiff ought to be taxed on the party-and-party basis or indemnity basis. It would, to say the least, be exceptional for the Court of Final Appeal to interfere with a decision of the Court of Appeal on an issue relating to the basis of taxation of costs.
(2)  There is an appeal pending before the Court of Appeal in CACV 466/2018 against the Taxation Decision which, I am told, will be heard on 3 May 2019. Unless and until the Taxation Decision has been overturned by the Court of Appeal, I consider that I ought to proceed on the basis of the existing court order. In any event, assuming that the Plaintiff should be successful in the Court of Appeal such that the Plaintiff’s costs ought to be taxed on the indemnity basis instead of the common fund basis for the purpose of the First Instance Indemnity and CA Indemnity, the Plaintiff has not adduced any relevant evidence, or given any estimate, of the amount of extra costs that it may be able to recover from the 5^th Defendant.
(3)  There are the taxation proceedings under the court’s order dated 21 March 2018 to ascertain the amount of the Plaintiff’s claim against the 5^th Defendant under the First Instance Indemnity and CA Indemnity. The total amount of the Plaintiff’s claim, disregarding Part 3A and 3B mentioned above, comes to about HK$14.5 million. It is not in dispute, however, that the Plaintiff is currently holding a net sum of about HK$12.3 million by way interim payment previously paid by the 5^th Defendant. The shortfall is therefore only about HK$2.2 million (at the highest), plus some interest on the principal amount of the relevant costs. I shall come back to this shortfall later.

23. Lastly, in respect of the judicial review application, Au J has recently given judgment in HCAL 199/2015 remitting a decision made by the SFC refusing to further investigate, or commence fresh investigation into, the Plaintiff’s complaint against the 1^st Defendant arising out of the court’s finding of breach of fiduciary duties in this action to the SFC for reconsideration (see paragraphs 120 and 121 of Au J’s judgment handed down on 16 November 2018). The outcome of the SFC’s reconsideration is uncertain. Even if the SFC should decide to take action against the 1^st Defendant after reconsideration, the outcome of such action is also uncertain. Besides, it is difficult to see how the SFC’s action or non-action has, or will have, any bearing on whether the money in court ought to be paid out to its owner (ie the 5^th Defendant).

24. Fourth, Ms Eu argues that the 3^rd, 4^th and 5^th Defendants are still under the wrongdoer control of the 1^st Defendant. However, the 1^st Defendant has ceased to be a director of the 5th Defendant in 2015 and of the 1^st Defendant in 2017. Further, the wrongdoing of the 1^st Defendant has been corrected by the judgment of the learned Recorder in this action, and it cannot be assumed that he will continue to commit wrongs against the 3^rd, 4^th or 5^th Defendants. In any event, as earlier mentioned, the court is not dealing with any application concerning the use of funds by the 5^th Defendant. Any application to that end can, as earlier mentioned, properly be made to the BVI court.

25. In my view, taking into account the shortfall mentioned above and making some allowance for the element of interest, I consider that the sum of HK$50 million currently in court ought to be paid out to the 5^th Defendant, with the balance to be dealt with after completion of the taxation proceedings.

DISPOSITION

26. For the foregoing reasons:

(1) I grant leave to the Plaintiff to amend the 1^st Bill of Costs limited to the addition of Part 27 to that bill; and
(2) I order that the sum of HK$50 million currently in court in this action be paid out to the 5^th Defendant.

27. On the question of costs:

(1) In respect of the Amendment Application, the Plaintiff has been partially successful only. The 5^th Defendant’s objection to the application is not unreasonable. Also, the Plaintiff is seeking an indulgence of the court to amend the 1^st Bill of Costs. The oversight on the part of the Plaintiff’s solicitors is a bad one, because it is not easy to overlook the order made by the learned Recorder in relation to the costs of the action itself. Overall, I consider that a fair order to make would be that the Plaintiff shall pay to the 5^th Defendant its costs incurred in resisting the Amendment Application, save that there be no order as to the costs of the hearing on 27 November 2018.
(2) In respect of the Payment Out Application, in view of the fact that the 5^th Defendant has been largely successful, I make an order that the Plaintiff shall pay the 5^th Defendant’s costs of and occasioned by the Payment Out Application, including the costs of the hearing on 27 November 2018, to be taxed on the party-and-party basis if not agreed with certificate for senior counsel.

28. For the benefit of the Taxing Master, I shall apportion 50% of the costs of the hearing to the Amendment Application, and 50% to the Payment Out Application.

29. There is one other matter that I should mention in passing. Some of the hearing bundles prepared by the parties contain considerably more than 250 pages per file (with duplications). Practitioners are reminded again to observe paragraph 4(4) of Practice Direction 5.4 regarding the preparation of hearing bundles.

30. Lastly, it remains for me to thank counsel for their assistance rendered to the court.

	(Anderson Chow)
	Judge of the Court of First Instance
	High Court

Ms Audrey Eu, SC, and Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Edward Chan, SC, instructed by ONC Lawyers, for the 5^th Defendant

HCA 3291/2003

[2018] HKCFI 1546

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

________________________

BETWEEN
	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1st and 2nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)	Plaintiff
	and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2^nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3^rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

________________________

Before: Hon Chow J in Chambers (Open to Public)

Date of Hearing: 4 July 2018

Date of Decision: 4 July 2018

Date of Reasons for Decision: 6 July 2018

________________

DECISION

________________

INTRODUCTION

1. On 29 March 2018, the Plaintiff issued 2 summonses seeking leave to appeal against the following orders made by this court:-

(1) an order dated 19 March 2018 (“the Disclosure-Refusal Order”) dismissing the Plaintiff’s application for further disclosure of information and documents by Reed Smith Richards Butler (“RSRB”) relating to the funding arrangement in respect of the 5^th Defendant’s costs in this action and in CACV 142/2015; and
(2) an order dated 21 March 2018 (“the Taxation Order”) directing the Plaintiff to commence proceedings and proceed with the taxation against the 5^th Defendant pursuant to various costs indemnity orders previously made by the court in favour of the Plaintiff more particularly referred to in paragraph 16 of the court’s written decision handed down on 21 March 2018.

2. The two applications came before me on 4 July 2018. At the conclusion of the hearing, I dismissed the two applications, with reasons to be given later. This I now do.

INTENDED APPEAL AGAINST THE DISCLOSURE-REFUSAL ORDER

3. The background facts giving rise to the Disclosure-Refusal Order and Taxation Order are set out in the court’s previous written decisions handed down on 19 March 2018 (“the Second Disclosure Decision”) and 21 March 2018 (“the Taxation Decision”) respectively, and shall not be repeated here. Unless otherwise expressly indicated, I shall continue to use the expressions and abbreviations as defined in the two written decisions in these reasons.

4. The test for deciding whether to grant leave to appeal under Section 14AA of the High Court Ordinance, Cap 4, is well established. Leave to appeal shall not be granted unless (a) the appeal has a reasonable prospect of success, or (b) there is some other reason in the interest of justice why the appeal shall be heard. For this purpose, reasonable prospects of success involve the notion that the prospects are more than “fanciful”, without having to be “probable” (see SMSE v KL [2009] 4 HKLRD 125, at paragraph 17 per Le Pichon JA).

5. Three intended grounds of appeal against the Disclosure-Refusal Order are raised in the Plaintiff’s draft notice of appeal, namely:-

(1)   The court erred in law and in principle in holding that the purpose of a non-party costs order can be achieved by directing such an application against the 3^rd Defendant (plus PIL Finance Limited and Belmont Limited) as the funder of the 5^th Defendant’s costs.
(2)   The court erred as to the applicability of the “Preservation Purpose” in the present case formed on the basis of the court’s other reasons to dismiss the Plaintiff’s further discovery application.
(3)   The court erred in taking the view that “there is a valid basis for the 3^rd Defendant to lend monies to the 5^th Defendant to fund litigations which the 5^th Defendant would otherwise be unable to pursue for lack of funds”, “the 5^th Defendant had a proper interest to oppose the Interim Payment Application”, and “it was [not] improper for the 5^th Defendant to be legally represented and take part in the relevant applications” (see paragraphs 22, 23 and 25 of the Second Disclosure Decision).

6. As stated in paragraph 5 of Mr Lam’s Skeleton Argument dated 29 June 2018 for the Plaintiff, the key question which the Plaintiff seeks to raise in the intended appeal is as follows:-

(1) should the Plaintiff be satisfied with the ability to issue a non-party costs application against the 3^rd Defendant, PIL Finance Limited and Belmont Limited (“the Paying Companies”); or
(2) should the Plaintiff be entitled to seek further information as to the real party responsible for controlling the litigation or actively assisting the 5^th Defendant behind the scenes, such that a non-party costs application can be issued against such party?

7. In relation to (1) above, it should be noted that the court dismissed the Plaintiff’s Third Disclosure Application not because, or merely because, it considered that the Plaintiff should be “satisfied” with the ability to issue a non-party costs application against the Paying Companies. At paragraph 19 of the Second Disclosure Decision, the court pointed out that, prima facie, the Plaintiff’s ability to pursue an application for non-party costs against the Paying Companies should be sufficient to satisfy or protect the Plaintiff’s position as regards costs. The court went on to state that unless there were some good reasons justifying the Plaintiff’s attempt to go beyond or behind the actual funder of the 5^th Defendant’s costs, it should not exercise its discretion to order RSRB to provide further disclosure to assist the Plaintiff in such exercise which would likely, or at least potentially, lead to further satellite litigations. The court then considered the specific facts and circumstances of the present case, and came to the conclusion that the further disclosure sought by the Plaintiff should be refused. In coming to that conclusion, the court took into account, inter alia, the fact that Section 52A(2) should not be used for collateral purposes (such as for pursuing a complaint of breach of fiduciaries against Mr Thomas Chan) or be allowed to generate satellite litigations, and the view taken that the information and documents sought by the Plaintiff would not likely be of great potential value to the fair determination of the Plaintiff’s intended application for non-party costs, or elucidate considerations highly probative to the exercise of the court’s discretion on whether to make a non-party costs order (see paragraphs 20 to 30 of the Second Disclosure Decision).

8. In relation to (2) above, Mr Lam argues, at paragraph 6(a) of his Skeleton Argument, that the “Preservation Purpose” of an application for a non-party costs order under Section 52A(2) of the High Court Ordinance would be defeated if the Plaintiff were to pursue such application against the Paying Companies only. This is because, according to Mr Lam, “[i]f a non-party costs order were to be made against the Paying Companies, D5’s assets would still ultimately [be] used to settle the same improperly incurred legal costs (by paying off the Loans)”. It should be noted, however, that the Plaintiff’s intended application for a non-party costs order relates to the costs which the 5^th Defendant has been ordered to pay to the Plaintiff arising out of its resistance to the various interim payment applications taken out by the Plaintiff, but not the costs which the 5^th Defendant has itself incurred, whereas the Loans made by the Paying Companies to the 5^th Defendant were used to fund the 5^th Defendant’s own costs in relation to (inter alia) various applications referred to in paragraph 24 of the Second Disclosure Decision. In so far as the 5^th Defendant is under a liability to repay the Loans to the Paying Companies, such liability (if any) would remain regardless of whether the Plaintiff’s intended application for a non-party costs order is directed against the Paying Companies or Mr Thomas Chan, or the outcome of such application.

9. In paragraph 6(b) of his Skeleton Argument, Mr Lam further argues that if the Plaintiff were to simply require the Paying Companies to pay the costs which the 5^th Defendant has been ordered to pay to the Plaintiff, it would be wholly nugatory in serving the Preservation Purpose as the depletion of the Paying Companies’ assets has exactly the same detrimental effect as the depletion of the 5^th Defendant’s assets insofar as the shareholders of the 3^rd Defendant are concerned. This point was considered and dealt with in paragraph 22 of the Second Disclosure Decision, and will not be repeated here.

10. There is one other matter that I should mention here. Mr Lam refers to and relies upon paragraph 26 of the First Disclosure Decision, where I stated that “it is debatable whether it was reasonable for the 5^th defendant to oppose the Interim Payment Application and to lodge an appeal against the November Order”. In resisting the First and Second Disclosure Applications, RSRB argued, at the hearing on 17 January 2017, that it was not unreasonable for the 5^th Defendant to oppose the Plaintiff’s Interim Payment Application. The 5^th Defendant was not, however, represented at that hearing, and thus the court did not have the benefit of receiving or considering any submissions from the 5^th Defendant. In the First Disclosure Decision given on 25 January 2017, the court left open the question of whether it was reasonable for the 5^th defendant to oppose the Interim Payment Application and to lodge an appeal against the November Order. Subsequently, on 14 March 2017, the Plaintiff made the Third Disclosure Application. On 5 April 2017, the court granted leave to the 5^th Defendant to intervene in the Third Disclosure Application. Mr Edward Chan, SC (together with Mr Law Man-chung) appeared for the 5^th Defendant at the hearing of the Third Disclosure Application on 12 December 2017. As can be seen from paragraph 23 of the Second Disclosure Decision, I accepted Mr Chan’s submission that the 5^th Defendant had a proper interest to oppose the Interim Payment Application because the money in court belonged, as a matter of law, to it, even though the opposition ultimately turned out to be unsuccessful. In this regard, in paragraph 18 of the Court of Appeal’s judgment in Waddington Limited v Chan Chun Hoo Thomas (HCMP 1326/2017, 18 October 2017), the Court of Appeal also expressed its agreement with the submission of Mr Chan that “whilst a company in a derivative action should take a neutral stance in the trial of the action, this is not necessarily the case in respect of interlocutory applications that may directly concern or affect the interest of the company”.

11. Taking into account the threshold required for a successful appeal against an exercise of discretion by a judge at first instance, I do not consider the Plaintiff’s intended appeal has a reasonable prospect of success. Neither do I consider that there is some other reason in the interest of justice why the appeal shall be heard, bearing in mind, in particular, the principle of proportionality referred to in paragraph 15(4) of the Second Disclosure Decision.

INTENDED APPEAL AGAINST THE TAXATION ORDER

12. Five intended grounds of appeal against the Taxation Order are raised in the Plaintiff’s draft notice of appeal, namely:-

(1)   The court erred in law and in principle at paragraphs 22 to 23 of the Taxation Decision in holding that its jurisdiction to make an indemnity costs order in a favour of a minority shareholder in a derivative action is based on Section 52A(1) of the High Court Ordinance, instead of it being derived from the court’s equitable jurisdiction to order a full indemnity for charges and expenses to be paid out of a fund.
(2)   The court erred in law and in principle at paragraph 24 of the Taxation Decision in holding that the analogy of the full indemnity of a trustee is not exact.
(3)   The court erred in law and in principle at paragraphs 29 to 31 of the Taxation Decision in following the obiter dicta in Wallersteiner (a judgment of the English Court of Appeal not binding on this court) and holding that the indemnity of a minority shareholder in a derivative action ought to be taxed.
(4)   The court did not have jurisdiction to vary the First Instance Indemnity and the CA Indemnity because they are full indemnity orders and not costs orders.
(5)   Alternatively, the court erred in law and in principle at paragraph 30 of the Taxation Decision in holding that the indemnity of a minority shareholder in a derivative action should be taxed on a common fund basis, as opposed to an indemnity basis.

13. All these points were considered in the Taxation Decision, and I do not propose to repeat the reasoning and analysis here:-

(1)   for Ground 1, see paragraph 22 of the Taxation Decision, which refers to an earlier decision given by me in this case on 12 June 2015 (in particular, paragraphs 17 to 26 thereof);
(2)   for Ground 2, see paragraph 24 of the Taxation Decision;
(3)   for Ground 3, see paragraphs 26 to 28 of the Taxation Decision;
(4)   for Ground 4, see paragraphs 32 to 33 of the Taxation Decision; and
(5)   for Ground 5, see paragraphs 29 to 31 of the Taxation Decision.

14. Mr Lam has not raised any new arguments in support of the intended grounds of appeal. I am not satisfied that the Plaintiff’s intended appeal has a reasonable prospect of success. I also do not consider that there is some other reason in the interest of justice why the appeal shall be heard.

DISPOSITION

15. For the foregoing reasons, I dismiss the Plaintiff’s two summonses both dated 29 March 2018, with costs to the 5^th Defendant, to be taxed if not agreed.

	(Anderson Chow)
	Judge of the Court of First Instance High Court

Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Edward Chan, SC and Mr Law Man-chung, instructed by ONC Lawyers, for the 5^th Defendant

Reed Smith Richards Butler absent

HCA 3291/2003

[2018] HKCFI 1113

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

________________________

BETWEEN
	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)	Plaintiff
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2^nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3^rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

________________________

Before: Hon Chow J in Chambers (Open to Public)

Date of Hearing: 14 May 2018

Date of Decision: 17 May 2018

________________________

DECISION

________________________

1. This is the Plaintiff’s application for an extension of time to commence proceedings for the taxation or assessment of certain costs under paragraph 2 of this court’s earlier order dated 21 March 2018.

4. On 10 March 2014, Mr Recorder P Fung, SC ordered (“the March 2014 Order”), inter alia, (i) the 1^st Defendant to pay the Plaintiff the costs of this action to be taxed on the common fund basis, if not agreed, and (ii) the 5^th Defendant to indemnify the Plaintiff in respect of any costs incurred by the Plaintiff which it will not have been able to recover from the 1^st Defendant (“the First Instance Indemnity”).

5. On 15 January 2014, the 1^st Defendant filed a Notice of Appeal in CACV 10/2014 (“the Main Appeal”) against the Judgment.

6. On 26 November 2014, the learned Recorder ordered (“the November 2014 Order”) the 5^th Defendant to indemnify the Plaintiff in relation to the costs of the Main Appeal (“the CA Indemnity”).

7. On 20 May 2016, the Court of Appeal handed down its judgment in CACV 10/2014 dismissing the Main Appeal with costs to the Plaintiff (limited to 75% of its costs).

8. In relation to the costs of the derivative action, the Plaintiff’s costs against the 1^st Defendant have been taxed and settled, save in respect of the costs under an order made by Master Lai dated 1 March 2016 which, I was told at the previous hearing on 16 January 2018, have not yet been taxed.

9. In relation to the costs of the Main Appeal, the Plaintiff claimed costs of HK$3,418,403.82 against the 1^st Defendant. The Allocatur was issued on 30 November 2017 allowing HK$2,366,809.07 as taxed costs (exclusive of interest). These costs have also been settled by the 1^st Defendant.

10. The Plaintiff did not, however, proceed to enforce the First Instance Indemnity and the CA Indemnity against the 5^th Defendant in respect of the costs incurred by it in the action and the Main Appeal which it was unable to recover from the 1^st Defendant.

11. On 3 August 2017, the 5^th Defendant issued a summons seeking (inter alia) an order that the Plaintiff do commence taxation proceedings and proceed with the taxation against the 5^th Defendant pursuant to, inter alia:-

(1) paragraph 5 of the March 2014 Order (relating to the First Instance Indemnity); and
(2) paragraph 2 of the November 2014 Order (relating to the CA Indemnity).

12. On 9 January 2018, the 5^th Defendant issued a further summons to amend the earlier summons of 3 August 2017 seeking, effectively, an order that the costs of the Plaintiff to be indemnified by the 5^th Defendant pursuant to the First Instance Indemnity and CA Indemnity be taxed on the “party and party”, alternatively “common fund”, basis.

13. On 21 March 2018, this court handed down its decision on the 5^th Defendant’s said summonses and ordered (“the March 2018 Order”), inter alia, that:

(1) the Plaintiff’s respective costs in respect of the First Instance Indemnity and CA Indemnity shall be taxed or assessed by a Master on the common fund basis; and
(2) unless the Plaintiff shall commence proceedings for the taxation or assessment of the aforesaid costs within 14 days from the date of the order therein, the Plaintiff shall be debarred from enforcing the First Instance Indemnity and CA Indemnity against the 5^th Defendant (“paragraph 2 of the March 2018 Order”).

14. The time for the commencement of proceedings for the taxation or assessment of the costs in respect of the First Instance Indemnity and CA Indemnity under paragraph 2 of the March 2018 Order expired on 4 April 2018. The Plaintiff did not commence proceedings for the taxation or assessment of the relevant costs, but took out a summons on 29 March 2018 (“the Summons”) seeking:-

(1) a stay of paragraph 2 of the March 2018 Order pending the outcome of its application for leave to appeal against that order or the outcome of the appeal (if leave to appeal is granted) or;
(2) alternatively, an order that the time for the Plaintiff to commence the proceedings for the taxation or assessment of the relevant costs be extended for 90 days from the date of the order to be made thereunder (paragraph 4 of the Summons).

15. The Summons came before Madam Justice M Chan on 4 April 2018. At that call-over hearing, the Plaintiff informed the judge that the Plaintiff would not pursue the stay application, but would apply for an extension of time to commence the proceedings for the taxation or assessment of the relevant costs under paragraph 4 of the Summons.

16. The substantive hearing of the Summons came before this court on 14 May 2018. In his Skeleton Argument, Mr Lam confirmed that the Plaintiff would not pursue the stay application, but would confine its application to the extension of time sought under paragraph 4 of the Summons.

17. On behalf of the 5^th Defendant, Mr Law submits that the present application is misconceived, because the sanction imposed by paragraph 2 of the March 2018, which is in the nature of an “unless order”, has already taken effect under Order 2, rule 4 of the Rules of the High Court, Cap 4A. Accordingly, unless relief from sanction is sought and granted by the court, the application for an extension of time to comply with paragraph 2 of the March 2018 is doomed to failure. References hereinafter to orders and rules shall, unless otherwise expressly indicated, be to the Rules of the High Court.

18. Order 2, rule 4 states as follows –

“Where a party has failed to comply with a rule or court order, any sanction for failure to comply imposed by the rule or court order has effect unless the party in default applies to the Court for and obtains relief from the sanction within 14 days of the failure.”

19. The meaning and effect of this rule was explained by Fok JA (as he then was), giving the judgment of the Court of Appeal, in Daimler AG v Leiduck [2012] 3 HKLRD 119:

[47] Mr Wong submitted, in reliance on Marcan Shipping (London) Limited v Kefalas & Anor [2007] EWCA Civ 463, unrep., 17.5.07 at §§28 to 36, that, under the new procedural regime, it is not for the party seeking to take advantage of a default to apply to the court in order to render a sanction for that default effective. Instead, the sanction takes effect immediately and it is for the party in default to apply for relief from the sanction. Only if there is an application for relief from the sanction is the court required to consider whether, in all the circumstances, it is just to make an order granting relief from the consequences that would otherwise follow.
[48] We would accept those submissions as an accurate summary of the effect of O.2 r.4 and O.2 r.5.

20. In Lee Sai Nam v Li Shu Chung, HCA 1711/2009, 21 May 2013, Deputy High Court Judge Marlene Ng further explained the position as follows:-

[68] … An unless order is peremptory in nature, ie it directs a party or parties to perform some requirement by a certain date and specifies the consequences of default. The consequences may differ according to the circumstances. Auld LJ in Hytec Information Systems Ltd v Coventry City Council, stated that such an order “is, by its nature, intended to mark the end of the line for a party who has failed to comply with it and any previous orders of the court”.
[69] … the sanction imposed in any unless order takes effect automatically unless relief from sanction is obtained, and the non-defaulting party does not have to make any application in order to enforce the sanction.
[71] It is therefore important to keep in mind the distinction between the operation of the sanction which is automatic and the exercise of the court’s discretion to grant relief. In considering whether the sanction has become operative, the court must confine itself to deciding whether there has been any breach of the unless order, and must not embark on the exercise of examining whether there is any plausible explanation or justification for the default… Further, since the sanction in any unless order becomes operative automatically upon breach, it is not for the court in deciding whether or not there has been such breach to question the suitability of the sanction vis-à-vis the default or to re-write the sanction imposed under such order.
[72] This can be procedural tripwire for the unwary. Once a breach of the unless order occurs, the defaulting party cannot escape the guillotine effect of the sanction by seeking extension of time and/or by putting forward mitigating factors to explain the default. His only recourse is to apply for relief from sanction.

21. It is thus clear that the Plaintiff cannot avoid the automatic consequence of default provided for in paragraph 2 of the March 2018 simply by seeking an extension of time for compliance. The fact that the Plaintiff made the application for an extension of time prior to the expiry of the deadline for compliance, a matter repeatedly emphasised by Mr Lam, is neither here nor there, for Order 2, rule 4 makes it clear that the sanction for failure to comply with the order has effect unless the party in default applies to the court for and “obtains relief” from the sanction within 14 days of the failure.

22. On behalf of the Plaintiff, Mr Lam applied, belatedly at the hearing on 14 May 2018, for relief from sanction under Order 2, rule 5. That rule provides as follows:-

“(1) On an application for relief from any sanction imposed for a failure to comply with any rule or court order, the Court shall consider all the circumstances including –
(a) the interests of the administration of justice;
(b) whether the application for relief has been made promptly;
(c) whether the failure to comply was intentional;
(d) whether there is a good explanation for the failure to comply;
(e) the extent to which the party in default has complied with other rules and court orders;
(f) whether the failure to comply was caused by the party in default or his legal representative;
(g) in the case where the party in default is not legally represented, whether he was unaware of the rule or court order, or if he was aware of it, whether he was able to comply with it without legal assistance;
(h) whether the trial date or the likely trial date can still be met if relief is granted;
(i) the effect which the failure to comply had on each party; and
(j) the effect which the granting of relief would have on each party.
(2) An application for relief must be supported by evidence.”

23. No prior notice of intention to apply for relief from sanction was given by Plaintiff, notwithstanding the fact that it was plainly aware, from Mr Law’s Skeleton Argument dated 10 May 2018, that the 5^th Defendant would rely on Order 2, rule 4 to resist the Summons. Further, it is clear from Order 2, rule 5 that a range of matters mentioned in sub-paragraphs (a) to (j) thereof have to be considered before the court may grant relief from sanction under that rule. Quite apart from the requirement in rule 5(2) that the application must be supported by evidence, it seems to me to be clear, as a matter of procedural fairness, that a party intending to apply for relief from sanction must give proper notice of the application to the other side so that it will have an opportunity, if so advised, to file evidence which may be relevant to the matters mentioned in sub-paragraphs (a) to (j) to resist the application. This was not done. I am therefore not prepared to entertain the Plaintiff’s oral application made at the hearing for relief from sanction under Order 2, rule 5.

24. There is, I consider, no answer to Mr Law’s submission that the Plaintiff’s application for an extension of time to comply with paragraph 2 of the March 2018 Order is misconceived. Accordingly, the Summons is dismissed with costs to the 5^th Defendant, to be taxed if not agreed.

	(Anderson Chow)
	Judge of the Court of First Instance High Court

Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Law Man-chung, instructed by ONC Lawyers, for the 5^th Defendant

HCA 3291/2003

[2018] HKCFI 627

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED	2^nd Defendant
	(formerly known as CHANSAM INVESTMENTS LIMITED)
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司)	3^rd Defendant
	(formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

_______________

Before: Hon Chow J in Chambers (Open to Public)

Date of Hearing: 16 January 2018

Date of Decision: 21 March 2018

_____________________

D E C I S I O N

_____________________

INTRODUCTION

1. The principal issue which arises for determination is whether, for the purpose of the Plaintiff’s indemnity by the 5^th Defendant in respect of the costs that it has incurred in this derivative action and in appeals proceedings therefrom:-

(1) the Plaintiff’s costs ought to be taxed or assessed on a “party and party”, alternatively “common fund”, basis; or
(2) the Plaintiff is entitled to a full indemnity of the costs incurred by it and payable to its solicitors, Kao, Lee & Yip (“KLY”), subject only to the qualification that the 5^th Defendant, being a party liable to pay KLY’s bills, may call for taxation of those bills on a “solicitor and own client” basis under Section 68(1) of the Legal Practitioners Ordinance, Cap 159.

BACKGROUND FACTS

2. The present action is a multiple derivative action brought by Waddington Limited (the Plaintiff), a minority shareholder of Playmates Holdings Limited formerly known as Playmates Interactive Entertainment Limited (the 3^rd Defendant), for wrongs allegedly done to and damage suffered by Profit Point Limited (the 5^th Defendant). The 5^th Defendant is an indirect wholly-owned subsidiary of the 3^rd Defendant via Playmates International Limited (the 4^th Defendant). The main protagonists in this action are two brothers, Mr Albert Chan (the person in control of the Plaintiff) and Mr Thomas Chan (the 1^st Defendant).

3. After a contested trial, Mr Recorder P Fung, SC handed down a judgment on 18 December 2013 (“the Judgment”) in favour of the 5^th Defendant against the 1^st Defendant in the sum of HK$33,511,220.32. The learned Recorder also directed the parties to file written submissions on (inter alia) the issues of interest and costs which, as indicated at paragraph 136 of the Judgment, were to be dealt with on paper without any hearing.

4. On 15 January 2014, the 1^st Defendant filed a Notice of Appeal in CACV 10/2014 (“the Main Appeal”) against the Judgment.

5. On 10 March 2014, the learned Recorder, following consideration of written submissions from the Plaintiff and the 5^th Defendant, delivered a written ruling on interest and costs and made, inter alia, the following order (“the March 2014 Order”):-

(1)   the 1^st Defendant do pay to the Plaintiff the costs of this action to be taxed on a common fund basis, if not agreed (paragraph 3);
(2)   the 5^th Defendant do indemnify the Plaintiff in respect of any costs incurred by the Plaintiff which it will not have been able to recover from the 1^st Defendant (“the First Instance Indemnity”) (paragraph 5); and
(3)   the parties have liberty to apply to a Judge of the Court of First Instance for further directions in respect of the working out of the order, if necessary (paragraph 6).

6. On 22 August 2014, the Plaintiff issued a summons seeking an order that the 5^th Defendant do further indemnify the Plaintiff in respect of any costs incurred by the Plaintiff in the Main Appeal. On 26 November 2014, the learned Recorder made an order (“the November 2014 Order”) that the 5^th Defendant do indemnify the Plaintiff in relation to the costs of the Main Appeal (“the CA Indemnity”).

7. On 20 May 2016, the Court of Appeal handed down its judgment in CACV 10/2014 (“the CA Judgment”) dismissing the Main Appeal with costs to the Plaintiff (limited to 75% of its costs).

8. On 14 October 2016, the Court of Appeal dismissed the 1^st Defendant’s application for leave to appeal to the Court of Final Appeal against the CA Judgment.

9. On 30 November 2016, the Plaintiff issued a summons seeking an order that the 5^th Defendant do further indemnify the Plaintiff in respect of any costs incurred or to be incurred by the Plaintiff in relation to (inter alia) the 1^st Defendant’s application to the Court of Final Appeal for leave to appeal against the CA Judgment.

10. On 9 February 2017, this court made an order (“the February 2017 Order”) that the 5^th Defendant do indemnify the Plaintiff in respect of any costs reasonably incurred or to be incurred by the Plaintiff in relation to the 1^st Defendant’s application to the Court of Final Appeal for leave to appeal which the Plaintiff will not be able to recover from the 1^st Defendant, subject to a cap of HK$150,000 (“the CFA Leave Indemnity”). This court also stated, for the avoidance of doubt, that the Plaintiff’s costs, for the purpose this indemnity vis-à-vis the 5^th Defendant, were to be assessed on a common fund basis.

11. On 14 February 2017, the Appeal Committee of the Court of Final Appeal dismissed the 1^st Defendant’s renewed application (in FAMV 49/2016) for leave to appeal against the CA Judgment with costs to the Plaintiff.

12. In relation to the derivative action in HCA 3291/2003, the Plaintiff’s costs against the 1^st Defendant have been taxed and settled, save in respect of a particular costs order made by Master Lai dated 1 March 2016 which have not yet been taxed.

13. In relation to the Main Appeal in CACV 10/2014, the Plaintiff claimed costs of HK$3,418,403.82 against the 1^st Defendant. The Allocatur was issued on 30 November 2017 allowing HK$2,366,809.07 as taxed costs (exclusive of interest).

14. In relation to the application to the Court of Final Appeal in FAMV 49/2016 for leave to appeal, the Plaintiff claimed costs of HK$2,022,677.00 against the 1^st Defendant. The Allocatur was issued on 30 November 2017 allowing HK$1,006,126.00 as taxed costs (exclusive of interest).

15. The 1^st Defendant has paid to the Plaintiff the taxed costs (together with all interest accrued thereon) referred to in paragraphs 13 and 14 above.

16. On 3 August 2017, the 5^th Defendant issued a summons seeking (inter alia) an order that the Plaintiff do commence taxation proceedings and proceed with the taxation against the 5^th Defendant pursuant to:-

(1)   paragraph 5 of the March 2014 Order (relating to the First Instance Indemnity);
(2)   paragraph 2 of the November 2014 Order (relating to the CA Indemnity); and
(3)   paragraph 2 of the February 2017 Order (relating to the CFA Leave Indemnity).

17. On 9 January 2018, the 5^th Defendant issued a summons to amend the earlier summons of 3 August 2017 seeking, effectively, an order that the costs of the Plaintiff to be indemnified by the 5^th Defendant pursuant to the First Instance Indemnity and CA Indemnity be taxed on a “party and party”, alternatively “common fund”, basis.

18. The 5^th Defendant’s 2 summonses came before me on 16 January 2016.

19. In relation to the CFA Leave Indemnity, the parties agreed at the hearing that the Plaintiff should be paid the sum of HK$150,000 by the 5^th Defendant out of the money paid into court by the 1^st Defendant. The only outstanding issue relates to the question of interest, which I shall deal with at the end of this decision.

DISCUSSION

20. As held by the Court of Appeal in its judgment in CACV 142/2015 handed down on 17 February 2016, the 5^th Defendant’s liability to indemnify the Plaintiff in respect of the costs of the derivative action (ie, the First Instance Indemnity) is immediate and does not only crystallize when the shortfall between (a) the costs incurred by the Plaintiff in the derivative action and (b) the costs payable by the 1^st Defendant under paragraph 3 of the March 2014 Order has been ascertained. The same principle applies to the CA Indemnity. That being the position, one would have thought that it would be in the Plaintiff’s interest to assess its costs under the First Instance Indemnity and CA Indemnity as soon as practicable. In view of the long history of these proceedings, it is also obvious that the various outstanding issues on costs ought to be disposed of without further delay.

21. Ms Audrey Eu, SC (on behalf of the Plaintiff) objects, however, to the 5^th Defendant’s application on the grounds that (i) the March 2014 Order and the November 2014 Order are not costs orders and should not be subject to any form of taxation on any basis, and (ii) those orders granted a full indemnity (akin to a contractual indemnity) over all costs incurred by the Plaintiff (see paragraph 5 of the Plaintiff’s Skeleton Argument dated 12 January 2018).

22. I have previously considered the question of whether the March 2014 Order is a costs order in my decision handed down on 12 June 2015 and do not propose to analyse the same issue again. At paragraph 26 of that decision, I expressed the view (provisionally on that occasion) that “the court’s jurisdiction to make an indemnity costs order in favour of a minority shareholder in a derivative action should, strictly speaking, be regarded as being based on section 52A(1) of the High Court Ordinance, but equitable principles would continue to govern the exercise of such jurisdiction by the court”; in other words the March 2014 Order should be regarded as a form of costs order under Section 52A(1), which states as follows:-

“Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.”

23. I remain of the same view. In any event, even if the March 2014 Order should strictly not be regarded as a costs order and therefore should not be subject to inter partes taxation under the machinery of Order 62 of the Rules of the High Court, Cap 4A, it does not follow that the Plaintiff is entitled to a “full indemnity” subject only to the qualification that the 5^th Defendant may call for taxation of KLY’s bills on a “solicitor and own client” basis under Section 68(1) of the Legal Practitioners Ordinance as contended by Ms Eu.

24. In submitting that the Plaintiff is entitled to a full indemnity, Ms Eu says that the Plaintiff is in a position similar to a “trustee” or “agent” who are entitled to be paid back “all that that they have had to pay out” or “the costs which he has actually and properly incurred himself” (see Re Grimthorpe [1958] 1 Ch 615 at 623, and Lewin on Trusts, 19^th Ed, paragraph 27-220 respectively). In my view, although the jurisprudential basis of the plaintiff’s right to an indemnity by the company on whose behalf the derivative action is brought is drawn on an analogy with the position of a trustee/agent (see Wallersteiner v Moir (No 2) [1975] 1 QB 373 at 392, 403-404, 407), the analogy is not exact, for at least 2 reasons: (i) unlike a trustee/agent who may have no interest in the outcome of the litigation, the plaintiff in a derivative action, as a minority shareholder in the company on whose behalf the action is brought, would generally have a personal, financial, interest in the outcome of the action; and (ii) a trustee/agent owes well established duties or obligations to the beneficiaries/principal which are not owed by the plaintiff to the company in a derivative action.

25. There are, it seems to me that, three questions which should be considered for the present purpose:-

(1)   whether the Plaintiff’s costs to be indemnified by the 5^th Defendant are subject to any form of court scrutiny;
(2)   if the answer to (1) is yes, what should be the appropriate form of scrutiny, and appropriate scale for assessment of the Plaintiff’s costs; and
(3)   whether the appropriate form of scrutiny and scale for assessment of the Plaintiff’s costs as determined under (2) would be consistent with and permissible by the March 2014 Order and November 2014 Order.

26. In relation to (1), I consider it to be clear as a matter of principle that the Plaintiff’s costs under the CFI Indemnity/CA Indemnity are subject to the court’s scrutiny. In a previous decision handed down on 25 May 2017, I expressed the view that -

“it cannot seriously be argued that for the purpose of assessing the amount of the indemnity, the plaintiff is entitled to be paid whatever costs that it alleges it has incurred without any form or scrutiny or assessment. Whether such scrutiny or assessment should be called a taxation or some other name does not matter. I accept that the standard to be applied in assessing the plaintiff’s costs is a matter of principle which may merit further consideration. However, that is not an issue which requires determination in the plaintiff’s applications for interim payment or indemnity, but will arise when the court comes to actually assess the plaintiff’s costs for the purpose of the indemnity” (paragraph 22).

27. The above approach was approved by the Court of Appeal in its decision handed down on 18 October 2017 in HCMP 1327/2017 (paragraphs 39 and 40).

28. In passing, it may be noted that Lewin on Trusts states that a trustee is entitled to be paid out of the trust funds the costs which he has actually and properly incurred (see paragraph 24 above). This suggests that the trustee’s costs are subject to the court’s scrutiny or control.

29. In relation to (2), the majority of the English Court of Appeal in Wallersteiner considered that the Plaintiff’s costs for the purpose of the indemnity ought to be taxed:-

(1) “If the action succeeds, the wrongdoing director will be ordered to pay the costs: but if they are not recovered from him, they should be paid by the company. And all the additional costs (over and above party and party costs) should be taxed on a common fund basis and paid by the company”, per Lord Denning MR at 392; and
(2) “The plaintiff, acting under the authority of such a direction, would be secure in the knowledge that, when the costs of the action should come to be dealt with, this would be upon the basis, as between himself and the company, that he has acted reasonably and ought prima facie to be treated by the trial judge as entitled to an order that the company should pay his costs, which should, I think, normally be taxed on a basis not less favourable than the common fund basis …”, per Buckley LJ at 405.

30. It can be seen from the above passages that Lord Denning MR considered that the plaintiff’s costs in a derivative action for the purpose of the indemnity should be taxed on a “common fund basis”, while Buckley LJ considered that they should normally be taxed on a basis “not less favourable than the common fund basis”. There are passages in the third judgment of the Court of Appeal by Scarman LJ which may be read as supporting a more generous approach to the plaintiff. I prefer the majority’s approach and consider that the normal basis of assessment of the plaintiff’s costs to be indemnified by the company on whose behalf the derivative action is brought should be the common fund basis, which I applied in Melvin Waxman v Li Fei Yu, HCA 1973/2012 (21 March 2017), at paragraph 47. Requiring the Plaintiff’s costs to be taxed on the common fund basis seems to me to accord with principle, and do practical justice to the parties.

31. I do not agree with Ms Eu’s submission that, if the 5^th Defendant wishes to challenge the quantum of the amount payable under the indemnity, the appropriate way is for it to request for a taxation on a solicitor and own client basis under Section 68(1) of the Legal Practitioners Ordinance. As submitted by Mr Edward Chan, SC (for the 5^th Defendant), on a taxation on a solicitor and own client basis, the solicitor is entitled to be paid costs if they have been incurred with the client’s express approval or instruction, even if they could not be justified objectively or are unreasonable, eg, the client instructing his solicitor to make unnecessary applications or take patently bad points or do unnecessary work, or agreeing to pay excessive fees by counsel or solicitor, etc. There seems to me to be no good reason in principle or justice why the company on whose behalf a derivative action is brought should be required, in principle, to indemnify the plaintiff in respect objectively unjustifiable or unreasonable costs.

32. In respect of (3), the question of the scale of assessment of the Plaintiff’s costs for the purpose of the First Instance Indemnity was not dealt with or determined by the learned Recorder. The same observation applies to the CA Indemnity. In my view, the court’s jurisdiction is not exhausted, and can now made a further order or give a further direction that the relevant costs should be taxed or assessed on a common fund basis (being the alternative basis proposed by the 5^th Defendant) in order to make effective, or for the working out of, the previous orders imposing the First Instance Indemnity and CA Indemnity.

33. I should also add that:-

(1) if the March 2014 Order and November 2014 Order are properly to be regarded as costs orders, plainly the machinery of taxation under Order 62 would be applicable; and
(2) on the other hand, if the March 2014 Order and November 2014 Order are, strictly speaking, not costs orders, I see no reason why the court could not direct assessment of the relevant costs by means of a further or supplementary order (this is already provided for by paragraph 6 of the March 2014 Order in respect of the First Instance Indemnity).

34. Lastly, in respect of the CFA Leave Indemnity, I agree with Mr Chan that, in view of the cap of HK$150,000 provided for in the February 2017 Order, the Plaintiff is not entitled to be paid any further interest on costs by the 5^th Defendant.

DISPOSITION

35. For the foregoing reasons, I made the following orders:-

(1)   the Plaintiff’s respective costs under paragraph 5 of the March 2014 Order and paragraph 2 of the November 2014 Order shall be taxed or assessed by a Master on a common fund basis;
(2)   unless the Plaintiff shall commence proceedings for the taxation or assessment of the aforesaid costs within 14 days from the date of the order herein, the Plaintiff shall be debarred from enforcing the First Instance Indemnity and CA Indemnity against the 5^th Defendant; and
(3)   the 5^th Defendant shall pay the sum of HK$150,000 to the Plaintiff in full discharge and satisfaction of the CFA Leave Indemnity, such sum to be paid out of the money in court now standing to the credit of the 5^th Defendant in this action.

36. I also make an order that the Plaintiff shall pay the 5^th Defendant’s costs of the 2 summonses, to be taxed if not agreed on a party and party basis, with certificate for 2 counsel. I do not consider the present circumstances to be such as would justify ordering the costs to be taxed on an indemnity basis.

37. Lastly, it remains for me to thank counsel for their assistance rendered to the court.

	(Anderson Chow)
	Judge of the Court of First Instance High Court

Ms Audrey Eu, SC, and Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Edward Chan, SC and Mr Law Man-chung, instructed by ONC Lawyers, for the 5^th Defendant

HCA 3291/2003

[2018] HKCFI 580

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED	2^nd Defendant
	(formerly known as CHANSAM INVESTMENTS LIMITED)
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司)	3^rd Defendant
	(formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

_______________

Before: Hon Chow J in Chambers (Open to Public)

Date of Hearing: 12 December 2017

Date of Decision: 19 March 2018

___________________

D E C I S I O N

___________________

INTRODUCTION

1. The principal issue which I have to decide is whether to order Reed Smith Richards Butler (“RSRB”), the solicitors on record for the 5^th Defendant in this action until 13 January 2017, to make further disclosure of information and documents relating to the funding arrangement in respect of the 5^th Defendant’s costs in this action and in CACV 142/2015 (collectively “the Proceedings”).

BACKGROUND FACTS

2. The background facts relevant for the present purposes have been set out in my previous decision handed down on 25 January 2017 (“the First Disclosure Decision”), and will not be repeated here. Unless otherwise expressly indicated, I shall continue to use the expressions and abbreviations as defined in the First Disclosure Decision.

3. On 9 September 2016, the Plaintiff took out a summons (“the First Disclosure Application”) against RSRB seeking disclosure of:-

(a)   the identity/identities of each of the funder(s) of the 5^th Defendant’s costs or any part thereof incurred in the Proceedings;
(b)   an itemised breakdown of the 5^th Defendant’s costs incurred in the Proceedings; and
(c)   whether, and if so when and the amount(s) thereof, RSRB received costs on account and/or payment in respect of the 5^th Defendant’s costs incurred in the Proceedings or any part thereof (including but not limited to those in respect of Counsel’s brief fees).

4. On 6 December 2016, the Plaintiff took out a further summons (“the Second Disclosure Application”) seeking leave to amend the aforesaid summons by adding the following item to be disclosed by RSRB:-

“whether the agreement(s) concerning the funding of the 5^th Defendant’s costs incurred in the Proceedings was/were made orally or in writing; if made orally, the parties thereto and the terms thereof; if made in writing, copies of such agreement(s) and/or record(s) or document(s) evidencing such agreement(s).”

5. By the First Disclosure Decision, I allowed paragraph 1(a) of the First Disclosure Application, but rejected the rest of that application and the Second Disclosure Application.

6. In compliance with the order made in the First Disclosure Decision, Ms Asha Sharma of RSRB made an affirmation on 6 February 2017 stating that the 5^th Defendant’s costs in the Proceedings were paid by the following parties:-

(a)   Playmates Holding Limited (ie, the 3^rd Defendant);
(b)   PIL Finance Limited; and
(c)   Belmont Limited.

7. On 14 March 2017, the Plaintiff issued a summons (“the Third Disclosure Application”) against RSRB seeking disclosure of further information and documents relating to the funding arrangement in respect of the 5^th Defendant’s costs in the Proceedings, in particular:-

(a)   in respect of the costs on account and/or payments received by RSRB from (i) Playmates Holdings Limited; (ii) PIL Finance Limited; and (iii) Belmont Limited (collectively “the Companies”) (or any of them) in respect of the costs of the 5^th Defendant (including but not limited to Counsel’s fees) incurred in the Proceedings or any part thereof:-
(i)   the amounts thereof, with itemized breakdown stating clearly the amounts paid by each of the Companies respectively; and
(ii)   when RSRB received such costs on account and/or payments from each of the said Companies;
(b)   whether any retainer and/or agreement was entered into by RSRB with the 5^th Defendant in respect of the Proceedings and if yes, the terms thereof concerning the payment of the 5^th Defendant’s costs (including Counsel’s fees) incurred in the Proceedings;
(c)   whether any agreement(s) was/were made between RSRB on the one hand and the Companies (or any of them) and/or other individual(s) or entity/entities on the other hand concerning the payment of the 5^th Defendant’s costs (including but not limited to Counsel’s fees) incurred in the Proceedings;
(d)   if the answer to (c) above is “yes”:-
(i)   whether such agreement(s) was/were made orally or in writing;
(ii)   if made orally, the parties thereto and the terms thereof; and
(iii)   if made in writing, copies of such agreement(s) and/or record(s) and/or document(s) evidencing such agreement(s);
(e)   if the answer to (c) above is “no”, whether any inquiries were made by RSRB concerning the payments received by RSRB in respect of the 5^th Defendant’s costs (including but not limited to Counsel’s fees) incurred in the Proceedings;
(f)   if the answer to (e) above is “yes”, with whom were such inquiries made; whether such inquiries were answered; and if answered, what was the information obtained by RSRB upon making such inquiries;
(g)   the identity/identities of the individual(s) from whom instructions were taken by RSRB in respect of (i) the conduct of the Proceedings on behalf of the 5^th Defendant and (ii) the payment of costs on behalf of each of the Companies;
(h)   whether the said PIL Finance Limited and Belmont Limited are whollyowned subsidiary companies of Playmates Holdings Limited as referred to in the relevant Annual Reports of Playmates Holdings Limited;
(i)   information and/or documents requested and obtained by RSRB from each of the Companies in relation to (i) identity of its shareholders and directors and(ii) approval and/or authorization from each of the said Companies to fund and/or agree to fund the Proceedings on behalf of the 5^th Defendant;
(j)   the extent of the Companies’ involvement in the conduct of the Proceedings by the 5^th Defendant; and
(k)   the nature and extent of the Companies’ interest (financial or otherwise) in the conduct of the Proceedings by the 5^th Defendant.

8. As confirmed in paragraphs 13 and 15 of the 5^th Affirmation of Mr Sidney To (a director of the 5^th Defendant):-

(a)   PIL Finance Limited and Belmont Limited were at all material times, and are, wholly owned subsidiaries of the 3^rd Defendant.
(b)   The 5^th Defendant obtained interest-free loans from the 3^rd Defendant in order to fund its legal representation in this action.
(c)   The 3^rd Defendant procured PIL Finance Limited and Belmont Limited to advance the loans to the 5^th Defendant.
(d)   The total amount of the loans advanced by the 3^rd Defendant (through PIL Finance Limited and Belmont Limited) to the 5^th Defendant for the purpose of these proceedings amounted to approximately HK$11,871,409.45 as at 27 March 2017, as stated in a demand letter of that date issued by King & Wood Mallesons on behalf of the 3^rd Defendant to ONC Lawyers (the 5^th Defendant’s solicitors) for repayment of the loans.

9. By a letter dated 28 March 2017, RSRB informed the court that they would take a neutral stance in respect of the Third Disclosure Application, and asked to be excused from attending the hearing of the application.

10. On 5 April 2017, I granted leave to the 5^th Defendant to intervene in the Third Disclosure Application. The Plaintiff did not appeal against the substantive order granting leave to the 5^th Defendant to intervene, but sought leave to appeal against the costs order made by the court consequent upon the Plaintiff’s unsuccessful opposition to the 5^th Defendant’s application to intervene. The application for leave to appeal was dismissed by me on 25 May 2017, and by the Court of Appeal on 18 October 2017 (in HCMP 1326/2017). I shall come back to an aspect of the decision of the Court of Appeal later.

11. On 10 November 2017, the Plaintiff issued a further summons (“the Expert Evidence Application”) seeking leave to file and serve the 17^th Affirmation of Mr Albert Chan in order to admit into evidence an expert report on BVI law for “the interpretation of the BVI Court Order dated 30 September 2005” (“the BVI Court Order”) referred to in paragraph 3 of the First Disclosure Decision (see paragraph 1(b) of the Plaintiff’s Skeleton Argument dated 7 December 2017).

12. The Third Disclosure Application and the Expert Evidence Application came before me on 12 December 2017. This is my decision on the two applications.

THE THIRD DISCLOSURE APPLICATION SHOULD BE REFUSED

13. As mentioned in paragraph 17 of the First Disclosure Decision, the Plaintiff made the First and Second Disclosure Applications with a view to pursuing a non-party costs order under Section 52(A)(2) of the High Court Ordinance, Cap 4 against the 5^th Defendant’s funder in respect of the costs which the 5^th Defendant had been ordered to pay to the Plaintiff in the Proceedings.

14. The Plaintiff has now been told that the funder was, effectively, the 3^rd Defendant, with PIL Finance Limited and Belmont Limited acting upon the procurement of the 3^rd Defendant to advance the relevant loans to the 5^th Defendant. The Plaintiff is not, however, satisfied with the information obtained or the ability to pursue the 3^rd Defendant and/or PIL Finance Limited and Belmont Limited for payment of the relevant costs, but wishes to obtain further information and documents with a view to identifying “the real individuals, against whom an application for non-party costs should properly be made”. It is said that the mere disclosure by RSRB of the Companies is insufficient to enable the Plaintiff to take out an application for non-party costs orders against “the person(s) behind the said Companies who is/are the real party to the litigation between Profit Point and the Plaintiff” (see paragraphs 1 and 10 of the 14^th Affirmation of Mr Albert Chan). It is obvious, from the 14^th and 15^th Affirmations of Mr Albert Chan that the Plaintiff considers Mr Thomas Chan to be the “real party” who ought to bear the costs which the 5^th Defendant has been ordered to pay to the Plaintiff in the Proceedings. The Third Disclosure Application is, in reality, an attempt by the Plaintiff to gather evidence or materials in support of the intended application against Mr Thomas Chan.

15. In paragraph 19 of the First Disclosure Decision, I set out Blake J’s summary, given in his judgment in Thomson v Berkhamsted Collegiate School [2009] 6 Costs LR 859, at paragraph 19 (quoted with approval by Leveson LJ in Flatman v Germany [2013] 1 WLR 2676, at paragraph 49), of the factors relevant to the court’s exercise of its discretion whether to order disclosure of information and documents sought for the purpose of an intended application for a non-party costs order, as follows:-

(1)   the strength of the application as it now appears unassisted by disclosure;
(2)   the potential value to the fair determination of the application of the documents of which the claimant seeks disclosure and whether they are likely to elucidate considerations highly probative of the exercise of the court's discretion, or threaten to drag the application into a side alley of satellite litigation with diminishing returns for the overall issue;
(3)   whether on a summary assessment it is obvious that the documents for which disclosure is sought will be the subject of proper legal professional privilege; and
(4)   whether the likely effect of any order the court might be minded to make will be proportionate and just in all the circumstances.

16. In respect of the strength of the application, the starting point is the statutory basis under Section 52(A) of the High Court Ordinance providing for the court’s jurisdiction to make a non-party costs order, as follows:-

“(1) Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.
(2) Without prejudice to the generality of subsection (1), the Court of Appeal or the Court of First Instance may, in accordance with rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the Court of Appeal or the Court of First Instance, as the case may be, is satisfied that it is in the interests of justice to do so.”

17. Section 52A(2) of the High Court Ordinance confers upon the court a general discretion to make a costs order against a non-party where it is in the interests of justice to do so. As a matter of principle, such discretion can be exercised not only against the “funder” of the litigation, but may be exercised against a person who controlled the litigation, or the real party interested in the outcome of the litigation who actively assisted a party in pursuing a claim or defence which eventually failed (see To Pui Kui v Ng Oi Che, CACV 67 & 156/2014, 27 February 2015, at paragraphs 49.2 and 49.3 per Yuen JA; Chiu Tak Kwong v Tan Yufang [2010] 5 HKLRD 718).

18. This having been said, the court’s discretion must be exercised having regard to the purpose of Section 52A(2) of the High Court Ordinance. That section is, in my view, primarily about “costs recovery”, in particular to enable a party to recover costs from a non-party to an action. Generally speaking, it should be a matter of indifference to the receiving party as to where his costs would come from, so long as he is able to recover the costs that he has been awarded by the court. There may, of course, be special circumstances where the receiving party may justifiably argue that his costs should not be paid by a particular person, or come out from a particular source. I alluded to this possibility in paragraph 25 of the First Disclosure Decision when I stated that it was not a pre-condition to the exercise of power to award costs against a non-party that the unsuccessful party (ie, the party liable to pay costs) was impecunious. Nevertheless, I consider it to be clear, as a matter of principle, that Section 52A(2) is not designed to be used, and should not be used, as a means to enable a party to gather evidence of, or pursue, a complaint of breach of fiduciary duties. An application for a non-party costs order under Section 52A(2) is inherently not suitable for determining such issue. Like most applications for costs, an application for non-party costs ought generally to be disposed of swiftly without the need for any detailed investigation of contested facts or complicated arguments on law. The danger of allowing Section 52A(2) to be used for collateral purposes, such as for pursuing a complaint of breach of fiduciary duties, is that it could become the source of satellite litigations, contrary to the underlying objectives of the CJR.

19. Take the present case as an example. The Plaintiff has already obtained confirmation that the 3^rd Defendant is the actual funder of the 5^th Defendant’s costs in the Proceedings, and can pursue an application for non-party costs against the 3^rd Defendant, jointing PIL Finance Limited and Belmont Limited as parties to the intended application if it is considered necessary to do so. Prima facie, that should be sufficient to satisfy or protect the Plaintiff’s position as regards costs. Unless there are some good reasons justifying the Plaintiff’s attempt to go beyond or behind the actual funder of the 5^th Defendant’s costs, I do not consider that the court should exercise its discretion to order RSRB to provide further disclosure to assist the Plaintiff in such exercise, which would likely, or at least potentially, lead to further satellite litigations.

20. The Plaintiff’s current application for disclosure is launched on the basis that it wishes to hold the real party to the litigation between the 5^th Defendant and the Plaintiff to bear the costs which the 5^th Defendant has been ordered to pay to the Plaintiff in the Proceedings. It is clear, from an examination of the information and documents sought, as well as the fact that the application is directed against RSRB, that the application is linked to the funding arrangement in respect of the 5^th Defendant’s costs. In other words, the Plaintiff is seeking to make out a case against the so-called “real party” through his participation or involvement in relation to the funding arrangement in respect of the 5^th Defendant’s costs. It is now clear that it is the 3^rd Defendant who has been funding the 5^th Defendant’s litigation. The 3^rd Defendant, being a company, can of course only act through the agency of individuals, in particular its board of directors acting collectively. The Plaintiff says that Mr Thomas Chan is in de facto control of the 3^rd and/or 5^th Defendants. Even if one assumes, in the Plaintiff’s favour, that the 3^rd and/or 5^th Defendants are controlled by Mr Thomas Chan and he has caused or procured the 3^rd Defendant to fund the 5^th Defendant’s litigation, it does not follow that he should be personally responsible for the costs liabilities of the 3^rd and/or 5^th Defendants. Were it otherwise, the controller of a company involved in a litigation would generally be at risk of having to personally bear the other party’s costs should the company fails in its claim or defence in the litigation. In this regard, it has to be recognized that many companies are, in actual practice, controlled by a person (or a few persons), with the approval, consent or authority of the relevant board of directors.

21. I shall now deal with a number of features in the present case which the Plaintiff relies upon in support of the contention that Mr Thomas Chan, or any other person who may be described as the “real party” to the litigation between the 5^th Defendant and the Plaintiff, ought properly to be made the target of the Plaintiff’s intended application for non-party costs.

