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

CACV 101/2018
CACV 103/2018
(Heard Together)

[2022] HKCA 480

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS 101 OF 2018 AND 103 OF 2018

(ON APPEAL FROM HCMP NO 1002 OF 2017)

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BETWEEN

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(HEARD TOGETHER)

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J U D G M E N T

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Hon Kwan VP:

1.  I agree with the judgment of Yuen JA.

Hon Yuen JA:

Introduction

2.  On 2 November 2017, Harris J (“the Judge”) decided as a preliminary issue that the Applicant Mr Lam (“the Member”) has locus standi to bring a statutory derivative action under s.733 Companies Ordinance Cap.622 (“CO”) on behalf of the Respondent (“the Company”) even though it is a charitable company (“Preliminary Issue Decision”).

3.  In a Decision made on 15 March 2018 with written reasons handed down on 18 April 2018, the Judge gave leave to the Member to pursue on behalf of the Company two claims (“the Allowed Claims”) (paras.47 and 58 below), but not two other claims (“the Disallowed Claims”) (paras.47 and 58 below) in the derivative action (“Leave Decision”).

4.  CACV101 is the Member’s appeal against that part of the Leave Decision refusing leave to pursue the Disallowed Claims.

5.  CACV103 is the Company’s appeal against the Preliminary Issue Decision, as well as that part of the Leave Decision giving leave to pursue the Allowed Claims.

6.  The appeals were heard together. Detailed written submissions were provided by both parties on the Preliminary Issue Decision as well as the Leave Decision.

7.  Pursuant to our direction at the hearing of the appeals, on 15 January 2020 the parties filed supplemental written submissions on the judgment of this Court (Lam VP, Cheung and Poon JJA) in 釋照月(Sik Chiu Yuet) v Secretary for Justice [2018] HKCA 488, [2018] 4 HKLRD 194.

8.  Further, one of the key authorities argued at the hearing was the English Court of Appeal’s judgment in Children’s Investment Foundation Fund (UK) v Attorney General and others [2018] EWCA Civ 1605, [2019] Ch 139 (“CIFF CA”). After the hearing, it came to this court’s attention that on 14-15 January 2020, the Supreme Court of the United Kingdom (“UKSC”) heard the appeal from CIFF CA and reserved judgment.

9.  On 29 July 2020, the UKSC handed down judgment (also known as Lehtimaki and others v Cooper) [2020] UKSC 33 (“CIFF UKSC”), in which CIFF CA was overturned, effectively reinstating the judgment of the Chancellor [2017] EWHC 1379 (Ch) (“CIFF Ch”).

10.  In CIFF UKSC, Lady Arden JSC also examined in depth the duties of members of a charitable company when exercising their right to vote. We therefore gave directions on 30 July 2020 for the parties to file further submissions. Two rounds of submissions were filed and exchanged on 13 August 2020 and 20 August 2020.

11.  Although there was an indication at the conclusion of the hearing that our judgment would be confined to the locus standi issue, that was pre-CIFF UKSC. In the post-CIFF UKSC written submissions of the Member, it was submitted that if this court decides the locus standi issue in favour of the Member, it may (i) proceed to hear the appeals with the New Evidence (see para.71 below) or (ii) remit the matter to the court below for reconsideration. The Company did not oppose this in its written submissions in reply. In light of this, and the detailed written submissions on the Leave Decision already provided to this Court, and most importantly the statements of law in CIFF UKSC, this judgment will determine both the locus standi issue and the leave issue.

Background

12.  It is necessary to set out in this Judgment the relevant background in detail because of factual developments at different stages in time, including after the Judge’s Decisions.

13.  On 18 October 1966, the Company was incorporated (under a different name) as a company limited by guarantee with no share capital. At the date of the hearing of the appeals, we were informed that there were 1,089 members.

14.  It is most important to these appeals to note the objects for which the Company was established. One of the objects is “to preach, promote and support the faith of the great Buddhism as a fundamental ascetic practice to cultivate virtues, to promote family happiness and to enhance friendship amongst members; and also base on the Buddhism Philosophy to promote peace, culture and education to mankind”, and other objects include the establishment of schools and nursing homes, the publication of promotional documents, the delivery of lectures, the holding of exhibitions etc.

15.  The Company has been granted tax exemption under section 88 of the Inland Revenue Ordinance (Cap 112) as a charitable institution. As will be mentioned later in this Judgment, the Secretary for Justice (“SJ”) has been made aware of these proceedings, but has not taken any part in them or expressed any views.

MOA

16.  The Memorandum and Articles of Association (“MOA”) of the Company, as amended or altered in 1997, contains the following clauses, which are pertinent to the issues in these appeals.

17.  Clause 4 of the Memorandum provides that the liability of the members is limited. Clause 5 provides that every member undertakes to contribute a maximum of $20 only to the Company’s assets for payment of its liabilities and costs in the event of its winding-up.

18.  Importantly, Clause 6 provides that its income and property shall be applied solely towards the promotion of the objects of the Company.

19.  Clause 6A provides that, subject to Clauses 6C and 6D, no income or property of the Company shall be paid or transferred to the members.

20.  Clause 6B provides that no member of the Committee of the Management or Governing Body of the Company (“Committee Member”) shall be appointed to any salaried or fee-paying office of the Company, and no remuneration or benefit in money or money’s worth (except as provided in Clause 6D) shall be given by the Company to any Committee Member. (Pausing there, it is common ground that the Committee is equivalent to a board, and Committee Members are equivalent to directors, and the terms “Committee” and “board”, and “Committee Members” and “directors” have been used interchangeably).

21.  Clause 6C provides that payment may be made in good faith by the Company of reasonable and proper remuneration to any officer or servant of the Company, or to any member not being a Committee Member in return for services actually rendered to the Company.

22.  Clause 6D provides that payment may be made in good faith by the Company: (a) to any Committee Member of out-of-pocket expenses; (b) of interest on money lent by any member or Committee Member at a specified rate; (c) of reasonable and proper rent for premises leased by any member or Committee Member; (d) of remuneration or other benefit in money or money’s worth to a company in which a member or Committee Member is interested solely as a member by holding not more than 1/100 part of its capital, or controlling 1/100 part of its votes.

23.  Pausing there, it would be noted that whilst Clause 6A was expressly made subject to Clauses 6C and 6D, Clause 6B was not made so subject, and the only benefits that a Committee Member may receive are confined to the 4 situations in Clause 6D.

24.  Clause 7 provides that on “winding up dissolution”, the Company’s net assets shall not be distributed among the members, but shall be transferred to institutions having similar objects to it and which have similar prohibitions as Clause 6, the choice of such institutions to be determined in default by a judge of the High Court.

Art. 28

25.  It is convenient here to set out Article 28 of the Articles of Association (“Art. 28”) as it had been relied upon by the Company (at least at one stage). This article is headed “Disqualification of Committee Members” and states that the office of a Committee Member shall be vacated if (among other things) the Committee Member: “(b) without the consent of the Association [Company] in General meeting holds any other office of profit under the Association”; or “(g) is directly or indirectly interested in any contract with the Association and fail to declare the nature of his interest in manner required by Section 147 of the [Companies] Ordinance”.

Matters of the Member’s concern

26.  The Member has been a registered member of the Company for decades and has been a substantial donor. In a nutshell, these proceedings arose out of his concern with the following 4 matters.

(I) The ECC sale

27.  Back in 1990, the Company had bought premises in Chai Wan called the Eastern Culture Centre (“ECC”). On 28 July 2011, the Company entered into a provisional sale and purchase agreement (“ECC PSPA”) to sell ECC at $80 million. On 11 August 2011, a formal sale and purchase agreement (“ECC FSPA”) was signed, and on 31 October 2011, the assignment was executed.

28.  (a) The Member considered that this sale was at a substantial undervalue. Valuers’ reports made in 2015 put the market value of ECC as at the date of the ECC FSPA at $127.5 million - $137 million (C/694 and D/798). (b) On the Company’s part, valuers’ reports made in 2015 and 2018 put the fair market value of ECC as at the date of the ECC PSPA at $83 million (F/1383 and F/1421). (c) Pausing there, although there is a period of 14 days between the PSPA and the FSPA, it was not contended before the Judge that there was any substantial movement in the market value during that period.

29.  It is noteworthy that in 2011, the Company had cash or cash equivalents of more than $161.5 million, and the Company has not suggested that there was an immediate need to sell ECC for financial reasons.

