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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D E C I S I O N

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1.  I have before me two summonses issued by the 1st Defendant in these proceedings.  The first is a time summons, which was issued on 21 September 2006 seeking a further 14 days within which the 1st Defendant should be required to file a defence to these proceedings.

2.  Subsequently, on 3 October 2006, shortly before the time summons was due to be heard, a further summons was taken out seeking a stay of these proceedings pending the happening of one or other of various events.

3.  The first stay sought was a stay of all further proceedings in this action until after determination of the 1st Defendant’s appeal to the Court of Final Appeal, from a decision of the Court of Appeal given in this matter in CACV 220 of 2005.  Alternatively, it was suggested that all further proceedings in the action should be stayed until after determination of another appeal in these proceedings, CACV 134 of 2006.  In the further alternative, it was sought to extend the time for a service of defence until 28 days after either the making or refusal to make of an order for consolidation of these proceedings (HCA 3291 of 2003) and another set of proceedings issued earlier this year, HCA 1063 of 2006. 

4.  In order to understand the inter-relationship between the various appeals and proceedings, it is necessary to sketch in very briefly some of the somewhat complicated procedural background to these proceedings.  The underlying dispute in these proceedings is between the Plaintiff, who is a minority shareholder of Playmates Holdings Limited, the 3rd Defendant, who was disgruntled as a result of a number of transactions undertaken in relation to that company and its subsidiaries.

5.  In the original pleading the Plaintiff, Waddington Limited, sued on behalf of itself and all other shareholders in Playmates Holdings Limited, except the 1st and 2nd Defendants, in respect of three transactions.  The first of these was in relation to the sale of shares in an associated company of Playmates Holdings Limited called Prestige Properties Limited.  These shares were ultimately owned by Playmates Holdings Limited through what was then a subsidiary, but subsequently a sub-subsidiary, known as Profit Point Limited.  The shares were said to have been sold at substantially less than their proper value, taking into account the fact that the 2nd Defendant was able, some months after the sale in question, to secure a substantially higher price for the sale of its stake in Prestige Properties Limited.

6.  The second and third transactions related to the acquisition by another subsidiary of Playmates Holdings Limited, known as Autoestate Holdings Limited, which acquired from Prestige Properties Limited, two properties on separate occasions about a year apart; one in Canton Road, (in what was termed the Pretty Star transaction); and the second in Tuen Mun (in what was termed the Bagnols transaction).

7.  When the action was first brought it was brought as a derivative action on behalf of Playmates Holdings Limited, in which the Plaintiff was a shareholder.  However, the companies that suffered any losses as a result of the transactions were respectively Profit Point and Autoestate.  This raised a number of questions, one of which was whether or not Playmates Holdings would have been entitled to sue if it had brought an action itself in relation to the loss that was suffered by its subsidiaries.

8.  An application was made by the 1st Defendant to strike out the statement of claim in this action.  The application proceeded on a number of bases, one of which was the question of whether or not Playmates Holdings would have been a proper plaintiff in its own right, and therefore whether or not it was a proper nominal defendant in these proceedings.  It was also suggested that no reasonably arguable cause of action was disclosed in relation to any of the transactions complained of.

9.  That matter came before me at the end of April 2004.  In my judgment on the striking out application, delivered about a year later, I held that a reasonably arguable cause of action had been shown in relation to the Profit Point transaction, but not in relation to either of the Pretty Star or Bagnols transactions.  I also held that because of the no reflective loss principle, established in Johnson v Gore Wood and other cases, it was inappropriate for the action to be brought on behalf of Playmates Holdings Limited.  I went on to say that it was at least arguable that it was open to the Plaintiff to sue on behalf of the ultimate subsidiary which had suffered the loss by way of a multiple derivative action on behalf of that subsidiary.

10.  That decision was appealed to the Court of Appeal.  In its decision, delivered on 30 May this year, the Court of Appeal held that contrary to my view the Pretty Star and Bagnols transactions did disclose at least an arguable case of wrongdoing, and that therefore the Plaintiff should be permitted to pursue its complaints in relation to those matters as well as an overall scheme involving all three transactions which were complained of.  The Court of Appeal also took the view that that a multiple derivative action was at least a possibility and was arguable.  Although it is not entirely clear, it seems that the Court of Appeal took the view that it might be possible to pursue such an action by way of a derivative action on behalf not of the ultimate subsidiary company, which would have suffered the loss, but on behalf of the holding company of which the complaining shareholder is a shareholder.