22. First, Ms Audrey Eu, SC (for the Plaintiff) submits that an application against the Companies “completely defeats the purpose of seeking a non-party costs order in respect of D5’s costs, which is to preserve the assets of D5 (and of D3) for the benefit of D3’s public shareholders and shift D5’s costs liability to the real person(s) responsible”, and “funds of the Paying Companies are funds of D3 in the same way as funds of D5” (see paragraphs 11 and 14(a) of the Plaintiff’s Skeleton Argument). The validity of this submission depends on what should be regarded as the proper purpose of a non-party costs order. As earlier mentioned, I consider the primary purpose of an application under Section 52A(2) to be “costs recovery”. In the special circumstances of the present case where the 5^th Defendant’s assets consists solely of the fruits of this action brought specifically by the Plaintiff on its behalf, it is, I believe, reasonably arguable that the assets of the 5^th Defendant should be preserved for the benefit of the 5^th Defendant and not be used to pay the Plaintiff’s costs (as mentioned in paragraph 25 of the First Disclosure Decision). I pause to add that whether the court should ultimately order the funder (or some other party) to be responsible for the 5^th Defendant’s liability to pay costs to the Plaintiff remains, of course, to be fully argued in due course. However, the same consideration does not apply to the assets of the 3^rd Defendant. As submitted by Mr Edward Chan, SC (for the 5^th Defendant), it is prima facie a matter for the 3^rd Defendant to decide how it wishes to deploy its assets. In view of the fact that the 5^th Defendant is a wholly-owned subsidiary of the 3^rd Defendant, there is, I consider, a valid basis for the 3^rd Defendant to lend monies to the 5^th Defendant to fund litigations which the 5^th Defendant would otherwise be unable to pursue for lack of funds. The fact that the 3^rd Defendant is a public company, and/or that the Plaintiff is a shareholder of the 3^rd Defendant, does not seem to me to make any difference.

23. Second, Ms Eu argues that the 5^th Defendant’s opposition to the Interim Payment Application was “to cover for the real party benefiting from the stance taken by D5 and who had been the wrongdoer behind D5” (see paragraph 7 of the Plaintiff’s Skeleton Argument). Although the 5^th Defendant’s opposition to the Interim Payment Application, if successful, may incidentally benefit Mr Thomas Chan, I do not consider that it would, by that reason alone, be improper for the 5^th Defendant to resist the Interim Payment Application. It will be recalled that in the Interim Payment Applicant, the Plaintiff sought an order that the bulk of the recovery made in the derivative action and paid into court by Mr Thomas Chan, to the extent of HK$30,913,708.30, should be paid out to the Plaintiff as interim payment of its costs incurred in the action. Since the money in court belonged, as a matter of law, to the 5^th Defendant, it seems to me to be clear that the 5^th Defendant had a proper interest to oppose the Interim Payment Application, even though the opposition ultimately turned out to be unsuccessful.

24. Third, Ms Eu says that the 5^th Defendant has spent almost HK$12 million by way of legal costs when it ought to remain neutral in the present derivative action brought by the Plaintiff for its benefit (see paragraphs 1(b), 8 and 13 of the Plaintiff’s Skeleton Argument). From what is known to the court, it would appear that the 5^th Defendant started to become actively involved in this action since the Plaintiff’s launched the Interim Payment Application on 22 August 2014. Up to 27 March 2017, the 5^th Defendant has been involved in quite a number of contested hearings before the court, including (i) a hearing in November 2014 before Mr Recorder P Fung SC to resist the Interim Payment Application, (ii) two hearings before this court in December 2014 and June 2015 respectively in relation to its applications for leave to appeal against the November Order and a stay of the November Order pending appeal, (iii) an appeal hearing in February 2016 before the Court of Appeal in CACV 142/2015, (iv) a hearing before this court in December 2016 relating to pre-judgement and post-judgment interest, and (v) a hearing before this court in February 2017 to resist the Plaintiff’s application to vary a costs order nisi made in relation to the court’s decision regarding pre-judgement and post-judgment interest. Since the court has not seen the relevant bills, the court is in no position to comment on the reasonableness of the costs incurred by the 5^th Defendant in respect of the above matters. In any event, the court is not presently concerned with the amount, or reasonableness, of the 5^th Defendant’s own costs incurred in the Proceedings, but with the question of whether it should order RSRB to make further disclosure to assist the Plaintiff in its intended application for a non-party costs order. In so far as the stance that the 5^th Defendant ought to take in the present derivative action is concerned, it is, I believe, not controversial that the 5^th Defendant should adopt a neutral position in relation to the principal claim brought by the Plaintiff against Mr Thomas Chan. It does not, however, follow that the 5^th Defendant should also remain neutral in relation to other applications which may directly affect its interests. As remarked by the Court of Appeal in paragraph 19 of its decision handed down on 18 October 2017 in HCMP 1326/2017 (referred to in paragraph 10 above):-

“We also agree with Mr Chan that whilst a company in a derivative action should take a neutral stance in the trial of the action, this is not necessarily the case in respect of interlocutory applications that may directly concern or affect the interest of the company.”

25. The matters ventilated at the hearings mentioned above all directly concern or affect the interests of the 5^th Defendant. I do not consider that it was improper for the 5^th Defendant to be legally represented and take part in the relevant applications.

26. Fourth, Ms Eu argues that the 5^th Defendant’s opposition to the Interim Payment Application was in breach of the BVI Order (see paragraph 8 of the Plaintiff’s Skeleton Argument). I shall deal with this point when I come to consider the Expert Evidence Application below.

27. Fifth, Ms Eu says that the Companies were at all material times and are under the same wrongdoer control as the 5^th Defendant, and that directors of the Companies who authorised the funding of the 5^th Defendant’s costs are likely to be in breach of fiduciary duties (see paragraphs 11 and 21(d) of the Plaintiff’s Skeleton Argument). The theme of breach of fiduciary or directors’ duties is repeatedly emphasised by Mr Albert Chan (see, for example, paragraphs 14, 16 and 21 of his 14^th Affirmation, and paragraphs 13 and 17 of his 15^th Affirmation). As earlier mentioned, I do not consider that Section 52A(2) should be used by the Plaintiff to gather evidence of, or pursue, a complaint of breach of fiduciary duties. If Mr Thomas Chan, or any other person, has acted in breach of fiduciary duties owed to the 3^rd Defendant in causing or procuring it to fund the 5^th Defendant’s litigation, the proper complainant would be the 3^rd Defendant, and the Plaintiff may bring a derivative action on behalf of the 3^rd Defendant against Mr Thomas Chan or such other person (if it can satisfy the conditions for bringing a derivative action).

28. Sixth, Ms Eu refers to and relies on a previous observation made by this court in paragraph 32 of the First Disclosure Decision, viz, “[s]hould it be shown at some future time that there is in fact more than one funder of the 5^th defendant, the plaintiff can make a further application for disclosure of additional relevant information (assuming that such application can be justified)”. It should be noted, however, that observation was made with reference to the Plaintiff’s application for disclosure of information under paragraph 1(b) and (c) of the First Disclosure Application (namely, for a breakdown of the 5^th Defendant’s costs incurred in the Proceedings, and for information as to when and the amount(s) of costs that RSRB had received) and in answer to the argument of Mr Lam (for the Plaintiff) that such information would be relevant to the Plaintiff’s intended application for non-party costs should there be more than one funder of the 5^th Defendant’s costs. As stated in paragraph 32 of the First Disclosure Decision, I was not persuaded by that argument. In any event, I made it clear that the Plaintiff could make a further application for disclosure of additional relevant information assuming that the application could be justified. As it is, I do not consider the present application to be justified.

29. For the above reasons, I am not satisfied that the Plaintiff has made out a prima facie or reasonably arguable case that the so-called “real party” to the litigation between the 5^th Defendant and the Plaintiff, be it Mr Thomas Chan or any other party, should be ordered to bear the costs which the 5^th Defendant has been ordered to pay to the Plaintiff in the Proceedings.

30. Further, it is by no means clear, in my view, that the information and documents sought by the Plaintiff as itemised in sub-paragraphs (a) to (k) of the Third Disclosure Application would likely be of great potential value to the fair determination of the Plaintiff’s intended application for non-party costs order, or elucidate considerations highly probative to the exercise of the court's discretion on whether to make a non-party costs order. In the ordinary course of the events, the 3^rd Defendant’s decision to advance loans to the 5^th Defendant to fund its litigation would have been made by the board of directors of the 3^rd Defendant (or by person(s) duly authorized by the board to make such decision) and executed by the 3^rd Defendant employees or agents. Bearing in mind Mr Sidney To’s evidence that decisions made in relation to the present derivative action were made by an independent committee set up by the 3^rd Defendant as long ago as 2003 and Mr Thomas Chan has been excluded from the said independent committee to avoid any conflict of interest, it is, I believe, unlikely that the information and documents sought by the Plaintiff from RSRB (eg, the person who made the oral agreement with RSRB concerning the 5^th Defendant’s costs or who signed the relevant retainer or agreement with RSRB, the person who gave instructions to RSRB in respect of the conduct of the Proceedings on behalf of the 5^th Defendant or the payment of costs on behalf of the Companies, or the information or documents requested or obtained by RSRB in relation to the approval and/or authorization from each of the Companies to fund and/or to agree to fund the Proceedings on behalf of the 5^th Defendant) would actually identify the so-called “real party” (whom the Plaintiff believes to be Mr Thomas Chan) to the litigation between the 5^th Defendant and the Plaintiff. The likelihood is that the information and documents disclosed by RSRB would simply lead to further inquiries or applications for more information and documents and lead to more satellite litigations. At least, the Plaintiff has failed to demonstrate that the information and documents sought have great potential value, or would be highly probative to the exercise of the court's discretion on whether to make a non-party costs order. On the other hand, I consider that requiring RSRB to give further disclosure as sought by the Plaintiff would likely lead to more satellite litigations.

THE EXPERT EVIDENCE APPLICATION

31. On behalf of the 5^th Defendant, Mr Chan opposes the Expert Evidence Application on the ground that (i) Order 32, rule 11A(4) of the Rules of the High Court provides that where the determination of an application is adjourned for the hearing of a summons, no further evidence may be adduced unless it appears to the court that there are “exceptional circumstances” making it desirable that further evidence should be adduced, and (ii) there are no exceptional circumstances here to justify the admission of expert evidence on BVI law (in the form of an opinion by Mr Richard Millet QC) at the adjourned hearing of the Third Disclosure Application on 12 December 2017. Although Order 32, rule 11A(4), on its terms, applies only to a hearing before a Master, I agree with Mr Chan that the same principle must be applicable to a hearing before a Judge.

32. In the present case, the Third Disclosure Application was made on 14 March 2017, whereas the Expert Evidence Application was made on 10 November 2017, after Mr Albert Chan had filed his 15^th Affirmation on 15 May 2017 in reply to the 5^th Affirmation of Mr Sidney To filed on 31 March 2017. The Plaintiff’s explanation for the late application to adduce expert evidence on BVI law is, as I understand it, that the need to adduce such evidence was raised by this court in its previous decision handed down on 25 May 2017 dismissing the Plaintiff’s application for leave to appeal against the costs order made in relation to the 5^th Defendant’s application to intervene in the Third Disclosure Application, where it was observed (at paragraph 27) that “[w]hetherthe 5^th defendant’s application amounted to a breach of the BVI Court Order dated 30 September 2005 is a matter of BVI law, and cannot be determined simply on the basis of the wording of that order.” However, as pointed out by Mr Chan, the Plaintiff had already made an allegation that the 5^th Defendant acted contrary to the BVI Court Order in Mr Albert Chan’s 9^th Affirmation filed in September 2016 in support of the First Disclosure Application. In any event, there is no explanation for the further delay between May and November 2017. In all the circumstances, I am not minded to allow the Expert Evidence Application. For the sake of completeness, I shall briefly deal with the expert evidence sought to be adduced by the Plaintiff.

33. Mr Richard Millet QC’s opinion is that, as a matter of BVI law and under the BVI Court Order:-

(1)   The 5^th Defendant’s opposition to the Third Disclosure Application is outside the scope of the BVI Court Order, and the 5^th Defendant’s directors are acting beyond their directorial powers conferred by paragraph 3 of the BVI Court Order in so doing.
(2)   The 5^th Defendant’s director (Mr Sidney To) has no actual or ostensible authority either to oppose that application or to instruct lawyers to do so.
(3)   The 5^th Defendant (as a nominal defendant) is not entitled to take a stance that is adversarial to the Plaintiff in this derivative action, subject to one qualification, viz, ensuring that there is no overcharging of the Plaintiff’s expenditure under the indemnity in the March Order.
(4)   The 5^th Defendant is bound to take a neutral stance so far as concerns any disputes within the proceedings, save in the one aspect mentioned above, simply because the 5^th Defendant has no power under the BVI Court Order to do anything else.

34. Even I were to admit the Plaintiff’s expert evidence and accept the above propositions as a matter of BVI law, it would not affect my conclusion on the Third Disclosure Application, because the question that I have to decide is not whether the 5^th Defendant is acting within the powers conferred by the BVI Court Order, or its directors have actual or ostensible authority, to oppose the application, but whether I should exercise my discretion to order RSRB to disclose the information and documents sought by the Plaintiff. I would have come to the same conclusion with or without the participation of the 5^th Defendant. I would only add that, as stated by the Court of Appeal, the 5^th Defendant is not bound, at least as a matter of Hong Kong law, to adopt a neutral stance in respect of interlocutory applications that may directly concern or affect its interest (see paragraph 24 above). I do not consider the 5^th Defendant to be acting improperly in resisting the present application by the Plaintiff.

DISPOSITION

35. For the foregoing reasons, I dismiss the Plaintiff’s summonses dated 14 March 2017 and 10 November 2017 respectively, with costs to the 5^th Defendant, to be taxed if not agreed, with certificate for two counsel.

	(Anderson Chow)
	Judge of the Court of First Instance High Court

Ms Audrey Eu, SC, and Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Edward Chan, SC and Mr Law Man-chung, instructed by ONC Lawyers, for the 5^th Defendant

Reed Smith Richards Bulter, absent

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED	2^nd Defendant
	(formerly known as CHANSAM INVESTMENTS LIMITED)
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司)	3^rd Defendant
	(formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

_______________

Before:Hon Chow J in Chambers

Date of Hearing: 27 April 2017

Date of Decision: 25 May 2017

___________________

D E C I S I O N

___________________

INTRODUCTION

1. I have before me the following two summonses:-

(1) the plaintiff’s summons dated 23 February 2017 (“the 1^st Leave Summons”) seeking leave to appeal against the orders that I made in my decision dated 9 February 2017 (“the Decision”) on the grounds as set out in a draft notice of appeal attached to the summons (“the 1^st Draft Notice of Appeal”); and
(2) the plaintiff’s summons dated 13 April 2017 (“the 2^nd Leave Summons”) seeking leave to appeal against paragraph 5 of my order dated 5 April 2017 (“the Costs Order”) on the grounds as set out in a draft notice of appeal attached to the summons (“the 2^nd Draft Notice of Appeal”).

TEST FOR GRANTING LEAVE TO APPEAL

2. The test for granting leave to appeal is well settled. Leave to appeal shall not be granted unless the court hearing the application for leave is satisfied that (a) the appeal has a reasonable prospect of success; or (b) there is some other reason in the interests of justice why the appeal shall be heard. Further, as explained by the Court of Appeal in SMSE v KL [2009] 4 HKLRD 127, at paragraph 17 per Le Pichon JA (with whom the other member of the Court of Appeal agreed), a “reasonable” prospect of success for this purpose means a prospect which is more than “fanciful” but without having to be “probable”.

THE 1^ST LEAVE SUMMONS

3. The background facts are well known to the parties. I do not propose to set them out again in this decision.

4. By a summons dated 30 November 2016 (“the Further Interim Payment/Indemnity Summons”), the plaintiff sought the following relief against the 5^th defendant:-

(1)   a further interim payment in the sum of HK$10,200,379.28 in respect of the costs of the action pursuant to the indemnity granted by Mr Recorder P Fung SC on 10 March 2014;
(2)   payment of the sum of HK$4,580,722.09 in respect of the costs incurred by the plaintiff in relation to CACV 10/2014 pursuant to the indemnity (“the Appeal Indemnity”) granted by Mr Recorder P Fung SC on 26 November 2014; and
(3)   an order for (i) an indemnity (“the Leave Indemnity”) in respect of the plaintiff’s costs in relation to the 1^st defendant’s applications to the Court of Appeal and the Court of Final Appeal for leave to appeal against the judgment of the Court of Appeal dated 20 May 2016 (“the CA Judgment”), and (ii) an interim payment in the sum of HK$16,800.00 pursuant to such indemnity.

5. In the Decision:-

(1)   I dismissed the plaintiff’s application mentioned in (1) above (see paragraph 13).
(2)   I dismissed the plaintiff’s application mentioned in (2) above, as well as the plaintiff’s application, made orally at the hearing on 7 February 2017, to amend the Further Interim Payment/Indemnity Summons such that the plaintiff’s application should be treated as one for interim payment in respect of the costs incurred by the plaintiff in relation to CACV 10/2014 instead of payment of those costs pursuant to the Appeal Indemnity (see paragraphs 17 and 22).
(3)   In respect (3) above, I dismissed the plaintiff’s application insofar as it relates to the costs incurred in relation to the 1^st defendant’s application to the Court of Appeal, but ordered the 5^th defendant to indemnify the plaintiff in respect of any costs reasonably incurred by it in relation to the 1^st defendant’s application to the Court of Final Appeal which the plaintiff will not be able to recover from the 1^st defendant, subject to a cap of HK$150,000.

6. The 1^st Draft Notice of Appeal contains 4 proposed grounds of appeal. For the reasons appearing below, I am not satisfied that any of the 4 proposed grounds of appeal has a reasonable prospect of success, or there is any other reason in the interests of justice why the appeal shall be heard.

The 1^st ground

7. The 1^st ground relates to the plaintiff’s claim for further interim payment in respect of costs incurred in the action. Ms Audrey Eu SC argues that I should at least have ordered further interim payment to the extent of HK$1,074,000, this figure being based on what it is alleged was “put forward and accepted” by the 5^th defendant as the “proposed costs”.

8. The amount of the further interim payment now sought by the plaintiff is materially different from, and smaller than, the amount originally sought under the Further Interim Payment/Indemnity Summons, namely, HK$10,200,379.28. That figure was arrived at after deducting the interim payment granted by the Recorder (HK$23,000,000) in November 2014 from the total costs which the plaintiff has allegedly incurred in this action (HK$33,200,379.28). For the reasons given in paragraphs 6 to 12 of the Decision, I declined to grant any further interim payment to the plaintiff.

9. The plaintiff now argues that the 5^th defendant, through Mr Edward Chan SC’s skeleton argument dated 3 February 2017, accepted that the plaintiff had incurred some further costs over and above the amount of HK$30,913,708.39 which were considered by the Recorder when the first application for interim payment was considered by him in November 2014, and the figure of HK$1,074,000 was “put forward and accepted” by the 5^th defendant as the “proposed costs”. However, as explained by Mr Edward Chan SC and as can be seen from the 5^th defendant’s skeleton argument dated 3 February 2017, the figure of HK$1,074,000 was based on some “preliminary objection” prepared by the 5^th defendant’s law costs draftsman. They included costs that (it was argued) “D5 should not be responsible, i.e. costs incurred in relation to taxation proceedings between P and the non-parties, namely Ms Chiang (Deacons), HSBC (JSM) and other non-parties (Cheung Tong & Rosa)” (see paragraph 3.9(2) of the skeleton argument dated 3 February 2017), and the figure of HK$1,074,000 was put forward “without prejudice to the 5^th Defendant’s right to make further objections and lower suggestions upon a full taxation” (see page 1 of Table 1 attached to the skeleton argument dated 3 February 2017).

10. I do not accept the premise of the plaintiff’s argument that the 5^th defendant put forward and accepted that the plaintiff should at least be entitled to interim payment to the extent of HK$1,074,000.

11. In paragraph 1(c) of the 1^st Draft Notice of Appeal, the plaintiff complains that “[t]he Judge provided no or no sufficient reason for declining to order an interim payment even to such limited extent [ie, HK$1,074,000]”. There was no reason given because the plaintiff did not argue that the court should grant interim payment to the extent of HK$1,074,000 only at the hearing on 7 February 2017. I would add that the raising of a new point in a proposed appeal, as the plaintiff now seeks to do, often causes unfairness to the proposed respondent and adds to the costs of the proceedings. If there is a good point to be made, it should generally be made at the original hearing and not be reserved for deployment in the appeal court.

The 2^nd ground

12. The 2^nd ground relates to the plaintiff’s claim for payment under the Appeal Indemnity.

13. Paragraph 2(a) of the 1^st Draft Notice of Appeal contends that I ought to have granted leave to the plaintiff to amend the Further Interim Payment/Indemnity Summons such that the plaintiff’s application should be treated as one for interim payment in respect of the costs incurred by it in relation to CACV 10/2014 instead of payment of those costs pursuant to the Appeal Indemnity. The application to amend was expressly considered and rejected by me in paragraphs 16 to 22 of the Decision which I do not propose to repeat here.

14. Paragraph 2(b) of the 1^st Draft Notice of Appeal alleges that the sum put forward and accepted by the 5^th defendant for the purpose of this application was slightly over HK$2 million and, given this acceptance/admission, there was no reason for the court not to, inter alia, grant “an interim payment at least to the extent of that sum”. Again, as explained by Mr Edward Chan SC and as can be seen from the 5^th defendant’s skeleton argument dated 3 February 2017, the figure of slightly over HK$2 million mentioned in Table 2 thereof only represented the “preliminary opinion of D5’s law costs draftsman” and the 5^th defendant’s objections as stated in that table were made “without prejudice to the 5^th defendant’s right to make further objections and lower suggestions upon a full taxation”.

15. Paragraph 2(c) and (d) of the 1^st Draft Notice of Appeal contends that I ought to have granted interim payment to the extent of HK$2,300,000, being two-thirds of 75% of the total costs allegedly incurred by the plaintiff in CACV 10/2014 (ie HK$4,580,722.09 x 75% x 2/3). As I understand it:-

(1) the “75%” comes from the fact that in paragraph 192 of the CA Judgment dismissing the 1^st defendant’s appeal and allowing the plaintiff’s cross-appeal in relation to the issue of pre-judgment interest rate but dismissing rest of the plaintiff’s cross-appeals, the Court of Appeal made a global costs order that the 1^st defendant should pay the plaintiff 75% of its costs of the appeal and cross-appeals; and
(2) the “two-thirds” reduction comes from what is said to be a “general rule” referred to by Barma J (as he then was) in Re Lehman Brothers Securities Asia Ltd (No 1) [2010] 1 HKLRD 43 at paragraphs 26 and 27 of his judgment.

16. In my view, the fact that the Court of Appeal made a global costs order that the 1^st defendant should pay the plaintiff 75% of its costs of the appeal and cross-appeals cannot be taken to mean that 75% of the total costs allegedly incurred by the plaintiff in CACV 10/2014 are, or should be treated as being, attributable to the 1^st defendant’s appeal and 25% to the plaintiff’s cross-appeals. In this regard, it is relevant to note that, for the reason given in paragraph 18 of the Decision, I consider that the Appeal Indemnity does not cover the plaintiff’s costs in relation to its cross-appeals. This finding is not challenged by the plaintiff in the 1^st Draft Notice of Appeal.

17. In so far as the so called “general rule” is concerned, as I read Barma J’s judgment Re Lehman Brothers Securities Asia Ltd (No 1), two-thirds of the amount sought is considered to be the appropriate starting point for the amount of the interim payment if the court decides that interim payment ought to be granted. In other words, the “general rule” relates to the question of the “quantum” of the interim payment to be granted, but not the anterior question of whether an order for interim payment should be made. Moreover, Re Lehman Brothers Securities Asia Ltd (No 1) related to a claim by provisional liquidators, being a well-known accountancy firm, for interim payment whom it was said had a proven track record showing that their claims could be relied upon as being generally reasonable. At paragraph 31 of the judgment, Barma J said that “the general level of recovery in other cases provides a certain level of comfort” (see paragraph 31). The same cannot be said of claim(s) previously made by the plaintiff.

18. Lastly, I repeat my observation above regarding the raising of a new point by the plaintiff in the proposed appeal. At the hearing on 7 February 2017, the plaintiff argued that it was entitled to interim payment of the sum of HK$4,580,722.09 in respect of the costs incurred in relation to CACV 10/2014. It was not suggested by the plaintiff that the court should make an order for interim payment limited to two-thirds of 75% of that sum.

The 3^rd ground

19. The 3^rd ground relates to the plaintiff’s claim for (i) the Leave Indemnity, and (ii) an interim payment in the sum of HK$16,800.00 pursuant to such indemnity.

20. In so far as the plaintiff’s costs incurred in relation to the 1^st defendant’s application to the Court of Appeal for leave to appeal against the CA Judgment are concerned:-

(1) the 5^th defendant did not dispute that that plaintiff was entitled to an indemnity in principle, subject to the question of undertakings and the 5^th defendant’s right to tax the plaintiff’s costs (see paragraph 24 of the Decision); and
(2) in relation to the question of interim payment, it is not in dispute that, of the total costs of HK$166,285 allegedly incurred, the plaintiff has already been paid the sum of HK$149,585 by the 1^st defendant as ordered by the Court of Appeal. The remaining minor sum of HK$16,800 plainly cannot justify leave to appeal being granted to the plaintiff.

21. In so far as the plaintiff’s costs incurred in relation to the 1^st defendant’s application to the Court of Final Appeal are concerned, I made an order that the 5^th defendant was to indemnify the plaintiff in respect of such costs but the indemnity was to be subject to a cap of HK$150,000. The plaintiff’s objection relates to the cap that was imposed. As mentioned in paragraph 27 of the Further Interim Payment/Indemnity Decision, the cap was imposed because the plaintiff’s counsel refused to produce a draft bill or any information regarding its likely costs despite being invited to do so by the court. Also, the cap relates to the maximum amount which the 5^th defendant can be called upon to indemnify the plaintiff in respect of any costs reasonably incurred by it in relation to the 1^st defendant’s application to the Court of Final Appeal which it “will not be able to recover from the 1^st defendant”. There has never been any suggestion that the 1^st defendant will not pay, or be able to pay, any amount which he is adjudged liable to pay to the plaintiff, and there is no evidence, even up to now, that the sum of HK$150,000 is not sufficient to cover any shortfall of the actual costs incurred by the plaintiff after taking into account the costs recoverable from the 1^st defendant.

22. Paragraph 3(d) of the 1^st Draft Notice of Appeal contends that I erred in law and in principle in requiring taxation of the plaintiff’s costs (whether on a common basis or otherwise), and further contends the plaintiff’s right to an indemnity from the 5^th defendant is akin to that of a trustee from a trust. In my view, it cannot seriously be argued that for the purpose of assessing the amount of the indemnity, the plaintiff is entitled to be paid whatever costs that it alleges it has incurred without any form or scrutiny or assessment. Whether such scrutiny or assessment should be called a taxation or some other name does not matter. I accept that the standard to be applied in assessing the plaintiff’s costs is a matter of principle which may merit further consideration. However, that is not an issue which requires determination in the plaintiff’s applications for interim payment or indemnity, but will arise when the court comes to actually assess the plaintiff’s costs for the purpose of the indemnity.

The 4^th ground

23. The 4^th ground relates to the costs of the Further Interim Payment/Indemnity Summons. The fact of the matter is that the plaintiff substantially failed in its applications under that summons. I see no good reason why costs should not follow the event.

THE 2^ND LEAVE SUMMONS

24. The 2^nd Leave Summons relates solely to the costs order made consequent upon my decision to grant leave to the 5^th defendant to intervene in the plaintiff’s summons dated 14 March 2017. The 5^th defendant’s application to intervene was strenuously opposed by the plaintiff’s counsel at the hearing on 5 April 2017. Since the plaintiff failed in its opposition to the 5^th defendant’s application, I saw no reason why costs should not follow the event.

25. In paragraph 1 of the of the 2^nd Draft Notice of Appeal, the plaintiff argues that I should have reserved the issue of costs until the substantive determination of the plaintiff’s summons as the outcome of the summons must be a highly material consideration in determining costs. I do not accept this argument. The two matters are separate and distinct. For the reasons given when I granted the 5^th defendant’s application, I consider that the 5^th defendant is plainly entitled to intervene in the plaintiff’s summons in view of the fact that the relief sought by the plaintiff directly concerns or affects the 5^th defendant. Even if the plaintiff should ultimately succeed in obtaining the relief that it seeks under the summons, there is, I consider, no reasonable basis for the plaintiff to oppose the 5^th defendant’s application to intervene.

26. Ms Eu refers me to an earlier order that I made on 23 February 2017 in relation to another application by the 5^th defendant to intervene in the plaintiff’s summons dated 30 September 2016 to compel the 1^st defendant to pay judgment interest into court. On that occasion, both applications were heard together in one hearing. There was no serious, stand-alone, argument raised by the plaintiff that the 5^th defendant’s application to intervene should be refused. In fact, the 5^th defendant was treated more or less as being a party to the plaintiff’s application, and the hearing on 23 February 2017 was focused on the question of whether the 1^st defendant ought to pay judgment interest into court. I do not see how the costs order made against the 5^th defendant there should be treated as a precedent for the present situation.

27. None of the matters advanced in paragraph 2 of the 2^nd Draft Notice of Appeal seems to me to afford a good or sufficient reason for making a different costs order. In particular:-

(1) The point raised in paragraph 2(a) is a new point which was not raised at the hearing on 5 April 2017. Whether the 5^th defendant’s application amounted to a breach of the BVI Court Order dated 30 September 2005 is a matter of BVI law, and cannot be determined simply on the basis of the wording of that order.
(2) The other matters raised in paragraph 2(b), (c) and (d) are all controversial, but could not justify denying the 5^th defendant an opportunity to be heard in respect of a matter which directly concerns or affects its interest.

28. In all, I do not consider that the plaintiff’s proposed appeal against the Costs Order has a reasonable prospect of success, or there is any other reason in the interests of justice why the appeal shall be heard.

DISPOSITION

29. The 1^st Leave Summons is dismissed with costs to the 5^th defendant, to be taxed on a party and party basis if not agreed with certificate for two counsel.

30. The 2^nd Leave Summons is dismissed with costs to the 5^th defendant, to be taxed on an indemnity basis if not agreed with certificate for junior counsel only. The costs are to be taxed on an indemnity basis because, as submitted by Mr Chan, the application for leave to appeal is completely without merits. However, it is a simple matter which would not justify the costs of senior counsel.

(Anderson Chow)
Judge of the Court of First Instance
High Court

Ms Audrey Eu, SC and Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Edward Chan, SC and Mr Law Man-chung, instructed by ONC Lawyers, for the 5^th defendant

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1st Defendant
	TGC INVESTMENTS LIMITED	2nd Defendant
	(formerly known as CHANSAM INVESTMENTS LIMITED)
	PLAYMATES HOLDINGS LIMITED	3rd Defendant
	(彩星集團有限公司)
	(formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant
_______________

Before: Hon Chow J in Chambers

Date of Hearing: 23 February 2017

Date of Judgment: 23 February 2017

________________________

D E C I S I O N

________________________

INTRODUCTION

1. I have before me two applications to vary the costs orders nisi which I made in paragraph 23 of my previous decision handed down on 6 December 2016, as follows:-

(1) the 1^st defendant and the 5^th defendant shall pay the plaintiff the costs of the plaintiff’s summons dated 30 September 2016 (“the Waddington Summons”); and
(2) the 5^th defendant shall pay the plaintiff its costs in relation to the 5^th defendant’s summons dated 25 November 2016 (“the Profit Summons”), and there shall be no order as to costs as between the 5^th defendant and the 1^st defendant in relation to that summons.

2. The plaintiff now seeks, by a summons dated 14 December 2016 as amended by a further summons dated 15 December 2016, the following costs orders instead:-

(1) the 1^st defendant shall pay the plaintiff the costs of the Waddington Summons; and
(2) the 5^th defendant do indemnify the plaintiff for all costs incurred in relation to the Waddington Summons and the Profit Summons, and there shall be no order as to costs as between the 5^th defendant and the 1^st defendant in relation to that summons.

3. On the other hand, the 5^th defendant seeks, by a summons dated 20 December 2016, the following costs orders-

(1) the 1^stdefendant shall pay the plaintiff the costs of the Waddington Summons; and
(2) there shall be no order as to costs as between the 5^th defendant and the plaintiff and as between the 5^th defendant and the 1^st defendant in relation to the Profit Summons.

4. By way of alternative, the 5^th defendant seeks an order that: (i) the 1^st defendant and the 5^th defendant shall pay the plaintiff the costs of the Waddington Summons, and (ii) the plaintiff shall pay the 5^th defendant the costs of the Profit Summons.

COSTS OF THE WADDINGTON SUMMOMS

5. By the Waddington Summons, the plaintiff sought an order that (i) the Shortfall, (ii) the post-judgment interest on the Shortfall at the judgment rate from 18 December 2013 to the date of payment in, and (iii) the post-judgment interest on the Judgment Sum at the judgment rate from 18 December 2013 to 21 March 2014, be paid into court.

6. The 1^st defendant opposed (i) and (ii) above, but was prepared to pay the post-judgment interest referred to in (iii) above (in the sum of HK$683,078.03) into court. In respect of (i), the 1^st defendant contended that the Shortfall should be paid to the 5^th defendant directly, instead of into court. In respect of (ii), the 1^st defendant contended that the Shortfall did not carry any further post-judgment interest.

7. The 5^th defendant opposed (i), (ii) and (iii) above, contending that the amounts of interest (in so far as payable) should be paid to it directly, instead of into court.

8. For the reasons given in my written decision dated 6 December 2016, I rejected the 1^st and 5^th defendants’ respective arguments and made the order sought by the plaintiff under the Waddington Summons.

9. In relation to the costs of the Waddington Summons, since both the 1^st defendant and the 5^th defendant unsuccessfully opposed that summons, prima facie both ought to pay the plaintiff’s costs.

10. The plaintiff has not advanced any reason in its skeleton argument dated 20 February 2017 as to why the 5^th defendant should not be liable to the plaintiff for the costs of the Waddington Summons. However, in his oral submissions, Mr Lam on behalf of the plaintiff argues that the 1^st defendant, but not the 5^th defendant, should be liable for those costs because the primary responsibility to pay the interests fell on the 1^st defendant.

11. On the other hand, Mr Law on behalf of the 5^th defendant argues that the major issues in relation to the Waddington Summons were between the plaintiff and the 1^st defendant. This is not correct. There were two major points raised in relation to the Waddington Summons: (i) whether the amounts of interest ought to be paid into court or to the 5^th defendant directly, and (ii) whether the Shortfall should carry any further post-judgment interest. Although the 5^th defendant maintained a neutral position in respect of point (ii), it made detailed submissions on point (i), contending that the amounts in question ought to be paid to it directly.

12. Mr Law further argues that the 5^th defendant was entitled to make submissions in respect of point (i), because “it has concerns that any payment-in might be treated by Waddington as its reserve funds for satisfaction of its costs order”. I accept that the 5^th defendant was entitled to make submissions on point (i), but its opposition to the Waddington Summons was ultimately not accepted by the court.

13. There is no good reason why the 5^th defendant should not be liable to pay costs for its unsuccessful opposition to the Waddington Summons. In all, the costs order nisi previously made, namely, that the 1^st defendant and the 5^th defendant shall pay the plaintiff its costs of the Waddington Summons, is confirmed. Further, the plaintiff’s costs are to be assessed on a common fund basis, if not agreed, in line with the previous order made by Mr Recorder P Fung SC in March 2014.

COSTS OF THE PROFIT SUMMOMS

14. By the Profit Summons, the 5^th defendant applied for leave to intervene in the Waddington Summons, and for an order that the hearing of that summons be adjourned so that it could be heard together with a separate application made by the plaintiff seeking disclosure of information relating to the 5^th defendant’s funder(s) in this litigation (“the Disclosure Application”). I accepted the former application but rejected the latter one. As earlier mentioned, I made an order nisi that the 5^th defendant shall pay the plaintiff its costs in relation to the Profit Summons, and there be no order as to costs as between the 5^th defendant and the 1^st defendant in relation to that summons.

15. None of the parties has sought to vary the second aspect of the order nisi, ie that there be no order as to costs as between the 5^th defendant and the 1^st defendant in relation to the Profit Summons.

16. In respect of the first aspect of the order nisi, the 5^th defendant submits that either (i) the plaintiff should pay the 5^th defendant its costs in relation to the Profits Summons, or (ii) there should be no order as to costs as between the plaintiff and the 5^th defendant, on the ground that the 5^th defendant succeeded in obtaining leave to intervene in the Waddington Summons despite the plaintiff’s opposition which Mr Law submits was wholly misconceived. Mr Law also argues that although the court declined to adjourn the hearing of the Waddington Summons, the 5^th defendant’s application for such direction was sought with a view to saving costs and to ensure that all issues can be dealt with in one go.

17. In relation to the Profits Summons, the focus of the arguments at the hearing on 1 December 2016 was not in fact on whether the 5^th defendant should be allowed to intervene in the Waddington Summons, but whether the amounts of interest ought to be paid to the 5^th defendant directly, instead of into the court. Further, it is obvious that the 5^th defendant sought leave to intervene not for the sake of intervening, but in order to enable it to advance arguments as to why the amounts in question should be paid to the 5^th defendant directly. As it was, the 5^th defendant’s arguments were rejected by me. I do not consider the fact that the 5^th defendant was granted leave to intervene to be of much significance in relation to the issue of the costs of the Profits Summons.

18. In so far as the 5^th defendant’s application for adjournment of the hearing of the Waddington Summons is concerned, that was rejected for the reason given in paragraph 12 of my written decision dated 6 December 2016, namely, that I failed to see any reason why the Waddington Summons should be heard together with the Disclosure Application. The two applications concerned completely different matters and were independent of each other.

19. The 5^th defendant failed to achieve the purpose of seeking leave to intervene in the Waddington Summons (namely, to resist the plaintiff’s application for payment into court), and further failed to obtain an adjournment of the hearing of the Waddington Summons. In my view, the Profits Summons should be regarded as having arisen incidentally to the Waddington Summons. In all the circumstances, I consider that the 5^th defendant ought to pay the plaintiff its costs incurred in relation to the Profit Summons.

20. I therefore confirm the order nisi that the 5^th defendant shall pay the plaintiff its costs in relation to the Profit Summons, and there be no order as to costs as between the 5^th defendant and the 1^st defendant in relation to that summons. The plaintiff’s costs to be paid by the 5^th defendant are to be assessed on a common fund basis, if not agreed.

FURTHER INDEMNITY SOUGHT BY THE PLAINTIFF

21. On the question of indemnity, the Waddington Summons may be regarded as part and parcel of the steps taken by the plaintiff in this multiple derivative action to pursue a claim against the 1^st defendant for the benefit of the 5^th defendant. In principle, the plaintiff ought to be indemnified by the 5^th defendant in respect of any costs incurred which it may not be able to recover from the 1^st defendant. For this purpose, the plaintiff’s costs should be assessed on a common fund basis (see Wallersteiner v Moir (No 2) [1975] QB 373, at 391-392 per Lord Denning MR and at 403 per Buckley LJ).

22. However, I have already ordered the 5^th defendant to pay, along with the 1^st defendant, the plaintiff’s costs incurred in relation to the Waddington Summons, also to be assessed on a common fund basis. There is thus no purpose in making any further costs indemnity order in favour of the plaintiff in relation to the costs of the Waddington Summons. The same logic applies to the plaintiff’s costs incurred in relation to the Profits Summons.

23. In all, I decline to make any further costs indemnity order in favour of the plaintiff in respect of the Waddington Summons and the Profits Summons.

24. I shall now hear the parties on the question of the costs of the various applications before me.

[The court heard further submissions made on behalf of the plaintiff, the 1^st defendant and the 5^th defendant.]

25. The plaintiff and the 5^th defendant has each been largely unsuccessful in its respective application(s) to vary the costs orders nisi. I consider that it would be fair in the circumstances to make no order as to costs as between them in respect of the plaintiff’s summonses dated 14 December 2016 and 15 December 2016 respectively and the 5^th defendant’s summons dated 20 December 2016, including the costs of the hearing today, and I so order.

26. Mr Lam informs the court that the plaintiff will not be maintaining the application for an indemnity in respect of its present applications. I should mention that I would not, in any event, order the 5^th defendant to indemnify the plaintiff in respect of the costs of their summonses dated 14 December 2016 and 15 December 2016 respectively, because (i) the plaintiff has been largely unsuccessful in those applications (save in respect of the basis of assessment of the costs to be paid by the 1^st defendant and the 5^th defendant[1]), and (ii) the application for indemnity cannot be regarded as an application made for the benefit of the 5^th defendant.

27. The 1^st defendant has been successful in resisting the variations sought by the plaintiff and the 5^th defendant in so far as he might be affected by them. I consider that his costs should be borne by the plaintiff and the 5^th defendant, to be assessed on a party and party basis, if not agreed, and I so order.

28. Lastly, I should mention that I would not in any event have been disposed to deal with these summonses by written submissions only. I consider the oral submissions to be helpful in distilling and clarifying the true issues between the parties on the various summonses, and also in answering a number of queries that I had in my mind when reading the papers and the parties’ respective submissions.

[Costs were then summarily assessed.]

	(Anderson Chow) Judge of the Court of First Instance
	High Court

Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Daniel Shum, of K & L Gates, for the 1^st defendant

Mr Law Man-chung, instructed by ONC Lawyers, for the 5^th defendant

[1] The plaintiff did not, as a matter of fact, ask for the costs to be assessed on a common fund basis in its summonses.

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

BETWEEN
	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)	Plaintiff
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant
_______________

Before: Hon Chow J in Chambers

Date of Hearing: 7 February 2017

Date of Decision: 9 February 2017

_______________

D E C I S I O N

_______________

INTRODUCTION

1. This case has come before me on a number of previous occasions. The background facts are well known to the parties. I do not propose to set them out again in this decision.

2. By a summons dated 30 November 2016 (“the Summons”), the plaintiff seeks the following relief against the 5^th defendant:-

(1) a further interim payment in the sum of HK$10,200,379.28 in respect of the costs of the action pursuant to the indemnity granted by Mr Recorder P Fung SC on 10 March 2014 (“the March Order”): see paragraphs 1 to 2 of the Summons;
(2) payment of the sum of HK$4,580,722.09 in respect of the costs incurred by the plaintiff in relation to CACV 10/2014 pursuant to the indemnity (“the Appeal Indemnity”) granted by Mr Recorder P Fung SC on 26 November 2014 (“the November Order”): see paragraphs 3 to 4 of the Summons; and
(3) an order for indemnity in respect of the plaintiff’s costs in relation to the 1^st defendant’s applications to the Court of Appeal/Court of Final Appeal for leave to appeal against the judgment of the Court of Appeal dated 20 May 2016 (“the Leave Indemnity”), and an interim payment in the sum of HK$16,800.00 pursuant to such indemnity: see paragraphs 5 to 7 of the Summons.

FURTHER INTERIM PAYMENT IN RESPECT OF THE COSTS OF THE ACTION

3. According to the plaintiff, it incurred costs of HK$29,526,728.39 (“the 1^st Set of Costs”) in the action up to 15 May 2014, and has incurred further costs of HK$3,673,650.89 (“the 2^nd Set of Costs”) since that date, making a total of HK$33,200,379.28. Taking into account the interim payment of HK$23,000,000 already received by the plaintiff from the 5^th defendant, the plaintiff says that it is out of pocket to the extent of HK$10,200,379.28 and therefore seeks a further interim payment in that sum.

4. Mr Justin Lam accepts that the 1^st Set of Costs (HK$29,526,728.39) and part of the 2^nd Set of Costs (to the extent of HK$756,666.49) formed part of the total costs of HK$30,913,708.39 put forward by the plaintiff in support of the previous interim payment application before the learned Recorder in November 2014. On that occasion, the learned Recorder exercised his discretion and made an order for interim payment to the plaintiff in the sum of HK$23,000,000 (see paragraph 44 of the learned Recorder’s decision handed down on 26 November 2014).

5. I am not prepared to order the 5^th defendant to make any further interim payment to the plaintiff in respect of the costs of the action, for the following reasons.

6. First, the bulk of the costs allegedly incurred by the plaintiff forming the subject matter of the present interim payment application was considered the learned Recorder in November 2014, and he ordered the 5^th defendant to make interim payment of HK$23,000,000 only. There has not been any material change of circumstances since that date which would justify another interim payment application in respect of the same costs.

7. Second, although the plaintiff has been granted an indemnity in respect of the costs of the action, it is not the case that the plaintiff is entitled to recover from the 5^th defendant the full amount of the legal costs that it has incurred irrespective of whether such costs are reasonable or reasonably incurred. On the footing that the plaintiff is entitled to have its costs of the action assessed on an indemnity basis for the purpose of the indemnity vis-à-vis the 5^th defendant, the plaintiff’s costs are still subject to scrutiny by the court. This, I understand, is not disputed by Mr Lam.

8. I should mention that, according to Mr Edward Chan SC (for the 5^th defendant), the question of whether the plaintiff’s costs should be assessed on an indemnity basis or on a common fund basis is controversial, and he reserves the 5^th defendant’s position on this matter to be resolved when the plaintiff’s costs come to be assessed in future. For the purpose of the present application, it is not necessary for me to decide whether, under the March Order, the plaintiff is entitled to have its costs assessed on an indemnity basis for the purpose of the indemnity vis-à-vis the 5^th defendant, and I express no view on this matter.

9. Mr Chan has raised a number of objections to the costs allegedly incurred by the plaintiff, and submitted that those costs have been unreasonably or improperly incurred or relate to costs for which the 5^th defendant should not be held responsible (see paragraphs 3.7 and 3.8 to of his skeleton argument). I do not propose to recite the details of those objections in this decision save to state that there is, prima facie, considerable force in those objections.

10. There is also the issue of proportionality when assessing the plaintiff’s costs, having regard to the total costs incurred (HK$33,200,379.28) and the amount of recovery made in this action (HK$33,511.220.32 by way of principal plus interest thereon). I take into account Mr Lam’s submission that substantial costs were incurred by the plaintiff in relation to the 1^st defendant’s strike out application (which, I am told, was partly successful). In my view, the proportionality between the costs incurred and the amount of the recovery made is something which the court can properly take into account when assessing the plaintiff’s costs (whether on indemnity or common fund basis) for the purpose of the indemnity vis-à-vis the 5^th defendant.

11. It is possible that the plaintiff’s costs, upon assessment, would exceed the HK$23,000,000 already received by the plaintiff by way of interim payment. However, it is not at all clear what the excess may come to.

12. The purpose of ordering interim payment to the plaintiff is not, in my view, to enable it to be paid in full the amount which it may ultimately recover pursuant to the indemnity. Mr Lam submits that the purpose of interim payment is to “ameliorate the injustice to [the plaintiff] for being out of pocket through continuous funding of the litigation for the benefit of the [5^th defendant]”. It seems to me that the injustice to the plaintiff for being out of pocket for funding this action has been substantially ameliorated by the previous interim payment of HK$23,000,000. There is no impediment to the plaintiff seeking assessment of its costs (whether on indemnity or common fund basis) vis-à-vis the 5^th defendant for the purpose of the indemnity and obtaining final payment under the indemnity.

13. Overall, I decline to exercise my discretion to order any further interim payment to the plaintiff in respect of the costs of the action.

PAYMENT/INTERIM PAYMENT PURSUANT TO THE APPEAL INDEMNITY

14. The 1^st defendant’s appeal in CACV 10/2014 was dismissed by the Court of Appeal on 20 May 2016. The Court of Appeal also dismissed the plaintiff’s cross-appeals save in relation to the issue of pre-judgment interest. At paragraph 192 of their Judgment, the Court of Appeal made an order nisi that the 1^st defendant was to pay the plaintiff 75% of its costs of the appeal and cross-appeals, to be taxed on a party and party basis.

15. According to the plaintiff, it has incurred costs of HK$4,580,722.09 in CACV 10/2014. Mr Lam accepts that the said sum relates to the costs of both the 1^st defendant’s appeal and the plaintiff’s cross-appeals.

16. As originally worded in paragraphs 3 and 4 of the Summons, the plaintiff seeks payment of the sum of HK$4,580,722.09 pursuant to the Appeal Indemnity. Such application would plainly be objectionable because, on any view of the matter, the 5^th defendant is entitled to have the plaintiff’s costs properly assessed by the court, whether on an indemnity or common fund basis.

17. When this objection was raised by Mr Chan at the hearing, Mr Lam in his reply submissions sought leave to amend the Summons such that the application would be treated as one for interim payment only. I am not minded to grant leave to the plaintiff to amend the Summons because, even after the amendment, the plaintiff would still face considerable difficulties regarding the amount of the interim payment which may properly be ordered pursuant to the Appeal Indemnity.

18. On the face of the November Order, the Appeal Indemnity only covers the plaintiff’s costs incurred in relation to the 1^st defendant’s appeal, but not the plaintiff’s cross-appeals. The plaintiff’s respondent’s notices by way of cross-appeal were dated 5 February 2014 and 3 June 2014 respectively, both prior to its summons dated 22 August 2014 seeking (inter alia) the Appeal Indemnity. The plaintiff could have sought expressly an indemnity to cover its costs in relation to the cross-appeals, but did not do so. Different considerations arise as to whether an indemnity should be granted in respect of the costs of the 1^st defendant’s appeal and the plaintiff’s cross-appeals. I consider that a party seeking a costs indemnity in his favour should make clear what the indemnity is intended to cover. It is not right to extend the scope of the indemnity by implication.

19. In his written reply submissions dated 7 February 2017 (faxed to the court shortly before the commencement of the hearing), Mr Lam invites that court to consider making a further indemnity order to cover the costs of the plaintiff’s cross-appeals under its inherent jurisdiction (and ordering interim payment pursuant thereto). I am not prepared to entertain the plaintiff’s application for a further indemnity order made in this manner. For the purpose of any such application, the plaintiff would have to show that it was reasonable for it to cross-appeal the principal judgment of the learned Recorder handed down on 18 December 2013. As a matter of fact, 3 out of 4 grounds of the plaintiff’s cross appeals were dismissed by the Court of Appeal. I do not consider that the plaintiff has put forward sufficient materials for this court to consider whether it is proper to grant the further indemnity sought. It would also be unfair, in my view, for the 5^th defendant to be suddenly faced with yet another application of the plaintiff.

20. In so far as the quantum of the costs incurred by the plaintiff in relation to the 1^st defendant’s appeal is concerned, Mr Chan has provided a (preliminary) list of objections prepared by a law costs draftsman which suggests the costs should only be slightly over HK$2 million (assessed on an indemnity basis). Mr Lam has not raised any argument in respect of that assessment, save to submit that the court should not carry out a mini-taxation in the present application (which I agree).

21. In my view, it is for the plaintiff to put forward and justify a proper sum by way of interim payment, which the plaintiff has failed to do. It would not be right for the court to simply pluck a figure out of the air and make an order for interim payment accordingly.

22. In all, I decline to make any order under paragraphs 4 and 5 of the Summons.

23. In passing, I note that the plaintiff did not apply for interim payment in respect of its appeal costs until 30 November 2016, more than 6 months after the Court of Appeal handed down its Judgment dismissing the 1^st defendant’s appeal. This delay shows that the 1^st plaintiff has no urgent need for the interim payment.

THE LEAVE INDEMNITY

24. Subject to (i) the question of undertakings, and (ii) the 5^th defendant’s right to tax the plaintiff’s costs, Mr Chan accepts that the plaintiff is entitled to an indemnity in relation to the 1^st defendant’s applications for leave to appeal.

25. In so far as the 1^st defendant’s application to the Court of Appeal is concerned, it was dismissed by the Court of Appeal on 14 October 2016 with costs to the plaintiff. The plaintiff claimed costs in the total sum of HK$166,385. The Court of Appeal made a slight reduction of HK$16,800 and allowed HK$149,585 as costs to be paid by the 1^st defendant. The amount allowed comes to about 89.9% of the plaintiff’s costs. It is not suggested by the plaintiff that it has encountered, or will encounter, any difficulty in recovering the sum of HK$149,585 from the 1^st defendant.

26. Even if one were to assume that the plaintiff’s costs ought to be assessed on an indemnity basis for the purpose of the indemnity vis-à-vis the 5^th defendant, I have reservation on whether there will be any substantial difference between the costs as ultimately assessed and the amount awarded by the Court of Appeal. I repeat the observation in paragraph 12 above, and am not prepared, in the exercise of my discretion, to order any interim payment in respect of the plaintiff’s costs in relation to the 1^st defendant’s application to the Court of Appeal for leave to appeal.

27. In so far as the 1^st defendant’s application to the Court of Final Appeal is concerned, despite the court pointing out at the hearing that the plaintiff has not provided any estimate of the likely costs which it may incur, Mr Lam maintains that it is not necessary for the plaintiff to produce a draft bill or any information regarding its likely costs. In my view, in any application for prospective indemnification of costs, the applicant ought to provide the court with a reasonable estimate of his likely costs so that the court can exercise a proper and reasonable control over the costs that may be incurred. The applicant cannot take it for granted that the court will simply make a blanket order in its favour.

28. In all the circumstances, I would make an order that the 5^th defendant do indemnify the plaintiff in respect of any costs reasonably incurred by the plaintiff in relation to the 1^st defendant’s application to the Court of Final Appeal for leave to appeal which the plaintiff will not be able to recover from the 1^st defendant, subject to a cap of HK$150,000. For the avoidance of doubt, the plaintiff’s costs, for the purpose this indemnity vis-à-vis the 5^th defendant, are to be assessed on a common fund basis (see Wallersteiner v Moir (No 2) [1975] 1 QB 373, at 391-392 per Lord Denning MR and at 403 per Buckley LJ).

DISPOSITION

29. Save as mentioned in paragraph 28 above, the plaintiff’s Summons is dismissed.

30. On the question of costs, the 5^th defendant is, in substance, the successful party (including the argument in relation to the Leave Indemnity). The Court of Appeal accepted the 5^th defendant’s argument that the plaintiff’s pervious application for interim payment could not be regarded as an application made for the benefit of the 5^th defendant, and thus the plaintiff was not entitled to any indemnity by the 5^th defendant for the costs of that application: see the Judgment of the Court of Appeal in CACV 142/2015 (17 February 2016), at paragraphs 28 and 29. I consider the present application to be substantially of the same nature, and I see no reason why the plaintiff should not have to pay the 5^th defendant’s costs of resisting the Summons. I make an order that the plaintiff shall pay the 5^th defendant’s costs of and occasioned by the Summons, including the costs of the hearing on 7 February 2017, to be taxed on a party and party basis if not agreed, with certificate for one counsel.

	(Anderson Chow) Judge of the Court of First Instance
	High Court

Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Edward Chan, SC and Law Man-chung, instructed by ONC Lawyers, for the 5^th defendant

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1st Defendant
	TGC INVESTMENTS LIMITED	2nd Defendant
	(formerly known as CHANSAM INVESTMENTS LIMITED)
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司)	3rd Defendant
	(formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant

_______________

Before: Hon Chow J in Chambers

Date of Hearing: 17 January 2017

Date of Decision: 25 January 2017

_______________

D E C I S I O N

_______________

INTRODUCTION

1. The issue which I have to decide is whether to order Messrs Reed Smith Richards Butler (“RSRB”), the solicitors on record for the 5^th defendant in this action until 13 January 2017, to disclose the identity/identities of the funder(s) of the 5^th defendant’s costs in this action and in CACV 142/2015.

BACKGROUND FACTS

2. The present action is a multiple derivative action brought by Waddington Limited (the plaintiff), a minority shareholder of Playmates Holdings Limited formerly known as Playmates Interactive Entertainment Limited (the 3^rd defendant), for wrongs done to and damage suffered by Profit Point Limited (the 5^th defendant). The 5^th defendant is an indirect wholly-owned subsidiary of the 3^rd defendant via Playmates International Limited (the 4^th defendant). The main protagonists in this action are two brothers, Mr Albert Chan (the person in control of the plaintiff) and Mr Thomas Chan (the 1^st defendant).

3. By the time of the commencement of this action on 2 September 2003, the 5^th defendant had already been voluntarily wound up and dissolved in the BVI on 18 March 2003. It was restored, upon the plaintiff’s application, by an order of the High Court of the BVI dated 30 September 2005, which provided, inter alia, that:-

(1)   The dissolution of the 5^th defendant be revoked and the 5^th defendant be restored for the purpose of pursuing any claims it has or may have, either on its own behalf or as part of a derivative action or representative action, arising from the facts and circumstances the subject of this action.
(2)   A declaration that upon restoration, the management and control of the 5^th defendant be vested in the directors who were in office immediately prior to the dissolution (ie the 1^st defendant and Mr Sidney To).
(3)   Upon restoration of the 5^th defendant, the powers and functions of the directors and officers be limited to carrying out any necessary functions on behalf of the 5^th defendant for the purpose of prosecuting or defending the said derivative action on behalf of the 5^th defendant. The directors and officers of the 5^th defendant may not, without the permission of the BVI High Court, engage in any business on behalf of or in the name of the 5^th defendant.

4. On 18 December 2013, Mr Recorder P Fung SC handed down a judgment (“the Judgment”) in favour of the 5^th defendant against the 1^st defendant for the sum of HK$33,511,220.32.

5. On 15 January 2014, the 1^st defendant filed a Notice of Appeal in CACV 10/2014 (“the Main Appeal”) against the Judgment.

6. On 10 March 2014, the learned Recorder delivered a further ruling on interest and costs and made (inter alia) the following order (“the March Order”):-

(1) the 1^st defendant do pay to the plaintiff the costs of this action to be taxed on the common fund basis, if not agreed; and
(2) the 5^th defendant do indemnify the plaintiff in respect of any costs incurred by the plaintiff which it will not have been able to recover from the 1^st defendant (“the Shortfall”).

7. On 21 March 2014, the 1^st defendant paid the sum of HK$44,597,466.49 (comprising the principal sum of HK$33,511,220.32 and interest thereon) into court.

