Waddington Ltd v. Chan Chun Hoo Thomas and Others

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003

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BETWEEN

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J U D G M E N T

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INTRODUCTION

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

THE RELEVANT PARTIES AND THE RELEVANT HISTORY

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

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

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

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

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

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

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

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

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

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

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

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

(i) The 18.08% interest of Waddington in Playmates.

(ii) The indirect holding by Playmates through Playmates International and Profit Point of 4.28% of Prestige.

(iii) The 46.20% interest of Chansam in Playmates.

(iv) The 39.20% interest of Chansam in Prestige.

(v) The sale by Profit Point of its 4.28% shareholding in Prestige (the Sale Shares) in the market between 22 and 24 May 2000.

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

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

(i) The sale by Profit Point between 22 and 24 May 2000 of its 4.28% shareholding in Prestige (the Sale Shares).

(ii) The sale by Chansam of part of its holding in Prestige (34.25%) to Funrise in the Yugang Transaction.

(iii) The sale by Chansam on 14 September 2000 of its remaining shareholding in Prestige (4.95%) in the market pursuant to one of the conditions in the Yugang Transaction.

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

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

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

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

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

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

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

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

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

(i) the sale by Playmates of its shareholding in Prestige (the Sale Shares) between 22 and 24 May 2000, which is the complaint now before me;

(ii) the purchase by Playmates through a subsidiary called Autoestate Properties Ltd. (“Autoestate”) at about the end of 2000 of a company by the name of Pretty Star Limited (“Pretty Star”) which used to be a wholly-owned subsidiary of Prestige and which held a commercial building at and known as “100 Canton Road, Tsimshatsui, Kowloon” (“the Canton Road Property”) and other assets (“the Pretty Star Transaction”) and

(iii) the purchase by Playmates through Autoestate in the middle of 2002 of another company by the name of Bagnols Limited (“Bagnols”) which also used to be a wholly-owned subsidiary of Prestige and whose principal asset was a property known as “No. 1, Tin Hau Road, Tuen Mun, New Territories” (“the Tuen Mun Property”) (“the Bagnols Transaction”).

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

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

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

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

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

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

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

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

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

“The course of the proceedings below

56. At first instance, in a meticulous and careful judgment Barma J applied the threshold test laid down in Prudential. He held that the plaintiff had failed to show a prima facie case in respect of the second and third transactions and struck them out. The Court of Appeal, without citing Prudential, reversed his decision and held that at common law a plaintiff in a derivative action is not required to establish a prima facie case, thereby restoring the claims in respect of the second and third transactions.

57. The defendant did not seek leave to appeal to this Court from the decision of the Court of Appeal on this issue, and accordingly for the present these claims must remain part of the action. But I agree with Mr Justice Ribeiro PJ that the decision in Prudential remains good law and should be applied in Hong Kong in any derivative action brought at common law, including multiple derivative actions. I also agree with him that the decision of the Court of Appeal in the present case should not be followed in future, whether in any other case or in any further proceedings in this case such as an application for leave to add Autoestate as a defendant.

58. When the case came before Barma J the claim was brought on behalf of Playmates alone. The judge held that any losses which it suffered were merely reflective of the losses suffered by its sub-subsidiaries Profit Point and Autoestate, and that recovery of such losses was precluded by the principle established by the House of Lords in Johnson v Gore Wood (supra). He held that there was no exception to the principle of the kind relied on by the plaintiff and that in so far as its claim was brought on behalf of Playmates, it was liable to be struck out. He did not strike the action out with immediate effect because he also held that the plaintiff, as a shareholder in Playmates, was entitled in principle to bring a multiple derivative action on behalf of its sub-subsidiaries. Accordingly, he gave it an opportunity to apply for leave to amend the proceedings to enable it bring such an action.

59. The Court of Appeal allowed the plaintiff’s cross-appeal and set aside the judgment of Barma J, thereby restoring the Statement of Claim as originally formulated and allowing the action to proceed in respect of all three impugned transactions. It dismissed the appellant’s appeal and held that a multiple derivative action is maintainable in Hong Kong. Following this decision, Playmates International and Profit Point were added as fourth and fifth defendants so that the action could be continued on their behalf. For a reason which was not explained to us a similar action on behalf of Autoestate was brought by separate proceedings.

60. The appellant now appeals to this Court and invites us to dismiss the action. He contends that :

(1) a derivative action may be brought only by a member of the company in which the cause of action is vested and not by a member of its parent or ultimate holding company; and that

(2) there is no relevant exception to the principle that a shareholder cannot recover loss which is merely reflective of the loss suffered by his company and accordingly the plaintiff cannot bring a derivative action on behalf of Playmates to recover losses which merely reflected the losses suffered by its sub-subsidiaries.”

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

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

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

WADDINGTON’S CASE AND THE DEFENCES OF THOMAS

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

(i) The Sale Shares had been held by Profit Point as a long-term investment.

(ii) There was no apparent reason to justify the sale by Profit Point of the Sale Shares in the market at a loss all of a sudden between 22 and 24 May 2000 at between $0.60 and $0.70 per share.

(iii) On 28 July 2000, an Agreement was entered into between Chansam, Funrise, Yugang and Thomas (“the Yugang Agreement”) whereby Chansam agreed to sell to Funrise 273,000,000 Shares held by the former in Prestige (being 34.25% of the issued shares in Prestige) at $2.20 per share. The completion of the Yugang Agreement took place in September 2000.

(iv) At all material times, Thomas was a director of and in control of Playmates, Playmates International, Profit Point and Chansam and owed fiduciary duties, in particular, to the first three of those companies.

(v) The Sale Shares were caused to be sold by Profit Point at the time and at the prices they were sold at the instigation or direction of Thomas.

