WU MEI SAM v. THE PUI YING MIDDLE SCHOOL OF HONG KONG

HCMP 1122/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1122 OF 2015

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JUDGMENT
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1.  I have before me an application for leave to commence a statutory derivative action on behalf of The Pui Ying Middle School of Hong Kong, which is a company limited by guarantee and operates on a not for profit basis a school in Pok Fu Lam. I shall refer to it as the “Company”. The intended defendants are 2 current directors, Choi Kin Chung and Chan Yee Yee, and a former director Tsang Ip Chun Daniel.

2.  The School operated by the Company is affiliated with TheHong Kong Council of the Church of Christ in China.

3.  As of the passing of a special resolution on 30 July 1985 the articles(13) have provided that the board of the Company shall consist of no less than 10 and no more than 20 directors. Article 13 provides that all directors “shall be members of the School”. It is clear that the reference to “School” in the articles means the Company: see for example paragraphs2 and 3 of the memorandum of association. It is also clear that in the context of a company incorporated by guarantee that the reference to members are to those person who have become members of the Company: section 2(1) of the Companies Ordinance, Cap.622. Article 4 provides that “All members of Protestant Churches shall be entitled to be admitted as a member of the Company upon his giving notice of his intention to become a member of the Company”. It follows that all directors must be members of a “Protestant Church”. There is no requirement that they have been alumni of the School.

4.  The Plaintiff is a member of the Company and an alumni ofthe School.

5.  In the draft Statement of Claim exhibited to the Plaintiff’s supporting affidavit 3 claims against the intended Defendants are pleaded. One of those is that the intended 1^st and 2^nd Defendants are not alumni of the School and were not, therefore, qualified to be directors and a mandatory injunction should be granted for the removal of their names from the Companies Registry showing them as directors. As I pointed out at the first call over hearing of the summons this claim was based on a clearly erroneous reading of the memorandum and articles of association. It should have been abandoned. It has not been abandoned. The Plaintiff has filed a further affidavit drafted by solicitors suggesting that as a matter of ordinary English usage “members of the School” means somebody who went to the School and disagreeing with my explanation given at the first hearing of the originating summons. The claim is also retained in the revised Statement of Claim prepared by Mr. Foster Yim, who appeared for the Plaintiff at the call over hearing and before me on the substantive application, after the call over hearing. This argument ignores:

(1) The definition of School in article 1;

(2) The definition of “member” in section 2(1) of the Companies Ordinance;

(3) The way in which “member” is used in articles 3 and 4;

(4) The Plaintiff’s definition is inconsistent with the use of the word “member” in those articles dealing with the convening of general meetings;

(5) The way in which any lawyer with even a rudimentary understanding of Company Law would understand the term.

The Plaintiff’s argument is unsustainable and obviously so.

6.  There is an associated claim that the intended 1^st Defendant admitted at an annual general meeting on 16 December 2014 that he is not a Christian. The Company does not dispute this. Although the draft Statement of Claim in neither its original nor revised form spells it out it is intended to suggest that as a result he could not be a director. The Company explains through the evidence of Reverend So how the intended 1^stDefendant came to be a director. The intended 1^st Defendant attended a Pui Ying School in Guangzhou. He subsequently came to Hong Kong and became a successful businessman, has made donations to various Pui Ying schools and is regarded as one of the most distinguished alumni of what one might loosely call the Pui Ying community. He was invited to join the Board. Initially he declined. He agreed in March 2009. Reverend So says that the intended 1^st Defendant had made it known before joining the Board that he was not a Christian. Mr. Adrian Lai, who appeared for the Company, explained that the Company had taken on board my explanation of how the articles operated at the call over hearing. The intended 1^st Defendant’s term of office expires in October of this year. Absent a change in the articles it accepts that he could not continue on the Board. It seems to me that there is no need for any action to be brought for the removal of the intended 1^st Defendant and, in any event, thePlaintiff could have brought one in his personal capacity for breach of the articles. There was no need to bring a derivative action. In the circumstances to suggest that it is appropriate to bring an action against the intended 1^st Defendant seems uncharitable given Reverend So’s evidence on how the intended 1^st Defendant came to be involved with the Company.