8. On 22 August 2014, the plaintiff made an application (“the Interim Payment Application”) seeking, inter alia, the following relief:-

(1)   an interim payment to the plaintiff to be paid out of the sum in court;
(2)   the interim payment be in the sum of HK$30,913,708.39, or such other amount as the court may deem just; and
(3)   the 5^th defendant do further indemnify the plaintiff in respect of any costs incurred by it in the Main Appeal with liberty to the plaintiff to apply for further payment out from the sum in court in respect of such indemnity.

9. The Interim Payment Application, opposed by the 5^th defendant, came before the learned Recorder on 13 November 2014. He handed down his written decision on 26 November 2014 and made, inter alia, the following order (“the November Order”):-

(1)   there be an order for interim payment to the plaintiff in the sum of HK$23,000,000 to be paid out of the sum in court;
(2)   the 5^th defendant do indemnity the plaintiff in relation to the costs of the Main Appeal; and
(3)   there be a costs order nisi that the 5^th defendant do pay the plaintiff the costs of the application.

10. The plaintiff’s subsequent application to vary the costs order nisi contained in the November Order was rejected by the learned Recorder on 17 December 2014. The Plaintiff’s costs of the Interim Payment Application have since been taxed at HK$679,363 which, I am told, have not yet been satisfied by the 5^th defendant.

11. In the meantime, on 5 December 2014, the 5^th defendant took out a summons (“the December Summons”) seeking (i) leave to appeal to the Court of Appeal against the November Order, and (ii) a stay of execution of the November Order pending the determination of the 5^th defendant’s proposed appeal.

12. The stay application under the December Summons first came before me on 5 December 2014 as an urgent application. It was disposed on upon certain undertaking given by Mr Albert Chan which it is not necessary to recite in this decision. The leave application under the December Summons came before me on 9 June 2015. In a written decision handed down on 12 June 2015, I granted the 5^th defendant leave to appeal against the November Order limited to one of the grounds sought to be raised by the 5^th defendant, namely, that the learned Recorder was functus officio and had no jurisdiction to make the November Order.

13. On 17 February 2016, the Court of Appeal dismissed the 5^th defendant’s Appeal in CACV 142/2015. The Court of Appeal held that, in view of the 5^th defendant being under an immediate liability to indemnify the plaintiff in respect of the costs that it had expended for the benefit of the 5^th defendant, the plaintiff was entitled to apply for interim payment of those costs, as well as future costs to be incurred by it in resisting the Main Appeal (see paragraph 22 of the judgment of the Court of Appeal). The Court of Appeal also ordered the 5^th defendant to pay the plaintiff its costs incurred in resisting the appeal and the application for leave to appeal, as well as the costs reserved on 5 December 2014.

14. On 20 May 2016, the Court of Appeal dismissed the 1^st defendant’s Main Appeal and allowed the plaintiff’s cross appeal on the issue of pre-judgment interest rate.

15. On 9 September 2016, the plaintiff took out a summons against RSRB seeking disclosure of:-

(a)   the identity/identities of each of the funder(s) of the 5^th defendant’s costs or any part thereof incurred in this action and in CACV 142/2015 (“the Proceedings”);
(b)   an itemised breakdown of the 5^th defendant’s costs incurred in the Proceedings; and
(c)   whether, and if so when and the amount(s) thereof, RSRB received costs on account and/or payment in respect of the 5^th defendant’s costs incurred in the Proceedings or any part thereof (including but not limited to those in respect of Counsel’s brief fees).

16. On 6 December 2016, the plaintiff took out a further summons seeking leave to amend the aforesaid summons by adding the following item to be disclosed by RSRB:-

“whether the agreement(s) concerning the funding of the 5^th defendant’s costs incurred in the Proceedings was/were made orally or in writing; if made orally, the parties thereto and the terms thereof; if made in writing, copies of such agreement(s) and/or record(s) or document(s) evidencing such agreement(s).”

DISCUSSION

17. According to Mr Lam, the plaintiff’s present applications are the first step in preparation for an application under Section 52(A)(2) of the High Court Ordinance, Cap 4, for a non-party costs order against the 5^th defendant’s funder in respect of the costs which the 5^th defendant has been ordered to pay to the plaintiff in this action and in CACV 142/2015 (not including the 5^th defendant’s liability to indemnify the plaintiff in respect of the Shortfall and the costs of the Main Appeal under the March Order and November Order respectively). Mr Lam justifies the intended application against the funder on the following basis:-

(1)   The 5^th defendant has no assets of its own save the recovery made in this action, which I am told amounts to some HK$51.9 million in total, which has been paid into court (“the Sum in Court”).
(2)   The Sum in Court paid by the 1^st defendant is in satisfaction of his liability for loss suffered by the 5^th defendant as a result of his breach of fiduciary duty, and should be used for the benefit of the 5^th defendant and, ultimately, the shareholders of the 3^rd defendant comprising (inter alia) public investors.
(3)   In such circumstances, it is only fair and just to first require the funder, whom the plaintiff says is the real wrongdoer controlling the 5^th defendant in this action, to bear the costs which the 5^th defendant has been ordered to pay to the plaintiff.
(4)   Further, the Sum in Court should only be used as the last resort to settle such liability of the 5^th defendant.

18. It is not in dispute that the court has jurisdiction to make a non-party costs order against the funder of a party in an action under Section 52(A)(2) of the High Court Ordinance, and an ancillary jurisdiction to order the party being funded and/or the solicitors acting for that party to disclose the identity of the funder as well as information and documents relating to the funding arrangement (see Great City Enterprises Ltd v UBS AG [2014] 5 HKC 361, at paragraphs 8 to 9 per Chung J; SC DG Petrol SRL v Vitol Broking Ltd [2014] EWHC 3900; Raiffeisen Zentralbank Osterreich AG v Crosseas Shipping Ltd [2003] EWHC 1381 (Comm)).

19. The factors relevant to the court’s exercise of its discretion whether to order such disclosure were summarised by Blake J in Thomson v Berkhamsted Collegiate School [2009] 6 Costs LR 859, at paragraph 19 (quoted with approval by Leveson LJ in Flatman v Germany [2013] 1 WLR 2676, at paragraph 49), as follows:-

(1)   the strength of the application as it now appears unassisted by disclosure;
(2)   the potential value to the fair determination of the application of the documents of which the claimant seeks disclosure and whether they are likely to elucidate considerations highly probative of the exercise of the court's discretion, or threaten to drag the application into a side alley of satellite litigation with diminishing returns for the overall issue;
(3)   whether on a summary assessment it is obvious that the documents for which disclosure is sought will be the subject of proper legal professional privilege; and
(4)   whether the likely effect of any order the court might be minded to make will be proportionate and just in all the circumstances.

20. In relation to (1) above, I have been referred to various authorities setting out the principles governing the court’s exercise of its power to make a costs order against a non-party (see Thomson v Berkhamsted, at paragraphs 17 and 18; Flatman v Germany, at paragraphs 25 and 26; Adams v Yindjibarndi Aboriginal Corporation RNTBC [2014] WASC 467(S), at paragraphs 34 to 42). I do not propose to review those authorities here since the present application is clearly not the appropriate occasion for any detailed consideration of the merits of the plaintiff’s intended application for a costs order against the funder of the 5^th defendant. I would merely state that, subject to the discussion below on the specific objections raised by Mr Law on behalf of RSRB, I am satisfied that the plaintiff’s intended application has at least a reasonable prospect of success having regard to the matters mentioned in paragraph 17 above.

21. In relation to (2) above, it seems clear that the 5^th defendant must have been funded by a third party in this action and in CACV 142/2015. This much is not, I believe, seriously disputed by Mr Law. Information relation to the identity of the funder of the 5^th defendant is of critical importance to the plaintiff’s intended application, without which the plaintiff would simply not be in any position to launch the relevant application.

22. In relation to (3) above, the identity of the funder and the fact of payment of costs to a solicitor are not information protected by any legal professional privilege (see Pang Yiu Hung v Commissioner of Police [2003] 2 HKLRD 125, at paragraphs 28 to 34 per Hartmann J (as he then was), referred to by DHCJ Wilson Chan (as he then was) in Akai Holdings Ltd (in compulsory liquidation) v James Henry Ting (13 September 2016), HCCL 42/2005, at paragraph 15).

23. In relation to (4) above, I do not see that any disproportionate costs or expenses will have to be incurred by RSRB to comply with the order for disclosure of information or discovery of documents sought by the plaintiff.

24. Mr Law argues, however, that the plaintiff has failed to demonstrate any serious basis for justifying any costs order against the non-party funder and therefore the disclosure sought by the plaintiff should be refused. He relies, in particular, on the following matters:-

(1)   the 5^th defendant has over HK$51m by way of assets which should be sufficient to meet the costs which it has been ordered to pay to the plaintiff;
(2)   it was not unreasonable for the 5^th defendant to oppose the plaintiff’s Interim Payment Application;
(3)   the plaintiff’s allegation that the 5^th defendant is fighting this case to protect the interest of the 1^st defendant is unfounded; and
(4)   the plaintiff’s applications are an afterthought and an abuse of process because the plaintiff never gave any warnings that it might seek a non-party costs order against the funder of the 5^th defendant.

25. As to the first point raised by Mr Law, I accept that, generally speaking, the financial position of the party whose liability to pay costs is sought to be satisfied by a non-party is a relevant consideration (see Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, at paragraph 25). However, it is not a pre-condition to the exercise of power to award costs against a non-party that the unsuccessful party is impecunious (see Dunghutti Elders Council(Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) (2012) 200 FCR 154, at paragraph 87). Moreover, as earlier noted, the 5^th defendant’s assets consist solely of the fruits of this action brought specifically by the plaintiff on its behalf. It is, in my view, reasonably arguable that those assets should be preserved for the benefit of the 5^th defendant and, indirectly, of its shareholder(s), and not be expended on legal costs (see Dunghutti Elders Council, at paragraph 90).

26. As to the second point raised by Mr Law, it is debatable whether it was reasonable for the 5^th defendant to oppose the Interim Payment Application and to lodge an appeal against the November Order. What is not debatable, though, is that the stance adopted by the 5^th defendant is legally incorrect, as now confirmed by the judgment of the Court of Appeal. Even if one assumes that the conduct of the 5^th defendant is reasonable, I do not consider, in the circumstances of this case, that this factor is necessarily a sufficient reason to refuse to make a non-party costs order against the funder of the 5^th defendant.

27. As to the third point raised by Mr Law, Mr Lam has (in my view, correctly) submitted that it is not necessary to draw any conclusions on the identity of the funder of the 5^th defendant at this stage (see paragraph 21 of his skeleton argument dated 12 January 2017). The fact that the 5^th defendant might not have acted for the benefit of the 1^st defendant, or the 1^st defendant might not be the 5^th defendant funder, cannot be a reason not to make a non-party costs order against the true funder.

28. Lastly, as to the fourth point raised by Mr Law, the premise relied upon by him is factually incorrect. Prior to the issue of the summons on 9 September 2016, the plaintiff had already raised concerns about the source of the 5^th defendant’s funds and alluded to the possibility of making an application for a non-party costs order (see Kao, Lee & Yip’s letter dated 4 December 2014 to RSRB, and paragraph 6 of the plaintiff’s written submissions on costs dated 2 March 2016 in CACV 142/2015).

29. In all, I consider that RSRB should be ordered to disclose information relating to the identity of the 5^th defendant’s funder.

SCOPE OF THE ORDER

30. As a matter of principle, the information to be disclosed, or documents to be discovered, ought to be no more than what is reasonably necessary to enable the plaintiff to pursue the intended application for a non-party costs order against the funder of the 5^th defendant.

31. Plainly, the identity of the funder ought to be disclosed (paragraph 1(a) of the summons dated 9 September 2016).

32. I am unable to see, however, the relevance of the information sought under paragraph 1(b) and (c) of the summons dated 9 September 2016. When this point was raised with Mr Lam at the hearing, his answer was that there might be more than one funder and their respective contributions to the 5^th defendant’s costs would be relevant to the plaintiff’s intended application. I am not persuaded by this argument. In any event, there is presently no basis to believe that there is more than one funder of the 5^th defendant. Should it be shown at some future time that there is in fact more than one funder of the 5^th defendant, the plaintiff can make a further application for disclosure of additional relevant information (assuming that such application can be justified). Lastly, unless there is some strong reason(s) justifying disclosure of the additional information at this stage, I consider, as an exercise of discretion and not a matter of jurisdiction, that the further disclosure sought by the plaintiff ought to be considered after the funder has been brought into the picture (see Reeves v Sprecher [2009] 1 Cost LR 1, at paragraphs 25 to 27 per Sir Donald Rattee).

33. The same considerations apply to the plaintiff’s application for disclosure of the additional information or document(s) under the summons dated 6 December 2016.

DISPOSITION

34. In all, I make an order in terms of paragraph 1(a) of the plaintiff’s summons dated 9 September 2016, save that the affidavit to be made by a partner of RSRB in compliance with this order shall be filed and served within 7 days of the date of this decision. I dismiss the plaintiff’s summons dated 6 December 2016.

35. On the question of costs, instead of making two separate costs orders under the two summonses, I would make an order nisi that RSRB shall pay to the plaintiff 80% of its overall costs incurred in relation to the two summonses, including the costs of the hearing on 17 January 2017 and all reserved costs, to be taxed if not agreed.

(Anderson Chow)
Judge of the Court of First Instance
High Court

Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Law Man-chung, for Reed Smith Richards Butler

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

BETWEEN
	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)	Plaintiff

and
	CHAN CHUN HOO THOMAS (陳俊豪)	1st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant
_______________

Before: Hon Chow J in Chambers

Date of Hearing: 1 December 2016

Date of Judgment: 6 December 2016

________________________

D E C I S I O N

________________________

INTRODUCTION

1. The main issues that I have to decide are:-

(1) whether, by reason of the terms of a previous court order made in this action and as varied by the Court of Appeal, certain pre-judgment interest on the principal judgment sum should be paid into court instead of to the party in whose favour the judgment is given;
(2) whether the post-judgment interest on the principal judgment sum should likewise be paid into court instead of to the party in whose favour the judgment is given; and
(3) whether post-judgment interest is payable on pre-judgment interest under section 49 of the High Court Ordinance.

BACKGROUND FACTS

2. This is a multiple derivative action brought by Waddington (the plaintiff) on behalf of Profit (the 5^th defendant) against Thomas (the 1^st defendant) for breach of fiduciary duty.

3. On 18 December 2013, Recorder P Fung SC gave a judgment (“the Judgment”) in favour of Profit against Thomas for the sum of HK$33,511,220.32 (“the Judgment Sum”). On 10 March 2014, the learned Recorder made a further order (“the Order”) directing Thomas to pay the Judgment Sum together with simple interest thereon at 2.5% per annum from 28 September 2000 to the date of judgment (18 December 2013) into court within 21 days pending further directions from the court. Since the actual terms of the Order is material to the present discussion, I shall set out the relevant parts of the Order below:

“1. the 1^st Defendant do pay to the 5^th Defendant simple interest at 2.5% per annum on the judgment sum of $33,511,220.32 from 28^th September 2000 until the date of judgment;
2. the 1^st Defendant do pay into court the judgment sum of $33,511,220.32 together with interest thereon as aforesaid within 21 days from the date hereof pending further directions by the court.”

4. The order that the Judgment Sum and pre-judgment interest thereon should be paid into court, instead of to Profit, was made upon Waddington’s application on (inter alia) the following grounds:-

(1) Profit was a company incorporated in the BVI which had been dissolved in February 2003 and was restored upon the application of Waddington specifically for the purpose of this action;
(2) Profit did not carry on any business and there could be no prejudice to any party for the Judgment Sum and pre-judgment interest thereon to be paid into court pending further orders of the court; and
(3) the derivative action was necessitated by Thomas’ breach of fiduciary duty owed to Profit, which was still under his control. Hence, if the Judgment Sum and pre-judgment interest thereon were paid to Profit they would again come under the control of the wrongdoer.

5. Thomas did not object to the order sought by Waddington that the Judgment Sum should be paid into court, instead of to Profit, but apparently did not make clear his stance in relation to the pre-judgment interest thereon. The learned Recorder considered, however, that the only logical course to follow was to also order the pre-judgment interest to be paid into court. Accordingly, he ordered both the Judgment Sum and pre-judgment interest thereon to be paid into court.

6. On 21 March 2014, Thomas paid the sum of HK$44,597,466.49 (comprising the Judgment Sum and pre-judgment interest thereon at 2.5% per annum) into court. That was 93 days after the date of the Judgment.

7. Thomas and Waddington’s appeal and cross-appeal respectively against the Judgment and Order were dismissed by the Court of Appeal on 20 May 2016, save that Waddington’s cross-appeal on the rate of pre-judgment interest was allowed such that:-

“the rate of 2.5% awarded by the judge below shall be substituted by the rate of 1% over the HSBC Best Lending Rate from time to time over the period from 28^th September 2000 until the date of judgment as the applicable rate for pre-judgment interest” (“the CA Order”).

8. On or about 17 June 2016, Thomas gave notice to Waddington that he had deposited the sum of HK$18,970,563.51, being the shortfall of pre-judgment interest as a result of the CA Order (“the Shortfall”), into Profit’s bank account.

9. By its summons dated 30 September 2016, Waddington applies to the court for an order directing Thomas to pay into court the following within 14 days:

(1) the Shortfall (there being no dispute that the amount comes to HK$18,970,563.51);
(2) post-judgment interest on the Shortfall at judgment rate from 18 December 2013 to the date of payment in under (1) above; and
(3) the sum of HK$683,078.03, being post-judgment interest on the Judgment Sum at judgment rate from 18 December 2013 to 21 March 2014.

10. Thomas opposes (1) and (2) above, but is prepared to pay the sum of HK$683,078.03 under (3) above as may be ordered or directed by the court.

(1) In respect of (1), Thomas contends that the Shortfall should be paid to Profit directly, instead of into court.
(2) In respect of (2), Thomas’ position is that the Shortfall should not carry any further interest.

11. By a summons dated 25 November 2016, Profit applies to intervene in Waddington’s summons against Thomas in order to oppose (1) and (3) above, contending that the Shortfall and the post-judgment interest on the Judgment Sum should be paid to Profit directly instead of into court. In respect of (2), Profit makes no submission on the question of whether post-judgment interest is payable on the pre-judgment interest under section 49 of the High Court Ordinance, but submits if such post-judgment interest is payable it should likewise be paid to Profit instead of into court. Profit also seeks an order that Waddington’s application be heard together with another application made by Waddington against Profit’s solicitors (Messrs Reed Smith Richards Butler) seeking disclosure of information relating to Profit’s funder(s) in this litigation.

12. In view of the fact the Judgment Sum and any interest thereon belong beneficially to Profit, it seems to me to be obvious that Profit has a sufficient interest to intervene in the present application by Waddington against Thomas. I would therefore grant leave to Profit to intervene in Waddington’s application. On the other hand, I do not see why this application should be heard together with Waddington’s other application mentioned above.

ISSUE 1: WHETHER THE SHORTFALL SHOULD BE PAID INTO COURT INSTEAD OF TO PROFIT?

13. The only change that the Court of Appeal expressly made to the Order was to substitute the applicable pre-judgment interest rate on the Judgment Sum, leaving the rest of the Order intact. That being the position, it seems to me to be clear that the effect of the Order, read together with the CA Order, is to require Thomas to pay the Judgment Sum together with pre-judgment interest thereon, calculated at the rate of 1% per annum above the HSBC Best Lending Rate from time to time from 28 September 2000 to 18 December 2013, into court. It follows that the Shortfall ought to be paid into court instead of to Profit.

14. On behalf of Thomas, Mr Ngo argues that the 21 days’ period for payment into court under the Order had long expired by the time of the hearing of the appeal, and the Court of Appeal could not possibly have envisaged that Thomas would be required to pay the Shortfall into court within 21 days of the date of the Order. Plainly, the time limit set by the Order for payment into court could not be complied with, and the Court of Appeal could not have intended that Thomas would be required to do the impossible. It is, however, a different matter whether Thomas should be required to pay into court the pre-judgment interest, which the Court of Appeal held should be calculated at a higher rate. As mentioned above, I consider it to be clear that such requirement was not intended to be disturbed by the Court of Appeal.

15. Mr Ngo next argues that Thomas has already paid the Shortfall to Profit and it would be unfair to require him to make another payment into court. If I am correct in my view regarding the true effect of the Order as varied by the CA Order, Thomas should never have paid the Shortfall to Profit in the first place. It is up to Thomas to seek repayment from Profit. It has not been suggested that Profit is not in a position to repay the Shortfall to Thomas.

16. On behalf of Profit, Mr Mok argues that there is no need for the Shortfall to be paid into court because the money already paid into court (in excess of HK$44 million) is more than sufficient to protect Waddington’s costs position. I am not, however, being asked to make a fresh order under this part of Waddington’s summons. I am merely construing the effect of the original Order as varied by the CA Order and applying it to the facts before me. I would observe that, in any event, the order requiring Thomas to pay the Judgment Sum and pre-judgment interest thereon into court was not designed to provide a pot of funds from which Waddington might obtain satisfaction of the costs that it had been awarded.

ISSUE 2: WHETHER THE POST-JUDGMENT INTEREST ON THE PRINCIPAL JUDGMENT SUM SHOULD LIKEWISE BE PAID INTO COURT INSTEAD OF TO PROFIT?

17. The Order is silent on post-judgment interest. It cannot, in my view, be construed as requiring Thomas to pay the post-judgment interest into court. However, logic would dictate that the post-judgment interest should also be paid into court. Since Thomas has not in fact made payment of the post-judgment interest and has indicated that he is prepared to do as ordered or directed by the court, I would order Thomas to pay into court the sum of HK$683,078.03 within 14 days of the date of this decision.

ISSUE 3: WHETHER POST-JUDGMENT INTEREST IS PAYABLE ON PRE-JUDGMENT INTEREST UNDER SECTION 49 of the High Court Ordinance?

18. As a matter of principle, pre-judgment interest forms part of the “judgment debt” for the purpose of section 49 of the High Court Ordinance and therefore also carries interest from the date of the judgment until satisfaction: see Novoship (UK) Limited v Vladimir Mikhaylyuk [2013] EWHC 89 (Comm) at paragraphs 21-23, 32-38 and 40; Miliangos v George Frank (Textiles) Ltd (No 2) [1997] QB 489 at 494E-F.

19. As in relation to the post-judgment interest on the Judgment Sum, I consider that the post-judgment interest on the Shortfall should also be paid into court.

20. I therefore order Thomas to pay into court within 14 days post-judgment interest on the Shortfall at the rate of 8% per annum from the date of judgment (18 December 2013) to the date of payment in.

DISPOSITION

21. In respect of Waddington’s summons dated 30 September 2016, I order Thomas to pay into court within 14 days:-

(1) the sum of HK$18,970,563.51;
(2) post-judgment interest on the Shortfall (HK$18,970,563.51) at the rate of 8% per annum from 18 December 2013 to the date of payment in; and
(3) the sum of HK$683,078.03.

22. In respect of Profit’s summons dated 25 November 2016, I make an order in terms of paragraphs 1 and 2 thereof, and dismiss the rest of that summons.

23. On the question of costs, I make the following orders nisi:-

(1) Thomas and Profit shall pay Waddington the costs of Waddington’s summons; and
(2) Profit shall also pay Waddington the costs in relation to Profit’s summons, and there shall be no order as to costs as between Profit and Thomas in relation to that summons.

	(Anderson Chow) Judge of the Court of First Instance
	High Court

Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Samuel Ngo, of K & L Gates, for the 1^st defendant

Mr Johnny Mok, SC and Mr Lam Man-chung, instructed by Reed Smith Richards Bulter, for the 5^th defendant

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^stand 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED)
	and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED	2^nd Defendant
	(formerly known as CHANSAM INVESTMENTS LIMITED)
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司)	3^rd Defendant
	(formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

_______________

Before: Hon Chow J in Chambers

Date of Hearing: 9 June 2015

Date of Handing Down Judgment: 12 June 2015

________________

DECISION

________________

INTRODUCTION

1. I have before me the 5^th defendant’s summons filed on 5 December 2014 (“the Summons”) seeking (i) leave to appeal to the Court of Appeal against an order made by Mr Recorder P Fung SC on 26 November 2014 (“the November Order”), and (ii) a stay of execution of the November Order pending the determination of the 5^th defendant’s proposed appeal. The 5^th defendant’s proposed grounds of appeal are set out in a draft Notice of Appeal annexed to the Summons. References hereinafter to “Grounds” are references to those in the draft Notice of Appeal.

Background facts

2. The present action is a multiple derivative action brought by Waddington Limited (the plaintiff), a minority shareholder of Playmates Holdings Limited formerly known as Playmates Interactive Entertainment Limited (the 3^rd defendant), for wrongs allegedly done to and damage suffered by Profit Point Limited (the 5^th defendant). The 5^th defendant is an indirect wholly-owned subsidiary of the 3^rd defendant via Playmates International Limited (the 4^th defendant). The main protagonists in this action are two brothers, Mr Albert Chan (the person in control of the plaintiff) and Mr Thomas Chan (the 1^st defendant).

3. After a contested trial lasting some 12 days, the learned Recorder handed down a judgment on 18 December 2013 (“the Judgment”) in favour of the 5^th defendant against the 1^st defendant in the sum of HK$33,511,220.32. The learned Recorder also directed the parties to file written submissions on (inter alia) the issues of interest and costs which, as indicated at paragraph 136 of the Judgment, were to be dealt with on paper without any hearing.

4. On 15 January 2014, the 1^st defendant filed a Notice of Appeal in CACV 10/2014 (“the Main Appeal”) against the Judgment. The plaintiff filed a Respondent’s Notice and a Respondent’s Supplementary Notice on 5 February 2014 and 3 June 2014 respectively.

5. In the meantime, on 10 March 2014, the learned Recorder, following consideration of written submissions from the plaintiff and the 5^th defendant, delivered a written ruling on interest and costs (“the March Ruling”) and made the following order (“the March Order”):-

(1)   the 1^st defendant do pay to the 5^th defendant simple interest at the rate of 2.5% per annum on the judgment sum of HK$33,511,220.32 from 28 September 2000 until the date of judgment (ie 18 December 2013);
(2)   the 1^st defendant do pay into court the judgment sum together with interest thereon within 21 days from the date of the March Order;
(3)   the 1^st defendant do pay to the plaintiff the costs of this action to be taxed on the common fund basis, if not agreed;
(4)   there be certificate for three counsel;
(5)   the 5^th defendant do indemnify the plaintiff in respect of any costs incurred by the plaintiff which it will not have been able to recover from the 1^st defendant (“the Shortfall”);
(6)   the parties have liberty to apply to a Judge of the Court of First Instance for further directions in respect of the working out of the order, if necessary.

6. On 21 March 2014, the 1^st defendant, in compliance with the March Order, paid the sum of HK$44,597,466.49 (comprising the principal sum of HK$33,511,220.32 and interest thereon) into court.

7. On 22 August 2014, the plaintiff issued a summons (“the August Summons”) seeking, inter alia, the following relief:-

(1)   an interim payment to the plaintiff “pursuant to the Order for indemnity in favour of the Plaintiff against the 5^th Defendant made by Recorder P. Fung SC dated 10^th March 2014…, which Interim Payment shall be paid out from the sum paid into Court by the 1^st Defendant on 21^st March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th Defendant”;
(2)   the interim payment be in the sum of HK$30,913,708.39, or such other amount as the court may deem just; and
(3)   the 5^th defendant do further indemnify the plaintiff in respect of any costs incurred by the plaintiff in the Main Appeal with liberty to the plaintiff to apply for further payment out of the sum paid into court by the 1^st defendant in respect of such indemnity.

8. The August Summons came before the learned Recorder on 13 November 2014, who handed down his written decision on 26 November 2014 (“the November Decision”) and made, inter alia, the following order (ie, the November Order) upon the undertaking of the plaintiff and Mr Albert Chan that they and each of them will account to the 5^th defendant and pay back into court such amount of costs as actually recovered by the plaintiff from the 1^st defendant following actual payment by the 1^st defendant of the costs ordered to be paid under the March Order:-

(1) there be an order for interim payment to the plaintiff in the sum of HK$23,000,000 out of the sum paid into court by the 1^st defendant on 21 March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th defendant; and
(2) the 5^th defendant do indemnity the plaintiff in relation to the costs of the Main Appeal (“the Appeal Indemnity”).

9. The 5^th defendant now seeks leave to appeal against the November Order, and a stay of execution of the November Order pending the determination of its proposed appeal.

Applicable principles for leave to appeal

10. The principles governing an application for leave to appeal against an interlocutory judgment or order of the Court of First Instance to the Court of Appeal are well settled. Leave to appeal shall not be granted unless the court hearing the application for leave is satisfied that (a) the appeal has a reasonable prospect of success; or (b) there is some other reason in the interests of justice why the appeal shall be heard. Further, as explained by the Court of Appeal in SMSE v KL [2009] 4 HKLRD 127, at paragraph 17 per Le Pichon JA (with whom the other member of the Court of Appeal agreed), a “reasonable” prospect of success for this purpose means a prospect which is more than “fanciful” but without having to be “probable”.

Proposed appeal in respect of the order for interim payment

11. Grounds 1 to 3 relate to the order for interim payment. The following points are raised by the 5^th defendants in those grounds:-

(1)   The November Order, in so far as it relates to the interim payment, is in effect a variation of the March Order. However, the March Order had been duly sealed prior to the making of the November Order and thus the learned Recorder was functus officio and had no jurisdiction to make the November Order.
(2)   The learned Recorder had no jurisdiction, alternatively erred in principle, in ordering an interim payment of HK$23,000,000 when, at this stage, it is impossible to ascertain whether this sum would exceed the amount of the Shortfall.
(3)   Further or alternatively, having regard to the indemnity provision in the March Order and the very substantial amount of costs claimed by the plaintiff relative to the judgment sum, the learned Recorder erred in principle, or acted unreasonably, or had failed to take into account relevant considerations, in ordering an interim payment of HK$23,000,000 when, at this stage, it is impossible to ascertain whether such sum would exceed the amount of the Shortfall.

(i) Preliminary observations

12. Under the March Order, the 5^th defendant’s obligation to indemnify the plaintiff is in respect of the Shortfall only. The November Order, on the other hand, goes further than the March Order in that it requires, or enables, payment of the plaintiff’s costs to be made out of funds belonging to the 5^th defendant, at a time when the amount of the Shortfall has not yet been ascertained. As pointed out by Mr Johnny Mok SC (for the 5^th defendant), it is by no means clear on the evidence that the amount of the Shortfall would come to HK$23,000,000.

13. Hence, if the November Order is to be regarded as having being made “pursuant to” the indemnity provision in the March Order, there would be force in Mr Mok’s argument that the November Order was in effect a variation of the March Order and that the learned Recorder had no jurisdiction to vary the same in view of the fact that by the time of the making of the November Order the March Order had already been drawn up and sealed: see Wong Hung Kar Kee Mimi v Severn Villa Ltd [2014] 1 HKLRD 1088, at paragraphs 16 to 17 and 32 per Queenie Au-Yeung J, applying the following principle stated by Keith JA in Andayani v Chan Oi Ling [2000] 4 HKC 233, at 237C-D:-

“There must, of course, come a time in any proceedings when the court must be regarded as having completed its task. When that time is reached, the court is said to be functus officio. Once that stage has arrived, the court has no further jurisdiction over the case. But when does that stage arrive? The answer given by the common law is when the judge's order has been drawn up, entered or otherwise perfected.”

14. There is some support for the view that the November Order was indeed an order made pursuant to the indemnity provision in the March Order having regard to the way in which paragraph 1 of the August Summons was framed, namely, “there be an interim payment to the Plaintiff pursuant to the Order for indemnity in favour of the Plaintiff against the 5^th Defendant made by Recorder P. Fung SC dated 10^th March 2014 …”.

15. However, as explained by Mr Benjamin Yu SC (for the plaintiff) and as appears from paragraphs 14 and 15 of the November Decision, the application for interim payment was advanced “on a wider basis than just paragraph 5 of the March Order” and was so dealt with by the learned Recorder, such “wider basis” being a reference to (according to the plaintiff) the general equitable jurisdiction of the court to grant an indemnity in respect of the plaintiff’s costs and make an order for interim payment of those costs.

16. In what follows, I shall proceed on the basis that the learned Recorder did approach the August Summons as an exercise under the general equitable jurisdiction of the court and not as an application “pursuant to” the indemnity provision in the March Order.

(ii) Ground 1

17. On behalf of the 5^th defendant, Mr Mok argues that the court’s jurisdiction to order a company to indemnify a minority shareholder in respect of his costs incurred or to be incurred in a derivative action brought by that shareholder for the benefit of the company is a statutory jurisdiction based on section 52A(1) of the High Court Ordinance (Cap 4), which provides as follows:-

“Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.”

18. On the other hand, Mr Yu contends that the court’s jurisdiction is not based on statute, but on its general equitable jurisdiction.

19. In support of his argument, Mr Mok has referred me to the judgment of Buckley LJ in Wallersteiner v Moir (No 2) at 403F-G where it was pointed out that while the right of a trustee or agent to seek an indemnity costs order has been treated as founded in contract, it would be difficult to imply a contract of indemnity between a company and one of its members in relation to the latter’s costs incurred or to be incurred in a derivative action. There is, however, nothing in that judgment or in the judgments of Lord Denning MR or Scarman LJ in the same case which suggests that the court’s jurisdiction to make an indemnity costs order in favour of a minority shareholder in a derivative action is based on statute, as opposed to the court’s general equitable jurisdiction.

20. On the other hand, Mr Yu has referred me to the following passages in Wallersteiner v Moir (No 2)which explain the basis of the court’s jurisdiction to make such indemnity costs order:-

(1) Lord Denning MR at 391G-H:
“… the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency. This indemnity does not arise out of a contract express or implied, but it arises on the plainest principles of equity. It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris”.
(2) Buckley LJ at 403E-404B:
“But there are circumstances in which a party can embark on litigation with a confident expectation that he will be indemnified in some measure against costs. A trustee who properly and reasonably prosecutes or defends an action relating to his trust property or the execution of the trusts is entitled to be indemnified out of the trust property. An agent is entitled to be indemnified by his principal against costs incurred in consequence of carrying out the principal's instructions: Broom v. Hall (1859) 7 C.B. N.S. 503; Pettman v. Keble (1850) 9 C.B. 701 and Williams v. Lister & Co. [1913] W.N. 295. The next friend of an infant plaintiff is prima facie entitled to be indemnified against costs out of the infant's estate: Steeden v. Walden [1910] 2 Ch. 393. It seems to me that in a minority shareholder's action, properly and reasonably brought and prosecuted, it would normally be right that the company should be ordered to pay the plaintiff's costs so far as he does not recover them from any other party. In all the instances mentioned the right of the party seeking indemnity to be indemnified must depend on whether he has acted reasonably in bringing or defending the action, as the case may be: see, for example, as regards a trustee, In re Beddoe, Downes v. Cottam [1893] 1 Ch. 557. It is true that this right of a trustee, as well as that of an agent, has been treated as founded in contract. It would, I think, be difficult to imply a contract of indemnity between a company and one of its members. Nevertheless, where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder's action, the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company's name, it would, I think, clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff's costs.”
(3) Scarman LJ at 407A-B:
“I agree that it is open to the court in a stockholder's derivative action to order that the company indemnify the plaintiff against the costs incurred in the action. I think that the principle is the same as that which the court applied in In re Beddoe; Downes v. Cottam [1893] 1 Ch. 547, which concerned the costs incurred by a trustee in an action respecting the trust estate. The indemnity is a right distinct from the right of a successful litigant to his costs at the discretion of the trial judge; it is a right which springs from a combination of factors - the interest of the company and its shareholders, the relationship between the shareholder and the company, and the court's sanction (a better word would be ‘permission’) for the action to be brought at the company’s expense.”

21. Mr Yu also relies on the judgment of Lindley LJ in Re Beddoe [1898] 1 Ch 547 at 553-555 to show that costs incurred by a trustee which the court allows to be paid out of the trust estate is not to be regarded as “costs” falling within the discretion of the court but ought properly to be regarded as charges and expenses incurred in the execution of the trust:

“ The summons was heard by Mr. Justice Kekewich, and he authorized the payment of the costs of the action and of the summons out of the trust estate. From this order Mr. Cottam has appealed.
The first question which arises is whether any appeal lies from that order, and for reasons which I will give presently I am of opinion that an appeal does lie. The important sections and rules which we have to consider are the 49th section of the Judicature Act, 1873, and the Order LXV., rule 1. The 49th section of the Act of 1873 runs thus: ‘No order made by the High Court of Justice or any Judge thereof, by the consent of parties, or as to costs only, which by law are left to the discretion of the Court, shall be subject to any appeal, except by leave of the Court or Judge making such order.’ Therefore, we have to ascertain what costs only are by law left to the discretion of the Court. That is found by turning to Order LXV., rule 1… Now, in the first place, it will be observed that neither in the Act nor in the rule is there a word said about charges and expenses, either of mortgagees or trustees. The 49th section relates to ‘costs only’ which by law are left to the discretion of the Judge… Then what costs are there referred to? ‘Subject to the provisions of the Act and these rules, costs of and incident to all proceedings in the Supreme Court shall be in the discretion of the Court or Judge.’ What Court or Judge? I apprehend the meaning of the rule is quite obvious, that in every proceeding in the Court the costs of that proceeding are in the discretion of the Judge who has to deal with it - who has to try it. He knows the facts of the case, he knows the conduct of the parties and the nature of the controversy, and the costs of every proceeding are, therefore, placed in the discretion of the Judge who tries the proceeding. It does not mean that the costs in a proceeding are to be in the discretion of the Court or Judge before whom these costs may incidentally come, upon an application to have them borne by some fund or some person not before the Court in the proceedings in which they have been incurred - that is not the meaning of the rule. Although costs are costs when they are incurred, the moment you come to ask that they shall be borne as expenses by a particular fund, or by persons not parties to the proceedings in which they were incurred, they become, not costs, but charges and expenses, and when once you get them into the category of charges and expenses this rule and this enactment do not apply to them.”

22. Mr Yu argues that the same analysis is applicable to an indemnity costs order made by the court under the principles established in Wallersteiner v Moir (No 2).

23. To counter these views, Mr Mok has referred me to the judgment of the English Court of Appeal in McDonald v Horn [1995] 1 All ER 961 which related to an application for a pre-emptive costs order in the context of an action brought by members of an occupational pension scheme against (inter alia) the pension fund trustees. The claimants alleged breaches of trust and abuse of fiduciary powers on the part of the trustees and brought the action to compel them to account to the fund. One of the issues raised in that case was whether the court had jurisdiction to make the pre-emptive costs order sought. Hoffmann LJ (as he then was) considered that there was a compelling analogy between a minority shareholder’s action for damages on behalf of a company and an action by a member of a pension fund to compel trustees or others to account to the fund, and thus the principles established in Wallersteiner v Moir (No 2) should be extended to the latter situation. On the question of the court’s jurisdiction to make such order, Hoffmann LJ considered that it was to be found in section 51 of the Supreme Court Act 1981 (which is equivalent to section 52A(1) of the High Court Ordinance).

24. The last authority which I need to refer to is the decision of the Court of Final Appeal in Financial Secretary v Wong (2003) 6 HKCFAR 476, in particular the judgment of Litton NPJ at paragraphs 103 to 110:-

“ 103. One starts with the proposition that, historically, at common law, the court had no power to award costs.
…
105. In the Court of Chancery, the position was different - see the observations of Lord Hatherley in Garnett v. Bradley at 957 – the Court of Chancery always having had a wide discretion as to the measure and extent as to costs: see also Andrews v. Barnes (1888) 39 Ch.D. 133 at 138.
106. Then came the Judicature Act 1875, mingling the jurisdictions of the courts of common law and equity. By Order LV (incorporated as part of the Act in the schedule) judges of the High Court were given a general discretion as to costs. Order LV is in these terms:
‘Subject to the provisions of the Act, the costs of an incident to all proceedings in the High Court shall be in the discretion of the Court; but nothing herein contained shall deprive a trustee, mortgagee, or other person, of any right to costs out of a particular estate or fund to which he would be entitled according to the rule hitherto acted upon in Courts of Equity: Provided, that where any action or issue is tried by a jury, the costs shall follow the event, unless upon application made at the trial, for good cause shewn, the Judge, before whom such action or issue is tried, or the Court shall otherwise order.’
107. Plainly, the intention of the legislature was to sweep all the powers of the judges of the High Court as regards costs under one roof: categorized by Lord Hatherley in Garnett v. Bradley at 955 as the judge’s ‘absolute discretion (meaning of course his judicial discretion) to determine this question of costs’.
108. Ever since that time, the jurisdiction in England to award costs has been entirely statutory…
109. In Hong Kong the Supreme Court of Judicature was first established in 1844 by Ordinance No. 15 of that year. In essence the law of England was introduced into Hong Kong, except where local conditions rendered them inapplicable or where they had been modified by laws passed by the local legislature. The Supreme Court Ordinance of 1873 established the model for the modern Supreme Court which existed (with many modification) until the resumption of sovereignty in 1997. Throughout this period the jurisdiction and the practice relating to the award of costs in Hong Kong followed that of England: To the extent that the current s.52A(1) of the High Court Ordinance is in terms virtually identical to s.51(1) of the Supreme Court Act 1981.
110. It follows from what is said above that in Hong Kong, as in England, the jurisdiction of the High Court to award costs is statutory.”

25. The above judgment of Litton NPJ would tend to suggest that the equitable jurisdiction of the court to order the costs of a trustee, mortgagee, or other person to be paid out of a particular estate or fund should now be regarded as being statutorily based. If that be the right view to take, it would be difficult to see why the court’s jurisdiction to make an indemnity costs order in favour of a minority shareholder in a derivative action should stand on a different footing.

26. While the matter is not free from doubt, on the basis of the existing authorities, I consider the better view to be that the court’s jurisdiction to make an indemnity costs order in favour of a minority shareholder in a derivative action should, strictly speaking, be regarded as being based on section 52A(1) of the High Court Ordinance, but equitable principles would continue to govern the exercise of such jurisdiction by the court. I do not, however, need to come to a final conclusion on this issue for the purpose of the present application. All that I need to be satisfied is that the proposed appeal has a “reasonable prospect of success” as explained by the Court of Appeal in SMSE v KL. This threshold can, in my view, plainly be satisfied in relation to the proposition that the court’s jurisdiction to make an indemnity costs order in such a situation is based on section 52A(1) of the High Court Ordinance.

27. I have dealt with the issue of the basis of the court’s jurisdiction to make an indemnity costs order in favour of a minority shareholder in a derivative action at some length out of deference to the detailed submissions made by leading counsel on this issue. For reasons explained below, I have reservation on whether the resolution of this nice legal issue would be decisive of the question raised by Ground 1.

28. The indemnity provision in the March Order (ie paragraph 5 thereof) was, as accepted by Mr Yu, itself an exercise of the court’s discretion under the principles established in Wallersteiner v Moir (No 2). However, the indemnity granted by the learned Recorder on that occasion was restricted to the Shortfall only. As I see it, it was open to the plaintiff to seek a wider costs indemnity and/or interim payment in conjunction with the indemnity at that time (ie in the written submissions filed pursuant to the directions contained in paragraph 136 of the Judgment). It may be that the plaintiff did not see any need to do so at that stage. Whatever may be the reason(s) for the plaintiff’s initial decision not to ask for a wider costs indemnity and/or interim payment in conjunction with the indemnity, there is, it seems to me, a serious question susceptible to reasonable debate on whether it was open to the plaintiff to subsequently seek a further or different order from the court against the same party and in respect of the same costs. This question arises irrespective of the true basis of the court’s jurisdiction to make an indemnity costs order in favour of a minority shareholder in a derivative action. In this regard, I consider that the decision of the Court of Final Appeal in The Liberty Container (2007) 10 HKCFAR 256 relied on by Mr Yu is, arguably, distinguishable in that the two costs orders made in that case were against two different parties.

29. Since I am satisfied that the 5^th defendant’s proposed appeal under Ground 1 has a “reasonable prospect of success”, I shall grant leave to the 5^th defendant to appeal on that ground.

30. In passing, I should mention that I am of the view, if the learned Recorder had jurisdiction to make a wider indemnity costs order in favour of the plaintiff against the 5^th defendant, he would also have jurisdiction to make the order for interim payment, such jurisdiction being supplemental or incidental to the jurisdiction to make the wider indemnity costs order, in much the same way that the court has jurisdiction to order interim payment of fees and disbursements incurred by liquidators or provisional liquidators on behalf of the company of which they have been appointed as liquidators or provisional liquidators: see Re MF Global HK Ltd (No 2) [2012] 3 HKLRD 56; Re Lehman Brothers Securities Asia Ltd (No 1) [2010] 1 HKLRD 43.

(iii) Grounds 2 and 3

31. Grounds 2 and 3 are both premised on the assumption that the order for interim payment in the November Order was linked to the indemnity provision in the March Order and was intended to cover the Shortfall. However, it is clear from the November Decision that the application for interim payment was advanced by the plaintiff, and dealt with by the learned Recorder, on the basis of the court’s “wider jurisdiction” under the principles as established in Wallersteiner v Moir (No 2). I do not consider Grounds 2 and 3 to be arguable and I am not prepared to grant leave to appeal in respect of those grounds.

Proposed appeal in respect of the Appeal Indemnity

32. Grounds 4 to 5 relate to the order for the Appeal Indemnity. Two points are raised:-

(1) The learned Recorder had no jurisdiction, alternatively erred in principle, in ordering the 5^th defendant to indemnify the plaintiff in relation to the costs of the Main Appeal.
(2) Further or alternatively, having regard to the relatively modest terms of the indemnity provision in the March Order and the very substantial amount of costs of the action already claimed by the plaintiff relative to the judgment sum, the learned Recorder erred in principle, or acted unreasonably, or had failed to take into account relevant considerations, in ordering the 5^th defendant to provide a full indemnity to the plaintiff in relation to the costs of the Main Appeal, when a fairer and more reasonable order in all the circumstances would have been to order the 5^th defendant to indemnify the plaintiff only in respect of any costs incurred by it which it will not have been able to recover from the 1^st defendant in the Main Appeal, or some other order short of a full indemnity.

33. On the question of jurisdiction, Mr Mok argues that only the Court of Appeal, but not the learned Recorder (or any first instance judge) has the power to order the 5^th defendant to indemnify the plaintiff in relation to the costs of the Main Appeal. This does not seem to me to be the correct legal position. In relation to an application by a trustee for a Beddoe order in respect of the costs of an appeal or possible appeal to the Court of Appeal, it seems clear that the application can be made to a first instance judge: see Re Mong Man Wai William, CACV 34/2012 (20 December 2012), at paragraphs 27 and 68; see also Kimball Wong v Cynthia Fok Shin Yee, CACV 143/1987 (23 December 1987) in relation to a prospective appeal to the Privy Council from the Court of Appeal prior to 1997. I see no reason why the practice should be any different in relation to a similar application by a minority shareholder under the principles established in Wallersteiner v Moir (No 2).

34. The wording of section 52A(1) of the High Court Ordinance does not compel a contrary conclusion. There seems to me no good reason to read section 52A(1) narrowly to exclude the Court of First Instance from having the jurisdiction to make an indemnity costs order in favour of a party in respect of the costs which he may incur in the Court of Appeal: see Laws v National Grid Plc [1998] Pens LR 205, at paragraphs 45 to 47 per Laddie J. Whether the Court of Instance should exercise such jurisdiction in any given case is a matter of discretion which can be reviewed by the Court of Appeal in accordance with the well established principles governing an appeal against an exercise of discretion by a first instance judge.

35. The scope or extent of the indemnity to be granted also seems to me to be a matter of discretion for the learned Recorder. In Wallersteiner v Moir (No 2) [1975] 1 QB 373 at 407A-D, Scarman LJ expressed the view that the indemnity to the minority shareholder is a “full indemnity” such as an agent has who incurs expense in the authorised business of the principal. The learned Recorder’s decision to order a full indemnity in respect of the costs incurred or to be incurred by the plaintiff in the Main Appeal is consistent with this view. I can see no valid basis to challenge the exercise of discretion by the learned Recorder on this point.

Disposition

36. In all, I grant to the 5^th defendant leave to appeal under Ground 1. In lieu of any stay of execution, I have been told by Mr Yu that the plaintiff is prepared to give the same undertaking referred to in paragraph 12 of my earlier decision dated 5 December 2014 pending the determination by the Court of Appeal of the 5^th defendant’s appeal. I therefore made no order on the 5^th defendant’s stay application upon the plaintiff’s aforesaid undertaking.

37. I also make an order nisi that the costs of this application, as well as the costs reserved on 5 December 2014, with certificate for two counsel, be in the cause of the 5^th defendant’s appeal.

38. Lastly, it remains for me to thank counsel for the assistance that they have rendered to the court.

	(Anderson Chow)
	Judge of the Court of First Instance
	High Court

Mr Benjamin Yu, SC and Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Johnny Mok, SC and Mr Lam Man-chung, instructed by Reed Smith Richards Bulter, for the 5^th defendant

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

______________________

BETWEEN
	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1st and 2nd defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED	Plaintiff
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant
______________________

Before: Mr Recorder Patrick Fung SC in Court

Date of Written Submissions: 11 December 2014

Date of Handing Down Ruling: 17 December 2014

________________________

RULING ON COSTS

________________________

1. I refer to my Decision handed down on 26 November 2014 (“my Decision”).

2. Paragraph 48 of my Decision reads as follows:

“48. I therefore make the following orders:
(i) Upon the undertaking to the Court by each of the Plaintiff and Chan Chun Wai Albert through the Plaintiff’s Leading Counsel that they and each of them will account to the 5^th Defendant and pay back into Court such amount of costs as actually recovered by the Plaintiff from the 1^st Defendant following actual payment by the 1^st Defendant, there be an order for interim payment to the Plaintiff in the sum of $23,000,000 from out of the sum paid into Court by the 1^st Defendant on 21 March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th Defendant.
(ii) An order that the 5^th Defendant do indemnify the Plaintiff in relation to the costs of the appeal by the 1^st Defendant to the Court of Appeal against the Judgment herein handed down on 18 December 2013.
(iii) An order nisi that the costs of this application be paid by the 5^th Defendant to the Plaintiff.”

3. By a Summons issued by the plaintiff on 3 December 2014 (“the Summons”) the plaintiff asks for an order in the following terms:

“1. The order nisi as to costs made by Mr Recorder Patrick Fung, SC in the Decision handed down on 26 November 2014 be varied as follows:
“The costs of this application be paid by the 5^th Defendant forthwith to thePlaintiff, to be paid out from the sum paid into Court by the 1^st Defendant on 21 March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th Defendant”; and
2. The costs of this application be paid forthwith by the 5^th Defendant to the Plaintiff, to be paid out from the sum paid into Court by the 1^st Defendant on 21 March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th Defendant.”

4. I then directed that the parties should make written submissions on the Summons and that I would decide the matter on paper.

5. The plaintiff made its Submissions dated 11 December 2014 and the 5^th defendant likewise made its Submissions dated 11 December 2014.

6. Apparently, the 5^th defendant was agreeable to an order being made in terms of the Summons. That was communicated to the plaintiff on 10 December 2014. Nevertheless, the plaintiff still made its Submissions on 11 December 2014. That was followed by the 5^th Defendant’s Submissions.

7. In the above circumstances, I must deal with the matter on the basis that there is no consensus between the parties and I will decide on the Summons as I think fit.

8. As I understand it, the plaintiff’s contention is that it is entitled to the costs of the Interim Payment Application from the 5^th defendant and also to an order that the same be payable forthwith from out of the sum paid into court by the 1^st defendant on 21 March 2014 on an indemnity basis and without the need to go for taxation. The plaintiff bases such contention on the fact that, in my Order dated 10 March 2014 (“the March Order”), I had already ordered that “the 5^th defendant do indemnify the plaintiff in respect of any costs incurred by the plaintiff which it will not have been able to recover from the 1^st defendant”.

9. I believe that the plaintiff has misunderstood the effect of paragraph 5 of the March Order. Paragraph 5 of the March Order dealt only with the costs in the trial of the action. It did not deal with the costs of the Interim Payment Application which had not even been issued when the March Order was made. Furthermore, it only dealt with the costs incurred by the plaintiff in the lis between the plaintiff and the 1^st defendant.

10. The Interim Payment Application is something completely different. It is strictly an argument between the plaintiff and the 5^th defendant and has got nothing to do with the 1^st defendant.

11. Regarding the Interim Payment Application, I have already made an order nisi that the costs of the same be paid by the 5^th defendant to the plaintiff. I have not said that it is on an indemnity basis and I have not ruled that it is not necessary to go for taxation. Those costs must be taxed on a party and party basis and then paid by the 5^th defendant to the plaintiff. If by that stage the parties agree that such payment should be satisfied from out of the fund in court, they can do it by way of a consent summons.

12. In the circumstances, I make absolute my order that the costs of the Interim Payment Application be paid by the 5^th defendant to the plaintiff.

13. Regarding the Summons itself, the plaintiff has failed to persuade me to vary my costs order nisi. I see no reason why the plaintiff should not pay the costs of the Summons to the 5^th defendant and I so order.

	(Patrick Fung SC)
	Recorder of the Court of First Instance
	of the High Court

Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Johnny Mok SC and Mr MC Law, instructed by Reed Smith Richards Butler, for the 5^th defendant

HCA 3291 of 2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

______________

BETWEEN

	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED	Plaintiff
	and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2^nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3^rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

________________

Before: Mr Recorder Patrick Fung SC in Chambers

Date of Hearing: 13 November 2014

Date of Decision: 26 November 2014

_____________

D E C I S I O N

_____________

THE APPLICATION

1. This is an application by the plaintiff by summons issued on 22 August 2014 (“the Summons”). Paragraphs 1 – 3 of the Summons read as follows : -

“1. there be an interim payment to the Plaintiff pursuant to the Order for indemnity in favour of the Plaintiff against the 5^th Defendant made by Recorder P. Fung SC dated 10^th March 2014 (“the Interim Payment”), which Interim Payment shall be paid out from the sum paid into Court by the 1^st Defendant on 21^st March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th Defendant (“the Sum in Court”);
2. the Interim Payment be in the sum of HK$30,913,708.39, or such other amount as the Court may deem just;
3. the 5^th Defendant do further indemnify the Plaintiff in respect of any costs incurred by the Plaintiff in CACV 10/2014 (“the Appeal Indemnity”) with liberty to the Plaintiff to apply for further payment out of the Sum in Court in respect of the Appeal Indemnity;”

BACKGROUND

2. I set out below the background history of the case.

3. After a trial before me lasting 12 days, I handed down my judgment on 18 December 2013 (“the Judgment”).

4. In the Judgment, I already set out the history of these proceedings which began as early as in 2003. I will not repeat the same here. Where applicable, I shall use the same abbreviations and definitions here as in the Judgment.

5. I gave judgment in favour of Profit Point and against Thomas in the sum of $33,511,220.32.

6. Subsequently to the Judgment, the parties made written submissions on a number of consequential matters such as interest and costs.

7. On 10 March 2014, I handed down my Ruling On Interest And Costs (“the Ruling”). An order of the same date (“the March Order”) was sealed as a consequence of the Ruling.

8. By the March Order, it was ordered as follows : -

“1. the 1^st Defendant do pay to the 5^th Defendant simple interest at 2.5% per annum on the judgment sum of $33,511,220.32 from 28^th September 2000 until the date of judgment;
2. the 1^st Defendant do pay into court the judgment sum of $33,511,220.32 together with interest thereon as aforesaid within 21 days from the date hereof pending further directions by the court;
3. the 1^st Defendant do pay to the Plaintiff the costs of this action to be taxed on the common fund basis, if not agreed;
4. there be a certificate for three Counsel;
5. the 5^th Defendant do indemnify the Plaintiff in respect of any costs incurred by the Plaintiff which it will not have been able to recover from the 1^st Defendant; and
6. the parties have liberty to apply to a Judge of the Court of First Instance for further directions in respect of the working out of this order, if necessary.”

9. Paragraph 5 of the March Order is “the Order for indemnity” referred to in paragraph 1 of the Summons.

10. Pursuant to paragraph 2 of the March Order, on 21 March 2014, Thomas paid into court the judgment sum together with interest thereon in the total amount of $44,597,466.49. That money has been sitting in court earning interest and is “the Sum in Court” referred to in paragraph 1 of the Summons.

PRELIMINARY MATTERS

11. First, at the beginning of the hearing, Mr Chan SC (leading Mr Law) for Profit Point, took the preliminary objection that the application should not be entertained by the court because the Summons had not been served on Thomas.

12. After hearing arguments, I overruled the objection and said that I would give my reasons later. I shall do so below.

13. Secondly, one of the points taken by Mr Chan SC in his main argument was that, under paragraph 5 of the March Order, the indemnity for costs in favour of Waddington from out of the assets of Profit Point was only for any shortfall which Waddington would not have been able to recover from Thomas. Since there has not yet been any taxation of costs in the proceedings, Profit Point should not have to indemnify Waddington in respect of any costs at this stage.

14. I raised with Mr Yu SC (leading Mr Lam) for Waddington the question as to whether it was accurate for Waddington to state under paragraph 1 of the Summons that interim payment was applied for “pursuant to the Order for indemnity in favour of the Plaintiff against the 5^th Defendant made by Recorder P Fung dated 10 March 2014”. Mr Yu SC thereupon clarified and said that Waddington’s application was made on a wider basis than just paragraph 5 of the March Order.