(vi) In all the circumstances, an inference can and should be drawn that, prior to the time of the selling of the Sale Shares in May 2000, Thomas and Chansam had already entered into negotiation or had arrived at an understanding or agreement with Yugang and/or its controlling shareholder, a Mr. Cheung Chung Kiu (“Mr. Cheung”), for the sale by Chansam of its 34.25% shareholding in Prestige to Yugang or its subsidiary which turned out to be Funrise.  The significance of the percentage of the shareholding agreed to be sold was so that the trigger point at that time of 35% prescribed by the Code on Takeovers and Mergers (“the Takeovers Code”) for a general offer by the purchaser to buy the shares of all the shareholders of Prestige would not be reached.

(vii) In all the circumstances, Thomas should have included Profit Point in the benefit of the transaction between him and Chansam on the one hand and Mr. Cheung, Yugang and Funrise on the other hand with the result that the Sale Shares would be sold at $2.20 per share instead of between $0.60 and $0.70 per share.

(viii) In view of what actually transpired, Profit Point (and indirectly Playmates International and Playmates) has suffered loss and damage.

(ix) Such loss and damage were caused by the breach of fiduciary duty by Thomas.

(x) Hence, Thomas and Chansam, as a knowing beneficiary of the breach of fiduciary duty on the part of Thomas, should be held liable to compensate the loss and damage suffered directly by Profit Point.

(xi) In relation to sub-paragraph (vi) above, Waddington also runs an alternative case, in the event that it fails to prove the matters referred to in that sub-paragraph, that the selling of the Sale Shares was caused by Thomas in contemplation of either the sale to Yugang or a similar transaction well knowing the requirements under the Takeovers Code.

(xii) In the further alternative, Thomas was seeking to avoid a conflict situation that he might enter into if both Profit Point and Chansam continued to hold shares in Prestige.  Thus, his causing Profit Point to dispose of its shareholding in Prestige was not in the best interest of Profit Point.

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

(i) Shortly before the selling of the Sale Shares, Thomas, after having had discussions with the Father and with a view to catching the temporary rebound in the market (described in Chinese as “小陽春”), thought that it was a good time to dispose of the Sale Shares.  He and some of the directors of Profit Point therefore decided to sell the same in the market.

(ii) At the time of the selling of the Sale Shares, Thomas had not agreed or negotiated with Mr. Cheung or Yugang or anyone else regarding the sale of the shares in Prestige held by Chansam.

(iii) It was Mr. Cheung who approached Thomas for the first time in June 2000 for the sale of his controlling stake in Prestige up to just below 35% of its total issued share capital.  The price was eventually agreed at $2.20 per share.

(iv) Hence, there has been no breach of fiduciary duty on the part of Thomas vis-à-vis Profit Point, Playmates International or Playmates.

(v) Thus, Waddington’s claim should be dismissed.

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

5. The law of the BVI applies in the present case.  Under BVI law, it is not possible to have a multiple derivative action and therefore, irrespective of the merits, Waddington’s case should be dismissed.

6. The alternative cases referred to in paragraph 31 (xi) and (xii) are not open to Waddington because the same have not been pleaded in the Re-Amended Statement of Claim.

7. Waddington has been guilty of laches, delay and acquiescence.

8. The action has been instituted and maintained by Waddington and Albert not bona fide for the benefit of Playmates, Playmates International or Profit Point but for the ulterior purpose of embarrassing Thomas and therefore, in the exercise of the Court’s discretion, it should dismiss the action.

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

(i) It is too late for Thomas to take such jurisdictional and technical points.  Thomas is bound by the CFA Judgment and is estopped from taking such points, except in relation to the pleadings.

(ii) In any event, under BVI law, it is possible to have a multiple derivative action.

(iii) The pleading point is invalid because the Re-Amended Statement of Claim is wide enough to cover the alternative cases of Waddington.

(iv) The laches, delay, acquiescence and ulterior purpose points are all denied.

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

THE MAIN ISSUE

The Disposal of the Sale Shares

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

(i) The Sale Shares were first purchased by Profit Point in 1994   at an average cost of $2.29 per share.

(ii) Those shares had since 1 July 1997 been described in the books of Profit Point and Playmates as a “long term investment” holding.  None of them had been sold until 22 May 2000.

(iii) In the Annual Reports of Playmates, the Sale Shares had been consistently referred to as a long term investment.  For example, in the Annual Report of Playmates for the year 1998, in Note 14 to the Accounts which deals with investments in the Group, under “(a) Long term investments”, the Sale Shares, inter alia, were described as follows : -

“(ii) At 31 December 1998, the Group held 34,156,338 shares of Prestige Properties Holdings Limited representing 5.1% of the total issued shares of that company.

(iii) The investments in listed securities are intended to be held for   the long term.  Consequently the directors believe that the   underlying net asset values of the investments are a better basis   than market value for determining whether permanent       diminution in value has arisen.”

(iv) The Sale Shares were similarly described in the Annual Report of Playmates for the year 1999 which was dated 23 March 2000.

(v) Furthermore, as at May 2000, Prestige was a properties-holding company and the owner of the Canton Road Property which was the headquarters of the Playmates Group as well as of the Tuen Mun Property which was the factory building of the Playmates Group.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“4.  The increase in non-operating income was mainly due to the disposal   of shares in ICG Asia Limited (previously known as Harbour Ring   International Holdings Ltd.) (“ICG”) which recorded a gain of   approximately HK$215 million.  The gain was partly offset by a     HK$29 million loss on the disposal of shares in Prestige Properties   Holdings Limited and the unrealised loss on investment in securities   as all securities had been marked to market value as at the year end   date.

