LAM KIN CHUNG v. SOKA GAKKAI INTERNATIONAL OF HONG KONG LTD

HCMP 1002/2017

[2019] HKCFI 2916

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1002 OF 2017

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D E C I S I O N

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1.  On the 1 November 2017, I heard a preliminary issue arising from the Applicant’s originating summons seeking leave to bring proceedings against various persons in connection with the affairs of the Respondent Company. I found against the Company. My reasons were delivered on the next day.

2.  On the 14 March 2018 the originating summons came back on before me and I dealt with the remaining issues and also delivered my decision the next day.  It is not necessary to summarise the grounds on which leave was sought and the disputes before me.  They are fully set out in my decisions.  It is sufficient to say that the Company is a charity and much of the argument before me focused on how, if at all, the charitable character of the Company affected the approach be taken in determining the application.

3.  The Company has appealed my decisions.  The appeal is fixed to be heard on 7 and 8 January 2020, almost two years after      my second judgment was delivered.  I am told that the reason for,      what I consider to be an entirely unsatisfactory delay, is that the dates were fixed in consultation with counsel’s diaries.  It seems to me that certainly in the case of the Company, if it was concerned to prevent what it apparently considers to be a misconceived action being pursued,      it should have asked for the appeal to be fixed without reference to counsel’s diaries, and for dates to be identified as soon as possible.

4.  If this has been done it may well be that I would have taken a view that the application for the Company to indemnify the Applicant for his costs of the proposed action, should be adjourned until after the appeal.  It is that application which I will determine today and that I now turn to.

5.  Section 738(2) of the Companies Ordinance (Cap 622), provides:

“An order may require the company to indemnify, out of its assets, the member against the costs incurred or to be incurred by that member in bringing or intervening in the proceedings or in making the application.”

6.  On the 18 January 2019 the Applicant issued a summons restoring the application in paragraph 2 of the originating summons seeking an indemnity under section 738 of his costs of HCA 1287/2017, which is the derivative action, such costs to be paid out of the Company’s assets.  As is the normal practice I had adjourned the question of indemnification until after I had been provided with information about the Company’s ability to indemnify the Applicant for the costs he will incur in pursing the derivative action.

7.  I have now been provided with that information. In my view it is clear that the Company is able to indemnify the Applicant’s likely costs.  The estimate provided by the Applicant of the likely costs if      the derivative action goes to trial is HK$6,826,266.66.  I have been provided with the Company’s financial statement for the year ending 31 March 2018. This shows in the statement of comprehensive income:

		2018		2017
	Note	HK$		HK$
Revenues收入	3	53,683,565		54,774,282
Costs of revenues收入直接成本		(4,612,361)		(3,469,741)
Gross revenues毛收入		49,071,204		51,304,541
Provision for legal claims 訴訟費索償撥備	15	(10,540,000)		(600,000)
General and administrative expenses 基本及行政支出		(38,758,287)		(36,300,010)
(Deficits) / surplus for the year 本年(赤字) / 盈餘	4	(227,083)		14,404,531

8.  The Company had net current assets of HK$275,331,622      and cash balances in excess of HK$300,000,000 at the end of the      2018 financial year.

9.  Excluding provisions for legal costs it would appear to make a surplus.  Although the Company has filed evidence attempting to suggest that it has plans for considerable expenditure in the near future, it seems to me that even if, and the evidence smacks of exaggeration, the plans and estimates are genuine, clearly the Company can still indemnify the costs on the basis that I shall explain later.

10.  Aside from suggesting that an order for indemnification will restrict the Company’s ability to finance its intended planned expenditure, Mr Yin has taken the following objections to the application.

11.  First, he argues that where a company is founded for charitable purposes and its members have no economic interest in it,      the Court should approach an application on the basis that it is a kin to a Beddoe application and the Court should have regard to the public interest in the assets of the Company being used for charitable purposes and      the Applicant should be required to demonstrate sufficient chance of success to justify the Company’s assets being used to fund the proposed litigation.

