Lau Man Wai Joseph and Others v. Cheung Sun Ling Sanny, The Administratrix of the Estate of Kwan Yau Hang, Deceased and Others

CACV 191/2016
and CACV 192/2016
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 191 OF 2016

(ON APPEAL FROM HCMP NO 1013 OF 2011)

_______________________

_______________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 192 OF 2016

(ON APPEAL FROM HCMP NO 2477 OF 2011)

_______________________

_______________________

(HEARD TOGETHER)

__________________________________

REASONS FOR JUDGMENT

__________________________________

Hon Lam VP (giving the Reasons for Judgment of the Court):

1.On 2 September 2015, Lok J determined several preliminary issues (“the judgment”) in the context of 3 actions concerning the affairs of Kam Lan Koon: HCMP 143 of 2011, HCMP 1013 of 2011 and HCMP 2477 of 2011. Kam Lan Koon [“the Koon”] had been a Taoist Temple and the judge had, by an order of 8 May 2012, with the consent of the parties, ruled that it was a charity. There were disputes between two groups of members which the judge referred to as the Traditionalists’ Camp and the Reformists’ Camp. The judge presided over all the proceedings from an early stage.

2.The first set of proceedings, HCMP 143 of 2011 (which the judge to referred as the Better Administration Action), was brought by 4 members of the Reformists’ Camp against 5 chairpersons of the Koon, the Koon and the Secretary for Justice seeking declaratory and other relief regarding the administration of the Koon. 

3.In the second set of proceedings, HCMP 1013 of 2011 (which the judge referred to as the Resolutions Action), 20 members of the Reformists’ Camp sought relief against the 5 chairpersons and the Koon challenging a series of resolutions purportedly passed in 2011 by the Board of the Koon and at an extraordinary general meeting on 20 March 2011 and the annual general meeting on 8 May 2011.  Those resolutions were recited by the judge at [28] to [37] in the judgment as follows:

“ 28. As Mr Chong had raised concern that there had been no Board’s meeting held in the past, the Koon started to hold Board’s meetings in early 2011.  In the Board’s meeting on 27 February 2011, the Board confirmed that: (i) the past Exco’s meetings were extended meetings of the Board; and (ii) the 5 Chairpersons were authorised to handle the affairs of the Koon under Arts 19.4 and 19.5 of the Articles.  Further, the Board resolved that, recognising the tradition of the annual nomination of councillors by the Spiritual Master, the election of councillors would be conducted by way of casting a vote of confidence for or against the entire cabinet of councillors in compliance with the election requirements specified in Art 17 of the Articles.

29. There is also another important provision in Art 7.1 of the Articles governing the right to vote and participation in election, which reads:

‘Subject to Article 6 above, any member (irrespective of sex and nationality) who as attained the age of 18 and who has:

(a) been admitted as a member of the Koon for a period not less than 12 months;

(b) for the previous 6 months continuously attending the Koon

shall be entitled to attend, to propose motions and to vote at general meetings and to participate in the election of Councillors.’

30. On 27 February 2011, the Board passed a resolution that, for the purpose of construing the meaning of “continuously attending” under Art 7.1(b), 70% attendance was the most reasonable construction of “continuously attending” for the past 6 months (“the 70% Attendance Resolution”).  On the same day, notice was given for the holding of an EGM on 20 March 2011.

31. On 17 March 2011, the Board passed a resolution that Mr Chong would not be the legal advisor of the Koon for the coming EGM.

32. In the EGM on 20 March 2011, the members passed various resolutions to confirm, inter alia, the matters mentioned in paragraph 28 above.

33. The 70% Attendance Resolution was first enforced in this EGM.  Members who had not satisfied the 70% attendance requirement were not allowed to vote.  Such attendance requirement was also enforced in the subsequent AGMs and EGMs.

34. Because of the dispute between the two rivalry camps, the Koon did not hold Spiritual Writing in March or April 2011 to select the officers of the Exco.

35. On 16 April 2011, the Board issued notice for AGM to be held on 8 May 2011.

36. On 30 April 2011, the 5 Chairpersons passed a resolution that Mr Chong would not be the legal advisor of the Koon for the coming AGM.