15. I shall therefore deal with the application on the wider basis as stated by Mr Yu SC.

THE CASE OF WADDINGTON

16. The case of Waddington can be summarised as follows : -

(i) Profit Point has no valid basis for making the preliminary objection or resisting the application for the following reasons : -
(a) Thomas, who was found to be the wrongdoer in the Judgment, is in control of Playmates which holds 100% of Playmates International and through it 100% of Profit Point.
(b) The only two directors of Profit Point have been Thomas and Mr To Shu Sing Sydney (“Mr To”).
(c) Mr To, who has made an affirmation (“Mr To’s Affirmation”) which was filed on 7 November 2014 on behalf of Profit Point in opposition to the application, is in fact a close ally of and acting at the bidding of Thomas. Mr To was also heavily involved in the impugned transaction referred to in the Judgment.
(d) Profit Point had all the time professed to take a neutral stance in the proceedings until shortly before the hearing of the present application.
(e) Thomas must have been aware of the present application since the time of the filing of the Summons in August 2014 but Profit Point (in effect acting for Thomas) did not file evidence of opposition until very shortly before the hearing, that is, by filing Mr To’s Affirmation.
(f) The resistance to the application is in reality put up for the benefit of Thomas who should have put up resistance himself by applying for a stay of execution pending his appeal against the Judgment.
(g) Thomas would have failed in any application for a stay pending appeal because he would not have been able to satisfy the test for such a stay, that is, whether there are strong grounds of appeal. Hence, he should not be allowed to resist the application through the back-door.
(ii) The court does have inherent jurisdiction to grant the application both for an order for interim payment and for indemnity for costs in relation to the appeal by Thomas.
(iii) The court should exercise its discretion in ordering the interim payment applied for for the following reasons : -
(a) Waddington has expended vast sums of money by way of legal costs in the past 11 years in the proceedings for the benefit of Profit Point.
(b) It is fair and just that Profit Point should reimburse Waddington in respect of such legal costs.
(c) On the authority of Wallersteiner v Moir (No. 2) [1975] QB 373, the court should order the company for whose benefit a derivative action is brought to indemnify the plaintiff in respect of the legal costs incurred.
(d) In any event, Waddington was in effect acting as the agent for Profit Point and, on the law of agency, the principal should indemnify the agent in respect of its expenses incurred for the principal.
(e) Now that money has in fact been recovered for Profit Point by way of the fruits of the litigation, Profit Point should reimburse Waddington for the legal costs expended.
(f) The purpose of paragraph 5 of the March Order is only to make sure that Waddington will not recover double both from Thomas and Profit Point. It does not derogate from the obligation on the part of Profit Point to indemnify Waddington.
(iv) The court should also exercise its discretion in ordering that Profit Point do indemnify Waddington in resisting the appeal by Thomas against the Judgment because it is clearly in the interest of Profit Point for the Judgment to be upheld so that Profit Point can keep the fruits thereof. By the March Order, the court has indeed already granted an indemnity by Profit Point in favour of Waddington regarding the legal costs of the action including the trial. A fortiori, there must equally be an indemnity regarding the legal costs of the appeal.

THE ARGUMENTS OF PROFIT POINT

17. The arguments of Profit Point against the application can be summarised as follows : -

(i) Thomas has not been served with the Summons. He has not been involved in the management of Profit Point.
(ii) Now that there is a sum of over $44 million sitting in court which is supposed to be due to Profit Point, any depletion thereof will be to the prejudice of Profit Point.
(iii) Paragraph 5 of the March Order only entitles Waddington to claim from Profit Point any shortfall which it is unable to recover from Thomas. Since Waddington has delayed in proceeding with the taxation of costs and since it is not known how much shortfall there will be, Profit Point should not be asked to provide any indemnification to Waddington at this stage.
(iv) The cases relied on by Waddington in support of the proposition that the court has inherent jurisdiction to order interim payments only relate to the ordering of interim payments in favour of provisional liquidators and have no application to the present situation.
(v) Regarding the indemnity for the costs of the appeal, the application should not be heard “ex parte”. I take that to mean that it should not be heard in the absence of Thomas.

THE PRELIMINARY OBJECTION

18. Profit Point is a company incorporated in the British Virgin Islands (“BVI”). It was dissolved in February 2003 by a Resolution of the Sole Shareholder of Profit Point.

19. The said dissolution was revoked upon Waddington’s application for the restoration of Profit Point to the High Court of the BVI which granted the order of revocation dated 30 September 2005. One of the terms of that order is that the “directors and officers of [Profit Point] may not, without the permission of the Court, engage in any business on behalf of or in the name of [Profit Point].”

20. Since the revocation of the dissolution, the board of directors of Profit Point has always consisted of only Mr To and Thomas.

21. In Mr To’s Affirmation, he says in paragraph 4 as follows : -

“4. Immediately prior to the dissolution in March 2003, the only two directors of the 5^th Defendant were Mr Thomas Chan (i.e. the 1^st Defendant) and myself. Since the 5^th Defendant was restored under the BVI Court Order, the 1^st Defendant has all along been abstaining from participating in the management of the 5^th Defendant and has not been involved in any affairs of the 5^th Defendant, not to mention the conduct of these proceedings for the 5^th Defendant. As a matter of fact, since the restoration of the 5^th Defendant in September 2005, I have been the only director making decisions on its behalf. The 1^st Defendant did not take part in the management of the 5^th Defendant.”

22. I asked Mr Chan SC at the hearing as to whether he was in a position to say that Thomas did not have knowledge of the present application. He said that he was not. He further said that at one stage it was considered by Profit Point as to whether it should write to Thomas to inform him of the present application. Eventually, Profit Point decided not to do so in order to avoid any accusation of collusion between Profit Point and Thomas.

23. I am afraid that I find such apparent attempt to avoid letting Thomas know about the present application puzzling, to say the least.

24. I simply am not able to accept that Thomas has no knowledge of the present application in view of the fact of close association between Mr To and Thomas and the circumstances of the entire case. In any event, Thomas is deemed in law to have knowledge of the same in his capacity as a director of Profit Point.

25. Furthermore, I cannot see how the present application can affect the interest of Thomas, except for the fact that he would want to put obstruction in the way of anything which Waddington wishes to do in these proceedings. The present application is strictly something between Waddington and Profit Point and has got nothing to do with Thomas in his personal capacity.

26. I do not see why the Summons should have been served on Thomas at all. If he had wanted to make submissions to the court, he should have come forward himself instead of through Profit Point.

27. Hence, I overruled Mr Chan SC’s preliminary objection.

INHERENT JURISDICTION

28. Counsel for Waddington have referred me to the cases of Re MF Global HK Ltd (No. 2) [2012] 3 HKLRD 56 and Re Lehman Brothers Securities Asia Ltd (No. 1) [2010] 1 HKLRD 43 in which Harris J in the former case and Barma J (as he then was) in the latter case ordered interim payments in the two winding-up cases to be made to cover the fees and disbursements of provisional liquidators before any taxation of costs could be carried out. They rely on those cases in order to demonstrate that the court has inherent jurisdiction to order interim payments to cover legal costs before taxation can be carried out.

29. In reply, counsel for Profit Point have referred me to the case of Re Hawkins Development Ltd [2010] 1 HKLRD 535 to support the proposition that the court has no power under RHC Order 62 rules 21 to 21C to order an interim payment of costs in non-interlocutory proceedings. In that case, the petitioner in a winding-up petition had paid $700,000 into court as security for the costs of the company. The petition was dismissed with costs to the company on an indemnity basis. The company applied for the money paid into court to be paid out in part satisfaction of its costs. Costs not in dispute totalled $768,812. The Registrar then gave directions for a provisional taxation of the company’s bill of costs by a taxing master without a hearing under Order 62 rule 21B(1) which was set down for February 2010. At issue was whether there was a procedural lacuna, in that the new Order 62 rule 9A (for summary assessment of costs) applied only to interlocutory proceedings and there was no power under Order 62 rules 21 – 21C to order interim payment of costs; and if so, whether the court should exercise its inherent jurisdiction to order the interim payment. On 18 December 2009, Kwan JA (sitting as an additional judge of the Court of First Instance) gave her Decision and held that there was indeed a procedural lacuna and that the court had no power to order interim payments of costs under Order 62 in non-interlocutory proceedings but that the court did have inherent jurisdiction to make such an order. She further held that in exercising such jurisdiction the court must act with circumspection. There was no good reason to deprive the company of part settlement of its costs until completion of the taxation process when the undisputed amount would clearly exceed the amount of the money paid into court as security. She therefore ordered payment out of the sum in court to the company accordingly.

30. In paragraph 17 of her judgment, the learned judge said : -

“Inherent jurisdiction may be exercised to control the process of the court when it is just and equitable to do so, even in respect of matters which are regulated by statute or by rules of court, so long as this could be done without contravening any statutory provision.”

31. It is quite obvious that the three cases cited above do not have direct application to the present case other than in relation to the general inherent jurisdiction of the court.

32. I am satisfied that the court has jurisdiction to entertain the present application on the authority of the Wallersteiner case. In that case Buckley LJ said at p.403G – p.404B : -

“….. It seems to me that in a minority shareholder’s action, properly and reasonably brought and prosecuted, it would normally be right that the company should be ordered to pay the plaintiff’s costs so far as he does not recover them from any other party. In all the instances mentioned the right of the party seeking indemnity to be indemnified must depend on whether he has acted reasonably in bringing or defending the action, as the case may be: see, for example, as regards a trustee. In re Beddoe, Downes v. Cottam [1893] 1 Ch 557. It is true that this right of a trustee, as well as that of an agent, has been treated as founded in contract. It would, I think be difficult to imply a contract of indemnity between a company and one of its members. Nevertheless, where a shareholder has in good faith and on reasonable grounds such as the plaintiff in a minority shareholder’s action, the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company’s name, it would, I think, clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff’s costs. This would extend to the plaintiff’s costs down to judgment, if it would have been reasonable for an independent board exercising the standard of care which a prudent business man would exercise in his own affairs to continue the action to judgment. If, however, an independent board exercising that standard of care would have discontinued the action at an earlier stage, it is probable that the plaintiff should only be awarded his costs against the company down to that state.”
(emphasis added)

At p.407A – D, Scarman LJ (as he hen was) said : -

“ An indemnity. I agree that it is open to the court in a stockholder’s derivative action to order that the company indemnify the plaintiff against the costs incurred in the action. I think that the principle is the same as that which the court applied in In re Beddoe; Downes v Cottam [1893] 1 Ch 547, which concerned the costs incurred by a trustee in an action respecting the trust estate. The indemnity is a right distinct from the right of a successful litigant to his costs at the discretion of the trial judge; it is a right which springs from a combination of factors – the interest of the company and its shareholders, the relationship between the shareholder and the company, and the court’s sanction (a better word would be “permission”) for the action to be brought at the company’s expense. It is a full indemnity such as an agent has who incurs expense in the authorised business of his principal. As a general rule, I would expect application for leave to bring proceedings at the expense of the company to be made at the commencement of the action: but, as Lindley LJ in In re Beddoe at p.557 recognised in relation to a trustee’s action on behalf of the trust estate, if at the end of the case the judge should come to the conclusion that he would have authorised the action had he been applied to, he can even then allow the plaintiff his costs on a full indemnity basis against the company.”
(emphasis added)

See also the judgment of Lord Denning MR at p.391G – p.392F.

33. It is clear from the judgments referred to above that the court has power to order a full indemnity by the company to the plaintiff in a derivative action in respect of his costs incurred for the benefit of the company.

SHOULD INTERIM PAYMENT BE ORDERED

34. In the present case, the battle has been won by Waddington for the benefit of Profit Point. There is a sum of over $44 million deposited in court and earning interest which represent the fruits of the litigation. Waddington has actually paid out of its own funds legal costs exceeding $28 million in the past 11 years with some bills still unsettled.

35. In my judgment, it is plainly just and equitable that an interim payment should be made from out of the money in court to Waddington to cover at least part of the legal costs which it has incurred in these proceedings so far.

36. I cannot see any undue prejudice being caused to Waddington or any creditor of Waddington by such an order. According to paragraph 5 of Mr To’s Affirmation : - “After the BVI Court Order was made in September 2005, the 5^th Defendant has not engaged in any business, nor does it have any assets of its own”. Needless to say, I cannot see any undue prejudice being caused to Thomas by such an order.

37. Regarding the complaint by Profit Point that Waddington has delayed in going for taxation of costs, Mr Yu SC has explained that, insofar as the non-taxation of the costs ordered by the Court of Final Appeal is concerned, it is practically a set-off exercise between Waddington and Thomas which would result in a sum of approximately $2.65 million being due from Waddington to Thomas in the end. Thomas has not taken the initiative to tax these costs and Waddington has no reason to be keen either.

38. Regarding the costs of the trial before me, I accept Mr Yu SC’s submission that, since the matter is very complicated, it has taken some considerable time for the bills of costs to be prepared and drawn up. In any event, they were ready in August 2014 and the matter will proceed to taxation.

39. The matters referred to in paragraphs 37 and 38 above have been deposed to in the 16^th Affirmation of Lo Nga Yin Melissa filed on 12 November 2014.

40. In the result, I do not think that there is anything in the complaint by Profit Point about the delay by Waddington in proceeding to taxation.

AMOUNT OF THE INTERIM PAYMENT

41. Waddington claims an interim payment in the sum of $30,913,708.39 which is broken down as follows : -

(i) $29,526,728.39 being the total amount of legal costs, charges and disbursements incurred by Waddington up to 15 May 2014, of which $28,097,159.39 has already been paid by Waddington out of its own funds;
(ii) $1,386,980 being the sum at least presently estimated to be payable by Waddington to various parties.

42. Both Waddington and Albert have offered an undertaking to the court to account to Profit Point and pay back into court such amount of costs as actually recovered by Waddington from Thomas following actual payment thereof by Thomas.

43. I am satisfied that such an undertaking by each of Waddington and Albert will be sufficient to protect the interest of Profit Point.

44. On the basis of such undertakings, I exercise my discretion and make an order for interim payment to Waddington in the sum of $23,000,00.

45. The fact that I have ordered such a sum instead of the full amount asked for by Waddington will, I believe, give added incentive to Waddington to proceed to taxation as soon as practicable and to press Thomas to proceed with the appeal to the Court of Appeal with all expedition. It will also take care of Profit Point’s submission that it may query about some of the items of costs claimed by Waddington.

INDEMNITY FOR THE APPEAL

46. On the authority of the Wallersteiner case, I cannot see why I should not make an order that Profit Point do indemnify Waddington for the costs of the appeal by Thomas to the Court of Appeal against the Judgment. I do so order.

47. Regarding the liberty to Waddington to apply for further payment out to cover the costs of the appeal asked for, I take the view that normally the respondent will not need to incur much expense before the hearing. Waddington can of course make any application it wishes if circumstances justify it. I am not prepared to give any express liberty at this stage.

CONCLUSION

48. I therefore make the following orders : -

(i) Upon the undertaking to the Court by each of the Plaintiff and Chan Chun Wai Albert through the Plaintiff’s Leading Counsel that they and each of them will account to the 5^th Defendant and pay back into Court such amount of costs as actually recovered by the Plaintiff from the 1^st Defendant following actual payment by the 1^st Defendant, there be an order for interim payment to the Plaintiff in the sum of $23,000,000 from out of the sum paid into Court by the 1^st Defendant on 21 March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th Defendant.
(ii) An order that the 5^th Defendant do indemnify the Plaintiff in relation to the costs of the appeal by the 1^st Defendant to the Court of Appeal against the Judgment herein handed down on 18 December 2013.
(iii) An order nisi that the costs of this application be paid by the 5^th Defendant to the Plaintiff.

49. Finally, I wish to thank counsel for their assistance.

	(Patrick Fung SC) Recorder of the Court of First Instance
	of the High Court

Mr Benjamin Yu SC and Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Warren Chan SC and Mr MC Law, instructed by Reed Smith Richards Butler, for the 5^th Defendant

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

_____________

BETWEEN
	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1st and 2nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PTROFIT POINT LIMITED)	Plaintiff
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant
and
	YUGANG INTERNATIONAL LIMITED	Respondent (in the third party discovery summons)
and
	LEE KAR SZE CARMELO	Intended Witness
	CHIANG SUI FOOK LILIAN	Intended Witness
___________

Date of summary assessment of costs: 13 March 2014

_________________________________

SUMMARY ASSESSMENT OF COSTS

_________________________________

1. This is the summary assessment of costs in respect of the indemnity costs order I made on 5 June 2013.

2. The background leading to the award of costs has been fully set out in my Reasons for Decision dated 7 June 2013 and I do not want to repeat the same here. For the purpose of this summary assessment of costs, I will use the same abbreviations that I have adopted in the said Reasons for Decision.

3. After the hearing, I ordered, inter alia, the plaintiff to pay Mr Lee and Ms Chiang the costs of the Subpoenas Summonses on an indemnity basis. I also ordered the plaintiff to pay Yugang the costs of the Yugang Summons on an indemnity basis. I now proceed to assess these costs summarily.

The costs of Mr Lee

4. I refer to the Statement of Costs of Mr Lee filed on 19 June 2013 and the plaintiff’s List of Objections filed on 3 July 2013.

5. Even taking into account that the costs are to be assessed on an indemnity basis, I find that the hourly rate charged by Mr Ronald Tong is excessive. I reduce it to $5,000 an hour. For the trainee solicitor, I reduce it to $1,100 an hour.

6. I allow the photocopy charges in item B in full.

7. The time charged for the communications in item C is reasonable. Taking into account the adjustment in hourly rates, I reduce the sum claimed in item C to $3,600.

8. In my judgment, the time charged in item D for the preparation work is excessive, in particular as counsel had been briefed to attend the hearing and there was some duplication of works because the solicitors also appeared for Yugang in the same hearing. Further, taking into account the adjustment in hourly rates, I reduce the amount in item D to $12,000.

9. Even taking into account that Mr Anson Wong of counsel also appeared for Yugang in the same hearing, I take the view that the fee charged by counsel for the Subpoenas Summons is reasonable and so I allow the fee in full.

10. I therefore summarily assess Mr Lee’s costs in the sum of $34,108.

The costs of Ms Chiang

11. I refer to the Statement of Costs filed by Ms Chiang on 18 June 2013 and the plaintiff’s List of Objections filed on 2 July 2013.

12. Even taking into account that the costs are to be assessed on an indemnity basis, I find that the hourly rates charged by Mr Ronny Chow and Mr Robert Clark are excessive. In particular, the application is not a particularly complicated one, and so I reduce their hourly rates to $5,000. For Ms Ruby Chong, I reduce it to $2,500 an hour.

13. I allow item B in full.

14. For the communications in item C, I only allow 1.5 hours for communications with client, and so the sum allowed is $9,500.

15. For the time spent in perusing the documents in items D1 and D2, I take the view that the time spent is excessive, I allow a total of 2 hours for these items and so the sum assessed is $10,000. For items D3 and D4, I allow the total time claimed, in particular I allow some travelling time as the costs are to be assessed on an indemnity basis. After adjusting the hourly rates, the sum allowed under items D3 and D4 is $8,750.

16. Hence, I assess Ms Chiang’s costs in the sum of $28,370.

The costs of Yugang

17. I refer to Yugang’s Statement of Costs dated 19 June 2013 and the plaintiff’s List of Objections filed on 3 July 2013.

18. Even taking into account that the costs are to be assessed on an indemnity basis, I find that the hourly rates charged by Mr Ronald Tong and Mr Albert Rosa are excessive. I reduce them to $5,000 an hour. For the trainee solicitor, I reduce it to $1,100 an hour.

19. I allow the manual work in item B in full.

20. For the communications in item C, I am of the view that the time claimed is excessive, in particular the time spent in attendance on client and attendance on counsel. I also do not accept that the nature of the application justifies the involvement of 2 senior solicitors. Taking into account the adjustment in hourly rates, I reduce the sum claimed to $35,000.

21. For the professional work in item D, I take the view that the sums claimed are very excessive, in particular the time spent in perusing the documents and the preparation for the hearing. As counsel had been briefed to attend the hearing, I do not accept that the solicitors need to spend so much time in preparing the hearings. Further, there was no point for 2 senior solicitors to attend the hearings. I therefore only allow a sum of $75,000 under item D.

22. For counsel’s fees, I consider it reasonable to have engaged counsel to attend the first hearing on 8 April 2013 taking into account the nature of the application. I allow the counsel’s fee for the first hearing in full. For the substantive hearing, as the application is not a particularly complicated one, I only allow $100,000 as the brief fee. For the other fees of Mr Wong, they are excessive in particular about the time spent in conference. I allow a total of $70,000 for items E2 and E3. The total amount of counsel’s fees allowed is $193,000.

23. I allow item F in full.

24. I therefore assess Yugang’s costs in the sum of $304,551.

(David Lok)
Deputy High Court Judge

Kao, Lee & Yip, for the plaintiff

Cheung, Tong & Rosa, for Yugang International Limited and Mr Lee Ka Sze Carmelo

Deacons, for Ms Chiang Sui Fook Lilian

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

______________

BETWEEN

	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED	Plaintiff
	and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2^nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3^rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

________________

Before: Mr Recorder Patrick Fung SC in Court

Date of Written Submissions: 3 January 2014 & 30 January 2014

Date of Handing Down Ruling: 10 March 2014

________________________________

RULING ON INTEREST AND COSTS

________________________________

INTRODUCTION

1. On 18 December 2013, I handed down my Judgment in this matter. This Ruling should be read in the light of my Judgment.

2. At the end of my Judgment, I directed Waddington and Thomas to file written submissions on the following outstanding matters: -

(a) the basis of interest on the judgment sum;
(b) the date from which interest should be payable;
(c) the party/parties in favour of which costs should be payable;
(d) the basis for taxation of costs and
(e) certificate for Counsel.

3. In addition, I gave the parties liberty to apply for directions, if necessary.

4. Waddington and Thomas have now filed very detailed submissions on the abovementioned matters. As I had indicated, I would decide the matters on paper without hearing oral submissions. I do so now.

WADDINGTON’S SUBMISSIONS

5. By the Submissions by its Counsel, Mr Benjamin Yu SC, Ms Eva Sit, Mr Elliot Fung and Mr Justin Lam, dated 3 January 2014, Waddington asks for the following orders : -

(i) interest on the judgment sum should be compounded with monthly rests at the rate of prime plus 1%;
(ii) interest should be payable from 28 September 2000, i.e., the date on which Thomas obtained the benefit of the sale proceeds from the Yugang Transaction;
(iii) costs should be paid by Thomas to Waddington with an indemnity from Profit Point in favour of Waddington;
(iv) costs should be assessed on an indemnity basis;
(v) there should be a certificate for four Counsel in favour of Waddington.

6. Waddington also asks that the judgment sum together with interest thereon should be paid into Court to be retained until further order of the court.

THOMAS’ SUBMISSIONS

7. By the Submissions of his Counsel, Mr Martin Lee SC, Mr Hectar Pun and Mr Richard Yip, dated 30 January 2014, Thomas submits that the following orders should be made : -

(i) interest on the judgment sum should be simple interest based on the Hong Kong Dollar Interest Settlement Rates published by the Hong Kong Monetary Authority (“HIBOR”) + 1% and the court should give further directions on expert evidence and submissions on what is the commercial lending interest rate in Hong Kong if necessary;
(ii) interest be payable from the date of the breach but excluding periods of delay attributable to Waddington and the period during which Profit Point was not a party to the action;
(iii) costs be paid by Thomas to Waddington;
(iv) costs be assessed on a party and party basis;
(v) there be a certificate for two Counsel.

8. Thomas is agreeable to the judgment sum being paid into court pending further direction by the court.

9. I take it that Thomas is agreeable to the interest on the judgment sum also being paid into court on the same basis. Whether that is in fact agreeable to him, I take the view that that is the only logical course to follow.

INTEREST RATE ON JUDGMENT SUM

10. I deal first with the question of the appropriate interest rate on the judgment sum.

11. Counsel for Waddington rely on the line of cases in Hong Kong beginning with Komala Deccof v Perusahaan Pertambangon Minyak dan Gas Bumi Negara (Pertamina) [1984] HKLR 219 and ending with Tam Po Kei v Tam Bo Kin (No. 2) [2011] 2 HKLRD 272 in which the courts in Hong Kong have adopted the conventional formula of prime plus 1% for pre-judgment interest on judgment sums.

12. On the other hand, Counsel for Thomas have drawn my attention to the recent decision of the Court of Final Appeal in the case of Libertarian Investments Ltd. v Thomas Alexej Hall (FACV Nos. 14 and 16 of 2012) (Unreported, judgment handed down on 6 November 2013). In that case, the Court of Final Appeal awarded equitable compensation to the Plaintiff for the breach of fiduciary duties by the Defendant in pound sterling and ordered that pre-judgment interest on the judgment sum be paid at the rate of 2% over the Bank of England base rate.

13. Counsel for Thomas have also drawn my attention to the personal injuries cases recently decided by Bharwaney J. in Chan Pak Ting v Chan Chi Kuen [2013] 1 HKLRD 634 and Chan Pak Ting v Chan Chi Kuen (No. 2) [2013] 2 HKLRD 1. In those two cases, broadly speaking, the learned Judge considered the substantial downturn in the economic landscape in Hong Kong since 1996 which resulted in a constant state of low interest rates and came to the conclusion that, in personal injuries cases in Hong Kong, the assumption of a net rate of return of 4.5% per annum which had been adopted since the case of Cookson v Knowles in 1996 was no longer valid. He then worked out a series of new discount rates on a much lower scale.

14. Counsel for Thomas have further drawn my attention to the Report by the Law Commission in the United Kingdom on “Pre-Judgment Interest on Debts and Damages” published in 2004 in which the Law Commission recommended that the interest rate on pre-judgment interest should be set at the Bank of England base rate plus 1% but that the court should have a discretion to depart from such rate for good reasons.

15. On the basis of the abovementioned authorities, Counsel for Thomas submit that I should no longer adopt the conventional rate of prime plus 1% in the present case.

16. I agree with Counsel for Thomas. The current UK base rate is 0.5%, the current 12-month HIBOR is 0.87% and the current prime rate in Hong Kong is 5%. I believe that interest rates in Hong Kong have steadily been at the sort of low level set out above for the past decade or more. In my judgment, there is no longer justification for adopting the conventional figure of prime plus 1% for pre-judgment interest on judgment sums.

17. I do not think that it is necessary in the present case for any further evidence or submissions to be received on this aspect. I have come to the conclusion that adopting a figure of 2.5% per annum will do justice between the parties and I adopt this figure for awarding pre-judgment interest on the judgment sum.

PERIOD DURING WHICH PRE-JUDGMENT INTEREST IS PAYABLE

18. I take the view that interest should start to be payable as from 28 September 2000, i.e., the date of completion of the Yugang Transaction. That would have been the day on which Waddington would reap the benefit of a sale of the Sale Shares at the higher price.

19. I do not agree with Counsel for Thomas that there should be exclusion of certain periods.

20. So far as the period during which Profit Point was not a party to the action is concerned, it has been obvious from the start that one of the main complaints of Waddington was in relation to Profit Point and the Sale Shares and that the substance of the relevant claim was for the benefit of Profit Point.

21. As regards the periods between 28 September 2000 and 2 September 2003 and between 8 September 2008 and 3 August 2010 when, it is said, Waddington had been guilty of unexplained and inordinate delays, such alleged delays had, as far as I am aware, never been investigated into during the trial or on other occasions. There was no application by Thomas to strike out for want of prosecution in relation to such alleged delays. Judging from the complexity of the matter, I would not be surprised if Waddington had sometimes taken a longer time than usual to consider matters of pleadings, discovery, tactics and other relevant matters in the course of the litigation.

COMPOUND OR SIMPLE INTEREST

22. I agree with Counsel for Thomas that in the circumstances of this case, an order that simple as opposed to compound interest on the judgment sum is appropriate.

23. It is clear that in cases such as Tam Po Kei (supra), China Everbright-IHD Pacific Ltd v Ching Poh (2002) 5 HKCFAR 630 and Wallersteiner v Moir (No. 2) [1975] QB 373 in which compound interest was awarded, the defendant directors in those cases had misappropriated company funds and used the same for their own profit. The present is not such a case. It is on a less serious level.

24. Furthermore, in the Libertarian case (supra), the Court of Final Appeal ordered the defendant to pay equitable compensation together with only simple interest thereon. At paragraph 142 of the report, Riberio PJ makes the following point : -

“142. Thus, compound interest may be appropriate where the trustee or fiduciary has misappropriated funds which the Court assumes would have been used by him to earn profits and, instead of ordering an account of those profits, orders him to pay compound interest on the sum extracted. Where the fiduciary is ordered to pay equitable compensation on the basis of gains which the Court finds would have accrued to the trust estate if he had duly performed his fiduciary duty, it would be double-counting and punitive to order the amount of equitable compensation to carry compound interest.”

BASIS OF TAXATION

25. Thomas has argued points which he probably should not have argued. He was not amenable to any mediation exercise. The main part of his evidence was not accepted by the court. Nevertheless, he is a defendant in these proceedings.

26. Taking everything into account and bearing in mind the fact that his conduct is not as serious as the defendants in the cases cited in paragraph 23 above, I have come to the conclusion that justice will be done by ordering that he should pay the costs of this action to Waddington to be taxed on the common fund basis.

CERTIFICATE FOR COUNSEL

27. This case is complicated in some respects. Nevertheless, the trial did not last very long, only 11½ days. It is only in very exceptional circumstances that there should be a certificate for four Counsel as requested by Waddington.

28. Taking everything into account, I have decided to certify the case fit for three Counsel.

INDEMNITY BY PROFIT POINT IN FAVOUR OF WADDDINGTON

29. This action was instituted by Waddington for the benefit of Profit Point and a judgment for a sum of over $33,000,000.00 has been obtained on its behalf.

30. In Wallersteiner v Moir (No. 2) 407B-D, Scarman LJ said : -

“The indemnity is a right distinct from the right of a successful litigant to his costs at the discretion of the trial judge; it is a right which springs from a combination of factors – the interest of the company and its shareholders, the relationship between the shareholder and the company, and the court’s sanction (a better word would be “permission”) for the action to be brought at the company’s expense. It is a full indemnity such as an agent has who incurs expense in the authorised business of his principal. As a general rule, I would expect application for leave to bring proceedings at the expense of the company to be made at the commencement of the action: but, as Lindley LJ in In re Beddoe at p.557 recognised in relation to a trustee’s action on behalf of the trust estate, if at the end of the case the judge should come to the conclusion that he would have authorised the action had he been applied to, he can even then allow the plaintiff his costs on a full indemnity basis against the company …”
Further, Lord Denning MR said at 391 G-392B: -
“The first is that the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonable incurred by him in the course of the agency. This indemnity does not arise out of a contract express or implied, but it arises on the plainest principles of equity. It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris: see Hardoon v Belilios [1901] AC 118 and In re Richardson, Ex parte Governors of St. Thomas’s Hospital [1911] 2 KB 705. Seeing that, if the action succeeds, the whole benefit will go to the company, it is only just that the minority shareholder should be indemnified against the costs he incurs on its behalf. If the action succeeds, the wrongdoing director will be ordered to pay the costs: but if they are not recovered from him, they should be paid by the company, and all the additional costs (over and above party and party costs) should be taxed on a common fund basis and paid by the company: see Simpson and Miller v British Industries Trust Ltd (1923) 39 TLR 286.”

31. According to Counsel for Waddington, their Submissions have been served on Profit Point so as to give the latter notice of such an application. Profit Point has not responded by lodging any objection with the court or otherwise.

32. In all the circumstances, I am prepared to order that, in respect of that part Waddington’s costs in this action which will not have been recovered from Thomas, Waddington should be indemnified by Profit Point.

CONCLUSION

32. In the result, I make the following order : -

(i) Thomas do pay to Profit Point simple interest at 2.5% per annum on the judgment sum of $33,511,220.32 from 28 September 2000 until the date of judgment;
(ii) Thomas do pay into court the judgment sum of $33,511,220.32 together with interest thereon as aforesaid within 21 days from the date of this Ruling pending further directions by the court;
(iii) Thomas do pay to Waddington the costs of this action to be taxed on the common fund basis, if not agreed.
(iv) there be a certificate for three Counsel;
(v) Profit Point do indemnify Waddington in respect of any costs incurred by Waddington which it will not have been able to recover from Thomas.
(vi) the parties have liberty to apply to a Judge of the Court of First Instance for further directions in respect of the working out of this order, if necessary.

	(Patrick Fung SC) Recorder of the Court of First Instance
	of the High Court

Mr Benjamin Yu SC, Ms Eva Sit, Mr Elliot Fung and Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Martin Lee SC, Mr Hectar Pun and Mr Richard Yip, instructed by Deacons, for the 1^st Defendant

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

______________

BETWEEN

	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1^st and 2^nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PROFIT POINT LIMITED	Plaintiff
	and
	CHAN CHUN HOO THOMAS (陳俊豪)	1^st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2^nd Defendant
	PLAYMATES HOLDINGS LIMITED (彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3^rd Defendant
	PLAYMATES INTERNATIONAL LIMITED	4^th Defendant
	PROFIT POINT LIMITED	5^th Defendant

________________

Before: Mr Recorder P Fung SC in Court

Dates of Hearing: 15 to 19, 22 to 26, 29 July and 16 August 2013

Date of Handing Down Judgment: 18 December 2013

________________

J U D G M E N T

________________

INTRODUCTION

1. This case is part of a long-running saga of disputes between two brothers, Mr. Albert Chan (“Albert”) and Mr. Thomas Chan (“Thomas”), the 1^st Defendant. The case itself has a long history of its own. The Writ of Summons was issued in 2003. There was a series of interlocutory proceedings, including a strike-out application by Thomas, which went all the way to the Court of Final Appeal. Finally, the trial commenced before me in July this year, just under 10 years since the issue of the Writ of Summons.

THE RELEVANT PARTIES AND THE RELEVANT HISTORY

2. The head of the Chan family is Mr. Chan Tai Ho (“the Father”).

3. The Father has three sons and two daughters, namely, Albert, Thomas, Allen, Karen and Sim Chu.

4. The 3^rd Defendant, Playmates Holdings Limited, is a company which is incorporated in Bermuda and listed on the Stock Exchange of Hong Kong (“the Stock Exchange”). It has had a number of other names and there are a number of other companies in the group also starting with the name “Playmates”. Since the witnesses and Counsel have consistently been referring to the 3^rd Defendant as “Playmates”, I shall do the same in this Judgment.

5. The 4^th Defendant (“Playmates International”) is a company incorporated in the British Virgin Islands (“BVI”) and a wholly-owned subsidiary of Playmates.

6. The 5^th Defendant (“Profit Point”) is a company incorporated in the BVI. Before 18 April 2001, it was 100% directly owned by Playmates. Since 18 April 2001, it became 100% directly owned by Playmates International and thus, in turn, still a wholly-owned subsidiary of Playmates.

7. Prestige Properties Holdings Limited (“Prestige”) is a company incorporated in Bermuda and listed on the Stock Exchange. It is not a party to these proceedings, although the shares in it play a very significant role in these proceedings.

8. Prior to the period between 22 and 24 May 2000, Profit Point held 34,156,338 shares in Prestige (“the Sale Shares”) (equivalent to 4.28% of its then issued share capital). Those shares were sold in the market at between $0.60 and $0.70 per share during the 3 days between 22 and 24 May 2000. Such sale is the subject-matter of the complaint of the Plaintiff (“Waddington”) in these proceedings.

9. Waddington is a company incorporated in the BVI. It is owned or controlled by Albert. It holds 18.08% of the issued share capital of Playmates. Until sometime in 2006, it also held 15.28% of the then issued share capital of Prestige.

10. The 2^nd Defendant which I shall refer to herein as “Chansam”, is a company incorporated in the BVI. Its major shareholder of over 85% of its issued share capital is a company which is owned or controlled by a discretionary trust for the benefit of Thomas and his family. The other shareholders of Chansam are the Father (7.4%) and a company owned or controlled by a discretionary trust for the benefit of one of the sisters and her family (another 7.4%). Chansam has not put in a Defence and is not present or represented in these proceedings.

11. As at May 2000, Chansam held 312,512,572 shares in Prestige (equivalent to 39.20% of its then issued share capital). At the same time, Chansam also held 46.40% of the issued share capital of Playmates.

12. At this juncture, it will be convenient to refer to three Corporate Charts annexed to the Opening Submissions of the Plaintiff. They are annexed hereto as Appendix A(i), (ii) and (iii). They will facilitate the understanding of the corporate structures and inter-relationship between the various companies involved in this matter at different stages during the relevant period.

13. The first Chart (Appendix A(i)) is entitled “Corporate Chart 1 : Sale of shares in Prestige by Profit Point (22-24.05.2000)”. The important features to note are : -

(i) The 18.08% interest of Waddington in Playmates.
(ii) The indirect holding by Playmates through Playmates International and Profit Point of 4.28% of Prestige.
(iii) The 46.20% interest of Chansam in Playmates.
(iv) The 39.20% interest of Chansam in Prestige.
(v) The sale by Profit Point of its 4.28% shareholding in Prestige (the Sale Shares) in the market between 22 and 24 May 2000.

14. The second Chart (Appendix A(ii)) is entitled “Corporate Chart 2 : Sale of shares in Prestige from Chansam to Yugang (28.07.2000 – 28.09.2000).” This chart deals mainly with the sale in July (with completion in September) 2000 by Chansam of part of its holding in Prestige, namely, 34.25%, to a listed company, Yugang International Limited (“Yugang”) via the latter’s wholly-owned subsidiary, Funrise Limited (“Funrise”). This sale has been referred to by the parties as “the Yugang Transaction”. I shall refer to it likewise and deal with it in greater detail below.

15. The third Chart (Appendix A(iii)) is entitled “Corporate Chart 3 : Sale of shares in Prestige by Profit Point and Chansam (22.05.2000 – 28.09.2000)”. This chart sets out the picture after taking into account the following transactions : -

(i) The sale by Profit Point between 22 and 24 May 2000 of its 4.28% shareholding in Prestige (the Sale Shares).
(ii) The sale by Chansam of part of its holding in Prestige (34.25%) to Funrise in the Yugang Transaction.
(iii) The sale by Chansam on 14 September 2000 of its remaining shareholding in Prestige (4.95%) in the market pursuant to one of the conditions in the Yugang Transaction.

THE NATURE OF THE ACTION AND THE GIST OF THE PLAINTIFF’S COMPLAINT

16. These proceedings are in the nature of a multiple derivative action brought by a minority shareholder (Waddington) in a parent company (Playmates) for wrongs allegedly done to and damage suffered by the parent company’s indirectly (via another wholly-owned subsidiary, Playmates International) wholly-owned subsidiary (Profit Point).

17. The action has been instituted by Waddington for and on behalf of itself and all other shareholders (except Thomas – the alleged wrongdoer and Chansam – the alleged beneficiary of the alleged wrongs) in Playmates, Playmates International and Profit Point.

18. The gist of the Plaintiff’s claim is succinctly put by Lord Millett NPJ in paragraph 39 of his Judgment in the Court of Final Appeal : Waddington Ltd V. Chan Chun Hoo (2008) 11 HKCFAR 370 (“the CFA Judgment”) which I shall deal with in greater detail below. At that stage, there were sought to be impugned by the Plaintiff three transactions. By the time of the trial, there was only one transaction in issue left before me.

19. In paragraph 39 of the CFA Judgment, Lord Millett put it thus : -

“39. Three transactions are impugned by the plaintiff. The first is a sale in 2000 by Profit Point of its entire shareholding in a company called Prestige Properties Holdings Ltd. It is alleged that the sale was at a price which was less than could have been obtained, thereby causing loss directly to Profit Point and indirectly to its parent company Playmates International and its ultimate holding company Playmates. The transaction is alleged to have been entered into pursuant to an overall agreement which was for the appellant’s personal benefit and to have been procured by him in breach of his fiduciary duty.”

THE HISTORY OF THE PLAINTIFF’S CLAIMS AND THE CFA JUDGMENT

20. At this juncture, it will be convenient to trace briefly the history of the Plaintiff’s original claims, the strike-out proceedings culminating in the CFA Judgment and the Plaintiff’s ultimate claims.

21. The Writ of Summons was issued on 2 September 2003. The original Plaintiff was Waddington and the original Defendants were Thomas, Chansam and Playmates only. It was in the form of a single derivative action. The complaints of Waddington related to three transactions, namely : -

(i) the sale by Playmates of its shareholding in Prestige (the Sale Shares) between 22 and 24 May 2000, which is the complaint now before me;
(ii) the purchase by Playmates through a subsidiary called Autoestate Properties Ltd. (“Autoestate”) at about the end of 2000 of a company by the name of Pretty Star Limited (“Pretty Star”) which used to be a wholly-owned subsidiary of Prestige and which held a commercial building at and known as “100 Canton Road, Tsimshatsui, Kowloon” (“the Canton Road Property”) and other assets (“the Pretty Star Transaction”) and
(iii) the purchase by Playmates through Autoestate in the middle of 2002 of another company by the name of Bagnols Limited (“Bagnols”) which also used to be a wholly-owned subsidiary of Prestige and whose principal asset was a property known as “No. 1, Tin Hau Road, Tuen Mun, New Territories” (“the Tuen Mun Property”) (“the Bagnols Transaction”).

22. Thomas applied to strike out the Statement of Claim and the action. The application was heard by Barma J. (as he then was) who held that the Plaintiff’s claims were merely reflective of the losses of Playmates’ sub-subsidiaries, Profit Point and Autoestate, and therefore precluded by the reflective loss doctrine authoritatively explained in the case of Johnson v. Gore Wood & Co. [2002] 2 AC 1 and hence liable to be struck out. He, however, held that relief by way of a multiple derivative action was available to Waddington. He further held that Waddington would have to satisfy the threshold test of showing, on a prima facie basis, both that the company having the cause of action would be likely to succeed if it brought the proceedings itself and that the case fell within an applicable exception to the rule in Foss v. Harbottle (1843) 2 Hare 461. On the facts assumed, he held that such a prima facie case had been established in relation to the transaction involving Profit Point, but that no prima facie case had been shown in relation either to Autoestate’s acquisition of Pretty Star or to Autoestate’s acquisition of Bagnols.

23. In the result, the learned Judge held that the entire pleading had to be struck out as falling foul of the reflective loss principle. Since a multiple derivative action on behalf of Profit Point was, however, in principle available and prima facie sustainable on the facts pleaded, he declined to dismiss the action but granted Waddington the opportunity to reconstitute its pleading to accord with the principles laid down.

24. The case went to the Court of Appeal which, whilst endorsing the learned Judge’s view on a multiple derivative action, reversed him on the prima facie case requirement, holding that no such requirement existed at common law. Waddington’s case therefore remained intact. Thomas took the matter further to the Court of Final Appeal.

25. Regarding the state of play by the time the case was heard in the Court of Final Appeal, Lord Millett NPJ said this in paragraph 34 of the CFA Judgment : -

“34. The Statement of Claim which was before the Court of Appeal has since been amended, and we have been told that the plaintiff intends to apply for leave to consolidate the proceedings with another action and to make further amendments to the Statement of Claim.”

26. By that stage, Playmates International and Profit Point had been joined as the 4^th and 5^th Defendants respectively. Waddington was proposing to join Autoestate as the 6^th Defendant. As will be seen, this eventually did not materialise.

27. Regarding the statutory provisions governing the action, Lord Millett made the position clear in paragraph 45 of the CFA Judgment as follows : -

“45. Section 168BC, which was added to the Companies Ordinance in July 2004 and came into force on 15 July 2005, requires the plaintiff to obtain the leave of the court before bringing a derivative action. The present proceedings, however, were issued nearly two years before the section came into force and are accordingly governed by the position at common law, which is expressly preserved by s.168BC(4).”

28. In my opinion, for the purpose of dealing with one of the points taken by Waddington, it would be helpful to recount the history of the strike-out application by Thomas through the courts and his arguments. For this purpose, I gratefully adopt the summary given by Lord Millett in paragraphs 56 – 60 of the CFA Judgment as follows : -

“The course of the proceedings below
56. At first instance, in a meticulous and careful judgment Barma J applied the threshold test laid down in Prudential. He held that the plaintiff had failed to show a prima facie case in respect of the second and third transactions and struck them out. The Court of Appeal, without citing Prudential, reversed his decision and held that at common law a plaintiff in a derivative action is not required to establish a prima facie case, thereby restoring the claims in respect of the second and third transactions.
57. The defendant did not seek leave to appeal to this Court from the decision of the Court of Appeal on this issue, and accordingly for the present these claims must remain part of the action. But I agree with Mr Justice Ribeiro PJ that the decision in Prudential remains good law and should be applied in Hong Kong in any derivative action brought at common law, including multiple derivative actions. I also agree with him that the decision of the Court of Appeal in the present case should not be followed in future, whether in any other case or in any further proceedings in this case such as an application for leave to add Autoestate as a defendant.
58. When the case came before Barma J the claim was brought on behalf of Playmates alone. The judge held that any losses which it suffered were merely reflective of the losses suffered by its sub-subsidiaries Profit Point and Autoestate, and that recovery of such losses was precluded by the principle established by the House of Lords in Johnson v Gore Wood (supra). He held that there was no exception to the principle of the kind relied on by the plaintiff and that in so far as its claim was brought on behalf of Playmates, it was liable to be struck out. He did not strike the action out with immediate effect because he also held that the plaintiff, as a shareholder in Playmates, was entitled in principle to bring a multiple derivative action on behalf of its sub-subsidiaries. Accordingly, he gave it an opportunity to apply for leave to amend the proceedings to enable it bring such an action.
59. The Court of Appeal allowed the plaintiff’s cross-appeal and set aside the judgment of Barma J, thereby restoring the Statement of Claim as originally formulated and allowing the action to proceed in respect of all three impugned transactions. It dismissed the appellant’s appeal and held that a multiple derivative action is maintainable in Hong Kong. Following this decision, Playmates International and Profit Point were added as fourth and fifth defendants so that the action could be continued on their behalf. For a reason which was not explained to us a similar action on behalf of Autoestate was brought by separate proceedings.
60. The appellant now appeals to this Court and invites us to dismiss the action. He contends that :
(1) a derivative action may be brought only by a member of the company in which the cause of action is vested and not by a member of its parent or ultimate holding company; and that
(2) there is no relevant exception to the principle that a shareholder cannot recover loss which is merely reflective of the loss suffered by his company and accordingly the plaintiff cannot bring a derivative action on behalf of Playmates to recover losses which merely reflected the losses suffered by its sub-subsidiaries.”

29. In the end, the Court of Final Appeal decided that multiple derivative actions were available at common law in Hong Kong and dismissed the appeal by Thomas. Lord Millett concluded in paragraph 89 of the CFA Judgment as follows : -

“89. I would dismiss the appeal so that the proceedings may continue as a multiple derivative action on behalf of Profit Point but not as a derivative action on behalf of Playmates to recover damages for reflective loss. I would leave it to the courts below to deal with any further applications in relation to the pleadings in accordance with the principles which I have endeavoured to state.”

30. The latest pleading of claim by Waddington is its Re-Amended Statement of Claim filed on 3 August 2010. This must be a pleading filed after the CFA Judgment which was handed down on 8 September 2008. Waddington has not made any more claim in relation to the Pretty Star Transaction and the Bagnols Transaction, probably as a result of the findings of Barma J. relating to those two transactions as referred to above.

WADDINGTON’S CASE AND THE DEFENCES OF THOMAS

31. The case of Waddington can be summarised as follows : -

(i) The Sale Shares had been held by Profit Point as a long-term investment.
(ii) There was no apparent reason to justify the sale by Profit Point of the Sale Shares in the market at a loss all of a sudden between 22 and 24 May 2000 at between $0.60 and $0.70 per share.
(iii) On 28 July 2000, an Agreement was entered into between Chansam, Funrise, Yugang and Thomas (“the Yugang Agreement”) whereby Chansam agreed to sell to Funrise 273,000,000 Shares held by the former in Prestige (being 34.25% of the issued shares in Prestige) at $2.20 per share. The completion of the Yugang Agreement took place in September 2000.
(iv) At all material times, Thomas was a director of and in control of Playmates, Playmates International, Profit Point and Chansam and owed fiduciary duties, in particular, to the first three of those companies.
(v) The Sale Shares were caused to be sold by Profit Point at the time and at the prices they were sold at the instigation or direction of Thomas.
(vi) In all the circumstances, an inference can and should be drawn that, prior to the time of the selling of the Sale Shares in May 2000, Thomas and Chansam had already entered into negotiation or had arrived at an understanding or agreement with Yugang and/or its controlling shareholder, a Mr. Cheung Chung Kiu (“Mr. Cheung”), for the sale by Chansam of its 34.25% shareholding in Prestige to Yugang or its subsidiary which turned out to be Funrise. The significance of the percentage of the shareholding agreed to be sold was so that the trigger point at that time of 35% prescribed by the Code on Takeovers and Mergers (“the Takeovers Code”) for a general offer by the purchaser to buy the shares of all the shareholders of Prestige would not be reached.
(vii) In all the circumstances, Thomas should have included Profit Point in the benefit of the transaction between him and Chansam on the one hand and Mr. Cheung, Yugang and Funrise on the other hand with the result that the Sale Shares would be sold at $2.20 per share instead of between $0.60 and $0.70 per share.
(viii) In view of what actually transpired, Profit Point (and indirectly Playmates International and Playmates) has suffered loss and damage.
(ix) Such loss and damage were caused by the breach of fiduciary duty by Thomas.
(x) Hence, Thomas and Chansam, as a knowing beneficiary of the breach of fiduciary duty on the part of Thomas, should be held liable to compensate the loss and damage suffered directly by Profit Point.
(xi) In relation to sub-paragraph (vi) above, Waddington also runs an alternative case, in the event that it fails to prove the matters referred to in that sub-paragraph, that the selling of the Sale Shares was caused by Thomas in contemplation of either the sale to Yugang or a similar transaction well knowing the requirements under the Takeovers Code.
(xii) In the further alternative, Thomas was seeking to avoid a conflict situation that he might enter into if both Profit Point and Chansam continued to hold shares in Prestige. Thus, his causing Profit Point to dispose of its shareholding in Prestige was not in the best interest of Profit Point.

32. The main defence of Thomas is as follows : -

(i) Shortly before the selling of the Sale Shares, Thomas, after having had discussions with the Father and with a view to catching the temporary rebound in the market (described in Chinese as “小陽春”), thought that it was a good time to dispose of the Sale Shares. He and some of the directors of Profit Point therefore decided to sell the same in the market.
(ii) At the time of the selling of the Sale Shares, Thomas had not agreed or negotiated with Mr. Cheung or Yugang or anyone else regarding the sale of the shares in Prestige held by Chansam.
(iii) It was Mr. Cheung who approached Thomas for the first time in June 2000 for the sale of his controlling stake in Prestige up to just below 35% of its total issued share capital. The price was eventually agreed at $2.20 per share.
(iv) Hence, there has been no breach of fiduciary duty on the part of Thomas vis-à-vis Profit Point, Playmates International or Playmates.
(v) Thus, Waddington’s claim should be dismissed.

33. In addition, Thomas has also taken the following points in defence : -

5. The law of the BVI applies in the present case. Under BVI law, it is not possible to have a multiple derivative action and therefore, irrespective of the merits, Waddington’s case should be dismissed.
6. The alternative cases referred to in paragraph 31 (xi) and (xii) are not open to Waddington because the same have not been pleaded in the Re-Amended Statement of Claim.
7. Waddington has been guilty of laches, delay and acquiescence.
8. The action has been instituted and maintained by Waddington and Albert not bona fide for the benefit of Playmates, Playmates International or Profit Point but for the ulterior purpose of embarrassing Thomas and therefore, in the exercise of the Court’s discretion, it should dismiss the action.

34. Waddington’s answers to the additional points taken by Thomas are as follows : -

(i) It is too late for Thomas to take such jurisdictional and technical points. Thomas is bound by the CFA Judgment and is estopped from taking such points, except in relation to the pleadings.
(ii) In any event, under BVI law, it is possible to have a multiple derivative action.
(iii) The pleading point is invalid because the Re-Amended Statement of Claim is wide enough to cover the alternative cases of Waddington.
(iv) The laches, delay, acquiescence and ulterior purpose points are all denied.

35. I shall deal with the main case and the main defence below before dealing with the additional issues raised.

THE MAIN ISSUE

The Disposal of the Sale Shares

36. Waddington first relies on the following incontrovertible facts : -

(i) The Sale Shares were first purchased by Profit Point in 1994 at an average cost of $2.29 per share.
(ii) Those shares had since 1 July 1997 been described in the books of Profit Point and Playmates as a “long term investment” holding. None of them had been sold until 22 May 2000.
(iii) In the Annual Reports of Playmates, the Sale Shares had been consistently referred to as a long term investment. For example, in the Annual Report of Playmates for the year 1998, in Note 14 to the Accounts which deals with investments in the Group, under “(a) Long term investments”, the Sale Shares, inter alia, were described as follows : -
“(ii) At 31 December 1998, the Group held 34,156,338 shares of Prestige Properties Holdings Limited representing 5.1% of the total issued shares of that company.
(iii) The investments in listed securities are intended to be held for the long term. Consequently the directors believe that the underlying net asset values of the investments are a better basis than market value for determining whether permanent diminution in value has arisen.”
(iv) The Sale Shares were similarly described in the Annual Report of Playmates for the year 1999 which was dated 23 March 2000.
(v) Furthermore, as at May 2000, Prestige was a properties-holding company and the owner of the Canton Road Property which was the headquarters of the Playmates Group as well as of the Tuen Mun Property which was the factory building of the Playmates Group.

37. On such evidence, Mr. Yu SC, representing Waddington, submits that there was no apparent reason why Thomas and Profit Point should decide to sell the Sale Shares in the market at a loss all of a sudden in May 2000.

38. I now deal with the explanation given by Thomas about the disposal of the Sale Shares.

39. Thomas is the only factual witness for the defence. He has only filed one Witness Statement which is dated 9 August 2011. It consists of 23 paragraphs contained in 6 pages. He dealt with the disposal of the Sale Share and what are known as “the Harbour Ring Shares” (which I shall refer to below) by Profit Point between paragraphs 11 and 15. Nothing has been said about the circumstances under which and the reasons why the Sale Shares were sold.

40. As Mr. Yu SC has pointed out, in the witness box, Thomas gave three different versions regarding the reason for the sale of the Sale Shares.

41. First, under cross-examination, Thomas said that he made the decision that Profit Point should sell the Sale Shares after he had had some discussion with the Father about the general market conditions. The Father advised him that he should sell because of the market rebound (described in Chinese as “小陽春”). It was therefore a commercial decision on his part.

42. Secondly, a bit later in his cross-examination, he said that there had been discussions during a board meeting of Profit Point. The decision was made by the board and he was merely “executing” the decision of the board. When asked which of the directors took part, he said that he could not remember. He was also not able to produce any board minutes to support his evidence.

43. Thirdly, in re-examination, he was referred by his leading Counsel, Mr Martin Lee SC, to a board resolution of Profit Point dated 3 May 2000 which authorised him to open a cash securities account with Tai Fook Securities Company Limited (“Tai Fook”). It was in fact Tai Fook who required such a board resolution for the purpose of opening the cash securities account.

44. As is clear from the above, none of the three versions was mentioned in the Witness Statement of Thomas.

45. As a matter of commonsense, irrespective of any rebound in the market, if one is considering selling a particular share which one is holding, the most important factor to consider is not how the market in general is behaving but how that particular share has been behaving. You can have a rising share in a falling market and you can have a falling share in a rising market. I have been supplied with a record of the daily closing prices of Prestige shares produced by Bloomberg during the relevant period. In March and April 2000, the share price was generally quite steady in the $0.50 - $0.60 range with rather thin trading. Between 2 and 17 May 2000, trading was very thin with the price being very steady at $0.45 or $0.46. On 19 May 2000, the price rose to $0.55 with trading volume reaching 3 million. The closing prices during the critical period of 22 to 24 May 2000 were between $0.60 and $0.68. Then followed just under two weeks’ trading with much increased volume as compared with the first half of May 2000 with the price ranging between $0.60 and $0.63. Then as from 12 June 2000, the price went back to $0.55 with extremely thin trading.

46. In the circumstances set out in paragraph 45 above, I cannot identify any factor which would give an average investor reason to think that it would be an opportune time to dump over 34 million Prestige shares in the market. Just how the Prestige shares were able to maintain their price level in the market during the 3 days between 22 and 24 May 2000 I do not know and I should not speculate. On the balance of probabilities, I am not convinced that the decision to sell the Sale Shares had been prompted by the temporary rebound in the market as alleged by Thomas.

47. Furthermore, according to Thomas, the instruction to Tai Fook was to sell the entire holding of 34,156,338 Prestige shares at one go. In paragraph 15 of his Witness Statement, he says : -

“(2) I was duly authorized by Profit Point’s Board of Directors in accordance with the Articles of Association of Profit Point to open a cash securities dealing account with Tai Fook and to deposit the Prestige Shares with Tai Fook.”

That must mean that the entirety of the Sale Shares were deposited with Tai Fook. If a reasonable investor is thinking of selling a large quantity of a particular share in the market, one would expect him to test the market by selling in relatively small lots to begin with and see how the market would react before selling the rest. In the present case, it seems that Thomas was determined right at the beginning to dispose of the entire holding of the Sale Shares at one go. He certainly has not adverted to any urgency for the disposal of all the Sale Shares within a very short time, like 3 days, such as the necessity to raise cash quickly. One wonders why.

48. Indeed, the evidence is clear that the Playmates Group was not in need of any cash at that time. It was cash-rich as a result of the sale of the Harbour Ring Shares.

The cash position of the Playmates Group at the time of disposal of the Sale Shares

49. According to the Annual Report of Playmates for the year 1999 (dated 23 March 2000), the Playmates Group had been holding 244,900,000 shares in a company by the name of Harbour Ring International Holdings Limited (“the Harbour Ring Shares”) also as a long-term investment.

50. As a result of a contemplated takeover by, inter alia, the Li Ka Shing Foundation, which eventually materialised, the price of the share shot up in stages from about $0.57 in January 2000 to over $9.00 in March 2000.

51. Playmates reaped the benefit of such an astronomical rise in the share price and sold its holding of the Harbour Ring Shares and made a substantial profit. As a result, not only was it able to declare a final dividend of $0.06 per share, it was also able to declare a special dividend of $0.25 per share.

