Waddington Ltd v. Chan Chun Hoo Thomas and Others

FACV No. 15 of 2007

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 15 OF 2007 (CIVIL)

(On appeal from CACV No. 220 of 2005)

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Between :

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J U D G M E N T

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Chief Justice Li :

1.I agree with the judgment of Mr Justice Ribeiro PJ and that of Lord Millett NPJ.

Mr Justice Bokhary PJ and Mr Justice Chan PJ:

2.We agree with the judgment of Lord Millett NPJ and the observations added by Mr Justice Ribeiro PJ.  All that we would add is simply this.  On the well established thinking as to why a single derivative action is maintainable, there is no reason why a multiple derivative action is not.  That is the shortest answer to all of the objections raised to the Court holding that multiple derivative actions are maintainable in Hong Kong.  These objections include the one that so holding would be an act of creation best left to the legislature.  There are considerations that sometimes operate, singly or in combination, to persuade the judiciary to leave a development of the law to the legislature.  Principal among these considerations are that the proposed development : (i) would, unless prospective only, upset existing dealings; (ii) calls for wide-ranging consultations available only under the legislative process; and (iii) involves laying down a rule that requires conditions and exceptions which the legislature is best placed to prescribe.  None of these considerations, or any other consideration militating against development of the law by judicial decision, operates in the present case.  Further legislation in this branch of the law may be highly desirable.  But, despite all the arguments so ably advanced by Mr Victor Joffe QC for the appellant, the Court can and should hold here and now that multiple derivative actions are maintainable in Hong Kong.

Mr Justice Ribeiro PJ :

3.I agree with the Judgment of Lord Millett NPJ and gratefully adopt his account of the facts and his treatment of the principal issues in this appeal.  I wish to add some observations of my own on a point which does not arise for decision in the present case but which, in my view, calls for comment.  This concerns the threshold requirements for permitting a derivative action to proceed at common law and under section 168BC of the Companies Ordinance.[1]

Barma J’s decision

4.At first instance,[2] in an admirable judgment, Barma J found that in the derivative action brought by the plaintiff (“Waddington”) on behalf of Playmates Holdings Limited (“Playmates”), the claims advanced were merely reflective of the alleged losses of Playmates’ sub-subsidiaries Profit Point Limited (“Profit Point”) and Autoestate Properties Limited (“Autoestate”) and therefore precluded by the reflective loss doctrine authoritatively explained in Johnson v Gore Wood & Co.[3]  He rejected the argument that the case falls within an exception to that principle and concluded that in so far as Waddington’s claim was for reflective losses, it was liable to be struck out.[4]

5.However, he held that a minority shareholder in a holding company may as a matter of law be allowed to bring proceedings, by what has sometimes been called (conveniently, although somewhat inaccurately) a “multiple derivative action”, on behalf of a wholly owned sub-subsidiary which has the cause of action, in circumstances where the alleged wrongdoer is effectively in control at every level of the corporate chain.[5]  He therefore held that a derivative action by Waddington (a shareholder in Playmates) brought on behalf of Profit Point and Autoestate is in principle available.

6.His Lordship furthermore held[6] that the threshold test for permitting such a derivative action to proceed requires the plaintiff to show, 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 falls within an applicable exception to the rule in Foss v Harbottle.[7]   On the facts assumed, Barma J held that such a prima facie case had been established in relation to the transaction involving Profit Point.[8]   But he held that no prima facie case had been shown in relation either to Autoestate’s acquisition of Pretty Star Limited or to Autoestate’s  acquisition of Bagnols Limited.[9]

7.Since the Statement of Claim had formulated Waddington’s claim solely as a derivative action on behalf of Playmates (and not on behalf of either Profit Point or Autoestate, neither company having then been joined as a party), the entire pleading had to be struck out as falling foul of the reflective loss principle.  However, since a derivative action on behalf of Profit Point was in principle available and was 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.  Whether the Autoestate transactions could be revived as part of Waddington’s claim would depend on whether an amendment capable of meeting the threshold requirement of a prima facie case could be formulated on the facts.

The Court of Appeal’s decision

8.In the Court of Appeal,[10] while endorsing the Judge’s view that a derivative action brought on behalf of a company’s sub-subsidiary is available as a matter of law, Rogers VP reversed him on the prima facie case requirement, holding that no such requirement exists at common law:

“Mr Joffe QC, who appeared on behalf of the first defendant, argued that it was necessary for a plaintiff in a derivative action to establish a prima facie case that the company is entitled to the relief prayed in the action and that it falls within the proper boundaries of the exceptions to the rule in Foss v Harbottle.  He relied on statements in the judgment of Findlay J in DEG Holdings Pty Limited v Golden Harvest Entertainment (Holdings) Ltd (unreported) HCA No 10087/1998, 10 July 1998 and that of Godfrey JA in Tan Eng Guan v Southland Company Ltd [1996] 2 HKLR 117.  Quite apart from the fact that what Godfrey JA said was by no means specific in this regard, I do not consider that there is any requirement in respect of a common law derivative action that the plaintiff must show that it has a prima facie case prior to being allowed to proceed with the action.  When the Companies Ordinance Cap 32 was amended in 2004 by the introduction of section 168BC relating to the creation of a statutory derivative action it was made a condition of the plaintiff being able to bring such proceedings that it had to obtain leave of the court.  Even under those provisions, all the plaintiff was required to do was to show that there was a serious question to be tried.  Importantly, however, section 168BC(4) specifically provides that the Ordinance did not affect the common law right to bring derivative actions.  Many of Mr Joffe’s arguments were premised upon the argument that the plaintiff had not adduced evidence to prove this, that or the other.  It is appreciated that in other jurisdictions there is such a requirement and, indeed, in the United Kingdom, rules have been introduced to provide for it.  There has been, as yet, no introduction of any such procedure or requirement into the Rules of the High Court in Hong Kong.  There may be in the future, but that is another matter.”[11]

9.The appellant has not sought leave to appeal against this ruling so that the point, although discussed during the hearing of this appeal, is not a matter for decision in relation to the facts of the present case.  However, as it raises a point of some general importance, it merits discussion. 

The threshold requirement at common law

10.I am, with respect, unable to accept that Rogers VP is correct in stating that there is no common law requirement for the plaintiff to show a prima facie case as a condition of being allowed to proceed with a derivative action.  In my view, both as a matter of principle and on authority, the common law does indeed require the plaintiff to show the requisite prima facie case when his locus to sue derivatively on behalf of the company is challenged.

