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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J U D G M E N T

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Introduction

1. By this action, which the Plaintiff brings as a derivative action on behalf of itself and all other shareholders of the 3^rd Defendant (“Playmates”), the Plaintiff seeks to obtain relief on behalf of the Playmates against the 1^st and 2^nd Defendants (“TC” and “Chansam” respectively) in respect of three sets of transactions entered into by or through subsidiaries of Playmates between 2000 and 2002.

2. There are two applications before the court:-

(1)	The first is an application by TC and Chansam by summons dated 20 October 2003, seeking to strike out the proceedings against them. The grounds stated in the summons are that the Plaintiff is not entitled to bring or continue these proceedings, and that there is no prima facie case disclosed that the Plaintiff or Playmates is entitled to any of the relief claimed.
(2)	The second is an application by the Plaintiff by summons dated 27 October 2003, seeking leave to proceed with the action on the basis that the court is satisfied that there is a prima facie case that Playmates is entitled to the relief claimed against TC and Chansam and that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle(1843) 2 Hare 461.

3. In the event, the parties approached the applications on the basis that whatever conclusion I came to on the striking out summons would be determinative of both applications. I therefore propose to focus on that summons in this judgment, and shall not deal separately with the leave to proceed summons.

4. Mr Kotewall S.C., appearing for TC and Chansam, contends that the Plaintiff’s claims should be struck out for one or more of the following reasons:-

(1)	As all the transactions complained of were carried out, not by Playmates itself, but by wholly owned subsidiaries (or sub-subsidiaries) of Playmates, the alleged losses arising from such transactions would have been suffered by such subsidiaries or sub-subsidiaries, so that the losses allegedly suffered by Playmates would be merely reflective of the subsidiaries’ losses, and as such would be irrecoverable as the result of the principle established in Johnson v Gore Wood & Co (a firm)[2002] AC 1.
(2)	The Plaintiff has failed to establish a prima facie case:-
	(i)	that there has been any wrongdoing on the part of TC and Chansam; and
	(ii)	that any of the exceptions to the rule in Foss v Harbottle apply in the circumstances of this case - in particular, it is said that it is not shown that there is any prima facie case of a “fraud on the minority”, and it is also, I think, said that wrongdoer control has not been shown, given that TC was never interested in 50% or more of Playmates’ issued shares.
	from which it follows that the Plaintiff has no locus standi to bring this derivative action purportedly on behalf of Playmates against TC and Chansam
(3)	The action is an abuse of the process of the court because the Plaintiff has brought it, not in good faith in the best interests of Playmates, but because of ulterior motives or for collateral purposes.
(4)	The action is barred by laches, delay and acquiescence having regard to the time which it took the Plaintiff to commence it.

5. I shall consider each of these contentions in turn. Before doing so, however, I shall introduce the parties and a number of other companies which feature in these proceedings, and describe the relevant transactions and the gist of the complaints made in respect of them.

The parties and the other companies involved

6. Many of the companies involved in the transactions which arise for examination in these proceedings have undergone changes of name, in some cases on several occasions. To avoid confusion, I shall refer to them by one of such names throughout this judgment.

7. Playmates, for whose benefit the Plaintiff says it brings this action, was incorporated in Bermuda in 1991 and has been listed on the Stock Exchange of Hong Kong (“the Stock Exchange”) since early 1994. There has been no suggestion that, for the purposes of the applications before me, anything turns on the fact that it is not a Hong Kong company. Prior to its listing, Playmates was a subsidiary of Prestige Properties Holdings Limited (“Prestige”). Prestige was itself listed on the Stock Exchange in 1984. It was founded by Mr Chan Tai Ho, two of whose sons, TC and Albert Chan Chun Wai (“AC”) can, I think, be regarded as the principal protagonists in these proceedings. Its business consisted of the design, manufacture, distribution and sale of toys, and also of investments in property. The listing of Playmates in 1994 was part of a corporate reorganisation whereby the toy business and the property business were separated, by the demerger of Playmates from the group of companies of which Prestige was the holding company. According to the Statement of Claim, at all material times since then the principal business activities of Playmates and its subsidiaries (collectively “the Playmates Group”) have been in the toy sector, consisting of the designing, manufacturing, marketing and sale of toys.

8. The Plaintiff is a British Virgin Islands (“BVI”) company. It is a shareholder in Playmates, holding some 6.5% of Playmates’ issued share capital. It is a company through which AC and his family are interested in Playmates.

9. TC is the 1st Defendant. He is, as I have said, the brother of AC. He is and was at all material times a director of Playmates, being its Chairman and one of its executive directors. According to the Plaintiff, TC was responsible for the transactions which form the subject matter of these proceedings.

10. Chansam is also a BVI company. It had a substantial shareholding in Playmates from at least 1997 until December 2001 (owning 47.21% of Playmates’ issued shares as at 31 December 1997, 1998 and 1999, 44.76% of Playmates’ issued shares as at 31 December 2000 and 49.55% of Playmates’ issued share capital between March 2001 and 28 December 2001). During that period, it is said to have been a company through which TC and his family were interested in Playmates, as it was indirectly owned as to 85.2% by the trustee of a discretionary trust established for the benefit of TC and his family (the remaining 14.8% of Chansam was owned as to 7.4% by TC and AC’s father, and 7.4% indirectly by the trustee of a discretionary trust established for the benefit of their sister and her family). On 28 December 2001, Chansam’s shareholding in Playmates was acquired by another BVI company called Angers Investments Limited (“Angers”), which the Plaintiff says is also a company through which TC and his family were (and are) interested in Playmates, as it is, like Chansam, indirectly owned by the trustee of a discretionary trust established for the benefit of TC and his family. Angers owned 49.55% of the issued share capital of Playmates as at 31 December 2001, and 46.83% as at 31 December 2002. It is alleged that throughout, TC controlled Playmates through Chansam’s and later Angers’ shareholding in Playmates.

11. There are a number of further companies which feature in these proceedings. These include:-

(1)	Prestige, which I have referred to in paragraph 7 above. For present purposes, it is to be noted that Chansam was also a major shareholder of Prestige, owning some 47.04% of its issued share capital until about March 2000, and some 39.2% of its issued share capital between March and July 2000. During this time, Chansam was the single largest shareholder in Prestige. Playmates was also until May 2000 an indirect shareholder in Prestige, as 4.28% of Prestige’s issued share capital was (until then) owned by a subsidiary of Playmates called Profit Point Limited (“Profit Point”). The Plaintiff says that as a result of such shareholdings, and the fact that he was the Chairman and an Executive Director of Prestige, TC had effective control of Prestige and its subsidiaries.
(2)	Profit Point, a BVI company which was a subsidiary of Playmates, and which owned 4.28% of the issued share capital of Prestige until May 2000. Until 18 April 2001 Profit Point was a wholly owned direct subsidiary of Playmates. Thereafter, it was an indirectly wholly owned subsidiary of Playmates until its dissolution on 18 March 2003.
(3)	Yugang International Limited (“Yugang”), a Bermuda company which is also listed on the Stock Exchange. According to the Plaintiff, Yugang is an investment holding company with interests in various business sectors.
(4)	Funrise Limited (“Funrise”), a BVI company which is a wholly owned subsidiary of Yugang.
(5)	Autoestate Properties Limited (“Autoestate”), a BVI company which is a wholly owned indirect subsidiary of Playmates, which acquired the next two companies to which I shall refer, Pretty Star Limited (“Pretty Star”) and Bagnols Limited (“Bagnols”) from