(II) The SWHCC purchase

30.  On 18 August 2011, Choy Yuen On, David (“Mr Choy”), a Committee Member, emailed the Member in relation to negotiations for the purchase by the Company of a property in a building called Foo Yan Court (“the FY premises”). Mr Choy said the vendor was increasing its asking price and asked the Member to assist as he (the Member) knew the vendor (B/497). The Member says in his affirmation filed on 28 April 2017 (“Lam I”) that on 24 August 2011, he was told by the vendor that the price could be negotiated if a potential purchaser presented a cheque, and he relayed the message to Mr Choy (para.18).

31.  However, two days later, Mr Choy entered into a provisional sale and purchase agreement (“SWHCC PSPA”) to purchase a property called the Sai Wan Ho Culture Centre (“SWHCC”) for $23.8 million. The SWHCC is opposite the FY premises and of similar size. On 8 September 2011, a formal sale and purchase agreement (“SWHCC FSPA”) was signed. On 25 October 2011, a Nomination was signed between Mr Choy as “Nominator” and the Company as “Nominee” whereby Mr Choy confirmed that the deposit, expressed in the SWHCC FSPA as having been paid by him, was in fact money provided by the Company, and relinquished his interest in the property. On the same day, the assignment was executed.

32.  (a) The Member considered that this purchase was at a substantial overvalue. A valuer’s report made in 2015 put the market value of SWHCC at $18.5 million as at 9 November 2011 (the significance of this date is unknown) (C/661). (b) On the Company’s part, a valuer’s report made in 2018 put the fair market value of SWHCC as at the date of the SWHCC PSPA at $23.72 million (F/1468). (c) Pausing there, although there is a period of 2 months between the date of the FSPA and 9 November 2011, it was not contended before the Judge that there was any substantial movement in the market value during that period.

33.  As far as the procedure undertaken by the Committee in authorizing those 2 transactions is concerned, Mr Chan Chai Tung (“Mr Chan”, the 19^th Defendant), a Committee Member at the relevant time, said in a memorandum signed on 28 October 2017 that he had not been provided with any information in advance regarding the transactions, nor was he consulted, nor had he been asked to participate in, nor had he been informed of, any voting procedure or decision regarding both transactions (Lam III, “LKC-6”, F/1254-56). Mr Chan died in 2018 (Lam Aff 24.7.2019, exh “LKC-1”, para.5).

(III) Remuneration paid to Committee Members

34.  In 2012, the Member raised the issue that remuneration had been paid to some Committee Members contrary to the MOA. Subsequently he estimated that more than $9.4 million had been paid over a period of 3 years (years ended 31 March 2012 to 31 March 2014) to some Committee Members (Lam I, para.62). In Lam I, he named 10 Committee Members who had received remuneration (“Remunerated Committee Members”).

35.  The Company’s initial response in this respect, as set out in para.23 of the affirmation of Chong Ka Yee, a director of the Company, filed on 25 May 2017 (“Chong I”), is that the Member’s concern was “misconceived” as the effect of Art. 28 (para.25 above) is to “automatically strip a Committee member of his status as such” in situations set out in Art.28 (b) and (g). In other words, the argument appears to be that once a Committee Member receives remuneration, he would automatically no longer be a Committee Member, and thus he would not fall foul of Clause 6B (para.20 above).

36.  In a subsequent affirmation of Chong Ka Yee filed on 25 October 2017 (“Chong III”), she added in para.3 that “most of the alleged Remunerated Committee Members … were in fact full time employees of the [Company] for quite some time well before they became Committee members …. Their services and contribution to the [Company] were well recognized by most of the members of the [Company] and thus they got elected by the members of the [Company] to serve on the Committee …. They were remunerated whilst serving on the Committee only because they continued to work as full time employees … after their election to the Committee and were thus entitled to be paid for their work. A small number of the alleged Remunerated Committee Members … were offered full time employment with the [Company] after their appointment as Committee members and they were remunerated whilst serving on the Committee … only because of the work they did as salaried employees. They were never paid any emoluments of office for services rendered to the [Company] as Committee Members …” (emphasis added). She added in para.5 that “unfortunately, the presence of … Clauses 6A to 6E and the effect of [Art. 28] were inadvertently overlooked by all concerned when electing some of the full time employees to serve as [Committee Members] and offering employment to some of the [Committee Members] shortly after their appointment … If those clauses had been brought to their attention at that time, I verily believe that the decision would not have been made to invite the Remunerated Committee Members to serve on the Committee … (or to offer employment to them …) and even if so invited (or offered with employment …), the Remunerated Committee Members would have made an election between” being Committee Members and being salaried employees (emphasis added).

37.  The Member’s reply to this was that although he had raised the issue of remuneration as early as 2012, the Remunerated Committee Members continued to be remunerated thereafter, and they were not elected by the members as the first AGM of the Company was only held in January 2014.

(IV) Contracts with Mr Choy’s companies

38.  The 4^th matter that concerned the Member was the Company’s contracts with a company controlled by Mr Choy. Mr Choy was appointed as a Committee Member on 31 December 1992 and resigned on 14 December 2013 (E/1113).

39.  Mr Choy controlled more than 60% and his wife controlled the balance of shares in a company called Hang Foong Mechanical and Electrical Ltd (“HF Ltd”), which had entered into contracts to provide repair and maintenance services to the Company until the end of 2013. The Member says that this is contrary to Clause 6B (para.20 above).

40.  Further, as it had been declared by the directors in the Company’s financial statements that the Company had not entered into any material contracts with any company in which any Committee Member has any interests, the Member says that Mr Choy had failed to disclose his interests in these contracts, contrary to s.162 CO which requires that any director who has a material interest in a contract or proposed contract with the company should declare the nature of his interest at the earliest practicable board meeting.

41.  The Company’s response was as follows. First, on 26 November 2014, the Company’s “Chief Director” and “Committee Chairman” (different individuals) wrote to all members in response to a letter Mr Choy had sent to some members. The letter stated that “for many years”, HF Ltd had been maintaining the air conditioning systems at various centres and had undertaken repair projects, and that the Company’s lawyers have studied this issue and “pointed out that it may be inconsistent with clauses on conflicts of interests within the Memorandum and Articles of Association”. The letter went on to say that when this issue was explained to Mr Choy, he decided to resign and that his resignation as a Committee Member was not forced upon him.

42.  Subsequently, in Chong I, the Company among other things put forward its view as to the effect of Art.28 (para.25 above).

OS - HCMP1002/2017

43.  On 28 April 2017, the Member issued an originating summons in HCMP1002/2017 (“the OS”) seeking leave pursuant to s.733 CO to issue a statutory derivative action against 19 former and present Committee Members (“Intended Defendants”). Apart from the 10 individuals named in Lam I, 9 other individuals were added. The Company has referred to them as “the 2011 Committee Members”.

44.  For ease of reading, sections 732-734 CO have been annexed to this Judgment.

Preliminary Issue Summons

45.  By a summons dated 25 May 2017 (“Preliminary Issue Summons”), the Company sought the determination of the following as a preliminary issue:

“Whether in light of the undisputed or indisputable fact that the Respondent is a company not of a private nature with shareholders but a charitable company incorporated by guarantee whose members have no right to any of its surplus assets upon its dissolution and whose affairs are subject to supervision by the courts at the instance of the Secretary for Justice, the Member has any legitimate or sufficient interest to invoke sections 732(1) and 733 of the Companies Ordinance (Cap. 622) to bring proceedings on behalf of the Respondent?” (“Preliminary Issue”)

Interim leave order

46.  On 31 May 2017, as the intended claims would shortly become time-barred, the Judge granted interim leave to the Member to issue a protective writ against the Intended Defendants, against undertakings by the Member not to serve the writ without leave of the court and to withdraw the writ in the event that the court ruled, either at the hearing of the Preliminary Issue Summons or at the substantive hearing of the OS, that leave to issue the writ should not have been granted (“the Interim leave order”).

Writ and Statement of Claim – HCA1287/2017

47.  Pursuant to the Interim leave order, the Member issued a writ of summons against the Intended Defendants in HCA 1287/2017 (“the Action”) on 1 June 2017. The four claims pleaded in the Writ were summarised in the Leave Decision as follows [4]:

“(i) On 11 August 2011, the defendants, in breach of duty, caused the plaintiff to sell [ECC] for HK$80 million which was worth at least HK$127 million, causing substantial loss to the Company [“1^st Claim”].

(ii) On 25 August 2011, the defendants, in breach of duty, caused the Company to acquire [SWHCC] in consideration of a purchase price of HK$23.8 million which was worth no more than HK$18.5 million [“2^nd Claim”].