11.It is a fundamental principle of company law, expressed as part of the rule in Foss v Harbottle, that where a wrong has been done to a company, it is the company itself which is the proper plaintiff.  That principle does, of course, admit of exceptions, the exception generally relevant to derivative actions being the “fraud on the minority” exception.  Jenkins LJ explained the position in Edwards v Halliwell,[12] as follows:

“... where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring what is known as 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.”

12.It follows that where a wrong is alleged to have been done to a company and a minority shareholder purports to bring a derivative action on the company’s behalf, it is incumbent on the shareholder to show that the general “proper plaintiff” rule is displaced and that the case falls within the relevant exception. 

13.The derivative action is a procedural device invented by the courts to afford protection to the minority.  Procedurally, there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court.  But it does not follow from this that there is no threshold requirement to be met by the plaintiff.  Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority; as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.

14.The time-honoured practice at common law is for the plaintiff to issue proceedings “on behalf of himself and the other shareholders other than the defendants”, naming the company on whose behalf the proceedings are brought as one of the defendants.  A challenge to the plaintiff’s locus generally takes the form of an application by the relevant defendants to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no locus to sue on the company’s behalf.  The issue of standing can also arise in other procedural contexts, such as an application to add a party or to amend a pleading so as to introduce a derivative action.   It is in such a context that the court has to consider whether the self-appointed derivative plaintiff should be permitted to proceed with the action by way of exception to the proper plaintiff rule. 

15.The Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[13] addressed the need for a standard to determine whether a sufficient case has been shown by the plaintiff, identifying the potential dilemma posed by the choice of standard as follows:

“...what course is to be taken ... if ...  the court is confronted by a motion on the part of the delinquent or by the company, seeking to strike out the action?  For at the time of the application the existence of the fraud is unproved.  It is at this point that a dilemma emerges.  If, upon such an application, the plaintiff can require the court to assume as a fact every allegation in the statement of claim, as in a true demurrer, the plaintiff will frequently be able to outmanoeuvre the primary purpose of the rule in Foss v Harbottle by alleging fraud and ‘control’ by the fraudster.  If on the other hand the plaintiff has to prove fraud and ‘control’ before he can establish his title to prosecute his action, then the action may need to be fought to a conclusion before the court can decide whether or not the plaintiff should be permitted to prosecute it. In the latter case the purpose of the rule in Foss v Harbottle disappears.  Either the fraud has not been proved, so cadit quaestio; or the fraud has been proved and the delinquent is accountable unless there is a valid decision of the board or a valid decision of the company in general meeting, reached without impropriety or unfairness, to condone the fraud.”

16.The Court concluded that the answer was for a prima facie case test to be adopted, coupled with the possibility of seeking the views of the company in general meeting where appropriate:

“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. On the latter issue it may well be right for the judge trying the preliminary issue to grant a sufficient adjournment to enable a meeting of shareholders to be convened by the board, so that he can reach a conclusion in the light of the conduct of, and proceedings at, that meeting.”[14]

17.The foregoing passages from Prudential were applied by Knox J in Smith v Croft (No 2)[15] where his Lordship held that O 18 r 19 or O 33 r 3 were equally acceptable vehicles for deciding whether a minority shareholder had the necessary standing,[16] applying the prima facie case test whichever procedure is adopted:

“...my conclusion is that it is the question stated by the Court of Appeal as a preliminary matter that has to be decided, that it is a special form of procedure concerned with giving sensible operation to the rule in Foss v Harbottle, 2 Hare 461 and which was concerned with avoiding the Scylla and Charybdis, on the one hand of having a preliminary issue which effectively requires one to try the whole action where the rule serves no useful purpose, and on the other side of the strait, of assuming that everything that the plaintiffs allege is necessarily correct as a matter of fact, which is of course the technique the court adopts when it has what was called a strict demurrer. The Court of Appeal, it seems to me, has laid down a halfway house for this very special type of case, one in which the legal issues in this particular case are sufficiently well defined for the parties to be able to argue them.”[17]

This has continued to be the approach of the English courts.[18]

18.The prima facie case test has also been adopted in Hong Kong.  Thus, in Tan Eng Guan v Southland Company Limited,[19] the Court of Appeal held that the Judge at first instance should not have entered summary judgment where the plaintiff’s locus standi to bring a derivative action was being challenged and, referring to the prima facie case test adopted in Prudential and Smith v Croft (No 2), held that the question of standing was best dealt with by the trial of a preliminary issue, as recognized in England and Wales. 

19.In  DEG Holdings Pty Limited v Golden Harvest Entertainment (Holdings) Ltd,[20] Findlay J applied the Prudential approach, commenting:

“This, to my mind, seems right.  It is one thing to proceed with an action on the basis of an alleged wrong against oneself, but quite another to sue for an alleged wrong against another and drag that other through the courts.  In the latter case, it seems reasonable that the plaintiff should establish a prima facie case before being allowed to proceed.”[21]

It was also applied by Chu J in Chung Sau Ling v Asia Women's League Limited.[22]

20.The common law rule is therefore that a plaintiff whose standing to bring a derivative action is challenged must establish a prima facie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v Harbottle (usually the fraud on the minority exception).  Where, as often occurs, the plaintiff seeks an order to be indemnified as to costs by the company which may benefit from the derivative action, the court’s approach is to consider whether and to what extent an honest, independent and prudent board might decide to authorise prosecution of the action, given the available evidence.[23]

21.One may also note in passing that the burden and threshold requirements are different where a defendant seeks to strike out a plaintiff’s action on the ground that the loss claimed is merely reflective loss.  In such cases, the plaintiff is asserting his own cause of action and the burden lies on the defendant to show that it is plain and obvious that the losses are indeed merely reflective and the action is unsustainable.  Thus, in Johnson v Gore Wood, Lord Bingham of Cornhill noted: “At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.”[24]

The statutory derivative action in Hong Kong

22.A statutory derivative action was introduced by an amendment to the Companies Ordinance enacted on 22 July 2004.[25]  The relevant  provisions[26] came into operation on 15 July 2005,[27] which was after issue of the Writ[28] in the present case.  They are therefore inapplicable to the present proceedings.  Various questions concerning the effect of those provisions are likely to require judicial consideration in due course.[29]  I will confine my present remarks to certain aspects of the statutory scheme and its relationship with the common law derivative action.

23.The scheme providing for the statutory derivative action is contained in Part IVAA of the Companies Ordinance.  Section 168BC is of immediate importance, providing:

(1) A member of a specified corporation may, with the leave of the court granted under subsection (3)—

(a) bring proceedings before the court on behalf of the specified corporation; or

(b) intervene in any proceedings before the court to which the specified corporation is a party for the purposes of continuing, discontinuing or defending those proceedings on behalf of the specified corporation.

