WADDINGTON LTD v. CHAN CHUN HOO THOMAS AND OTHERS

cacv 220/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 220 of 2005

(on appeal from HCA NO. 3291 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from a judgment of Barma J given on 29 April 2005.  The matter before the judge was an application by the first defendant to strike out the proceedings on the grounds that the plaintiff was not entitled to bring or continue the action and alternatively that there was no prima facie case disclosed by the plaintiff and, secondly, an application by the plaintiff seeking leave to proceed with the action on the basis that the court was satisfied that there was a prima facie case that the third defendant was entitled to relief against the first and second defendants.

2.  The judge ordered that the statement of claim should be struck out under Order 18 rule 19 of the Rules of the High Court and under the inherent jurisdiction but he gave leave to the plaintiff to file an amended statement of claim within 42 days.  It might be mentioned that subsequently the plaintiff has made 2 different applications for leave to file an amended statement of claim but those applications have been refused although indications have been given that some form of statement of claim would be permitted.

3.  The first defendant appealed against the judge’s order submitting that the action should have been struck out and that no amendment was permissible.  The plaintiff cross appealed on the basis that the judge should have permitted the action to continue and not struck out the statement of claim.  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

4.  The third defendant (which for convenience will be referred to as “Playmates”) was incorporated in Bermuda in 1991 and since 1994 has been listed on the Hong Kong Stock Exchange.  Previously it had been a subsidiary of another listed company, Prestige Properties Holdings Ltd (“Prestige”).

5.  The plaintiff is a company through which Mr Albert Chan Chun Wai and his family have held their interest in Playmates.  For convenience he will be referred to in this judgment, as in the judgment below, as “AC”.  At all relevant times the plaintiff has held some 6.5% of the issued share capital of Playmates.  The first defendant is one of AC’s brothers and will be referred to as “TC”.  It is alleged that TC and his family had an 85.2% interest in the trust of which the second defendant, “Chansam”, was the trustee.  It was a discretionary trust which at all relevant times held a substantial interest in Playmates.  As set out in the judgment, that interest was 47.21% of the issued share capital as at the 31 December 1997, 1998 and 1999, 44.76% of the issued share capital as at 31 December 2000 and 49.55% of the issued share capital between March 2001 and 28 December 2001.  Thereafter Chansam’s shareholding in Playmates was acquired by another company, Angers Investments Ltd (“Angers”), but that is alleged to have been another company through which TC and his family held their interest in Playmates.  Angers owned 49.55% of the issued share capital of Playmates as at 31 December 2001 and 46.83% as at 31 December 2002.  The relevance of this is that the plaintiff’s allegation is that at all relevant times TC controlled Playmates through these shareholdings.

6.  In brief the plaintiff’s complaint is that the first defendant arranged a sale of a one third shareholding in Prestige, being the bulk of the Prestige shareholding held by Chansam.  That provided something over $600 million to Chansam.  Per share that was nearly 4 times the market price of Prestige shares at the time.  This was followed shortly afterwards by Prestige selling what, in effect, was an unattractive investment property to Playmates for $498 million.  About 18 months later there was a sale of another lesser property to Playmates for $52 million.  It is the plaintiff’s case that these were interlinked transactions and that Playmates had to raise money in order to finance them.  Not only that, but Playmates had to be divested of the shareholding held on its behalf in Prestige because the purchaser of the Prestige shares did not want to fall foul of the Stock Exchange rules which required a party acquiring a 35% shareholding of a public company to make a public offer for the remainder of the shares.  Nor did it want to be accused of acting in concert.  Had the shares in Prestige held for Playmates not been disposed of, the purchaser of Chansam’s shares in Prestige and the first defendant might have been vulnerable to an accusation of acting in concert in view of TC’s controlling shareholding in Playmates.  The Prestige shares held for Playmates were sold in the market at market price, that was, thus, at almost a quarter of the price per share achieved by Chansam.  The scheme of how that was done is set out in paragraphs 14 to 22 of the judgment of the court below.