52. The position is summed up in the minutes of a meeting of the Audit Committee of the board of Playmates held on 6 April 2001 as follows : -

“4. The increase in non-operating income was mainly due to the disposal of shares in ICG Asia Limited (previously known as Harbour Ring International Holdings Ltd.) (“ICG”) which recorded a gain of approximately HK$215 million. The gain was partly offset by a HK$29 million loss on the disposal of shares in Prestige Properties Holdings Limited and the unrealised loss on investment in securities as all securities had been marked to market value as at the year end date.
5. Financial position of the Group remained healthy with current ratio improved to 2 for the year 2000 as compared to 1.5 of the previous year. Such improvement was attributable to the reduction in outstanding accounts receivables by half as a result of speedier collection at the year end.”

53. Under cross-examination, Thomas admitted that Playmates did make a profit of $215 million from the sale of the Harbour Ring Shares and that the company had a lot of cash in May 2000.

The Yugang Transaction

54. It would be convenient to set out first what Thomas has said in his Witness Statement as to how the Yugang Transaction since it is not very long. It reads as follows : -

“The 2^nd Transaction – The Sale by Chansam of its shares inPrestige to Funrise
16. I did not, whether by myself or through anyone else, have any approach from or contact whatsoever with Yugang or Funrise or any person acting for or on behalf of any one or both of those companies with regard to the 2^nd Transaction prior to or at the time of the 1^st Transaction, that is, in or before May 2000.
17. At or around the end of June 2000, Mr. Cheung Chung Kiu (“Mr. Cheung”) contacted me and expressed his interest in acquiring Chansam’s interest in Prestige. Consequently, Mr. Cheung and I reached a consensus on the percentage of shares to be sold and the price per share if the deal should proceed.
18. I recall that on 1^st July 2000 a Saturday and a public holiday, I went to the office of Chansam’s solicitors, Messrs. Deacons to brief them on the above intended sale of Chansam’s interest in Prestige and instructed them to begin the negotiations.
19. On 2^nd July 2000, a Sunday, both parties and their respective lawyers met at the office of Messrs. Woo Kwan Lee & Lo who acted for the purchaser in order to finalise the deal (“the Sunday Meeting”). We aimed to conclude the deal by early next week, and make a public announcement of the transaction as soon as possible after execution of the agreement.
20. After the Sunday Meeting, the negotiations got stuck over a pending action in relation to Prestige’s sale of Century Square in 1997, an office building in Central. As the purchaser of Century Square had failed to complete the purchase, Prestige forfeited the deposit paid by the purchaser, which was HK$248 million. The action was disclosed in various annual reports of Prestige. No agreement was reached and the deal fell through because Chansam and I refused to provide an indemnity in respect of any loss or damage which Prestige and its group companies might suffer as a result of that action.
21. I recall that in or around the 4^th week of July 2000, Mr. Cheung contacted me and expressed that he was prepared to limit Chansam’s and my liability under the indemnity if I was interested to re-start the negotiations. From then on, our respective lawyers re-started the negotiations. Eventually the parties reached agreement on 28^th July 2000, and Chansam’s and my liability in respect of the pending action was limited to 50% of the loss or damage (if any) which Prestige and its group companies might suffer as a result of that action.
22. Pursuant to the terms of the deal, Funrise would acquire around 34.25% of the issued share capital of Prestige (273,000,000 shares) at a price of HK$2.20 per share. Furthermore, Chansam would place a further 7.38% of Prestige’s issued share capital to independent third parties not later than 7 days prior to completion of the deal and the placement was made at a price of HK$0.60 per share.
23. It will be seen from the above that the 2^nd Transaction had nothing to do with the 1^st Transaction and that it was after the conclusion of the 1^st Transaction that I was approached by Mr. Cheung.”

55. Under cross-examination, Thomas gave more details. He was first referred to paragraphs 17 and 18 of his Witness Statement by Mr Yu SC. I now set out the relevant parts of his evidence on 26 July 2013 (Day 10) as follows : -

“Q. When you prepared this statement, in paragraphs 17 and 18, did you look for documents to help you remember the date?
A. No, no documents. Simply a conversation.
Q. There would have been lots and lots of documents flowing between your representative and Mr Cheung Chung Kiu’s representative on this proposed transaction; is that right?
A. Until on the second day it then begin.
Q. No, the question is: there would have been lots of documents; right? Is that right?
A. Before going to the solicitors’ firm, there was no documents.
Q. And your solicitors would have kept an attendance note of the meeting that you had with them; right? And so what I suggest to you, if you were conscientiously trying to give the full picture to the court about these events, you would naturally have looked for some documents to assist in your recollection of the dates of these events; is that right? Would you agree?
A. I disagree. My way of handling this matter was very straightforward. In around end of June, Mr Cheung Chung Kiu phoned me up and he said, “Thomas, please go out to have a coffee.” That’s how I remember this incident.
Q. Yes, but that would have been over ten years before you made this statement. Right?
A. I do not remember.
Q. Well, you made your statement in August 2011. You were trying to relate events you say in June 2000, so it must have been more than ten years ago.
A. Well, I tried my best to recollect the incident.
Q. So that’s why I suggest to you, Mr Chan, that if you were conscientiously trying to recall the dates of these events, you would naturally have looked for documents to refresh your memory. Would you agree?
A. I do not agree. When I do business, I did not do each and everything relying on documents. This is only a very simple matter. Somebody phoned me up and asked me to come out to have a cup of tea or coffee. Why is it necessary to look for a document?”
“A. Well, everything has to be done following sequence. End of June, I received a phone call from Mr Cheung. He asked me out for a cup of coffee, so I went out. We sat down. If my memory does not fail me, we had a coffee and then we had a discussion. As I recall, Mr Cheung spoke with a strong accent. What he said was, “I have lots of money, I had lot of cash, just talking myself personally I have over $100 million.”
MR YU: Over a billion.
THE INTERPRETER: Oh, over 1 billion.
A. No, he did not mention about personally, he just said he had lots of money. He did not mention any company name or people’s name, he just said he had over 1 billion and he want to make investment. He said that he want to invest in property holding companies, listed companies. Initially I found that he was quite strange of him, and I thought that he was just not serious when he talk about this. That means I did not consider him genuine. And so my response to him was, “You want to buy a property holding company, buy the controlling stake? So how much you are offering? If you can make a suitable offer, I may be willing to sell.”
At that time, I was also saying it in a joking way, not taking it very serious. Well, in fact what I meant was that if you are offering a sufficient price, I may consider it. That’s it. But in my mind, I did not find him to be serious.
Some time afterwards, I do not recall whether it was one or two days thereafter or two or three days thereafter, he phoned me again. He said, “I have read your annual report, the NAV of your shares was $2.79, but do you think that is still worth that much? It is no longer in the year 1999, it is already in May 2000. You know that the market has already go down.” He said, “I cannot offer you as high as 2.79.” He said, “The most I can offer you is $2.”
I said, “If it is $2, then there’s no point in further discussing.” And then he said, “I will talk to someone then.” I mean, he said, “I will think about it.”
And then in around end of July, he phoned me up again and he said, “I’m sincere, I’m engaging Woo Kwan & Lo.” When I heard this, I thought, well, maybe there is something in it. And so then in 1 July I went to Deacons. It was Alain Cheng who introduced this firm to me.”
“MR YU: Mr Chan, you haven’t actually answered my question. My question was: what were the matters that you needed to negotiate with Mr Cheung Chung Kiu on this transaction?
A. That’s what I have told you just now. That’s how the matter developed as far as I can recall.
Q. You obviously had to negotiate the price with Mr Cheung Chung Kiu, right?
A. Yes.
Q. And you told us that he said 2.79 was too high and he was offering you $2.
A. That’s my recollection that he had said this.
Q. Yes. And so was there a lot of to-ing and fro-ing on this question of price? Because you were quite apart. One was $2, the other was $2.79.
A. Well, the way the business is conduct is like this. In 1999, the price was $2.79 and in May 2000 --
THE INTERPRETER: The witness correct me. He said not May, he said June, end of June.
MR YU: Just for the record, I think he first say May, so the interpreter was right, and then the witness said it was not May, end of June.
MR LEE: That’s correct.
A. There has been a lot of changes and that the markets have go down and I accept this.
MR YU: So tell my Lord, how did it come about that he was offering you $2, you were asking for $2.79, eventually how were you able to reach your agreement on price?
HIS LORDSHIP: Sorry, I don’t think his evidence was he ever asked for $2.79.
A. (In English) I never asked for $2.79.
MR YU: Right.
HIS LORDSHIP: According to his evidence earlier, it was Mr Cheung who said, “I have read your annual report, it shows an NAV of 2.79 and it’s not worth 2.79 now.”
MR YU: Thank you, my Lord.
So tell my Lord how were you able eventually to reach a price?
A. Well, we did not arrive at the consensus about the price immediately.
Q. So how?
A. On the first meeting it was mentioned that the NAV was 2.79, and on the second occasion when we came out, he said that 2.79 was too high, and he was not willing to offer that. And so he offered $2. Yes, that’s it. But I find $2 is too low. I said, “If it is $2, I don’t think on that even my father would accept it.” I do not recall whether it was on the same occasion which he make the offer of $2.2 or whether it was in a subsequent telephone conversation which he made this offer and said, “$2.20, accept it or not. If you accept it, I’ll ask Woo Kwan & Lo to proceed with it.”
Q. How about yourself? Did you actually mention any price, offer any price?
A. On the first occasion, I did mention that if you offer a price close to the NAV of last year, that we would then consider. This is my offer.
Q. Yes. So the figure you had in mind was close to $2.79; is that right?
A. In my mind, I know that the price had dropped, but when doing business it does no harm just to throw out a price to see how the other side responds.
Q. All right. So apart from the indication that you were looking for a price close to the NAV for 1999, December, did you offer any other price?
A. At what stage?
Q. At any time?
A. I do not remember.
Q. So you might have, but you don’t remember?
A. I might have, but I do not remember.
Q. As far as Mr Cheung was concerned, apart from the $2, did he offer any other price?
A. Well, he first offered $2, but then our side did not accept, so the price $2.2 may be another offer from him.
Q. You don’t remember?
A. Correct, I don’t remember.
Q. And you don’t remember whether there were other prices mentioned or discussed?
A. I do not remember.
Q. Mr Chan, the negotiation was done on the basis of dollar per share; is that right?
A. No.
HIS LORDSHIP: Sorry, not -- was done on the basis of dollar per share?
MR YU: Yes.
A. What do you mean by the question?
Q. The negotiation on the price was done on the basis of dollar per share; is that right?
A. But there were other things that were negotiated.
Q. Yes. My question is: the premise upon which you and Mr Cheung negotiated was that he was only buying less than 35 per cent of the share capital; is that right?
A. Yes, that is correct. He already mentioned this on the first occasion.
Q. Because if he was to buy all your shares, he wouldn’t be offering you anything like $2 per share, is that right?
A. I do not know what price he would offer.
Q. Because he would not want to have to make a general offer.
A. I’m not familiar with this. Only those people who are familiar with that know how to do it.
Q. You are familiar, are you not, with the concept of general offer?
A. Well, I cannot say that I am familiar with this, but as to the concept of it, well, since this is something to do with the legal things, well, I only know that it means somebody’s making an offer and as to the technicalities, I do not know.”

56. I pause at this juncture to express my view that the evidence of Thomas does not ring true. First, Thomas said that Mr. Cheung rang him up and said : “Thomas, please go out to have a coffee.” That suggests that Thomas and Mr. Cheung were already acquainted with each other. He then described their meeting and said that he noticed that Mr. Cheung spoke with a strong accent. That would suggest that he did not know Mr. Cheung before. According to Thomas, Mr. Cheung said : “I have lots of money, I had lot of cash, just talking myself personally I have over $1 billion.” Normal business people would simply not speak like that in the circumstances described by Thomas.

57. Secondly, Thomas said that Mr. Cheung did not mention any company name or people’s name and just said that he wanted to invest in property holding companies, listed companies. It would be very strange if Mr. Cheung did not expressly mention the name of Prestige and yet somehow Thomas seemed to know that he was talking about buying a controlling stake in Prestige. Thomas did not even ask “Are you wanting to buy my company Prestige?”.

58. Thirdly, it is very odd that Mr. Cheung did not ask Thomas how much he would sell his controlling stake in Prestige for but first referred to the NAV of Prestige at $2.79 per share as shown by its Annual Report and then said that the most that he would offer was $2.00 per share. It is to be noted that later in his testimony as quoted above, he changed his evidence and said that it was he who first suggested “a price close to the NAV of last year”.

59. Fourthly, according to Thomas, he said to Mr. Cheung : “If it is $2, then there’s no point in further discussing.” Naturally, one would have expected Mr. Cheung to ask in reply how much Thomas would want. Thomas has not given such evidence at first but later changed his evidence in the way set out in paragraph 58 above.

60. I should also record at this point that I have come to the conclusion that Thomas has shown himself to be a very evasive witness in the witness box. In fact, I had to warn him a number of times that if he continued to answer his questions in such an evasive manner, I might draw an inference unfavourable to him. It is worthy of note that his Counsel in their Speaking Note For The 1^st Defendant has had to devote 12 pages to seek to argue and explain that Thomas was not trying to be deliberately evasive but that he was just unfamiliar with the surroundings in a courtroom, that it was just his manner of speaking and that he was basically an honest witness trying to do his best. It is interesting to note that one of the headings in that part of the Speaking Note is “(2) The So-called ‘13 Occasions’ ‘The Court has Asked D1 to Answer the Question Put’ (P’s Closing §28). That shows the frequency at which Thomas was giving unsatisfactory answers when under cross-examination.

61. I am afraid that I do not agree with the submission of Counsel for Thomas. I think that he appreciated what the questions in cross-examination were directed at and that he was merely trying to stall for time in order to think or to confuse the issue. I also take the view that he was very well aware of the great significance of the trigger point of 35% under the Takeovers Code as opposed to just knowing the concept in an unfamiliar way as he alleged in his oral testimony.

62. Eventually, as mentioned in paragraph 31(iii) above, the Yugang Agreement was entered into. I now set out the relevant provisions therein as follows : -

(i) Chansam is described as “the Vendor”, Funrise as “the Purchaser”, Yugang as “Yugang” and Thomas as “the Guarantor”.
(ii) Recitals (B) and (C) read as follows : -
“(B) The Vendor legally and beneficially owns 312,512,572 Shares representing approximately 39.2% of the issued share capital of the Company immediately prior to Completion assuming no Shares were issued since the date of this Agreement to Completion. As at the date hereof, Chan Tai Ho and Chan Sim Chu, persons deemed to be acting in concert with the Vendor and the Guarantor, legally and beneficially own 6,354,000 Shares and 12,964,416 Shares respectively.
(C) The Sale Shares represent approximately 34.24% of all of the Shares in issue on Completion assuming no Shares were issued pursuant to the employee share option of the Company since the date of this Agreement to Completion. The Sale Shares represent approximately 82.27% of all the Shares held by the Vendor and/or parties acting in concert with the Vendor (as such term is defined under the Code).”
(iii) Clause 1 is the definition clause. It defines : -
(a) the “Sale Shares” as meaning “273,000,000 Shares beneficially owned by the Vendor”;
(b) the “Completion Date” as being 28 September 2000 and
(c) the “Executive” as “the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director”.
(v) Clause 3(A) reads as follows : -
“(A) The Purchase Price payable to the Vendor by the Purchaser shall be HK$600,600,000 (being HK$2.2 per Sale Share) (the “Consideration”) and shall be paid in cash by the Purchaser to the Vendor as follows : -
(a) the sum of HK60,000,000 (“Deposit”) shall be paid by way of cheque upon the signing of this Agreement to the Vendor’s Solicitors and the Purchaser’s Solicitors as joint stakeholders subject to the terms and conditions of the Escrow Letter as deposit and in part payment of the Consideration; and
(b) the balance of the Consideration being HK$540,600,000 shall be paid on Completion.”
(vi) Clause 4(A) reads as follows : -
“4. CONDITIONS
(A) Completion of this Agreement is conditional upon the following conditions being fulfilled and remaining fulfilled or waived by the Purchaser as at Completion : -
(iv) Confirmation from the Executive that the Purchaser or any parties acting in concert with the Purchaser will not be required to make a general offer pursuant to the Code in respect of all the issued Shares (other than the Sale Shares) as a result of Completion;”
(vii) Clause 11(A) and (B) read as follows : -
“11. VENDOR’S UNDERTAKING TO DISPOSESHARES AND ASSIST IN LITIGATION
(A) The Vendor further undertakes to the Purchaser to procure the sale to independent third parties, at least 7 days prior to the Completion Date, of all the Shares (other than the Sale Shares) held by the Vendor or any parties acting in concert with the Vendor.
(B) The Vendor undertakes to dispose of the Shares as referred to in the Clause 11(A) above (excluding the Sale Shares) only to independent person (as contemplated under the Code) who is independent of and does not act in concert with the Vendor or the Purchaser and to produce such verification or confirmation in such manner as the Executive may reasonably require to satisfy itself of the acquirer’s independence.”

63. From the provisions of the Yugang Agreement set out in paragraph 62 above, it is clear that Yuganag and Funrise would only want to buy 34.24% of the issued shares of Prestige and that Thomas and Chansam would have to be responsible for disposing of all the remaining shares in the hands of concert parties before completion of the Yugang Agreement so that there would be no need for Yugang and Funrise to make a general offer.

64. As can be seen from Chart 3 (Appendix A (iii) hereto), the remaining shares in Prestige held by Chansam and concert parties were all disposed of in the market on 14 September 2000.

The NAV (Net Asset Value) of Prestige

65. It is clear from the evidence of Thomas that the negotiation between him and Mr. Cheung was on the basis of the NAV of Prestige at $2.79 per share. According to Thomas, that was the figure as at the end of 1999.

66. It transpired that there was a share placement of 132,800,000 by Prestige at $0.50 per share in March 2000 as a result of which the NAV of Prestige was reduced to $2.41 per share.

67. This is made clear in the Annual Report of Prestige for the year 1999 in which the following paragraphs appear in the Chairman’s Statement by Thomas dated 23 March 2000 : -

“NET ASSET VALUE
The consolidated net asset value per share of the Company as at 31 December 1999 was HK$2.79 based on the 664,357,415 shares in issue as compared to HK$2.62 per share and 664,357,415 shares in issue as at 31 December 1998.
ADJUSTED NET ASSET VALUE
In March 2000, the Company issued a share placement of 132,800,000 new ordinary shares at a price of HK$0.50 per share to independent investors. The placing shares represent approximately 20% of the existing issued share capital of the Company. Taking into account the net proceeds from the share placement of approximately HK565 million and the enlarged number of shares in issue of 797,157,415 shares immediately after the placement, the adjusted net asset value per share would be HK$2.41.”

68. Furthermore, in relation to the takeover of Prestige by Yugang, there was a Joint Announcement made by both of them dated 1 August 2000. It contains the following paragraph : -

“Consideration
Pursuant to the Agreement, Funrise has agreed to purchase from Chansam the Sale Shares, representing approximately 34.25 per cent of the issued share capital of Prestige, for a total cash consideration of HK$600,600,000 (or HK$2.20 per Sale Share). The purchase price per Sale Share had been arrived at after arm’s length negotiation between the parties with reference to the consolidated net tangible asset value of the Prestige Group as at 31 December 1999 after some in-house preliminary valuation on the properties as mentioned below. The consolidated net asset value of the Prestige Group was HK$1,852,676,000 (or approximately HK$2.78 per Share) as at 31 December 1999 as disclosed in its latest published audited financial statements. The consideration of HK$2.20 per Sale Share represents a discount of approximately 20.86 per cent of the consolidated net asset value per Share of the Prestige Group as at 31 December, 1999.
The purchase price per Sale Share represents a premium of approximately 266.67 per cent over the closing price of HK$0.60 per Share as quoted on the Stock Exchange on 28 July, 2000.”

69. Under cross-examination, Thomas was simply unable to offer any satisfactory explanation as to why, if the negotiations really began in June 2000 as he has alleged, the adjusted NAV figure of $2.41 per share did not form the basis of the negotiations or was even referred to.

70. I find it inconceivable that Mr. Cheung, being the Chairman of a listed company, Yugang, and who must have been advised by lawyers and accountants before making an offer to take over another listed company, Prestige, would not have been aware of and relied on the lower NAV figure published on 23 March 2000 in his negotiations with Thomas, if he had made the approach in as late as June 2000.

71. It is trite law that the general burden of proof is on Waddington to prove the wrongdoing on the part Thomas and Chansam. Once it has established a prima facie case, however, the evidential burden shifts onto the Defendants.

72. In this regard, I find the discovery on the part of Thomas to be amazingly inadequate. One would have thought that in a matter of this nature, there would have been a great quantity of documents relevant to due diligence investigation and the negotiations which would give an idea as to how and when the entire process of negotiation began. There has been no discovery of any such documents by Thomas.

73. Furthermore, Thomas is the only witness for the defence. None of his co-directors on the boards of Playmates and Profit Point or any of his lawyers or accountants involved in the Yugang Transaction or the Father has been called to give evidence. They would have been able to throw some light on the process of the negotiations and the co-directors and the Father would have been able to give evidence on the decision to sell the Sale Shares.

74. In view of the above, I have no alternative but to draw an adverse inference against Thomas to the effect that his failure to make the necessary discovery and to call all the necessary witnesses to support his case must be for the reason that the same would have had an adverse effect on his case.

My Findings on the Main Issue

75. In the abovementioned circumstances and on the balance of probabilities but subject to any favourable conclusion (favourable to Thomas) which I may come to regarding the other defences put forward by Thomas, I make my findings on the main issue as follows : -

(i) I do not accept that the negotiations between Thomas and Mr. Cheung in relation to the Yugang Transaction first took place at the end of June 2000 as alleged by Thomas.
(ii) I find as a fact that at the time of the sale of the Sale Shares on 22 to 24 May 2000, Thomas and Mr. Cheung had well been into the negotiations or had even arrived at an understanding or agreement in principle regarding what eventually became the Yugang Transaction. I base such finding, in particular, on the fact that in the Yugang Transaction the parties plainly made it known that the basis of negotiation for the price was the old NAV figure of $2.79 per share as opposed to the adjusted figure of $2.41 per share which was published on 23 March 2000.
(iii) On the bases of the way that Thomas made the decisions on the sale of the Sale Shares and the sale of the shares in the Yugang Transaction and the way in which he effected such sales, I find as a fact that Thomas was at all material times the person in control of Playmates, Playmates International, Profit Point and Chansam. I further find as a fact that he did cause Profit Point to sell the Sale Shares on 22 - 24 May 2000. This was done for the sole or main purpose of preparing for the implementation of what eventually became the Yugang Transaction, so that the trigger point of 35% for a general offer would not be reached.
(iv) The sale of the Sale Shares was to the disadvantage of Profit Point and indirectly of Playmates International and Playmates and to the benefit of Thomas and Chansam.
(v) Thomas should have included Profit Point in getting the benefit of a sale of the Sale Shares at $2.20 per share instead of between $0.60 and $0.70 per share, even by arranging for Chansam to sell a smaller quantity of its own shares to Yugang and Funrise.
(vi) In the circumstances, Thomas has been in breach of his fiduciary duty owed to Profit Point, Playmates International and Playmates and should compensate Profit Point for its loss.

76. In the circumstances, it is not necessary for me to make any finding regarding the alternative cases of Waddington.

77. It is also not necessary for me to deal with some of the other points advanced by Mr. Yu SC, such as the allegation that, in March 2000, Thomas was in financial difficulty.

78. I shall deal with the question of the relief to be granted after I have dealt with the other defences put forward by Thomas.

THE OTHER DEFENCES PUT FORWARD BY THOMAS

79. I now deal with the other defences raised by Thomas as summarised in paragraph 33 above and the answers to the same by Waddington as summarised in paragraph 34 above.

The Pleadings Point

80. As observed in paragraph 76 above, in view of my findings on the main issue, it is not necessary for me to consider the question of whether it is open to Waddington on the pleadings to put forward its lesser alternative cases.

81. In any event, I agree with Mr. Yu SC’s submission that the greater includes the lesser and that no prejudice would have been caused to Thomas. In all the circumstances, I do not see how the case and the evidence would have been differently prepared by Thomas to deal with the alternative cases raised by Waddington in addition to its primary case. The alternative cases were set out in Waddington’s opening and Mr. Lee SC did cross-examine the witness for Waddington on them and make submissions about them in the closing submissions of Thomas. See John G Stein & Co Ltd v O’Hanlon [1965] AC 890 @ 909, Waghorn v George Wimpey & Co Ltd [1969] 1 WLR 1764 @ 1771 and Arab Bank Ltd v Ross [1952] 2 QB 216 @229.

Is it open to Thomas to raise the defences of BVI law, laches, delay and acquiescence and ulterior purpose?

82. At this juncture, I should add that it seems that Thomas has raised under “other issues” the point that it has not been proved by Waddington that at all material times he was the person in control of the boards of Playmates and Chansam (what has been called the “wrongdoer control” point). There is no dispute that Thomas is the largest beneficial owner of Playmates and Chansam. This fact in itself would entitle one to draw the prima facie inference that he is the person in control, unless the contrary is proved. Both in his Witness Statement and on his oral evidence, Thomas has not really seriously alleged that it was somebody else who made the decision to sell the Sale Shares in the market and to sell the stake in Prestige held by Chansam. In my findings on the main issue in paragraph 75 (iii) above, I have already found as a fact that Thomas was the person in control of Playmates, Playmates International, Profit Point and Chansam. I therefore need say no more about the “wrongdoer control” point under the above heading other than that, on the balance of probabilities, it would be highly unlikely for Profit Point (either by its board or in general meeting) to pass a resolution to sue Thomas for any wrong done to it.

83. It is now settled law that even at common law the locus standi of a plaintiff to bring a derivative action must be determined as a preliminary issue, in the sense that the plaintiff is required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle. See Prudential Assurance Co., Ltd. v. Newman Industries Ltd. (No. 2) [1982] 1 Ch 204 @ 221B – D and 221G – 222B, Smith v Croft [1988] 1 Ch 114 @ 159C – E and the CFA Judgment which expressly approved the Prudential case (per Lord Millett NPJ in paragraphs 53 – 55 of the CFA Judgment).

84. It does not matter that the preliminary issue of the locus standi of Waddington in bringing the action was not raised as an application for the determination of a preliminary issue but in the form of a strike-out application by Thomas. All the grounds which might affect the right of Waddington to bring the action available to Thomas at the time of the strike-out application, even up to the Court of Final Appeal stage, should have been brought up for argument. The strike-out application was made by Thomas, I believe, under Order 18 rule 19 of the Rules of the High Court and the inherent jurisdiction of the Court. Thus, all the grounds now argued by Thomas, namely, BVI law, laches, delay and acquiescence and ulterior purpose, could and should have been raised and argued at that stage. For Thomas to put forward grounds of opposition bit by bit would be an abuse of process. See the case of Henderson v. Henderson (1843) 3 Hare 99, 67 ER 313.

85. As it was, the only point argued was whether it was possible to have a multiple derivative action in Hong Kong. That was determined by the Court of Final Appeal. See the conclusion of Lord Millett in paragraph 89 of the CFA Judgment as set out in paragraph 29 above.

86. In my judgment, it is now far too late for Thomas to raise the abovementioned defences. Even if the position about the relevant BVI law had not solidified before the Court of Final Appeal stage, in my view, it could and should have been raised by the time the matter got to the Court of Final Appeal. Indeed, I take the view that what was held by Lord Millett NPJ as set out in paragraph 89 of the CFA Judgment could well amount to res judicata against Thomas in that it expressly authorized Waddington to proceed with this action subject to amendment of the pleadings.

87. Counsel for Thomas rely on the case of Re Chime Corporation Limited (No. 2) [2003] 2 HKLRD 945 and the case of Buildtech Ltd. v. Hung Wan Construction Co., Ltd. (Unreported, HCMP 154/2012 16 February 2012) in support of their argument that res judicata is not applicable in the present case. With respect, I do not think that those two cases on the whole actually assist Thomas.

88. In the Re Chime case, Kwan J (as she then was) distinguished between cause of action estoppel and issue estoppel. In paragraph 13 of her judgment, the learned Judge said : -

“ For there to be cause of action estoppel, the cause of action in the later proceedings must be identical to the earlier proceedings, the two sets of proceedings must be between the same parties or their privies, the subject-matter in dispute must be the same, and the judgment in the earlier proceedings be final and conclusive.”

She then went on in paragraph 15 to say that it would be inappropriate to describe the striking-out of a pleading as a “cause of action” because it was only a “remedy”. She ended the same paragraph by saying : -

“I will deal with the contention of a final and conclusive judgment on an interlocutory application for res judicata purpose when I consider the arguments on issue estoppel.”

89. In paragraph 18 of her judgment, the learned Judge went on to deal with issue estoppel. She said : -

“18. An issue estoppel arises in the situation where a party is precluded from contending the contrary of any precise point which, having once been distinctly put in issue, has been solemnly and with certainty determined against him. The other conditions are the same as in a cause of action estoppel, regarding the identity of parties and the finality of the judicial decision said to create the estoppel (see Halsbury’s Laws of England (4^th ed.) Vol. 16, para. 977).”

90. After having dealt with the particular facts of the case before her, the learned Judge went on to say in paragraphs 23 and 24 of her judgment as follows : -

“23. For my part, I do not think there is any conflict in the authorities. I do not find it particularly helpful to categorise the determination as interlocutory or procedural. Whether the determination on an interlocutory application is capable of giving rise to issue estoppel would depend on the nature and substance of the ruling. In Mullen v Conoco Ltd [1998] QB 382 at p.396D-G, examples were given of determinations capable of giving rise to res judicata (a successful application for summary judgment) and determinations not capable of doing so (an unsuccessful application for summary judgment, the exercise of discretion to set aside a default judgment). Another obvious example of a determination not capable of constituting a final decision is a ruling on the merits of a case in granting an interlocutory injunction pending trial (see Desert Sun Loan Corp v Hill [1996] 2 All ER 847 at p.l863E).
24. If the Judge had indeed made a ruling on this issue when he ruled there is a serious question to be tried, the decision he reached on the merits of the case is clearly a provisional one subject to revision after trial. It is not a final and conclusive decision capable of giving rise to res judicata.”

91. In the Buildtech case, in paragraph 13 of the judgment of the Court of Appeal (Yeung V-P and Kwan JA), it is said : -

“13. The defendant apparently seeks to rely on issue estoppel here. For issue estoppel to apply, there must be a distinct determination of the court on an issue in sufficiently clear and precise terms, and the decision on the issue must be a final decision. In respect of the exercise of discretion in an interlocutory matter, this does not give rise to res judicata. Further, the rules relating to res judicata in interlocutory matters are less stringent than those generally applicable. See Re Chime Corp Ltd (No. 2) [2003] 2 HKLRD 945 at paras 18 to 24; Mullen v. Conoco Ltd [1998] QB 382 at 396D to G; and Chu Hung Ching v. Chan Kam Ming & Ors [2001] 1 HKC 396 at 402D to E.”

92. In my judgment, the issue before the Court of Final Appeal in this case, albeit in the context of a strike-out application, was whether Waddington could as a matter of law maintain a multiple derivative action (the present action) in Hong Kong under common law. The dismissal of the strike-out application was not based on any provisional view or the exercise of a discretion on the part of the Court of Final Appeal. It was based on the determination of a point of law by the Court of Final Appeal in an all-or-nothing situation. That Court decided that “the proceedings may continue as a multiple derivative action on behalf of Profit Point but not as a derivative action on behalf of Playmates to recover damages for reflective loss.” (paragraph 89 of the CFA Judgment). That is “the nature and substance of the ruling”. It is “a distinct determination of the court on an issue in sufficiently clear and precise terms, and the decision on the issue” is a final decision (see Re Chime and Buildtech above).

93. I have therefore come to the conclusion that there is at least an issue estoppel, if not res judicata, preventing Thomas from raising the issue of whether the present multiple derivative action can be maintained in law in the Hong Kong courts.

94. Furthermore, I fail to see what laches, delay and acquiescence there were on the part of Waddington which would afford a defence to Thomas. Indeed, in the closing submissions of counsel for Thomas, the point did not seem to have been pursued further.

95. Regarding the ulterior purpose point, I also do not think that Thomas has succeeded in showing such a defence. As I understand it, the gist of the complaint of Thomas in relation to this point is that Waddington’s action has been primarily motivated by Albert’s wish to discredit and embarrass Thomas. In law, the existence of animosity between the plaintiff and the defendant in a derivative action does not prevent the plaintiff from commencing and continuing such an action, provided that there is a good cause of action. In the Australian case of Swansson v. RA Pratt Properties Pty Ltd. (2002) 42 ACSR 313, Palmer J. said this at paragraph 41 of his judgment : -

“To take another example: a derivative action sought to be instituted by a current shareholder for the purpose of restoring value to his or her shares in the company would not be an abuse of process even if the applicant is spurred on by intense personal animosity, even malice, against the defendant: it is not the law that only a plaintiff who feels goodwill towards a defendant is entitled to sue…”

In the case of Lewis v. Nortex Pty Ltd. (in liquidation) [2006] NSWSC 768, again Palmer J. said the following at paragraph 5 of his judgment : -

“However, it is not the law that a plaintiff is prevented from bringing a cause of action against another by the sole consideration that he or she is motivated by ill will against the defendant. A prima facie good cause of action does not become an abuse of process merely because the plaintiff harbours ill will against the defendant: the action, if prima facie a good one, will only be an abuse of process if it is prosecuted for an ulterior purpose, i.e., to achieve an end for which it is not designed…”

BVI Law

96. In case I am wrong above and that it is still open to Thomas to argue that BVI law governs the present action and that under BVI law it is not possible to have a multiple derivative action, I now proceed to deal with the position of BVI law.

97. As the effect of BVI law is a question fact, each side has adduced the evidence of an expert on BVI law to assist the court in deciding the same. Waddington called Mr. Richard Lester Millett Q.C. who gave evidence by video link and Thomas called Mr. Paul Anthony Webster Q.C. who gave evidence in person. Besides having written their own respective expert reports, the two experts have also written a Joint Report of Experts (“the Joint Report”).

98. The argument of Thomas as pleaded in paragraph 2 of the Re- Amended Defence of the 1^st Defendant can be summarised as follows : -

(i) Waddington is not a direct shareholder of Profit Point.
(ii) Waddington is seeking to sue Thomas in the name and/or on behalf of Profit Point for alleged wrongs done to Profit Point by way of a multiple derivative action.
(iii) For multiple derivative actions, it is the law of incorporation (lex incorporationis) which governs whether a derivative action is available or permissible.
(iv) Profit Point is a company incorporated under BVI law.
(v) Section 184C (“Section 184C”) of the BVI Business Companies Act 2004 (“the BC Act”) which came into effect on 1 January 2005 is relied upon. Under BVI law and, in particular, subsections (1) and (6) of Section 184C, multiple derivative actions are not possible or permissible.
(vi) In the circumstances, Waddington being a stranger to Profit Point has no right to and cannot bring the present action in the name and/or on behalf of Profit Point.

99. Section 184C reads as follows : -

“184C. (1) Subject to subsection (3), the Court may, on the application of a member of a company, grant leave to that member to
(a) bring proceedings in the name and on behalf of that company; or
(b) intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.
(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the Court must take the following matters into account
(a) whether the member is acting in good faith;
(b) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters;
(c) whether the proceedings are likely to succeed;
(d) the costs of the proceedings in relation to the relief likely to be obtained; and
(e) whether an alternative remedy to the derivative claim is available.
(3) Leave to bring or intervene in proceedings may be granted under subsection (1) only if the Court is satisfied that
(a) the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b) it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole.
(4) Unless the Court otherwise orders, not less than twenty eight days notice of an application for leave under subsection (1) must be served on the company and the company is entitled to appear and be heard at the hearing of the application.
(5) The Court may grant such interim relief as it considers appropriate pending the determination of an application under subsection (1).
(6) Except as provided in this section, a member is not entitled to bring or intervene in any proceedings in the name of or on behalf of a company.”

100. The main arguments of Counsel for Thomas in their final submissions can be summarised as follows : -

(i) Section 184C (6) of the BC Act has the effect of preventing the bringing of a multiple derivative action (“MDA”). It has the effect of abrogating any common law right which a party may have in bringing an MDA upon its coming into effect on 1 January 2005.
(ii) As from the date of the coming into operation of the BC Act on 1 January 2005, no one can bring a derivative action, whether simple, double or multiple, except under the BC Act.
(iii) Under the BC Act, there is no continuing parallel common law regime for all forms of derivative actions, including MDAs.
(iv) The BC Act has retrospective effect in that it prevents the bringing of all common law derivative actions, including MDAs, on or after 1 January 2005, even though a right to pursue the same had accrued prior to that date, although no proceedings had actually been brought.
(v) The amendments to the pleadings by Waddington in March 2007 did not relate back to the date of the Writ of Summons in this action in 2003.

101. The main arguments of Counsel for Waddington in their final submissions can be summarised as follows : -

(i) MDAs were permissible at common law in the BVI prior to the coming into effect of the BC Act.
(ii) The common law MDA continues to exist after the coming into effect of the BC Act since Section 184C only codifies and abrogates single derivative actions at common law and has left common law MDA untouched.
(iii) In any event, Waddington’s right to bring a common law MDA on behalf of Profit Point in this case is protected, even if (contrary to proposition (ii) above) Section 184C did abrogate the common law MDA, because of (a) the common law presumptions against retrospectivity or (b) the saving provisions in paragraph 61 (1) (b) – (c) of Schedule 2 of the BC Act and the fact that in the present case the right to bring an MDA at common law had already accrued and that an MDA had actually been commenced before the coming into effect of the BC Act.

102. It is noteworthy that it is now common ground that MDAs were permissible at common law in the BVI prior to the coming into effect of the BC Act on the authority of the CFA Judgment and Kleinwart Benson Ltd. v. Lincoln City Council [1999] 2 AC 349.

103. In the circumstances, the only issue is whether Section 184C has the effect of abrogating the common law MDA in the BVI.

104. It is also worthy of note that the two experts are in agreement that there is no difference in substance between Section 184C (6) and Section 260 of the Companies Act 2006 applicable to England and Wales or Northern Ireland (“the Companies Act”).

105. For the sake of completeness, I set out Sections 260 and 261 of the Companies Act below : -

“260 Derivative claims
(1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company –
(a) in respect of a cause of action vested in the company, and
(b) seeking relief on behalf of the company.
This is referred to in this Chapter as a “derivative claim”.
(2) A derivative claim may only be brought –
(a) under this Chapter, or
(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).
(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
(4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.
(5) For the purpose of this Chapter –
(a) “director” includes a former director;
(b) a shadow director is treated as a director; and
(c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.
261 Application for permission to continue derivative claim
(1) A member of a company who brings a derivative claim under this Chapter must apply to the court for permission (in Northern Ireland, leave) to continue it.
(2) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie case for giving permission (or leave), the court –
(a) must dismiss the application, and
(b) may make any consequential order it considers appropriate.
(3) If the application is not dismissed under subsection (2), the court –
(a) may give directions as to the evidence to be provided by the company, and
(b) may adjourn the proceedings to enable the evidence to be obtained.
(4) On hearing the application, the court may –
(a) give permission (or leave) to continue the claim on such terms as it thinks fit,
(b) refuse permission (or leave) and dismiss the claim, or
(c) adjourn the proceedings on the application and give such directions as it thinks fit.”

106. In the abovementioned circumstances, I do not propose to rehearse all the arguments between the two experts but will only set out the essence of the same in light of their ultimate agreements on the points referred to in paragraphs 102 and 104 above.

107. I set out the gist of Mr. Millett’s evidence below.

108. Mr. Millett takes the view that the BA Act, in particular, Section 184C, has only created a statutory regime in relation to a simple derivative action in place of the simple derivative action at common law in the BVI. He believes that MDAs at common law in the BVI have been left untouched by the BC Act. In support, he first relies on the consultation paper entitled “BVI Company Law Review Consultation on Members’ Remedies” dated 8 September 2004 (“the BVI Consultation Paper”) introduced by the BVI Government which preceded the passing of the BC Act into law. It is a fairly short document (11 pages) and focussed on the topic of “shareholder remedies” in the BVI.

109. I set out the relevant parts of the BVI Consultation Paper below : -

“English Legal Provisions Concerning Shareholder Remedies
In order to provide some perspective, it is useful to consider the remedies available to shareholders under English law.
The English law concerning shareholder remedies is partly contained in the UK Companies Act 1985 and is partly provided for by common law. ……………………………………………….
The Law Commission of England and Wales published a Consultation Paper on shareholder remedies in October 1996. Following a consultation exercise, the Law Commission published its Report in October 1997.
Although the recommendations in the Report have not yet been implemented, the UK Company Law Review Steering Group established in 1998 also considered shareholder remedies and reported its views in its final report issued in June 2001. The report has been broadly accepted by the UK Government. In its White Paper “Modernising Company Law” published in July 2002, the UK Government indicated its intention to prepare a new draft Companies Bill that, on enactment would replace the current Companies Act, 1985. Although a new Companies Bill covering audit, investigations and a new type of company, the “community interest company” is currently under consideration by the UK Parliament, the timetable for the bigger project is unclear. In a consultation paper published in March 2004, the Secretary of State stated that the Government will legislate “as soon as Parliamentary time allows”. However, a Companies Bill has not yet been published.
The Issues
There are two principal policy areas: derivative actions and the protection of minority shareholders. These are discussed separately below.
Derivative Actions
Under English common law, which in the absence of statutory provisions to the contrary, would almost certainly be held to apply in the BVI, a shareholder of a company may not normally bring proceedings in the name of the company to enforce a cause of action belonging to the company. There are two related principles behind this. The first is the “majority rule” principle. The second is the principle that one person cannot usually bring proceedings against a defendant in respect of a cause of action belonging to a third party (the so-called Rule in Foss v. Harbottle).
In the case of a company, the Courts have made a number of exceptions to the Rule in Foss v. Harbottle. In particular, the Rule will not be enforced by the Courts where:
l the alleged wrong that would form the basis for the proceedings is ultra vires the company;
l the transaction complained of could be validly done or sanctioned only by a special resolution; or
l what has been done amounts to a fraud and the wrongdoers are themselves in control of the company.
A number of jurisdictions have provided minority shareholders with statutory rights to take derivative actions in exceptional circumstances. Examples are Canada (the Canada Business Corporations Act), Australia (Corporations Act 2001), New Zealand (Companies Act 1993) and South Africa. The Law Commission of England and Wales in their Report referred to above, recommended that statutory provision be made for derivative actions with the leave of the Court and these Recommendations were adopted by the Company Law Review Steering Group in their Final Report. It is therefore most likely that statutory provision will be made for derivative actions in the new UK Companies Law that is expected to be drafted and enacted within the next few years.
The above models all require the shareholder to obtain the leave of the Court before commencing a derivative action. It is considered that this is an important safeguard against undue interference by shareholders in the management of the company and against excessive litigation.
The English Law Commission recommended that the derivative action procedure should be limited to claims in respect of breaches (or threatened breaches) of duty by a director or shadow director (including claims against third parties as a result of such breaches) but that it should extend to negligence by the directors or shadow directors. There is no such limitation in the legislation of some of the jurisdictions cited above, for example Canada and Australia, although under the Australian Corporations Act there is a rebuttable presumption that granting leave is not in the best interests of the company where the directors acted properly and in good faith in making the decision and did not have a material personal interest in the decision.
With regard to the class of persons who may bring a derivative action, the Australian legislation is very wide as it extends to members, former members and officers. The English Law Commission recommended that only a current member should be able to pursue a derivative action.
The statutory derivative action procedures in Canada, New Zealand and Australia replace the former common law provisions and the English Law Commission made a similar recommendation in respect of the UK.
Most of the legislation cited above provides the Court with guidance as to the matters that should be taken into account when determining whether or not an applicant should be granted leave to pursue a derivative action.
Pleas see the attached clauses 3 to 6.”

110. At the end of the document, there appear 6 draft clauses. Clause 3 is identical to the present Section 184C.

111. Thus, it is quite obvious from the BVI Consultation Paper that the BVI legislature was following the lead given by the Law Commission of England and Wales in its Report (“the LC Report”). Since both experts in their evidence have referred to the LC Report dated September 1997, despite the fact that the BVI Consultation Paper seems to suggest that there are subsequent reports on the subject, I will treat the same as being the most relevant one.

112. The relevant chapter in the LC Report is Chapter 6.

113. In paragraph 6.1 of the LC Report, it is said : -

“6.1 In this part we are concerned with the law relating to the ability of a shareholder to bring proceedings to enforce a cause of action vested in the company (a derivative action).”

114. The relevant parts of paragraph 6.4 of the LC Report read as follows : -

“6.4 Our view was that the basic approach to the right to bring a derivative action was a sound one : on individual shareholder should only be able to bring such an action in exceptional circumstances. ……………………………… We therefore put forward proposals for a new procedure for derivative actions.”

115. Paragraphs 6.50 – 6.55 of the LC Report read as follows : -

“ Who should be able to bring a derivative action
6.50 In the consultation paper we concluded provisionally that there was no justification for permitting former members to bring derivative actions. Our view was that there is bound to be a current member who (if the wrong has not been ratified) could maintain proceedings. We saw no reason why a former member should be able to bring a derivative claim if the current members were not willing to do so. The vast majority of respondents agreed with this view. For these purposes, “member” is defined by section 22 of the Companies Act 1985. We recommend that the derivative action should be available only to members of the company.
Extent to which common law rule should be abrogated
Should it entirely replace the common law derivative action
6.51 The vast majority of respondents agreed with the provisional view expressed in the consultation question that “an action which can be brought under the new procedure should only be capable of being so brought, and not also under the exceptions to the rule in Foss v Harbottle”. The question left open the possibility that derivative actions may still be brought under the common law in circumstances which fell outside the new procedure. However, it was apparent that many respondents considered that the new procedure should entirely replace the existing common law right to bring a derivative action.
6.52 Having considered the matter further, and in the light of the responses to the consultation paper, we consider that it would be desirable for the new procedure to replace entirely the common law right to bring a derivative action. In the consultation paper we quoted the following comments on the Canadian legislation:
It would only lead to confusion to allow both common law and statutory actions. A more orderly development of the law would result from one point of access to a derivative action and would allow a body of experience and precedent to build up to guide shareholders.
6.53 We noted that diverging principles might develop between the new procedure and the procedure at common law which would add to the current confusion. This would go against our stated aim of making the law simpler. We consider that the only way to avoid this problem is for the new procedure to replace the common law derivative action entirely.
6.54 As explained in the consultation paper and noted above, it is not only under the fraud on the minority exception that a share holder can bring a derivative action. He can also bring one for loss caused by an ultra vires or illegal transaction. He also appears to have the option to bring one in respect of breaches of special resolution procedures. We propose that these situations should also be replaced by the new derivative procedure so that they will be subject to the new restrictions and procedures discussed in this part. We consider that where a director causes a company to enter into an ultra vires or illegal transaction or one for which a special majority is required he will be regarded as having acted in breach of duty for the purposes of the new derivative procedure.
6.55 As indicated above, there may be a few very rare cases which could have been brought as derivative actions under the common law but will not come within the terms of the new procedure. But we consider that if we are to put the derivative action on a new, simpler and more rational basis then this is something which cannot be avoided. As we have explained, we consider that our proposals set logical and clearly identifiable limits on the availability of the action. For any exceptional cases of hardship, there is still the possibility of bringing proceedings under section 459 and, if appropriate, seeking an order that proceedings may be brought on the company’s behalf under section 461(2)(c). We therefore recommend that the new derivative procedure should replace the common law derivative action entirely.”
116. Later in Chapter 6 and under the main heading “Other relevant provisions”, the following appears : -
“ Multiple derivative acitons
6.109 Finally, in connection with the new derivative procedure, we raised the issue of whether a shareholder in a parent company should be able to bring a derivative action on behalf of a subsidiary or associated company within the group (which we referred to, for simplicity, as a “multiple derivative action”). We expressed no provisional view but invited comments on this point.
6.110 Although a small majority of respondents who addressed this issue did consider that provision should be made for multiple derivative actions, we are not persuaded that it would be helpful or practicable to include such a provision. We consider that this situation is likely to be extremely rare and that any rule attempting to deal with it would be complicated and unlikely to be able to cover every conceivable situation. We consider that the question of multiple derivative actions is best left to the courts to resolve, if necessary using the power under section 461(2)(c) of the Companies Act 1985 to bring a derivative action. Accordingly, we do not consider that there should be any express provision dealing with multiple derivative actions.”

117. There then follows the conclusion the relevant parts of which read as follows : -

“ Conclusion
6.111 To summarise, we recommend that the right to bring a derivative action at common law should be replaced by a simpler and more modern procedure. We recommend that the basis of the right to bring a derivative action should be set out in the Companies Acts, but that the details of the procedure should be set out in rules of court so as to give maximum flexibility.
6.112 The derivative action should be available to current members of the company where the cause of action arises as a result of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director, or a director putting himself in a position where his personal interests conflict with his duties to the company (although the claim itself need not be against a director). For these purposes, director should include both shadow and de facto directors. However, derivative claims should be subject to tight judicial control at all stages.”

118. Mr. Millett further relies on the English case of Universal Project Management Services Ltd. v. Fort Gilkicker Ltd. [2013] EWHC 348 the judgment in which was delivered by Briggs J. (as he then was) on 2 February 2013. In that case, Briggs J., after having reviewed all the relevant authorities, including the LC Report and a number of academic commentaries on the subject, decided in a very careful judgment that Section 260 of the Companies Act only created a statutory scheme in relation to the single derivative action but did not have the effect of abrogating the MDA at common law. The said academic commentaries included one by Lord Millett himself, speaking extra-judicially, in his article “Multiple Derivative Actions”, in the Gore-Browne bulletin for July 2010 in which he said : -

“Had the facts alleged in Waddington come before an English Court the case must have been dismissed in limine, and for the first time more than 150 years an alleged injustice would be without redress. The moral for would-be fraudsters is simple; choose an English company and be careful to defraud its subsidiary and not the company itself.”

119. Briggs J. stated his conclusion thus : -

“Conclusion
44. I have come on balance to the conclusion that the 2006 Act did not do away with the multiple derivative action. My reasons follow. First, there was before 2006 a common law procedural device called the derivative action by which the court could permit a person or persons with the closest sufficient interest to litigate on behalf of a company by seeking for the company relief in respect of a cause of action vested in it. Those persons would usually be a minority of the company’s members, but might, if the company was wholly owned by another company, be a minority of the holding company’s members. These were not separate derivative actions, but simply examples of the efficient application of the procedural device, designed to avoid injustice, to different factual circumstances.
45. In 2006 Parliament identified the main version of that device, namely where locus standi is accorded to the wronged company’s members, labelled it a “derivative claim” and enacted a comprehensive statutory code in relation to it. As a matter of language, section 260 applied Chapter 1 of Part 11 only to that part of the old common law device thus labelled, leaving other instances of its application unaffected.
46. Applying the well established relevant principle of construction, Parliament did not expressly abolish the whole of the common law derivative action in relation to companies, even though by implication from the comprehensiveness of the statutory code it did do so in relation to derivative claims by members (as defined) of the wronged company. Beyond that, the assertion that the remainder of the common law device was abolished fails because abolition was neither express nor a clear or necessary implication.
47. Section 260 could so easily have been phrased to achieve precisely that result. Sub-section (1) could have excluded the phrase “by a member of a company” and re-introduced it in sub-section (2) as a specific additional requirement in sub-sub-section (1) so that it read “under this Chapter by a member of the company”. Alternatively, the whole of the common law derivative action in relation to companies could expressly have been abolished, as it was, for example, by section 236(3) of the Australian Corporations Act 2001 which provides that:
“The right of a person at general law to bring, or to intervene in, proceedings on behalf of the company is abolished.”
48. Neither Lord Millett nor any of the other academic writers who have concluded that the 2006 Act abolished multiple derivative actions have addressed the simple point of construction advanced by Mr Lightman, Mr Hollington QC and by Mr Bailey in the present case, and it may be assumed that the editors of Palmer must have applied the same or a similar analysis.
49. I reach this conclusion with some relief. Not only does it address the manifest scope for real injustice which the abolition of any derivative action by members of a holding company would have entailed, and as graphically described by Lord Millett in his article, but it ensures that English company law runs in this respect in harmony with the laws of Hong Kong, Singapore, Canada, Australia and New Zealand, all of which have, albeit by different methods, ensured that injustice of the type described by Lord Millett can properly be addressed.”

120. Mr. Millett is of the opinion that on a reading of the BVI Consultation Paper, the true construction of Section 184C, a reading of the LC Report, the true construction Section 260 of the Companies Act and on the authority of the Fort Gilkicker case, the BVI courts would most likely follow the reasoning of Briggs J. in the Fort Gilkicker case and hold that Section 184C does not have the effect of abrogating the MDA at common law and therefore the present action is in order.

121. On the other hand, Mr. Webster holds the following opinion : -

(i) The wording of Section 184C is very clear. It has the effect of abrogating all kinds of derivative actions at common law. It only permits a single derivative action to be pursued.
(ii) The FortGilkicker case was probably wrongly decided. In any event, the reasoning in that case is unlikely to be applicable to the statutory framework of the BC Act. In the circumstances, that decision is unlikely to be followed by the BVI courts.

122. I have gone through in detail the summary of Mr. Webster’s reasoning and the arguments of Counsel for Thomas as set out in the Closing Submissions for the 1^st Defendant in paragraphs 182 – 265 thereof. Having considered Section 184C, the BVI Consultation Paper, Section 260 of the Companies Act and the LC Report, I am convinced that the decision by Briggs J. in the FortGilkicker case is sound. In such circumstances, I prefer the evidence and opinion of Mr. Millett to those of Mr. Webster.

123. I also take into account the fact that in Part B of the Joint Report, the experts have agreed under paragraph 1 (i) as follows : -

“The Common Law of England from time to time applies to the BVI and decisions of the English superior courts are considered persuasive authority except where they are inconsistent with local laws or court decisions.”

124. I find as a fact that on the true construction of Section 184C, after taking into account the BVI Consultation Paper, Section 260 of the Companies Act and the LC Report, and on the authority of the Fort Gilkicker case, the BVI courts will most probably hold as a matter of BVI law that Section 184C has not abrogated the common law right of a party to institute and maintain an MDA. Hence, even if it were still open to Thomas to advance the argument based on BVI law, such argument facts.

THE POSITION OF CHANSAM

125. Chansam is not present or represented in these proceedings.

126. The causes of action against Chansam as pleaded in the Re-Amended Statement of Claim are as follows : -

(i) Chansam, by entering into the Yugang Agreement, “knowingly and intentionally procured” Thomas to breach the fiduciary duties owed by Thomas to Profit Point. (paragraph 46 of the Re-Amended Statement of Claim)
(ii) Chansam conspired with Thomas to breach the fiduciary duties owed by Thomas to Profit Point. (paragraph 47 of the Re-Amended Statement of Claim)
(iii) Chansam dishonestly assisted Thomas in his breach of the aforesaid fiduciary duties and/or knowingly received the profits from the sale of its shares in Prestige denied from the breach of the aforesaid fiduciary duties of Thomas. (Paragraph 48 of the Re-Amended Statement of Claim)

127. I have not been able to find any evidence in support of the allegations set out in paragraph 126 above. Furthermore, it is a breach of fiduciary duty by Thomas situation rather than a breach of trust with Chansam knowingly receiving trust money or the “proceeds” of a breach of trust. The fact that Thomas was in control of Chansam and using Chansam as a vehicle is very different from Chansam having “procured” Thomas to commit a breach of fiduciary duty or having “conspired” with Thomas for him to commit a breach of fiduciary duty.

128. It is noteworthy that Counsel for Waddington in their written Opening Submissions and Closing Submissions have hardly touched upon the claim against Chansam.

129. I therefore conclude that Waddington has not made out its case against Chansam and I dismiss Waddington’s claim against Chansam accordingly.

QUANTUM

130. Counsel for Waddington have produced a document entitled “Appendix – Calculation of Loss of Profit Point” which I annex hereto as Appendix B. It sets out the detailed calculations regarding the loss of Profit Point on two alternative bases. Having considered the matter carefully, I have come to the conclusion on balance that it is fair for me to adopt the “pro rata sale” basis (i.e. Scenario (ii)) in Appendix B.

131. I therefore hold that Profit Point has suffered loss and damage in the sum of $33,511,220.32.

INTEREST AND COSTS

132. In their final submissions, Counsel for Waddington ask for an award of compound interest and costs on an indemnity basis with a certificate for four Counsel.

133. I think there should be full submission on such an application.

CONCLUSION

134. I give judgment in favour of Profit Point and against Thomas in the sum of $33,511,220.32.

135. I dismiss the claim by Waddington against Chansam.

136. I direct that : -

(i) Waddington should file and serve its written submission within 14 days from the date of handing down of this Judgment, not counting Christmas Day, Boxing Day and New Year’s Day (if applicable), dealing with : -
(a) the basis of interest on the Judgment sum;
(b) the date from which interest should be payable;
(c) the party/parties in favour of which costs should be payable;
(d) the basis for taxation of costs and
(e) certificate for Counsel.
(ii) Thomas should file and serve his written submission in reply within 14 days from the expiration of the said period of 14 days on the same basis.
(iii) I shall thereafter make a ruling on paper and without a hearing.
(iv) I give the parties liberty to apply for directions, if necessary.

137. It remains for me to thank Counsel and the two experts, Mr. Millett and Mr. Webster, for their assistance rendered to the Court.

