The trial of Waddington Ltd v Chan Chun Hoo Thomas & Ors (HCA 3291/2003) finally took place in July 2013. The proceedings at trial was a multiple derivative action (“MDA”) brought by a minority shareholder in a parent company for wrongs allegedly done to and damage suffered by the parent company’s sub-subsidiary. Eventually, the minority shareholder succeeded in claiming for damages on behalf of the sub-subsidiary. 

Nature of the proceedings

Waddington Limited (“Waddington”) is a minority shareholder of Playmates Holdings Limited (“Playmates”) whilst Profit Point Limited (“Profit Point”) is the wholly-owned sub-subsidiary of Playmates through its wholly-owned subsidiary Playmates International Limited (“Playmates International”). The action was brought by Waddington in relation to 3 transactions entered into by or through the sub-subsidiaries of Playmates, alleging breach of fiduciary duty on the part of Thomas Chan (“Thomas”), who was the chairman and executive director of Playmates, the director of Profit Point as well as the controlling beneficial owner of Playmates, Playmates International and Profit Point through Chansam Investment Limited (“Chansam”).

Striking out application by Thomas

The proceedings was originally a single derivative action (“SDA") brought about by Waddington on behalf of itself and other shareholder of Playmates against Thomas and Chansam. Thomas applied to strike out Waddington’s claims, which was held at first instance that Waddington’s claims should be struck out under the doctrine of reflective loss (i.e. Waddington’s claims were merely reflective of the alleged loss of Playmates’ subsidiaries) However, it was also held that Waddington was entitled to bring an MDA on behalf of Profit Point, of which a prima facie case was established against Thomas.

The striking out application went all the way to the Court of Final Appeal (“CFA”), which confirmed that an MDA is maintainable under common law in Hong Kong when the wrongdoers defraud a subsidiary or sub-subsidiary through their control of the parent company and thus its subsidiaries. Waddington was therefore allowed to continue its claims against Thomas as an MDA on behalf of Profit Point.  The CFA did not specifically deal with the point that the governing law should be the law of the BVI (i.e. place of incorporation of Profit Point) since Thomas did not raise this point during his striking out application.  However, the CFA did state (obiter) that a company is governed by the law of the place of its incorporation.  This position was also adopted by the Court of Appeal in East Asia Satellite Television (Holdings) Ltd v New Cotai, LLC & Ors [2011] 4 HKC 115 (“East Asia”).

Issues at Trial

Share Sale by Profit Point

By the time of the trial, the only transaction impugned by the Plaintiff was a share sale by Profit Point allegedly at a price less than what could have been obtained, thereby causing loss directly to Profit Point and indirectly to Playmates and Playmates International.

On the finding of facts, the trial judge held that the share sale was to the disadvantage of Profit Point and indirectly to Playmates and Playmates International for the benefit of Thomas and Chansam. The trial judge also found as a fact that Thomas was the person in control of Profit Point, Playmates International and Playmates. As a result, Thomas was in breach of his fiduciary duty owed to Profit Point, Playmates International and Playmates and was ordered to compensate Profit Point for its loss.

BVI Law Defence

At the trial, Thomas also raised a defence that the present case should be governed by the law of the BVI (i.e. the place of incorporation of Profit Point) and that an MDA is not maintainable under BVI law. The trial judge ruled that it was too late for Thomas to raise such defence, which could have been raised in his striking out application. The dismissal of the striking out application by CFA was based on the determination of a point of law and amounted to a final decision that Waddington could continue its MDA on behalf of Profit Point. Thus, there is at least an issue of estoppel, if not res judicata, preventing Thomas from raising such a defence at trial.

Whether BVI law allows MDA

Notwithstanding his ruling above, the trial judge went on to consider whether an MDA is maintainable under BVI law, in particular, whether s.184C of the BVI Business Companies Act 2004 (“BC Act”) abrogates any common law right which a party may have in bringing an MDA. S.184C(1) codifies SDA whilst s.184C(6) states that a member is not entitled to bring any derivative actions except as provided in this section. Mr. Millet and Mr. Webster were called as expert witnesses on BVI law, who both agreed that there is no difference in substance between s.260 of Companies Act 2006 in UK (“Companies Act”) and s.184C(6).

Mr. Millet took the view that s.184C of the BC Act only codifies common law SDA but MDA at common law remains untouched by the BC Act. Firstly, he referred to the relevant report of English and Wales Law Commission, of which the BVI legislature followed. The report stated that “the question of multiple derivative actions is best left to the courts to resolve”. Secondly, he relied on Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (“Fort Gilkicker”), which held that s.260 of Company Act only created a statutory scheme in relation to an SDA but did not have the effect of abrogating MDA at common law. Therefore, Mr. Millet opined that s.184C of the BC Act does not have the effect of abrogating MDA at common law in the BVI.

On the other hand, Mr. Webster holds the view that s.184C(6) abrogates any common law right to bring an MDA as it stipulates that a member is not entitled to bring any derivative actions except as provided in this section, which only permits an SDA. He also opined that the English case relied on by Mr. Millet is unlikely to be followed by the BVI courts.

The trial judge preferred the evidence and opinion of Mr. Millet to those of Mr. Webster and considered that the BVI courts will most probably hold as a matter of law that s.184C has not abrogated the common law right of a party to institute MDA in BVI.

At this juncture, it is interesting to refer again to East Asia, of which Mr. Millet and Mr. Webster were also called as expert witnesses on BVI law. All experts accepted that an MDA is not possible under BVI law. The reason Mr. Millet has now departed from his opinion in East Asia is probably in light of the decision of Fort Gilkicker. 

It is also important to note that whether an MDA is maintainable under BVI law was a question of fact to be determined by the trial judge in the case based on expert evidence.  If a similar issue arises again in another case, the court may hold a different finding depending on the then expert evidence. It appears from the expert evidence of Mr. Millet and Mr. Webster that this area of BVI law still remains unsettled.  However, we share the trial judge’s view that the BVI courts will most probably hold that an MDA is maintainable under BVI law. This is in fact an important issue in Hong Kong because many companies operating in Hong Kong are incorporated in the BVI.

Conclusion

The long-running saga of the Waddington case has finally came to a conclusion but it remains to be seen if Thomas would appeal the CFI decision. In any event, the Waddington proceedings has no doubt proven to be significant because it led to (1) the confirmation by CFA that an MDA at common law is maintainable in Hong Kong and (2) amendment of the statutory derivative actions under s.168BC of Companies Ordinance (Cap 32) to include provisions for statutory MDA.