7.  Between 22 and 24 May 2000, the entire 4.28% shareholding in Prestige held in the name Profit Point Ltd (“Profit Point”), which was a wholly owned subsidiary of the plaintiff, was sold on the stock market at prices ranging between HK$0.60 and HK$0.70 per share.  The sales were transacted at market price.  The sales generated proceeds of approximately HK$22.2 million.

8.  On 28 July 2000 Chansam entered into a conditional sale and purchase agreement with Funrise Limited (“Funrise”), a BVI company which is a wholly owned subsidiary of Yugang International Limited (“Yugang”), a Bermuda company which is also listed on the Stock Exchange.  Yugang is an investment holding company with interests in various business sectors.  The agreement was for the sale by Chansam to Funrise of some 34.25% of the issued share capital of Prestige (some 273 million shares) at a price of HK$2.20 per share.  At the time, the market price of shares in Prestige was HK$0.60 per share.  Doubtless, such a commanding size of shareholding in a public company might achieve that sort of premium, if there were no other major shareholder.  The agreement was conditional on Funrise not being required to make a general offer for shares in Prestige (a requirement which would be triggered if Funrise, either alone or together with parties acting in concert with it, came to hold 35% of the shares of Prestige).  As part of that arrangement, Chansam undertook to sell, or procure the sale of, all other shares in Prestige held by it or parties acting in concert with it (totalling a further 7.38% of Prestige’s issued share capital) to independent third parties who were not acting in concert with either Chansam or Funrise not later than 7 days prior to completion of the sale to Funrise.  That, therefore, was done by selling the shares on the stock market.

9.  It is the Plaintiff’s case that at the time when the Prestige shares held in the name of Profit Point were sold on the market, TC had already begun to negotiate the sale of Chansam’s shares to Yugang and that the essential terms of the latter sale were already agreed.  It is said that if TC had complied with his duties as a director of Playmates he would have arranged for Playmates to participate in and benefit from the substantially higher sale price agreed with Funrise for Chansam’s shares in Prestige.  Instead, he simply enabled Chansam to maximise its profits from the sale to Yugang.  It is said that TC thus breached his fiduciary duty to Playmates.  It is said that in consequence, there was a loss of HK$52.9 million, or at least HK$41.6 million, depending on whether the entirety or only a proportionate part of Playmate’s indirect shareholding in Prestige should have been included in the sale to Funrise.  One of the matters raised on this appeal is that this was a loss of Profit Point and the loss suffered by Playmates was only a consequential loss suffered as a result of its shareholding in Profit Point and thus a “reflected loss” which was irrecoverable in law.  Before leaving this aspect, it can be noted that in Playmates Annual Report for 1999, published on 23 March 2000, just 2 months before the sale of the Prestige shares, inter alia, the Prestige shares were referred as forming “a substantial portion of the net assets held by “the [G]roup”.  Moreover, it was stated that that investment was intended to be held “for the long term”.  Whether that was simply a device to enable the accounts to be drawn up on the basis of net asset value rather than market value is, perhaps, at this stage, a matter for conjecture.

10.  The next part of the arrangement was the purchase of Pretty Star Limited, (“Pretty Star”), from a subsidiary of Prestige and of a debt owed by Pretty Star to another subsidiary of Prestige from that other subsidiary.  On 4 December 2000, Autoestate Properties Limited (“Autoestate”), another wholly owned subsidiary of Playmates, entered into a sale and purchase agreement with two subsidiaries of Prestige namely Prestige Properties International Limited (“Prestige International”) and Prestige Finance Limited (“Prestige Finance”) by which Autoestate agreed to acquire from Prestige International the entire issued share capital of Pretty Star and from Prestige Finance a debt owed by Pretty Star to Prestige Finance.  The total consideration of HK$252,065,866 was split as to HK$47,648,483 for the shares and HK$204,417,383 for the debt.  The only relevant asset was a property at 100 Canton Road, Kowloon, 6 floors of which were occupied by Playmates as their headquarters.  The rather convoluted arrangements surrounding this sale are set in paragraph 17 to 19 of the judgment below:-