	(Patrick Fung, SC)
	Recorder of the Court of First Instance
	of the High Court

Mr Benjamin Yu SC, Ms Eva Sit, Mr Elliot Fung and Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Martin Lee SC, Mr Hectar Pun, Mr Richard Yip and Mr Au Lut Chi, instructed by Fairbairn Catley Low & Kong, for the 1^st Defendant

The 2^nd Defendant, in person, absent

King & Wood, for the 3^rd Defendant, attendance excused

The 4^th Defendant, in person, absent

Reed Smith Richards Butler, for the 5^th Defendant, attendance excused

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

_____________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders
	in PLAYMATES HOLDINGS LIMITED (except
	the 1st and 2nd Defendants), PLAYMATES
	INTERNATIONAL LIMITED and
	PTROFIT POINT LIMITED)
and
	CHAN CHUN HOO THOMAS (陳俊豪)	1st Defendant
	TGC INVESTMENTS LIMITED	2nd Defendant
	(formerly known as CHANSAM
	INVESTMENTS LIMITED)
	PLAYMATES HOLDINGS LIMITED	3rd Defendant
	(彩星集團有限公司) (formerly known as
	PLAYMATES INTERACTIVE
	ENTERTAINMENT LIMITED)
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant
and
	YUGANG INTERNATIONAL LIMITED	Respondent (in
		the third party
		discovery summons)
and
	LEE KAR SZE CARMELO	Intended Witness
	CHIANG SUI FOOK LILIAN	Intended Witness
___________

Before: Deputy High Court Judge Lok in Chambers

Date of Hearing: 5 June 2013

Date of Decisions: 5 June 2013

Date of Reasons for Decisions: 7 June 2013

__________________________

REASONS FOR DECISIONS

__________________________

1. This case has been fixed for trial on 15 July 2013 with 9 days reserved. I am not the trial judge assigned to hear this case.

Background

2. I have already set out the background of this case in my previous Reasons for Decisions dated 7 May 2013 (“the Previous Reasons”), and I do not want to repeat the same here. For the purpose of the present Reasons for Decisions, I would adopt the same abbreviations that I have used earlier.

3. On 27 March 2013, I dismissed the EY Summons. One of the reasons for the dismissal of the EY Summons is that such application should have been directed against Yugang (see: para 29 of the Previous Reasons). Following that decision, the plaintiff issued another third party discovery summons on 28 March 2013 against Yugang (“the Yugang Summons”). The documents required to be disclosed in the Yugang Summons are wider than those requested in the EY Summons. Apart from all the correspondence between Yugang and its auditor, EY, relating to the sale of the Prestige shares, the plaintiff, by way of the Yugang Summons, is asking Yugang to disclose, inter alia, all its correspondence with the 2^nd defendant relating to the sale of the Prestige shares. In the hearing on 5 June 2013, I dismissed the Yugang Summons.

4. On 7 May 2013, the plaintiff filed ex parte applications for leave to issue 2 respective writs of subpoena duces tecum against Mr Lee Ka Sze Carmelo (“Mr Lee”) and Ms Chiang Sui Fook Lilian (“Ms Chiang”), who were the solicitors acting for Yugang and the 2^nd defendant respectively in the sale of the Prestige shares. The Master referred the applications to me for consideration. Since the making of the applications appeared to be an attempt by the plaintiff to get the documents under the Yugang Summons through the back door, I directed the plaintiff to take out inter parte summonses for such applications. The plaintiff did so and the summonses (“the Subpoenas Summonses”) came me on 5 June 2013. I dismissed the Subpoenas Summonses in the hearing.

5. I now give my reasons for these decisions.

The Yugang Summons

6. The reasons put forward by the plaintiff in support of the Yugang Summons are more or less the same as those in support of the HSBC, the PWC and the EY Summonses as stated in the Previous Reasons. In short, the plaintiff says that the documents requested are relevant to the issues of corporate control of the various entities including the 2^nd defendant, the timing of the sale of the Prestige shares to Yugang, the reasons behind the sale of the Prestige shares by Profit Point and the sale of the Prestige shares to Yugang, and the liabilities of the 2^nd defendant.

7. Subject to the sanction of the court, Yugang has no objection for the disclosure of certain documents including retainer letters and engagement letters through which Yugang engaged the solicitors’ firm, Woo Kwan Lee & Lo, and EY to commence the works on the sale of the Prestige shares to Yugang and certain documents passing between Yugang or Funrise and the 1^st or 2^nd defendants in relation to the sale of the Prestige shares. For the remaining documents, Yugang objects the discovery on the grounds that the documents are not relevant to the issues of the case, the discovery of the documents is not necessary for the fair disposal of the case or for saving costs, and the documents requested have not been identified with precision.

8. I do not find it necessary to decide on these particular issues. In my judgment, from the case management perspective, the court should not allow third party discovery at such a late stage of the proceedings even if the documents are relevant to the issues of the case.

9. This case has a long history, and the parties have had ample time for the preparation of the case. In the various listing questionnaires filed by the plaintiff prior to the granting of leave to set down, the plaintiff had confirmed that there was no other outstanding interlocutory application. Up to now, no reason has been put forward by the plaintiff to justify the delay in the making of the third party discovery applications. Some of the documents requested in the Yugang Summons might have been included in the EY Summons taken out by the plaintiff on 22 October 2012, but this cannot explain why the discovery application relating to the other documents, which prima facie are relevant to the issues of the case, had only been made on 28 March 2013 which was shortly before the PTR and only about 3.5 months before the trial.

10. Now that the trial will take place in less than 6 weeks’ time. If the discovery order is made, some time should be allowed to Yugang to locate the documents in order to comply with the obligations under the discovery order. In other words, the parties will only be able to obtain the documents shortly before the trial. This is wholly undesirable and would place undue burden on the parties in the preparation of the trial.

11. Further, there is a real risk that, if third party discovery is ordered, it may prompt another round of discovery and filing of witness statements which would have the effect of derailing the trial itself. Taking into account the history of the conduct of the present litigation, such risk is real. Further, if there are some other documents referred to in the documents disclosed by Yugang, it would be very difficult for the court to deny, for example, the defendants’ request for discovery of further documents or to adjourn the trial for further investigation. Unlike the documents ordered to be disclosed under the HSBC Summons and the PWC Summons, most of the documents covered by the Yugang Summons are Yugang’s own documents, or the correspondence between Yugang and its professional representatives. Since Yugang is not a party to the proceedings, the plaintiff and the defendant may have to seek further clarifications from the relevant personnel of Yugang about the contents of the new documents. As I see it, there is a real risk that the parties may have to call additional witnesses or to carry out further investigation to deal with the possible matters raised in the new documents.

12. Based on the aforesaid, from the case management perspective, the court should adopt a robust approach and put a stop to all new discovery, otherwise there would be no end to such exercise. This should be the case even if Yugang has no objection to disclose some of the documents listed out in the Yugang Summons. I therefore dismissed the whole Yugang Summons.

The Subpoenas Summonses

13. Since I disallow the plaintiff’s application for discovery of documents by Yugang, the court should not permit the plaintiff to obtain the same documents, through the back door, by requesting Mr Lee (the solicitor acting for Yugang in the sale of Prestige shares) to attend the trial to produce such documents.

14. Ms Chiang was acting for the 2^nd defendant in the sale of the Prestige shares. From the case management perspective, the court should likewise not allow the plaintiff to issue a subpoena against her. Firstly, the plaintiff had not indicated in any of the listing questionnaires that it intended to call Ms Chiang or Mr Lee as one of its witnesses at the trial. No reason has been put forward to justify the change in the stance. Secondly, the plaintiff has all along been trying to obtain third party discovery by way of summonses. No reason has been put forward by the plaintiff as to why it had not taken out similar application against Ms Chiang earlier together with the HSBC, PWC and EY Summonses. Thirdly, there is a real risk that the documents to be disclosed by Ms Chiang at the trial will necessitate further investigation by the parties with the result of derailing the trial itself. Based on these reasons, the court should not grant leave to issue a subpoena against Ms Chiang.

15. In his submission, Mr Lam, counsel for the plaintiff, relies on the passage in para 32/7/1 of Hong Kong Civil Procedure 2013 and argues that the proper procedure is for the court to grant leave to issue the subpoenas at this stage. After the issuance of the subpoenas, it is always open to the intended witnesses to apply to set aside the subpoenas.

16. I disagree. The said passage only states that the judge should not and cannot take it upon himself to decide issues relating to the relevance and usefulness of any evidence that may be given, and so leave to issue a subpoena should be granted unless the application is an abuse of process. To me, as there is a pending third party discovery summons against Yugang, it is certainly an abuse of process in applying for leave to issue a subpoena against Mr Lee with a view to obtain the documents through the back door. For the subpoena against Ms Chiang, knowing full well the sentiment of the court about late applications expressed in the earlier hearings and the court’s concern that similar applications can disrupt the trial date, the plaintiff should have issued a third party discovery summons against Ms Chiang with a view to seek a proper determination by the court. In such circumstances, trying to obtain the documents through another channel is an abuse of process. Further, it is not open to the plaintiff to argue that, in view of the urgency of the trial, the plaintiff can simply apply for such subpoenas by-passing the court’s determination on the propriety of the third party discovery. Hence, I dismissed the Subpoenas Summonses.

Costs

17. Based on my ruling that the making of the applications for leave to issue subpoenas is an abuse of process, I ordered the plaintiff to pay the 1^st defendant, Mr Lee and Ms Chiang the costs of the Subpoenas Summonses on an indemnity basis.

18. For the Yugang Summons, I ordered the plaintiff to pay the costs of Yugang on an indemnity basis. Since Yugang is a third party which has been dragged into the litigation at a very late of the proceedings, Yugang should be able to recover its costs on a full indemnity basis.

19. In determining the issue of costs of the Yugang Summons vis-à-vis the plaintiff and the 1^st defendant, I have taken into account the dicta of Lam JA in Li Xiao Yun & Anr v China Gas Holdings Ltd, unreported, CACV 39/2013 (decision of the Court of Appeal in on 11 March 2013) that the applicant for late application should normally be expected to face an adverse costs order on indemnity basis. However, since I did not award costs on indemnity basis in respect of the other late applications mentioned in the Previous Reasons, to maintain consistency, I awarded such costs against the plaintiff on a party-and-party basis.

20. Finally, I would repeat the dicta I have made in the Previous Reasons about late applications:

“51. In this action, the parties have taken out a lot of late applications shortly before the PTR. This practice is highly unsatisfactory and should be discouraged. Apart from the prejudice likely to be caused to the parties by such late applications including the possible adjournment of the trial, there is serious disruption to the court diary as the court has to struggle to find some time during the limited time before the trial to hear the applications (see also the dicta of Lam JA in Li Xiao Yun & Anr v China Gas Holdings Ltd, unreported, CACV 39/2013, decision on 11 March 2013, at §18).
52.But for the timing of the applications, most of these applications do have merit and the courts are always puzzled as to why these applications are made so late.
53.Express warning about late applications has already been given in §34 of Practice Direction 5.2, and practitioners should be reminded that late applications may be dismissed on the basis of delay alone. Unless there are exceptional circumstances and there are good reasons for the delay, one should not expect the courts to grant any late applications taken out shortly before the PTR. This is the case even if the applications have satisfied all the other threshold requirements for the granting of the relevant orders. Practitioners should therefore give serious thought about the question relating to outstanding interlocutory applications when they fill in the listing questionnaires before the case is set down for trial, otherwise they only have themselves to blame if their late applications are rejected on the ground of delay alone. Further, as pointed out by Lam JA in Li Xiao Yun & Anr v China Gas Holdings Ltd, supra, at §18), applicant for late application should normally be expected to face an adverse costs order on indemnity basis.

21. Further under the new CJR regime, the court, when facing an application for leave to issue a subpoena against a fresh witness shortly before the trial, is bound to consider the effect of such application on the trial and whether the testimony from such witness would have the possible effect of derailing the trial. Hence, unless there are good reasons to the contrary, practitioners should always include the names of the possible witnesses in the listing questionnaires to avoid the possibility of the court disallowing such witnesses to testify at the trial.

(David Lok)
Deputy High Court Judge

Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Hectar Pun and Mr Richard Yip, instructed by Fairbairn Catley Low & Kong, for the 1^st defendant

The 2^nd defendant, in person, absent

The 3^rd defendant, represented by King & Wood Mallesons, attendance excused

The 4^th defendant, in person, absent

The 5^th defendant, represented by Reed Smith Richards Butler, attendance excused

Mr Anson Chan, instructed by Cheung, Tong & Rosa, for Yugang International Limited and Mr Lee Ka Sze Carmelo

Ms Chong Pui Kiu Ruby, of Deacons, for Ms Chiang Sui Fook Lilian

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

____________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in Playmates Holdings Limited except the 1st and 2nd Defendants), PLAYMATES INTERNATIONAL LIMITED And PROFIT POINT LIMITED)
	and
	CHAN CHUN HOO THOMAS	1st Defendant
	T G C INVESTMENTS LIMITED	2nd Defendant
	(formerly known as Chansam Investments Limited)
	PLAYMATES HOLDINGS LIMITED	3rd Defendant
	(formerly known as Playmates Interactive Entertainment Limited)
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant
____________

Before: Deputy High Court Judge Lok in Chambers (open to public)

Date of Hearing: 31 May 2013

Date of Decision: 31 May 2013

_____________

D E C I S I O N

_____________

1. This is an application for leave to appeal against the costs order I made in respect of the plaintiff’s application for an order to permit the plaintiff’s BVI law expert, Mr Richard Millett, QC, to give evidence by means of video-conferencing facility (“the Costs Order”). In that hearing, I made the Costs Order that save that the costs of the hearing be paid by the plaintiff to the 1^st defendant with certificate for one counsel, the costs of the summons be costs in the cause.

2. There is no dispute between the parties about the following propositions in relation to an application for leave to appeal against a costs order:

(a) to obtain leave to appeal, an applicant has to show more than just an arguable case with reasonable and not fanciful prospects of success, although he does not have to demonstrate that the appeal will probably succeed (SMSE v KL [2009] 4 HKLRD 125, per Le Pichon JA, paragraph 17).
(b) the appellate court will not interfere with the exercise of a judge’s discretion in the award of costs unless it can be shown that he:
(i) failed to exercise discretion;
(ii) exercised it upon a false principle;
(iii) did not exercise judiciously; or
(iv) the exercise of the discretion was demonstrably flawed (Hong Kong Civil Procedure 2013, Volume 1, paragraph 62/2/11, page 1106).

3. The background of this case has been set out in my reasons for decision dated 7 May 2013 and I do not want to repeat the same here.

4. As mentioned in the said reasons, it is regrettable that the question about leave to adduce expert evidence was left to be determined by the trial judge at the PTR hearing. The delay in the determination on such issue has certainly complicated the conduct of the proceedings.

5. Because leave to adduce expert evidence on BVI law was only granted by consent on 24 April 2013, the plaintiff’s BVI law expert cannot personally come to Hong Kong to testify and, as a result, the plaintiff had to apply for leave to allow its expert to testify by way of video-conferencing facilities (“the Video-Link Application”).

6. The plaintiff issued a summons for the Video-Link Application on 30 April 2013. On 7 May 2013, the 1^st defendant’s solicitors wrote to the plaintiff’s solicitors asking for a copy of Mr Millett QC’s report to enable the 1^st defendant “to duly consider and prepare for the summons”.

7. There were then some heated exchanges between the solicitors for the plaintiff and the 1^st defendant. The plaintiff’s solicitors refused to provide a copy of the expert report to the 1^st defendant on the ground that the contents of the expert report were irrelevant to the application, and they alleged that the defendant’s solicitors had “wilful intention to obstruct the progress leading to the trial”.

8. The parties then came before me on 15 May 2013. Upon the request of the court, the plaintiff supplied a copy of Mr Millett QC’s report to 1^st defendant for consideration. After perusing the report, Mr Lee, SC, counsel for the 1^st defendant, indicated no objection to the plaintiff’s Video-Link Application.

9. I then decided on the issue of costs relating to the Video-Link Application and I gave the oral reasons for the decision. Before I was able to reduce my oral reasons into writing, the plaintiff obtained the transcript and filed the present application for leave to appeal against the Costs Order. In any event, the reasons for the Costs Order can be found in the transcript itself.

10. It is clear from the Costs Order that I treated the costs of the hearing on 15 May 2013 separately from the costs of the summons itself.

11. As to the costs of the hearing, it is clear that the main dispute between the parties is whether the contents of Mr Millett QC’s report are relevant to the Video-Link Application. In this regard, I disagree with the view taken by the plaintiff’s solicitors. In my judgment, the contents of the report are clearly relevant. In deciding whether to grant a video-link application, one of the considerations is whether the credibility of the expert is in issue. Because of the nature of the expert evidence, one may say that credibility of the experts is unlikely to be in issue in the present case. However, Mr Millett was the expert in the leading case in East Asia Satellite Television (Holdings) Ltd v New Cotai, LLC [2011] 3 HKLRD 734. In order to determine whether Mr Millett is going to depart from his expert opinion he has given earlier, the 1^st defendant should be entitled to peruse the contents of the expert report before indicating his stance to the application.

12. The 1^st defendant voluntarily withdrew the objection after perusing the report. In such circumstances, the court is entitled to assume that had the report been supplied to the plaintiff before the hearing, the hearing itself could have been avoided. In such circumstances, I ordered the plaintiff to pay the costs of the 1^st defendant of the hearing on 15 May 2013 with certificate for one counsel.

13. So far as the costs of the summons itself, it is true that Mr Lee, SC had indicated in the hearing on 24 April 2013 that the 1^stdefendant would object to the application. However, this was not an unreasonable stance before perusing the contents of the plaintiff’s expert report. In particular, the 1^st defendant’s expert would be able to attend the trial personally for cross-examination by the plaintiff’s counsel.

14. Furthermore, it was not wholly the fault of the 1^st defendant that put the plaintiff in such a difficult position of having to arrange for the expert to testify with such short notice. As mentioned in my reasons dated 7 May 2013, the 1^st defendant had taken out the summons for leave to file expert evidence on BVI law as early as March 2012. Apparently the Registrar made an order to the effect that such application would be dealt with by the trial judge at the PTR hearing. In such circumstances, the criticism should not be directed against the 1^st defendant alone, and the most appropriate costs order for the summons should be one of costs in the cause. I therefore so ordered.

15. Mr Lam, counsel for the plaintiff, also relies heavily on the contents of the defendant’s solicitors’ letter dated 29 April 2013. However, this letter had been superseded by subsequent correspondence between the parties. In such circumstances, one should not just focus on the contents of this letter in determining the possible stance of the 1^stdefendant in respect of the Video-Link Application.

16. Based on the aforesaid reasons, I am of the view that the chance of the Court of Appeal in interfering with my exercise of the discretion is very slim and so I refuse the plaintiff’s application for leave to appeal against the Costs Order.

	(D Lok)
	Deputy High Court Judge

Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Hector Pun, instructed by Fairbairn Catley Low & Kong, for the 1^st defendant

The 2^nd defendant, TCG Investments Limited (formerly known as Chansam Investment Limited), in person, absent

The 3^rd defendant, Playmates Holdings Limited (formerly known as Playmates Interactive Entertainment Limited), represented by King & Wood, appearance exempted

The 4^th defendant, Playmates International Limited, in person, absent

The 5^th defendant, Profit Point Limited, represented by Reed Smith Richards Butler, appearance exempted

Please refer to CACV136/2013 for the relevant appeal(s) to the Court of Appeal.

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

_____________

BETWEEN
	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED (except the 1st and 2nd Defendants), PLAYMATES INTERNATIONAL LIMITED and PTROFIT POINT LIMITED)
	and
	CHAN CHUN HOO THOMAS (陳俊豪)	1st Defendant
	TGC INVESTMENTS LIMITED	2nd Defendant
	(formerly known as CHANSAM INVESTMENTS LIMITED)
	PLAYMATES HOLDINGS LIMITED	3rd Defendant
	(彩星集團有限公司) (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)
	PLAYMATES INTERNATIONAL LIMITED	4th Defendant
	PROFIT POINT LIMITED	5th Defendant

_____________

Before: Deputy High Court Judge Lok in Chambers

Dates of Hearings: 27 March & 24 April 2013

Dates of Decisions: 27 March & 24 April 2013

Date of Reasons for Decisions: 7 May 2013

__________________________

REASONS FOR DECISIONS

__________________________

1. This case has been fixed for trial on 15 July 2013 with 9 days reserved. I am not the trial judge assigned to hear this case.

2. In the hearings on 27 March 2013, I made the following decisions:

(i)   allowing the plaintiff’s summons dated 28 September 2012 (“the HSBC Summons”) for third party discovery against HSBC who was the 2^nd defendant’s banker;
(ii)   allowing, in part, the plaintiff’s summons dated 16 October 2012 (“the PWC Summons”) for third party discovery against PricewaterhouseCoopers (“PWC”) who was the 2^nd defendant’s accountant; and
(iii)   dismissing the plaintiff’s summons dated 22 October 2012 (“the EY Summons”) for third party discovery against Ernst & Young (“EY”) who was the auditor of Yugang International Limited (“Yugang”).

3. The PTR then came before me on 8 April 2013. Shortly before and after that hearing, the plaintiff and the 1^st defendant have taken out a number of applications before the court. All these applications, except for the plaintiff’s summons dated 28 March 2013 for third party discovery against Yugang, have been adjourned for argument before me on 24 April 2013. In that hearing, I made the following decisions:

(i)   dismissing the 1^st defendant’s summons dated 3 April 2013 for security for costs (“the Security for Costs Summons”);
(ii)   allowing the 1^st defendant’s summons dated 12 April 2013 for the withdrawal of the interrogatories served by the plaintiff (“the Interrogatories Summons”); and
(iii)   adjourning the 1^st defendant’s summons dated 3 April 2013 for an O 14A hearing or hearing of preliminary issue (“the Preliminary Issue Summons”) to be dealt with by the trial judge.

4. I now give my reasons for these decisions.

5. In the adjourned hearing on 24 April 2013, the parties have also agreed for the court to grant leave to them to file expert evidence on BVI law for the purpose of the trial, and so I do not need to deal with such application in these Reasons.

BACKGROUND

6. This case has a long history. It involves a multiple derivative action brought by a minority shareholder (the plaintiff) in the listed parent company (the 3^rd defendant) for wrongs done to and damage suffered by the 5^th defendant, which is the 3^rd defendant’s indirect wholly-owned subsidiary. The transactions complained of took place in May to July 2000. At that time, the 1^st defendant was the chairman, executive director and controlling beneficial shareholder of the 3^rd defendant and a director of the 5^th defendant. The 2^nd, 3^rd and 4^th defendants are intermediate holding companies of the 5^th defendant which have been joined for procedural purposes in the multiple derivative action.

7. The transactions complained of consisted of:

(i) the 5^th defendant selling its entire 4.28% shareholding in Prestige Property Holding Limited (“Prestige”), an associated listed company also beneficially owned by the 1^st defendant, in the market at a loss at prices of $0.6 to $0.7 a share between 22 to 24 May 2000; and
(ii) the 2^nd defendant (a vehicle controlled by the 1^st defendant) entering into an agreement with a third party, Yugang, on 28 July 2000 to sell the 34.25% Prestige shares held by the 2^nd defendant at $2.2 a share, whereby it was a condition precedent that Yugang would not have to make a general offer (triggering point is 35%).

8. The plaintiff’s case is that these transactions were part of an arrangement whereby the 1^st defendant was to dispose of his own substantial shareholding in Prestige to Yugang at a significant premium (the consideration of the sale to Yugang was $600,600,000) on terms that Yugang would not be required to make a general offer, and to that end the 1^st defendant had to procure the 5^th defendant (which would be regarded as his concert party by reason of his beneficial ownership of the same) to dispose of the 5^th defendant’s Prestige shares. The 1^st defendant therefore procured the 5^th defendant to dispose of its Prestige shares in the market.

9. According to the plaintiff, the wrong done to the 5^th defendant was two-fold. Not only was the 5^th defendant prevented from taking part in the beneficial sale to Yugang (which would have been possible if the 1^st defendant had procured the disposal of part of the 2^nd defendant’s shares to keep the overall percentage under 35%), the “forced sale” of the Prestige shares in the market in fact resulted in a loss to the 5^th defendant in the sum of $56,000,000 (measured against the carrying value of $2.28 a share) or at least $27,700,000 (measured against book value as at 31 December 1999 at 1.46 a share).

10. It is also part of the plaintiff’s case that these transactions have a number of unusual features which cry out for explanation:

(i)   the 5^th defendant was, on the 1^st defendant’s own case, a portfolio investment holding company, and the 4.28% Prestige shares were one of its 2 main assets. Those Prestige shares had been held since around 1994 and were classified as a long term investment in the 5^th defendant’s accounts with carrying value of $2.28 a share and updated book value of $1.46 a share;
(ii)   earlier in May 2000, the 5^th defendant had already sold its other main asset, a bloc of shares in Harbour Ring International Holdings Ltd (“Harbour Ring”), but at a very substantial gain of $215,000,000;
(iii)   within a short time, the 5^th defendant saw fit to dispose of its only remaining asset (4.28% Prestige shares) at a significant loss;
(iv)   at that time, the 3^rd defendant’s group was cash-rich and was not in need of funds;
(v)   there is no evidence of any board discussion or approval for the sale of the 4.28% Prestige shares prior to their disposal. Although the 1^st defendant alleges that the sale was “duly approved” by the directors of the 5^th defendant, no board resolution has been produced in support up to now;
(vi)   rather, it appears that on 18 May 2000, a meeting of the board of the 5^th defendant (consisting of the 1^st defendant and To Shu Shing Sidney) resolved to authorise the 1^st defendant to sign all “securities transfer documents of [Prestige]”. There is no evidence of any discussion at the board of what the proposed transfer was, or its terms, price or rationale. The 1^st defendant then went ahead and gave instructions to sell the 4.28% Prestige shares;
(vii)   it was only after the event, on 3 June 2000, that the Executive Committee of the board of the 3^rd defendant (consisting of the 1^st defendant, To Shu Shing Sidney, Ip Shu Wing Charles and Cheng Bing Kin Alain) retrospectively ratified the disposal of the 4.28% Prestige shares by the 5^th defendant. The reason given for such ratification was that “the then market condition was favourable and the disposal was beneficial to the Group as a whole”.

11. In reply to these allegations, the 1^st defendant denies that there was any breach of fiduciary duty. The 1^st defendant claims that there was ulterior purpose for the plaintiff in commencing the present proceedings against the defendants, and the plaintiff has no locus to bring this action under BVI law on behalf of the 5^th defendant. In reply to the allegations about the sale of the 4.28% Prestige shares, the 1^st defendant avers that the authorization given to him for such sale by the board of the 5^th defendant on 18 May 2000 was “in conformity with … the Articles of Association of [the 5^th defendant]”, the sale of such shares was at market price and was ratified by the Executive Committee of the board of the 3^rd defendant. Further, the loss arising from the disposal of the 4.28% Prestige shares was “more than compensated by the substantial gain realised from the Harbour Ring shares”.

THE DISCOVERY SUMMONSES AGAINST HSBC, PWC AND EY

12. The plaintiff took out 3 third party discovery summonses against HSBC, PWC and EY in September and October 2012.

13. There is no disagreement about the following principles for third party discovery under s 42 of the High Court Ordinance (Cap 4) and O 24 r 7A of the RHC (Cap 4) , which were summarised in Ngan In Leung & Ors v Chu Yuet Wah, unreported, HCA 388/2006 (decision of Au-Yeung DHCJ, as she then was, on 14 August 2012) at §§61-62:

(i)   it must be shown that the non-party is likely to have the documents in his possession, custody or power which are relevant to an issue arising out of a claim;
(ii)   the test of relevance is the Peruvian Guano test;
(iii)   it must be shown that the order must be necessary either for disposing fairly of the matters or for saving costs;
(iv)   the order sought must identify with precision the document, documents or categories of documents which are required to be disclosed;
(v)   even if satisfied with the above, the court still has to exercise its discretion, bearing in mind that disclosure orders against third parties are exceptional. It should not be used as a fishing exercise for documents nor speculative. It should not be oppressive to the witness, e.g. by the terms being too wide. It must identify the documents by means of a particular description and not a general description;
(vi)   it will be oppressive if the order requires the third party to make fine judgments regarding the relevance of the documents; or if it requires him to undertake a search of an excessively large amount of documents; or if it does not specify the documents with reasonable particularity; and
(vii)   the court may also in its discretion refuse to order the disclosure of documents which are confidential.

(a) The HSBC Summons

14. HSBC was the banker of the 1^st and the 2^nd defendants at the material times. The documents sought are, namely, a charge over the securities dated 3 February 2000 made by the 2^nd defendant in favour of HSBC (“the Charge”) and all communications related to the Charge and a 2^nd Mortgage dated 28 February 2000 made jointly by the 2^nd defendant and another in favour of HSBC in respect of the 1^st defendant’s residence in Middle Gap Road (“the 2^nd Mortgage”) and the dealings of the Prestige shares.

15. I ordered discovery of these documents on the ground that they are relevant to the issues arising or likely to arise in the proceedings.

16. Firstly, these documents are relevant to the issue of corporate control. It is the plaintiff’s case that up to 28 December 2001, the 1^st defendant was in control of the 2^nd defendant, and through the 2^nd defendant, was in control of the Playmates Group, which is denied by the 1^st defendant. As the Charge and the 2^nd Mortgage would have imposed substantial financial liabilities on the 2^nd defendant, they would have been executed by those in control of the 2^nd defendant at the time. Hence, the requested documents may shed light on the issue of corporate control.

17. Secondly, these documents may explain the reasons behind the sale of the 4.28% Prestige shares by the 5^th defendant and the sale of the Prestige shares by the 2^nd defendant to Yugang. According to the plaintiff, the Charge and the 2^nd Mortgage would have placed the 1^st and the 2^nd defendants under mounting pressure to repay their debts to HSBC. Such intense financial pressure may explain why the 2^nd and the 5^th defendants disposed of the Prestige shares so suddenly.

18. The discovery of the requested documents is therefore necessary for the court to determine the aforesaid issues. The 2^nd defendant has not filed a Defence and has been absent in these proceedings. The 1^st defendant has not included these documents in his list of documents, and Mr Pun, the then counsel for the 1^st defendant, confirms at the hearing that the 1^st defendant is not prepared to supply such documents. Under such circumstances, I allowed the HSBC Summons to enable the plaintiff to obtain such documents for the proper preparation of the trial.

19. In the hearing, Mr Pun submits that the court should not allow the application at that stage because the 1^st defendant may lodge an appeal against the court’s decision. If the 1^st defendant does so, the trial date may be jeopardised.

20. I agree that the application could have been made earlier. However, the HSBC Summons was taken out on 28 September 2012 which was about 10 months before the trial. Due to the state of the court diary, the application was only heard on 27 March 2013, and yet there was still by then considerable time before the commencement of the trial. Furthermore, the documents requested relate very much to the 1^st defendant and the operation of the 2^nd defendant, and so I do not expect that the 1^st defendant would have any difficulty in dealing with the materials revealed in these documents. If the 1^st defendant had no control over the 2^nd defendant as alleged by him, he can simply make a further witness statement to explain the situation or to deal with it in his oral testimony at the trial. I do not foresee that the 1^st defendant has to carry out extensive investigation in relation to these documents, and it is unlikely that the trial date will be jeopardised.

21. Further, possibility of appeal is not a valid consideration for the court in determining the merits of the application. In any event, there is mechanism for the Court of Appeal to deal with urgent appeals thereby minimising the risk of the disruption of the trial date.

22. The 1^st defendant also argues that HSBC may not keep the documents due to the lapse of time. If that is the case, the relevant personnel of HSBC can make an affirmation to confirm that the bank is no longer in possession of these documents. At this stage, the court cannot assume that HSBC has thrown away those documents.

23. Based on these reasons, I allowed the HSBC Summons. Although the plaintiff succeeds in the application, it should only get the costs of the hearing if it eventually succeeds in the claim against the 1^st defendant. I therefore made the costs order that, save that the costs of the hearing on 27 March 2013 be the plaintiff’s costs in the cause as between the plaintiff and the 1^st defendant, the costs of the HSBC Summons be costs in the cause.

(b) The PWC Summons

24. PWC was the auditor of the 2^nd defendant at the material times. The documents sought are, namely, the Charge, the 2^nd defendant’s reports and accounts for 1999 and 2000 (ie. the time around the sale of the Prestige shares to Yugang), a Disclosure Letter and the Escrow Letter which form part of the sale agreement of the Prestige shares to Yugang (“the Sale Agreement”), and communications in relation to PWC’s work on the Sale Agreement. In the hearing, I allowed the PWC Summons save that the documents required to be disclosed do not cover the 2^nd defendant’s reports and accounts for 1999 and 2000.

25. According to the plaintiff, by reason of the close proximity in time between the sale by the 5^th defendant of the Prestige shares at $0.60 to $0.70 a share in late May 2000 and the sale of the shares to Yugang in July 2000, the 1^st defendant should have known, in May 2000, about the opportunity of selling the Prestige shares at a substantial premium. The 1^st defendant denies such allegation both in the pleading and in his witness statement without supplying much particulars. The documents requested would shed light as to when the negotiation for sale of the shares to Yugang had started. As this is a crux issue of the case, the plaintiff should be entitled to the documents requested in order to investigate whether the 2 sales were unrelated as claimed by the 1^st defendant.

26. However, I refused the plaintiff’s request for the discovery of the audited reports and accounts and monthly management accounts of the 2^nd defendant for the years 1999 and 2000. The documents requested, in particular the monthly management accounts, should be voluminous, and so the discovery of these documents at this stage of the proceedings may cause unnecessary burden on the parties in the preparation of the trial. Further, the financial accounts of the 2^nd defendant may be subject to different interpretations and the parties may seek the assistance of experts to interpret these financial accounts, which is highly undesirable in view of the limited time available before the commencement of the trial. Further, I have serious doubt about the probative or the evidential values of these accounts, and so I refused the discovery of these documents.

27. I only allowed the PWC Summons in part. I therefore made the costs order that, save that there be no order as to costs of the hearing on 27 March 2013 between the plaintiff and the 1^st defendant, the costs of the PWC Summons be costs in the cause.

(c) The EY Summons

28. EY was the auditor of Yugang at the material times. The documents sought are, namely, the Disclosure Letter and the Escrow Letter which form part of the Sale Agreement, a Circular by Yugang dated 21 August 2000 containing further details of the Sale Agreement and communications in relation to EY’s works on the Sale Agreement.

29. Despite that the documents requested may be relevant to the issues of the case, I refused the application for the following 2 reasons. Firstly, the documents requested are actually Yugang’s documents. The summons should have been issued against Yugang, or at least Yugang should be given the opportunity to be heard on the application. Without informing Yugang about the application, it is not appropriate for the court to make the discovery order against Yugang’s auditor. Secondly, after obtaining the documents, the parties of the present litigation may have to carry out further investigation such as approaching Yugang to seek further clarifications about the contents of these documents. After all, these documents were prepared by a third party who is not directly involved in this case. This process may take considerable time and it may jeopardise the trial date which is a milestone date. Hence, it is not appropriate to order discovery against Yugang’s auditor at such a late stage of the proceedings and I dismissed the EY Summons with costs.

THE SECURITY FOR COSTS SUMMONS

30. I then turn to the 3 summonses taken out by the 1^st defendant shortly before or after the PTR.

31. Firstly, the 1^st defendant applies for security for costs in this action in the sum of $10,160.399.37.

32. There is serious dispute between the parties as to whether the plaintiff is ordinarily resident out of Hong Kong for the purpose of the security for costs application. However, I do not consider it necessary to rule on this particular issue as I would dismiss the Security for Costs Summons on the ground of delay alone.

33. After the implementation of the civil justice reform, the courts have repeatedly emphasised that late applications should be discouraged as such kind of applications can easily disrupt the trial dates which are milestone dates. Further, Practice Direction 5.2 (at §34) has expressly provided that the PTR is not an extension of the CMC. The court expects a case to be ready for trial at the PTR and late interlocutory applications may be dismissed on the basis of delay alone. This would have been sufficient for me to dismiss the Security for Costs Summons.

34. Further, late application for security for costs, in particular when the trial is imminent, per se constitutes very real prejudice to a plaintiff, since the plaintiff is being put in a position of having little or no choice but to put up the security in order not to abandon and waste all the work done and costs incurred in preparing for trial. In these circumstances, the application should be refused (see: BBMB Finance (Hong Kong) Ltd v China Underwriters Life and General Insurance Co Ltd [1991] 1 HKLR 617, 626-628 (per Fuad VP); Tsang Yee Mui v Personal Representatives of Mak Chik Wing, deceased, unreported, HCA 2606/2006 (decision on 21 July 2008 at §§34-38 (per Chu J, as she then was)).

35. This action was commenced in 2003. The Court of Final Appeal gave judgment in 2008 stating that the action could proceed as a multiple derivative action on behalf of the 5^th defendant. In his Timetabling Questionnaire filed on 28 January 2011, the 1^st defendant stated that he intended to apply for security for costs within 28 days after the close of pleadings and even sought directions to that effect. No further reference to seeking security was made in his Listing Questionnaires filed on 20 September 2011 and 19 March 2012. Instead, the 1^st defendant confirmed, in his 2^nd Listing Questionnaire, that he agreed not to take out any further interlocutory applications save for those which ought to be made to the listing judge or master.

36. It was only shortly before the PTR that the 1^st defendant issued the Security for Costs Summons. The explanation purportedly given for the delay was that the 1^st defendant was apparently uncertain as to whether the plaintiff would proceed to trial. This is neither a credible nor sufficient explanation for the very substantial delay. Further, substantial costs had already been incurred by the parties in the conduct of this action. If the 1^st defendant is genuinely seeking to ask the plaintiff to provide security to cover his costs, one would expect the 1^st defendant to have made such application at a much earlier time. By reason of the substantial delay, I have reason to believe that the application is only a tactical move by the 1^st defendant to put undue pressure on the plaintiff to raise substantial fund in the limited time before the trial.

37. Based on these strong reasons, I dismissed the Security for Costs Summons with costs.

THE INTERROGATORIES SUMMONS

38. The plaintiff served the interrogatories without order on the 1^st defendant on 5 April 2013. The 1^st defendant applies to the court for an order for the withdrawal of the interrogatories.

39. As I see it, the interrogatories can be divided into the following 4 broad categories:

(i)   interrogatories relating to the issue of corporate control (Questions 1 and 2);
(ii)   interrogatories relating to the Charge, the 2^nd Mortgage and the 2^nd defendant’s indebtedness to HSBC (Questions 3 to 8);
(iii)   interrogatories relating to the other “investment securities” held by the 5^th defendant apart from the Harbour Ring shares and the Prestige shares (Questions 9 to 10); and
(iv)   interrogatories relating to the circumstances for the disposal of the Prestige shares and the Harbour Ring shares (Questions 11-20).

40. Firstly, I have no hesitation in disallowing the interrogatories relating to the Charge, the 2^nd Mortgage and the 2^nd defendant’s indebtedness to HSBC. The court has already allowed the HSBC Summons requiring HSBC to disclose documents relating to these interrogatories. As I see it, the plaintiff should have no problem in getting the answers to these interrogatories from the documents to be disclosed under the HSBC Summons, and so it is not necessary for the plaintiff to administer such interrogatories for the fair disposal of the case or for saving costs. Further, it is not the purpose of interrogatories to test the creditability of the counter-party’s case, and so it is not appropriate for the 1^st defendant to provide these answers before the completion of the discovery process against HSBC.

41. For the remaining interrogatories, I take the view that there are generally relevant to the issues of the case. Taking into account that the plaintiff knows very little about the circumstances under which the 5^th defendant disposed of the Prestige and the Harbour Ring shares, I would have allowed the interrogatories had they been served earlier.

42. Despite such observation, I allowed the application for the withdrawal of the interrogatories for the following 4 reasons. Firstly, the plaintiff only served the interrogatories shortly before the PTR, and the trial of this action is going to commence in about 2.5 months’ time. In such circumstances, I doubt very much whether administering interrogatories at this stage would result in any saving in costs. Secondly, the plaintiff has failed to give any reason to explain or justify the delay in the serving of the interrogatories. Thirdly, the answers to these interrogatories may prompt another round of discovery and interrogatories which may jeopardise the trial date. Fourthly, bearing in mind the express warning given to the parties as contained in Practice Direction 5.2, it is not appropriate for the court to allow the plaintiff to administer interrogatories at such a late stage of the proceedings.

43. In fact, there is nothing to prevent the plaintiff to pursue these interrogatories during cross-examination at the trial. According to the plaintiff, it would be more desirable for the 1^st defendant to provide the answers to these interrogatories before the trial. If further investigation needs to be carried out to verify the truthfulness of the 1^st defendant’s answers, there may be disruption to the trial which can be avoided if the plaintiff can obtain the answers earlier.

44. I can see the advantage of obtaining the answers at the early stage of the proceedings, but I doubt whether the late provision of these answers can assist the fair disposal of the issues of the case. Quite on the contrary, administering interrogatories at this stage may prompt further applications which may unnecessarily complicate the proceedings or even jeopardise the trial date. As I see it, the plaintiff should try to get the answers during cross-examination at the trial. If further investigation needs to be carried out, the plaintiff can make the appropriate application before the trial judge, who can then decide the application based on the answers given and the overall circumstances of the case. Hence, I allowed the 1^st defendant’s summons for the withdrawal of the interrogatories with costs.

THE PRELIMINARY ISSUE SUMMONS

45. That leaves only the Preliminary Issue Summons, under which the 1^st defendant asks the court to conduct an O 14A hearing, or alternatively a trial on preliminary issue, to determine whether the plaintiff has any right to bring the present multiple derivative action on behalf of or in the name of the 5^th defendant, which is a BVI company, for the allged wrongs done to the 5^th defendant.

46. Firstly, I have no hesitation in dismissing the plaintiff’s application for an O 14A hearing. According to the recent Court of Appeal’s decision in East Asia Satellite Television (Holdings) Ltd v New Cotai LLC [2011] 3 HKLRD 734, whether the plaintiff has the right to bring the present multiple derivative action on behalf of the 5^th defendant would depend on the law of the place in which the 5^th defendant was incorporated, which is BVI in the present case. It is also trite law that question of foreign law is question of fact and not question of law. As O 14A hearing is for a determination on a question of law, it is not appropriate for the court to order an O 14A hearing to resolve the factual issue as to whether the plaintiff, according to BVI law, does enjoy the right to bring multiple derivative action on behalf of the 5^th defendant.

47. Further, taking into account the limited time before the trial, it is neither feasible nor desirable to conduct a trial of preliminary issue to determine this particular question. The trial proper will start on 15 July 2013, and the plaintiff has yet filed the expert evidence on the issue of BVI law. At this stage, the court has no idea how long the hearing on preliminary issue will take, and it is just impossible for the court to allocate a few days before the trial to determine the question about the plaintiff’s locus to sue.

48. I also doubt how much costs can be saved by ordering a trial on preliminary issue at this stage. As the trial proper will start in about 2.5 months’ time, the order for preliminary hearing will actually increase the costs as counsel would have to be retained for two instead of one hearing. Hence, there would be no separate hearing on preliminary issue before the trial.

49. In view of my ruling, Mr Lee, SC, counsel for the 1^st defendant, indicates to me that the 1^st defendant would reserve the right to make an application before the trial judge to determine the said preliminary issue on the first day of the trial. In order to give more flexibility to the trial judge to deal with this matter, I adjourned the Preliminary Issue Summons to be dealt with by the trial judge instead of dismissing the Summons. However, it has all along been the object of the 1^st defendant’s Preliminary Issue Summons to have a separate hearing before the trial to determine the preliminary issue and the 1^st defendant’s application has failed to achieve such purpose, I ordered that the costs of the Preliminary Issue Summons incurred up to the hearing of 24 April 2013 be paid by the 1^st defendant.

50. Before I leave the subject on the plaintiff’s locus to sue, I would add one observation about the 1^st defendant’s summons for leave to file expert evidence on BVI law. The 1^st defendant has taken out such summons as early as 19 March 2012. The application was not dealt with until it came before me in the PTR. This is highly undesirable. It is only with the consent of the parties that avoids perhaps lengthy argument shortly before the trial. Even with the granting of leave, there is very limited time available to the parties, in particular the plaintiff, to prepare the expert reports for the trial. Further, since I do not have the benefit of all the expert reports at the PTR, there is no way for me to give any sensible directions for the calling of expert evidence at the trial. Hence, for case management purposes, question about the right of the parties to adduce expert evidence should not be left for determination at such a late stage of the proceedings.

FINAL OBSERVATIONS

51. In this action, the parties have taken out a lot of late applications shortly before the PTR. This practice is highly unsatisfactory and should be discouraged. Apart from the prejudice likely to be caused to the parties by such late applications including the possible adjournment of the trial, there is serious disruption to the court diary as the court has to struggle to find some time during the limited time before the trial to hear the applications (see also the dicta of Lam JA in Li Xiao Yun & Anr v China Gas Holdings Ltd, unreported, CACV 39/2013, decision on 11 March 2013, at §18).

52. But for the timing of the applications, most of these applications do have merit and the courts are always puzzled as to why these applications are made so late.

53. Express warning about late applications has already been given in §34 of Practice Direction 5.2, and practitioners should be reminded that late applications may be dismissed on the basis of delay alone. Unless there are exceptional circumstances and there are good reasons for the delay, one should not expect the courts to grant any late applications taken out shortly before the PTR. This is the case even if the applications have satisfied all the other threshold requirements for the granting of the relevant orders. Practitioners should therefore give serious thought about the question relating to outstanding interlocutory applications when they fill in the listing questionnaires before the case is set down for trial, otherwise they only have themselves to blame if their late applications are rejected on the ground of delay alone. Further, as pointed out by Lam JA in Li Xiao Yun & Anr v China Gas Holdings Ltd, supra, at §18), applicant for late application should normally be expected to face an adverse costs order on indemnity basis.

(David Lok)
Deputy High Court Judge

Mr Elliot Fung (in the hearing on 27 March 2013), Ms Eva Sit and Mr Elliot Fung (in the hearing on 24 April 2013), instructed by Kao, Lee & Yip, for the plaintiff

Mr Hectar Pun (in the hearing on 27 March 2013), Mr Martin Lee, SC, Mr Hectar Pun and Mr. Richard Yip (in the hearing on 24 April 2013), instructed by Fairbairn Catley Low & Kong, for the 1^stdefendant

The 2^nd defendant, in person, absent

The 3^rd defendant, represented by King & Wood Mallesons, attendance excused

The 4^th defendant, in person, absent

The 5^th defendant, represented by Reed Smith Richards Butler, attendance excused

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

____________

BETWEEN

	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders in Playmates Holdings Limitedexcept the 1^st and 2^nd Defendants)
	and
	CHAN CHUN HOO THOMAS	1^st Defendant
	T G C INVESTMENTS LIMITED	2^nd Defendant
	(formerly known as Chansam Investments Limited)
	PLAYMATES HOLDINGS LIMITED	3^rd Defendant
	(formerly known as Playmates Interactive Entertainment Limited)

____________

Before: Hon Barma J in Chambers

Date of Hearing: 23 October 2006

Date of Decision: 23 October 2006

________________

D E C I S I O N

________________

1. I have before me two summonses issued by the 1st Defendant in these proceedings. The first is a time summons, which was issued on 21 September 2006 seeking a further 14 days within which the 1st Defendant should be required to file a defence to these proceedings.

2. Subsequently, on 3 October 2006, shortly before the time summons was due to be heard, a further summons was taken out seeking a stay of these proceedings pending the happening of one or other of various events.

3. The first stay sought was a stay of all further proceedings in this action until after determination of the 1st Defendant’s appeal to the Court of Final Appeal, from a decision of the Court of Appeal given in this matter in CACV 220 of 2005. Alternatively, it was suggested that all further proceedings in the action should be stayed until after determination of another appeal in these proceedings, CACV 134 of 2006. In the further alternative, it was sought to extend the time for a service of defence until 28 days after either the making or refusal to make of an order for consolidation of these proceedings (HCA 3291 of 2003) and another set of proceedings issued earlier this year, HCA 1063 of 2006.

4. In order to understand the inter-relationship between the various appeals and proceedings, it is necessary to sketch in very briefly some of the somewhat complicated procedural background to these proceedings. The underlying dispute in these proceedings is between the Plaintiff, who is a minority shareholder of Playmates Holdings Limited, the 3rd Defendant, who was disgruntled as a result of a number of transactions undertaken in relation to that company and its subsidiaries.

5. In the original pleading the Plaintiff, Waddington Limited, sued on behalf of itself and all other shareholders in Playmates Holdings Limited, except the 1st and 2nd Defendants, in respect of three transactions. The first of these was in relation to the sale of shares in an associated company of Playmates Holdings Limited called Prestige Properties Limited. These shares were ultimately owned by Playmates Holdings Limited through what was then a subsidiary, but subsequently a sub-subsidiary, known as Profit Point Limited. The shares were said to have been sold at substantially less than their proper value, taking into account the fact that the 2nd Defendant was able, some months after the sale in question, to secure a substantially higher price for the sale of its stake in Prestige Properties Limited.

6. The second and third transactions related to the acquisition by another subsidiary of Playmates Holdings Limited, known as Autoestate Holdings Limited, which acquired from Prestige Properties Limited, two properties on separate occasions about a year apart; one in Canton Road, (in what was termed the Pretty Star transaction); and the second in Tuen Mun (in what was termed the Bagnols transaction).

7. When the action was first brought it was brought as a derivative action on behalf of Playmates Holdings Limited, in which the Plaintiff was a shareholder. However, the companies that suffered any losses as a result of the transactions were respectively Profit Point and Autoestate. This raised a number of questions, one of which was whether or not Playmates Holdings would have been entitled to sue if it had brought an action itself in relation to the loss that was suffered by its subsidiaries.

8. An application was made by the 1st Defendant to strike out the statement of claim in this action. The application proceeded on a number of bases, one of which was the question of whether or not Playmates Holdings would have been a proper plaintiff in its own right, and therefore whether or not it was a proper nominal defendant in these proceedings. It was also suggested that no reasonably arguable cause of action was disclosed in relation to any of the transactions complained of.

9. That matter came before me at the end of April 2004. In my judgment on the striking out application, delivered about a year later, I held that a reasonably arguable cause of action had been shown in relation to the Profit Point transaction, but not in relation to either of the Pretty Star or Bagnols transactions. I also held that because of the no reflective loss principle, established in Johnson v Gore Wood and other cases, it was inappropriate for the action to be brought on behalf of Playmates Holdings Limited. I went on to say that it was at least arguable that it was open to the Plaintiff to sue on behalf of the ultimate subsidiary which had suffered the loss by way of a multiple derivative action on behalf of that subsidiary.

10. That decision was appealed to the Court of Appeal. In its decision, delivered on 30 May this year, the Court of Appeal held that contrary to my view the Pretty Star and Bagnols transactions did disclose at least an arguable case of wrongdoing, and that therefore the Plaintiff should be permitted to pursue its complaints in relation to those matters as well as an overall scheme involving all three transactions which were complained of. The Court of Appeal also took the view that that a multiple derivative action was at least a possibility and was arguable. Although it is not entirely clear, it seems that the Court of Appeal took the view that it might be possible to pursue such an action by way of a derivative action on behalf not of the ultimate subsidiary company, which would have suffered the loss, but on behalf of the holding company of which the complaining shareholder is a shareholder.

11. The position therefore is that at this stage the original statement of claim in this action, which I had struck out subject to giving the Plaintiff liberty to put forward amendments to cater for the observations that I had made in my judgment on the striking out application, has been reinstated. However, between the time of my ruling and the decision of the Court of Appeal, the plaintiff proceeded with these proceedings by trying to take steps to put my ruling into effect. It did so by proffering an amendment to the statement of claim which removed reference to the two transactions which I considered did not give rise to any reasonably arguable cause of action, and also to deal with the question of the proper parties by including as proposed further nominal defendants Profit Point, the subsidiary which on my view had suffered the loss in relation to the sale of its shareholding in Prestige Properties Limited, and also an intermediate holding company, which for a time existed between Playmates Holdings and Profit Point, which was called Playmates International Limited.

12. When the application to amend came before me I indicated that I did not think, in the light of my earlier ruling, that it was either necessary or proper to include Playmates Holdings, or Playmates International as parties, since the party which had suffered the loss, and thus the party on whose behalf the claim ought to be brought, was Profit Point. I therefore declined to give leave to amend in the form of the amendment proffered, but gave the Plaintiff a further opportunity to proffer an amendment, which I envisaged would only have Profit Point as the nominal party in substitution for Playmates Holdings. The Plaintiff was concerned as to whether or not this was the right procedure and appealed this decision to the Court of Appeal as well. That appeal is CACV 134 of 2006.

13. My ruling which led to CACV 134 of 2006 was delivered before the hearing of the appeal on the striking out proceedings, which was CACV 220 of 2005. It had been the Plaintiff’s hope that both appeals could be dealt with at the same time and they took steps to have CACV 134 of 2006 listed for hearing at the same time as the striking out appeal. However, when the appeals came on for hearing the Court of Appeal decided that it would not be appropriate to deal with CACV 134 of 2006 at that point and accordingly adjourned it to a later date to be fixed. In the event, that appeal is now fixed for hearing towards the end of March 2007, about six months from now.

14. In the meantime a further procedural complication arose, which was that, as a result of the operation of Order 15, rule 8 of the Rules of the High Court, any amendment of these proceedings to add parties would not become effective until service was effected on the parties concerned. That meant that at that stage, at least, service would have to be effected on Profit Point, and, if it were permitted to remain and to be kept as a nominal party, Playmates International, but so far as Playmates International was concerned, that could only happen after the outcome of the appeal against my ruling on the amendment.

15. Because of limitation concerns and because the action would not be deemed to have commenced against the added parties until they were actually served, the Plaintiff saw a need to take out a fresh writ naming all three nominal defendants in order to preserve their position in terms of limitation pending the outcome of the appeal. That fresh writ was issued in HCA 1063 of 2006. It was the Plaintiff’s intention to consolidate that action with these proceedings in due course, once the outcome of the appeal was known.

16. In the event, where we are left at the moment is that the Court of Appeal in CACV 220 of 2005 has reinstated the original pleading. There is a separate action, HCA 1063 of 2006, in which it was intended to bring the same claim in substantive terms in relation to the Profit Point transaction, that being the only transaction on which proceedings were permitted to continue at the time when it was brought as the Court of Appeal had not, at the time of the issue of that writ, ruled on the question of whether the claims in respect of the other transactions involving Pretty Star and Bagnols were reasonably arguable. The position therefore is, at this stage, that the present proceedings have a viable statement of claim in the light of the judgment of the Court of Appeal in CACV 220 of 2005.

17. However, Mr Lee, who appears for the 1st Defendant, has submitted that it would be unfair and inappropriate to require the 1st Defendant to file its defence in these proceedings until after the question of parties had been fully sorted out and in that respect he says that the appeal in CACV 134 of 2006 may well be relevant. He says that the intended appeal by the 1st Defendant to the Court of Final Appeal against the decision in CACV 220 of 2004, which will also raise question of who are properly parties to these proceedings, will also be relevant, and that an application for leave to appeal to the Court of Final Appeal is due to be heard by the Court of Appeal on 31 January next year.

18. Miss Sit has submitted that contrary to Mr Lee’s position, the situation is in fact that the substantive claims of the plaintiff are known and have a clear and, at this stage at least, reasonably final shape. They are as pleaded in the original statement of claim in this action in relation to each of the three transactions of which complaint is made. Miss Sit points out that whatever may be the outcome of the appeal in CACV 134 of 2006, or any appeal to the Court of Final Appeal, assuming that leave is given, it is only in the event that the Court of Final Appeal comes to the view that Playmates Holdings Limited cannot be a proper nominal party in these proceedings because of the no reflective loss principle, and that there is no means of bringing a multiple derivative action on behalf of the ultimate subsidiary that actually suffered the loss, that the Plaintiff will not be able to proceed with this claim.

19. It seems to me that there is much force to that submission. In my view, although it is fair to say that the final shape of the statement of claim, insofar as the nominal parties to it, that is to say the intended recipients of any award of damages that might be made in respect of the alleged wrongdoing, is yet to be finalised, that does not, in my view, apply to the substantive complaints or the underlying facts which are said to give rise to a right of relief on the part of one or other of the intended nominal parties.

20. The proceedings relate to matters that took place as long ago as the years 2000 and 2001. The action was commenced in 2003. Although there was some delay in bringing the proceedings in the first place, there has since been substantial further delay through the procedural applications that have taken place in the proceedings to date. It seems to me that in the circumstances it is important for the action to proceed as best it can, pending the resolution of whatever further appeals may be proceeded with in the future.

21. I say this because it seems to me that as a matter of case management it is undesirable for matters that date back so many years to be left in abeyance without the parties setting out their respective cases and proceeding on to the preparation for an eventual trial of the proceedings, because it seems to me that the longer the amount of time that lapses, the greater is the danger that documents may be lost, or that witnesses’ memories may fade, or that evidence which might otherwise have been available in support of, or in contradiction of, the claims brought by the Plaintiff may be lost.

22. It seems to me that unless there is some real disadvantage or unfairness to the defendant in requiring him to put forward his case by way of defence at this stage, it would be preferable and appropriate to order the action to proceed, leaving it to the other action to catch up and any amendments which may be necessitated as a result of the appeal in CACV 134 of 2006, to be made as and when the need arises. It seems to me that given that the substantive factual claim of the Plaintiff is clear and has been put forward in its pleading, there is no reason why the 1st Defendant, who is the alleged wrongdoer, should not be in a position to put forward a defence of substance to the claims.

23. The only matter that remains outstanding is the question of which company should be the recipient of any award of damages made against the 1st Defendant in the event that the claims against him succeed. That does not seem to me to be a matter of such great significance in the overall scheme of things as to require the further delay to these proceedings that would be necessitated either by waiting for the outcome of any possible appeal to the Court of Final Appeal, or by waiting for the outcome of the pending appeal to the Court of Appeal, against my ruling on the amendment to add Profit Point and Playmates International as parties to these proceedings.

24. It seems to me that as the shape of the allegations is now clear, it is appropriate for the Defendant to respond to those allegations and for the matter to proceed. In the event that it is decided that the appeal in CACV 134 of 2006 need not be proceeded with, which is a matter for the Plaintiff to consider with his legal advisors, it would be open to the Plaintiff to proceed with its consolidation summons and get on with the matter on that basis.

25. If it is decided by the Plaintiff that it would be safer to proceed with the appeal, and if the Court of Appeal takes the view that it is in order for all three proposed nominal defendants to be joined as nominal defendants in the alternative, then that too will involve only a small amount of further pleading in relation to the elements of wrongdoer control in respect of those nominal defendants. Again, I do not see that it would take a great deal of time or work to enable the action to be amended and to effectively catch up, as it were, with itself.

