WADDINGTON LTD v. CHAN CHUN HOO THOMAS AND OTHERS

                    HCA3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3291 OF 2003 

____________________

____________________

________________

D E C I S I O N

________________

Plaintiff’s application to vary costs order nisi

1.  I will deal first with the Plaintiff’s application to vary the costs order nisi that I made when I handed down judgment on 29 April 2005 in respect of the 1^st Defendant’s application to strike out the claim against him, and the Plaintiff’s application for, in effect, a determination that a prima facie case for relief had been established against the 1^st and 2^nd Defendants.  The order nisi provided for the Plaintiff to pay the 1^st and 2^nd Defendants their costs of the applications.

2.  The Plaintiff has suggested three possible variations to the costs order nisi.  First, it suggests that it should receive a proportion of the costs of the applications as a whole, notwithstanding that I ordered that its statement of claim should be struck out (although I afforded the Plaintiff an opportunity to proffer an amendment to put forward a claim on a proper procedural footing).  Alternatively, it suggests that the 1^st Defendant should be deprived of part of his costs in relation to the applications.  Finally, it suggests in the further alternative that the costs of the applications should be in the cause of the action.

3.  I have to say at once that the third of those alternatives does appeal to me.  The applications were made decided on the basis of the arguments advanced before me, and I think that I should determine the incidence of the costs of the applications by reference to their outcome.  The fact that the action may proceed and may ultimately succeed does not mean that the applications do not fall to be dealt with on their own merits.  I therefore am not inclined to make an order that the costs of the applications should in any way be in the cause of the proceedings as a whole.

4.  As for the suggestion that some proportion of the costs should be awarded to the Plaintiff, whatever that proportion may be, again I have to say that I do not find much merit in that submission.  The principles on which the court acts in deciding how costs should be awarded at the end of a hearing are set out in Order 62 rule 3(2) of the Rules of the High Court and have been amplified in Re Elgindata Limited (No. 2) [1992] 1 WLR 1207, in which Nourse LJ said, in relation to the possibility of disallowing part of the costs incurred by a successful party, that the general rule, which is that costs should follow the event, does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but that where that has caused a significant increase in the length or cost of the proceedings, he may be deprived of the whole or a part of his costs. 

5.  Then, dealing with the question of the circumstances in which the successful party should be ordered to pay part or all of the costs of the unsuccessful party, Nourse LJ said that where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or part of the unsuccessful party’s costs.

6.  It is thus necessary to consider first who the successful and unsuccessful parties in the application were.  The 1^st Defendant’s application before me was to strike out the statement of claim as it was then formulated.  There can be little question but that the 1^st Defendant was successful in relation to that application.  The statement of claim, as it stood, was struck out.  I held that it was defective for the reasons I explained in my judgment.  In those circumstances, it seems to me quite clear that it was the 1^st Defendant who was successful, and not simply partly successful, in the applications before me. 

7.  In order, therefore, not just to deprive him of his costs but to order that he should pay part of the Plaintiff’s costs, it will be necessary for the Plaintiff to satisfy me that issues or allegations were improperly or unreasonably raised by the 1^st Defendant.  I do not think that this can be said of any of the points in respect of which I found against the 1^st Defendant and in favour of the Plaintiff.  Those points can, I think, be summarised as the following:  whether or not there was a prima facie case in relation to the Profit Point transaction; whether or not there was a prima facie case of wrongdoer control; whether or not the Plaintiff’s claim should be struck out on the basis of delay; and whether or not the Plaintiff’s claim should be struck out on the basis of there being an ulterior motive or on the basis that it was otherwise an abuse of process.

8.  Although I found against the 1^st Defendant on each of these points, I did not think at the time - and I do not think now - that there was anything improper or unreasonable in the 1^st Defendant ventilating these points before me and asking the court to determine them.  That being the case, I do not see any basis on which it would be proper for me to order that the 1^st Defendant should have to pay any part of the Plaintiff’s costs.