5.  Financial position of the Group remained healthy with current ratio improved to 2 for the year 2000 as compared to 1.5 of the previous year.  Such improvement was attributable to the reduction in outstanding accounts receivables by half as a result of speedier collection at the year end.”

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

The Yugang Transaction

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

“The 2^nd Transaction – The Sale by Chansam of its shares in Prestige to Funrise

16. I did not, whether by myself or through anyone else, have any approach from or contact whatsoever with Yugang or Funrise or any person acting for or on behalf of any one or both of those companies with regard to the 2^nd Transaction prior to or at the time of the 1^st Transaction, that is, in or before May 2000.

17. At or around the end of June 2000, Mr. Cheung Chung Kiu (“Mr. Cheung”) contacted me and expressed his interest in acquiring Chansam’s interest in Prestige. Consequently, Mr. Cheung and I reached a consensus on the percentage of shares to be sold and the price per share if the deal should proceed.

18. I recall that on 1^st July 2000 a Saturday and a public holiday, I went to the office of Chansam’s solicitors, Messrs. Deacons to brief them on the above intended sale of Chansam’s interest in Prestige and instructed them to begin the negotiations.

19. On 2^nd July 2000, a Sunday, both parties and their respective lawyers met at the office of Messrs. Woo Kwan Lee & Lo who acted for the purchaser in order to finalise the deal (“the Sunday Meeting”). We aimed to conclude the deal by early next week, and make a public announcement of the transaction as soon as possible after execution of the agreement.

20. After the Sunday Meeting, the negotiations got stuck over a pending action in relation to Prestige’s sale of Century Square in 1997, an office building in Central. As the purchaser of Century Square had failed to complete the purchase, Prestige forfeited the deposit paid by the purchaser, which was HK$248 million. The action was disclosed in various annual reports of Prestige. No agreement was reached and the deal fell through because Chansam and I refused to provide an indemnity in respect of any loss or damage which Prestige and its group companies might suffer as a result of that action.

21. I recall that in or around the 4^th week of July 2000, Mr. Cheung contacted me and expressed that he was prepared to limit Chansam’s and my liability under the indemnity if I was interested to re-start the negotiations. From then on, our respective lawyers re-started the negotiations. Eventually the parties reached agreement on 28^th July 2000, and Chansam’s and my liability in respect of the pending action was limited to 50% of the loss or damage (if any) which Prestige and its group companies might suffer as a result of that action.

22. Pursuant to the terms of the deal, Funrise would acquire around 34.25% of the issued share capital of Prestige (273,000,000 shares) at a price of HK$2.20 per share. Furthermore, Chansam would place a further 7.38% of Prestige’s issued share capital to independent third parties not later than 7 days prior to completion of the deal and the placement was made at a price of HK$0.60 per share.

23. It will be seen from the above that the 2^nd Transaction had nothing to do with the 1^st Transaction and that it was after the conclusion of the 1^st Transaction that I was approached by Mr. Cheung.”

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

“Q. When you prepared this statement, in paragraphs 17 and 18, did you look for documents to help you remember the date?

A. No, no documents. Simply a conversation.

Q. There would have been lots and lots of documents flowing between your representative and Mr Cheung Chung Kiu’s representative on this proposed transaction; is that right?

A. Until on the second day it then begin.

Q. No, the question is: there would have been lots of documents; right? Is that right?

A. Before going to the solicitors’ firm, there was no documents.

Q. And your solicitors would have kept an attendance note of the meeting that you had with them; right? And so what I suggest to you, if you were conscientiously trying to give the full picture to the court about these events, you would naturally have looked for some documents to assist in your recollection of the dates of these events; is that right? Would you agree?

A. I disagree. My way of handling this matter was very straightforward. In around end of June, Mr Cheung Chung Kiu phoned me up and he said, “Thomas, please go out to have a coffee.” That’s how I remember this incident.

Q. Yes, but that would have been over ten years before you made this statement. Right?

A. I do not remember.

Q. Well, you made your statement in August 2011. You were trying to relate events you say in June 2000, so it must have been more than ten years ago.

A. Well, I tried my best to recollect the incident.

Q. So that’s why I suggest to you, Mr Chan, that if you were conscientiously trying to recall the dates of these events, you would naturally have looked for documents to refresh your memory. Would you agree?

A. I do not agree.  When I do business, I did not do each and   everything relying on documents.  This is only a very simple   matter.  Somebody phoned me up and asked me to come out to   have a cup of tea or coffee.  Why is it necessary to look for a   document?”

“A. Well, everything has to be done following sequence.  End   of June, I received a phone call from Mr Cheung.  He asked me out for a cup of coffee, so I went out.  We sat down.  If   my memory does not fail me, we had a coffee and then we had a   discussion.  As I recall, Mr Cheung spoke with a strong accent.    What he said was, “I have lots of money, I had lot of cash, just  talking myself personally I have over $100 million.”

MR YU: Over a billion.

THE INTERPRETER: Oh, over 1 billion.

A.  No, he did not mention about personally, he just said he had   lots of money.  He did not mention any company name or people’s   name, he just said he had over 1 billion and he want to make   investment.  He said that he want to invest in property holding   companies, listed companies.  Initially I found that he was quite   strange of him, and I thought that he was just not serious when he talk about this. That means I did not consider him genuine. And so   my response to him was, “You want to buy a property holding   company, buy the controlling stake? So how much you are   offering? If you can make a suitable offer, I may be willing to sell.” 

At that time, I was also saying it in a joking way, not taking it very serious. Well, in fact what I meant was that if you are   offering a sufficient price, I may consider it. That’s it. But in my   mind, I did not find him to be serious.