“17. The sale and purchase was conditional on a number of conditions being satisfied, including the completion of a loan restructuring.  This related to a loan facility which had been granted to Prestige Finance by Hang Seng Bank Limited, the outstanding balance of which was HK$224 million as at 20 December 2000.  This loan facility was secured by a mortgage over the Canton Road Property, which, as I have noted, was the principal asset of Pretty Star.  Pretty Star itself owed Prestige Finance some HK$442,417,383 in respect of a loan which had been made to it by Prestige Finance.  In order to secure the release of this mortgage in favour of Hang Seng Bank Limited, Prestige was to borrow a fresh loan of HK$238 million from a bank in Hong Kong against the security of the Canton Road Property, such fresh loan to be repayable one year after drawdown.  The loan proceeds would be used to pay down the loan to Pretty Star from Prestige Finance so as to bring the loan balance down to HK$204,417,383.  Prestige Finance would use the monies repaid to it by Pretty Star to repay its loan to Hang Seng Bank Limited, thereby releasing the Canton Road Property so as to make it available to be mortgaged by Pretty Star to the bank from which it obtained the fresh loan.

18. The net effect of the loan restructuring and the purchase by Autoestate of the balance of the debt owed by Pretty Star to Prestige Finance was that Prestige Finance would recover in full the monies which it had lent to Pretty Star, and Pretty Star would be left owing HK$238 million to the bank from which it obtained the fresh loan, and HK$204,417,383 to Autoestate (which acquired the balance of the Prestige Finance loan to Pretty Star from Prestige Finance).  The bank would be secured by a mortgage over the Canton Road Property, whereas the loan acquired by Autoestate would be unsecured, and would depend for its repayment principally if not entirely (as the rental yield from the property was said to be unlikely to be sufficient to enable Pretty Star to effect any meaningful repayment of the loan to it) on the value of the Canton Road Property after allowing for the debt owed to the bank.

19. The agreed value of the Canton Road Property for the purpose of the transactions was HK$498 million.”

11.  It is alleged that there was no adequate financial, commercial or other proper reason for these transactions, and that they were not entered into bona fide in the best interests of Playmates, or were otherwise detrimental to its interests.  The rental yield of the Canton Road property was 2.69%.  In the disclosure documents issued by Prestige to its shareholders relating to this transaction, because it was disclosable and related transaction, Dao Hang Securities said:

“We concur with the Directors’ view that such rental yield is not satisfactory when compared with the similar investment buildings of which annualised rental yield for the financial year 2000 (based on the total rental income received for the nine months ended the 30^th September, 2000) is higher than 5%.”

12.  Playmates itself issued disclosure documents in relation to the Pretty Star transaction with a view to there being a special general meeting to approve the purchase.  In those documents it is stated:

“The Directors are of the opinion that, after taking into account the internal resources and the available banking facilities of the Enlarged Group and barring any unforeseen circumstances, the Enlarged Group has sufficient working capital for its present requirements.”

13.  Despite this show of optimism, Playmates found it necessary to raise, almost immediately, a substantial amount by a rights issue.  The rights issue was to raise immediate funds for the company of an aggregate net sum of approximately $105 million after deducting the estimated expenses.  It was said in the documents that the proceeds were “currently intended to be used as payment of initial costs for the Group’s current and ongoing licensing commitments (which include royalties and development costs of relevant toy products), and, if there is any remainder after satisfying such commitments, for reducing the bank borrowings of the Group and as general working capital of the Group”.

14.  When it is considered that royalties are usually payable on turnover and are most certainly predictable, the fact that the statement as to adequacy of internal resources could have been made in relation to the Pretty Star purchase so soon before it was found necessary to raise a very substantial sum for the payment of royalties, albeit possibly in respect of new licences to be entered, raises considerable questions as to the thoroughness and effectiveness of the board of directors and those responsible for financial oversight of Playmates.  Whether it shows worse in relation to the person(s) responsible for the two transactions remains to be seen.  Nevertheless, it can be said that on the face of the matter there would have been no need for a rights issue had the Pretty Star transaction not been effected.