11.  The position therefore is that at this stage the original statement of claim in this action, which I had struck out subject to giving the Plaintiff liberty to put forward amendments to cater for the observations that I had made in my judgment on the striking out application, has been reinstated.  However, between the time of my ruling and the decision of the Court of Appeal, the plaintiff proceeded with these proceedings by trying to take steps to put my ruling into effect.  It did so by proffering an amendment to the statement of claim which removed reference to the two transactions which I considered did not give rise to any reasonably arguable cause of action, and also to deal with the question of the proper parties by including as proposed further nominal defendants Profit Point, the subsidiary which on my view had suffered the loss in relation to the sale of its shareholding in Prestige Properties Limited, and also an intermediate holding company, which for a time existed between Playmates Holdings and Profit Point, which was called Playmates International Limited.

12.  When the application to amend came before me I indicated that I did not think, in the light of my earlier ruling, that it was either necessary or proper to include Playmates Holdings, or Playmates International as parties, since the party which had suffered the loss, and thus the party on whose behalf the claim ought to be brought, was Profit Point.  I therefore declined to give leave to amend in the form of the amendment proffered, but gave the Plaintiff a further opportunity to proffer an amendment, which I envisaged would only have Profit Point as the nominal party in substitution for Playmates Holdings.  The Plaintiff was concerned as to whether or not this was the right procedure and appealed this decision to the Court of Appeal as well.  That appeal is CACV 134 of 2006. 

13.  My ruling which led to CACV 134 of 2006 was delivered before the hearing of the appeal on the striking out proceedings, which was CACV 220 of 2005.  It had been the Plaintiff’s hope that both appeals could be dealt with at the same time and they took steps to have CACV 134 of 2006 listed for hearing at the same time as the striking out appeal.  However, when the appeals came on for hearing the Court of Appeal decided that it would not be appropriate to deal with CACV 134 of 2006 at that point and accordingly adjourned it to a later date to be fixed.  In the event, that appeal is now fixed for hearing towards the end of March 2007, about six months from now.

14.  In the meantime a further procedural complication arose, which was that, as a result of the operation of Order 15, rule 8 of the Rules of the High Court, any amendment of these proceedings to add parties would not become effective until service was effected on the parties concerned.  That meant that at that stage, at least, service would have to be effected on Profit Point, and, if it were permitted to remain and to be kept as a nominal party, Playmates International, but so far as Playmates International was concerned, that could only happen after the outcome of the appeal against my ruling on the amendment. 

15.  Because of limitation concerns and because the action would not be deemed to have commenced against the added parties until they were actually served, the Plaintiff saw a need to take out a fresh writ naming all three nominal defendants in order to preserve their position in terms of limitation pending the outcome of the appeal.  That fresh writ was issued in HCA 1063 of 2006.  It was the Plaintiff’s intention to consolidate that action with these proceedings in due course, once the outcome of the appeal was known.

16.  In the event, where we are left at the moment is that the Court of Appeal in CACV 220 of 2005 has reinstated the original pleading.  There is a separate action, HCA 1063 of 2006, in which it was intended to bring the same claim in substantive terms in relation to the Profit Point transaction, that being the only transaction on which proceedings were permitted to continue at the time when it was brought as the Court of Appeal had not, at the time of the issue of that writ, ruled on the question of whether the claims in respect of the other transactions involving Pretty Star and Bagnols were reasonably arguable.  The position therefore is, at this stage, that the present proceedings have a viable statement of claim in the light of the judgment of the Court of Appeal in CACV 220 of 2005. 

17.  However, Mr Lee, who appears for the 1st Defendant, has submitted that it would be unfair and inappropriate to require the 1st Defendant to file its defence in these proceedings until after the question of parties had been fully sorted out and in that respect he says that the appeal in CACV 134 of 2006 may well be relevant.  He says that the intended appeal by the 1st Defendant to the Court of Final Appeal against the decision in CACV 220 of 2004, which will also raise question of who are properly parties to these proceedings, will also be relevant, and that an application for leave to appeal to the Court of Final Appeal is due to be heard by the Court of Appeal on 31 January next year.

18.  Miss Sit has submitted that contrary to Mr Lee’s position, the situation is in fact that the substantive claims of the plaintiff are known and have a clear and, at this stage at least, reasonably final shape.  They are as pleaded in the original statement of claim in this action in relation to each of the three transactions of which complaint is made.  Miss Sit points out that whatever may be the outcome of the appeal in CACV 134 of 2006, or any appeal to the Court of Final Appeal, assuming that leave is given, it is only in the event that the Court of Final Appeal comes to the view that Playmates Holdings Limited cannot be a proper nominal party in these proceedings because of the no reflective loss principle, and that there is no means of bringing a multiple derivative action on behalf of the ultimate subsidiary that actually suffered the loss, that the Plaintiff will not be able to proceed with this claim.

