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

CACV 103/2018

[2022] HKCA 931

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 103 OF 2018

(ON APPEAL FROM HCMP NO 1002 OF 2017)

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

Introduction

1.  On 4 April 2022, this court gave a Judgment (“the Judgment”) ordering, among other things, the dismissal of an appeal of a charitable company (“the Company”) from certain orders made by Harris J (“the judge”):

(a)  holding that a member (“the Member”) has locus standi to bring a statutory derivative action (“the Preliminary Issue Decision”) and

(b)  giving him leave to proceed with the action (“the Leave Decision”).

2.  The matter arose from two property transactions that the Company had entered into, with the Member claiming that one property was sold under market value and another was bought over market value. 

3.  There had been placed before the judge a resolution made at an extraordinary general meeting of the Company in 2017 (“the 2017 EGM Resolution”).  After the judge had made his order giving leave, another resolution was made at another extraordinary general meeting of the company in 2019 (“the 2019 EGM Resolution”) which this court accepted as fresh evidence and considered on determining the appeal.

This court’s Judgment

4.1.  On the Preliminary Issue Decision, the company’s arguments before this court were: (1) that a member of a charitable company has no standing as he suffers no reflective loss (“the no loss issue”) and (2) that it was not proper to give leave to a member as that would enable him to bypass the Secretary for Justice (“the SJ issue”).

4.2.  For reasons set out in paras.87 - 98 and paras.99 - 112 of the Judgment, we rejected the company’s arguments on the no loss issue and the SJ issue respectively.

5.1.  On the Leave Decision, this arises in the context of s.734 Companies Ordinance, in which the company’s argument before this court was that the members had approved or ratified the transactions by the 2019 EGM Resolution, which had addressed certain deficiencies concerning the 2017 EGM Resolution which the judge had raised.

5.2.  However, after considering the Judgment of the UKSC in Lehtimaki and others v Cooper [2020] UKSC 33 (“CIFF UKSC”) which set out the fiduciary duties of members of a charitable company when called upon to vote, and the report of the independent committee of the Company presented to the members, and the advice given by the Company’s then counsel to the members, as well as omissions and inaccuracies at the EGM, this court held that the 2019 EGM Resolution was still deficient for reasons set out in paras.140 - 150 of the Judgment.

Notice of Motion for leave to appeal to the CFA

6.  On 3 May 2022, the Company filed a Notice of Motion for leave to appeal to the Court of Final Appeal.  Written submissions were filed by both parties.

7.  The following were said to be questions of great general or public importance:

“1. In the case of a charitable company incorporated by guarantee (i.e., a charitable company) with a large and diverse membership, is the company entitled to give effect to a resolution passed by its members in general meeting when it does not have practical means of ascertaining whether the members have acted in accordance with the fiduciary duty owed by them to the charitable objects of the company when they voted for the resolution?

2. In the context of a member of a charitable company owing fiduciary duties, is the duty so owed by the member in deciding whether to vote in favour of or against the company pursuing a monetary claim confined to the duty of adequate deliberation (as explained by Lord Walker in Pitt v Holy [2003] 2 AC 108), or more extensive so as to include a requirement for the member to assess the propriety of the conduct which is the subject matter of the claim?

3. In the case of a charitable company with charitable objects of a spiritual and ethical nature, is it compatible with their fiduciary duties owed to the charitable objects for members to decide by resolution in general meeting to forego a substantial monetary claim by taking into account and giving priority to the broader, non-financial considerations of the charity, such as and in particular those of a spiritual or ethical nature and if so, whether the company is entitled to give effect to a resolution so passed by the members?

4. Further or in the alternative to the above question, in the case of a charitable company with charitable objects of a spiritual and ethical nature, given that a court will not interfere with the exercise of a discretion by a fiduciary unless that fiduciary has acted in breach of duty or if the circumstances attain a sufficient level of exceptionality and seriousness (as held by the English Supreme Court in Children’s Investment Fund Foundation (UK) v. Attorney General and others [2022] AC 155), whether it is open to the Court to conclude (in the absence of any finding of breach of duty or circumstances of a sufficient level of exceptionality and seriousness) that resolutions passed by an overwhelming majority of independent members (who have decided that it would be in the interest of the company to forego the monetary claims) could be overridden by the Court in deciding whether to grant or withhold leave to a member to bring a statutory derivative action in the name of the company to pursue a monetary claim?”