Some time afterwards, I do not recall whether it was one or two   days thereafter or two or three days thereafter, he phoned me again.    He said, “I have read your annual report, the NAV of your shares   was $2.79, but do you think that is still worth that much? It is no   longer in the year 1999, it is already in May 2000. You know that   the market has already go down.” He said, “I cannot offer you as   high as 2.79.” He said, “The most I can offer you is $2.”

I said, “If it is $2, then there’s no point in further   discussing.” And then he said, “I will talk to someone then.”  I   mean, he said, “I will think about it.”

And then in around end of July, he phoned me up again and   he said, “I’m sincere, I’m engaging Woo Kwan & Lo.” When I   heard this, I thought, well, maybe there is something in it. And so   then in 1 July I went to Deacons. It was Alain Cheng who   introduced this firm to me.”

“MR YU: Mr Chan, you haven’t actually answered my question. My question was: what were the matters that you needed to negotiate with Mr Cheung Chung Kiu on this transaction?

A. That’s what I have told you just now. That’s how the matter developed as far as I can recall.

Q. You obviously had to negotiate the price with Mr Cheung Chung Kiu, right?

A. Yes.

Q. And you told us that he said 2.79 was too high and he was offering you $2.

A. That’s my recollection that he had said this.

Q. Yes. And so was there a lot of to-ing and fro-ing on this question of price? Because you were quite apart. One was $2, the other was $2.79.

A. Well, the way the business is conduct is like this. In 1999, the price was $2.79 and in May 2000 --

THE INTERPRETER: The witness correct me. He said not May, he said June, end of June.

MR YU: Just for the record, I think he first say May, so the interpreter was right, and then the witness said it was not May, end of June.

MR LEE: That’s correct.

A. There has been a lot of changes and that the markets have go down and I accept this.

MR YU: So tell my Lord, how did it come about that he was offering you $2, you were asking for $2.79, eventually how were you able to reach your agreement on price?

HIS LORDSHIP: Sorry, I don’t think his evidence was he ever asked for $2.79.

A. (In English) I never asked for $2.79.

MR YU: Right.

HIS LORDSHIP: According to his evidence earlier, it was Mr Cheung   who said, “I have read your annual report, it shows an NAV of 2.79   and it’s not worth 2.79 now.”

MR YU: Thank you, my Lord.

So tell my Lord how were you able eventually to reach a price?

A. Well, we did not arrive at the consensus about the price immediately.

Q. So how?

A. On the first meeting it was mentioned that the NAV was 2.79, and on the second occasion when we came out, he said that 2.79 was too high, and he was not willing to offer that. And so he offered $2. Yes, that’s it. But I find $2 is too low. I said, “If it is $2, I don’t think on that even my father would accept it.” I do not recall whether it was on the same occasion which he make the offer of $2.2 or whether it was in a subsequent telephone conversation which he made this offer and said, “$2.20, accept it or not. If you accept it, I’ll ask Woo Kwan & Lo to proceed with it.”

Q. How about yourself? Did you actually mention any price, offer any price?

A. On the first occasion, I did mention that if you offer a price close to the NAV of last year, that we would then consider. This is my offer.

Q. Yes. So the figure you had in mind was close to $2.79; is that right?

A. In my mind, I know that the price had dropped, but when doing business it does no harm just to throw out a price to see how the other side responds.

Q. All right. So apart from the indication that you were looking for a price close to the NAV for 1999, December, did you offer any other price?

A. At what stage?

Q. At any time?

A. I do not remember.

Q. So you might have, but you don’t remember?

A. I might have, but I do not remember.

Q. As far as Mr Cheung was concerned, apart from the $2, did he offer any other price?

A. Well, he first offered $2, but then our side did not accept, so the price $2.2 may be another offer from him.

Q. You don’t remember?

A. Correct, I don’t remember.

Q. And you don’t remember whether there were other prices mentioned or discussed?

A. I do not remember.

Q. Mr Chan, the negotiation was done on the basis of dollar per share; is that right?

A. No.

HIS LORDSHIP: Sorry, not -- was done on the basis of dollar per share?

MR YU: Yes.

A. What do you mean by the question?

Q. The negotiation on the price was done on the basis of dollar per share; is that right?

A. But there were other things that were negotiated.

Q. Yes. My question is: the premise upon which you and Mr Cheung negotiated was that he was only buying less than 35 per cent of the share capital; is that right?

A. Yes, that is correct. He already mentioned this on the first occasion.

Q. Because if he was to buy all your shares, he wouldn’t be offering you anything like $2 per share, is that right?

A. I do not know what price he would offer.

Q. Because he would not want to have to make a general offer.

A. I’m not familiar with this. Only those people who are familiar with that know how to do it.

Q. You are familiar, are you not, with the concept of general offer?

A.  Well, I cannot say that I am familiar with this, but as to the     concept of it, well, since this is something to do with the legal things,     well, I only know that it means somebody’s making an offer and as     to the technicalities, I do not know.” 

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

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

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

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

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

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

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

(i)  Chansam is described as “the Vendor”, Funrise as “the     Purchaser”, Yugang as “Yugang” and Thomas as “the   Guarantor”.

(ii)  Recitals (B) and (C) read as follows : -

“(B) The Vendor legally and beneficially owns 312,512,572 Shares representing approximately 39.2% of the issued share capital of the Company immediately prior to Completion assuming no Shares were issued since the date of this Agreement to Completion. As at the date hereof, Chan Tai Ho and Chan Sim Chu, persons deemed to be acting in concert with the Vendor and the Guarantor, legally and beneficially own 6,354,000 Shares and 12,964,416 Shares respectively.

(C)  The Sale Shares represent approximately 34.24% of all of the Shares in issue on Completion assuming no Shares were issued pursuant to the employee share option of the Company since the date of this Agreement to Completion. The Sale Shares represent approximately 82.27% of all the Shares  held by the Vendor and/or parties acting in concert with the Vendor (as such term is defined under the Code).”