37. In the AGM on 8 May 2011, the members passed a resolution that due to the suspension of the Spiritual Writing that year, the office of the entire Exco, including the 17 councillors, appointed by the Spiritual Master in the previous year would be extended until the holding of the next Spiritual Writing for the selection of officers.  Again the 70% attendance requirement was enforced in this AGM.”

4.After the commencement of the second set of proceedings, on 15 October 2011, the Board passed another resolution terminating the membership of 22 members of the Reformists’ Camp.  The judge referred to this as the Termination Resolution.  This led to the third set of proceedings in HCMP 2477 of 2011 (which the judge referred to as the Membership Action) by which the 22 expelled members challenged the validity of that resolution.

5.We shall adopt the same nomenclatures as the judge in this judgment.

6.As mentioned above, the judge presided over these three actions and over the years he had tried his best to case manage the same to achieve procedural economy.  At [46] to [50] of the judgment, the judge explained how preliminary issues came to be framed and at the trial of such issues they were further narrowed down.  In the end, the judge determined four issues which were summarized at [49] of the judgment as follows:

“ (i) was any election of councillors held since 1998 until [the Better Administration Action]? (the original issue No 4) (“the Election Issue”)

(ii) whether the councillors are entitled to “interpret” Article 7.1 so as to require a 70% attendance by members to qualify for voting? (the original issue 9) (“the 70% Attendance Issue”)

(a) whether the council was properly constituted [when the 70% Attendance Resolution was made]?

(b) whether such interpretation was correct in law having regard to the way attendance record was kept?

(iii) whether the purported expulsion of any or all of the 22 Plaintiffs from membership was valid as a matter of jurisdiction, i.e. whether what they were alleged to have done fell within Art 9.2? (the original issue No 10)(“the Expulsion Issue”)

(a) whether the council was properly constituted [when the Termination Resolution was made]?

(b) whether the council can rely on the rule purportedly made in 2000, and whether the council relied on such rule at the 15 October 2011 meeting and if not, whether it can be relied on later?

(iv) whether the purported expulsion of any or all 22 Plaintiffs from membership was invalid by reason that [the Termination Resolution] was passed in breach of the rules of natural justice? (a sub-issue of the Expulsion Issue) (“the Natural Justice Issue”) ”

7.The trial of preliminary issues took place in January and February 2015 (lasting 14 days) and the judge handed down the judgment on 2 September 2015.  In essence, he determined all the issues in favour of the Reformists’ Camp.

8.After the handing down of the judgment, there were disagreements on the orders that the judge should make.  Before the orders were sealed, the Defendants (viz those represented by Mr Chan SC before us) served notices of appeal in CACV 191 of 2015 (in respect of the Resolutions Action) and CACV 192 of 2015 (in respect of the Membership Action).  The orders in those two actions were eventually drawn up and sealed on 7 September 2016 (dated 30 August 2016, being the date of hearing at which the judge actually made the orders).

9.The orders made in the two actions are in the following terms:

(a) In the Resolutions Action:

“ 1. The Councillors resolution dated 27^th February 2011 referred to in paragraph 5 of the Statement of Claim is void and of no effect;

2. A 2-day hearing be fixed for the argument of the costs of this action together with HCMP 143/2011 and HCMP 2477/2011

3. Costs be reserved.”

(b) In the Membership Action,

“ 1. The councillors resolution dated 15^th October 2011 referred to in paragraph 7 of the Statement of Claim is void and of no effect;

2. The 1^st to 22^nd Plaintiffs (by original action) and each of them is and has always been member of the 16^th Defendant (by original action), Kam Lam Koon;

3. The stay of the Counterclaim by the Order herein dated 20^th June 2013 be lifted;

4. A 2-day hearing be fixed for the argument of the costs of this action together with HCMP 143/2011 and HCMP 1013/2011; and

5. Costs be reserved.”

10.The judge adjourned the determination of the actual order to be made in the Better Administration Action and there was no appeal in that action.  Subsequently, the Defendants took out a summons on 21 September 2016 seeking to strike out that action and similar summonses were issued in respect of the Resolutions Action and the Membership Action.  The summonses were scheduled to be heard in the week after the hearing of these appeals.

11.We heard the appeals on 29 June 2017.  After hearing counsel, we dismissed the appeals with costs.  We now give reasons for the dismissal of the appeals.