8.1.  Further or alternatively, the Company submitted that leave should be granted on the “or otherwise” ground as follows:

“5. The Court has plainly erred by failing to appreciate that the duty of a member of a charitable company in deciding whether to vote in favour of or against the company pursuing a monetary claim is confined to the duty of adequate deliberation (as explained by Lord Walker in Pitt v Holt [2003] 2 AC 108) and on the facts of the present case the Court has wrongly proceeded on the basis that:

(1) the 2019 EGM Notice had not drawn members’ attention to their duty as one owed to the charitable objects of the Company, when the materials provided in the said notice included, amongst other things, the judgment of Harris J [2018] HKCFI 769 in which he made plain at §12-14 that their duty was to act in the best interests of the Company;

and

(2) despite the information supplied to members by the Company in the 2019 EGM Notice, they would not have known about the Company’s charitable objects as well as the nature and quantum of the claims and the background circumstances prior to voting on the revised resolutions.”

8.2.  It would appear that the question in the “or otherwise” ground overlaps substantially with the others.

Discussion

9.1.  The Company is no longer pursuing the no loss issue or the SJ issue, thereby accepting that the Member has locus standi to bring the statutory derivative action.

9.2.  The Company’s intended appeal to the CFA centers on leave for the statutory derivative action, in essence, whether or how the 2019 EGM Resolution should impact on the decision of the court whether or not to grant leave for the action.  The special feature in the case is that the Company is a charitable company.  In this respect, the Company accepts that this court has accurately summarised the law as set out in CIFF UKSC that members of a charitable company owe fiduciary duties in relation to its charitable objects, and must comply with those duties when voting.

10.  The questions raised in the Notice of Motion as being ones of great general or public importance pertain to (1) the manner of proving that its members had fulfilled their fiduciary duties when voting for the 2019 EGM Resolution when “the company does not have any practical means to ascertain if their members have voted in accordance with their fiduciary duties” (Skeleton Submissions for the Respondent, para.5), and (2) whether this court has imposed a higher duty than that of fair consideration.

11.  We note first, that the Company has presented as the foundation for these questions the premise that it is a “mass membership” charity.  As recorded in para.13 of the Judgment, as at the date of the hearing of the appeal, the court was informed that there were 1,089 members.  We would doubt whether this number makes it a “mass membership” charity, as compared with say, the National Trust in the UK which was the context in which this term was used in CIFF CA [2018] 3 WLR 1470.

12.1.  Be that as it may, the Company appears to accept that it bears the burden of proving the effect of the 2019 EGM Resolution for approval or ratification of the transactions in the context of s.734 CO, but submits that this court has in its Judgment imposed a higher duty than a “fair consideration” of the subject at hand.

12.2.  In fact, this court has repeatedly referred in the Judgment to the principle of fair consideration (see eg paras.135(4), 144 and 147).  It was emphasized that “the duty of supervision on the part of this court will thus be confined to the question of ... fairness with which the deliberation has been conducted” (quoted in para.135(4) of the Judgment).

12.3.  What paras.140 - 150 showed is that in view of (among other things), the advice given by the Company’s then counsel at the meeting, the matters which should have been mentioned to the members but were not, and material inaccuracies, the members’ consideration was based upon erroneous matters presented to them by the Company, with the result that there was no fair consideration of the subject at hand.

12.4.  Even if the members were implicitly aware of their fiduciary duties to the charitable objects of the Company and the requirement that its assets should be applied only to those purposes, the erroneous matters included advice from the Company’s then counsel that the members’ vote had “nothing to do with legal proceedings” (thereby rendering the statement of claim and Harris J’s Judgment irrelevant) and “no legal liability would arise” in their exercise of voting choices (para.141), the description of the proceedings as the pursuit of “monetary gains” when they were to recoup the Company’s losses (paras.143 and 147), and inaccurate references to some claims as being “stale” and the Company not having suffered any actual loss (para.146).

12.5.  These were matters that the Company had presented to the meeting, which it obviously intended the members to consider when voting for the 2019 EGM Resolution.  In its skeleton submissions, the Company has not answered the court’s comments on these matters.

13.1.  Thus, there is no question in this case of whether mass membership charitable companies in general may or may not encounter practical difficulties in ascertaining their members’ compliance with their fiduciary obligations.  If all relevant matters are properly put before a meeting, it may be assumed (except in cases of breach of duty or where the circumstances attain a sufficient level of exceptionality and seriousness) that a charitable company’s members had indeed given the subject at hand fair consideration in discharging their fiduciary duties.

13.2.  What the present appeal dealt with (in the context of leave under s.734 CO) was whether this company has proved that its members had been given correct and material information to give fair consideration to the subject at hand, such that the members could exercise their fiduciary duties in voting for or against the resolution for approval or ratification.

Order

14.  For the reasons set out above, we would decline to give leave on all grounds as none of the questions set out in the Notice of Motion arise.  Having considered the statement of costs, we would order by way of gross sum assessment that the Company pay to the Member costs of $320,000.