(iii)  Clause 1 is the definition clause.  It defines : -

(a)  the “Sale Shares” as meaning “273,000,000 Shares beneficially owned by the Vendor”;

(b)  the “Completion Date” as being 28 September 2000 and

(c)  the “Executive” as “the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director”.

(v)  Clause 3(A) reads as follows : -

“(A)  The Purchase Price payable to the Vendor by the Purchaser shall be HK$600,600,000 (being HK$2.2 per Sale Share) (the “Consideration”) and shall be paid in cash by the Purchaser to the Vendor as follows : -

(a)  the sum of HK60,000,000 (“Deposit”) shall be paid by way of cheque upon the signing of this Agreement to the Vendor’s Solicitors and the Purchaser’s Solicitors as joint stakeholders subject to the terms and conditions of the Escrow Letter as deposit and in part payment of the Consideration; and

(b)  the balance of the Consideration being HK$540,600,000 shall be paid on Completion.”

(vi)  Clause 4(A) reads as follows : -

“4. CONDITIONS

(A) Completion of this Agreement is conditional upon the following conditions being fulfilled and remaining fulfilled or waived by the Purchaser as at Completion : -

(iv)  Confirmation from the Executive that the Purchaser or any parties acting in concert with the Purchaser will not be required to make a general offer pursuant to the Code in respect of all the issued Shares (other than the Sale Shares) as a result of Completion;”

(vii)  Clause 11(A) and (B) read as follows : -

“11. VENDOR’S UNDERTAKING TO DISPOSE SHARES AND ASSIST IN LITIGATION

(A) The Vendor further undertakes to the Purchaser to procure the sale to independent third parties, at least 7 days prior to the Completion Date, of all the Shares (other than the Sale Shares) held by the Vendor or any parties acting in concert with the Vendor.

(B) The Vendor undertakes to dispose of the Shares as   referred to in the Clause 11(A) above (excluding the   Sale Shares) only to independent person (as contemplated under the Code) who is independent of   and does not act in concert with the Vendor or the   Purchaser and to produce such verification or   confirmation in such manner as the Executive may reasonably require to satisfy itself of the acquirer’s independence.”

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

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

The NAV (Net Asset Value) of Prestige

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

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

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

“NET ASSET VALUE

The consolidated net asset value per share of the Company as at 31 December 1999 was HK$2.79 based on the 664,357,415 shares in issue as compared to HK$2.62 per share and 664,357,415 shares in issue as at 31 December 1998.

ADJUSTED NET ASSET VALUE

In March 2000, the Company issued a share placement of 132,800,000 new ordinary shares at a price of HK$0.50 per share to independent investors.  The placing shares represent approximately 20% of the existing issued share capital of the Company.  Taking into account the net proceeds from the share placement of approximately HK565 million and the enlarged number of shares in issue of 797,157,415 shares immediately after the placement, the adjusted net asset value per share would be HK$2.41.”

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

“Consideration

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

The purchase price per Sale Share represents a premium of approximately 266.67 per cent over the closing price of HK$0.60 per Share as quoted on the Stock Exchange on 28 July, 2000.”

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

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

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

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

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

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

My Findings on the Main Issue

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

(i)  I do not accept that the negotiations between Thomas and Mr. Cheung in relation to the Yugang Transaction   first took place at the end of June 2000 as alleged by Thomas.

(ii)  I find as a fact that at the time of the sale of the Sale   Shares on 22 to 24 May 2000, Thomas and Mr. Cheung   had well been into the negotiations or had even arrived   at an understanding or agreement in principle regarding   what eventually became the Yugang Transaction.  I base such finding, in particular, on the fact that in the   Yugang Transaction the parties plainly made it known   that the basis of negotiation for the price was the old   NAV figure of $2.79 per share as opposed to the   adjusted figure of $2.41 per share which was published   on 23 March 2000.

(iii)  On the bases of the way that Thomas made the decisions on the sale of the Sale Shares and the sale of   the shares in the Yugang Transaction and the way in   which he effected such sales, I find as a fact that   Thomas was at all material times the person in control of Playmates, Playmates International, Profit Point and Chansam. I further find as a fact that he did cause Profit Point to sell the Sale Shares on 22 - 24 May   2000. This was done for the sole or main purpose of   preparing for the implementation of what eventually   became the Yugang Transaction, so that the trigger   point of 35% for a general offer would not be reached.

(iv)  The sale of the Sale Shares was to the disadvantage of Profit Point and indirectly of Playmates International   and Playmates and to the benefit of Thomas and   Chansam.

(v)  Thomas should have included Profit Point in getting the   benefit of a sale of the Sale Shares at $2.20 per share   instead of between $0.60 and $0.70 per share, even by   arranging for Chansam to sell a smaller quantity of its   own shares to Yugang and Funrise.

(vi)  In the circumstances, Thomas has been in breach of his   fiduciary duty owed to Profit Point, Playmates International and Playmates and should compensate   Profit Point for its loss.

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

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

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

THE OTHER DEFENCES PUT FORWARD BY THOMAS

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

The Pleadings Point

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

24. If the Judge had indeed made a ruling on this issue when he ruled there is a serious question to be tried, the decision he reached on the merits of the case is clearly a provisional one subject to revision after trial.  It is not a final and conclusive decision capable of giving rise to res judicata.”

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

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

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

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

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

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

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

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

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

BVI Law

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

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

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

(i)  Waddington is not a direct shareholder of Profit Point.

(ii)  Waddington is seeking to sue Thomas in the name and/or on behalf of Profit Point for alleged wrongs done to Profit Point by way of a multiple derivative action.

(iii)  For multiple derivative actions, it is the law of incorporation (lex incorporationis) which governs whether a derivative action is available or permissible.