15.  It is further alleged that as a result of these transactions Playmates has suffered substantial losses as the Canton Road Property had dropped in value from the agreed value of HK$498 million to HK$257 million by September 2003, when the writ in these proceedings was issued, a fall of HK$241 million.

16.  At the end of June 2002 Autoestate agreed to acquire the entire issued share capital of Bagnols Ltd (“Bagnols”).  The acquisition was pursuant to a sale and purchase agreement by which Autoestate agreed to acquire Bagnols for a cash consideration of HK$14.2 million.  Bagnols owned a Tuen Mun Property.  Bagnols’ main liability was a bank mortgage loan of HK$38.5 million, secured on the Tuen Mun Property.  For the purposes of this transaction, the Tuen Mun Property was agreed to be worth HK$55 million, implying that there was net equity in the property of slightly in excess of the amount agreed to be paid for Bagnols.

17.  As with the Pretty Star transaction, it is alleged that there was no adequate financial, commercial or other proper reason for the acquisition of Bagnols and that the acquisition was not made bona fide in the best interests of Playmates.  It is further alleged that as a result of this transaction, Playmates suffered a loss, as the Tuen Mun Property dropped in value from the agreed value of HK$55 million at the time of the transaction to HK$32,450,000 as at September 2003, a depreciation in value of some HK$22,550,000.

18.  Again, the plaintiff relies on the fact that there had been a rights issue.  The closing date for taking up the rights had been 2 May 2002.  The amount raised by the rights issue had been just under $52.5 million.  Interestingly the reason given for the rights issue had been blandly stated to be “for general working capital purposes”.

19.  The judge refused to draw the inferences which the plaintiff relied upon.  In paragraphs 104 to 113 of the judgment he expressed the view that he could not see any connection between the various transactions.  He said, for example, that he did not think that the proximity of the sale of the Prestige shares and the Pretty Star transaction affected the matter.  I regret to say that I am unable to agree with the judge in his refusal to accept that the inferences which the plaintiff seeks to draw are valid inferences which could be drawn.  At the stage of a striking out the court has to assess whether the plaintiff has a sustainable case.  The time for deciding whether it is correct to draw any necessary inferences and whether the plaintiff succeeds in the case usually only comes once the court has heard all the evidence. 

20.  The difficulty that has arisen, in my view, may stem from the fact that the pleadings commenced on the basis of dividing up the various transactions and whilst relying on the complete picture, or overall effect of the transactions, that matter came towards the end of the pleading.  In assessing the plaintiff’s case, the judge also divided up the transactions.  But it seems to me that what is necessary is to look at the totality.  So many of the transactions, in particular the immediate divestment by Prestige of its commercially unattractive property leading to a substantial improvement in its financial position followed, almost immediately, by a rights issue by Playmates, which had thitherto never been suggested, at least to the shareholders and the public and indeed quite the reverse is true, leads to the belief that the plaintiff does have a valid case that, in effect, TC has benefited by the sale of the Prestige shares held by Chansam and has in the process caused Playmates to lose out by selling its previously considered long-term investment at a fraction of the price at which TC and his family sold their shares and, indeed, caused Playmates to acquire seemingly bad investment properties and to make rights issues at the same time, to boot.  There may be valid explanations for all the transactions but that cannot be assumed at the moment.  In summary, I see no reason why the plaintiff should not proceed with its derivative action.  In so saying I do not lose sight of the fact that the commencement and prosecution of a derivative action against the management of a public company is a very serious matter.