(2) Any proceedings brought under subsection (1)(a) on behalf of a specified corporation shall be brought in the name of the specified corporation.

(3) The court may, on the application of a member of a specified corporation, grant leave for the purpose of subsection (1) if the court is satisfied that—

(a) it appears to be prima facie in the interest of the specified corporation that leave be granted to the applicant;

(b) if the applicant is applying for leave to bring proceedings under subsection (1)(a), there is a serious question to be tried and the specified corporation has not itself brought the proceedings;

(c) if the applicant is applying for leave to intervene in proceedings under subsection (1)(b), the specified corporation has not diligently continued, discontinued or defended those proceedings; and

(d) except where leave is granted by the court under section 168BD(4), the member has served a written notice on the specified corporation in accordance with section 168BD.

(4) Subject to other provisions in this Part, this Part shall not affect any common law right of a member of a specified corporation to bring proceedings on behalf of the specified corporation, or intervene in any proceedings to which the specified corporation is a party.

(5) The court may dismiss an application for leave under subsection (3) if the applicant has, in the exercise of any common law right—

(a) brought proceedings on behalf of the specified corporation in respect of the same cause or matter; or

(b) intervened in the proceedings in question to which the specified corporation is a party.

(6) For the avoidance of doubt, this section does not prevent a member of a specified corporation from bringing proceedings in respect of the specified corporation, or intervening in any proceedings to which the specified corporation is a party, on his own behalf in respect of his personal right. 

24.It is first to be noted that section 168BC applies only to proceedings brought by “a member of a specified corporation[30] ... on behalf of the specified corporation”.  It is therefore a scheme designed to deal with a “simple” derivative action and does not provide for actions brought on behalf of a company’s subsidiary or sub-subsidiary.  This is of course understandable since the availability of such a derivative action had not previously been authoritatively determined in Hong Kong. 

25.In other jurisdictions, locus to bring a statutory derivative action is often conferred in broader terms capable of embracing derivative actions on behalf of a subsidiary or sub-subsidiary.  Thus, in Australia, provision is made (subject to the court granting leave) for proceedings to be brought on behalf of a company by a person who is “a member, [etc] of the company or of a related body corporate ...”[31]  New Zealand has taken the same approach.[32]  In Canada, a complainant bringing a derivative action may be a shareholder of the corporation “or any of its affiliates” and may sue (with leave) on behalf of the corporation or any of its subsidiaries.[33]  And in Singapore, the statutory approach is to allow not only immediate members of the corporation, but “any other person who, in the discretion of the Court, is a proper person to make an application [for leave to sue on behalf of the relevant company] under this section”.[34] 

26.This does not, however, mean that “multiple” derivative actions cannot  be brought in Hong Kong.  Such actions continue to be available under the existing common law rules.  It is nevertheless obviously appropriate for the Ordinance to be amended to take in “multiple” derivative actions as there is no justification for excluding them from the statutory scheme.

27.Secondly, section 168BC(4)[35] provides that subject to its other provisions, Part IVAA shall not affect the common law right of a member to bring a derivative action.  By virtue of this provision, the statutory derivative action and the common law derivative action co-exist in parallel.[36]

28.Two points should be made as regards the statutory derivative action when compared to the common law derivative action:

(a) Since section 168BC(3)(b) makes the grant of leave conditional on the court being satisfied that “there is a serious question to be tried”, the Prudential test regarding the sustainability of the company’s cause of action has been modified by adoption of the lower threshold of “a serious question to be tried” and abandonment of the more stringent “prima facie case” test.[37]

(b) Similarly, the second Prudential requirement, that is, the requirement of showing prima facie that the case falls within a relevant (usually the fraud on the minority) exception to the rule in Foss v Harbottle, has been jettisoned by the statutory scheme.  The often difficult question of whether a Foss v Harbottle exception applies no longer needs to be determined in establishing locus to bring statutory derivative actions given that the company must now be given notice enabling it to make known its position regarding the action;[38] and given that the court now has a discretion to decide whether the proceedings are prima facie in the interest of the company.[39]  In exercising its discretion, the court is effectively deciding, on the basis of criteria laid down by statute, whether the plaintiff should exceptionally be allowed to sue in place of the company which is normally the proper plaintiff, rendering the common law exceptions to the rule in Foss v Harbottle otiose in this context.  The discretion is also obviously a safeguard against vexatious and inappropriate proceedings by disgruntled members.

29.The co-existence of both the statutory and the common law derivative actions may lead to problems where a member seeks to invoke both.  Section 168BC(5) provides that the court may dismiss an application for leave to commence a statutory derivative action if the applicant has already commenced a common law one.  Section 168BE deals with the reverse situation where after leave has been granted to a member to commence a statutory derivative action, he then institutes a common law action.  Under the provision, the court has the power to strike out or order appropriate amendment of the common law action.  There are no express provisions relating to the situation of the institution of a common law derivative action after statutory leave has been refused and the converse situation of seeking leave after a common law derivative action has been struck out.

30.In the various situations which may arise where a party seeks to take advantage of the availability of both the statutory and the common law derivative action, the court should exercise its powers, both express and inherent, to prevent the abuse of the court’s process and to ensure that the dispute is resolved fairly and expeditiously without unnecessary procedural complications.

31.In providing for two parallel regimes, the Bills Committee noted that there exist a large number of companies incorporated outside Hong Kong but controlled by Hong Kong residents.  On the basis that the right of a shareholder to bring a derivative action is governed by the law of the place of incorporation,[40] it was concerned that the abolition of the common law right to bring derivative actions in respect of non-Hong Kong companies might deprive their shareholders of rights otherwise available to them.[41]  But as Lord Millett points out in his judgment, it is not necessary to preserve the common law in Hong Kong on derivative actions to cater for the application of the law of the place of incorporation on derivative actions for non-Hong Kong companies.

32.The co-existence of both the statutory and common law regimes is unusual in an international context[42] and is a source of confusion and complication.  It would appear to be appropriate for the statutory regime to replace the common law derivative action altogether.  This question deserves to be addressed by the Administration and the Legislature as soon as possible.