The internal management argument had not been determined by the judge

12.Mr Chan SC (who appeared for the Defendants in these appeals, but not at the trial of preliminary issues below) put at the forefront of his submissions that the Plaintiffs in these proceedings had no locus to bring these actions and they had no cause of action against the Defendants.  These were not issues determined by the judge and they were not included in the preliminary issues agreed between the parties at the hearing of 2 December 2014 when a trial of preliminary issues was ordered.

13.The Defendants intended to rely on the same arguments in the strike out applications returnable before the judge in early July 2017.

14.We took the view that if there were any substance in the arguments on locus and cause of action, they should first be canvassed before the court below instead of being taken for the first time in these appeals. The proper course was for the Defendants to take out summonses to strike out in the court below.  Had that been done, the Court can be assured that parties had the proper opportunity to go through the usual course of evidence and arguments in the first round and we would have the benefit of the view of the judge on those issues before we consider the same. 

15.It cannot be emphasized enough that it is inherent in a system of appeal that the appeal process is predicated upon a first instance decision. An appeal is not simply to have another panel of judges to hear the arguments all over again with the hope that they may reach different conclusions from that of the first instance judge.  Though appellate judges are usually more experienced, it is equally important (if not more important) that by the time the matter is considered by the Court of Appeal, parties (including their counsel) had already gone through the experience of a first round of arguments.  Armed with the benefit of the first instance judgment and better understanding of the issues, counsel are expected to be more focused and refined in their arguments.  This Court, being a court of appellate jurisdiction, should not normally entertain applications which have not been made and adjudicated upon in the court below.

16.In this connection, the Defendants had not taken out any applications for the striking out of the Resolutions Action and the Membership Action before the determination of the preliminary issues by the judge.  They were content to have the trial of preliminary issues without including the questions of locus and cause of action as issues in that trial. 

17.And such omissions on the part of the Defendants should be considered in the context of the progress of these actions.  The actions were set down for trial (full trial of all the issues instead of trial of preliminary issues) on 21 August 2013 and all three actions were to be tried together.  The court below had allocated 30 days for the trial, with 5 more days reserved.  Unfortunately, by the time of the pretrial reviews, the state of the defence pleadings and evidence was such that the judge found great difficulties in distilling the relevant issues.  The judge had to hold 4pretrial reviews from October to December 2014 before the commencement of the trial of preliminary issues on 5 January 2015.  It is evident from the transcripts of these pretrial reviews that the judge was rather frustrated by not having the assistance he expected from defence counsel.  To be fair, one should not attribute too much blame on counsel as he was instructed at a rather late stage.

18.Though the then counsel for the Defendants (not Mr Chan) did flag the issues of locus and form of actions at the pretrial reviews, he had done so in such an ineffective manner that the judge had difficulties in understanding the purpose of his submission and its effects.  The first pretrial review came before the judge on 7 October 2014.  At that hearing, counsel for the Defendants explained his contention on locus by focusing on the question whether the Plaintiffs were members of the Koon[1].  Thus, the judge justifiably thought that it was the same issue as the validity of the Termination Resolution.

19.At the next pretrial review on 12 November 2014, counsel elaborated a little on his contention as to locus and form of action[2].  In view of the imminence of the trial, he enquired cautiously if the court would entertain an application to strike out the actions at such late stage.  The judge alerted counsel to the costs implication if such a course was adopted as he might have to adjourn after hearing the parties on that application.  That apparently was the reason why the Defendants hesitated from issuing the applications right away.

20.The judge also explored if there were more effective means to resolve the disputes.    In the end, the judge directed parties to prepare a list of issues for consideration at the next pretrial review. 

21.Pursuant to such directions, both parties submitted lists of issues.  The Defendants’ list of issues was to be found in a document which was more in the nature of submissions.  Grouped under the heading of HCMP 1013/2011, the Defendants said there were 8 issues, two of which were:

“ (g) What is the legal basis that members can challenge decisions of councilors in councilors meeting given that members’ right and obligations arise by signing or endorsing in the Memorandum and Articles. The Articles, being a contract among members and the company, only govern rights and obligations vis-à-vis members, and the company. Directors (here councilors) are, in their capacity as councilors, not members and therefore not susceptible to any challenge based on the articles (and Memorandum) unless (a) personal rights of members under the Articles are infringed and/or (b) the company is sued and an injunction is claimed against and restrain it, including its directors who are its agents and / or employees.