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

22.  Mr Joffe argued that the plaintiff had not established that TC was in control of Playmates.  Quite apart from the fact that the plaintiff, as I have already indicated, was not required to prove anything at this stage, the indisputable shareholding by Chansam was clearly sufficient for the plaintiff to base a case on the footing that the TC had control of Playmates.  The argument on behalf of the TC was that in order to establish control of a company it was necessary for the person said to be in control to be able to command a 50% voting right either by reason of his own shareholding or combined with that of others who would be expected would vote with him.  In my view this is creating far too high a test of what constitutes control.  Control is a practical matter.  What degree of voting power is sufficient to constitute control varies with the circumstances of each company.  It may be noted that Prestige found it necessary to go to the trouble and expense of not only issuing the documents entitled “Disclosable and Connected Transaction” in relation to the Pretty Star sale but also to obtain the sanction of the independent shareholders precisely because TC was the “indirect controlling shareholder of Playmates”.  In the Playmates disclosure documents TC was described as being the controlling beneficial shareholder of Playmates.  It is a fact that a number of companies in Hong Kong are, for practical purposes, controlled by shareholders having less than even a 20% shareholding.  The fact that the rules of the Stock Exchange require a general offer to be made when a shareholding of 35% is achieved is a reflection of the perception that a 35% shareholding would almost undoubtedly command control of a company.

23.  Whilst the judge did not accept that the plaintiff was entitled to commence proceedings on the basis of a derivative action on the basis of the overall agreement, he did consider that it was open to the plaintiff to bring proceedings in respect of the sale of the Prestige shares held in the name of Profit Point.  The point at issue there is that the plaintiff was not, of course, a shareholder of Profit Point.  The shares in Profit Point’s name were at all material times treated as being assets of the Playmates’ Group.  It was thus acknowledged that any action brought in respect of a wrong done to Profit Point would constitute what has been referred to as a double or multiple derivative action.  Mr Joffe argued that such actions are not maintainable as a matter of law.

24.  The principal argument as to why double or multiple derivative actions are not maintainable was that only a shareholder can bring a derivative action on behalf of a company of which he is a shareholder and since a shareholder of a holding company is not a shareholder of a subsidiary company he has no interest in the subsidiary which would enable him to bring a derivative action.  Coupled with that, the only loss that would have occurred would be a loss to the subsidiary company and the holding company, of which the plaintiff was a shareholder, would only suffer what has been referred to in the cases as reflected loss.  The reflected loss would come about by reason of the holding company not being paid dividends or deriving other benefits from the subsidiary company.  In cases such as Johnson v Gore Wood and Co [2002] 2 AC 1 and Day v Cook [2002] 1 BCLC 1 the House of Lords and the Court of Appeal respectively made clear that a shareholder could not recover in respect of loss which had occurred to a company because it was loss sustained by the company and not by the shareholder.  If it were otherwise there might be a problem of double recovery by both the shareholder and by the company.  Furthermore, it would breach the rule that a company was separate legal entity from its shareholder.

25.  Whilst accepting as fundamental the principles of separate shareholder identity from that of the company and the inability of a shareholder to recover loss if it is wholly incurred by the company, it nevertheless appears to me that there are very strong arguments that a double derivative action is maintainable.  Derivative actions are, after all, a procedural means devised by the courts to enable a minority shareholder to enforce the rights of a company in relation to wrongs inflicted by insiders.  The rules developed by the courts in respect of derivative actions have been complex and, as Mr Yu SC, who appeared on behalf of the plaintiff pointed out, are based on a concept of an exception to the general rule that only the party suffering the wrong can bring proceedings.  The limits of those exceptions have often been difficult to discern and apply.  It would also appear that the derivative action was one originally devised in the United States. 

26.  As a matter of logic and concept I can see no reason why if a shareholder can bring an action in respect of a wrong done to a company provided it joins the company as a party to the action, in much the same way as a beneficiary might bring an action to enforce a trust by joining of the trustee as a party to the action, a shareholder cannot bring an action in respect of a wrong which may have been done to a wholly-owned subsidiary if that subsidiary is controlled by the same persons who controlled the holding company of which the plaintiff is a shareholder, just as much as if it were a wrong to the holding company.  It would be on the basis that the person in control of the holding company commits a wrong in respect of one of the assets of that company, namely a wholly-owned subsidiary, just as much as if he committed wrong in respect of any other asset of that company.