(iii) Between about June 2011 and January 2014, the 1^st, 2^nd, 3^rd, 5^th, 6^th, 13^th, 15^th, 16^th, 17^th and 18^th defendants received remuneration from the Company in breach of clause 6B of the [MOA] and [Art.24]. The directors who received these payments profited wrongly to the extent of the sums paid to them, in breach of the aforesaid provisions, and section 162(1) [CO], Cap 32, and their fiduciary duties as directors, and are liable to account for those payments [“3^rd Claim”].

(iv) During the period from about 2011 to the end of 2013, the Company entered into contracts for repair and maintenance works with [HF Ltd] of which the 4^th defendant [Mr Choy] was a director and owned at least 66.67% of its issued shares. This was in breach of section 162(1) and the 4^th defendant’s fiduciary duties to the Company, and he is liable to account for the payments he received” [“4^th Claim”].

Position of Secretary for Justice

48.  After the Interim leave order, the Company’s solicitors wrote to the SJ on 14 June 2017 asserting (among other things) that as the Company was a charitable company, “the SJ alone is responsible for deciding whether proceedings should be brought (and hence any proceedings can only be brought with the prior sanction of the [SJ] by way of a relator action and not by way of a derivative action)”.

49.  The SJ’s response by a letter dated 28 June 2017 was to ask for further information and documents and to reserve his rights. Although further information and documents were supplied, and subsequently, the SJ was given copies of the Judge’s Decisions and informed of the hearing dates of these appeals, she has not taken any action in the proceedings or given any views.

50.  The SJ’s role as parens patriae (or more accurately, as the officer of the Government qua parens patriae) was examined in Sik Chiu Yuet, and will be discussed later in this Judgment in connection with the Company’s argument on the Preliminary Issue that essentially the Member has no locus standi as the consent of the SJ has not been given for a relator action (paras.99-112 below).

Notice of 2017 EGM

51.  After the Interim leave order, the Company issued a notice on 28 September 2017 (“the 2017 EGM Notice”) for an extraordinary general meeting to be held on 13 October 2017 (“2017 EGM”).

52.  To summarise, the relevant parts of the 2017 EGM Notice stated that the current Committee Members have collectively decided after taking legal advice that: (1) it is not in the interests of the Company to pursue the proposed action; and (2) “there is no possibility of payments to [Committee Members] in breach of the [MOA] inasmuch as any [Committee Member] would automatically lose his office pursuant to [Art.28] if he accepts a salary from the Company” (F/1338).

2017 EGM Resolutions

53.  At the 2017 EGM, a majority of members voted in favour of the following 4 resolutions (“2017 EGM Resolutions”) (F/1346-1354). There was also a 5^th resolution which is not material to these appeals.

(1) Insofar as it is within the competence and powers of the Company in General Meeting to ratify the alleged wrongdoings to the Company for which leave to bring a derivative action has been sought in [the OS], the sale of [ECC] at the consideration of HK$80,000,000.00 on 31 October 2011 by the Company to [the purchaser] is hereby confirmed approved and ratified by the Company and the said transaction be valid effective and binding on the Company as if the approval of the members of the Company had been duly sought.

(2) Insofar as it is within the competence and powers of the Company in General Meeting to ratify the alleged wrongdoings to the Company for which leave to bring a derivative action has been sought in [the OS], the purchase of [SWHCC] at the consideration of HK$23,800,000.00 on 25 October 2011 by the Company from [the vendor] is hereby confirmed approved and ratified by the Company and the said transaction be valid effective and binding on the Company as if the approval of the members of the Company had been duly sought.

(3) Insofar as it is within the competence and powers of the Company in General Meeting to ratify the alleged wrongdoings to the Company for which leave to bring a derivative action has been sought in [the OS], notwithstanding that [Mr. Choy], one of the Committee Members … of the years 2010 to 2013 who had failed to declare his interest in [HF Ltd], which is either wholly owned or substantially owned by Mr. Choy, to the Committees … entered into various contracts with the Company including the provision of mechanical ventilation and air conditioning system maintenance to various centres of the Company, it is hereby confirmed approved and ratified by the Company that the aforesaid contracts be valid effective and binding on the Company as if Mr. Choy had duly made such declarations to the Committees … at the material times.

(4) Insofar as it is within the competence and powers of the Company in General Meeting to ratify the alleged wrongdoings to the Company for which leave to bring a derivative action has been sought in [the OS], and insofar as it may be necessary to do so (notwithstanding what is stated in paragraph 3(2) of the Notice), it is hereby confirmed approved and ratified by the Company that it is not in the best interest of Company to pursue against the relevant committee members (for repayments of salaries paid to them) given that their offices have already been duly vacated.

Preliminary Issue Decision

54.  The Preliminary Issue Summons was heard by the Judge on 1 November 2017.

55.  In the Preliminary Issue Decision dated 2 November 2017, the Judge found that the Member had sufficient interest to invoke s.732(1) and s.733 CO to bring proceedings on behalf of the Company.

56.  The Judge’s reasons are summarised below.

(1) First, the Judge rejected the Company’s argument that leave should never be given to commence a statutory derivative action in the case of a company limited by guarantee where the members have no right to receive any form of distribution of the company’s assets.[1] The Judge held that people become members of companies which promote and facilitate non-commercial activities, such as religion and sports, because they have an interest in those activities, and if a wrong is being done which inhibits its properly fulfilling its purpose, which wrong is condoned by the board, there is no reason why a member may not commence a common law derivative action. In any event, when faced with an application for leave to commence a statutory derivative action (whatever may be the criteria for a common law derivative action), the court is only concerned with whether the statutory criteria under s.733 CO have been satisfied, and if so, whether it is a proper case for the court to exercise its discretion (recognizing that the fact that the company is a charity may be relevant to the exercise of its discretion).[2]

(2) Second, the Judge rejected the Company’s argument that, in the case of a charitable company, such rights and interests as exist in ensuring that the company conducts its affairs lawfully are public rights which can only be asserted by the Secretary for Justice, or at least that the derivative action is unnecessary because of the availability of the SJ to remedy any wrong.[3] The Judge held that whilst there is a public interest in the protection of charities, and there is no dispute that the Secretary of Justice could intervene if he considers it appropriate, it does not follow that a member does not have an interest in the proper administration of the company arising from his membership, which is distinct from the general public’s interest in the proper administration of charities generally.[4]

57.  On the assumption that leave to appeal was required, the Judge gave leave to appeal (para.21, Leave Decision handed down on 18 April 2018).

Leave Decision

58.  The OS for leave was heard by the Judge on 14 March 2018. The Judge allowed the Action to continue in respect of the 1^st and 2^nd Claims (“Allowed Claims”), but not in relation to the 3^rd and 4^th Claims (“Disallowed Claims”).

59.  The Judge’s reasons are summarised below.

(1) Having already determined (in the Preliminary Issue Decision) that the Member had sufficient interest to invoke s.733 CO, the Judge held that the principal issues in deciding whether leave should be granted were (i) whether the proposed proceedings raised a serious issue to be tried and (ii) whether it appears to be in the Company’s interests that it be tried.

(2) The Judge referred to the applicable principles as summarised by this Court (Cheung CJHC, Lam VP and Kwan JA) in Zhang Heng v Kingstone International Wealth Management Limited CACV 56/2017, paras.11, 12 and 19.[5]

(3) The Company did not dispute that there was a serious issue to be tried. The principal ground of opposition was that both the board and the members of the Company had decided that it was not in the Company’s interests for the proceedings to continue. As far as the board’s decision was concerned, the Company argued that it is consistent with the established principle of company law that the court would not override a decision made by the board that was within the board’s discretion.[6] As far as the members of the Company were concerned, the Company relied on the 2017 EGM Resolutions.