Lord Millett NPJ :

33.Two questions arise for decision in this appeal.  The first is whether a minority shareholder’s or derivative action may be brought by a person who is not a shareholder in the company in which the cause of action is vested and on behalf of which the action is brought but a shareholder in its parent or ultimate holding company.  Such an action has been described in the United States and in argument before us as a double or multiple derivative action (depending on whether the cause of action is vested in a subsidiary or sub-subsidiary), and for convenience I shall so describe it even though the description may be somewhat misleading.  In the interest of brevity I shall also use the expression “multiple derivative action” to embrace both double and multiple derivative actions.  The second question is whether there is a relevant exception to the principle which precludes a shareholder from suing for losses which are merely reflective of his company’s losses.

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. 

The parties

35.The Respondent to this appeal is the plaintiff Waddington Ltd.  It is a company incorporated in the British Virgin Islands (“BVI”) and a minority shareholder with some 6.5% of the shares in the 3^rd defendant, Playmates Holdings Limited (“Playmates”).  Playmates is a Bermudan company listed on the Hong Kong Stock Exchange involved in the design, manufacture, marketing and sale of toys.  It has been joined as the 3^rd defendant to enable the plaintiff to bring a derivative action on its behalf.

36.The 4^th defendant, Playmates International Limited (“Playmates International”), is a wholly owned subsidiary of Playmates.  The 5^th defendant, Profit Point Limited (“Profit Point”), is a company incorporated in the BVI and a wholly owned subsidiary of Playmates International and thus a wholly owned sub-subsidiary of Playmates.  Playmates International and Profit Point were not parties to the proceedings when the striking-out application was argued at first instance before Barma J, but they have since been joined as defendants so that a multiple derivative action may be brought on behalf of Profit Point as an alternative to the derivative action brought on behalf of Playmates.

37.Autoestate Limited (“Autoestate”) is another wholly owned subsidiary of Playmates International and thus a wholly owned sub-subsidiary of Playmates.  Although not yet a party to the present action it is proposed to add it as 6^th defendant to the consolidated proceedings for the same purpose.

38.The appellant is the 1^st defendant, Chan Chun Hoo Thomas.  He is and at all material times was the Chairman and Executive Director of Playmates and is alleged to have been a director at the relevant times of each of the companies in the Playmates group to which I have referred.  Through the 2^nd defendant and a family trust he is alleged to hold and, at all material times, to have held an indirect controlling interest in Playmates and hence in each of its subsidiaries and sub-subsidiaries. 

The impugned transactions

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 Limited.  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.

40.The second transaction is the acquisition in 2000 of Pretty Star Limited (“Pretty Star”) by Autoestate.  Pretty Star’s principal asset consisted of a commercial building in Kowloon.  It is alleged that this was an uncommercial deal made in breach of the appellant’s fiduciary duty pursuant to the same overall agreement and to have resulted in substantial losses to the Playmates group when the value of the Kowloon property fell below the price paid.

41.The third transaction is the acquisition in 2002 of Bagnols Limited (“Bagnols”) by Autoestate.  Bagnols’ principal asset consisted of a property in Tuen Mun.  It is alleged that this was another uncommercial deal made in breach of the appellant’s fiduciary duty pursuant to the overall agreement and to have resulted in substantial losses to the Playmates group when the value of the Tuen Mun property fell below the price paid.

42.The plaintiff also claims in respect of the overall arrangement to which reference has already been made.

43.None of the allegations in the Amended Statement of Claim has yet been proved.  None of them represents the findings of any court.  They remain no more than allegations which may or may not be substantiated at any trial.

44.The alleged losses, if they were incurred at all, were not incurred by the plaintiff (save indirectly as a shareholder in Playmates) but directly or indirectly by companies in the Playmates group, and any cause of action is vested in them.  Accordingly some form of derivative action is needed to enable the plaintiff to bring these proceedings.

The statutory derivative action

45.Section 168BC, which was added to the Companies Ordinance, Cap. 32, 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). 

46.Section 168BC governs an action brought by a member of a specified corporation on behalf of the corporation of which he is a member.  It does not therefore in terms apply to multiple derivative actions, but it is common ground that even if it does not authorise them it does not prohibit them either.

The common law derivative action

47.A company is a legal entity separate and distinct from its members.  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 represents 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 action is vested in the company and the company alone can sue.  This is the first rule in Foss v. Harbottle(1843) 2 Hare 461.  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 Wallersteiner v. Moir(No.2) [1975] 1 QB 373 CA at p.390; Prudential Assurance Co. Ltd v. Newman Industries Ltd(No.2) [1982] Ch 204 CA (“Prudential”) at p.210; Johnson v. Gore Wood & Co.[2002] 2 AC 1 at p.61 et seq.

48.The injustice which would result if a derivative action were not available where the company is controlled by the alleged wrongdoers is vividly described by Lord Denning MR in Wallersteiner v. Moir(No.2) (supra) at p.390:

“But suppose [the company] is defrauded by insiders who control its affairs - by directors who hold a majority of the shares - who then can sue for damages? Those directors are themselves the wrongdoers.  If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves.  If a general meeting is called, they will vote down any suggestion that the company should sue them themselves.  Yet the company is the one person who is damnified.  It is the one person who should sue.  In one way or another some means must be found for the company to sue.  Otherwise the law would fail in its purpose.  Injustice would be done without redress.” (my emphasis)

49.Sir James Wigram V-C recognised the problem in Foss v. Harbottle itself.  He suggested that proceedings could be brought by the individual shareholders in their private characters seeking the protection of the rights to which they were entitled in their corporate character.  This suggestion was adopted, and it became accepted practice for minority shareholders to file a bill in the Companies Court and ask for leave to use the name of the company to bring an action: see Atwool v. Merryweather(1867-8) LR 5 Eq pp 464-7n.  If they made out a reasonable case for being allowed to do so, the court would appoint them as representatives of the company to bring proceedings in the name of the company against the wrongdoers.  If the action was successful, any damages recoverable were payable to the company.

50.The need to apply to the court for leave to use the company’s name provided a useful filter to prevent frivolous and abusive actions or actions which it was not in the interests of the company to bring.  It also gave the court an opportunity to adjourn the proceedings in order to discover whether the impugned transactions, if capable of ratification by the company (not for example being ultra vires or a fraud on the minority),would be ratified by the independent shareholders.

51.This filter was soon abandoned.  The minority shareholders were permitted to bring an action against the wrongdoers without the leave of the court, joining the company as defendant in order to receive any damages that might be awarded: see Menier v. Hooper’s Telegraph Works(1874) 9 Ch App 350.  Since the company was a defendant it could not also be a plaintiff, and accordingly the action was traditionally framed as an action by the plaintiff “on behalf of himself and all other shareholders in the company except the defendants”.  In reality, as every one appreciated, the action was brought on behalf of the company in which the cause of action was vested.  This form of action was described by Lord Davey in Burland v. Earle [1902] AC 83 at p.93 as a “mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress”.  