27.  I found assistance in this respect in the decision of the Third Circuit Court of Appeals of the United States in the case of Alfred Blasband v Steven M. Rales and others 971 F.2d 1034 (1992).  At page 10 of the Lexis version of the report, Circuit Judge Greenburg delivering the judgment of the court said:

“However, we believe that the Delaware Supreme Court sub silentio recognized an indirect financial interest as a basis for standing in 1988 when in Sternberg v. O’Neil, 550 A.2d 1105 (Del. 1988), apparently for the first time, it permitted a plaintiff to pursue a double derivative suit.  n9 A double derivative action is identical in form to a traditional derivative action, except that in a double derivative the suit is brought on behalf of one corporation (e.g. a parent) to enforce a cause of action in [*1043] favor of a related corporation (e.g. its subsidiary).  As explained by one leading authority:

n9 The main issue in Sternberg was whether the Delaware courts could exercise personal jurisdiction over an Ohio corporation in an action brought by a shareholder of that corporation to redress the alleged wrongs to that company’s wholly owned subsidiary, a Delaware corporation.  The court never suggested that Delaware courts would not recognize the double derivative suit.  This is not surprising as such suits are well recognized, though there are some jurisdictions that refuse to permit them.  See generally 13 Charles R.P. Keating, Gail A. O’Gradney, Fletcher Cyclopedia of Corporations § 5977 (rev. ed. 1991).  Indeed, double derivative actions have been recognized by the inferior Delaware courts for at least the last two decades.  See, e.g., Levine v. Milton, 42 Del. Ch. 597, 219 A.2d 145 (1966).  Nonetheless, we have found no case decided by the Delaware Supreme Court entertaining such an action prior to Sternberg.

[**22]

[HN6] The holding company owes a duty to use its control of the subsidiary to sue to right wrongs to it, and the shareholder may in effect compel specific performance of these connected duties in a double representative action….

In a ‘double derivative’ action, the shareholder is effectively maintaining the derivative action on behalf of the subsidiary, based upon the fact that the parent or holding company has derivative rights to the cause of action possessed by the subsidiary.  The wrong sought to be remedied by the complaining shareholder is not only that done directly to the parent corporation in which he or she owns stock, but also the wrong done to the corporation’s subsidiaries which indirectly, but actually, affects the parent corporation and its shareholders.  Notwithstanding that the recognition of double derivative suits relaxes the plaintiff’s contemporaneous ownership requirement, the acceptance of the action acknowledges the realities of the changing techniques and structures of the modern corporation.  The ultimate beneficiary of a double derivative action is the corporation that possesses the primary right to sue.”

28.  I would note that the Delaware Court of Chancery has for long had a very high standing as regards jurisprudence relating to companies.  I also find support in the judgment of the Vice-Chancellor, Sir James Wigram, in Foss v Harbottle (1843) 2 Hare 461 where he said at page 492

“If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a pursuit by individual corporators in their private character, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principle so forcibly laid down by Lord Cottenham in Wallworth v Holt and other cases would apply, and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue.”

29.  In the course of argument, Mr Joffe, in answer to a question from the court, cited a number of authorities in which he said a wrong had been done to a company but that the courts found that no redress lay at the instance of a shareholder.  In respect of such an argument I found considerable assistance in the passage in the speech of Lord Cottenham in Wallworth v Holt 17 Ves. 619 referred to by Sir James Wigram.  At page 635 he said:

“…This result is quite sufficient to shew that such cannot be the law; for, as I have said upon other occasions (a), I think it the duty of this Court to adapt its practice and course of proceeding to the existing state of society, and not by too strict an adherence to forms and rules, established under different circumstances, to decline to administer justice, and to enforce rights for which there is no other remedy.  This has always been the principle of this Court, though not at all times sufficiently attended to.  It is the ground upon which the Court has, in many cases, dispensed with the presence of parties who would, according to the general practice, have been necessary parties.