(4) In relation to the 2017 EGM Resolutions, the Judge distinguished between (i) the ratification of an impugned transaction and (ii) the release of a director from breach of duty where that director had authorized the impugned transaction. The Judge found that the 2017 EGM Resolutions as worded (i) only ratified the transactions regarding ECC, SWHCC and the HF Ltd contracts, but (ii) did not release the Intended Defendants from any breach of duty on their part in authorizing those transactions.[7]

(5) As for the Company’s argument that the 2017 EGM Resolutions were evidence of the members’ “approval or ratification of conduct” and thus should be taken into account under s.734(2) CO when deciding whether to give leave, the Judge had 2 considerations. (i) The 1^st consideration related to the Member’s argument based on the Chancellor’s judgment in CIFF Ch that a member of a charitable company is not a person exercising his own right of property to vote as he sees fit. He must exercise his vote in the best interests of the charity. In respect of this 1^st consideration, the Judge accepted without deciding that that general principle applied, but held that it did not prevent a member ratifying a transaction or releasing a breach of duty as long as the board’s recommendations to do so “are framed with regard to relevant considerations and the members are given sufficient accurate and relevant information”. (ii) However, the Judge’s 2^nd consideration was that s.734(3)(c) CO had not been complied with, as he found that “the issues were not adequately or accurately explained to members and they did not reach a well-informed decision”. This was because the 2017 EGM Notice did not explain the Member’s complaints, or refer to the valuations he had obtained, and were clearly slanted in favour of the resolutions.[8] The Judge then outlined the steps which he expected a properly advised board to have taken before calling upon the members to ratify the impugned transactions and excuse any breach of duties as follows:[9]

“I would have expected a properly advised board to have proceeded as follows: to have formed a committee of independent directors who would have obtained independent advice in order to determine whether or not it was in the Company’s interests to proceed with any of the claims. They would have prepared a paper for the board, and the board would have been called upon to vote in favour of the committee’s recommendation. It might have been thought desirable that a meeting of members should then be convened, at which resolutions could be put before them to ratify the transactions, or to pass resolutions excusing any breach of duty that had taken place. The notice of general meeting would have been accompanied by the recommendations prepared by the committee of the board which I would have expected to have contained relevant documents such as the statement of claim.” (Emphasis added).

(6) Notwithstanding non-compliance with s.734(3)(c), the Judge found that it was not in the interests of the Company to allow the 3^rd and 4^th Claims to proceed because “if the matter had been properly explained, the members would have released the directors from liability for the breaches.”[10] His reasons for this view were as follows:[11]

“In the case of [HF Ltd], the company had been providing services to the Company for a long period before the 4^th defendant [Mr Choy] became a director. There is nothing to suggest that the 4^th defendant’s acceptance of appointment to the board in 2011 and the continuation of [HF Ltd] providing services to the Company were anything other than an oversight and a technical breach. Similarly, the employed defendants had all worked for the Company for lengthy periods prior to their appointment and there is nothing to suggest that their continued employment after accepting appointment to the board was anything other than inadvertence. If they and the board had been aware of the restrictions on their appointment, it is a compelling inference that they would not have been appointed, but would have continued as employees. It seems to me that it is not in the interest of the Company to allow those claims to proceed which I think it is probable most members, having regard to the charitable objects of the Company, would consider objectionable and that most third parties would consider ethnically (sic) questionable, particularly having regard to the charitable Buddhist objects of the Company” (emphasis added).

60.  Pausing there, it would appear that, in relation to the 3^rd Claim, the Judge was mistaken when he said that the employed defendants had all worked for the Company for lengthy periods prior to their appointment, because the 5^th and 17th Defendants had been Committee Members for some time before becoming employees of the Company (Chong III, para.3, see para.36 above).

61.  For the reasons summarised above, the Judge gave leave for the 1^st and 2^nd Claims but not for the 3^rd and 4^th Claims.

Events after the Leave Decision

The Independent Committee

62.  On 5 September 2018, the Committee set up an Independent Committee (“IC”) of 3 persons “in response to [the] observations” in the Leave Decision. It reported on 31 January 2019 (“the IC Report”).

63.  The IC explicitly stated that it was not its function to resolve any factual disputes, or differences in the valuation experts’ opinions, or legal arguments (para.12, IC Report). Presumably, this meant that it did not investigate the late Mr Chan’s allegations in his memorandum (para.33 above) which was not referred to in the Report.

64.  Prior to reporting, the IC called for submissions from the Member and the Intended Defendants. However, the Member stated in his solicitors’ letter dated 13 November 2018 to the Company’s solicitors that he would not communicate with the IC due to its lack of independence, as 2 members were Committee Members who had already opposed the proceedings earlier, and the chairman was from the same law firm as a Committee Member [Lam Aff 24.7.2019, paras.33 and 39].

65.  The IC Report is annexed to the 2^nd affirmation of Yvonne So filed 24 June 2019 (“So II”). As summarised at paras.96-99, the IC was of the view that: (1) regarding the sale of ECC, although no valuation report was obtained, there was no other information that the bank valuations were inaccurate, and “it was not unreasonable” for the Committee to rely on the bank valuations; (2) regarding the purchase of SWHCC, it was “not feasible and practicable to obtain a valuation report in a dynamic market”, the Committee had considered and compared about 10 properties before purchasing SWHCC, and there was no personal gain by any of the Committee Members; (3) there was merely an inadvertence in the failure to observe the Company’s Articles, and had the Committee been aware of the clauses [presumably meaning Clauses 6-6D of the MOA], the Remunerated Committee Members would have remained employees and would not have chosen to take up the office of committee members; (4) HF Ltd had been engaged by the Company since 1990 [para.92, IC Report] and the Company had been aware of Mr Choy’s interest in that company throughout the material years, so it would have been purely a procedural formality to require him to make disclosure. The IC did not recommend that any of the 4 Claims be pursued.

Notice of 2019 EGM

66.  On 14 March 2019, the Company gave notice to convene an EGM (exh. SWYY-18, So II).

2019 EGM

67.  On 29 March 2019, an EGM was convened (“2019 EGM”). The Company has exhibited minutes of the meeting, and the Member has exhibited a compact disc and transcript recording the events at the meeting which the Company has not challenged.

68.  A majority of members voted in favour of the following resolutions (“2019 EGM Resolutions”). Subsequently on 13 June 2019, the Company executed a Deed of Release and Discharge in favour of the Intended Defendants (“Deed of Release”).

2019 EGM Resolutions

69.  The 2019 EGM Resolutions were as follows:

“IT IS RESOLVED THAT:–

(1) Insofar as it is within the competence and powers of the Company in General Meeting to ratify the sale of [ECC] at the consideration of HK$80,000,000.00 on 31 October 2011 by the Company to [the purchaser], the same is hereby confirmed, approved and ratified by the Company to the intent that the said transaction be treated as valid, effective and binding on the Company as if the approval of the members of the Company had been duly sought before the said sale had taken place.

(2) Insofar as it is within the competence and powers of the Company in General Meeting to ratify the purchase of [SWHCC] at the consideration of HK$23,800,000.00 on 25 October 2011 by the Company from [the vendor], the same is hereby confirmed, approved and ratified by the Company to the intent that the said transaction be treated as valid, effective and binding on the Company as if the approval of the members of the Company had been duly sought before the said purchase had taken place.

(3) Insofar as it is within the competence and powers of the Company in General Meeting to decide not to pursue the 19 individuals of the 2011 Committee in [the OS] in respect of any cause of action which the Company may have against them in relation to the allegations of wrongful conduct, viz.:

(a) The sale of ECC at an undervalue (alleging a breach of the duty of care and skill owed by the 2011 Committee to the Company but not dishonesty or misappropriation of assets of the Company);

(b) The purchase of SWHCC at an overvalue (alleging a breach of the duty of care and skill owed by the 2011 Committee to the Company but not dishonesty or misappropriation of assets of the Company);

(c) A failure on the part of one of the Committee members on the 2011 Committee, Mr Choy Yuen On, David, to disclose his interest in the maintenance contracts entered into between his company, Hang Foong Mechanical and Electrical Ltd, and the Company; and

(d) Remuneration and payments to a certain number of members of the 2011 Committee in breach of provisions in the Company’s Memorandum of Association;

it is hereby resolved that any liabilities and claims for such wrongful conduct alleged against the said 19 individuals be waived, forgone and absolved, and further that the said conduct which is alleged to be wrongful be treated as if they had been expressly authorized by the Company in General Meeting before such conduct had taken place to the intent that no further legal action shall be taken or maintained against the said individuals.

(4) Insofar as it is within the competence and powers of the Company in General Meeting to waive any claims under [the OS] brought against the 19 individuals of the 2011 Committee, the current committee is hereby authorised to execute a deed of discharge, release and waiver to that effect.”

The Deed of Release

70.  On 13 June 2019, the Company executed a Deed of Release along the lines of resolution (4) above.

Company’s summons to adduce fresh evidence

71.  On 24 June 2019, the Company issued a summons for leave to adduce as fresh evidence the IC Report, the 2019 EGM Notice, the minutes of the 2019 EGM, the 2019 EGM Resolutions and the Deed of Release.

72.  The summons was opposed by the Member who filed an affirmation exhibiting the CD and transcript referred to above, and some correspondence.