(h) The court will not usually second guess decisions of directors (here councilor) in respect of internal affairs [the internal management rules: see Mac Dougall v Gardiner(1875) 1 Ch D 13; Browne v La Trinidad (1887) 37 Ch D 1 at 17] which are usually, by members in general meetings and/or the articles, left to be decided by directors (e.g Article 15).  No challenge can be brought if the majority does not desire to do so [the majority rule and the proper plaintiff rule; The court will not interfere in the internal affairs of the company when the irregularity complained of can be rectified by the company itself: see Foss v Harbottle 67 ER 189; Mac Dougall v Gardiner(1875) 1 Ch D 13] unless the prejudiced minority brings forth an action by way of the procedural mechanism of a derivative action, claiming [as exception to the majority rule in Foss v Harbottle] for example, breach of fiduciary duty, etc. …”    

22.The Plaintiffs’ list of issues was much clearer.  At the pretrial review on 2 December 2014, the judge first went through the Plaintiffs’ list. After hearing counsel for the Plaintiff, the judge examined the list with counsel for the Defendants.  One of the issues identified by the Plaintiffs was the validity of the expulsion.  In such context, there was this exchange between the judge and counsel for the Defendants[3]:

“ MR KWOK: Now, in - - now, when your Lordship talks about termination of membership, the consequence flowing from this will be - - now, if they are - - at the end of the day if your Lordship rules that the termination was proper, that the directors were fully empowered to terminate the membership and that because of their not following the appeal procedures, they are not entitled to come to court and ask for an alternative outcome, now, if this is the case, then the consequence directly from this - - flow indirectly from this will be that they won’t stand in locus to sue on, No 1, HCMP 143 …

COURT: That depends on my ruling first.

MR KWOK: Yes, yes.”

23.It is not clear if the judge was under the impression that this was the same issue on locus as those raised by counsel for the Defendants.  In any event, when the judge proposed to proceed to have a trial of the 10 issues framed by the Plaintiffs, counsel for the Defendants invited the judge to consider the issues raised by him.  The judge took the view that he could come back to the “right to sue” (which we take to be the issues raised in the Defendants’ List as mentioned above) after he determined the Plaintiffs’ issues[4].  Counsel for the Defendants did not insist on having the issues raised by him on internal management and form of action to be included in the issues to be tried by way of preliminary issues.  Instead, he categorically agreed with the judge’s suggestion to have the 10 issues determined in advance of other issues[5].  The order for trial of preliminary issues were made in such circumstances and there is no appeal against such order.

24.Whilst there were references to locus and causes of action in the Defendants’ written opening[6], those questions did not form any part of the preliminary issues framed by the judge.  As such, unless there was any order by the judge to modify the scope of the trial of preliminary issues, they were not determined by the judge in the judgment of 2 September 2015. Though there had been modifications of the scope of the preliminary issues after the failure of the settlement negotiation (reducing the issues into 3 issues with the additional issue on natural justice), there was no modification in terms of adding the issues on locus and causes of action as put forward in the opening. 

25.In his speaking note of 13 January 2015, counsel for the Defendants intimated to the court at paragraph 13:

“ … Ds are agreeable that the issue of membership be tried first. If membership is in Ps’ favour, they stand in locus to sue HCMP 143 and HCMP 1013 and the trial will continue. If not, those two cases will fall apart simply because of locus. The trial will hopefully be shortened.”

26.Against such background, no submission was advanced by counsel for the Plaintiffs on the questions of locus and cause of action at the trial of preliminary issues and the judge did not rule on the same.

27.Hence, we do not accept the submission of Mr Chan that the judge should have determined those issues in the judgment. 

28.Mr Chan also submitted that the judge should not approve the orders of 30 August 2016 as he did since the questions of locus and cause of action had yet to be determined.  Counsel submitted that the orders should explicitly state that they were “without prejudice to the Defendants’ contention that the Plaintiffs’ actions here are not properly constituted and the Plaintiffs did not have the right to sue the Defendants in their capacity as councilors of Kam Lan Koon”. 

