XCHRX HONG KONG HOUSING SERVICES FOR REFUGEES LTD. v. THE SECRETARY FOR JUSTICE

1999, HCMP 6007

Headnote

Charity - charitable company - voluntary dissolution - payment of surplus funds to other charity - role of Secretary for Justice - cy-pres principles and charitable corporations

1999, HCMP 6007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. HCMP 6007 OF 1999

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J U D G M E N T

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This application

1. By an Originating Summons issued by the Liquidators of Hong Kong Housing Services for Refugees Limited, a company in members voluntary liquidation ("the Company"), the Court's directions are sought as to:-

If not, the Company seeks such directions for distribution of the surplus as the Court sees fit.

The Company

2. The background to this application is as follows. The Company is a company limited by guarantee, incorporated on 29 December 1988 under the Companies Ordinance. It was set up at the instigation of, and with funding from, the Hong Kong Government to maintain centres for Vietnamese refugees in Hong Kong on its behalf.

3. By its Memorandum and Articles, its first listed objects are as follows:-

4. Clause 4 of the Memorandum provides as follows:-

5. Clause 5 qualifies the restrictions of Clause 4 by permitting the Company to apply its funds towards operational expenses such as the rent for its premises, remuneration of its officers or servants (other than members of the Executive Committee) for services actually rendered, payment of interest on money lent to the Association by any member and reimbursement of members' out-of-pocket expenses.

6. In my judgment, it is clear that the Company is a charitable corporation. It was established specifically for charitable purposes, namely, the promotion of the welfare of Vietnamese Refugees in camps in Hong Kong and the relief of the many hardships that such persons faced. The evidence is that in fact all directors and members acted without remuneration and out of charitable motives and that the Company's charitable status is recognized by the Inland Revenue Department for tax purposes.

The Secretary for Justice

7. The Originating Summons was served on the Secretary for Justice and is also addressed to the Inland Revenue Department, the Registrar of Companies and the Official Receiver.

8. It was clearly necessary for the Secretary for Justice to be served as the officer fulfilling the role previously played by the Attorney-General in representing the S.A.R. Government as parens patriae and so acting as protector of charities.

9. However, by letter received on the day of the hearing, the Department of Justice wrote to solicitors for the Liquidators stating that it "does not intend to oppose the application or be represented at the hearing today". While in the circumstances of the present case I have decided not to require attendance on behalf of the Secretary for Justice, I wish to make it clear that because of the important role of the Secretary as protector of charities, there should in future generally be representation from the Department of Justice at any hearing concerning the disposition of substantial charitable assets, at least at the initial stages of the hearing. The Secretary's representative should have an informed view of the merits of the application and be prepared to provide the Court with assistance as to the disposal of the matter.

The Company's provisions relating to a surplus on dissolution

10. With the closure of the Vietnamese camps in Hong Kong, it was decided to wind up the Company. The members unanimously passed a written special resolution dated 3 December 1998 for a members' voluntary winding-up. As at that date, with certain contingent liabilities catered for, surplus funds in the sum of $2,020,684.69 were expected. In fact, after having met those liabilities, the actual surplus as at 22 September 1999 was in the sum of $2,907,778.53. The only further liabilities expected are the legal costs and liquidation expenses relating to this application. If payment over of the surplus in is directed by Court and duly made, this will conclude the winding-up and the Company will be dissolved.

11. In the ordinary case, on a voluntary winding-up, section 250 of the Companies Ordinance would apply. That section provides as follows:-

12. However, as I have stated, this Company is a charitable corporation and there is no question of the surplus being distributed to its members. The treatment of the surplus is expressly provided for by Clause 8 of the Memorandum as follows:-

The members' decision

13. When resolving to wind up the Company, the members considered Clauses 4, 5 and 8 of the Memorandum and concluded, with the assistance of legal advice, that they were unable to identify a recipient meeting the requirements of those provisions.

14. They determined that Caritas Hong Kong (hereinafter "Caritas"), a charity incorporated by Ordinance, is the only institution which carries on work closely related to that of the Company, in that it runs welfare and accommodation projects for refugees including former Vietnamese refugees within Hong Kong, including at its Pillar Point Vietnamese Refugee Centre. Caritas was therefore identified as an institution having objects similar to those of the Association in this regard.

15. However, having examined the constitution of Caritas, the members took the view that it failed to meet the second requirement of Clause 8. In other words, they considered that its constitution did not "prohibit the distribution of its income and property among its members to an extent at least as great as is imposed on the Association under or by virtue of Clauses 4 and 5."

