Case Document

100%Judiciary

HCA 3291 of 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

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

________________

Before: Mr Recorder Patrick Fung SC in Chambers

Date of Hearing: 13 November 2014

Date of Decision: 26 November 2014

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D E C I S I O N

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THE APPLICATION

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

“1. there be an interim payment to the Plaintiff pursuant to the Order for indemnity in favour of the Plaintiff against the 5^th Defendant made by Recorder P. Fung SC dated 10^th March 2014 (“the Interim Payment”), which Interim Payment shall be paid out from the sum paid into Court by the 1^st Defendant on 21^st March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th Defendant (“the Sum in Court”);

2. the Interim Payment be in the sum of HK$30,913,708.39, or such other amount as the Court may deem just;

3. the 5^th Defendant do further indemnify the Plaintiff in respect of any costs incurred by the Plaintiff in CACV 10/2014 (“the Appeal Indemnity”) with liberty to the Plaintiff to apply for further payment out of the Sum in Court in respect of the Appeal Indemnity;”

BACKGROUND

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

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

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

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

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

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

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

“1. the 1^st Defendant do pay to the 5^th Defendant simple interest at 2.5% per annum on the judgment sum of $33,511,220.32 from 28^th September 2000 until the date of judgment;

2. the 1^st Defendant do pay into court the judgment sum of $33,511,220.32 together with interest thereon as aforesaid within 21 days from the date hereof pending further directions by the court;

3. the 1^st Defendant do pay to the Plaintiff the costs of this action to be taxed on the common fund basis, if not agreed;

4. there be a certificate for three Counsel;

5. the 5^th Defendant do indemnify the Plaintiff in respect of any costs incurred by the Plaintiff which it will not have been able to recover from the 1^st Defendant; and

6. the parties have liberty to apply to a Judge of the Court of First Instance for further directions in respect of the working out of this order, if necessary.”

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

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

PRELIMINARY MATTERS

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

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

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

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

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

THE CASE OF WADDINGTON

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

(i) Profit Point has no valid basis for making the preliminary objection or resisting the application for the following reasons : -

(a) Thomas, who was found to be the wrongdoer in the Judgment, is in control of Playmates which holds 100% of Playmates International and through it 100% of Profit Point.

(b) The only two directors of Profit Point have been Thomas and Mr To Shu Sing Sydney (“Mr To”).

(c) Mr To, who has made an affirmation (“Mr To’s Affirmation”) which was filed on 7 November 2014 on behalf of Profit Point in opposition to the application, is in fact a close ally of and acting at the bidding of Thomas. Mr To was also heavily involved in the impugned transaction referred to in the Judgment.

(d) Profit Point had all the time professed to take a neutral stance in the proceedings until shortly before the hearing of the present application.

(e) Thomas must have been aware of the present application since the time of the filing of the Summons in August 2014 but Profit Point (in effect acting for Thomas) did not file evidence of opposition until very shortly before the hearing, that is, by filing Mr To’s Affirmation.

(f) The resistance to the application is in reality put up for the benefit of Thomas who should have put up resistance himself by applying for a stay of execution pending his appeal against the Judgment.

(g) Thomas would have failed in any application for a stay pending appeal because he would not have been able to satisfy the test for such a stay, that is, whether there are strong grounds of appeal. Hence, he should not be allowed to resist the application through the back-door.

(ii) The court does have inherent jurisdiction to grant the application both for an order for interim payment and for indemnity for costs in relation to the appeal by Thomas.

(iii) The court should exercise its discretion in ordering the interim payment applied for for the following reasons : -

(a) Waddington has expended vast sums of money by way of legal costs in the past 11 years in the proceedings for the benefit of Profit Point.

(b) It is fair and just that Profit Point should reimburse Waddington in respect of such legal costs.

(c) On the authority of Wallersteiner v Moir (No. 2) [1975] QB 373, the court should order the company for whose benefit a derivative action is brought to indemnify the plaintiff in respect of the legal costs incurred.

(d) In any event, Waddington was in effect acting as the agent for Profit Point and, on the law of agency, the principal should indemnify the agent in respect of its expenses incurred for the principal.

(e) Now that money has in fact been recovered for Profit Point by way of the fruits of the litigation, Profit Point should reimburse Waddington for the legal costs expended.

(f) The purpose of paragraph 5 of the March Order is only to make sure that Waddington will not recover double both from Thomas and Profit Point. It does not derogate from the obligation on the part of Profit Point to indemnify Waddington.

(iv) The court should also exercise its discretion in ordering that Profit Point do indemnify Waddington in resisting the appeal by Thomas against the Judgment because it is clearly in the interest of Profit Point for the Judgment to be upheld so that Profit Point can keep the fruits thereof. By the March Order, the court has indeed already granted an indemnity by Profit Point in favour of Waddington regarding the legal costs of the action including the trial. A fortiori, there must equally be an indemnity regarding the legal costs of the appeal.

THE ARGUMENTS OF PROFIT POINT

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

(i) Thomas has not been served with the Summons. He has not been involved in the management of Profit Point.

(ii) Now that there is a sum of over $44 million sitting in court which is supposed to be due to Profit Point, any depletion thereof will be to the prejudice of Profit Point.

(iii) Paragraph 5 of the March Order only entitles Waddington to claim from Profit Point any shortfall which it is unable to recover from Thomas. Since Waddington has delayed in proceeding with the taxation of costs and since it is not known how much shortfall there will be, Profit Point should not be asked to provide any indemnification to Waddington at this stage.

(iv) The cases relied on by Waddington in support of the proposition that the court has inherent jurisdiction to order interim payments only relate to the ordering of interim payments in favour of provisional liquidators and have no application to the present situation.

(v) Regarding the indemnity for the costs of the appeal, the application should not be heard “ex parte”. I take that to mean that it should not be heard in the absence of Thomas.

THE PRELIMINARY OBJECTION

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

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

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

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

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

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

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

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

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

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

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

INHERENT JURISDICTION

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

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

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

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

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

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

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

(emphasis added)

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

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

(emphasis added)

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

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

SHOULD INTERIM PAYMENT BE ORDERED

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

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

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

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

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

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

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

AMOUNT OF THE INTERIM PAYMENT

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

(i) $29,526,728.39 being the total amount of legal costs, charges and disbursements incurred by Waddington up to 15 May 2014, of which $28,097,159.39 has already been paid by Waddington out of its own funds;

(ii) $1,386,980 being the sum at least presently estimated to be payable by Waddington to various parties.

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

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

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

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

INDEMNITY FOR THE APPEAL

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

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

CONCLUSION

48.I therefore make the following orders : -

(i) Upon the undertaking to the Court by each of the Plaintiff and Chan Chun Wai Albert through the Plaintiff’s Leading Counsel that they and each of them will account to the 5^th Defendant and pay back into Court such amount of costs as actually recovered by the Plaintiff from the 1^st Defendant following actual payment by the 1^st Defendant, there be an order for interim payment to the Plaintiff in the sum of $23,000,000 from out of the sum paid into Court by the 1^st Defendant on 21 March 2014 in respect of the judgment sum and interest thereon in favour of the 5^th Defendant.

(ii) An order that the 5^th Defendant do indemnify the Plaintiff in relation to the costs of the appeal by the 1^st Defendant to the Court of Appeal against the Judgment herein handed down on 18 December 2013.

(iii) An order nisi that the costs of this application be paid by the 5^th Defendant to the Plaintiff.