26. Finally, as far as the potential appeal to the Court of Final appeal is concerned, it seems to me that with respect to Mr Lee, that it is at least an open question as to whether or not the matter will eventually reach that court, because the matter is, after all, an interlocutory one in respect of which leave will be required. Even if leave is granted, it is unlikely that the appeal will be finally disposed of for some considerable time. Given that the length of time that has already elapsed since the commencement of these proceedings and the events which underlie them, it seems to me that it would be unsatisfactory to further delay the proceedings for the length of time that may be required before the Court of Final Appeal is able to hear and determine the proposed appeal to it, assuming that leave to appeal is given.

27. I say that particularly in light of the fact that it is only in the event that the Court of Final Appeal holds that both the no reflective loss applies so as to prevent Playmates Holdings suing and that no form of multiple derivative action is possible, so as to leave the plaintiff effectively without a remedy in this situation. That is not a course that can be ruled out, but it seems to me that in the circumstances it is not an outcome which is so overwhelmingly probable as to make it necessary or desirable or just that these proceedings should be held up further.

28. In the circumstances it seems to me that the proper course, as a matter of fairness to both parties on both sides, is that the matter should now proceed and that the 1st Defendant should be required to file his defence to this action in relation to the statement of claim in its original form as reinstated by the Court of Appeal, within a reasonable time. For those reasons I would dismiss the application for a stay. As I understand it, the application for an extension of time is not opposed, and I will therefore grant an extension of time of 14 days from today for the filing of the 1st Defendant’s defence in these proceedings.

(Aarif Barma)
Judge of the Court of First Instance
High Court

Ms Eva Sit, instructed by Messrs Kao, Lee & Yip, for the Plaintiff

Mr Martin Lee, SC, leading Mr Hector Pun, instructed by Messrs Fairbairn Catley Low & Kong, for the 1st Defendant

2nd Defendant, TCG Investments Limited (formerly known as Chansam Investment Limited), in person, absent

3rd Defendant, Playmates Holdings Limited (formerly known as Playmates Interactive Entertainment Limited, represented by Messrs Arculli, Fong & Ng, absent

HCA3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

____________________

BETWEEN

	WADDINGTON LIMITED	Plaintiff
	(Suing on behalf of itself and all other shareholders inPlaymates Holdings Limitedexcept the 1st and 2nd Defendants)
	and
	CHAN CHUN HOO THOMAS	1st Defendant
	T G C INVESTMENTS LIMITED (formerly known as Chansam Investments Limited)	2nd Defendant
	PLAYMATES HOLDINGS LIMITED (formerly known as Playmates Interactive Entertainment Limited)	3rd Defendant

____________________

Coram: Hon Barma J in Chambers

Date of Hearing: 7 March 2006

Date of Judgment: 7 March 2006

________________

D E C I S I O N

________________

Plaintiff’s application to vary costs order nisi

1. I will deal first with the Plaintiff’s application to vary the costs order nisi that I made when I handed down judgment on 29 April 2005 in respect of the 1^st Defendant’s application to strike out the claim against him, and the Plaintiff’s application for, in effect, a determination that a prima facie case for relief had been established against the 1^st and 2^nd Defendants. The order nisi provided for the Plaintiff to pay the 1^st and 2^nd Defendants their costs of the applications.

2. The Plaintiff has suggested three possible variations to the costs order nisi. First, it suggests that it should receive a proportion of the costs of the applications as a whole, notwithstanding that I ordered that its statement of claim should be struck out (although I afforded the Plaintiff an opportunity to proffer an amendment to put forward a claim on a proper procedural footing). Alternatively, it suggests that the 1^st Defendant should be deprived of part of his costs in relation to the applications. Finally, it suggests in the further alternative that the costs of the applications should be in the cause of the action.

3. I have to say at once that the third of those alternatives does appeal to me. The applications were made decided on the basis of the arguments advanced before me, and I think that I should determine the incidence of the costs of the applications by reference to their outcome. The fact that the action may proceed and may ultimately succeed does not mean that the applications do not fall to be dealt with on their own merits. I therefore am not inclined to make an order that the costs of the applications should in any way be in the cause of the proceedings as a whole.

4. As for the suggestion that some proportion of the costs should be awarded to the Plaintiff, whatever that proportion may be, again I have to say that I do not find much merit in that submission. The principles on which the court acts in deciding how costs should be awarded at the end of a hearing are set out in Order 62 rule 3(2) of the Rules of the High Court and have been amplified in Re Elgindata Limited (No. 2) [1992] 1 WLR 1207, in which Nourse LJ said, in relation to the possibility of disallowing part of the costs incurred by a successful party, that the general rule, which is that costs should follow the event, does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but that where that has caused a significant increase in the length or cost of the proceedings, he may be deprived of the whole or a part of his costs.

5. Then, dealing with the question of the circumstances in which the successful party should be ordered to pay part or all of the costs of the unsuccessful party, Nourse LJ said that where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or part of the unsuccessful party’s costs.

6. It is thus necessary to consider first who the successful and unsuccessful parties in the application were. The 1^st Defendant’s application before me was to strike out the statement of claim as it was then formulated. There can be little question but that the 1^st Defendant was successful in relation to that application. The statement of claim, as it stood, was struck out. I held that it was defective for the reasons I explained in my judgment. In those circumstances, it seems to me quite clear that it was the 1^st Defendant who was successful, and not simply partly successful, in the applications before me.

7. In order, therefore, not just to deprive him of his costs but to order that he should pay part of the Plaintiff’s costs, it will be necessary for the Plaintiff to satisfy me that issues or allegations were improperly or unreasonably raised by the 1^st Defendant. I do not think that this can be said of any of the points in respect of which I found against the 1^st Defendant and in favour of the Plaintiff. Those points can, I think, be summarised as the following: whether or not there was a prima facie case in relation to the Profit Point transaction; whether or not there was a prima facie case of wrongdoer control; whether or not the Plaintiff’s claim should be struck out on the basis of delay; and whether or not the Plaintiff’s claim should be struck out on the basis of there being an ulterior motive or on the basis that it was otherwise an abuse of process.

8. Although I found against the 1^st Defendant on each of these points, I did not think at the time - and I do not think now - that there was anything improper or unreasonable in the 1^st Defendant ventilating these points before me and asking the court to determine them. That being the case, I do not see any basis on which it would be proper for me to order that the 1^st Defendant should have to pay any part of the Plaintiff’s costs.

9. I turn to consider whether or not the 1^st Defendant should be deprived of some part of his costs. Having considered this matter carefully, I have come to the conclusion that it would not be appropriate for me to disturb the costs order nisi that I made when handing down my judgment. I think it is fair to say that, of the various issues raised, there were some on which the 1^st Defendant was successful and others on which the Plaintiff was successful. The Plaintiff, of course, ultimately succeeded in persuading me that it would be appropriate to afford it an opportunity to amend its case so as to put it forward on the basis of a double or multiple derivative action in relation to Profit Point.

10. That said, however, in my view, there are a number of points that should be made in connection with this aspect of the application. The first is that although most of the time during the hearing was spent on the following matters, namely, first, the question of prima facie case as to the Profit Point transaction; secondly, the existence of a prima facie case relating to wrongdoer control; thirdly, the question of the applicability of the no reflective loss principle; and finally, the question of double or multiple derivative actions and whether they are permissible and an appropriate procedural form to be adopted, all of these were matters that had to be raised in the context of the applications before me.

11. Second, I think it is relevant not to lose sight of the fact that, although my judgment was delivered in the context of the application to strike out, at about the same time as the application to strike out was taken out, the Plaintiff itself took out an application, effectively, for leave to proceed and for a determination by the court that there was a prima facie case in relation to its claims. That being so, I do not think it can really be said that the points about the existence of otherwise of a prima facie case on the questions of wrongdoer control or as to the merits of the Profit Point transaction itself (on which I found for the Plaintiff) are purely matters that had been raised by the Defendant. They were in fact also raised by the Plaintiff in the context of its own application.

12. Further, it seems to me that it would not be right to ignore altogether the time spent at the hearing and the preparation time spent in relation to the other transactions complained of, in respect of which I held that there was no prima facie case. Although in the skeleton submissions in support of the present application, Miss Eu S.C. and Mr Suen pointed out that relatively little time or paper was devoted to these matters in the Plaintiff’s skeleton arguments - that is to say, the transactions in relation to Pretty Star and Bagnols - it seems to me that this really is a reflection of the fact that, when arguing the matter before me, Mr Chang S.C. chose, no doubt for good reasons, to focus more on what he conceived to be the strongest part of the Plaintiff’s case and less on the parts that might have considered to be weaker.

13. In my view, if one looks at the matter overall, I do not think that it would be fair to say that there was a significant increase in the length or cost of the proceedings as a result of these points being argued and run. The application before me took two and a half days. It seems to me that whatever had been the case, even if the application had been limited only to the questions of no reflective loss, double or multiple derivative action, and the question of prima facie case had been dealt with relatively briefly, it is very unlikely that the application would have lasted significantly less time than in fact it did.

14. In those circumstances, it seems to me that there is no good reason why I should hold that the general rule in this case should not apply. As Nourse LJ said, the general rule does not cease to apply simply because a successful party raises issues or makes allegations on which he fails. I think, putting it at its highest, that that is all that can be said in relation to the points raised by the 1^st Defendant that turned out, at the end of the day, to be unsuccessful. That being so, I do not see any good reason to vary my costs order nisi and I therefore shall make that order absolute as far as the 1^st Defendant is concerned.

15. I should add that in my judgment, I indicated that the costs of the applications which I dealt with should be paid by the Plaintiff to the 1^st and 2^nd Defendants. That must have been a slip on my part since the 2^nd Defendant did not in fact join in the application to strike out. As Mr Huggins has said today - and I think Mr Kotewall said at the time of the hearing - those acting on his side act only for the 1^st Defendant. I therefore think there should be a variation of the order nisi only to the extent of deleting the reference to the 2^nd Defendant, which I did not participate and will thus have incurred no costs in relation to the applications.

3^rd Defendant’s application to vary costs order nisi

16. I turn next to deal with the question of the 3^rd Defendant’s application for variation of the costs order nisi. There is a preliminary matter in relation to this application, which is whether or not the 3rd Defendant should be permitted to make the application out of time, the summons by which the application was made not having been issued until 17 May 2005, when the time for making the application had already expired some four days earlier. Having been shown by Mr Wong a letter from the 3^rd Defendant’s solicitors to the court and the other parties, which was dated 13 May 2005, the last day on which an application for variation should have been made, it would appear that the intention to make the application, at least, was notified to the court and to the other parties within the time limit, and the delay of four days in actually taking out the summons was contributed to by the fact that the three intervening days were a weekend and a public holiday. In those circumstances, I think it would be right for me to entertain this application on its merits, and I shall extend the time for making the application accordingly.

17. Having heard Miss Eu and Mr Wong as to this, I am, on balance, persuaded by Mr Wong that his client, the 3^rd Defendant, should have its costs of the application and of its attendance at the application. Although it is right to say that the company in a derivative action, for whose benefit the action is brought, is, generally speaking, a nominal party, the fact remains that, in this case, the company was summoned before the court by both parties who issued a summons. Having been summoned, it seems to me that the company was entitled to attend and, in this case, the company did not in any way abuse that entitlement by unnecessarily instructing counsel to attend and make submissions at the hearing. It took, quite properly, a neutral stance and all that it did was to instruct solicitors to attend, essentially on a watching brief, which I cannot say was unreasonable having regard to the fact that it was summoned to appear, and that it is a public company which might well have been concerned to ensure that nothing was said that called for a response on its part. I would also add that the 3^rd Defendant, through its solicitors, did put forward a helpful chronology, which I found to be of assistance in understanding the background to the matter and in preparing my judgment. In those circumstances, it seems to me that its costs, which are unlikely to be particularly large in the overall context of the case, should properly be awarded to the 3^rd Defendant so that it will not be out of pocket in relation to them.

18. As I have come to the view that the 3^rd Defendant should be awarded its costs of and associated with the applications and of attending the hearing, it seems to me that, as between the parties, the appropriate party to bear those costs is the Plaintiff, as it was, in my view, the unsuccessful party in the application. I shall therefore vary my costs order nisi to the extent of ordering that the 3^rd Defendant should have its costs of and occasioned by the applications to be paid by the Plaintiff, to be taxed on a party and party basis if not agreed.

Plaintiff’s application for leave to amend the Statement of Claim

19. I turn now to consider the application by the Plaintiff for leave to amend its Statement of Claim pursuant to the opportunity which I had given it to do so in my judgment. As to this, there are two main aspects for consideration. The first concerns whether or not the 3^rd and 4^th Defendants in the current draft of the proposed amendments should be parties to the proceedings at all. The 3^rd Defendant is Playmates Holdings Limited and the 4^th Defendant is Playmates International Limited. The Plaintiff describes itself as suing on behalf of itself and all other shareholders in Playmates Holdings and also on behalf of Playmates International and Profit Point. Miss Eu has submitted that it is proper and appropriate for Playmates Holdings and Playmates International to be made and remain parties to the proceedings.

20. As I understood her submissions, she suggested first that this arose directly as a corollary of the application of the no reflective loss principle, and secondly that they were necessary and proper parties because it was necessary for the plaintiff to allege and prove control at all levels from the injured company itself, that is, Profit Point, all the way up the chain to the company in which the plaintiff was a shareholder, that being Playmates Holdings.

21. In my view, neither of these points is well-founded. So far as the first is concerned, it seems to me that the corollary of the no reflective loss principle is in fact that there is no need and no basis for intermediate and ultimate holding companies to be joined in a multiple derivative action. In this context the term “multiple derivative action” is simply intended to refer to a case where a derivative action is brought on behalf of a company by a plaintiff who is not an immediate shareholder in it, but is an indirect shareholder at one or more removes.

22. In order to determine whether or not intermediate companies ought to be joined as parties to these proceedings of this nature, it seems to me that it is important to focus on the allegations in the proceedings and on the relief that is sought in them. When one examines the proposed amended Statement of Claim in this case, it is quite clear, as Mr Huggins S.C., appearing for the 1^st Defendant, has submitted, that no allegations whatsoever are made that concern any wrongdoing vis-à-vis either the 3^rd or 4^th Defendants. Equally, no relief is sought on behalf of either the 3^rd or 4^th Defendants.

23. That being the case, I find it difficult to see that it can be said that the 3^rd or 4^th Defendants necessarily have to be parties to these proceedings.

24. As for the suggestion that they are necessary parties because it is necessary to establish wrongdoer control in relation to them, it seems to me that that does not assist the Plaintiff either. The fact that allegations may need to be made in the context of a claim does not mean that every party who is named in those allegations is necessarily a proper party to the proceedings. No relief being sought, either against or in favour of, a party in respect of whom allegations are made, it does not seem to me that it is necessary or proper to join such a party to the proceedings.

25. Miss Eu also submitted that it was appropriate for the two companies to be joined as 3^rd and 4^th Defendants respectively because, as the question of control arose, it would be necessary to obtain discovery in relation to that issue. With respect, that is not a good reason for joining them as a parties. It may afford a basis for seeking such information from them by subpoena or other process, if appropriate, but the fact that allegations are necessary and have to be made and established to enable the Plaintiff to succeed in its claim at the end of the day, does not mean that the parties in respect of whom such allegations are made need necessarily be made parties to the action.

26. I think, ultimately, the fact that no relief is claimed on behalf of either Playmates Holdings or Playmates International means that they are neither necessary nor proper parties to these proceedings. I would add that when I said in my judgment that I would leave it open to the plaintiff to decide on behalf of which company it wished to bring a claim, that was prompted by the fact that, at the time of the striking out application and of my judgment, Profit Point no longer existed, having been dissolved and struck off the register in its place of incorporation. Profit Point has now been restored to that register, and is therefore once again in existence and capable of being made a party to these proceedings and of receiving the fruits of the proceedings, if there are any, at the end of the day. It was not my intention to suggest (and I do not think that I did suggest) that a derivative action could or should be brought on behalf of more than one company, where only one company was said to have suffered loss. In this case the only party that is said to have suffered loss is Profit Point and it is, in my judgment, the only company that is a necessary and proper party to these proceedings. I therefore am not prepared to accede to the application to amend insofar as it seeks to join, or retain, Playmates Holdings and Playmates International as defendants to these proceedings. That is not to say that allegations in respect of them, in particular allegations of control of them by the 1^st and 2^nd Defendants, are not necessary as a matter of pleading, rather, it will simply mean that the pleading, insofar as it goes into questions of the 1^st and 2^nd Defendants’ alleged control of those two companies, will need to re-worded so that the companies are referred to simply by their name and not as defendants.

27. That leaves the question of whether or not the pleading is otherwise objectionable as it now stands on the grounds of lack of particularity. I think Mr Huggins’ main concern was to ensure that the case against his client was properly particularised and put in such a way as to leave very little or no scope for the plaintiff to depart from its pleaded case and thus to effectively tie the plaintiff down to a particular case on which it would mount its allegations of wrongdoer control and wrongdoing on the part of the 1^st Defendant. Having considered the criticisms that Mr Huggins has made of the pleading, while I would accept that there may be some scope for improvement in relation to its drafting, I think at the end of the day that it is tolerably clear what the case that is made in relation to control is.

28. At the Playmates Holdings level, control of that company by Mr Chan, the 1^st Defendant, is asserted to arise from the shareholding structure, in relation to which it is said that he (through a family trust) has a significant shareholding (at various times close to, or just over 50 per cent of the shareholding of Playmates Holdings), and that this shareholding was sufficient to indeed give him control over that company. That was a matter that I considered in the context of the application to strike out. I thought then, and still think now, that that is an adequate basis for an allegation of control. It will rarely be possible for plaintiffs in cases of this nature to give chapter and verse on specific acts that demonstrate control on the part of an alleged wrongdoer. It may well be necessary to start, at least, by alleging that control is to be inferred from the shareholding that the defendant has in the company in question.

29. As I read the paragraphs of the proposed Amended Statement of Claim that are now complained of, one of the main allegations that is made is that control is to be inferred from the shareholding structure of Playmates Holdings, Playmates International and Profit Point. Although there might be scope for greater cross-referencing in the various paragraphs in which control and the appointment of directors are alleged, it seems to me that it is clear enough that this is one of the main planks of the Plaintiff’s case.

30. The other main plank of the plaintiff’s case is to be found in paragraph 10(5), and the particulars thereunder. That paragraph and its particulars appear to have been put forward in response to comments which I made when giving my decision on the last occasion when an amendment was proffered for consideration. At that time there was an allegation that a number of directors of Playmates Holdings and Playmates International, other than the 1^st Defendant, were appointed by the 1^st Defendant. I held that that allegation on its own was inadequate because it was necessary for particulars to be given so that the 1^st Defendant could know the nature of the case he had to meet in relation to that allegation. It seems to me that that information is now provided, both by the information as to shareholding structure and as to the matters that are pleaded in the particulars under paragraph 10(5) of the proposed Amended Statement of Claim.

31. Mr Huggins has submitted that in those particulars themselves require further particularisation. Insofar as they consist of allegations that the 1^st Defendant personally chose the persons who were to be directors of the companies concerned, and that he determined their remuneration for their services as such directors, there comes a point when one has to draw a line and decide whether a particular allegation adequately informs the other party of the case he has to meet, and whether any further information as to it falls within the realm of evidence. In this case it seems to me that this falls just on the right side of the line from the Plaintiff’s point of view. I do not think, therefore, that the complaints of lack of particularity in respect of paragraphs 10(5)(a) (b) and (c) are well founded. It seems to me that the allegations having been made, the plaintiff will be limited to those allegations and to the allegations in relation to shareholding structure in trying to establish its case that there was control by the 1^st Defendant of Profit Point, Playmates International and Playmates Holdings.

32. So far as paragraph 10(5)(d) is concerned, the position is different, in that I agree with Mr Huggins that the last part of that paragraph does amount to no more than mere comment and speculation. It does not materially add to the allegations in the Amended Statement of Claim and should not, therefore, be included in any amendment.

33. Finally, paragraph 10(5)(e) contains an allegation that benefits had been conferred by the 1^st Defendant on particular directors. It seems to me that as there is an express allegation of the conferring of a benefit, which it is made in terms which leave it open as to whether other directors may be added as some later stage, it is appropriate that the plaintiff should be required at this stage to make clear its case as to whether or not there are any other directors on whom benefits are said to have been conferred. If it cannot or does not do so at this stage, the pleading should be limited to the directors who are named. It also seems to me that in this connection where it is alleged that a benefit in the form of shares was in fact conferred on the directors, it would appear from the material that is pleaded that the Plaintiff must be in possession of the necessary detail to enable it to specify the manner in which, or the time at which the shares were conferred, and it would, in my view, be appropriate for those matters to be properly spelt out so that the Plaintiff will have tied itself down to a particular case as to this allegation and the 1^st Defendant will know precisely what he has to meet in relation to it.

34. Subject to those two matters, it seems to me that the amendments that are put forward do sufficiently disclose to the 1^st Defendant the case which he will have to meet in relation to the issue of wrongdoer control in respect of the three companies with which these proceedings are concerned.

35. As there are still some aspects of the pleading which require further re-drafting, I am not inclined to make an order granting leave to amend in the form of the proposed amendment, but would instead give the plaintiff a further opportunity to put forward a revised amendment addressing the matters which I have referred to above, namely, the continued retention of the 3^rd and 4^th Plaintiffs as parties, and the concerns about paragraphs 10(5)(d) and (e).

(Aarif T Barma)
Judge of The Court of First Instance
High Court

Ms Audrey Eu, SC, leading Mr Jenkin Suen, instructed by Messrs Kao, Lee & Yip, for the Plaintiff

Mr Adrian Huggins, SC, leading Mr Stewart Wong, instructed by Messrs Fairbairn Catley Low & Kong, for the 1^st Defendant

2^nd Defendant, TCG Investments Limited (formerly known as Chansam Investment Limited), in person, absent

Mr William Wong, instructed by Messrs Norton Rose, for the 3^rd Defendant

Leave to amend a re-amended notice of appeal granted: see CACV134/2006 dated 23 March 2007

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

____________

BETWEEN

	WADDINGTON LIMITED (Suing on behalf of itself and all other shareholders in PLAYMATES HOLDINGS LIMITED except the 1^st and 2^nd Defendants)	Plaintiff
	And
	CHAN CHUN HOO THOMAS	1st Defendant
	TGC INVESTMENTS LIMITED (formerly known as CHANSAM INVESTMENTS LIMITED)	2^nd Defendant
	PLAYMATES HOLDINGS LIMITED (formerly known as PLAYMATES INTERACTIVE ENTERTAINMENT LIMITED)	3^rd Defendant

____________

Before: Hon Barma J in Chambers

Dates of Hearing: 27-29 April 2004

Date of Judgment: 29 April 2005

________________

J U D G M E N T

________________

Introduction

1. By this action, which the Plaintiff brings as a derivative action on behalf of itself and all other shareholders of the 3^rd Defendant (“Playmates”), the Plaintiff seeks to obtain relief on behalf of the Playmates against the 1^st and 2^nd Defendants (“TC” and “Chansam” respectively) in respect of three sets of transactions entered into by or through subsidiaries of Playmates between 2000 and 2002.

2. There are two applications before the court:-

(1) The first is an application by TC and Chansam by summons dated 20 October 2003, seeking to strike out the proceedings against them. The grounds stated in the summons are that the Plaintiff is not entitled to bring or continue these proceedings, and that there is no prima facie case disclosed that the Plaintiff or Playmates is entitled to any of the relief claimed.

(2) The second is an application by the Plaintiff by summons dated 27 October 2003, seeking leave to proceed with the action on the basis that the court is satisfied that there is a prima facie case that Playmates is entitled to the relief claimed against TC and Chansam and that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle (1843) 2 Hare 461.

3. In the event, the parties approached the applications on the basis that whatever conclusion I came to on the striking out summons would be determinative of both applications. I therefore propose to focus on that summons in this judgment, and shall not deal separately with the leave to proceed summons.

4. Mr Kotewall S.C., appearing for TC and Chansam, contends that the Plaintiff’s claims should be struck out for one or more of the following reasons:-

(1) As all the transactions complained of were carried out, not by Playmates itself, but by wholly owned subsidiaries (or sub-subsidiaries) of Playmates, the alleged losses arising from such transactions would have been suffered by such subsidiaries or sub-subsidiaries, so that the losses allegedly suffered by Playmates would be merely reflective of the subsidiaries’ losses, and as such would be irrecoverable as the result of the principle established in Johnson v Gore Wood & Co (a firm) [2002] AC 1.

(2) The Plaintiff has failed to establish a prima facie case:-

(i) that there has been any wrongdoing on the part of TC and Chansam; and

(ii) that any of the exceptions to the rule in Foss v Harbottle apply in the circumstances of this case - in particular, it is said that it is not shown that there is any prima facie case of a “fraud on the minority”, and it is also, I think, said that wrongdoer control has not been shown, given that TC was never interested in 50% or more of Playmates’ issued shares.

from which it follows that the Plaintiff has no locus standi to bring this derivative action purportedly on behalf of Playmates against TC and Chansam

(3) The action is an abuse of the process of the court because the Plaintiff has brought it, not in good faith in the best interests of Playmates, but because of ulterior motives or for collateral purposes.

(4) The action is barred by laches, delay and acquiescence having regard to the time which it took the Plaintiff to commence it.

5. I shall consider each of these contentions in turn. Before doing so, however, I shall introduce the parties and a number of other companies which feature in these proceedings, and describe the relevant transactions and the gist of the complaints made in respect of them.

The parties and the other companies involved

6. Many of the companies involved in the transactions which arise for examination in these proceedings have undergone changes of name, in some cases on several occasions. To avoid confusion, I shall refer to them by one of such names throughout this judgment.

7. Playmates, for whose benefit the Plaintiff says it brings this action, was incorporated in Bermuda in 1991 and has been listed on the Stock Exchange of Hong Kong (“the Stock Exchange”) since early 1994. There has been no suggestion that, for the purposes of the applications before me, anything turns on the fact that it is not a Hong Kong company. Prior to its listing, Playmates was a subsidiary of Prestige Properties Holdings Limited (“Prestige”). Prestige was itself listed on the Stock Exchange in 1984. It was founded by Mr Chan Tai Ho, two of whose sons, TC and Albert Chan Chun Wai (“AC”) can, I think, be regarded as the principal protagonists in these proceedings. Its business consisted of the design, manufacture, distribution and sale of toys, and also of investments in property. The listing of Playmates in 1994 was part of a corporate reorganisation whereby the toy business and the property business were separated, by the demerger of Playmates from the group of companies of which Prestige was the holding company. According to the Statement of Claim, at all material times since then the principal business activities of Playmates and its subsidiaries (collectively “the Playmates Group”) have been in the toy sector, consisting of the designing, manufacturing, marketing and sale of toys.

8. The Plaintiff is a British Virgin Islands (“BVI”) company. It is a shareholder in Playmates, holding some 6.5% of Playmates’ issued share capital. It is a company through which AC and his family are interested in Playmates.

9. TC is the 1st Defendant. He is, as I have said, the brother of AC. He is and was at all material times a director of Playmates, being its Chairman and one of its executive directors. According to the Plaintiff, TC was responsible for the transactions which form the subject matter of these proceedings.

10. Chansam is also a BVI company. It had a substantial shareholding in Playmates from at least 1997 until December 2001 (owning 47.21% of Playmates’ issued shares as at 31 December 1997, 1998 and 1999, 44.76% of Playmates’ issued shares as at 31 December 2000 and 49.55% of Playmates’ issued share capital between March 2001 and 28 December 2001). During that period, it is said to have been a company through which TC and his family were interested in Playmates, as it was indirectly owned as to 85.2% by the trustee of a discretionary trust established for the benefit of TC and his family (the remaining 14.8% of Chansam was owned as to 7.4% by TC and AC’s father, and 7.4% indirectly by the trustee of a discretionary trust established for the benefit of their sister and her family). On 28 December 2001, Chansam’s shareholding in Playmates was acquired by another BVI company called Angers Investments Limited (“Angers”), which the Plaintiff says is also a company through which TC and his family were (and are) interested in Playmates, as it is, like Chansam, indirectly owned by the trustee of a discretionary trust established for the benefit of TC and his family. Angers owned 49.55% of the issued share capital of Playmates as at 31 December 2001, and 46.83% as at 31 December 2002. It is alleged that throughout, TC controlled Playmates through Chansam’s and later Angers’ shareholding in Playmates.

11. There are a number of further companies which feature in these proceedings. These include:-

(1) Prestige, which I have referred to in paragraph 7 above. For present purposes, it is to be noted that Chansam was also a major shareholder of Prestige, owning some 47.04% of its issued share capital until about March 2000, and some 39.2% of its issued share capital between March and July 2000. During this time, Chansam was the single largest shareholder in Prestige. Playmates was also until May 2000 an indirect shareholder in Prestige, as 4.28% of Prestige’s issued share capital was (until then) owned by a subsidiary of Playmates called Profit Point Limited (“Profit Point”). The Plaintiff says that as a result of such shareholdings, and the fact that he was the Chairman and an Executive Director of Prestige, TC had effective control of Prestige and its subsidiaries.

(2) Profit Point, a BVI company which was a subsidiary of Playmates, and which owned 4.28% of the issued share capital of Prestige until May 2000. Until 18 April 2001 Profit Point was a wholly owned direct subsidiary of Playmates. Thereafter, it was an indirectly wholly owned subsidiary of Playmates until its dissolution on 18 March 2003.

(3) Yugang International Limited (“Yugang”), a Bermuda company which is also listed on the Stock Exchange. According to the Plaintiff, Yugang is an investment holding company with interests in various business sectors.

(4) Funrise Limited (“Funrise”), a BVI company which is a wholly owned subsidiary of Yugang.

(5) Autoestate Properties Limited (“Autoestate”), a BVI company which is a wholly owned indirect subsidiary of Playmates, which acquired the next two companies to which I shall refer, Pretty Star Limited (“Pretty Star”) and Bagnols Limited (“Bagnols”) from Prestige in January 2001 and July 2002 respectively.

(6) Pretty Star, a Hong Kong company which was a wholly owned subsidiary of Prestige until 16 January 2001, when its entire issued share capital was sold by Prestige to Autoestate. At all material times, Pretty Star’s principal asset was a property at 100 Canton Road, in Tsimshatsui in Kowloon (“the Canton Road Property”).

(7) Bagnols, also a Hong Kong company. It was a wholly owned subsidiary of Prestige until 10 July 2002, when its entire issued share capital was sold by Prestige to Autoestate. At all material times, Bagnols’ principal asset was a property at No. 1 Tin Hau Road in Tuen Mun in the New Territories (“the Tuen Mun Property”).

The transactions complained of

12. I turn now to describe the transactions of which complaint is made in these proceedings. At this stage, I propose only to set out the main features of these transactions, and to identify the gist of the Plaintiff’s complaint in relation to them, and shall return to them when considering Mr Kotewall’s submission that the Plaintiff’s claims should be struck out on the basis that it has failed to establish a prima facie case of wrongdoing against TC and Chansam.

13. First transaction - sale by Playmates and Chansam of shareholdings in Prestige

14. The first complaint relates to sales by Playmates and Chansam of their respective interests in Prestige between May and July 2000. The following transactions are relevant to this complaint:-

(1) Between 22 and 24 May 2000, Profit Point sold its entire 4.28% shareholding in Prestige on the stock market at prices ranging between HK$0.60 and HK$0.70 per share. The sales took place at market price. The sales generated proceeds for Profit Point of approximately HK$22.2 million.

(2) On 28 July 2002 Chansam entered into a conditional sale and purchase agreement with Funrise for the sale by Chansam to Funrise of some 34.25% of the issued share capital of Prestige (some 273 million shares) at a price of HK$2.20 per share. At the time, the market price of shares in Prestige was HK$0.60 per share. The agreement was conditional on Funrise not being required to make a general offer for shares in Prestige (a requirement which would be triggered if Funrise or parties acting in concert with it acquired 35% of the shares of Prestige, whether by a single transaction or series of transactions). In addition, Chansam undertook to sell or procure the sale of all other shares in Prestige held by it or parties acting in concert with it (totalling a further 7.38% of Prestige’s issued share capital) to independent third parties who were not acting in concert with either Chansam or Funrise not later than 7 days prior to completion of the sale to Funrise.

15. The Plaintiff says that it is to be inferred that at the time when Profit Point sold its shares in Prestige on the market, TC had already begun to negotiate the sale of Chansam’s shares to Yugang (acting through Funrise), and that the essential terms of the latter sale (including those which I have referred to in paragraph 13(2) above) were already agreed, or at least were known to TC. It is said that it therefore follows that he procured the sale by Profit Point of its shareholding in Prestige prior to the conclusion of the agreement between Chansam and Yugang in order to avoid having to include Profit Point’s shareholding in Prestige in the latter sale (as he should have done, in order to comply his duties as a director of Playmates, by enabling Profit Point and thus Playmates to participate in such sale and thereby to benefit from the substantially higher sale price agreed with Funrise), thus enabling Chansam to maximise its profits from the sale to Yugang. It is said that by causing Profit Point to sell its shareholding in Prestige when it did for this purpose, TC breached his fiduciary duty to Playmates, because he thereby preferred his personal interests to those of Playmates, by allowing Chansam to reap the entire benefit of the sale of shares in Prestige to Yugang, rather than including Profit Point’s 4.28% interest in Prestige in the parcel of shares sold to Funrise, or at least pooling together Chansam and Profit Point’s shares in Prestige, so that Profit Point would benefit proportionately with Chansam, in proportion to their respective shareholdings, from the sale of such shares to Funrise. It is said that in consequence, Playmates suffered a loss, measured by reference to the loss suffered by Profit Point, of HK$52.9 million or at least HK$41.6 million, depending on whether the entirety or only a proportionate part of Playmate’s indirect shareholding in Prestige was included in the sale to Funrise.

Second transaction - acquisition by Playmates of Pretty Star

16. The second complaint relates to Autoestate’s purchase of Pretty Star from a subsidiary of Prestige and of a debt owing by Pretty Star to another subsidiary of Prestige from that other subsidiary. On 4 December 2000, Autoestate entered into a sale and purchase agreement with a two subsidiaries of Prestige called Prestige Properties International Limited (“Prestige International”) and Prestige Finance Limited (“Prestige Finance”) by which Autoestate agreed to acquire from Prestige International the entire issue share capital of Pretty Star, and from Prestige Finance a debt owing from Pretty Star to Prestige Finance. The total consideration of HK$252,065,866 was split as to HK$47,648,483 for the shares and HK$204,417,383 for the debt.

17. The sale and purchase was conditional on a number of conditions being satisfied, including the completion of a loan restructuring. This related to a loan facility which had been granted to Prestige Finance by Hang Seng Bank Limited, the outstanding balance of which was HK$224 million as at 20 December 2000. This loan facility was secured by a mortgage over the Canton Road Property, which, as I have noted, was the principal asset of Pretty Star. Pretty Star itself owed Prestige Finance some HK$442,417,383 in respect of a loan which had been made to it by Prestige Finance. In order to secure the release of this mortgage in favour of Hang Seng Bank Limited, Prestige was to borrow a fresh loan of HK$238 million from a bank in Hong Kong against the security of the Canton Road Property, such fresh loan to be repayable one year after drawdown. The loan proceeds would be used to pay down the loan to Pretty Star from Prestige Finance so as to bring the loan balance down to HK$204,417,383. Prestige Finance would use the monies repaid to it by Pretty Star to repay its loan to Hang Seng Bank Limited, thereby releasing the Canton Road Property so as to make it available to be mortgaged by Pretty Star to the bank from which it obtained the fresh loan.

18. The net effect of the loan restructuring and the purchase by Autoestate of the balance of the debt owed by Pretty Star to Prestige Finance was that Prestige Finance would recover in full the monies which it had lent to Pretty Star, and Pretty Star would be left owing HK$238 million to the bank from which it obtained the fresh loan, and HK$204,417,383 to Autoestate (which acquired the balance of the Prestige Finance loan to Pretty Star from Prestige Finance). The bank would be secured by a mortgage over the Canton Road Property, whereas the loan acquired by Autoestate would be unsecured, and would depend for its repayment principally if not entirely (as the rental yield from the property was said to be unlikely to be sufficient to enable Pretty Star to effect any meaningful repayment of the loan to it) on the value of the Canton Road Property after allowing for the debt owed to the bank.

19. The agreed value of the Canton Road Property for the purpose of the transactions was HK$498 million.

20. It is alleged that there was no adequate financial, commercial or other proper reason for these transactions, and that they were not entered into bona fide in the best interests of Playmates, or were detrimental to its interests. It is further alleged that as a result of these transactions Playmates has suffered substantial losses, as the Canton Road Property has dropped in value from the agreed value of HK$498 million to HK$257 million by September 2003, when the writ in these proceedings was issued, a fall of HK$241 million.

Third transaction - acquisition by Playmates of Bagnols

21. The final transaction of which complaint is made involved the acquisition by Autoestate of the entire issued share capital of Bagnols on 10 July 2002. The acquisition was pursuant to a sale and purchase agreement by which Autoestate agreed to acquire Bagnols for a cash consideration of HK$14.2 million. Bagnols was, as I have noted, the owner of the Tuen Mun Property. Bagnols’ main liability was a bank mortgage loan of HK$38.5 million, secured on the Tuen Mun Property. For the purposes of this transaction, the Tuen Mun Property was agreed to be worth HK$55 million, implying that there was net equity in the property of slightly in excess of the amount agreed to be paid for Bagnols.

22. As with the Pretty Star transaction, it is alleged that there was no adequate financial, commercial or other proper reason for the acquisition of Bagnols, and that the acquistion was not made bona fide in the best interests of Playmates. It is further alleged that as a result of this transaction, Playmates has suffered a loss, as the Tuen Mun Property has dropped in value from the agreed value of HK$55 million at the time of the transaction to HK$32,450,000 as at September 2003, a depreciation in value of some HK$22,550,000.

Further complaint - overall scheme involving the transactions complained of

23. The Plaintiff further alleges that it is also to be inferred that the Pretty Star transaction was, or alternatively both that transaction and the Bagnols transaction were, part of an overall scheme between TC, Chansam and Yugang by which Yugang would acquire the bulk of Chansam’s shareholding in Prestige at a premium, at the price of HK$2.20 per share, on the understanding that TC would cause Playmates (or one of its subsidiaries) to acquire from Prestige or its subsidiaries Pretty Star and the debt owed by it to Prestige Finance, or Pretty Star, the debt and Bagnols, an arrangement that is said to have been to the advantage of Prestige and Yugang, but detrimental to Playmates.

Whether claim is unsustainable because of the principle against recovery of reflective loss

24. The principle that “reflective losses” are not generally recoverable at the suit of a shareholder was perhaps most clearly stated in the decision of the House of Lords in Johnson v Gore Wood (supra). There, Lord Millett analysed the reasons for the rule between pp.61G and 67D.

25. He said (at p.61G ff):-

“A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company’s property belongs to the company and not to its shareholders. If the company has a cause of action this is a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of actions is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 210. Correspondingly, of course, a company’s shares are the property of the shareholder and not of the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company’s net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact.
“This causes no difficulty where the company has a cause of action and the shareholder has none; or where the shareholder has a cause of action and the company has none ...
“The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholders’ loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company, which is allowed to recover to the exclusion of the shareholder. ...”

26. Having set out the well-known passage at pp.222-3 in the judgment of the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, Lord Millett went on to say that, although it had sometimes been suggested that the Prudential Assurance case was confined to the situation where the defendant was not in any breach of any duty owed to the shareholder personally, this was not correct, and that:-

“the principle applies even where the loss is caused by a wrong actionable at the suit of the shareholder personally.”

27. He then went on to say at pp.66 ff:-

“It is of course correct that the diminution in the value of the plaintiff’s shares was by definition a personal loss and not the company’s loss, but that is not the point. The point is that it merely reflected the diminution of the company’s assets. The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder’s loss is franked by that of the company. If so, such reflected loss is recoverable by the company and not by the shareholders. ...
“Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends (specifically mentioned in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204), and all other payments, which the shareholder might have obtained from the company if it had not been deprived of its funds. All transactions or putative transactions between the company and its shareholders must be disregarded. Payment to the one diminishes the assets of the other. In economic terms, the shareholder has two pockets, and cannot hold the defendant liable for his inability to transfer money from one pocket to the other. In principle, the company and the shareholder cannot together recover more than the shareholder would have recovered if he had carried on business in his own name instead of through the medium of a company. On the other hand, he is entitled (subject to the rules on remoteness of damage) to recover in respect of a loss which he has sustained by reason of his inability to have recourse to the company’s funds and which the company would not have sustd itself.
“The same applies to other payments which the company would have made if it had had the necessary funds. Even if the plaintiff would have received them qua employee and not qua shareholder, and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss, which is included in the company’s claim. The plaintiff’s primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it.”

28. Also in Johnson v Gore Wood, Lord Bingham put the point as follows (at pp.35-36), saying that the authorities supported the following propositions:-

“ (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholders’ shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. ... (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. ... (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. ...”

29. He went on to add, however, that:-

“These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder’s claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder’s claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 223) the loss claimed is “merely a reflection of the loss suffered by the company”. In some cases, the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company’s assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.”

30. The “no reflective loss” principle established in Johnson v Gore Wood has been applied in a number of subsequent cases, both in England and Australia - see e.g. Day v Cook [2002] 1 BCLC 1, Chen v Karandonis [2002] NSWCA 412 (unreported, 18 December 2002) and Gardner v Parker [2003] EWHC 1463 (Ch) (unreported, 26 June 2003). In Day v Cook, Arden LJ expressed the effect of Johnson v Gore Wood in the following terms, at paragraphs 38 to 41 of her judgment:-

“ [38] It will thus be seen from the speeches in Johnson v Gore Wood & Co [2001] 2 BCLC 313, [2001] 2 WLR 72 that where there is a breach of duty to both the shareholder and the company and the loss which the shareholder suffers is merely a reflection of the company’s loss. There is now a clear rule that the shareholder cannot recover. That follows from the graphic example of the shareholder who is led to part with the key to the company’s money box and the theft of the company’s money from that box. It is not simply the case that double recovery will not be allowed, so that, for instance, if the company’s claim is not pursued or there is some defence to the company’s claim, the shareholder can pursue his claim. The company’s claim, if it exists, will always trump that of the shareholder.

“ [39] Accordingly the court has no discretion. The claim cannot be entertained. The English rule is therefore different from the position in New Zealand: see Christensen v Scott [1996] 1 NZLR 273, above.

“ [40] Even in the case of owner-managed companies, there is no discretion. Thus the position in English law differs from the position (as I understand it to be) in the majority of states in the USA, where the courts exercise limited discretion to allow direct recovery by shareholders of closely-held corporations where the court is satisfied that:

‘ to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.’

(Principles of Corporate Governance, American Law Institute (1994) para 7.01.)

“ [41] However, it is apparent that there are limits to the application of the no reflective loss principle. The principal limit is that the no reflective loss principle does not apply where the company has no claim, and hence the only duty is the duty owed to the shareholder (Lord Bingham’s proposition (2)). Likewise, it does not apply where the loss which the shareholder suffers is additional to an different from that which the company suffers and a duty is also owed to the shareholder: see Lord Bingham’s proposition (3) and see Heron International Ltd v Lord Grade [1983] BCLC 224, as explained by Lord Millett in Johnson v Gore Wood. There may well be other limits.”

31. On the other hand, the English Court of Appeal in Giles v Rhind [2002] 2 WLR 237 held that the no reflective loss principle established by Johnson v Gore Wood did not apply where (per Waller LJ at para 35 of his judgment) “the wrongdoer has disabled the company from pursuing [its] cause of action” or (per Chadwick LJ at para 79 of his judgment) “the company ... has been forced to abandon [its claim] by reason of impecuniosity attributable to the wrong which has been done to it.” In Gardner v Parker (supra), however, Blackburne J considered that the exception to the no reflective loss policy apparently established in Giles v Rhind was to be strictly limited to the situation identified in that case, so that only financial inability on the part of the company which was attributable to the wrong done to it would justify a departure from the no reflective loss principle (see Gardner v Parker at paragraph 47 of the judgment).

32. Against the background of these authorities, Mr Kotewall submitted that as the transactions complained of were carried out by subsidiaries (or sub-subsidiaries) of Playmates, the alleged losses arising from them would have been suffered by the subsidiaries in question. In this case, it was Profit Point which suffered a loss in respect of the sale of its shares in Prestige and Autoestate which suffered losses in respect of the fall in value of the Canton Road Property and the Tuen Mun Property. Thus, even if Playmates suffered any loss as a result of these transactions, such losses could only be reflective of the losses suffered by Profit Point and Autoestate. Mr Kotewall submitted that the reflective nature of any loss suffered by Playmates was apparent not just from the Statement of Claim, but was made abundantly clear from the evidence of AC filed in relation to these applications.

33. In relation to the sale of the shareholding in Prestige, paragraph 28 of the Statement of Claim pleads the loss arising from such sale in this way:-

“Playmates ... has suffered loss and damage, including but not limited to loss and damage in the amount that Playmates and/or the relevant subsidiaries ought to have or could have received upon a sale of Playmates’ shareholding in Prestige or part of them (sic) to Yugang.”

34. In relation to the Pretty Star and Bagnols acquisitions, paragraphs 36 and 40 of the Statement of Claim plead the loss arising from the acquisitions by asserting that “Playmates ... has suffered substantial loss and damage”, calculated by reference to the alleged depreciation in the value of the Canton Road Property and Tuen Mun Property respectively between the date of their acquisition and the date of the writ.

35. Although the losses alleged to arise as a result of each of the transactions complained of is characterised as a loss by Playmates, further light is thrown on the nature of such alleged losses by their description in AC’s second affirmation of 5 December 2003, filed in opposition to the striking out application. Paragraphs 13(1) and (2), 20 and 28 of that affirmation set out AC’s as to the basis on which such losses are to be regarded as losses of Playmates. In each case, it is said that the relevant loss would have been “reflected in the balance sheet and the profit and loss accounts of the group accounts of Playmates”, that the value of Playmates’ investment in the relevant subsidiary would have been greater, and that such additional value could have been realised by way of dividends paid by the subsidiaries concerned, or by an increased amount being payable by way of distribution in the event of the winding up of such subsidiary. It is also said that insofar as Playmates provided funding for the subsidiaries’ acquisition of the underlying asset in each case, the losses to the subsidiaries would be likely to mean that Playmates would be unable to recoup in full the funding which it had provided.

36. So described, it is clear that the losses which the Plaintiff claims that Playmates has suffered are “reflective losses” which reflect the losses that would have been suffered by its subsidiaries, as in each case, if the relevant subsidiary took steps by bringing proceedings to recoup such losses itself, the successful recovery of such losses by the relevant subsidiary would result in the recovery of value in the subsidiary so as to eliminate any loss which might be suffered by Playmates whether as a result of the diminution in the value of the subsidiary, the inability of the subsidiary to make dividend payments or other distributions to Playmates, or the inability of the subsidiary to repay to Playmates funds which had been lent to the subsidiary to enable it to acquire the asset owned by it.

37. Mr Kotewall submitted that in the circumstances of this case, although the alleged wrongdoing on the part of TC was pleaded as a breach of his duty to Playmates, it could in each case be just as well have been pleaded as a breach of his duty to either Profit Point or Autoestate. There was no evidence before me as to the actual identity of the directors of either Profit Point or Autoestate at the time that the transactions complained of were entered into, such information not being readily available in respect of BVI companies such as these. However, given that both companies were wholly-owned subsidiaries or sub-subsidiaries of Playmates, it seems to me that, in the absence of evidence to suggest that they had an independent board of directors directing their affairs, it would be a fair inference to draw that they were subject to the control of whoever was in a position to direct Playmates’ business activities. Moreover, given that the no reflective loss principle applies to claims against an alleged wrongdoer who owes duties to both the company and its shareholder, it seems to me that reliance on the principle carries with it an acknowledgment (at least for present purposes) that (if Playmates has a good cause of action apart from the reflective loss point) a claim would lie against TC at the instance of Profit Point or Autoestate, as the case may be.

38. In the circumstances, it seems to me that on the face of it, the losses in respect of which AC seeks an order in favour of Playmates by this derivative action are losses which, so far as Playmates is concerned, are wholly reflective of losses suffered by Profit Point and Autoestate respectively. However, Mr Chang S.C., appearing for the Plaintiff, while not, I think, suggesting that the losses which the Plaintiff said were suffered by Playmates were other than reflective of losses which would equally be suffered by Profit Point and Autoestate, submitted that the Plaintiff was nevertheless entitled to bring these proceedings. As I understood his submissions, he suggested that there were three reasons why the Plaintiff’s claim should be allowed to proceed. These were:-

(1) Profit Point and Autoestate should be regarded as nothing more than nominees of Playmates in respect of the assets which they held, so that such assets should be regarded as being beneficially owned by Playmates, with the consequence that losses arising from impairment of or improper dealings with such assets were to be regarded as losses suffered by Playmates itself; alternatively

(2) There is a further exception to the “no reflective loss” principle where the subsidiary which has suffered loss is a wholly owned subsidiary or sub-subsidiary and there is wrongdoer control of both the parent and the subsidiary (and, presumably in the case of a sub-subsidiary which suffers loss, of the parent, the intermediate subsidiary and the sub-subsidiary), and that further exception comes into play here; alternatively

(3) (Insofar as it may be necessary) the Plaintiff is entitled to bring a claim on behalf of Profit Point and Autoestate by way of what might be described as a double or multiple derivative action, such a claim being appropriate where loss is suffered by a subsidiary or sub-subsidiary and there is wrongdoer control of parent and ultimate subsidiary company and of any intervening subsidiary companies.

Subsidiaries mere nominees for Playmates

39. As to the first of Mr Chang’s arguments, I think that it must be acknowledged that there may be several legitimate reasons why a group of companies will be structured in a way that involves the use of wholly owned subsidiaries. For example, it may be thought desirable to have different subsidiaries through which to carry on different aspects of the groups business activities, or there may be legitimate tax planning reasons why particular assets should be held by separate subsidiaries. That being so, in the absence of clear evidence to the contrary, I do not think that the court should be too ready to disregard the separate legal personality of companies within a group, and to regard an asset owning subsidiary as nothing more than a cipher or nominee for its parent or ultimate parent company. In this case, the Plaintiff is not able to point to anything other than the existence of the corporate structure by which Playmates was the parent or ultimate parent company of both Profit Point and Autoestate. Without more, I do not think that it would be right to regard that corporate structure as being of no effect, and I therefore do not think that this argument should be acceded to.

Further limitation on “no reflective loss” principle

40. I turn to consider whether or not there is, or might be, as Mr Chang submits, a further limitation to the “no reflective” loss principle along the lines set out in paragraph 37(2) above.

41. As to this, I think that it must be recognised that the statement of the principle by both Lord Bingham and Lord Millett in Johnson v Gore Wood and the terms in which it has been recognised in the subsequent authorities to which I have referred above are uncompromising, and do not (despite the reservation expressed by Arden LJ in Day v Cook) readily admit of exceptions or limitations.

42. The terms in which Lord Millett expressed himself are clear. He emphasised that, where both the company and the shareholder have a claim against the wrongdoer, the shareholder’s claim, insofar as it is in respect of a loss which is no more than a reflection of the loss suffered by the company, is “franked” (or, as Arden LJ put it in Day v Cook, “trumped”) by the company’s claim. The reasons for this conclusion are stated to be reasons of policy - primarily the policies (i) that there should be no possibility of double recovery against the wrongdoer, and (ii) the need to protect the interests of the company’s creditors over the interests of its shareholders or part of them.

43. It seems to me that the speech of Lord Bingham was no less uncompromising, at least so far as concerns loss which is, properly analysed, a reflective loss.

44. I do not think the parts of his judgment (at p.36B-E) where he states that “the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation” can fairly be read as indicating that the “no reflective loss” principle readily admits of an exception where the court considers that the justice of the case appears to call for one, for he goes on to explain how the court should approach matters - namely, by carefully scrutinising (whether on the pleadings in a strike out application, or on the evidence after a trial) the nature of the loss alleged to have been suffered by the shareholder claimant, to see whether the claim is for a loss which is “merely a reflection of the loss suffered by the company”. In other words, what the court must be careful to do is to examine the loss allegedly suffered, to see whether it is a reflective loss (in which case it is irrecoverable) or whether it is, properly analysed, not a reflective loss but a different form of loss suffered by the shareholder alone, and not by the company (in which case it will be, in principle, recoverable). That was precisely what Lord Bingham went on to do in Johnson v Gore Wood itself, by analysing the various heads of loss claimed by Mr Johnson, and rejecting all of those which were reflective losses, but permitting the claim to go forward in respect of those losses which were not (or at least arguably were not) purely reflective of the company’s losses.

45. Likewise, I do not think his description of the object of the court’s analysis of the claimed losses - to “ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible” - is to be understood as indicating that where the company does not enforce its full rights, the losses will be recoverable. It seems to me that Lord Bingham was by that phrase simply expressing the test for whether a particular loss is or is not properly to be regarded as a reflective loss - so that where a loss allegedly suffered by a shareholder would have been made good (by the company recouping it for its own benefit) if the company had pursued its claims to a successful conclusion, the loss should be regarded as reflective, and so irrecoverable at the suit of the shareholder.

46. Further, Lord Hutton appears to have been of the same view, as appears from his judgment at p.55C-H of Johnson v Gore Wood, where he said:-

“... In my opinion the resolution of the conflict between Prudential Assurance and Christensen v Scott narrows down to the issue whether, as held in the former case, the shareholder is debarred from bringing to trial an action claiming loss where such loss is merely reflective of loss suffered by the company, or whether the shareholder is entitled to proceed to trial on such a claim, it being a matter for the trial judge, if the plaintiff establishes his claim, to ensure that there is no double recovery and that creditors and other shareholders of the company to not suffer loss, which was the course which Pumfrey J held should be followed.
“My Lords, whilst in a case such as Christensen v Scott there may be merit in permitting an individual shareholder to sue, the decision in Prudential Assurance has stood in England for almost 20 years and, whilst the decision has sometimes been distinguished on inadequate grounds, it has been regarded as establishing a clear principle which the Court of Appeal has followed in other cases. I further consider that the principle has the advantage that, rather than leaving the protection of creditors and other shareholders of the company to be given by the trial judge in the complexities of a trial to determine the validity of the claim made by the plaintiff against the defendant, where conflicts of interest may arise between directors and some shareholders, or between the liquidator and some shareholders, the principle ensures at the outset of proceedings that where the loss suffered by the plaintiff is sustained because of loss to the coffers of the company, there will be no double recover at the expense of the defendant nor los to creditors of the company and other shareholders. Therefore, whilst I think that this House should uphold the Prudential Assurance principle, I also consider that it is important to emphasis that the principle does not apply where the loss suffered by the shareholder is separate and distinct from the loss suffered by the company.”

47. As I have explained above, I do not consider that any of the losses said to have been suffered by Playmates in this case can be said to be in any way separate and distinct from the losses suffered by Profit Point and Autoestate respectively.

48. I do not think that the reservation expressed by Arden LJ in paragraph 41 of her judgment in Day v Cook assists Mr Chang in the context of this submission. In the first place, I do not think that either of the limitations identified in that paragraph are really exceptions to the “no reflective loss” principle. The first limitation identified relates to the situation in which the shareholder has a cause of action, but the company has none. In such a situation, it does not seem to me that the “no reflective loss” principle is engaged so as to call for an exception to it to be devised. It seems from the speeches of Lords Bingham, Millett and Hutton in Johnson v Gore Wood that a “reflective loss” is one which is defined as a loss suffered by a shareholder which would be eliminated or recouped if the company successfully asserted its legal rights against the wrongdoer. Thus, by definition, where the company has no legal claim, so that it has no right to recover damages or compensation, the actionable loss suffered by the shareholder cannot be reflective of any actionable loss suffered by the company (there being none). The position is, I think, similar in respect of the second limitation identified. This relates to the situation where the loss suffered by the shareholder is separate, distinct and additional to that suffered by the company. Again, in such a situation, the shareholder’s loss is simply not “reflective” of any loss suffered by the company. If anything the limitations identified serve to emphasise the rigour with which the “no reflective loss” principle appears to apply.

49. Further, it seems to me that the exception which is contended for here is no different from the position in a number of states of the USA which was adverted to by Arden LJ in paragraph 40 of her judgment in Day v Cook. Whereas in the USA it appears that there are exceptions to the “no reflective loss” principle where the policy considerations against double recovery, multiplicity of actions and protection of the interests of creditors and other shareholders are not engaged, Arden LJ points out that the position in England is different, since there is there no discretion available to the court to override the “no reflective loss” principle.

50. I turn now to consider the effect of Giles v Rhind. In that case, the English Court of Appeal held that there was an exception to the “no reflective loss” principle where the wrongdoer had by his wrongdoing disabled the company from pursuing the cause of action which it had against him, by denuding it of its funds. In that situation, the Court of Appeal expressed distaste for the suggestion that a claim by a shareholder should be defeated by the “no reflective loss” principle. Although Waller LJ appears to have taken the view that none of the losses claimed by the Plaintiff were reflective losses (see paragraphs 28 and 40 of his judgment), Chadwick LJ seems to have been of the view that some at least of the heads of loss claimed were properly to be regarded as reflective losses (see paragraphs 47 to 49 of his judgment). However, both appeared to agree that the exception which I have described above was appropriate.

51. In Giles v Rhind, it appears that the company in question had gone into administrative receivership, and that a claim which it had brought against the alleged wrongdoer, one of its directors, was discontinued because it was not in a position to provide security for the defendant’s costs, arguably because it had been deprived of its funds as a result of the alleged wrongdoing. It was against this background that the shareholder plaintiff in Giles v Rhind brought his action against the defendant. While I can well understand the distaste which the Court of Appeal appeared to feel for the possibility that the defendant in Giles v Rhind, having seen off the company’s claim against him by pursuing an application for security for costs against it, should escape liability altogether, I have some difficulty in seeing that the result is consistent with the policy considerations identified in Johnson v Gore Wood, in particular the identification of the need to protect the interests of the company’s creditors as an important factor in the recognition of the “no reflective loss” principle. If, as appears to have been the position in Giles v Rhind, the company was in financial difficulties or insolvent, there may well have been creditors of the company whose interests called for consideration. To permit the shareholder to bring a claim in respect of what were properly to be regarded as reflective losses would appear to ignore the interests of such creditors, in precisely the same way as Lord Millett regarded objectionable in Johnson v Gore Wood - namely, that so far as the creditors were concerned, recovery by the other shareholder would just as much be an extraction of the company’s funds at their expense as non-recovery would have been in favour of the alleged wrongdoer. In either case, the creditors would not benefit.