(iv)  Profit Point is a company incorporated under BVI law.

(v)  Section 184C (“Section 184C”) of the BVI Business Companies Act 2004 (“the BC Act”) which came into effect on 1 January 2005 is relied upon.  Under BVI law and, in particular, subsections (1) and (6) of Section 184C, multiple derivative actions are not possible or permissible.

(vi)  In the circumstances, Waddington being a stranger to Profit Point has no right to and cannot bring the present action in the name and/or on behalf of Profit Point.

99.Section 184C reads as follows : -

“184C. (1) Subject to subsection (3), the Court may, on the application of a member of a company, grant leave to that member to

(a) bring proceedings in the name and on behalf of that company; or

(b) intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.

(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the Court must take the following matters into account

(a) whether the member is acting in good faith;

(b) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters;

(c) whether the proceedings are likely to succeed;

(d) the costs of the proceedings in relation to the relief likely to be obtained; and

(e) whether an alternative remedy to the derivative claim is available.

(3) Leave to bring or intervene in proceedings may be granted under subsection (1) only if the Court is satisfied that

(a) the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or

(b) it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole.

(4) Unless the Court otherwise orders, not less than twenty eight days notice of an application for leave under subsection (1) must be served on the company and the company is entitled to appear and be heard at the hearing of the application.

(5) The Court may grant such interim relief as it considers appropriate pending the determination of an application under subsection (1).

(6) Except as provided in this section, a member is not entitled to bring or intervene in any proceedings in the name of or on behalf of a company.”

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

(i)  Section 184C (6) of the BC Act has the effect of preventing the bringing of a multiple derivative action (“MDA”).  It has the effect of abrogating any common law right which a party may have in bringing an MDA upon its coming into effect on 1 January 2005.

(ii)  As from the date of the coming into operation of the BC Act on 1 January 2005, no one can bring a derivative action, whether simple, double or multiple, except under the BC Act.

(iii)  Under the BC Act, there is no continuing parallel common law regime for all forms of derivative actions, including MDAs.

(iv)  The BC Act has retrospective effect in that it prevents the bringing of all common law derivative actions, including MDAs, on or after 1 January 2005, even though a right to pursue the same had accrued prior to that date, although no proceedings had actually been brought.

(v)  The amendments to the pleadings by Waddington in March 2007 did not relate back to the date of the Writ of Summons in this action in 2003.

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

(i)  MDAs were permissible at common law in the BVI prior to the coming into effect of the BC Act.

(ii)  The common law MDA continues to exist after the coming into effect of the BC Act since Section 184C only codifies and abrogates single derivative actions at common law and has left common law MDA untouched.

(iii)  In any event, Waddington’s right to bring a common law MDA on behalf of Profit Point in this case is protected, even if (contrary to proposition (ii) above) Section 184C did abrogate the common law MDA, because of (a) the common law presumptions against retrospectivity or (b) the saving provisions in paragraph 61 (1) (b) – (c) of Schedule 2 of the BC Act and the fact that in the present case the right to bring an MDA at common law had already accrued and that an MDA had actually been commenced before the coming into effect of the BC Act.

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

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

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

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

“260 Derivative claims

(1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company –

(a) in respect of a cause of action vested in the company, and

(b) seeking relief on behalf of the company.

This is referred to in this Chapter as a “derivative claim”.

(2) A derivative claim may only be brought –

(a) under this Chapter, or

(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).

(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.

(4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.

(5) For the purpose of this Chapter –

(a) “director” includes a former director;

(b) a shadow director is treated as a director; and

(c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.

261 Application for permission to continue derivative claim

(1) A member of a company who brings a derivative claim under this Chapter must apply to the court for permission (in Northern Ireland, leave) to continue it.

(2) If it appears to the court that the application and the evidence filed by the applicant in support of it do not disclose a prima facie case for giving permission (or leave), the court –

(a) must dismiss the application, and

(b) may make any consequential order it considers appropriate.

(3) If the application is not dismissed under subsection (2), the court –

(a) may give directions as to the evidence to be provided by the company, and

(b) may adjourn the proceedings to enable the evidence to be obtained.

(4) On hearing the application, the court may –

(a) give permission (or leave) to continue the claim on such terms as it thinks fit,

(b) refuse permission (or leave) and dismiss the claim, or

(c) adjourn the proceedings on the application and give such directions as it thinks fit.”

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

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

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

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

“English Legal Provisions Concerning Shareholder Remedies

In order to provide some perspective, it is useful to consider the remedies available to shareholders under English law.

The English law concerning shareholder remedies is partly contained in the UK Companies Act 1985 and is partly provided for by common law. ……………………………………………….

The Law Commission of England and Wales published a Consultation Paper on shareholder remedies in October 1996. Following a consultation exercise, the Law Commission published its Report in October 1997.

Although the recommendations in the Report have not yet been implemented, the UK Company Law Review Steering Group established in 1998 also considered shareholder remedies and reported its views in its final report issued in June 2001. The report has been broadly accepted by the UK Government. In its White Paper “Modernising Company Law” published in July 2002, the UK Government indicated its intention to prepare a new draft Companies Bill that, on enactment would replace the current Companies Act, 1985. Although a new Companies Bill covering audit, investigations and a new type of company, the “community interest company” is currently under consideration by the UK Parliament, the timetable for the bigger project is unclear. In a consultation paper published in March 2004, the Secretary of State stated that the Government will legislate “as soon as Parliamentary time allows”. However, a Companies Bill has not yet been published.

The Issues

There are two principal policy areas: derivative actions and the protection of minority shareholders. These are discussed separately below.