52.By the 1980’s the absence of any appropriate filter to prevent unmeritorious claims or claims which it was not in the interests of the company to pursue was having unfortunate results.  A defendant’s only recourse was to apply to strike out the action under RSC O.18 r.19 or to have the plaintiff’s right to bring a derivative action determined as a preliminary issue.  Matters came to a head in Prudential, where the determination of the preliminary issue threatened to subject the company to a 30-day action in order to decide whether the plaintiffs were entitled to bring a 30-day action.  There was, as the Court of Appeal observed, a dilemma, for at the time of the application the alleged fraud had not been proved.  Either the court must assume the truth of every allegation in the statement of claim as in a true demurrer, in which case the company and its innocent shareholders might be subjected to groundless claims, or the action had to be fought to a conclusion before the plaintiffs’ right to bring a derivative action could be established.  Neither course was acceptable.

53.The solution which the Court of Appeal found in Prudential was to require the plaintiff, whether at the trial of a preliminary issue or on an application to strike out the proceedings, to establish a prima facie case both that the company was entitled to the relief claimed and that the plaintiff was entitled to bring the claim on its behalf by way of a derivative action.  In an appropriate case the court could adjourn the proceedings in order to ascertain whether the independent shareholders considered that it was in the interests of the company to pursue the claim.  

54.This approach was followed in Smith v. Croft (No.2) [1988] Ch 114 and was subsequently adopted by the Rules Committee when the Rules of the Supreme Court were amended by adding O.15 r.12A (later CPR r.19.9 and now s.260 of the Companies Act 2006).  This imposed a requirement for the plaintiff in a derivative action to obtain the leave of the court to continue the action, thereby providing the filter which had been discarded more than a century earlier.  The plaintiff has consistently been required on the application for leave to establish a prima facie case both that the company would be likely to succeed if it brought the action itself and that the case falls within an exception to the rule in Foss v. Harbottle.

55.Section 168BC of the Companies Ordinance adopts the course which has been taken in England since 1994 but with two significant differences.  First, in applying for leave the plaintiff is not required to establish a prima facie case but only that there is a serious question to be tried.  Secondly, by preserving the common law action it appears to have made the requirement to obtain the leave of the court optional.  It seems that this may have been intended to cater for overseas companies.  But it is not necessary to preserve the common law of Hong Kong in order to cater for such companies; such law is not even relevant to them.  If the question whether a derivative action is available is a question of substantive law, as the Bills Committee thought (following statements to this effect in Konamaneni v. Rolls Royce (India) Ltd [2002] 1 WLR 1269 at p.1284 and Base Metal Trading Ltd v. Shamurin [2005] 1 WLR 1157 at p.1176 CA), then it is governed by the law of the place of incorporation.  The same law also governs the company’s indoor management.  Neither question is governed by the common law of Hong Kong; both are governed by the law, whether statutory or common law, of the overseas jurisdiction.  The question whether the leave of the court is required is a procedural question governed by the lex fori.  In my opinion, once the legislation is extended to cover multiple derivative actions, the continued existence of two parallel regimes will serve no discernible purpose.  

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 plaintiff 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 Prudentialremains 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 4^th and 5^th 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.

Multiple derivative actions

61.So far as the researches of Counsel have been able to discover, there has never been a reasoned decision of a higher court in any common law jurisdiction outside the United States which is determinative of this question.  We must decide it as a matter of principle.

62.Such actions have been entertained in England, but in none of them has the plaintiff’s right to bring the action been challenged. Wallersteiner v. Moir (No.2) (supra)itself was such a case.  The plaintiff brought two claims, one to recover damages for the company of which he was a member and the other to recover damages for its subsidiary.  This fact did not escape the attention of the Court of Appeal, which observed that if damages were recoverable they would be payable in the one case to the company and in the other to the subsidiary.  But the plaintiff’s right to maintain the action on behalf of the subsidiary was not contested or considered.  It seems unlikely that the point escaped the notice of the experienced counsel who conducted the case.  It is more probable that they considered that it was unlikely to find favour with Lord Denning.  For my part I think he would have given it short shrift.

63.Similar actions have been brought in England since then, but in every case the right to bring the action has been assumed without argument: see Halle v. Trax[2000] BCC 1020; Trumann Investment Group v. Societe GeneralSA [2002] EWHC 2621; and Airey v. Cordell[2006] EWHC 2728.  In each of these cases, leave was granted to continue the action, but despite the wording of the rule in force at the relevant time, no point was taken that the plaintiff was not a member of the company in which the cause of action was vested.

64.The only case in which the question whether a multiple derivative action may be maintained has been decided in a common law jurisdiction outside the United States is Ruralcorp Consulting Pty Ltd v. Pynery Pty Ltd(1996) 21 ACSR 161 (“Ruralcorp”), a decision of the Senior Master of the state of Victoria.  He ruled that it may not.  I shall have to return to this decision later.

65.The multiple derivative action has been recognised in many states of the United States, but the legal basis on which the action is maintainable has varied from state to state and from time to time.  Many of the grounds upon which the action has been rationalised would not be accepted in either England or Hong Kong.  In some cases the subsidiary has been treated as a mere instrument, agent or alter ego of the parent company; in others the corporate structure has been described as a fiction or “specious and illusory device” allowing the court to pierce the corporate veil.  In the absence of special circumstances it is not permissible to adopt such an approach in Hong Kong.  In Melvin Brown v. Richard Tenney 532 N.E. 2d 230 (Ill. 1988), the Supreme Court of Illinois analysed the double derivative action as really consisting of two actions, one by the shareholders against the directors of the parent company for breach of their fiduciary duty in failing to bring an action against the wrongdoers, and the other to vindicate a right vested in the subsidiary.  The analysis assumes that a director of a company owes fiduciary duties to the shareholders, which appears be the case in Illinois but is not the law in England or Hong Kong.

66.While the United States cases are therefore of little assistance in deciding whether a multiple derivative action is maintainable in Hong Kong, they are helpful in demonstrating that it should be.  In Melvin Brown v. Richard Tenney (supra) the Appellate Court of Illinois observed that in the absence of such an action the additional layer in the corporate structure would:

“… prevent the righting of many wrongs and would insulate the wrongdoer from judicial intervention.”

In Holmes v. Camp(1917) 219 N.Y. 359, the Supreme Court of New York said that :

“The free use of holding companies which has grown up in recent years would prevent the righting of many wrongs if an action like the present might not be maintained by a stockholder of a holding company.”