The constitution of Caritas

16. The Council of Caritas Hong Kong was incorporated by the Caritas Hong Kong Incorporation Ordinance (Cap. 1092). In accordance with section 7, its constitution has been registered by the Registrar of Companies.

17. According to its constitution, it is the official social service agency of the Roman Catholic Church in Hong Kong and is established for charitable purposes. It espouses a wide range of charitable aims and objects which are set out in detail. It is under the direction and control of the Bishop in Council and operates through the Council and a Board of Management to which the Council delegates its powers.

18. The difficulty perceived by the Company's members flows from Clause 27 of the Caritas constitution which is in the following terms:-

Whether Clause 27 of Caritas' constitution disqualifies Caritas as a recipient of the surplus

19. I turn to consider whether, on the true construction of Clause 8, Caritas fails to qualify as a recipient because of Clause 27 of its constitution. In my judgment, the answer is "No".

20. What Clause 8 in the Company's Memorandum stresses is that the recipient's constitution must prohibit the distribution of its income and property among the recipient's members to an extent at least as great as is imposed on the Association under or by virtue of Clauses 4 and 5. In other words, the recipient must not have a constitution under which the funds transferred (and its own funds) could end up in the pockets of its members rather than being applied for the advancement of public, charitable purposes. This is made clear by the requirement that the prohibition be at least as rigorous as that contained in Clause 4. Clause 4 forbids funds of the Company being "paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise howsoever by way of profit to the members of the Association."

21. Clause 5 helps to define and limit the scope of the prohibition by preserving the right of the Company to spend part of its funds on practical operating necessities like rent, salaries, etc. It follows that the existence of similar powers in the recipient institution to fund its operating expenses are acceptable under Clause 8.

22. In my judgment, there is nothing in Clause 27 of the Caritas constitution to enable any of Caritas' funds to be distributed among its members (if any exist) either generally or on Caritas' liquidation. Clause 27 provides that if Caritas were to be liquidated, any surplus would be transferred to a different corporation, namely, the corporation sole created by the Bishop of the Roman Catholic Church in Hong Kong Incorporation Ordinance (Cap. 1092) and/or to an institution having similar objects to Caritas, for charitable purposes. In fact, it appears that Caritas has no "members" as such, since it was incorporated by Ordinance. There is accordingly no equivalent to the express prohibition of payments to members contained in Clause 4 of the Company's Memorandum. Nevertheless, its funds must, on dissolution, be applied for charitable purposes and no provision in Caritas' constitution allows any person to receive the funds "directly or indirectly, by way of dividend, bonus or otherwise howsoever by way of profit", as prohibited by Clause 4.

Whether Clause 28 of Caritas' constitution leads to disqualification

23. Clause 28 provides as follows:-

24. While this is a point which was not raised by the members, a possible argument arises that the existence of such a wide power to amend the constitution, including the power to introduce amendments to incorporate non-charitable objects in its constitution, might disqualify Caritas as a recipient for the purposes of Clause 8.

25. It is clear that a charitable institution, whether a corporation or an unincorporated association, with powers to amend its objects may lose its charitable status if it amends to include non-charitable purposes as part of its objects. This was recognized by Atkin LJ in Inland Revenue Commissioners v. Yorkshire Agricultural Society [1928] 1 KB 611 at 633 where he pointed out that an unincorporated society was able both to dissolve itself and to reassociate itself for other purposes, and in the latter case, that it could do so "by adding to its objects, objects which are non-charitable, or by substituting for its objects an object which is non-charitable instead of a charitable object." He added:-

26. In the United Kingdom, there has also been recognition that a charitable company may, by altering its objects, lose its charitable status, statutory provision being made for that eventuality in the Charities Act 1993, s. 64.

27. Does the power to amend in Caritas' constitution lead to the conclusion that, for the purposes of Clause 8, such constitution fails to "prohibit the distribution of its income and property among its members to an extent at least as great as is imposed on the Association under or by virtue of Clauses 4 and 5"?

28. In my judgment, the answer is again "No". The cases show that the mere existence of a power to alter objects does not per se affect the institution's charitable status. It is affected only if and when that power is exercised in such a way as to incorporate non-charitable objects.

29. In my view, for Clause 8 purposes, the constitution of the proposed recipient must be examined as it appears in the evidence before the Court. The evidence before me contains no suggestion that Caritas has amended or is likely to amend its constitution to permit distribution of its assets to members (if any) or to other individuals for private gain. Accordingly, Caritas' status as a charitable institution having the objects set out in its present constitution remains unaffected.