Derivative Actions

Under English common law, which in the absence of statutory provisions to the contrary, would almost certainly be held to apply in the BVI, a shareholder of a company may not normally bring proceedings in the name of the company to enforce a cause of action belonging to the company. There are two related principles behind this. The first is the “majority rule” principle. The second is the principle that one person cannot usually bring proceedings against a defendant in respect of a cause of action belonging to a third party (the so-called Rule in Foss v. Harbottle).

In the case of a company, the Courts have made a number of exceptions to the Rule in Foss v. Harbottle. In particular, the Rule will not be enforced by the Courts where:

l the alleged wrong that would form the basis for the proceedings is ultra vires the company;

l the transaction complained of could be validly done or sanctioned only by a special resolution; or

l what has been done amounts to a fraud and the wrongdoers are themselves in control of the company.

A number of jurisdictions have provided minority shareholders with statutory rights to take derivative actions in exceptional circumstances. Examples are Canada (the Canada Business Corporations Act), Australia (Corporations Act 2001), New Zealand (Companies Act 1993) and South Africa. The Law Commission of England and Wales in their Report referred to above, recommended that statutory provision be made for derivative actions with the leave of the Court and these Recommendations were adopted by the Company Law Review Steering Group in their Final Report. It is therefore most likely that statutory provision will be made for derivative actions in the new UK Companies Law that is expected to be drafted and enacted within the next few years.

The above models all require the shareholder to obtain the leave of the Court before commencing a derivative action. It is considered that this is an important safeguard against undue interference by shareholders in the management of the company and against excessive litigation.

The English Law Commission recommended that the derivative action procedure should be limited to claims in respect of breaches (or threatened breaches) of duty by a director or shadow director (including claims against third parties as a result of such breaches) but that it should extend to negligence by the directors or shadow directors. There is no such limitation in the legislation of some of the jurisdictions cited above, for example Canada and Australia, although under the Australian Corporations Act there is a rebuttable presumption that granting leave is not in the best interests of the company where the directors acted properly and in good faith in making the decision and did not have a material personal interest in the decision.

With regard to the class of persons who may bring a derivative action, the Australian legislation is very wide as it extends to members, former members and officers. The English Law Commission recommended that only a current member should be able to pursue a derivative action.

The statutory derivative action procedures in Canada, New Zealand and Australia replace the former common law provisions and the English Law Commission made a similar recommendation in respect of the UK.

Most of the legislation cited above provides the Court with guidance as to the matters that should be taken into account when determining whether or not an applicant should be granted leave to pursue a derivative action.

Pleas see the attached clauses 3 to 6.”

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

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

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

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

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

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

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

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

“ Who should be able to bring a derivative action

6.50 In the consultation paper we concluded provisionally that there was no justification for permitting former members to bring derivative actions. Our view was that there is bound to be a current member who (if the wrong has not been ratified) could maintain proceedings. We saw no reason why a former member should be able to bring a derivative claim if the current members were not willing to do so. The vast majority of respondents agreed with this view. For these purposes, “member” is defined by section 22 of the Companies Act 1985. We recommend that the derivative action should be available only to members of the company.

Extent to which common law rule should be abrogated

Should it entirely replace the common law derivative action

6.51 The vast majority of respondents agreed with the provisional view expressed in the consultation question that “an action which can be brought under the new procedure should only be capable of being so brought, and not also under the exceptions to the rule in Foss v Harbottle”. The question left open the possibility that derivative actions may still be brought under the common law in circumstances which fell outside the new procedure. However, it was apparent that many respondents considered that the new procedure should entirely replace the existing common law right to bring a derivative action.

6.52 Having considered the matter further, and in the light of the responses to the consultation paper, we consider that it would be desirable for the new procedure to replace entirely the common law right to bring a derivative action. In the consultation paper we quoted the following comments on the Canadian legislation:

It would only lead to confusion to allow both common law and statutory actions. A more orderly development of the law would result from one point of access to a derivative action and would allow a body of experience and precedent to build up to guide shareholders.

6.53 We noted that diverging principles might develop between the new procedure and the procedure at common law which would add to the current confusion. This would go against our stated aim of making the law simpler. We consider that the only way to avoid this problem is for the new procedure to replace the common law derivative action entirely.

6.54 As explained in the consultation paper and noted above, it is not only under the fraud on the minority exception that a share holder can bring a derivative action. He can also bring one for loss caused by an ultra vires or illegal transaction. He also appears to have the option to bring one in respect of breaches of special resolution procedures. We propose that these situations should also be replaced by the new derivative procedure so that they will be subject to the new restrictions and procedures discussed in this part. We consider that where a director causes a company to enter into an ultra vires or illegal transaction or one for which a special majority is required he will be regarded as having acted in breach of duty for the purposes of the new derivative procedure.

6.55  As indicated above, there may be a few very rare cases which could have been brought as derivative actions under the common law but will not come within the terms of the new procedure.  But we consider that if we are to put the derivative action on a new, simpler and more rational basis then this is something which cannot be avoided.  As we have explained, we consider that our proposals set logical and clearly identifiable limits on the availability of the action.  For any exceptional cases of hardship, there is still the possibility of bringing proceedings under section 459 and, if appropriate, seeking an order that proceedings may be brought on the company’s behalf under section 461(2)(c). We therefore recommend that the new derivative procedure should replace the common law derivative action entirely.”

116.  Later in Chapter 6 and under the main heading “Other relevant provisions”, the following appears : -

“ Multiple derivative acitons

6.109 Finally, in connection with the new derivative procedure, we raised the issue of whether a shareholder in a parent company should be able to bring a derivative action on behalf of a subsidiary or associated company within the group (which we referred to, for simplicity, as a “multiple derivative action”). We expressed no provisional view but invited comments on this point.