If this was true of New York in 1917 it is certainly no less true of Hong Kong in 2008.

67.But it is not necessary to travel to the United States to appreciate the need for a multiple derivative action to be maintainable.  Lord Denning’s justification of the derivative action in Wallersteiner v. Moir (No.2)(supra) applies as well to the case where the wrongdoers, who through their control of the parent company also control its subsidiaries, defraud a subsidiary or sub-subsidiary as it is to the case where they defraud the parent company itself.  In either case wrongdoer control precludes action by the company in which the cause of action is vested; and yet

“In one way or another some means must be found for the company to sue.  Otherwise the law would fail in its purpose.  Injustice would be done without redress.”

68.In my opinion it is not for the plaintiff to demonstrate that a multiple derivative action is maintainable in Hong Kong but for the appellant to show why it is not.

69.This the appellant has set out to do.  His reasons for disallowing the action may be summarised as follows :

(1)     The action contravenes fundamental principles of company law and in particular the principles (i) that a company is a separate legal person from its shareholders and (ii) that save in exceptional circumstances which are not alleged in the present case directors owe fiduciary duties to the company alone and not to its shareholders, let alone to the shareholders of its parent company.

(2)     A multiple derivative action is in truth two derivative actions, one by the shareholders on behalf of the parent company against the subsidiary for its failure to sue the wrongdoers and the other by the parent company on behalf of the subsidiary against the wrongdoers.  But neither action is maintainable, first because the subsidiary owes no duty to its parent company to bring proceedings against the wrongdoers, and secondly because the parent company is in control of the subsidiary and does not need the intervention of its shareholders to enable it to bring such proceedings.

(3)     It is well established that only a shareholder can bring a derivative action on behalf of the company of which he is a member.  A shareholder in a parent company has no title or interest in and is a stranger to the shares of its subsidiaries.  He has no rights in relation to the conduct of the affairs of the subsidiaries or in relation to the manner in which the directors of a subsidiary manage or dispose of its assets.

(4)     It is untrue to say that, absent the multiple derivative action, a wrong would be without redress.  It is true that in the 19^th Century when the derivative action was first developed there was no alternative remedy.  But for many years now minority shareholders have had a statutory means of obtaining redress if the affairs of the company are being conducted in a manner prejudicial to their interests.  The current provision in England is s.459 of the Companies Act 1985, replacing earlier provisions contained in the Companies Acts of 1948 and 1980.  Legislation in Hong Kong has broadly reflected the position in England: for the current provision see s.168A of the Companies Ordinance.

(5)     Legislation expressly authorising multiple derivative actions has been introduced in recent years in Australia, New Zealand, Canada and Singapore.  Its introduction in Hong Kong should be left to the legislature.  It should not be created by the courts, which lack the ability to resolve the many questions which would arise.

70.The first objection is seriously weakened by the fact that other commonwealth countries have all legislated to introduce multiple derivative actions without finding it necessary to make any significant changes to company law to accommodate them.  Both the first and second objections depend on the same analysis of the multiple derivative action as two or more derivative actions which have been consolidated into one, as its name implies.  But as I indicated at the outset the description, though convenient, is deceptive.  The action is a single action on behalf of the company in which the cause of action is vested.  The only question is whether the action, which may be brought by a member of the company, may be brought by a member of its parent or ultimate holding company.  This is simply a question of locus standi.

71.This is the question raised by the third objection, and it lies at the heart of the case.  There are numerous dicta in the cases to the effect that only a shareholder may bring a derivative action to enforce a right vested in the company.  But most of them are merely obiter.  Where they have formed the ground for decision, they have to be understood in their context.  In every case where the status of the plaintiff has been determinative, the question was whether a former shareholder or a person who was an equitable but not the legal owner of the shares in question could maintain the action: for former shareholders see Birch v. Sullivan[1957] 1 WLR 1247 at p.1249 (England); Dynevor Pty Ltd v. The Proprietors, Centrepoint Building Units Plan No.4327[1995] QCA 166 (Queensland); Keaney v. Sullivan[2007] IEHC 8 at p.19 and O’Neill v. Ryan[1993] ILRM 557(Ireland): for equitable owners see Maas v. McIntosh(1928) 28 SR (NSW) 441; Hooker Investments Ltd v. Email Ltd (1986) 110 ACLR 443 at p.435 (New South Wales).  The focus in all these cases was on the character of the plaintiff’s shareholding; he must be a current and legal shareholder.  The present case is concerned with a different question: the identity of the company of which he must be such a shareholder.

72.The only case in which the question whether a shareholder may maintain a multiple derivative action to enforce the rights of a subsidiary of the company of which he is a member has fallen for decision is Ruralcorp(supra).  The Senior Master gave two grounds for his conclusion that he may not.  The first was that the plaintiff was “a stranger” to the company, and “strangers” are not entitled to bring a derivative action.  By “stranger”, however, the Senior Master meant no more than a person who was not a shareholder, so his statement was not a reason for his conclusion but merely an assertion of it.

73.His second ground, scarcely more convincing than the first, was that equitable owners of shares in a company had no standing to bring a derivative action, and the want of standing of persons who had no legal or equitable interest in the shares was a fortiori.  But the reason why persons with only an equitable interest in a company’s shares cannot bring a derivative action on its behalf is that a company does not recognise or give effect to equitable interests.  Such persons are not named in the company’s register of members, and their existence let alone their identity is not discoverable from the share register.  But the identity of the shareholders of a company’s parent company is readily ascertainable by an inspection of the relevant share registers.

74.As I have said, the question is simply a question of the plaintiff’s standing to sue.  This would have been obvious when the procedure was for the proposed plaintiff to apply to the court for leave to use the company’s name.  On a question of standing, the court must ask itself whether the plaintiff has a legitimate interest in the relief claimed sufficient to justify him in bringing proceedings to obtain it.  The answer in the case of person wishing to bring a multiple derivative action is plainly “yes”.  Any depletion of a subsidiary’s assets causes indirect loss to its parent company and its shareholders.  In either case the loss is merely reflective loss mirroring the loss directly sustained by the subsidiary and as such it is not recoverable by the parent company or its shareholders for the reasons stated in Johnson v. Gore Wood (supra).  But this is a matter of legal policy.  It is not because the law does not recognise the loss as a real loss; it is because if creditors are not to be prejudiced the loss must be recouped by the subsidiary and not recovered by its shareholders.  It is impossible to understand how a person who has sustained a real albeit reflective loss which is legally recoverable only by a subsidiary can be said to have no legitimate or sufficient interest to bring proceedings on behalf of the subsidiary.