19.  It seems to me that there is much force to that submission.  In my view, although it is fair to say that the final shape of the statement of claim, insofar as the nominal parties to it, that is to say the intended recipients of any award of damages that might be made in respect of the alleged wrongdoing, is yet to be finalised, that does not, in my view, apply to the substantive complaints or the underlying facts which are said to give rise to a right of relief on the part of one or other of the intended nominal parties.

20.  The proceedings relate to matters that took place as long ago as the years 2000 and 2001.  The action was commenced in 2003.  Although there was some delay in bringing the proceedings in the first place, there has since been substantial further delay through the procedural applications that have taken place in the proceedings to date.  It seems to me that in the circumstances it is important for the action to proceed as best it can, pending the resolution of whatever further appeals may be proceeded with in the future. 

21.  I say this because it seems to me that as a matter of case management it is undesirable for matters that date back so many years to be left in abeyance without the parties setting out their respective cases and proceeding on to the preparation for an eventual trial of the proceedings, because it seems to me that the longer the amount of time that lapses, the greater is the danger that documents may be lost, or that witnesses’ memories may fade, or that evidence which might otherwise have been available in support of, or in contradiction of, the claims brought by the Plaintiff may be lost.

22.  It seems to me that unless there is some real disadvantage or unfairness to the defendant in requiring him to put forward his case by way of defence at this stage, it would be preferable and appropriate to order the action to proceed, leaving it to the other action to catch up and any amendments which may be necessitated as a result of the appeal in CACV 134 of 2006, to be made as and when the need arises.  It seems to me that given that the substantive factual claim of the Plaintiff is clear and has been put forward in its pleading, there is no reason why the 1st Defendant, who is the alleged wrongdoer, should not be in a position to put forward a defence of substance to the claims.

23.  The only matter that remains outstanding is the question of which company should be the recipient of any award of damages made against the 1st Defendant in the event that the claims against him succeed.  That does not seem to me to be a matter of such great significance in the overall scheme of things as to require the further delay to these proceedings that would be necessitated either by waiting for the outcome of any possible appeal to the Court of Final Appeal, or by waiting for the outcome of the pending appeal to the Court of Appeal, against my ruling on the amendment to add Profit Point and Playmates International as parties to these proceedings.

24.  It seems to me that as the shape of the allegations is now clear, it is appropriate for the Defendant to respond to those allegations and for the matter to proceed.  In the event that it is decided that the appeal in CACV 134 of 2006 need not be proceeded with, which is a matter for the Plaintiff to consider with his legal advisors, it would be open to the Plaintiff to proceed with its consolidation summons and get on with the matter on that basis.

25.  If it is decided by the Plaintiff that it would be safer to proceed with the appeal, and if the Court of Appeal takes the view that it is in order for all three proposed nominal defendants to be joined as nominal defendants in the alternative, then that too will involve only a small amount of further pleading in relation to the elements of wrongdoer control in respect of those nominal defendants.  Again, I do not see that it would take a great deal of time or work to enable the action to be amended and to effectively catch up, as it were, with itself. 

26.  Finally, as far as the potential appeal to the Court of Final appeal is concerned, it seems to me that with respect to Mr Lee, that it is at least an open question as to whether or not the matter will eventually reach that court, because the matter is, after all, an interlocutory one in respect of which leave will be required.  Even if leave is granted, it is unlikely that the appeal will be finally disposed of for some considerable time.  Given that the length of time that has already elapsed since the commencement of these proceedings and the events which underlie them, it seems to me that it would be unsatisfactory to further delay the proceedings for the length of time that may be required before the Court of Final Appeal is able to hear and determine the proposed appeal to it, assuming that leave to appeal is given.

27.  I say that particularly in light of the fact that it is only in the event that the Court of Final Appeal holds that both the no reflective loss applies so as to prevent Playmates Holdings suing and that no form of multiple derivative action is possible, so as to leave the plaintiff effectively without a remedy in this situation.  That is not a course that can be ruled out, but it seems to me that in the circumstances it is not an outcome which is so overwhelmingly probable as to make it necessary or desirable or just that these proceedings should be held up further.

28.  In the circumstances it seems to me that the proper course, as a matter of fairness to both parties on both sides, is that the matter should now proceed and that the 1st Defendant should be required to file his defence to this action in relation to the statement of claim in its original form as reinstated by the Court of Appeal, within a reasonable time.  For those reasons I would dismiss the application for a stay.  As I understand it, the application for an extension of time is not opposed, and I will therefore grant an extension of time of 14 days from today for the filing of the 1st Defendant’s defence in these proceedings.