7.  There are 2 other claims that the Plaintiff wishes to bring. Before addressing them it is helpful to explain the provision of the Companies under which these applications are brought. Sections732 and733 of the Companies Ordinance, Cap. 622 provide:

“732. Memberofcompanyorofassociatedcompanymaybring orinterveneinproceedings:

(1) If misconduct is committed against a company, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the misconduct before the court on behalf of the company.

(2) If, because of misconduct committed against the company, a company fails to bring proceedings in respect of any matter, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the matter before the court on behalf of the company.

(3) ……

(4) The cause of action in relation to the proceedings under subsection (1) or (2) is vested in the company. Any of those proceedings must be brought in the name of, and the relief (if any) must be sought on behalf of, the company.

733. Leave of Court to bring or intervene in proceedings

(1) On application by a member of a company or of an associated company of a company, the Court may grant leave for the purposes of section 732(1), (2) or (3) 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) or (2), there is a serious question to be tried and the company has not itself brought the proceedings; or

(ii) ...; and

(c) except where leave is granted by the Court under subsection (5), the member has served a written notice on the company in accordance with subsection (3), and the notice complies with subsection (4).

(2) The Court may refuse to grant leave if it is satisfied that-

(a) in the case of an application for leave to bring proceedings under section 732(1) or (2), the member has, in the exercise of any common law right, brought proceedings on behalf of the company in respect of the same cause or matter; or

(b) in the case of an application for leave to intervene in proceedings under section 732(3), ...

(3) The written notice must be served on the company, at least 14 days before the member applies for leave in respect of the company-

(a) in the case of a company as defined by section 2(1), by leaving the notice at, or by sending the notice by post to, its registered office; or

(b) in the case of a non-Hong Kong company, in a manner that the notice is sufficiently served on the company by virtue of section 803.

(4) The written notice must state-

(a) the member's intention to apply for leave for the purposes of section 732(1), (2) or (3) in respect of the company; and

(b) the reasons for that intention.

(5) The Court may grant leave to dispense with the service of a written notice for the purposes of subsection 1(c).”

8.  In determining whether or not to grant leave under section733, the principal matters that the court is concerned with are:

(1) whether the proposed action appears to be in the interests of the company; and

(2) whether there is a serious question to be tried[1].

9.  The threshold in respect of both these criteria is low. AsLordMillett notes at paragraph 55 of his judgment in Waddington Ltd v Chan Chun Hoo [2]“in applying for leave the plaintiff is not required to establish a prima facie case but only that there is a serious question to be tried.” Consistent with this in assessing applications for leave the prospects of success are to be investigated only to a limited extent; and the court should be slow to find against the applicant unless his prospects are so slim that he cannot be said to have any expectation of success[3]. Atthis stage it is not the court’s function to try to resolve conflicts of evidence or difficult questions of law, which require substantial argument and deliberation. In practice, if the applicant is able to produce a draft pleading that sets out a case with some prospect of success when only the allegations contained in the pleading are considered, the criteria will be satisfied unless the respondent can demonstrate fairly readily that there is a serious flaw in the claim and that it has no real substance[4]. In most cases, if a “serious question to be tried ” has been demonstrated, it is likely to appear to be in the company’s interests to bring proceedings.[5]

10.  The first claim relates to renovation works carried out at a building owned by the Company at its campus in Pok Fu Lum. This is pleaded in paragraphs 7.1 to 7.6 of the draft Statement of Claim:

“7.1 Kam Ming Building (the "Building") is a teacher dormitory in the Pui Ying Secondary School.

7.2 Due to aging, the Building required substantial maintenance work in or around early 2013.

7.3 In or around July 2013, without the approval of the Board of Directors, the 3^rd Defendant and/or the 1^st and 2^nd Defendants had (caused to) engage(d) Wah Kee Decoration Work Limited (華記裝修工程有限公司) ("Wah Kee") for the project ignoring tenders received and resolved observation of the "Guidelines on Tendering and Purchasing Procedures in Aided Schools" published by the Education Bureau in 2007 by the Board and the Administrative Committee.

7.4 Later, as shown from the Minutes of the Board of Directors dated 4 December 2013, upon the motion of the 1^st Defendant, the 2^nd and 3^rd Defendants became the persons in charge of the Building's management and maintenance.

7.5 The Board was only informed about the engagement of Wah Kee after an over-budget of several million Hong Kong dollars in or around April 2014, while the members of the School in the Annual General Meeting (the "AGM") held on 16 December 2014.