9.  I turn to consider whether or not the 1^st Defendant should be deprived of some part of his costs.  Having considered this matter carefully, I have come to the conclusion that it would not be appropriate for me to disturb the costs order nisi that I made when handing down my judgment.  I think it is fair to say that, of the various issues raised, there were some on which the 1^st Defendant was successful and others on which the Plaintiff was successful.  The Plaintiff, of course, ultimately succeeded in persuading me that it would be appropriate to afford it an opportunity to amend its case so as to put it forward on the basis of a double or multiple derivative action in relation to Profit Point. 

10.  That said, however, in my view, there are a number of points that should be made in connection with this aspect of the application.  The first is that although most of the time during the hearing was spent on the following matters, namely, first, the question of prima facie case as to the Profit Point transaction; secondly, the existence of a prima facie case relating to wrongdoer control; thirdly, the question of the applicability of the no reflective loss principle; and finally, the question of double or multiple derivative actions and whether they are permissible and an appropriate procedural form to be adopted, all of these were matters that had to be raised in the context of the applications before me. 

11.  Second, I think it is relevant not to lose sight of the fact that, although my judgment was delivered in the context of the application to strike out, at about the same time as the application to strike out was taken out, the Plaintiff itself took out an application, effectively, for leave to proceed and for a determination by the court that there was a prima facie case in relation to its claims.  That being so, I do not think it can really be said that the points about the existence of otherwise of a prima facie case on the questions of wrongdoer control or as to the merits of the Profit Point transaction itself (on which I found for the Plaintiff) are purely matters that had been raised by the Defendant.  They were in fact also raised by the Plaintiff in the context of its own application.

12.  Further, it seems to me that it would not be right to ignore altogether the time spent at the hearing and the preparation time spent in relation to the other transactions complained of, in respect of which I held that there was no prima facie case.  Although in the skeleton submissions in support of the present application, Miss Eu S.C. and Mr Suen pointed out that relatively little time or paper was devoted to these matters in the Plaintiff’s skeleton arguments - that is to say, the transactions in relation to Pretty Star and Bagnols - it seems to me that this really is a reflection of the fact that, when arguing the matter before me, Mr Chang S.C. chose, no doubt for good reasons, to focus more on what he conceived to be the strongest part of the Plaintiff’s case and less on the parts that might have considered to be weaker.

13.  In my view, if one looks at the matter overall, I do not think that it would be fair to say that there was a significant increase in the length or cost of the proceedings as a result of these points being argued and run.  The application before me took two and a half days.  It seems to me that whatever had been the case, even if the application had been limited only to the questions of no reflective loss, double or multiple derivative action, and the question of prima facie case had been dealt with relatively briefly, it is very unlikely that the application would have lasted significantly less time than in fact it did.

14.  In those circumstances, it seems to me that there is no good reason why I should hold that the general rule in this case should not apply.  As Nourse LJ said, the general rule does not cease to apply simply because a successful party raises issues or makes allegations on which he fails.  I think, putting it at its highest, that that is all that can be said in relation to the points raised by the 1^st Defendant that turned out, at the end of the day, to be unsuccessful.  That being so, I do not see any good reason to vary my costs order nisi and I therefore shall make that order absolute as far as the 1^st Defendant is concerned.

15.  I should add that in my judgment, I indicated that the costs of the applications which I dealt with should be paid by the Plaintiff to the 1^st and 2^nd Defendants.  That must have been a slip on my part since the 2^nd Defendant did not in fact join in the application to strike out.  As Mr Huggins has said today - and I think Mr Kotewall said at the time of the hearing - those acting on his side act only for the 1^st Defendant.  I therefore think there should be a variation of the order nisi only to the extent of deleting the reference to the 2^nd Defendant, which I did not participate and will thus have incurred no costs in relation to the applications.