29.We cannot accept this submission.  The effect of an order in terms of its potential impact on the striking out summons is to be decided by the doctrine of issue estoppel.  It does not depend on the format of the orders.  In light of the circumstances set out above, there is no basis for any party to suggest that the judge had determined the issues intended to be canvassed by the Defendants in the striking out summons.  The orders of 30 August 2016 could not generate any issue estoppel in such circumstances. Before us, Mr Chain (appearing for the Plaintiffs) readily accept this to be the case. 

30.Thus, at the beginning of the hearing of the appeals, we intimated to Mr Chan that, subject to one rider, it would not be appropriate for us to entertain the arguments on locus and cause of action.  The rider was this: if we were readily satisfied that the arguments were wholly devoid of merit, we would exercise our discretion to dispose of the same instead of subjecting the parties to the costs and burden of another round of futile arguments. 

Expulsion of members not a matter of internal management

31.After hearing Mr Chan, we came to the clear view that the arguments had no merit and could not be grounds for impugning the judge’s determination of the preliminary issues.  We announced our decision accordingly.

32.Focusing first on the Termination Resolution and the Membership Action, the 22 plaintiffs were expelled as members of the Koon by that resolution.  It was not merely a matter of internal management or procedural irregularity at meetings.  Membership is a core personal right of a shareholder.  Thus, section 633 of the Companies Ordinance Cap 622 provides for redress (if a member is wrongfully removed from the register of member) by application to court for rectification of the register.  The internal management rule only applies to irregularities which the majority has the power to ratify, see Hollington on Shareholders’ Rights 8^th Edn 3-31 to 3-45.  It is trite that the majority cannot unlawfully expel members who are in the minority.  The Membership Action was brought to enforce the personal rights of the plaintiffs as members of the Koon. 

33.Mr Chan attempted to persuade us that the effect of the Termination Resolution was not immediate expulsion.  Counsel referred us to article 9.1 of the Koon’s articles of association.  That article reads:

“9.1 The membership of a member shall cease upon happening of one or more of the following events:-

(a) upon the expiry of 1 month from the date of a written notice from him of his intended withdrawal from the Koon duly served upon the Koon.

(b) Upon his death or an order of bankruptcy having been made against him by a court of competent jurisdiction.

(c) Upon:-

(i) the expiry of the 60^th day from the date of a decision having been made by the Councillors expelling such member from the Koon; or

(ii) the date of dismissal by the Appeal Board of his appeal against the decision of the Councillors expelling him from the Koon; or

(iii) the date of endorsement by members in a general meeting of the decision of the Appeal Board dismissing his appeal

whichever occurs later in time.

34.An appeal procedure was provided by article 9.3 to 9.10. However, there is no provision in the articles prescribing that an expelled member must resort to that appeal procedure.  In a case like the present where the expelled members obviously had lost confidence in the Councillors and the Koon’s management (including the Honorary Legal Advisor who shall be the chairman of the Appeal Board and select the remaining 2 members of the Appeal Board), there is no principle of law to prevent them from seeking redress in court if they have legal grounds to challenge the Termination Resolution.  We do not accept the submission that it was speculative for the judge to proceed on the basis that the Honorary Legal Advisor would not be impartial.  The history of the disputes between the two camps (with which the judge was well familiar) speaks for itself in this regard.  In the present case, as noted by the judge at [86] of the judgment, the Plaintiffs relied on three grounds to challenge the Termination Resolution:

“ (i) the Board was not properly constituted when the Termination Resolution was made;

(ii) there was no proper basis or jurisdiction for the Board to terminate the membership of the 22 Plaintiffs; and

(iii) the Board had not informed the 22 Plaintiffs about the intended termination of their membership and had not provided an adequate opportunity for their respective cases to be heard, thereby breaching the principles of natural justice.”

35.We cannot accept Mr Chan’s analogy with the doctrine of exhaustion of alternative remedy in an application for judicial review in respect of the decision of a public authority.  By the Membership Action, the 22 plaintiffs sought to enforce their private rights as members of a Koon.  The fact that the court had declared the Koon to be a charity would not alter this aspect of the Plaintiffs’ rights. 