75.This is not to allow economic interests to prevail over legal rights.  The reflective loss which a shareholder suffers if the assets of his company are depleted is recognised by the law even if it is not directly recoverable by him.  In the same way the reflective loss which a shareholder suffers if the assets of his company’s subsidiary are depleted is recognised loss even if it is not directly recoverable by him.  The very same reasons which justify the single derivative action also justify the multiple derivative action.  To put the same point another way, if wrongdoers must not be allowed to defraud a parent company with impunity, they must not be allowed to defraud its subsidiary with impunity.

76.The appellant submitted that the plaintiffs in a single derivative action are allowed to bring the proceedings not because they have suffered a reflective loss but because the right to bring such proceedings is an incident of their shareholding. There are two answers to this.  In the first place it begs the question, for if shareholders are allowed to bring a multiple derivative action then the right to bring it will be another incident of their shareholding.  In the second place, it is necessary to ask why the shareholder’s right to bring a derivative action is an incident of his shareholding, and the reason is that he is regarded as having a legitimate and sufficient interest in the relief claimed in the proceedings. 

77.The fourth objection is easily disposed of.  Shareholders may bring proceedings under s.168A of the Companies Ordinance if the affairs of a subsidiary are being conducted in a manner which is prejudicial to their interests; and for this purpose the affairs of the subsidiary can also be regarded as the affairs of the parent company: see Re Citybranch Ltd [2005] 1 WLR 3505.  But while there is some overlap between such proceedings and the derivative action they serve essentially different functions.  Unfair prejudice proceedings are concerned to bring mismanagement to an end; derivative actions are concerned to provide a remedy for misconduct: see Re Charnley Davies Ltd (No.2)[1990] BCLC 760; Re Chime Corp Ltd(2004) 7 HKCFAR546.  While the court may have jurisdiction in the strict sense on a petition under s.168A to order payment of compensation to the company, the derivative action is the proper vehicle for obtaining such relief where the plaintiff’s complaint is of misconduct rather than mismanagement: see Re Chime Corp Ltd at p.571.

78.Two other aspects of s.168BA merit consideration.  First, while s.168A(2)(a)(ii) enables the court to direct the petitioner to bring a derivative action, it is far from clear that it can direct him to bring a multiple derivative action; and as at present advised I do not think that it can.  Secondly, under s.168A the court may order the minority shareholder to be bought out, and where he has a small shareholding, as the plaintiff has in the present case, that is a course which the Court may well take.  There is no reason why a plaintiff who does not want to be bought out should be compelled to invoke a process which may lead to that result. 

79.The last objection must also be rejected.  Australia, New Zealand, Canada and Singapore have all introduced legislation to require the plaintiff to obtain the leave of the court before instituting or continuing derivative actions, and have taken the opportunity to permit multiple derivative actions where the cause of action is vested in a “related” or “affiliated” company of the company of which the plaintiff is a member.  The various statutes have different threshold tests, different approaches to deciding whether the proposed action is in the interests of the company, and different procedures.  But it is noticeable that in prescribing such requirements none of the statutes draws any distinction between the single derivative action and the multiple derivative action; and in truth there is no conceivable reason why the procedural and other requirements of the two kinds of action should differ.

80.We have no power to extend the provisions of s.168BC to multiple derivative actions by analogy.  We must leave such actions to continue to be governed by the common law, while expressing the hope that the legislature may in due course extend the section to cover them, and perhaps at the same time take the opportunity to consider whether it is really sensible to maintain two parallel regimes with different threshold tests, one requiring leave and the other not.

Reflective loss

81.If multiple derivative actions are not maintainable in Hong Kong, then the plaintiff wishes to bring a single derivative action on behalf of Playmates to recover the losses which it is alleged to have suffered as a result of the breaches of fiduciary duty which the appellant owed to it as a director.  The plaintiff concedes that such losses are merely reflective of the losses allegedly suffered by the sub-subsidiaries and are accordingly prima facie not recoverable by Playmates.  But it submitsthat the present case falls within the exception described by the English Court of Appeal in Giles v. Rhind[2003] Ch 618.

82.I explained the rationale of the principle in Johnson v. Gore Wood & Co. (supra) at p.62, where I said :

“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.”

83.In Giles v. Rhind(supra), Chadwick LJ said at p.643 that the principle laid down in Johnson v. Gore Wood & Co.(supra) did not apply where the claim is made against :

“a wrongdoer who, in breach of his contract with the company and its shareholders, ‘steals’ the whole of the company’s business, with the intention that the company should be so denuded of funds that it cannot pursue its remedy against him, and who gives effect to that intention by an application for security for costs which his own breach of contract has made it impossible for the company to provide.”

84.In that case the company, which was in administrative receivership, brought proceedings against the wrongdoing director, who demanded and obtained an order for security for costs which successfully stifled the proceedings.  When the company discontinued the action a shareholder brought proceedings on its own behalf to recover its own loss.  It was conceded that this was reflective loss, but the Court of Appeal permitted the action to proceed.

85.It is impossible not to share the determination of the Court of Appeal not to allow a defendant who has been guilty of such conduct to escape liability.  But with respect it could not be right to allow the shareholder to bring an action for its own benefit; this would entail recovery by the wrong party to the prejudice of the company and its creditors.  It would produce precisely the result which I identified as unacceptable in Johnson v. Gore Wood & Co.(supra) at p.64D; it would allow the plaintiff to obtain by a judgment of the court the very same extraction of value from the company at the expense of its creditors that it alleged the defendant had obtained by fraud.  The Court of Appeal vouchsafed no explanation to justify this result, an explanation which might be thought to be particularly necessary given that the company was in administrative receivership.

86.Some way needed to be found in Giles v. Rhindwhich would allow the company to recover damages despite the discontinuance of its own proceedings.  If the company had not been in administrative receivership, the simplest course would have been to allow the shareholder to bring a derivative action.  As it was, this course would not have been open, for the company was no longer under the control of the wrongdoer.  But the court could have given the shareholder leave to apply to direct the administrative receiver to bring the action if the shareholder was willing to fund it.  The discontinuance should not have been an obstacle to either course.  There is no logic in allowing such an action where the wrongdoers are in a position to stifle any proceedings by the company, and disallowing it where they have succeeded in doing so. 