73.  On 5 December 2019, a single judge of this court ordered that the summons be heard together with the appeals. After hearing the summons, we exercised our discretion to give leave to adduce the fresh evidence, and made an order that the costs of the summons be in the appeal. We said that our reasons would be included in this Judgment, and they are summarised below.

74.  We would deal first with the argument of law from Mr Wong Yan Lung SC, leading counsel for the Member, that “post-leave ratification cannot be used to nullify or set aside leave already given”. He relies on s.734(1)(c) which provides that if a company’s members approve or ratify any conduct, the approval or ratification “is not a ground for any court to determine the proceedings brought … by the member in favour of the defendant” (emphasis added). Mr Wong construes the word “determine” as “terminate” (para. 11 of his written submissions) and argues that since leave has already been given, the court is barred from terminating the derivative action by reason of ratification.

75.  With respect, I do not agree with this analysis. Section 734(1) lays down the law in relation to ratification-based arguments which may occur at various stages in the course of a statutory derivative action. Section 734(1)(a) negates any “disqualification” argument. It stipulates that a ratification does not “prevent” the member (pre-leave) applying for leave [s.734(1)(a)(iii)] or (post-leave) bringing [s.734(1)(a)(i)] or intervening in proceedings [s.734(1)(a)(ii)]. Section 734(1)(b) stipulates that a ratification occurring pre-leave does not by itself constitute a reason for the court to refuse leave. And s.734(1)(c) stipulates that a ratification occurring post-leave does not by itself constitute a reason for the court to decide the derivative action (“determine the proceedings”) in favour of the defendant.

76.  However, whether the ratification occurred pre-leave [s.734(2)(b)] or post-leave [s.734(2)(a)], the court may take the ratification into account in deciding what judgment or order to make, but before doing so, the court should first have regard to the matters in s.734(3).

77.  At this point in time, this court is considering the Judge’s decision at the leave stage. The case has not got to the stage of the hearing of the Action, and it is only then that s.734(1)(c) would apply. The fact that the fresh evidence has occurred after the first instance leave decision does not make this appeal anything other than an appeal from the Judge’s decision at the leave stage, and the provisions which apply now are s.734(1)(a)(iii), s.734(1)(b), s.734(2)(b) and s.734(3).

78.  As for giving leave to adduce fresh evidence, we applied the well-established rule in Ladd v Marshall [1954] 1 WLR 1489 that an appellate court has a discretion to permit fresh evidence to be adduced if 3 conditions are met.

79.  As for the 1^st condition, the 2019 EGM took place after the hearing before the Judge, and obviously could not have been obtained at that hearing with reasonable diligence. It would be simply unrealistic for this court to ignore evidence of the factual situation “on the ground” as it has developed. This court has the power to make such further or other order as the case may require “according to the state of things at the time of the hearing” before this court (para.59/3/1, Hong Kong Civil Procedure 2022).

80.  As for the 2^nd condition, the IC Report, the 2019 EGM Notice, the minutes of the 2019 EGM, the 2019 EGM Resolutions and the consequential Deed of Release would, or might, if believed, have an important effect on the Judge’s mind regarding the Claims. The Judge had already referred in para.15 of the Leave Decision to s.734(2) CO, under which members’ “approval or ratification of conduct” would be taken into account when deciding whether or not to give leave. It is clear from the fresh evidence that: (a) the IC was established “in response to [the] observations” of the Judge in the Leave Decision: IC Report para.7; (b) the 2019 EGM Notice purported to include information which the Judge held was inadequately disclosed in the 2017 EGM Notice (para.59(5) above); and (c) the 2019 EGM Resolutions tracked the Judge’s references in the Leave Decision to “ratification” of transactions and “release” of directors’ breaches (para.59(5) above).

81.  At this stage of considering whether the fresh evidence should be permitted, it is only necessary to say that although criticisms may be levelled at the constitution of the IC and/or the impartiality of some of its analyses and recommendations, and/or the correctness or completeness of facts or comments stated or the impartiality shown by the IS or Committee or the barrister instructed by the Company who attended the meeting, and/or the accuracy of the minutes (Lam Aff 24.7.2019), it cannot be said that these pieces of evidence would not have had an important effect on the Judge’s mind. In view of para.16 of the Leave Decision, it would be artificial to suggest otherwise. As for the criticisms, a party applying to adduce fresh evidence only needs to show that such evidence would be material, not that it would be conclusive or determinative.

82.  As for the 3^rd condition, the evidence was of a sort which inherently is not improbable. All the fresh evidence is documentary. I note that the Member disputes the completeness and accuracy of the minutes, but that dispute is not such as to make them “inherently” improbable, as per the 3^rd condition in Ladd v Marshall.

83.  It is not necessary to consider Mr Wong’s argument that a party may thus be able to re-open decisions by making multiple attempts to adduce fresh evidence (“third or even fourth bites of the cherry”). We are not faced with this situation.

Appeals

84.  CACV 101/2018:

(1) In the Notice of Appeal filed on 12 April 2018, the Member appeals against the Leave Order in respect of the Disallowed Claims.

(2) In the Amended Respondent’s Notice filed on 13 June 2018, the Company seeks to uphold the Leave Order in respect of the Disallowed Claims, and cross-appeals against the Leave Order in respect of the Allowed Claims.

85.  CACV 103/2018:

(1) In the Amended Notice of Appeal filed on 9 May 2018, the Company appeals against the Preliminary Issue Order and the Leave Order in respect of the Allowed Claims.

(2) In the Respondent’s Notice dated and filed on 2 May 2018, the Member seeks to uphold the Preliminary Issue Order and the Leave Order in respect of the Allowed Claims. The Member also contends that the Judge should have held that he had interest to commence the statutory derivative action by reason of s.57A Trustee Ordinance Cap. 29 (“TO”). The material part of this section provides that “the court may provide such relief, make such order … as it thinks just relating to a charitable trust upon an application made to it –

(a) by (iii) … any … persons otherwise interested in the trust; and

(b) either (i) complaining of a breach [or supposed] breach of trust; or (ii) for the purposes of the better administration of the trust”.

Discussion

The Preliminary Issue Decision

86.  The Company has raised two preliminary issues on the Member’s locus standi, formulated in its Skeleton Arguments (para.3) as follows:

(1) “Whether a member of a charitable company has standing to bring a derivative action given that the assets of the company are irrevocably devoted to charity and hence the member has not suffered any reflective loss as a result of the alleged wrongs done to the company?” (“the no loss issue”)

(2) “Whether it is proper to grant leave to a member of a charitable company to bring a statutory derivative action, the effect of which is to enable him to bypass the requirement of obtaining the Secretary for Justice’s sanction to bring the proceedings in the form of a relator action having regard to the constitutional role of the Secretary for Justice as representative of the parens patriae?” (“the SJ issue”)

The no loss issue

87.  On behalf of the Company, Mr Ambrose Ho SC submitted: “It is trite that the derivative action (whether common law or statutory) is a procedural device which offers protection to a member of a company who has suffered a personal loss (albeit reflective of the loss to the company). This however presumes that the member has a private or proprietary interest to protect. Whilst this may be so in the case of regular private companies, it is not so in the case of corporate charities in which a member plainly has no such interest.”[12] (Emphasis added). “A derivative action is thus irreconcilable with basic principles of charity law.”[13]

88.  Dealing first with this argument, it is not necessary to consider whether the criteria for a common law derivative action have or have not been satisfied, for our case involves a statutory derivative action and it is the statutory criteria only which should be considered (Waddington Ltd v Chan Chun Hoo Thomas (2008) 11 HKCFAR 370, paras.28-32). (I note in passing that in Chung Sau Ling v Asia Women’s League Ltd [2001] 3 HKC 410, Chu J (as she then was) gave costs orders in a common law derivative action involving a charitable company, but it was not argued that such proceedings could or could not apply to such a company).

89.  For a statutory derivative action, the material parts of s.733 CO are as follows:

“Leave of Court to bring or intervene in proceedings

(1) On application by a member of a company …, the Court may grant leave for the purposes of section 732(1) … if it is satisfied that—

(a) on the face of the application, it appears to be in the company’s interests that leave be granted to the member;

(b) in the case of—

(i) an application for leave to bring proceedings under section 732(1) …, there is a serious question to be tried and the company has not itself brought the proceedings; …”.

