Waddington Ltd v. Chan Chun Hoo Thomas and Others
Read the full judgment text of HCA 3291/2003 on BabelCite. This High Court CFI judgment was delivered on 29 April 2005.
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.
Cited by 2 cases · Cites 4 cases
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HCA 3291/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 3291 OF 2003 ____________ BETWEEN
____________ 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 3rd Defendant (“Playmates”), the Plaintiff seeks to obtain relief on behalf of the Playmates against the 1st and 2nd 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:-
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:-
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:-
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:-
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):-
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:-
27.He then went on to say at pp.66 ff:-
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:-
29.He went on to add, however, that:-
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:-
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:-
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:-
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:-
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)
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):-
78.The Court of Appeal went on to say (at p.221G-222A):-
79.Mr Chang, however, submitted that:-
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:-
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:-
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.
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 1st Defendant The 2nd Defendant, absent Mr Jim James, of Messrs Norton Rose, for the 3rd Defendant Appeal dismissed: see CACV220/2005 dated 30 May 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
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Further hearings and rulings under HCA 3291/2003