3^rd Defendant’s application to vary costs order nisi

16.  I turn next to deal with the question of the 3^rd Defendant’s application for variation of the costs order nisi.  There is a preliminary matter in relation to this application, which is whether or not the 3rd Defendant should be permitted to make the application out of time, the summons by which the application was made not having been issued until 17 May 2005, when the time for making the application had already expired some four days earlier.  Having been shown by Mr Wong a letter from the 3^rd Defendant’s solicitors to the court and the other parties, which was dated 13 May 2005, the last day on which an application for variation should have been made, it would appear that the intention to make the application, at least, was notified to the court and to the other parties within the time limit, and the delay of four days in actually taking out the summons was contributed to by the fact that the three intervening days were a weekend and a public holiday.  In those circumstances, I think it would be right for me to entertain this application on its merits, and I shall extend the time for making the application accordingly.

17.  Having heard Miss Eu and Mr Wong as to this, I am, on balance, persuaded by Mr Wong that his client, the 3^rd Defendant, should have its costs of the application and of its attendance at the application.  Although it is right to say that the company in a derivative action, for whose benefit the action is brought, is, generally speaking, a nominal party, the fact remains that, in this case, the company was summoned before the court by both parties who issued a summons.  Having been summoned, it seems to me that the company was entitled to attend and, in this case, the company did not in any way abuse that entitlement by unnecessarily instructing counsel to attend and make submissions at the hearing.  It took, quite properly, a neutral stance and all that it did was to instruct solicitors to attend, essentially on a watching brief, which I cannot say was unreasonable having regard to the fact that it was summoned to appear, and that it is a public company which might well have been concerned to ensure that nothing was said that called for a response on its part.  I would also add that the 3^rd Defendant, through its solicitors, did put forward a helpful chronology, which I found to be of assistance in understanding the background to the matter and in preparing my judgment.  In those circumstances, it seems to me that its costs, which are unlikely to be particularly large in the overall context of the case, should properly be awarded to the 3^rd Defendant so that it will not be out of pocket in relation to them. 

18.  As I have come to the view that the 3^rd Defendant should be awarded its costs of and associated with the applications and of attending the hearing, it seems to me that, as between the parties, the appropriate party to bear those costs is the Plaintiff, as it was, in my view, the unsuccessful party in the application.  I shall therefore vary my costs order nisi to the extent of ordering that the 3^rd Defendant should have its costs of and occasioned by the applications to be paid by the Plaintiff, to be taxed on a party and party basis if not agreed.

Plaintiff’s application for leave to amend the Statement of Claim

19.  I turn now to consider the application by the Plaintiff for leave to amend its Statement of Claim pursuant to the opportunity which I had given it to do so in my judgment.  As to this, there are two main aspects for consideration.   The first concerns whether or not the 3^rd and 4^th Defendants in the current draft of the proposed amendments should be parties to the proceedings at all.  The 3^rd Defendant is Playmates Holdings Limited and the 4^th Defendant is Playmates International Limited.  The Plaintiff describes itself as suing on behalf of itself and all other shareholders in Playmates Holdings and also on behalf of Playmates International and Profit Point.  Miss Eu has submitted that it is proper and appropriate for Playmates Holdings and Playmates International to be made and remain parties to the proceedings. 

20.  As I understood her submissions, she suggested first that this arose directly as a corollary of the application of the no reflective loss principle, and secondly that they were necessary and proper parties because it was necessary for the plaintiff to allege and prove control at all levels from the injured company itself, that is, Profit Point, all the way up the chain to the company in which the plaintiff was a shareholder, that being Playmates Holdings.

21.  In my view, neither of these points is well-founded.  So far as the first is concerned, it seems to me that the corollary of the no reflective loss principle is in fact that there is no need and no basis for intermediate and ultimate holding companies to be joined in a multiple derivative action.  In this context the term “multiple derivative action” is simply intended to refer to a case where a derivative action is brought on behalf of a company by a plaintiff who is not an immediate shareholder in it, but is an indirect shareholder at one or more removes. 