90.  First, it should be noted that the provision is not limited to companies with a share capital only. The Company falls within the wide definition of a “company” under s.2(1) CO.^[14]

91.  Then, the statutory criteria are only as follows:

(1) the applicant is a member of a company;

(2) a serious question to be tried has been demonstrated; and

(3) on the face of the application, it appears to be in the company’s interests that leave is granted.

92.  As the Judge observed, when faced with an application for leave to commence a statutory derivative action, the court is only concerned with whether the above statutory criteria have been satisfied, and if so, whether it is a proper case for the court to exercise its discretion.[15] I respectfully agree with those observations. Although members of commercial trading companies generally have a private or proprietary interest to protect, there is no ground to “presume” as a condition for all companies that a member applying for leave in a statutory derivative action must have a “private or proprietary interest” in addition to the conditions set out in the statute.

93.  Mr Ho has not drawn our attention to any authorities establishing the proposition that such a “presumption” is a pre-requisite for a statutory derivative action. Cinematic Finance Ltd v Ryder [2010] EWHC 3387 does not support that proposition. The applicant in that case was the controlling shareholder (para.14) who was trying to circumvent the insolvency regime by starting a derivative claim. It was not a case where the company could not or would not enforce its rights due to malfeasance of the directors. The judge held that derivative claims should not normally be brought on behalf of a company in liquidation, the reason being that it would be for the liquidators to decide whether or not to pursue the action (para.22).

94.  In contrast, Mr Wong has referred us to:

(1) a Canadian case in which it was said (obiter) that “the class of persons who may bring a derivative action may also be wide enough to include members of societies or other bodies such as non-profit charitable organizations or unions” (Frank Smith on behalf of Toronto Harbour Commissioners v Disero (1991) 5 OR (3d) 585 p.20); and

(2) an Australian case Charlton v Baber (2003) 47 ACSR 31, in which a statutory derivative action was permitted to proceed even though the company was in liquidation.

95.  As our appeals concern a statutory derivative action, the Australian case is more relevant. There, it was held first that legislation for a statutory derivative action applied to a company in liquidation (paras.26-28). Pausing there, I note that the definition of “company” in s.722 CO does not exclude companies in liquidation.

96.  More relevantly, it was held in Charlton that even though it was uncertain if the proceeds of the derivative action would yield anything for the shareholder, the shareholder may in good faith pursue the action as his motives went beyond mere personal gain. As a former director, he may feel a sense of responsibility to creditors who have suffered losses (para.43).

97.  Indeed, the only “interests” referred to in s.733 CO are, not the applicant member’s interests, but “the company’s interests”, and in this regard, the Company has not denied that if the Action were to succeed, its financial position would be improved.

98.  For the above reasons, the Company’s argument on “the no loss issue” should be rejected.

The SJ issue

99.  In relation to the SJ issue, the Company has asserted that “notwithstanding the apparent breadth of the jurisdiction given to the Court by sections 732(1) and 733 of the Companies Ordinance (Cap.622), the jurisdiction cannot be invoked by a member of a charitable company, who must apply instead to the Secretary for Justice for her fiat to bring a relator action in her name.”[16] (emphasis added).

100.  For the following reasons, the Company’s argument on this issue should also be rejected. First, it does not inevitably follow from the fact that there is public interest in the protection of charities that a member of a charitable company does not have an interest in the proper administration of the company arising from his membership which is distinct from the general public’s interest in the proper administration of charities generally. It is interesting to note that although the SJ has throughout been apprised of these proceedings, at no stage has she confirmed the Company’s assertion in the preceding paragraph to be also her understanding of the jurisdiction as a matter of law. She has not applied to be a party, she has not assigned counsel to hold a watching brief in case that assertion is abandoned by the Company in the course of arguments in court, and there has not even been confirmation of that assertion by way of correspondence.

101.  This is corroborated by the holding in respect of a charitable gift that the “Attorney-General is not, ordinarily, a necessary party where the gift, which is the subject matter of the suit, was made to a corporate body” (Boulton v Church Society of the Diocese of Toronto (1867) 14 Gr 123, para.22).

102.  Secondly, there is no express exemption of charitable companies from the applicability of statutory derivative actions. This may be compared to some provisions in the CO which are expressed to be only applicable to, or not be applicable to, certain types of companies (eg. sections 99, 209, 233, 453).

103.  Thirdly, whatever may be the position where a charity has not been incorporated, it is clear from CIFF UKSC (discussed later in this Judgment) that where a charity has been incorporated, corporate governance provisions apply, although the manner in which members exercise their corporate rights are different from if they were just members of ordinary commercial companies.

104.  Fourthly, in considering the breadth of construction of relevant provisions, the court may take into account the position of the SJ in Hong Kong in the context of protection of charities, as discussed in Sik Chiu Yuet (a case which was not placed before the Judge).

105.  In Sik Chiu Yuet, a monk commenced proceedings under the TO in respect of the administration of a trust which held and managed a Buddhist temple. I would point out right away that proceedings under the TO are different from a statutory derivative action under the CO, and the relevance of this case lies only in the discussion in that judgment of the SJ’s position in Hong Kong as protector of charities.

106.  The monk claimed to be a “person otherwise [than as trustee] interested in the trust” under s.57A(a)(iii) TO. The judge at first instance struck out the proceedings, holding that as the SJ is the protector of charities, s.57A(a)(iii) should be given a narrow construction, and on that basis, the monk had no locus standi.

107.  On appeal, the Court of Appeal examined the differences between the legal schemes governing charities in Hong Kong and the United Kingdom (paras.21-24), noting in particular the inadequacy of protection by resorting to the SJ as parens patriae (paras.24-34), and concluded as follows (para.35):

“The stark reality is that under our present system, those in the Department of Justice have no resource or power to carry out any investigation. Thus, unless a complainant can produce concrete evidence, it is unlikely that the role of Secretary for Justice as parens patriae could be effectively evoked. But most complainants may have difficulty in procuring proper evidence because they do not have the means to carry out the necessary investigation. There are significant gaps in practice and in reality in the fulfilment of the role of the Secretary for Justice in protecting public interest in respect of charities.”

108.  In light of the above, the Court held that the court should not adopt a narrow construction of the expression “persons otherwise interested in the trust” (para.36). Although the Court did not formulate a precise test because of the wide possibilities of different charities involving different circumstances and considerations (para.38), it held that the criterion for locus standi should only be that “an applicant should [have] an interest in securing the due administration of a trust materially greater than, or different from, that possessed by ordinary members of the public” (para.39), and that “the interest in question need not be a legal interest or duty” (para.40).

109.  The Court of Appeal remitted the matter to the first instance judge for reconsideration in light of the judgment and further evidence.

110.  As mentioned above, proceedings under s.57A TO and those under s.733 CO are different (in various aspects including procedure, relief and liability for costs). However, the discussion in Sik Chiu Yuet can inform this court’s consideration whether the jurisdiction under s.733 should or should not be narrowly construed so as to exclude charitable companies.

111.  As noted above, s.733 has been drafted in wide terms, and there is no express exemption of charitable companies from its applicability. In light of the inadequacy of protection provided by the SJ as discussed in Sik Chiu Yuet, I do not consider that a narrow construction should be applied.

112.  Accordingly, I agree with the Judge that the Member has locus standi and the Company’s appeal against the Preliminary Issue Decision is dismissed. As indicated at the hearing, the costs of this part of CACV103 would follow the event.

The Leave Decision

113.  At the hearing of the appeals, Mr Wong submitted that if this court found that the Member has locus standi, then we should proceed to adjudicate on the Leave Decision, instead of remitting the case to the Judge for another decision taking into account the 2019 EGM Resolutions.

114.  Mr Ho, however, submitted that as the 2019 EGM Resolutions addressed the deficiencies raised by the Judge in the Leave Decision, the matter should be remitted to the Judge for him to exercise his discretion afresh. However, those submissions were made before the hearing of and judgment in CIFF UKSC (see para.8 above).

115.  Looking first at the statutory criteria for leave under s.733 CO (see paras.89 and 91 above), first, it is not in dispute that the Member was at all material times registered as a member of the Company[17].

116.  Secondly, there is also no dispute that there is a serious question to be tried (Leave Decision, para.6). As observed by Ribeiro PJ in Waddington at para.28, the statutory scheme adopts a different test from the common law by (1) adopting a lower threshold test of “a serious question to be tried” rather than the more stringent “prima facie case” test, and (2) jettisoning the second requirement of Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204 of showing prima facie that the case falls within a relevant exception to the rule in Foss v Harbottle (1843) 2 Hare 461.