87.The Court of Appeal may have assumed that the principle established in Johnson v. Gore Wood & Co.is not engaged where the company has lost the right to sue.  But the House of Lords expressly applied the principle not only where the company had the right to sue but also where it had declined or failed to sue.  There was nothing new in this.  In Prudential (supra) it had been submitted that a personal action at the suit of the shareholder will lie to recover reflective loss if the company’s remedy is for some reason not pursued.  The Court of Appeal countered the argument (at p.223) by posing the rhetorical question: “How can the failure of the company to pursue its remedy against the robber entitle the shareholder to recover for himself?”

88.The facts of the present case do not bring it within measurable distance of the exception described in Giles v. Rhind.  But Barma J went further and held that the supposed exception does not exist, and I respectfully agree with him.  The case has been followed in England at first instance in Perry v. Day[2005] 2 BCLC 405 and referred to without enthusiasm by the Court of Appeal in Day v. Cook [2002] 1 BCLC 1 and Gardner v. Parker[2004] 2 BCLC 554.  But in all these cases the court was bound by the decision in Giles v. Rhind.  In my opinion Giles v. Rhind and Perry v. Daywere wrongly decided and should not be followed in Hong Kong.

Conclusion

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.

Chief Justice Li :

90.The Court unanimously dismisses the appeal.  Submissions in writing as to costs should be filed and served by the Respondent within 21 days from the date of this Judgment and by the Appellant within 21 days thereafter, to be dealt with on the papers.

Mr Victor Joffe QC, Mr Martin Lee SC and Mr Hectar Pun (instructed by Messrs Fairbairn Catley Low & Kong) for the appellant

Mr Benjamin Yu SC and Ms Eva Sit (instructed by Messrs Kao, Lee & Yip) for the respondent

[1]         Cap 32.

[2]         HCA 3291/2003, 29 April 2005, at §36.

[3]         [2002] 2 AC 1. 

[4]         Judgment at §57.

[5]         Judgment §70.

[6]         Judgment §81.

[7]         (1843) 2 Hare 461.

[8]         Judgment §§90, 92 and 94.

[9]         Judgment §§100, 101 and 112.

[10]        Rogers VP and Le Pichon JA [2006] 2 HKLRD 896.

[11]        At p 904-905, §21.

[12]        [1950] 2 All ER 1064 at 1067.

[13]        [1982] Ch 204 at 219.

[14]        Ibid at 221-222.

[15]        [1988] Ch 114 at 129-130 and 131.

[16]        Ibid at 135.

[17]        Ibid at 138-139.

[18]        See, eg, Barrett v Duckett [1995] BCC 362 at 367; Halle v Trax [2000] BCC 1,020 at 1,023; and Airey v Cordell [2007] BCC 785 at 797, §55.

[19]        [1996] 2 HKLR 117.

[20]        HCA No 10087/1998, 10 July 1998.

[21]        Ibid, p 9.

[22]        (Unreported) HCA No 9241/2000, 22 May 2001.

[23]        Wallersteiner v Moir (No 2) [1975] QB 373 at 404; Smith v Croft (No 1) [1986] 1 WLR 580 at 590; and Airey v Cordell [2007] BCC 785 at §75.

[24]        [2002] 2 AC 1 at 36.

[25]        Ord No 30 of 2004, s 2, Schedule 3.

[26]        Sections 2 and 168BC to 168BG.

[27]        LN 82 of 2005.

[28]        In HCA 3291/2003, issued on 2 September 2003.

[29]        I note without any further comment, that some such issues have been discussed by Kwan J in Re F & S Express Ltd [2005] 4 HKLRD 743 and in Re Lucky Money Ltd (unreported, HCMP 505/2006, 18 July 2006); and by Barma J in Re Myway Ltd [2008] 3 HKLRD 614.

[30]        Section 2 defines “specified corporation” as embracing both Hong Kong and non-Hong Kong companies.

[31]        Australian Corporations Act 2001, s 236(1)(a), italics supplied.

[32]        New Zealand Companies Act 1993, s 165(1)(a).

[33]        Canadian Business Corporations Act 1985, ss 238 and 239(1).

[34]        Companies Act (Cap 50, Statutes of Singapore) s 216A(1)(c).  Margaret Chew, in Minority Shareholders’ Rights and Remedies, 2^nd Ed (LexisNexis, 2007), at pp 316-318, summarises the Singapore case-law on this discretion and provides a helpful comparative discussion of relevant provisions from Australia, Canada and New Zealand (which are conveniently set out in Appendices 4 to 6).  Another valuable comparative study can be found in Pearlie Koh Ming Choo, The Statutory Derivative Action in Singapore – A Critical and Comparative Examination (2001) 13 Bond LR 64.

[35]        Section 168BC(4) provides : “Subject to other provisions in this Part, this Part shall not affect any common law right of a member of a specified corporation to bring proceedings on behalf of the specified corporation, or intervene in any proceedings to which the specified corporation is a party.”

[36]        SeeTomasic & Tyler : Hong Kong Company Law : Legislation and Commentary (2008) para 8513; Company Law in Hong Kong : Practice and Procedure (2007 ed Scott, Gilchrist & Vaizey) para 8.056.  

[37]        Cf American Cyanamid Co v Ethicon Ltd [1975] AC 396 at 407.  In F & S Express Ltd, Kwan J at 747B-C referred to the threshold of a serious question to be tried as a relatively low threshold as in the case of an application for an interlocutory injunction.

[38]        Under section 168BC(3)(d) and section 168BD.

[39]        Section 168BC(3)(a).

[40]        Konamaneni v Rolls Royce (India) Ltd [2002] 1 WLR 1269 at §50 per Collins J (as he then was).  See also Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157 at para 68 (per Arden LJ).

[41]        See the Report of the Bills Committee LC Paper No. CB(1) 2264/03-04 (30 June 2004) at paras 126 to 129.  The report stated at para 127: 

“For companies incorporated outside Hong Kong, the law of the place of incorporation governs the right of a shareholder to bring a CDA [common law derivative action].  There may be different rules of internal management in the law of the place of incorporation compared with those applying to Hong Kong incorporated companies.  To abolish the common law right in respect of non-Hong Kong companies might deprive shareholders of those companies of rights otherwise available to them.  Hence, it is considered more desirable not to abolish the CDA, thereby giving shareholders one more option to commence an action on behalf of companies.”

See also the Consultation Paper on Statutory Derivative Action issued by the Administration (April 2004) CB(1) 1613/03-04(01) at para 9.

[42]        In Australia, Canada, New Zealand and the United Kingdom, the statutory regime has replaced the common law one.  See Company Law in Hong Kong : Practice and Procedure (2007 ed Scott, Gilchrist & Vaizey) para 8.056 footnote 312.