In Cockburn v. Thompson (a), Lord Eldon says, “A general rule, established for the convenient administration of justice, must not be adhered to in cases in which, consistently with practical convenience, it is incapable of application;” and again, “The difficulty must be overcome upon this principle, that it is better to go as far as possible towards justice than to deny it altogether.”  If, therefore, it were necessary to go much further than it is, in opposition to some highly sanctioned opinions, in order to open the door of justice in this Court to those who cannot obtain it elsewhere, I should not shrink from the responsibility of doing so; but, in this particular case, notwithstanding the opinions to which I have referred, it will be found that there is much more of authority in support of the equity claimed by this bill than there is against it.”

30.  The circumstances of today, where large companies, particularly public companies, conduct their affairs with a multiplicity of subsidiary companies which are no more than assets wholly controlled and, in practice, virtually indistinguishable from the holding company, are very different from the days in which derivative actions were first devised.  If it indeed be the case that a subsidiary company is no more than an asset which is controlled in much the same way as any other asset of a holding company, I cannot see that the law should deprive a shareholder of the holding company an opportunity to have a wrong righted, if that wrong was technically suffered by the subsidiary, but the effect of the wrong would resound to the holding company.  Whilst I have expressed my view that a double multiple derivative action is maintainable I would, in any event, have considered that the viability of such an action was a matter for trial, where full and detailed argument can be brought to bear upon this novel aspect once the facts which have been found.

The third defendant, Playmates

31.  On this appeal Mr Wong, who appeared on behalf of Playmates, attempted to repeat the line taken in an affirmation by Mr Yu Hon To David that the third defendant did not intend to take sides with any parties to this action but would simply render assistance to the court.  He reiterated what was said in that affirmation that the third defendant’s Board had constituted an independent committee comprised of three directors who would be responsible for the conduct of the action on behalf of Playmates.

32.  Two observations are pertinent here.  In the first place, despite protestations to the contrary, it would appear that the submissions made on behalf of Playmates did, indeed, take sides and the purport of the argument was that this action was not maintainable.  In the second place, it should be observed that all three members of this committee have at all times been three of the four non-executive directors of Playmates.  Two of the members of this committee were also, at all relevant times, members of the audit committee.  In the “Disclosable and Connected Transaction” document relating to the Pretty Star transaction, issued by Playmates in December 2000, it was stated that “A circular containing further details of the Agreement and the Property Management Agreement and the advice of the Independent Board Committee,...will be sent to the Shareholders shortly”.  It would appear that the members of the committee in charge of this litigation on behalf Playmates would, almost certainly, have been members of that Independent Board Committee.  The documents contained in the court files do not appear to contain any such Independent Board Committee advice although the documents relating to the “Major Transaction” disclosure do contain the following under the heading Reasons for the Proposed Acquisition:

“The Directors (including all independent non-executive Directors) consider that the terms of the Sale and Purchase Agreement are fair and reasonable and it is in the interests of the Company to enter the Sale and Purchase Agreement and to complete the Proposed Acquisition.”

33.  In those circumstances, the members of the Committee responsible for this litigation on behalf of Playmates had, seemingly, themselves approved the purchases by the company and the statements made in relation to thereto as well as the rights issues.  It would be surprising if those transactions had not been of concern to the Audit Committee.  In so far as this appeal is concerned, Playmates has taken a stance in the action and there may be reasons why the relevant persons in control of the litigation on behalf of Playmates wished to do so.  As regards the purchases and the rights issues the members of the committee cannot be said to be disinterested bystanders.

Conclusion

34.  In my view this appeal by the first defendant must be dismissed and the cross appeal by the plaintiff allowed, the judgment below should be set aside.  I would also make an order nisi that the first defendant should bear the costs of this appeal and cross appeal and in the court below.

Hon Le Pichon JA:

35.  I agree.