117.  Thirdly, the Court of Appeal has affirmed in Zhang Heng that if a serious question to be tried has been demonstrated, in most cases it will follow that it is prima facie in the interest of the company that proceedings are pursued (para.11), and that the threshold in deciding whether it is in the interests of the company is low (para.11). Pausing there, there can be no serious dispute that there would be a practical benefit to the Company if the alleged diminution in assets (eg due to sale of the ECC at an undervalue) was recouped.

118.  In the present case, the real issue is whether in the exercise of the court’s discretion:

(1) notwithstanding the above, no leave should be given for the Disallowed Claims, and

(2) leave should be given for the Allowed Claims, in particular since the 2019 EGM Resolutions.

119.  Dealing with (2) first, I would first emphasize 2 points which should inform this court’s discussion.

120.  First, it is of foremost significance that this charitable company’s “income and property shall be applied solely towards the promotion of the objects of the Company” (Clause 6). The MOA expressly include objects for which funds are required and to which they should be applied, eg establishment of more regional centres or schools, operation of homes for the aged and nursing homes, publication of promotional documents, delivery of lectures, holding of exhibitions, etc.

121.  Of course, one of the objects is “to preach, promote and support the faith of the great Buddhism as a fundamental ascetic practice to cultivate virtues, to promote family happiness and to enhance friendship amongst members; and also base on the Buddhism Philosophy to promote peace, culture and education to mankind”. These are values of a spiritual nature, consistent with a religious charity. These spiritual concepts do not override the proper application of the Company’s assets. It would be ludicrous to suggest, for instance, that to promote the object of enhancing friendship amongst members, the Company’s assets could be given away to them.

122.  This is corroborated in Clause 7 which stipulates that on “winding up dissolution”, the Company’s net assets shall not be distributed among the members, but shall be transferred to institutions having similar objects to it and which have similar prohibitions as Clause 6, the choice of such institutions to be determined in default by a judge of the High Court.

123.  Secondly, the charitable nature of the Company should inform the way in which members should vote. They should do so in the exercise of a fiduciary duty owed to the charitable purposes. The judgment in CIFF UKSC is helpful in this respect. To understand it, it is necessary to set out the background facts first.

124.  Like the Company in our case, CIFF was a charity and a company limited by guarantee with no share capital. It had 3 members, a husband and wife (both successful bankers) and a friend who was an economist (“Dr L”). The company was founded and run by the husband and wife jointly. However, the breakdown of their marriage impacted detrimentally on the operations of the company. Consequently, it was decided that the wife would resign as member and director of the company (also trustee of the charity) to set up another charity with the same objects as CIFF (“BWP”), and more importantly, by an agreement (“the Grant Agreement”), it was agreed that CIFF (which had assets of USD4 billion) would make a grant of USD360 million to support the work of BWP, to be further augmented by more donations from the private funds of the husband and wife.

125.  The payment under the Grant was subject to:

(a) approval by the Charity Commissioners (who referred the issue to the Court); and

(b) approval by the members of the company, as the payment to BWP (an entity connected with the wife) constituted payment for the wife’s loss of office, and s.217 Companies Act 2006 (similar to s.522 CO) required a payment for loss of office to be approved by the members of the company. As both the husband and the wife were conflicted out, the only member who could vote was Dr L.

126.  CIFF applied to the Chancellor for approval for (a) and for directions for (b).

127.  In CIFF Ch, the Chancellor (a) gave approval for the Grant, and (b) directed Dr L to vote at the meeting of the company in favour of approving the Grant (“the Direction”), holding that Dr L in his capacity as a member of the charitable company was a fiduciary.

128.  Dr L (as well as the company) did not accept that in his capacity as a member of CIFF, he was a fiduciary, and argued that accordingly the Chancellor could not in law make the Direction. Dr L’s position was that he would vote as he thought fit in the best interests of the charitable company, but he did not reveal his final decision as to how he would vote (para.171, CIFF UKSC). While he accepted that the Grant would resolve the operational problems within the company and achieve finality, he was concerned that BWP had a “very limited track record”, and a payment of USD360 million to resolve CIFF’s operational problems would come at too great a cost to CIFF’s beneficiaries (para.106, CIFF UKSC). CIFF’s position was that there would be many practical difficulties if members of charitable companies were held to be fiduciaries (para.75, CIFF UKSC).

129.  In CIFF CA, the UKCA agreed with the Chancellor that Dr L in his capacity as a member of CIFF was a fiduciary, but set aside the Direction. It held that although members must exercise their powers in good faith to further the purposes of the company, the “duty is subjective: in other words, that what matters is the member’s state of mind” (para.48 CIFF CA), and in the absence of evidence of breach of trust, the “non-intervention principle” (ie non-intervention by the court in a fiduciary’s exercise of discretion) meant that Dr L should have been left to decide for himself how to vote.

130.  On appeal, the UKSC unanimously held that a member of a charitable company owes a fiduciary duty, not to the company, but to the charitable purposes or objects of the charity (paras.50, 215). On this aspect, Lady Arden JSC confirmed in her judgment (with which the other judges agreed) that “there is a fiduciary relationship between the charitable objects of CIFF and [Dr L] in his capacity qua member of CIFF … [which] will apply to all other members of charitable guarantee companies which, like CIFF, contain restrictions which in general prevent members receiving profits from the company. Moreover, such restrictions are generally contained in the memorandum and articles of association of charitable companies” (para.78, emphasis added). In our case, these restrictions are found in Clauses 6 and 7 of the MOA.

131.  In this regard, it is significant that the above conclusion of the UKSC was reached, not on the basis of specific statutory provisions in the UK governing charities (which were said to be “additional restrictions … outside the structure” adopted for the administration of the charity, para.92), but on the basis that “the general principle is that, as a result of the agreement which is made when a person becomes a member of a company, the rights of a member against the company and his liabilities to it stem from the memorandum and articles and the obligations imposed by the Companies Act and the general law” (para.80, emphasis added).

132.  Lady Arden JSC held that the member’s fiduciary duty “requires that he considers whether the resolution should be passed and that he do so only by considering the best interests of the objects of the charity. That is because the resolution involves a disposition of assets that would otherwise be available for application by CIFF towards those objects”, although she acknowledged the possibility that “there may be some resolutions where a member may be able to take other interests into account as well” (para.90). I will return to this later in this Judgment (para.149 below).

133.  Having found that members of charitable companies owe a fiduciary duty to the charitable purposes, the UKSC also held that the Chancellor had jurisdiction to give the Direction to Dr L to vote in favour of the Grant. Although all the justices confirmed the “non-intervention principle”, they took different routes to arrive at the same conclusion that the Chancellor had such jurisdiction.

134.  Lady Arden JSC relied on the “exception to the non-intervention principle” route, irrespective of whether there was or might be a breach of duty or not (paras.123). Lord Briggs JSC, with whom Lord Wilson and Lord Kitchin JJSC agreed, relied on the “threat of breach of duty” route, as Dr L might in effect “veto” the Chancellor’s approval of the Grant (paras.208, 226). Lady Arden JSC disagreed with that “threat of breach of duty” route (paras.174-199), but the choice of routes turned on the facts of CIFF and it is not necessary to discuss them here.

135.  The significance of CIFF UKSC to our case lies in the affirmation of the following principles.

(1) Members of charitable companies, when voting at a company meeting, owe a fiduciary duty to the charitable purposes (paras.130-132 above); they are “pure fiduciaries with no proprietary or other separate stake of their own in the company’s assets” (para.210, CIFF UKSC).

(2) The “non-intervention principle” applies to the exercise of discretion by fiduciaries. Normally, a court would only intervene if there is a breach of duty.

(3) “The test for breach of duty has never been purely subjective. The fiduciary’s belief has to be both bona fide and reasonable … [Quoting Cowan v Scargill [1985] Ch 270, 289] this requirement is not discharged merely by showing that the trustee has acted in good faith and with sincerity. Honesty and sincerity are not the same as prudence and reasonableness” (para.232, CIFF UKSC).

(4) The discretion must be exercised “with an entire absence of indirect motive, with honesty of intention, and with a fair consideration of the subject. The duty of supervision on the part of this court will thus be confined to the question of the honesty, integrity, and fairness with which the deliberation has been conducted, and will not be extended to the accuracy of the conclusion arrived at, except in particular cases” (emphasis added) (In re Beloved Wilkes’s Charity (1851) 3 Mac & G 440, 448, quoted in Pitt v Holt [2013] UKSC 26 and at para.122, CIFF UKSC).