36.Grounds (i) and (ii) of the Plaintiffs’ challenge went to the constitution and jurisdiction of the Councillors in passing a resolution pursuant to article 9.2 as a matter of law.  We cannot see any basis to suggest (and Mr Chan did not make such suggestion) that the Appeal Board (constituted according to article 9.4) would be in a better position than the court to resolve such legal issues.  

37.Further, as highlighted by Kwan JA at the hearing, article 17(c) of the Koon’s articles of association provides that an expelled member would not be eligible for election or appointment as Councillors notwithstanding a pending appeal against the expulsion.  Thus, the Termination Resolution had immediate effect notwithstanding the existence of a mechanism for appeal. 

38.Mr Chan submitted that even if the Plaintiffs had the right to pursue the Membership Action, only the Koon should be the defendant.  This is not a question we need to resolve in the context of these appeals.  The locus and cause of action points only have relevance in the appeals if the judge had no jurisdiction at all to resolve the preliminary issues.  Once it is clearly demonstrated that the Plaintiffs had brought proceedings to enforce their personal rights against their expulsion, the court must have jurisdiction to determine issues which were relevant for the resolution of the validity of the Termination Resolution.  Since the judge only made a determination of these issues in the context of a judgment on preliminary issues, this Court would not pre-empt whatever decision the judge may make as to whether it is appropriate to grant any relief against defendants other than the Koon. 

39.In so saying, we must not be taken as accepting that only the Koon should be the defendant.  We simply leave that question open. 

40.As explained by the judge at [88] to [90], the 70% Attendance Issue was a relevant issue in his determination of the validity of the Termination Resolution.  And the Election Issue was also relevant to the 70% Attendance Issue as well as the validity of the Termination Resolution, see [51].  The Natural Justice Issue was a separate ground for challenging the validity of that resolution.  Hence, we are satisfied that the Defendants cannot impugn the judge’s determination of these preliminary issues in these appeals by reference to the locus and cause of action points.

The other grounds of appeal in the Resolution Action CACV 191

41.We have already explained why there is no irregularity in respect of the sealing of the orders without stating that they were made without prejudice to the Defendants’ challenge on the Plaintiffs’ locus and cause of action. 

42.Mr Chan advanced several other grounds to contend that the judge should not grant any relief to the Plaintiffs:

(a) The judge did not determine the estoppel argument regarding the validity of the appointment of the Councillors and he failed to pay regard to article 19.8 of the articles of association (Ground 5); and

(b) The judge’s finding that there was no Board meeting prior to 2011 might implicate the membership of some of the Plaintiffs (Ground 6).

43.The judge alluded to the estoppel argument at [71] to [75] of the judgment.  He was of the view that the point had not been properly pleaded and the Defendants could not rely on it.  Further, he doubted if the estoppel argument was a sound one given the supremacy of Mr Kwan in the Koon.  He also doubted if other plaintiffs would be affected even assuming there could be estoppel against Mr Chong.  In the end, the judge said he would not make a final ruling on the un-pleaded defence of estoppel.

44.It is quite plain that the judge did not regard the orders he made on 30 August 2016 as final orders in the sense of granting final relief to the Plaintiffs.  Thus, he continued to entertain the Defendants’ summonses for striking out. 

45.The orders were made to encapsulate the outcomes of the trial of preliminary issues.  It was necessary to do so because without any sealed orders the appeals cannot be processed, see Order 59 Rule 5(1)(a).  As recited above, the trial of preliminary issues came about in the very special circumstances of the present case and the Defendants through their counsel had consented to such a course and the framing of the issues.  There was no appeal against the order for trial of preliminary issues.  After the judge gave a judgment in respect of that trial, the Defendants immediately lodged appeals without waiting for the perfection of the orders.  The Defendants were also aware that the orders did not represent final relief being granted in favour of the Plaintiffs.  Thus, they did not shy away from taking out summonses to strike out the actions.

46.Examining the matter now with the benefit of hindsight, the trial of preliminary issues did not achieve the final resolution of the disputes as the judge expected.  However, since the Defendants had agreed to such a course, it is now too late for them to attempt to reverse the process after the judge had determined those issues against them.

47.Under Ground 7, Mr Chan submitted that the judge took irrelevant matters into consideration in assessing the validity of the 70% Attendance Resolution when he referred to the keeping of attendance records and the uncertainty as to the requirement of continuous attendance at [82] and [81] of the judgment.  Under Ground 8, Mr Chan submitted that those matters had not been pleaded and the Defendants were not adequately prepared in those respects.  