22.  In order to determine whether or not intermediate companies ought to be joined as parties to these proceedings of this nature, it seems to me that it is important to focus on the allegations in the proceedings and on the relief that is sought in them.  When one examines the proposed amended Statement of Claim in this case, it is quite clear, as Mr Huggins S.C., appearing for the 1^st Defendant, has submitted, that no allegations whatsoever are made that concern any wrongdoing vis-à-vis either the 3^rd or 4^th Defendants.  Equally, no relief is sought on behalf of either the 3^rd or 4^th Defendants. 

23.  That being the case, I find it difficult to see that it can be said that the 3^rd or 4^th Defendants necessarily have to be parties to these proceedings.

24.  As for the suggestion that they are necessary parties because it is necessary to establish wrongdoer control in relation to them, it seems to me that that does not assist the Plaintiff either.  The fact that allegations may need to be made in the context of a claim does not mean that every party who is named in those allegations is necessarily a proper party to the proceedings.  No relief being sought, either against or in favour of, a party in respect of whom allegations are made, it does not seem to me that it is necessary or proper to join such a party to the proceedings. 

25.  Miss Eu also submitted that it was appropriate for the two companies to be joined as 3^rd and 4^th Defendants respectively because, as the question of control arose, it would be necessary to obtain discovery in relation to that issue.  With respect, that is not a good reason for joining them as a parties.  It may afford a basis for seeking such information from them by subpoena or other process, if appropriate, but the fact that allegations are necessary and have to be made and established to enable the Plaintiff to succeed in its claim at the end of the day, does not mean that the parties in respect of whom such allegations are made need necessarily be made parties to the action. 

26.  I think, ultimately, the fact that no relief is claimed on behalf of either Playmates Holdings or Playmates International means that they are neither necessary nor proper parties to these proceedings.  I would add that when I said in my judgment that I would leave it open to the plaintiff to decide on behalf of which company it wished to bring a claim, that was  prompted by the fact that, at the time of the striking out application and of my judgment, Profit Point no longer existed, having been dissolved and struck off the register in its place of incorporation.  Profit Point has now been restored to that register, and is therefore once again in existence and capable of being made a party to these proceedings and of receiving the fruits of the proceedings, if there are any, at the end of the day.  It was not my intention to suggest (and I do not think that I did suggest) that a derivative action could or should be brought on behalf of more than one company, where only one company was said to have suffered loss.  In this case the only party that is said to have suffered loss is Profit Point and it is, in my judgment, the only company that is a necessary and proper party to these proceedings.  I therefore am not prepared to accede to the application to amend insofar as it seeks to join, or retain, Playmates Holdings and Playmates International as defendants to these proceedings.  That is not to say that allegations in respect of them, in particular allegations of control of them by the 1^st and 2^nd Defendants, are not necessary as a matter of pleading, rather, it will simply mean that the pleading, insofar as it goes into questions of the 1^st and 2^nd Defendants’ alleged control of those two companies, will need to re-worded so that the companies are referred to simply by their name and not as defendants. 

27.  That leaves the question of whether or not the pleading is otherwise objectionable as it now stands on the grounds of lack of particularity.  I think Mr Huggins’ main concern was to ensure that the case against his client was properly particularised and put in such a way as to leave very little or no scope for the plaintiff to depart from its pleaded case and thus to effectively tie the plaintiff down to a particular case on which it would mount its allegations of wrongdoer control and wrongdoing on the part of the 1^st Defendant.  Having considered the criticisms that Mr Huggins has made of the pleading, while I would accept that there may be some scope for improvement in relation to its drafting, I think at the end of the day that it is tolerably clear what the case that is made in relation to control is. 

28.  At the Playmates Holdings level, control of that company by Mr Chan, the 1^st Defendant, is asserted to arise from the shareholding structure, in relation to which it is said that he (through a family trust) has a significant shareholding (at various times close to, or just over 50 per cent of the shareholding of Playmates Holdings), and that this shareholding was sufficient to indeed give him control over that company.  That was a matter that I considered in the context of the application to strike out.  I thought then, and still think now, that that is an adequate basis for an allegation of control.  It will rarely be possible for plaintiffs in cases of this nature to give chapter and verse on specific acts that demonstrate control on the part of an alleged wrongdoer.  It may well be necessary to start, at least, by alleging that control is to be inferred from the shareholding that the defendant has in the company in question. 