(5) Lady Arden JSC held that did not exclude “the possibility of intervention in cases other than breach of duty … if the circumstances attain a sufficient level of exceptionality and seriousness. In my judgment, these exceptional cases have special resonance in the law of charities” (para.123, emphasis added). Lord Briggs JSC agreed that “the court’s jurisdiction to intervene in the affairs of charities extends beyond its trusts jurisdiction more widely than just in relation to schemes” (para.216).

136.  This brings up the issue of the effect of the 2019 EGM Resolutions. On behalf of the Member, Mr Wong submitted there were two points:

(a) the 2019 EGM Resolutions were not capable of being ratifications/releases without the sanction of the SJ; and

(b) in any event, the 2019 EGM suffered from certain “critical deficiencies” which undermined the effect of the 2019 EGM Resolutions.

137.  In relation to (a), Mr Ho submitted that the Member had failed to distinguish between (i) the rights and liabilities of company members inter se and (ii) the duties and obligations owed by a corporate charity to the public as represented by the SJ. The question whether company members can ratify a particular dispute internally is different and separate from the question whether such ratification can bind the SJ in her capacity as the representative of the parens patriae.

138.  In light of the other decisions in this Judgment, I do not think it is necessary or desirable to determine issue (a). I consider that in any event, on issue (b), in light of CIFF UKSC, the 2019 EGM Resolutions were still deficient, and nothing would be served by remitting the issue of leave to the Judge in order for him to take into account the 2019 EGM Resolutions.

139.  Before I discuss the 2019 EGM Resolutions, I note, as a preliminary matter, that it does not appear from the IC Report that the IC had “obtained independent advice in order to determine whether or not it was in the Company’s interests to proceed with any of the claims” (cf Leave Decision, para.16).

140.  More importantly, CIFF UKSC makes it clear that members of a charitable company must vote as fiduciaries owing a duty, not to the company, but to the charitable objects. Unfortunately, this fundamentally important duty appears not to have been conveyed to the members, whether in the 2019 EGM Notice or at the meeting by counsel instructed by the Company (not those appearing in these appeals). No reference appears to have been made to the requirement that the assets of the Company should be applied only to the purposes of the charity, and that the members had a fiduciary duty in law to comply with that.

141.  Instead, the members were told by the Company’s counsel that the purpose of the meeting was to discuss the IC Report and that the opinion of members to vote for or against it has “nothing to do with any legal proceedings” (005, Transcript). Rather than being reminded of the serious nature of their fiduciary duties, they were told that “no legal liability would arise in a company member’s exercise of those choices” (para.2.4 2019 EGM Minutes).

142.  It further appears that the focus was placed on the spiritual object of promoting peace and harmony, contrasting that with the characterization of the derivative action as a mercenary activity. The members should have been, but were apparently not, informed that what they had to decide, in their exercise of their fiduciary duty, was whether the spiritual object of peace and harmony justified the forgiving of claims of sizeable sums which could have gone towards charitable objects (such as regional centres, schools, nursing homes etc) to which the Company’s funds must be applied. Pausing there, Mr Ho attempted to equate the payment under the Grant in CIFF with the waiver of breach of duty in this case. The analogy is inappropriate because the payment by CIFF was proposed to be made to BWP, which was also a charity with similar objects to CIFF.

143.  Further, although the derivative action was to recoup the Company’s loss (eg the alleged difference between the market value of the ECC and the actual proceeds), it was articulated by the Committee as “monetary gains” (para.17(1) 2019 EGM Notice, para.7.4.1 Minutes).

144.  It is clear from CIFF UKSC that the proper exercise of a fiduciary duty requires a fair consideration of the subject. However, the matter was presented by the Committee as follows.

145.  It was alleged that the transaction which was the subject of the 1^st Claim had been discussed at an AGM on 27 November 2014. However, the extent of the “discussion” was not revealed and in any event, at that time, no valuation reports were available.

146.  Further it was alleged that the issues regarding the 1^st and 2^nd Claims “had now turned stale”, and “significantly, the company had not suffered any actual (as opposed to notional) loss as a result of those transactions” (para.7.4.5 Minutes). It was further alleged that “legal battles between the Company and some of its members … would reap little, if any, benefit for the Company” (para.7.5 Minutes). These allegations ignore the practical benefits from recouping funds allegedly lost as a result of the transactions.

147.  A fair consideration would have included looking into the propriety of the manner in which the Committee had gone about the sale of ECC and the purchase of SWHCC, including:

(a) whether the Committee has made a satisfactory response to the statement of the late Mr Chan that no information was given to him even though he was a Committee Member, and

(b) the allegations of the Committee at the 2017 EGM that the transactions had been approved in meetings of the “supreme council” (016-017, 2017 EGM Minutes, E/1230-1232), an organ which cannot be found in the MOA.

148.  As for the 3^rd Claim, no distinction appears to have been made between on the one hand, those Remunerated Committee Members who were originally employees and who continued to receive salaries, and on the other hand, those who were appointed Committee Members and only subsequently became paid employees (para.36 above). As for the 4^th Claim, as far as the contracts made with HF Ltd were concerned, it was said to be “morally wrong” to ask for a refund as services had been rendered (para.7.4 Minutes). Whilst that may be so if services had been rendered at cost only, there was no consideration of profits made from the rendering of those services. The Judge’s reason for refusing leave (that HF Ltd had been providing services since 1990, before Mr Choy was appointed a Committee Member in 1992) would have been a more valid consideration.

149.  It is correct that in a charitable company, “there may be some resolutions where a member may be able to take other interests into account as well” (CIFF UKSC para.90). An example of “other interests” may be where an intended defendant has no financial resources, so that it would be a waste of effort and costs to claim any meaningful compensation against him. However, there was no evidence of any such considerations here.

150.  In view of the above, I am not satisfied that the 2019 EGM Resolutions, even if they were remitted to the Judge, would make any difference to the grant of leave for the Allowed Claims which are unimpeachable. The consequence is this part of CACV103 is dismissed with an order nisi that the Company pay the Member’s costs with certificate for three counsel.

151.  This leaves CACV101 which can be dealt with shortly. In respect of the 3^rd Claim, the Judge was entitled to find on the evidence that for those Remunerated Committee Members who were originally employees, their appointment as Committee Members whilst continuing to be paid employees was done purely in ignorance of the MOA. There is no evidence that these persons received any additional remuneration for being Committee Members, and the assets of the Company were not affected. The point is not whether the breach is or is not ratifiable by the members. The point is whether the court should give leave to pursue proceedings for such an alleged breach. It is noteworthy that the Judge said “most third parties would consider [allowing the claims to proceed] ethnically (sic) questionable”, indicating that the Judge was not considering the question only from the view of the members. Therefore, as far as these persons were concerned, the Judge was entitled in the exercise of his discretion to refuse leave for the claims against them.

152.  That said, unfortunately the Judge appears to have erroneously assumed that all the Remunerated Committee Members were originally employees (para.17 Leave Decision). That was not correct in fact. There were 2 persons who were Committee Members for some time before becoming paid employees (Chong III and para.82 IC Report), but it appears the Judge has not considered their positions. As the Intended Defendants are sued as individuals, it would be fair for this discrete issue to be remitted to the Judge for consideration. Directions for this should be left to be made by the Judge.

153.  As for the 4^th Claim, the Judge found that HF Ltd had been providing services to the Company for a long period before Mr Choy became a Committee Member, and there was nothing to suggest that his appointment and the continuation of its services were anything other than an oversight and a technical breach (para.17, Leave Decision). Although there appeared to be no evidence before the Judge of the relevant dates (para.3(b) of the Notice of Appeal in CACV101), the relevant dates were included in the IC Report (ie HF Ltd started rendering services to the Company in 1990, 2 years before Mr Choy was appointed a Committee Member), thus verifying the Judge’s comment. Payments made to HF Ltd were for services rendered in a professional capacity. Even though there was no evidence that HF Ltd’s services were provided only at cost, there was also no evidence that it had received more in terms of profit margin than before Mr Choy’s appointment as a Committee Member. On this evidence, the Judge was entitled to refuse leave to pursue the 4^th Claim in the exercise of his discretion, and I see none of the usual grounds for an appellate court to interfere.

154.  Accordingly, save for the discrete matter in relation to the 2 individuals in relation to the 3^rd Claim, CACV 101 is dismissed. As the discrete matter is minor and did not take up much time, I see no reason why costs should not follow the event, and I would make an order nisi that the costs of CACV101 be paid by the Member to the Company with certificate for three counsel.

Hon Barma JA:

155.  I agree with the judgment of Yuen JA.