52. It does not seem to me to be an answer to this point to suggest that the creditors’ position arose as a result of the decision of the administrative receivers not to pursue the claim in the face of the application for security for costs. That would appear to be no different in principle from a situation in which the company had (whether through its directors or its liquidator) settled a claim which it had brought for less than full value. In the latter case, it is clear from Johnson v Gore Wood that a shareholder cannot recover in respect of reflective losses. I have difficulty in seeing that the position is different in a case where the company has not settled its claim, but having brought it, abandoned it altogether, whatever the reasons for doing so. In both cases it seems to me that the creditors and the shareholders are bound by the decision of the company not to pursue its claim to the end.

53. The point can, I think, be tested also in this way. Suppose the company had never sued, being so short of funds in consequence of the alleged wrongdoing that it could not even fund proceedings against the alleged wrongdoer. Could it be said in such circumstances that the shareholder should be entitled to sue in respect of reflective losses which he had allegedly suffered? I think not. In a situation where the company remains under the control of the wrongdoer, it would be open to the shareholder to seek to bring a derivative action on behalf of and for the benefit of the company. On the other hand, in a situation where the company is no longer in control of the wrongdoer, but in the hands of an administrator or liquidator, there would seem to be no reason why the shareholder should not invite such administrator or liquidator to take proceedings, providing, if necessary, funding or an indemnity in respect of the costs thereof. Either of these situations would result in action being brought on behalf of the company, which would be the proper plaintiff in respect of the losses which it had suffered, and which were reflected in losses allegedly suffered by the shareholder.

54. For these reasons, I do not think that Giles v Rhind can or should be regarded as authority or justification for the recognition of any wider exception to the “no reflective loss” principle.

55. Insofar as Mr Chang suggested that wrongdoer control of both parent and subsidiary justifies an exception to the “no reflective loss” principle, I would, with respect, disagree. Wrongdoer control calls for a mechanism to be found for the company’s claim to be brought before the courts, rather than for the recognition of a right of a shareholder to make a direct claim in respect of reflective losses, potentially at the expense of the company’s creditors and other shareholders.

56. Even in the case of a wholly-owned subsidiary, where there would appear to be no other shareholders whose interests call for separate consideration, it will not always be possible to know whether or not there are any creditors whose interests call for consideration. In such circumstances, it seems to me that it would be preferable for any claim to be brought on behalf of the company concerned, rather than by (or on behalf of) its parent. In this way, there can be no risk that the company’s creditors (if any) will be prejudiced, and there would seem to be no risk to its shareholders, whether there be many or one, since recovery by the company will mean that the reflective loss which they claim to have suffered will have been made good.

57. I therefore consider that there is no relevant exception to the “no reflective loss” principle which is available in this case. It therefore follows that the claim as formulated, based as it is on losses allegedly suffered by Playmates which are wholly reflective of the losses suffered by its subsidiaries or sub-subsidiaries, is, in my view, bad and is liable to be struck out, subject to the possibility of its reformulation as a double or multiple derivative action (that is to say, a derivative action brought on behalf of a company not by an immediate shareholder, but by a shareholder at one or more than one remove).

Double or multiple derivative actions

58. This was the third point argued by Mr Chang. He submitted that even if I were of the view (as I am) that the “no reflective loss” principle barred any recovery by or on behalf of Playmates, I should permit the action to be reformulated in the way that I have just described.

59. As to this, Mr Kotewall pointed out that this involved a change of position on the part of the Plaintiff, which had, through AC’s affirmations, indicated that it was not by the action as formulated seeking to recover losses on behalf of Profit Point or Autoestate, but on behalf of Playmates alone. This is correct. However, it does not seem to me that (assuming that the Plaintiff is able to establish an otherwise viable cause of action, a question which I consider later in this judgment) there is any good reason not to permit the Plaintiff to take such a course, if it is one which is otherwise available to it. I do not see that permitting the Plaintiff to do so would cause any irremediable prejudice to either TC or Chansam. At the end of the day, it seems to me that if there is a cause of action available to Profit Point or Autoestate which the Plaintiff is able properly to assert on their behalves, it would be appropriate to afford the Plaintiff an opportunity to seek to make the necessary amendments to its claim to do so. I therefore turn to consider whether or not it is possible in principle for such a multiple derivative action to be brought.

60. Mr Chang submitted that there was no reason in principle why double or multiple derivative actions should not be recognised. He submitted that the rationale for the derivative action as an exception to the rule in Foss v Harbottle (which he identified as fraud on the minority, wrongdoer control, the concern that the grievance would otherwise never reach the courts and lack of redress for wrongdoing) applied with just as much force to the question of whether or not derivative actions could be brought by a shareholder of a holding company in respect of companies within a group. He stressed that in the group context, it was very likely that a wrongdoer in respect of the affairs of subsidiaries, who had control of the holding company, was very likely to be in control of the subsidiaries, so as to be able to prevent both the subsidiary in question from bringing proceedings in respect of the wrong done to it, and at the same time to prevent its holding company from bringing a derivative action on behalf of the subsidiary in respect of that wrong. He accepted that the concerns of the courts to avoid double recovery and to ensure that any recovery did not prejudice the interests of any relevant company’s creditors had to be addressed, but said that this could be done by directing the payment of any recoveries to or for the account of the subsidiary which suffered the loss, although he added that this might not be essential in a case where it could be shown that the subsidiary could not take steps to recover the loss itself (so there would be no question of double recovery) and where there were no outside creditors of the subsidiary in question.

61. As to that last point, I do not think that the risk of double recovery is a particular concern - if a multiple derivative action were to be permitted, no question of double recovery should arise, since any recovery would be for the benefit of the subsidiary which suffered the loss. If, however, there were some difficulty in a particular case in directing recovery to the subsidiary immediately affected, it might be necessary to consider whether the court could direct payment to an intermediate or the ultimate holding company.

62. Mr Chang submitted that the exception to the rule in Foss v Harbottle was a judge-made rule, devised with the objective of ensuring that a wrong would not go unredressed due to the actions of the wrongdoer himself. He suggested that this was illustrated by Giles v Rhind. However, Giles v Rhind was not concerned with derivative actions - in that case, there was no attempt to bring any derivative action on behalf of the company (probably because the company had already sued and discontinued its own proceedings). The only question was whether or not the shareholder could bring a personal (not derivative) action to recover his losses, some of which might properly be regarded as reflective losses. I therefore do not derive much assistance from that case in this context.

63. Mr Chang also drew my attention to Wallersteiner v Moir (No 1) [1974] 1 WLR 991, in which both Geoffrey Lane J at first instance and the Court of Appeal permitted the defendant, Mr Moir, to bring a derivative action by counterclaim on behalf of both a parent and subsidiary company, and directed payment to each in respect of the loss suffered by it, notwithstanding that Mr Moir was a shareholder of only the parent company and not, it seems, of the subsidiary.

64. For his part, Mr Kotewall submitted that there was no basis on which the court could or should recognise the possibility of permitting the bringing of double or multiple derivative actions. He submitted that a double or multiple derivative action is not recognised by the law. He submitted further that the claim as pleaded was not aptly framed to support a possible multiple derivative action, and in particular that there was no allegation in the pleading of any duty owed or other basis of liability by TC or Chansam to either of Profit Point or Autoestate. He went on to submit that recognition of a double or multiple derivative action was objectionable in principle, because the Plaintiff was not a shareholder of either Profit Point or Autoestate, and only an immediate shareholder could bring a derivative action on behalf of the company of which he was a shareholder. In answer to the submission that the refusal to recognise the possibility of a multiple derivative action would be that there would be no remedy available to a shareholder of a holding company in respect of wrongdoing at the level of a subsidiary where the wrongdoer was in control of both subsidiary and holding company, Mr Kotewall suggested that there were three alternatives open to the aggrieved minority, these being (i) to seek to persuade their fellow shareholders to replace the board of the holding company, and thereafter the boards of the subsidiary or subsidiaries involved, so that the subsidiary or subsidiaries could commence their own proceedings; (ii) where the wrongdoers were in control of the holding company, to bring a derivative action in respect of such claims as the holding company may have if there was a fraud on the minority at the holding company level; and (iii) to petition under section 168A of the Companies Ordinance (presumably in respect of the parent) where such relief is available, or, as a last resort, to petition for the winding up of the holding company on the just and equitable ground pursuant to section 177(1)(f) of the Companies Ordinance. So far as Wallersteiner v Moir (No 1) was concerned, Mr Kotewall submitted that Mr Moir succeeded by default, and that no point was taken as to whether or not it was appropriate for Mr Moir to seek to recover in respect of the subsidiary in addition to the parent company, so that the case was not a particularly compelling authority in favour of multiple derivative actions.

65. It is true that, with the exception of Wallersteiner v Moir(No 1), in which the point does not seem to have been argued, no authority appears to have been found dealing with the question of whether double or multiple derivative actions are maintainable. However, I would note that although that case involved a default judgment, in the sense that Mr Moir was seeking to obtain judgment against Dr Wallersteiner because of the latter’s default in filing a reply and defence to counterclaim, the case did not in fact go by default, and was the subject of argument by counsel on both sides (although Mr Moir acted in person at first instance and for part of the appeal) with the assistance of Mr Browne-Wilkinson Q.C. (as he then was) as amicus curiae, a hearing being necessitated by the fact that Mr Moir was seeking declaratory relief by his counterclaim, as the court would require to be satisfied that it was an appropriate case for the grant of such relief and would not simply give declaratory judgment in default. In these circumstances, one might have expected that had there been a point to be taken on the validity or viability of a claim by Mr Moir on behalf of the subsidiary of which he was not a shareholder, it would have been. However, as the point does not seem to have been argued, I do not regard this decision as an authority in favour of double or multiple derivative actions, although it could, I think, be said that none of those involved appear to have considered that there was anything objectionable to the course which was ultimately adopted, of permitting the subsidiary to be made or remain a party, and making an order in its favour.

66. In order to consider whether or not, as a matter of principle, derivative actions should be restricted to claims brought by shareholders on behalf of corporations of which they are members, so as to exclude the possibility of shareholders in holding companies bringing actions on behalf of subsidiaries which are said to have been the victims of wrongdoing, I start with the rule in Foss v Harbottle itself. This was the subject of consideration in Prudential Assurance, where the English Court of Appeal stated (at p.210-211)

“A derivative action is an exception to the elementary principle that A cannot, as a general rule, bring an action against B to receover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested. This is sometimes referred to as the rule in Foss v Harbottle (1843) 2 Hare 461 when applied to corporations, but it has a wider scope and is fundamental to any rational system of jurisprudence. ...
“The classic definition of the rule in Foss v Harbottle is stated in the judgment of Jenkins LJ in Edwards v Halliwell [1950] 2 All ER 1064 as follows. (1) The proper plaintiff in an action in respect of a wrong alleged to be done to the corporation is, prima facie, the corporation. (2) Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter, because, if the majority confirms the transaction, cadit quaestio; or, if the majority challenges the transaction, there is no valid reason why the company should not sue. (3) There is no room for the operation of the rule if the alleged wrong is ultra vires is the corporation, because the majority of members cannot confirm the transaction. (4) There is also no room for the operation of the rule if the transaction complained of could be validly done or sanctioned only by a special resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority. (5) There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. In this case the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.”

67. It seems to me that the rule in Foss v Harbottle, as defined by Jenkins LJ in Edwards v Halliwell and endorsed by the Court of Appeal in Prudential Assurance involves the application of the principles of majority rule in the conduct of a company’s affairs to the question of whether the company should sue in respect of a wrong done to it. There can be no doubt that where a wrong is done to the company, the company itself is the proper plaintiff. It is ordinarily for the company, acting through its constitutional organs, to decide whether or not it should take action in respect of such a wrong. These are the principles embodied in points (1) and (2) of Jenkins LJ’s definition of the rule in Foss v Harbottle. However, point (5) of that definition provides the justification for allowing a minority shareholder to bring an action on behalf of the corporation, notwithstanding that the majority have chosen not to do so. In a situation in which the majority shareholder or shareholders, who are in control of the company by virtue of their majority shareholding, are themselves the party accused of wrongdoing, they are in a position to prevent the company from taking action against them, and it is in this situation that the minority is allowed, exceptionally, to bring proceedings on behalf of the company.

68. Ordinarily, the only person who would have an interest in bringing a derivative action would be a shareholder in the company concerned, as he has an interest in the economic well-being of the company, as his shareholding represents a legal right of participation in the affairs of the company and an economic interest in the value of its assets, since that value will affect the price he may be able to obtain for his shares should he wish to sell them, and will affect the amount (if any) that he will receive by way of distribution in the event that the company is wound up.

69. However, in recent years, it has become increasingly common for companies to carry on their business activities through a corporate structure involving the use of subsidiaries and subsidiaries. There are, of course, often good reasons why such a structure should be adopted in a particular case. There are benefits of limited liability in relation to the activities of a particular subsidiary, so that the holding company and the investors in it can to some extent be insulated from the effects of an unfavourable outturn to the business activities of particular subsidiaries. There are also often tax considerations which may mean that tax liabilities can be minimised through the use of an appropriate corporate structure. But this serves to highlight the economic interest that shareholders in the holding company have in the affairs of the subsidiaries. Although they do not hold shares in the subsidiaries, they are clearly interested in the conduct of their affairs, since that will affect (reflectively) the value of their investment in the holding company.

70. In such a case, where there has been wrongdoing in respect of the affairs of a subsidiary, and the wrongdoers are in control of both subsidiary and parent (or, subsidiary, intermediate holding companies and ultimate parent), I can see no reason in principle why a shareholder of the parent should not be permitted to bring a derivative action on behalf of the subsidiary which has suffered loss. Such a shareholder is just as much interested in the well being of such a subsidiary as he is in the well being of the parent whose shares he holds. If wrongdoer control is established at all levels from the parent down to the affected subsidiary, it cannot be expected that action will be taken to redress the wrongs done to the subsidiary. In such a situation, if the shareholder in the parent company is not permitted to take proceedings, the position would just as much be one in which his “grievance could never reach the court because the wrongdoers themselves, being in control [of the parent and the relevant subsidiary and sub-subsidiaries], would not allow [any of them] to sue”.

71. It is true that the shareholder has no legal interest or right of participation in the affairs of the subsidiary. However, it seems to me that to ignore his economic interests which I have described above would be to shut one’s eyes to the reality of the situation. In my view, provided that the plaintiff is able to show wrongdoer control at all levels from the company in which he is a shareholder down to the company affected, and that the case falls within one of the exceptions to the rule in Foss v Harbottle, there is no insuperable objection in principle to the recognition of the right of such a shareholder to bring proceedings on behalf of the company ultimately affected by the alleged wrongdoing. Refusal to recognise such a right would, on the contrary, mean that what would otherwise be a legitimate grievance would never be aired, and could go unredressed.

72. In this context, I do not think that Mr Kotewall’s suggestions as to the courses open to the aggrieved shareholder in the parent company compel a different conclusion. The first suggestion, that the aggrieved minority should persuade its fellow members to oust the existing directors and instal a new board which will be willing to investigate their complaints and take proceedings against the wrongdoers is not one which is likely to meet with any success in a situation where the alleged wrongdoers have voting control at the holding company level. The second, that a derivative action should be brought on behalf of the parent company to enforce such rights as it may be entitled to enforce is unlikely to produce any very satisfactory result, since however the claim by the parent against the wrongdoers might be framed, insofar as it sought to recover compensation for the damage caused to it by the wrongdoing to the subsidiary, it would no doubt be met by the argument put forward in this case, that the operation of the “no reflective loss” principle means that what is likely to be the substantial part (if not the whole) of its loss is irrecoverable. As for the final suggestion that proceedings should be brought under section 168A or 177(1)(f) of the Companies Ordinance, it seems to me that, as pointed out by the Court of Final Appeal in Nina Kung v Tan Man Kou and Cheung Yat Ming (unreported, CFA, FACV No. 6 of 2004, 13 December 2004), that claims of that nature are appropriate where the essence of the complaint is of unfairly prejudicial behaviour that leads the petitioner to wish to be relieved from further participation in the company as a shareholder, but not where the essence of the complaint is that there has been wrongdoing to the company in respect of which redress is sought for the benefit of the company and the aggrieved minority wishes to continue as a member of the company.

73. I should add that while this approach does represent a change of position on the part of the Plaintiff, who had not previously indicated any interest in pursuing a derivative action on behalf of Profit Point or Autoestate, and that the pleading as it currently stands does not put forward any such claim, I do not, as I have indicated, consider that there has been demonstrated any prejudice to TC or Chansam which would make it inappropriate for me to decline to permit the Plaintiff to proffer an amendment to now put forward such a claim.

74. Finally, I should also add that although the evidence at the hearing indicates that Profit Point has been dissolved, I would not regard this as being fatal. Such evidence as there is also indicates that the dissolution plan in respect of Profit Point indicates that it had no outstanding creditors. That being so, it seems to me that it would be open to the Plaintiff to seek either to have Profit Point’s existence restored in the BVI, or to seek recovery on behalf of its immediate holding company.

75. Thus, subject to the remaining points raised by Mr Kotewall, which I shall now go on to consider, I would be prepared to afford the Plaintiff an opportunity to put forward a draft amendment to its Statement of Claim, adding such parties as it thinks appropriate, so as to formulate its complaints in the form of a derivative action on behalf of Profit Point and Autoestate, or, if thought appropriate, their intermediate holding companies.

Does the Plaintiff need to show a prima facie case of wrongdoing and that the case is within the exceptions to the rule in Foss v Harbottle?

76. Mr Kotewall submitted that even if it were my view that it was open to the Plaintiff to bring a derivative action on behalf of Playmates notwithstanding his submissions as to the “no reflective loss” principle, it would remain necessary for the Plaintiff to satisfy the court that it could demonstrate that there existed a prima facie case both that there had been wrongdoing on the part of TC and Chansam and that this was an appropriate case for the bringing of derivative proceedings. As it happens, although I have acceded to Mr Kotewall’s submissions in respect of the “no reflective loss” point, I have come to the view that it is open to the Plaintiff to reformulate its pleadings so as to seek derivative relief on behalf of the relevant subsidiaries. It seems to me that in these circumstances, Mr Kotewall’s points as to the need for the Plaintiff to establish a prima facie case in both the respects mentioned remains one which the Plaintiff has to meet, since I can see no reason why the question of the Plaintiff’s right to bring a double or multiple derivative action should not be subject to the same considerations as those which would arise in the event of a more straightforward derivative action.

77. Mr Kotewall submitted that it was for the Plaintiff to establish the existence of a prima facie case in both these respects, on the basis of the observations of the English Court of Appeal in Prudential Assurance. In that case, Vinelott J at first instance rejected an application to have the question of whether the minority shareholders were entitled to bring a derivative action determined as a preliminary issue in the proceedings. As to this, the Court of Appeal stated (at p.221B-C):-

“... we have no doubt whatsoever that Vinelott J erred in dismissing the summons of May 19, 1979. He ought to have determined as a preliminary issue whether the plaintiffs were entitled to sue on behalf of Newman by bringing a derivative action. It cannot have been right to have subjected the company to a 30-day action (as it was then estimated to be) in order to enable him to decide whether the plaintiffs were entitled in law to subject the company to a 30-day action. Such an approach defeats the whole purpose of the rule in Foss v Harbottle and sanctions the very mischief that the rule is designed to prevent. ...”

78. The Court of Appeal went on to say (at p.221G-222A):-

“... The second observation which we wish to make is merely a comment on Vinelott J’s decision that there is an exception to the rule in Foss v Harbottle whenever the justice of the case so requires. We are not convinced that this is a practical test, particularly if it involves a full-dress trial before the test is applied. On the other hand we do not think that the right to bring a derivative action should be decided as a preliminary issue upon the hypothesis that all the allegations in the statement of claim of “fraud” and “control” are facts, as they would be on the trial of a preliminary point of law. In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle. ...”

79. Mr Chang, however, submitted that:-

(1) Although it might be that in a striking out application made in the context of a derivative action, the threshold for striking out should be lowered, so that it would not be necessary for the applicant to show that the case was completely unarguable, it would not be right to throw the burden of demonstrating a prima facie case onto the Plaintiff; or alternatively,

(2) that the Plaintiff should only be required to show the existence of a prima facie case in relation to the second matter referred to by the Court of Appeal, i.e. that the case fell within the proper boundaries of the exception to the rule in Foss v Harbottle, with the Plaintiff bearing the burden of establishing, in relation to the first part of the Prudential Assurance test, that there was no prima facie case disclosed for relief to be granted to the company for whose benefit the action was sought to be maintained.

80. Mr Chang’s submissions were based principally on certain observations of Knox J in Smith v Croft (No 2) [1988] 1 Ch 114 (at p.189G) to the effect that he considered that there might well be a stronger case for requiring a prospective plaintiff to have the onus of showing that his case fell outside the boundaries of the rule in Foss v Harbottle than there was for requiring the plaintiff to show that the company would be likely to succeed if it were itself to bring an action. However, it is clear that Knox J regarded himself as bound to apply as best he could the approach laid down by the Court of Appeal in Prudential Assurance (see his judgment at p.135E). Moreover, the terms in which the Court of Appeal expressed itself in Prudential Assurance are clear - that it is for the plaintiff in any given case to establish a prima facie case in relation to both limbs of the test that they identified. It seems to me also that in many (if not most) cases, where the plaintiff relies upon the fraud on the minority exception to the rule in Foss v Harbottle, in discharging the burden in respect of the second limb, it will be necessary at the same time to discharge the same burden in relation to the first limb - in order to show that there has (at least on a prima facie basis) been a fraud on the minority so as to justify the bringing of a derivative action, the plaintiff will have to show that there has been a breach of duty to the company that would have entitled it to sue the alleged wrongdoers.

81. I therefore propose to approach this aspect of the applications on the basis that the Plaintiff must show, on a prima facie basis, both that the company would be likely to succeed if it brought the action itself, and that the action falls within the exceptions to the rule in Foss v Harbottle. However, I should add that this has not affected the conclusions which I have reached below as to whether or not the claim should be allowed to proceed, and if so to what extent. Those conclusions would have been the same even if I had adopted either of the approaches advocated by Mr Chang.

Whether there is a prima facie case as to the Profit Point transaction

82. I consider first the Profit Point transaction. I have briefly outlined this transaction and the complaint in relation to it in paragraphs 13 and 14 above. In the Statement of Claim, the Plaintiff alleges:-

(1) that there was, at the time of the sale of Profit Point’s shareholding in Prestige into the market, no commercial, financial or other justification for the sale. In support of this allegation, reliance is placed on the following matters (see paragraph 18 of the Statement of Claim):-

(a) The Playmates Group was cash rich at the time, and did not need to raise funds by the sale of an investment;

(b) The investment in Prestige was classified as a long term investment in the group accounts of Playmates;

(c) Although the sale was at market price, it resulted in a loss when compared with the acquisition cost and was at a price that was, to TC’s knowledge, below the net asset value of Prestige (based on the net asset value of that company disclosed when Chansam’s entry into the conditional sale and purchase agreement with Yugang was announced).

(2) the entry into and terms of the conditional agreement for the sale of Chansam’s own shareholding in Prestige (to the extent of 34.25% of the issued share capital of Prestige) to Yugang at the price of HK$2.20 per share, on terms that Yugang would not be required to make a general offer for the shares of Prestige, and that for this purpose Chansam would undertake that it and parties acting in concert with it would dispose of their remaining shareholdings to independent third parties unconnected with either Chansam or Yugang; and

(3) that by reason of the nature, terms and circumstances of the sale to Yugang, and the proximity in time between the sales by Profit Point on the market and the sale by Chansam to Yugang, it should be inferred that TC was already in negotiation with Yugang at the time when Profit Point’s shareholding in Prestige was disposed of, and that the essential terms of the sale to Yugang including the price, and the conditions referred to in the previous sub-paragraph had been settled or agreed in principle, or at least were known to TC.

(4) Thus, it is to be inferred that the sale of Profit Point’s interest was procured by TC in order to maximise the profit which Chansam would obtain from the sale to Yugang, since if Profit Point’s shares had not already been disposed of, they would have had to be disposed of in order to enable completion of the sale to Yugang to take place (as Profit Point and Playmates would be regarded as concert parties of Chansam’s by reason of Chansam’s shareholding in Playmates), and that this would have required their inclusion (either wholly, or at least proportionately) in the parcel of shares sold to Yugang, thus reducing the profit Chansam would realise from that transaction.

83. In his evidence filed in support of the striking out application, TC states that he had had no agreement with or approach from Yugang, Funrise or any of their representatives in respect of a sale by Chansam of its Prestige shares prior to Profit Point’s sale of its shares in Prestige. I do not propose to place any weight on this evidence for present purposes. I do not think that it would be appropriate to do so, having regard to the fact that there has been no discovery of documents that might throw light on this point, and that there has not been any opportunity to test this evidence whether by cross-examination of TC or by reference to evidence which might be obtained from Yugang or its directors or officers.

84. Mr Kotewall submitted that the matters pleaded do not support the inference that the Plaintiff suggests should be drawn. He says, I think rightly, that the essential allegation which the Plaintiff must make good in order to succeed in its case is the allegation that it is to be inferred that at the time when Profit Point sold its shares in Prestige on the market, TC and/or Chansam were already in negotiation with Yugang, and that TC was aware of the terms that were ultimately agreed. Without such an inference being drawn, the basis of the claim against TC would fall away.

85. Mr Kotewall says that the matters relied on in the Statement of Claim do not support the inference that the Plaintiff needs in order to have any prospect of succeeding in its claim in relation to this transaction. He says that:-

(1) The Plaintiff is seeking to challenge a disposal of a long term investment at market price, which was, on the face of it, simply a commercial decision. In the absence of any material justifying the drawing of an inference that the sale was for an improper purpose, there can be no basis for the court to draw any adverse inferences from the fact of Profit Point’s sale. He says in effect that the Plaintiff is arguing that absent some positive justification for the sale, it should be regarded as suspicious.

(2) The timing of the two sales adds nothing, and that any time gap between the two sales would have been regarded with suspicion by the Plaintiff.

(3) Given that the sale was in the market, at market price, the fact that it might have been below net asset value is irrelevant, since the market price reflects the reasonably realisable value of the investment.

(4) The suggestion that the object of the condition requiring the sale of Chansam and related parties’ remaining shares in Prestige was necessary to avoid the possibility of a mandatory offer by Yugang was misconceived, since there was no basis on which Yugang and Chansam or Chansam’s related parties could be regarded as concert parties, there being no evidence of any prior agreement to exercise voting control between Yugang and Chansam. Thus, the main plank of the Plaintiff’s case as to the need to sell the Profit Point shares falls away.

86. In response, Mr Chang drew attention to certain other features of the sale of Profit Point’s shares in Prestige, which he said supported the inference which the Plaintiff contended should be drawn. He relied in particular on the fact that whereas Profit Point’s acquisition of its investment in Prestige had been resolved upon by the board of Playmates, there was no evidence or suggestion that the disposal had been similarly discussed or resolved upon, and on the failure of TC to put forward any explanation of the factors which had led to the sale of the Profit Point interest in Prestige when it happened.

87. In my view, in the absence of any clear reasons for the sale by Profit Point of its shareholding in Prestige, and the apparent absence of any discussion or resolution either at the Profit Point or Playmates level for such sale, coupled with the close proximity of that sale in terms of time with the conclusion of the agreement between Chansam and Yugang and the terms of that agreement, it is open to the court to draw the inference which the Plaintiff contends for. In coming to this conclusion, I have not overlooked the fact that the allegations are serious ones, and that the court must look to see if there is evidence which, if uncontradicted, would justify the finding of the proposition contended for. However, it does seem to me that the factors which I have just referred to do indicate that the inference is one which can properly be drawn.

88. So far as Mr Kotewall’s points are concerned, while I would accept that the fact that the sales were below net asset value is of relatively little significance, given that they appear to have been at market price, it seems to me that the question of whether or not the sale was simply a commercial decision is something that can only be determined when the reasons behind it are known, and that the proximity in time of the two transactions is a factor that the court would be entitled to take into account in drawing the inference suggested by the Plaintiff. As to the point in relation to whether or not Yugang and Chansam could be regarded as concert parties, it seems to me that whether or not this is something that could plausibly be suggested is besides the point. The fact is that Chansam undertook that it and any parties that would be regarded as acting in concert with it would dispose of any remaining shareholdings they held in Prestige. It may be that that term was not strictly necessary. But it was included, and it follows that if Profit Point had not already sold its shares, it would have been necessary for Profit Point’s shares to be disposed of prior to completion of the sale to Yugang.

89. Whether that inference will be drawn after trial is another matter. By that time, there may well be evidence that directly bears on the question of whether TC knew of the terms of the Yugang sale at the time when the sale by Profit Point was effected. There may also be evidence as to the decision making process within Profit Point or Playmates, as the case might be, by which the decision to sell the Profit Point shares in Prestige in May 2000 was reached. But at this stage, it seems to me that there is a prima facie case that, unanswered, would justify the drawing of the inference.

90. In the circumstances, it seems to me that the Plaintiff has established, at this stage, a prima facie case that Profit Point would have been entitled to relief as against TC. It was not suggested that the position in relation to Chansam would be different, and I therefore consider that the Plaintiff has established a prima facie case against Chansam in this respect as well.

91. Turning to the second element in respect of which the Plaintiff needs to establish a prima facie case, i.e. that the case falls within the exceptions to the rule in Foss v Harbottle, it seems to me that there are two aspects to this. First, whether there has been a fraud on the minority, and second, whether there is a prima facie case of wrongdoer control.

92. So far as fraud on the minority is concerned, it seems to me that the nature of the claim advanced against TC and Chansam is such that, if it is established, it will follow that there is the necessary fraud on the minority so as to come within the exceptions to the rule in Foss v Harbottle. For the reasons which I have given above, it seems to me that a prima facie case of wrongdoing has been established, and that therefore the Plaintiff has established a prima facie case in this respect also, in respect of this transaction.

93. As for wrongdoer control, Mr Kotewall submitted that this could not be established on a prima facie basis, since at no time did TC control more than 50% of the shares of Playmates, whether through Chansam or Angers. Mr Kotewall also suggested, I think, that at least in relation to Chansam, as TC did not (through his family’s trust) own the entirety of Chansam’s issued share capital, the degree of control over Playmates exercised by TC should be regarded as correspondingly reduced.

94. As was pointed out in Prudential Assurance (at p.219E), control “embraces a broad spectrum extending from an overall absolute majority of votes at the one end, to a majority of votes at the other end made up of those likely to be case by the delinquent himself plus those voting with him as a result of influence or apathy”. It seems to me that in the light of this approach to control, it is legitimate to take into account the likely effect of a failure on the part of certain shareholders to vote, just as much as it would be appropriate to take account of the fact that some shareholders will vote with the majority out of apathy, if not influence. Given the level of shareholdings in Playmates maintained by Chansam and later Angers, which was in the range of just under 45% to just under 50%, I have no hesitation in concluding that these companies were in a position to control Playmates, and through such control, its subsidiaries, by being in a position to procure the passing of an ordinary resolution at a general meeting of the shareholders of Playmates. Equally, it seems to me that given that TC was in control of some 85% of the issued shares of Chansam, through his family trust, he would be in a position to control the way in which that company voted its Playmates shares. I am therefore of the view that the necessary prima facie case as to wrongdoer control is made out in this case.

95. Insofar as it has been suggested that the appointment of an independent board committee of Playmates to consider the allegations of the Plaintiff indicates that the matter can be left to the company, acting through such committee to deal with, it is to be noted that the independent committee has caused the company to instruct solicitors for the purpose of these proceedings, and has indicated in affirmations filed on behalf of the Playmates that the company does not intend to take sides in the dispute, but will simply render such assistance as it can to the court and seeks only that the proceedings be resolved as expeditiously as possible. Having regard to the views which I have expressed as to the existence of a prima facie case in respect of the Profit Point transaction, it does not seem to me that there is anything in the stance taken by the independent committee that requires the action to be struck out in relation to that complaint.

96. For all of the foregoing reasons, I conclude that the claim in respect of the Profit Point transaction should be permitted to proceed, subject to the reformulation that will be necessary as a result of my conclusions as to the “no reflective loss” rule and the availability of a multiple derivative action.

Whether there is a prima facie case in relation to the Pretty Star transaction

97. I turn now to consider the Pretty Star transaction. As I have noted above, the allegation here is that there was no adequate financial, commercial or other proper reason or justification for the purchase by Autoestate of Pretty Star. It is alleged that the purchase was not in the best interests of Playmates, given the depressed state of the Hong Kong property market, and that the purchase subjected Playmates to deleterious financial effects, having regard to the likelihood of further falls in property values, the low yield of the Canton Road Property, the awareness on the part of Playmates’ board of the poor immediate outlook for the property market. It is also alleged that the impact of the acquisition would be to adversely affect Playmates’ cashflow and gearing ratio. It is further alleged that the purchase of Pretty Star was contrary to reasons for the demerger of Playmates from Prestige in 1993, and to the sale by Playmates of its interest in Prestige in May 2000.

98. It is, however, notable that there is no suggestion that the purchase was at anything other than proper value at the time it was entered into. Moreover, the transaction does appear, unlike the disposal by Profit Point of its shares in Prestige to have been considered and resolved upon by the board of Playmates. Further, it was the subject of shareholder approval at a general meeting of Playmates shareholders on 8 January 2001, prior to which the shareholders were provided with a statement of the directors’ reasons for entering into the transaction in which the directors provided their views as to the financial effect of the transaction on the group and on Hong Kong’s economic environment at the time. This stands in contrast to the position in relation to the Profit Point transaction, in which there was neither board nor shareholder approval.

99. In my view, unless it is possible for the Plaintiff to get around the fact of shareholder approval, there can be no basis for complaint in relation to the Pretty Star transaction.

100. The fact of shareholder approval is acknowledged in paragraph 45 of the Statement of Claim, in which it is alleged that in the absence of full and proper disclosure of the material facts in relation to the Pretty Star transaction (including the existence of the alleged overall agreement linking it with the Profit Point transaction, and/or that transaction and the Bagnols transaction), the approval of the shareholders of the Pretty Star transaction was void. In essence, in order to succeed in relation to this transaction, it is necessary for the Plaintiff to make out a prima facie case for the existence of the overall agreement. I consider whether this has been done below.

Whether there is a prima facie case in respect of the Bagnols transaction

101. Before doing so, however, I deal briefly with the Bagnols transaction. The criticisms in respect of the Bagnols transaction are substantially the same as those in relation to the Pretty Star transaction. However, like the Pretty Star transaction, there is no suggestion that the Bagnols transaction was at an overvalue when entered into. Further, the Bagnols transaction appears to have been the subject of consideration and a resolution by Playmates’ board. In these circumstances, it does not seem to me that in the absence of a prima facie case in relation to the alleged overall agreement, that the Bagnols agreement in itself can give rise to any prima facie case of wrongdoing on the part of TC.

Whether there is a prima facie case in relation to the alleged overall agreement

102. I turn therefore to the alleged overall agreement. This is said to have involved an agreement between TC and those in control of Yugang by which Yugang would acquire the bulk of Chansam’s shareholding in Prestige at a premium, at the price of HK$2.20 per share, on the understanding that TC would cause Playmates (or one of its subsidiaries) to acquire from Prestige or its subsidiaries Pretty Star and the debt owed by it to Prestige Finance, or Pretty Star, the debt and Bagnols, an arrangement that is said to have been to the advantage of Prestige and Yugang, but detrimental to Playmates.

103. I think it necessary to point out at the outset that the overall arrangement alleged requires the drawing of inferences that go much further than that which I considered could properly be drawn in relation to the sale of Prestige shares by Profit Point. The inference there is that TC was involved in negotiations for the sale of a substantial part of Chansam’s interest in Prestige to Yugang, and knew of the main terms of that transaction. It relates only to the position of TC. It is to be drawn, as I have said, against the background of an apparent lack of information at the time as to the reasoning behind the sale of Profit Point’s interest in Prestige, and the way in which that sale was decided upon. This absence of information stands in contrast to the manner in which the acquisition of Pretty Star and Bagnols were carried out (it is fair to say that the acquisition of Pretty Star being the subject of greater disclosure, perhaps because of the more substantial nature of the acquistion). On the other hand, in order to establish the existence of the overall agreement, it is necessary for inferences to be drawn involving not just TC, but also Yugang or those representing it in the negotiations for the acquisition by it of the shareholding in Prestige, to the effect that there was an agreement that Yugang would acquire that shareholding on terms that Pretty Star and Bagnols would later be acquired by Playmates. However, it does not appear to be suggested that any particular price or timing for the later acquisition of Pretty Star and Bagnols was agreed at that time. The lack of any suggestion of an agreed price for such later disposals means that it is not possible to identify the effective purchase consideration for the shareholding in Prestige. This, I think, militates strongly against the inference that the Plaintiff seeks to draw in respect of the alleged overall agreement, whichever form it takes. Further, if the overall arrangement included the Bagnols transaction, as the Plaintiff suggests, it seems to me that the considerable lapse in time between the acquisition of the shareholding in Prestige and the Bagnols transaction does cause difficulties for the Plaintiff, as it would be surprising for such a substantial time frame to have been agreed upon.

104. The Plaintiff relies on various matters (set out in paragraph 43 of the Statement of Claim) in support of the inference that an overall arrangement of the nature alleged existed. In my view, these matters do not justify the inferences which the Plaintiff seeks to draw as to the existence of an overall agreement of the nature alleged.

105. So far as reliance is placed on the nature, terms and surrounding circumstances of the three transactions, it seems to me that in the light of my conclusion that two of such transactions (those relating to Pretty Star and Bagnols) do not, of themselves, give rise to a prima facie case of wrongdoing on the part of TC, their juxtaposition with the only transaction in relation to which I have concluded that there is, at this stage, a prima facie case of wrongdoing disclosed does not take the matter any further.

106. Nor do I think that anything can be made of the alleged proximity in time between the sale of the Prestige Shares and the Pretty Star Transaction. It is notable that for this purpose, no reliance is placed on the Bagnols transaction, perhaps because the considerable lapse of time until it took place gives rise to the difficulties which I have mentioned in paragraph 102 above. However, the non-reliance on the Bagnols transaction in this context does seem to me to cast doubt on the existence of an overall arrangement involving that transaction. Similarly the suggestion that the purchase of in effect two properties from Prestige cannot be explained by mere coincidence seems to me to beg the question. Given that each of the transactions appears to have been the subject of consideration by the Playmates board, and that there is no real suggestion that the price paid for the property was other than a proper one at the time, it does not seem to me that there is anything in this point.

107. As to the suggestion that the price paid by Yugang for the Prestige shares could only be justified on the basis of an overall agreement, it seems to me that this ignores the fact that Yugang was acquiring a very significant stake in Prestige, which would give it considerable influence in another listed company, which might well have merited the payment of a substantial premium over market price. It also, I think, ignores the fact that the price paid, although a premium to the market price, was at a reasonable discount to the net asset value of Prestige at that time. Further, given that there is no allegation as to any agreement as to the price at which Pretty Star and Bagnols were to be disposed of to Playmates, it seems to me to be difficult to draw any inferences of this nature.

108. I do not think that the fact that TC may have been in a position to control Playmates through his (or his family trust’s) shareholding in Playmates takes the matter any further. The manner in which the Pretty Star transaction was carried out, involving as it did board consideration and shareholder approval would suggest that whatever control TC may have had over Playmates was not a factor in that transaction.

109. The reliance on the Pretty Star and Bagnols transactions themselves does not add anything, given that I have concluded that they do not in themselves show any prima facie case of wrongdoing on the part of TC. Nor do I see that the absence of an independent valuation obtained by Yugang of the Prestige group’s properties at the time of the acquisition of the shareholding in Prestige from Chansam takes the matter any further.

110. The fact that Prestige sold the Canton Road Property some months after the acquisition by Yugang of Prestige, in a transaction which appears to have been considered and resolved on by the board and shareholders of Prestige does not, in my view, support the inference which is sought to be drawn. In any event, even after the sale of this property, Prestige would still have been left with a substantial property portfolio.

111. I have some difficulty in following the final point relied on by the Plaintiffs - it would seem to involve, on the assumption that the allegation as to the valuation of the Canton Road Property at the time of the sale of the Prestige shares to Yugang is correct, Yugang having agreed to acquire Prestige on the basis of an attributed value to that property of some HK$746 million, in return for an agreement that the property should be taken off its hands at a substantially lower value. Quite apart from the fact that it is not alleged that any particular value or price for the subsequent sale was agreed at the time of the supposed overall agreement, such an arrangement, which would result in the locking in of a substantial loss to Yugang, would appear to make no sense from its point of view.

112. For all of these reasons, I do not consider that the Plaintiff has established any prima facie case as to the existence of the alleged overall agreement in either of the forms alleged.

113. Mr Chang suggested that even if I were of the view that the Plaintiff’s case in relation to the Pretty Star and Bagnols transactions, and the overall agreement, were not particularly strong, I should nonetheless allow it to go forward, if I were satisfied that there is a prima facie case in relation at least to the sale of Prestige shares by Profit Point, on the basis that the same parties and persons would be involved in giving evidence in relation to all these transactions. However, I do not think that I would be justified in doing so. It is quite clear that an investigation of these further aspects of the Plaintiff’s case would involve considerable additional time and expense, in terms of discovery, preparation for trial and at trial itself. Given that I am unable to identify a viable prima facie case in relation to any of these matters, the proper course is, in my view, simply to strike out those parts of the Plaintiff’s claim, leaving it to pursue its claim in relation to the only transaction in respect of which I consider that it has demonstrated, at this stage, a prima facie case.

114. It remains for me to consider Mr Kotewall’s arguments that the claim should be struck out as an abuse of process because it is brought for ulterior motives, or alternatively on the grounds of laches, delay and acquiescence.

Abuse of process or ulterior motives

115. As to abuse of process, Mr Kotewall submits that where a derivative action is brought for an ulterior motive, it should not be allowed to continue (see Nurcombe v Nurcombe [1985]1 WLR 370 and Barrett v Duckett [1995] 1 BCLC 243). He submits that in the light of what is described as a long history of hostilities between AC and TC, alleged improper dealings by AC in Playmates shares (by selling such shares prior to the commencement of these proceedings), and the weakness of the Plaintiff’s case, coupled with what is said to be the absence of any adequate answer to such points by the Plaintiff, it should be concluded that the Plaintiff has commenced these proceedings for an ulterior purpose.

116. To accede to this argument would require conclusions to be drawn as to the motives and purposes of the Plaintiff, or AC. I do not think that it would be right to do so summarily, without the relevant matters being properly explored. There are clearly likely to be disputes as to the underlying facts and the inferences to be drawn from them, and in the circumstances, I do not think it would be appropriate to strike the Plaintiff’s claim out on this ground.

Delay

117. As to delay, it is said that leaving aside the Bagnols transaction, there has been considerable delay between the occurrence of the matters complained of, and the commencement of the proceedings, which is unexplained, except for the suggestion that it took the Plaintiff and its legal advisors considerable time to review the relevant background documents and to consult counsel. It is submitted also that the delay has been prejudicial, in that the action may well have an impact on the public’s confidence in Playmates and its management. For its part, the Plaintiff says that complaints were raised as to the sale of Prestige shares as early as 2001.

118. I do not think that the lapse of time, of itself, can be taken to indicate that the Plaintiff was acquiescing in the conduct complained of. So far as prejudice is concerned, I have some difficulty in seeing how TC or Chansam have been prejudiced by any delay in the bringing of proceedings. It is not clear that any evidence that would have been available is likely now not to be available. Nor is it clear how TC has acted to his detriment in reliance on the delay, or why it would not be possible to grant relief on fair terms. While not ruling out the possibility that such a defence might succeed at the end of the day, I cannot see that it is so strong that the Plaintiff ought to be prevented from continuing with these proceedings, and I therefore would not be prepared to strike out the Plaintiff’s claim on this basis either.

Conclusions and costs

119. In the result, it seems to me that while there is a basis on which the Plaintiff might be entitled to seek relief on behalf of Profit Point, or perhaps its intermediate holding company and/or Playmates in respect of the sale by Profit Point of its shares in Prestige, that basis is not to be found in the Statement of Claim as it now stands. On the contrary, insofar as the claim is brought as a derivative action on behalf of Playmates alone, I have concluded that it cannot succeed because of the “no reflective loss” principle. I have also come to the view that the complaints in relation to Pretty Star, Bagnols and the overall arrangement do not give rise to even a prima facie case for relief, so that they should not be permitted to remain in issue.

120. In the circumstances, it seems to me that the proper course for me to adopt would be to strike out the present pleading, while leaving it open to the Plaintiff to take out an application to amend its writ and Statement of Claim if it wishes to do so. I shall therefore order that the Statement of Claim is to be struck out, and that, unless within 42 days or such further time as may be agreed between the parties or allowed by the court, the Plaintiff takes out a summons seeking leave to amend its Statement of Claim, the Plaintiff’s action shall stand dismissed. In the circumstances, I do not think it necessary to make any order in relation to the application for leave to proceed. So far as the costs of this application are concerned, bearing in mind that TC and Chansam have been substantially successful in their attack on the pleading as presently formulated, and have also been successful in striking out the allegations relating to Pretty Star, Bagnols and the overall agreement, I shall make an order nisi that TC and Chansam should have their costs of both applications, to be taxed on the party and party basis if not agreed, with certificate for two counsel.

(Aarif Barma)
Judge of the Court of First Instance
High Court

Mr Denis Chang, SC, Ms Audrey Eu, SC, leading Mr Jeremy S K Chan, instructed by Messrs Kao, Lee & Yip, for the Plaintiff

Mr Robert G Kotewall, SC, & Mr Stewart K M Wong, instructed by Messrs Deacons, for the 1^st Defendant

The 2^nd Defendant, absent

Mr Jim James, of Messrs Norton Rose, for the 3^rd Defendant

Appeal dismissed: see CACV220/2005 dated 30 May 2006

WADDINGTON LTD v. CHAN CHUN HOO THOMAS AND OTHERS

Related cases with same parties

Files (23)

(1)	The first is an application by TC and Chansam by summons dated 20 October 2003, seeking to strike out the proceedings against them. The grounds stated in the summons are that the Plaintiff is not entitled to bring or continue these proceedings, and that there is no prima facie case disclosed that the Plaintiff or Playmates is entitled to any of the relief claimed.

(2)	The second is an application by the Plaintiff by summons dated 27 October 2003, seeking leave to proceed with the action on the basis that the court is satisfied that there is a prima facie case that Playmates is entitled to the relief claimed against TC and Chansam and that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle (1843) 2 Hare 461.

(1)	As all the transactions complained of were carried out, not by Playmates itself, but by wholly owned subsidiaries (or sub-subsidiaries) of Playmates, the alleged losses arising from such transactions would have been suffered by such subsidiaries or sub-subsidiaries, so that the losses allegedly suffered by Playmates would be merely reflective of the subsidiaries’ losses, and as such would be irrecoverable as the result of the principle established in Johnson v Gore Wood & Co (a firm) [2002] AC 1.

(2)	The Plaintiff has failed to establish a prima facie case:-

	(i)	that there has been any wrongdoing on the part of TC and Chansam; and

	(ii)	that any of the exceptions to the rule in Foss v Harbottle apply in the circumstances of this case - in particular, it is said that it is not shown that there is any prima facie case of a “fraud on the minority”, and it is also, I think, said that wrongdoer control has not been shown, given that TC was never interested in 50% or more of Playmates’ issued shares.

	from which it follows that the Plaintiff has no locus standi to bring this derivative action purportedly on behalf of Playmates against TC and Chansam

(3)	The action is an abuse of the process of the court because the Plaintiff has brought it, not in good faith in the best interests of Playmates, but because of ulterior motives or for collateral purposes.

(4)	The action is barred by laches, delay and acquiescence having regard to the time which it took the Plaintiff to commence it.

(1)	Prestige, which I have referred to in paragraph 7 above. For present purposes, it is to be noted that Chansam was also a major shareholder of Prestige, owning some 47.04% of its issued share capital until about March 2000, and some 39.2% of its issued share capital between March and July 2000. During this time, Chansam was the single largest shareholder in Prestige. Playmates was also until May 2000 an indirect shareholder in Prestige, as 4.28% of Prestige’s issued share capital was (until then) owned by a subsidiary of Playmates called Profit Point Limited (“Profit Point”). The Plaintiff says that as a result of such shareholdings, and the fact that he was the Chairman and an Executive Director of Prestige, TC had effective control of Prestige and its subsidiaries.

(2)	Profit Point, a BVI company which was a subsidiary of Playmates, and which owned 4.28% of the issued share capital of Prestige until May 2000. Until 18 April 2001 Profit Point was a wholly owned direct subsidiary of Playmates. Thereafter, it was an indirectly wholly owned subsidiary of Playmates until its dissolution on 18 March 2003.

(3)	Yugang International Limited (“Yugang”), a Bermuda company which is also listed on the Stock Exchange. According to the Plaintiff, Yugang is an investment holding company with interests in various business sectors.

(4)	Funrise Limited (“Funrise”), a BVI company which is a wholly owned subsidiary of Yugang.

(5)	Autoestate Properties Limited (“Autoestate”), a BVI company which is a wholly owned indirect subsidiary of Playmates, which acquired the next two companies to which I shall refer, Pretty Star Limited (“Pretty Star”) and Bagnols Limited (“Bagnols”) from Prestige in January 2001 and July 2002 respectively.

(6)	Pretty Star, a Hong Kong company which was a wholly owned subsidiary of Prestige until 16 January 2001, when its entire issued share capital was sold by Prestige to Autoestate. At all material times, Pretty Star’s principal asset was a property at 100 Canton Road, in Tsimshatsui in Kowloon (“the Canton Road Property”).

(7)	Bagnols, also a Hong Kong company. It was a wholly owned subsidiary of Prestige until 10 July 2002, when its entire issued share capital was sold by Prestige to Autoestate. At all material times, Bagnols’ principal asset was a property at No. 1 Tin Hau Road in Tuen Mun in the New Territories (“the Tuen Mun Property”).

(1)	Between 22 and 24 May 2000, Profit Point sold its entire 4.28% shareholding in Prestige on the stock market at prices ranging between HK$0.60 and HK$0.70 per share. The sales took place at market price. The sales generated proceeds for Profit Point of approximately HK$22.2 million.

(2)	On 28 July 2002 Chansam entered into a conditional sale and purchase agreement with Funrise for the sale by Chansam to Funrise of some 34.25% of the issued share capital of Prestige (some 273 million shares) at a price of HK$2.20 per share. At the time, the market price of shares in Prestige was HK$0.60 per share. The agreement was conditional on Funrise not being required to make a general offer for shares in Prestige (a requirement which would be triggered if Funrise or parties acting in concert with it acquired 35% of the shares of Prestige, whether by a single transaction or series of transactions). In addition, Chansam undertook to sell or procure the sale of all other shares in Prestige held by it or parties acting in concert with it (totalling a further 7.38% of Prestige’s issued share capital) to independent third parties who were not acting in concert with either Chansam or Funrise not later than 7 days prior to completion of the sale to Funrise.

“	[38]	It will thus be seen from the speeches in Johnson v Gore Wood & Co [2001] 2 BCLC 313, [2001] 2 WLR 72 that where there is a breach of duty to both the shareholder and the company and the loss which the shareholder suffers is merely a reflection of the company’s loss. There is now a clear rule that the shareholder cannot recover. That follows from the graphic example of the shareholder who is led to part with the key to the company’s money box and the theft of the company’s money from that box. It is not simply the case that double recovery will not be allowed, so that, for instance, if the company’s claim is not pursued or there is some defence to the company’s claim, the shareholder can pursue his claim. The company’s claim, if it exists, will always trump that of the shareholder.

“	[39]	Accordingly the court has no discretion. The claim cannot be entertained. The English rule is therefore different from the position in New Zealand: see Christensen v Scott [1996] 1 NZLR 273, above.

“	[40]	Even in the case of owner-managed companies, there is no discretion. Thus the position in English law differs from the position (as I understand it to be) in the majority of states in the USA, where the courts exercise limited discretion to allow direct recovery by shareholders of closely-held corporations where the court is satisfied that:

		‘	to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.’

		(Principles of Corporate Governance, American Law Institute (1994) para 7.01.)

“	[41]	However, it is apparent that there are limits to the application of the no reflective loss principle. The principal limit is that the no reflective loss principle does not apply where the company has no claim, and hence the only duty is the duty owed to the shareholder (Lord Bingham’s proposition (2)). Likewise, it does not apply where the loss which the shareholder suffers is additional to an different from that which the company suffers and a duty is also owed to the shareholder: see Lord Bingham’s proposition (3) and see Heron International Ltd v Lord Grade [1983] BCLC 224, as explained by Lord Millett in Johnson v Gore Wood. There may well be other limits.”

(1)	Profit Point and Autoestate should be regarded as nothing more than nominees of Playmates in respect of the assets which they held, so that such assets should be regarded as being beneficially owned by Playmates, with the consequence that losses arising from impairment of or improper dealings with such assets were to be regarded as losses suffered by Playmates itself; alternatively

(2)	There is a further exception to the “no reflective loss” principle where the subsidiary which has suffered loss is a wholly owned subsidiary or sub-subsidiary and there is wrongdoer control of both the parent and the subsidiary (and, presumably in the case of a sub-subsidiary which suffers loss, of the parent, the intermediate subsidiary and the sub-subsidiary), and that further exception comes into play here; alternatively

(3)	(Insofar as it may be necessary) the Plaintiff is entitled to bring a claim on behalf of Profit Point and Autoestate by way of what might be described as a double or multiple derivative action, such a claim being appropriate where loss is suffered by a subsidiary or sub-subsidiary and there is wrongdoer control of parent and ultimate subsidiary company and of any intervening subsidiary companies.

(1)	Although it might be that in a striking out application made in the context of a derivative action, the threshold for striking out should be lowered, so that it would not be necessary for the applicant to show that the case was completely unarguable, it would not be right to throw the burden of demonstrating a prima facie case onto the Plaintiff; or alternatively,

(2)	that the Plaintiff should only be required to show the existence of a prima facie case in relation to the second matter referred to by the Court of Appeal, i.e. that the case fell within the proper boundaries of the exception to the rule in Foss v Harbottle, with the Plaintiff bearing the burden of establishing, in relation to the first part of the Prudential Assurance test, that there was no prima facie case disclosed for relief to be granted to the company for whose benefit the action was sought to be maintained.

(1)	that there was, at the time of the sale of Profit Point’s shareholding in Prestige into the market, no commercial, financial or other justification for the sale. In support of this allegation, reliance is placed on the following matters (see paragraph 18 of the Statement of Claim):-

	(a)	The Playmates Group was cash rich at the time, and did not need to raise funds by the sale of an investment;

	(b)	The investment in Prestige was classified as a long term investment in the group accounts of Playmates;

	(c)	Although the sale was at market price, it resulted in a loss when compared with the acquisition cost and was at a price that was, to TC’s knowledge, below the net asset value of Prestige (based on the net asset value of that company disclosed when Chansam’s entry into the conditional sale and purchase agreement with Yugang was announced).

(2)	the entry into and terms of the conditional agreement for the sale of Chansam’s own shareholding in Prestige (to the extent of 34.25% of the issued share capital of Prestige) to Yugang at the price of HK$2.20 per share, on terms that Yugang would not be required to make a general offer for the shares of Prestige, and that for this purpose Chansam would undertake that it and parties acting in concert with it would dispose of their remaining shareholdings to independent third parties unconnected with either Chansam or Yugang; and

(3)	that by reason of the nature, terms and circumstances of the sale to Yugang, and the proximity in time between the sales by Profit Point on the market and the sale by Chansam to Yugang, it should be inferred that TC was already in negotiation with Yugang at the time when Profit Point’s shareholding in Prestige was disposed of, and that the essential terms of the sale to Yugang including the price, and the conditions referred to in the previous sub-paragraph had been settled or agreed in principle, or at least were known to TC.

(4)	Thus, it is to be inferred that the sale of Profit Point’s interest was procured by TC in order to maximise the profit which Chansam would obtain from the sale to Yugang, since if Profit Point’s shares had not already been disposed of, they would have had to be disposed of in order to enable completion of the sale to Yugang to take place (as Profit Point and Playmates would be regarded as concert parties of Chansam’s by reason of Chansam’s shareholding in Playmates), and that this would have required their inclusion (either wholly, or at least proportionately) in the parcel of shares sold to Yugang, thus reducing the profit Chansam would realise from that transaction.

(1)	The Plaintiff is seeking to challenge a disposal of a long term investment at market price, which was, on the face of it, simply a commercial decision. In the absence of any material justifying the drawing of an inference that the sale was for an improper purpose, there can be no basis for the court to draw any adverse inferences from the fact of Profit Point’s sale. He says in effect that the Plaintiff is arguing that absent some positive justification for the sale, it should be regarded as suspicious.

(2)	The timing of the two sales adds nothing, and that any time gap between the two sales would have been regarded with suspicion by the Plaintiff.

(3)	Given that the sale was in the market, at market price, the fact that it might have been below net asset value is irrelevant, since the market price reflects the reasonably realisable value of the investment.

(4)	The suggestion that the object of the condition requiring the sale of Chansam and related parties’ remaining shares in Prestige was necessary to avoid the possibility of a mandatory offer by Yugang was misconceived, since there was no basis on which Yugang and Chansam or Chansam’s related parties could be regarded as concert parties, there being no evidence of any prior agreement to exercise voting control between Yugang and Chansam. Thus, the main plank of the Plaintiff’s case as to the need to sell the Profit Point shares falls away.