7.6 On the other: hand, it was discovered that the 3^rdDefendant not being a teacher of Pui Ying Secondary School nor Shatin Pui Ying College had moved in and occupied a duplex flat of the Building for more than a year without paying any rent.”

11.  The Company says that this is a materially inaccurate description of what took place. In its evidence it explains that the work was not carried out with funds provided by the Government and, therefore, the “Guidelines on Tendering and Purchasing Procedures in Aided Schools” did not apply. If the Company did fund the renovation works, and the Plaintiff does not suggest it did not, this would appear to be correct.

12.  The Company’s case in summary is this. The Board resolved to carry out renovation works. A consultant was engaged. Atthat time the cost estimate was $10,000,000. Tenders were called for. The tenders greatly exceeded the budget ranging from approximately $17,000,000 to $21,000,000. The intended 1^st Defendant suggested this was excessive and having talked to a contractor he believed that it was unnecessary to call for tenders and that it would be more economical to proceed by negotiating directly with contractors for the various trades involved and without the use of an independent consultant which would be expensive. He proposed that a task force consisting of himself and the intended 2^nd and 3^rd Defendants deal with the project and he took responsibility for any problems that might arise. The Board approved this proposal. Anumber of contractors for different trades provided quotes which in total came to about $9,000,000. The interior work was to be carried out by Comfort Horizon Design Limited. They fell behind with their work and were replaced by Wing Sing, who in turn proved unsatisfactory and were replaced by Wah Kee. These contracts were subsequently ratified by the Board. The eventual costs of all the works was $16,385,834.49 of which approximately $12,000,000 was in respect of the original tender work and the balance in respect of additional work. The sums payable to the various contractors have been checked by independent consultants.

13.  The Company says that whatever shortcomings from a corporate governance perspective may have occurred in respect of the tendering and administration for the works the documents (and the matters which I have summarised are borne out by the contemporary documents exhibited to the Company’s evidence) the fact is that works in respect to which tenders were originally called was carried out for materially less than the lowest tender and the entire works including additional works were completed for less than the lowest tender. The Company says that even if there were technical breaches of duties by the intended Defendants who were supervising the project voluntarily there is nothing to suggest that it caused any loss to the Company and indeed the Plaintiff has not identified any. It follows, the Company contends, that there is no serious question to be tried and even if arguably there has been a breach of duty the fact is that it is not in the interests of the Company to pursue it. Thereis no point in pursuing a claim merely to establish a technical breach of duty, particularly given the nature of the Company and the damage it would do to its reputation and the adverse impact it would have on those members of the Company who give their time, and in the case of the intended 1^st and 2^nd Defendants’ money, to assist the Company and Pui Ying community.

14.  In my view neither the Plaintiff’s evidence nor Mr. Yim in his submissions to the Court provided any convincing answer to the Company’s case. The Plaintiff has not demonstrated that the Company’s description of what occurred is incorrect or that there is any reason to think that the way the intended Defendants managed the renovation project caused any loss to the Company. Mr. Yim suggested that it was all rather unsatisfactory and that his client and other concerned members did not know precisely what has gone on and that their concerns were understandable. If, however, the Plaintiff and others were concerned about the management of the renovation project it was open to them to pursue the normal remedies available to a concerned shareholder to obtain information about the project in order that they could consider whether action should be taken. As it is the suggestion that the intended Defendants have caused any actionable loss to the Company is simply speculation.

15.  The final complaint is against the 3^rd Defendant and is set out as follows in paragraphs 13 and 14 of the draft Statement of Claim:

“13. Living in the Building without locus standi nor making any payment as well as his involvement in the Maintenance Work of the Building, the 3rd Defendant is in breach of his fiduciary duties.

14. As a result of the matters pleaded above, the Plaintiff suffered loss and damage:

PARTICULARS

Item	Amount
1. Damages from the 1st Defendant	To be assessed
2. Damages from the 2nd Defendant	To be assessed
3. Damages from the 3rd Defendant (including rental income, HKD20,000 per month, of the duplex flat in the Building)	To be assessed
Total

”

16.  The draft Statement of Claim does not tell the reader very much. In the evidence initially filed by and on behalf of the Plaintiff it is suggested that the intended 3^rd Defendant has lived in a flat in the building. He should not have done so because he was a director and, in any event, heshould have paid rent for doing so as it could otherwise have been let out.