The fall back provision for the surplus to go "to some charitable object"

30. In case my construction so far is wrong and if Caritas is not an institution which meets the two requirements of Clause 8, the question then arises as to whether the transfer to Caritas would nonetheless be justified by reliance on the final words of Clause 8 which are as follows:-

31. The effect of this fall back provision is that the members are obliged first to try to find a recipient which has objects similar to its own objects and which prohibits distributions in the manner discussed. If, however, they fail to do so after making due efforts, they become entitled to give the surplus to a charitable institution which does not comply with either of those requirements. In my view, in the circumstances of the present case, the fall back provision to a large extent deprives the twin requirements of Clause 8 of their restrictive effect.

32. The fall back provision operates where, on the evidence, one can be satisfied that "effect cannot be given to the aforesaid provisions". In the present circumstances, no other institution in Hong Kong is known to carry on work closely related to that of the Company. Accordingly, if Caritas does not meet both of the Clause 8 requirements, it would follow that "effect cannot be given to the aforesaid provisions" since no other candidate for transfer of the funds would be eligible. This triggers the fall back provision and the members can, after all, decide to transfer the surplus to Caritas anyway since, such a gift would be to a charitable object. A transfer to Caritas would at least have the benefit of being a transfer satisfying the first, if not both, of the two express requirements of Clause 8.

Conclusion as to the construction of Clause 8

33. It is therefore my view that on the true construction of Clause 8, the Company's members are entitled to transfer the surplus to Caritas. This is so because, in my judgment, Caritas satisfies the twin requirements of Clause 8, with neither Clauses 27 nor 28 of its constitution posing an impediment. Even if Caritas does not satisfy those requirements, the fall back provision is triggered and a transfer to Caritas may validly be made thereunder.

The residual power of the Court to deal with the surplus

34. I would add briefly that even if my foregoing views as to the effect of Clause 8 are incorrect and even if, for instance, Clause 8 were for any reason to be inapplicable, I would still be prepared to exercise my discretion to direct a transfer of the surplus to Caritas in the exercise of the Court's jurisdiction to direct surplus charitable assets to be applied cy-pres.

35. The basis of the Court's power to intervene in the affairs of charitable companies and, for instance, to direct a cy-pres scheme for a charitable company's assets, was for some time in doubt.

36. The view had once been that the Court's jurisdiction over charities was limited to cases where the assets in question were held on a charitable trust: see Picarda, The Law and Practice Relating to Charities (Butterworths, 2nd Ed.) p. 383.

37. The courts for some time therefore approached charitable corporations on the footing that they held their assets subject to charitable trusts: Construction Industry Training Board v A-G [1973] Ch 173. It was on this basis, for instance, that the court was felt able to direct a cy-pres scheme in relation to a company limited by guarantee: Re Dominion Students Hall Trust [1947] Ch 183. Such companies were also held to be limited in the range of their permissible investments by the Trustee Investments Act: Re Manchester Royal Infirmary (1889) 43 Ch D 420; Soldiers', Sailors' and Airmen's Family Association v A-G [1968] 1 WLR 313.

38. However, cogent grounds were raised for rejecting the notion that a charitable company held its own property on trust rather than absolutely (albeit subject to restrictions in its constitution). The Courts then changed tack and held that the court's jurisdiction over charitable corporations did not depend on their assets being held subject to charitable trusts. Such companies were in a position "analogous to" that of a trustee with fiduciary obligations sufficient to found the jurisdiction of the court to intervene in its affairs: Liverpool Hospital for Diseases of the Heart v A-G [1981] Ch 193; Re Vernon's W.T. [1972] Ch 300.

39. There is accordingly now no doubt that the Court does have jurisdiction to intervene. Where a surplus of funds exists which can no longer be applied for the original charitable purposes, it may direct such surplus to be applied cy-pres.

40. Accordingly, if, contrary to my foregoing findings, it is not possible to give effect to Clause 8's provisions for the disposal of the surplus, I am satisfied that a transfer of the surplus funds to Caritas would constitute an application of such funds for purposes coinciding as nearly as possible with the Company's original charitable purposes on cy-pres principles: see Picarda, (op. cit.) pp 285-287

41. As all that is required is a simple transfer and as a cy-pres scheme is only discussed here as an additional justification in principle for the transfer, I do not see any need for directing the preparation of a formal cy-pres scheme.

42. It will be sufficient for me to answer the question posed in the Originating Summons in the affirmative. I hold that the Company by its Liquidators, having satisfied all of its debts and liabilities, are at liberty to distribute its surplus of assets and income to Caritas pursuant to the terms of its Memorandum and Articles.