6.110  Although a small majority of respondents who addressed this issue did consider that provision should be made for multiple derivative actions, we are not persuaded that it would be helpful or practicable to include such a provision.  We consider that this situation is likely to be extremely rare and that any rule attempting to deal with it would be complicated and unlikely to be able to cover every conceivable situation.  We consider that the question of multiple derivative actions is best left to the courts to resolve, if necessary using the power under section 461(2)(c) of the Companies Act 1985 to bring a derivative action.  Accordingly, we do not consider that there should be any express provision dealing with multiple derivative actions.”

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

“ Conclusion

6.111 To summarise, we recommend that the right to bring a derivative action at common law should be replaced by a simpler and more modern procedure. We recommend that the basis of the right to bring a derivative action should be set out in the Companies Acts, but that the details of the procedure should be set out in rules of court so as to give maximum flexibility.

6.112  The derivative action should be available to current members of the company where the cause of action arises as a result of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director, or a director putting himself in a position where his personal interests conflict with his duties to the company (although the claim itself need not be against a director).  For these purposes, director should include both shadow and de facto directors.  However, derivative claims should be subject to tight judicial control at all stages.”

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

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

119.Briggs J. stated his conclusion thus : -

“Conclusion

44. I have come on balance to the conclusion that the 2006 Act did not do away with the multiple derivative action. My reasons follow. First, there was before 2006 a common law procedural device called the derivative action by which the court could permit a person or persons with the closest sufficient interest to litigate on behalf of a company by seeking for the company relief in respect of a cause of action vested in it. Those persons would usually be a minority of the company’s members, but might, if the company was wholly owned by another company, be a minority of the holding company’s members. These were not separate derivative actions, but simply examples of the efficient application of the procedural device, designed to avoid injustice, to different factual circumstances.

45. In 2006 Parliament identified the main version of that device, namely where locus standi is accorded to the wronged company’s members, labelled it a “derivative claim” and enacted a comprehensive statutory code in relation to it. As a matter of language, section 260 applied Chapter 1 of Part 11 only to that part of the old common law device thus labelled, leaving other instances of its application unaffected.

46. Applying the well established relevant principle of construction, Parliament did not expressly abolish the whole of the common law derivative action in relation to companies, even though by implication from the comprehensiveness of the statutory code it did do so in relation to derivative claims by members (as defined) of the wronged company. Beyond that, the assertion that the remainder of the common law device was abolished fails because abolition was neither express nor a clear or necessary implication.

47. Section 260 could so easily have been phrased to achieve precisely that result. Sub-section (1) could have excluded the phrase “by a member of a company” and re-introduced it in sub-section (2) as a specific additional requirement in sub-sub-section (1) so that it read “under this Chapter by a member of the company”. Alternatively, the whole of the common law derivative action in relation to companies could expressly have been abolished, as it was, for example, by section 236(3) of the Australian Corporations Act 2001 which provides that:

“The right of a person at general law to bring, or to intervene in, proceedings on behalf of the company is abolished.”

48. Neither Lord Millett nor any of the other academic writers who have concluded that the 2006 Act abolished multiple derivative actions have addressed the simple point of construction advanced by Mr Lightman, Mr Hollington QC and by Mr Bailey in the present case, and it may be assumed that the editors of Palmer must have applied the same or a similar analysis.

49. I reach this conclusion with some relief.  Not only does it address the manifest scope for real injustice which the abolition of any derivative action by members of a holding company would have entailed, and as graphically described by Lord Millett in his article, but it ensures that English company law runs in this respect in harmony with the laws of Hong Kong, Singapore, Canada, Australia and New Zealand, all of which have, albeit by different methods, ensured that injustice of the type described by Lord Millett can properly be addressed.”

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

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

(i) The wording of Section 184C is very clear.  It has the effect of abrogating all kinds of derivative actions at common law.  It only permits a single derivative action to be pursued.

(ii) The Fort Gilkicker case was probably wrongly decided.  In any event, the reasoning in that case is unlikely to be applicable to the statutory framework of the BC Act.  In the circumstances, that decision is unlikely to be followed by the BVI courts.

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

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

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

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

THE POSITION OF CHANSAM

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

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

(i)  Chansam, by entering into the Yugang Agreement, “knowingly and intentionally procured” Thomas to breach the fiduciary duties owed by Thomas to Profit Point.  (paragraph 46 of the Re-Amended Statement of Claim)

(ii)  Chansam conspired with Thomas to breach the fiduciary duties owed by Thomas to Profit Point.  (paragraph 47 of the Re-Amended Statement of Claim)

(iii)  Chansam dishonestly assisted Thomas in his breach of the aforesaid fiduciary duties and/or knowingly received the profits from the sale of its shares in Prestige denied from the breach of the aforesaid fiduciary duties of Thomas.  (Paragraph 48 of the Re-Amended Statement of Claim)

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

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

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

QUANTUM

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

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

INTEREST AND COSTS

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

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

CONCLUSION

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

135.I dismiss the claim by Waddington against Chansam.

136.I direct that : -

(i)  Waddington should file and serve its written submission within 14 days from the date of handing down of this Judgment, not counting Christmas Day, Boxing Day and New Year’s Day (if applicable), dealing with : -

(a) the basis of interest on the Judgment sum;

(b) the date from which interest should be payable;

(c) the party/parties in favour of which costs should be   payable;

(d) the basis for taxation of costs and

(e) certificate for Counsel.

(ii)  Thomas should file and serve his written submission in reply within 14 days from the expiration of the said period of 14 days on the same basis.

(iii)  I shall thereafter make a ruling on paper and without a hearing.

(iv)  I give the parties liberty to apply for directions, if necessary.

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

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

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

The 2^nd Defendant, in person, absent

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

The 4^th Defendant, in person, absent

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