12.  It seems to me that this is wrong. Section 738 provides the mechanism for a member who has been granted leave to commence a derivative action to seek indemnification.  The power under section 738(2) is discretionary and consequently the Court can and should have      regarded to all relevant considerations, which may include the fact that      the Company has charitable purposes.  There is, in my view, no basis for the importation of the criteria that govern a Beddoe application.

13.  The starting point must be that the Court has decided that the statutory criteria in section 733 have been satisfied, namely, that it appears to be in the Company’s interests that leave be granted and that a serious question to be tried has been demonstrated.  Normally, if a company has the liquid assets available to fund the derivative action without an undue negative impact on its planned operations, as I find to be the present case, indemnity will be given in terms the Court considers appropriate.       The only matter that has been raised to impact on the Court’s exercise      of the discretion is the passing of the resolution of members on 29 March 2019, which it is suggested calls into question the viability of the cause of action in the derivative action by rectifying the conduct complained of in the derivative action.  It does not seem to me correct at this stage to deal with costs by exploring afresh the question of whether or not a serious question to be tried has been shown.  If it is suggested that the derivative action is liable to be struck out, it might be appropriate to craft the indemnity so as to reflect that possibility, for example only allowing indemnification after a strike out application has been determined; necessarily unsuccessfully.  It is not a reason not to order an indemnity at all. 

14.  Mr Yin also argued that section 738(3), requires the Applicant to demonstrate that the proposed derivative action is brought bona fide and that the claim has a reasonable prospect of success.  In other words, a second review of the application is undertaken to be determined by more stringent criteria.

15.  I disagree. Section 738(3)’s language is directed to the motives and reasonableness of the Applicant in making the application.       It seems to me that the position must be assumed, leave having been granted, that the application was made in good faith and on reasonable grounds.  There may be rare cases in which a company has, for example, accepted that the low threshold in section 733 has been met, but opposes indemnification in which case it would be for the Company in the first instance to adduce evidence which suggests a lack of bona fide or that      the Applicant is being unreasonable.  But I can see no basis, and there appears to be no authority directly on point, for the suggestion that the application for indemnification requires a further review by reference to more stringent criteria of both the merits of the claim and the motives of the Applicant.

16.  I will, therefore, made an order that the Company indemnify the Applicant for the costs of conducting the derivative action.  The costs are to be subject to taxation if not agreed on a common fund basis to reflect the charitable nature of the Company.  The indemnity is, however, to be stayed until after the determination of the appeal.  I will also provide liberty to apply.

17.  There is also before me an appeal of a decision of Master Kot dated 12 March 2019 which is concerned with whether or not the Applicant could proceed to have the current costs order in his favour,     on the earlier applications to which I would referred, taxed immediately.       As I have now dealt with indemnification, the appeal is otiose and I dismiss it.

18.  The remaining matter I need to deal with is the costs of the appeal of Master Kot’s order.  I will make no order as to the costs of the appeal.  However, the question arises whether or not I should set aside paragraph 1 of the Master’s order thus leaving in place the costs order she made in favour of the respondent which resulted in the summary assessment of the respondent’s costs at HK$136,000, those cost now having been paid.

19.  This necessitates me considering whether or not the Master’s decision was correct.  The costs order that I made was “an order nisi for 95% of the costs of the Amended Originating Summons be paid by      the respondent to the applicant with certificate for two counsel”.      The RHC O 62, r 9D(1) provides that the costs of any proceedings should not be taxed until the conclusion of the action unless (by virtue of RHC O 62, r 9D(2)) the Court has ordered otherwise.  The issue before me put shortly is whether or not an action in the present context means the determination of both substantive elements of the originating summons, namely, the application for leave and the application for indemnifications.  In my view, it does, and therefore, it follows that I agree with Master Kot’s decision.  I can understand that in many cases it will be appropriate once leave has been dealt with for the Court to make a costs order that provides the taxation can proceed forthwith, but this was not something that was sought in the present case.