17.  The Company says this is a wholly misleading description of what took place. The evidence filed by the Company explains that the flat in question was used as a site office. The intended 3^rd Defendant stayed in the flat 2 or 3 times a week. He did so, he explains, because he lived in Tsuen Wan and it was convenient to do so when there were meetings the following morning. Reverend So confirms that because the flat was being used as site office there was never any question of it being let out. The intended 3^rd Defendant was assisting with the renovation project on a voluntary basis, the Board was aware that he stayed on occasions overnight at the flat and there was never any question of the intended 3^rd Defendant being asked to pay anything if he did so.

18.  The Plaintiff has not disputed the Company’s explanation of what actually happened. Paragraph 13 of the draft Statement of Claim seems to suggest that the claim against the intended 3^rd Defendant is for damages for breach of fiduciary duty, but it is difficult to see what loss was caused (assuming for present purposes that there was some breach of duty) if the Board never intended to let out the flat. If it was understood by the Board that the intended 3^rd Defendant would stay there without charge because it was more convenient for him to do so if he intended to work on the project the next day I cannot see what right the Company now has to seek mesne profits. I asked Mr. Yim on what basis it was suggested that the Company was entitled to recover anything from the intended 3^rdDefendant. Hewas not able to suggest an answer.

19.  It seems to me that in respect of this claim the Plaintiff has not established a serious question to be tried. Even if there was some arguable claim that the intended 3^rd Defendant should pay something for his occupation it seems that the sum would be so modest and any such claim looks so churlish that it would not be in the Company’s interests for the Company to pursue it. It seems to me relevant in this regard that the Company is a not for profit organisation running a School which relies to some extent on people being willing to donate time and money to helping in its operations. It is not going to be assisted by pursuing claims, which are likely to attract bad publicity and discourage people volunteering to help with its affairs.

20.  I dismiss the application with costs to the Company.

21.  The Company seeks in its written submission its costs on an indemnity basis. It does so for the following reasons:

(1) As a matter of legal principle, an indemnity costs order is compensatory and not penal in nature. The court, indetermining whether to order indemnity costs, is entitled to consider the character of the proceedings and the attributes of the parties: see Society for Protection of the Harbour Ltd. v. Town Planning Board [2004] 1 HKLRD 127 per Chu J. at paras.9-18[6];

(2) Where a party is of limited means, it may be appropriate to award it indemnity costs to reduce the amount of costs that has to come from that party’s pocket: Society for Protection of the Harbour Ltd., para.18;

(3) A charitable educational body should not lightly be dragged into litigation and its financial resources depleted.

(4) As evidenced by the School’s own financial statements, theSchool has been running a large deficit and its operation has to be financially maintained by selling its assets. Anindemnity costs order would alleviate the financial burden imposed on the School in meeting the litigation expenses for which the School has not budgeted.

(5) It is clear from the Plaintiff’s own evidence that this application is motivated by some unarticulated personal grudge against the intended defendants. This is a type of cases where the court should award indemnity costs to signal its displeasure at the misuse of legal proceedings.

22.  It seems to me that the Plaintiff’s application has been poorly thought threw. It may be that the Plaintiff at the outset had genuine concerns about the way in which the project was being administered and he suspected that the intended Defendants had abrogated too much responsibility to themselves and may in some way have benefited personally from the project. There are means by which he could have investigated such concerns including an application to the court for production of documents if he felt sufficiently strongly about the matter and was prepared to incur the costs of so doing. He has not done that. He has not made any allowances for the fact that building works tend to be time consuming and complicated to deal with and the intended Defendants were giving up their time to help with the project voluntarily. He has assumed the worst although he does not have evidence to substantiate his assumptions. The claim for the removal of the intended 1^st and 2^ndDefendants on the grounds that they are not alumni reflects poorly on him or those who have been advising him. Even after it was explained by me that the claim was misconceived he continued to pursue it. Hiscontinued pursuit of the claim for the removal of the intended 1^stDefendant on the grounds that he is not a member of a Protestant Church even after he has had the opportunity to consider the evidence of Reverend So does tend to suggest that he lacks objectivity and calls into question his motives.

23.  It seems to me that it is appropriate to order that the Plaintiff pay the costs on an indemnity basis. As the Plaintiff has not, however, had the opportunity to address the Company’s argument I will make a costs order nisi in order that he has the opportunity to challenge the order if he so wishes.