29.  As I read the paragraphs of the proposed Amended Statement of Claim that are now complained of, one of the main allegations that is made is that control is to be inferred from the shareholding structure of Playmates Holdings, Playmates International and Profit Point.  Although there might be scope for greater cross-referencing in the various paragraphs in which control and the appointment of directors are alleged, it seems to me that it is clear enough that this is one of the main planks of the Plaintiff’s case.

30.  The other main plank of the plaintiff’s case is to be found in paragraph 10(5), and the particulars thereunder.  That paragraph and its particulars appear to have been put forward in response to comments which I made when giving my decision on the last occasion when an amendment was proffered for consideration.  At that time there was an allegation that a number of directors of Playmates Holdings and Playmates International, other than the 1^st Defendant, were appointed by the 1^st Defendant.  I held that that allegation on its own was inadequate because it was necessary for particulars to be given so that the 1^st Defendant could know the nature of the case he had to meet in relation to that allegation.  It seems to me that that information is now provided, both by the information as to shareholding structure and as to the matters that are pleaded in the particulars under paragraph 10(5) of the proposed Amended Statement of Claim.

31.  Mr Huggins has submitted that in those particulars themselves require further particularisation.  Insofar as they consist of allegations that the 1^st Defendant personally chose the persons who were to be directors of the companies concerned, and that he determined their remuneration for their services as such directors, there comes a point when one has to draw a line and decide whether a particular allegation adequately informs the other party of the case he has to meet, and whether any further information as to it falls within the realm of evidence.  In this case it seems to me that this falls just on the right side of the line from the Plaintiff’s point of view.  I do not think, therefore, that the complaints of lack of particularity in respect of paragraphs 10(5)(a) (b) and (c) are well founded.  It seems to me that the allegations having been made, the plaintiff will be limited to those allegations and to the allegations in relation to shareholding structure in trying to establish its case that there was control by the 1^st Defendant of Profit Point, Playmates International and Playmates Holdings.

32.  So far as paragraph 10(5)(d) is concerned, the position is different, in that I agree with Mr Huggins that the last part of that paragraph does amount to no more than mere comment and speculation.  It does not materially add to the allegations in the Amended Statement of Claim and should not, therefore, be included in any amendment. 

33.  Finally, paragraph 10(5)(e) contains an allegation that benefits had been conferred by the 1^st Defendant on particular directors.  It seems to me that as there is an express allegation of the conferring of a benefit, which it is made in terms which leave it open as to whether other directors may be added as some later stage, it is appropriate that the plaintiff should be required at this stage to make clear its case as to whether or not there are any other directors on whom benefits are said to have been conferred.  If it cannot or does not do so at this stage, the pleading should be limited to the directors who are named.  It also seems to me that in this connection where it is alleged that a benefit in the form of shares was in fact conferred on the directors, it would appear from the material that is pleaded that the Plaintiff must be in possession of the necessary detail to enable it to specify the manner in which, or the time at which the shares were conferred, and it would, in my view, be appropriate for those matters to be properly spelt out so that the Plaintiff will have tied itself down to a particular case as to this allegation and the 1^st Defendant will know precisely what he has to meet in relation to it.

34.  Subject to those two matters, it seems to me that the amendments that are put forward do sufficiently disclose to the 1^st Defendant the case which he will have to meet in relation to the issue of wrongdoer control in respect of the three companies with which these proceedings are concerned. 

35.  As there are still some aspects of the pleading which require further re-drafting, I am not inclined to make an order granting leave to amend in the form of the proposed amendment, but would instead give the plaintiff a further opportunity to put forward a revised amendment addressing the matters which I have referred to above, namely, the continued retention of the 3^rd and 4^th Plaintiffs as parties, and the concerns about paragraphs 10(5)(d) and (e).