48.The requirement that was actually set out in article 7.1 was as follows:

“ 7.1 Subject to Article 6 above, any member (irrespective of sex and nationality) who has attained the age of 18 and who has:-

(a) been admitted as a member of the Koon for a period not less than 12 months; and

(b) for the previous 6 months continuously attending the Koon

shall be entitled to attend, to propose motions and to vote at general meetings and to participate in the election of Councillors.”

49.The judge addressed the validity of the 70% Attendance Resolution at [76] to [84] of the judgment.  His conclusion was that the Board was acting ultra vires in passing that resolution.  His reasoning, as appeared in those paragraphs, was that interpreting the requirement of article 7.1 as a requirement of 70% attendance in the past 6 months was arbitrary and without proper legal basis and there was no basis to read that as a requirement of 100% attendance to start with.  The proper approach was to examine the case of each member individually on its facts[7].  That seems to us to be plainly correct as a matter of construction of article 7.1.  

50.The references to the practice in the past, the keeping of attendance records and uncertainty in enforcement was simply part of the judge’s response to the argument of defence counsel that the 70% Attendance Resolution was a bona fide attempt to quantify the requirement in that article.

51.That submission missed the point.  As the judge said, the Board had no business in setting an inflexible criterion of 70% attendance in the guise of interpretation of article 7.1.  The true construction of that article is a matter for the court.  The Board could not by a resolution alter its true purport and effect.  Whilst in addition, the judge alluded to practical difficulties arising from the retrospective implementation of the 70% Attendance Resolution, those were not pertinent to the main line of reasoning leading the judge to his conclusion. 

52.Hence, Grounds 7 and 8 cannot avail the Defendants.

The other grounds of appeal in the Membership Action CACV 192

53.Under Ground 6 in the supplemental notice of appeal in CACV 192 of 2016, Mr Chan submitted that the validity of the Termination Resolution would not be affected by the invalid constitution of the Board by reason of article 19.8 of the articles of association of the Koon.  That article provides:

“19.8 All acts done by any meeting of Councillors or of a committee of Councillors, or by any person acting as a Councillor, shall notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such Councillor or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Councillor.”

54.The judge took the view that the directors could not rely on this article to resist the Plaintiffs’ claim.  He said at [93]:

“ ... These article and provisions are aimed to provide protection to third party dealing with the directors of a company. If the members of the company are challenging the appointment of the directors, as it is in the present case, the directors cannot rely on these article and provisions to justify their appointment and the lawfulness of their conduct vis-à-vis the members, otherwise the directors can rely on their own wrongdoing to obtain the directorship and to conduct the business of the company to the detriment of its members, which simply cannot be right.”

55.With respect, in the context of the Membership Action, the primary challenge was directed towards the Termination Resolution instead of the appointment of directors.  Hence, we cannot agree with the judge’s decision in that regard.

56.However, as submitted by Mr Chain, the judge also found that the Councillors had no proper basis to pass the Termination Resolution as no ground could be established under article 9.2.  In such circumstances, even though we accepted Mr Chan’s submission on article 19.8, it would not be sufficient to get the Defendants home.

57.Mr Chan had to resort to Clause 3.1 of the memorandum of association and section 98 of the Companies Ordinance Cap 622 as the platform for making out a ground under article 9.2(b) that these Plaintiffs had failed or refused to comply with or abide by any of the Articles of Association. Clause 3.1 provides:

“ 3. The objects for which the Koon is established are:-

3.1 To promote Taoism and to worship Taoist gods and to propagate and disseminate the virtuous teachings of ‘For the purpose of Charity and Virtuousness, Righteousness, Propriety and Harmnony (主善為師貞義禮和)’ as the main object, and for such purposes to arrange, conduct and run conferences, training institutions, lectures, religious services and to print and publish pamphlets, books and any other printed or written matters.”

58.Section 98(1) of the Companies Ordinance Cap 622 reads:

“ A condition that immediately before the commencement date of this Division was contained in the memorandum of association of an existing company and was in force is, for all purposes, to be regarded as a provision of the company’s articles.”

59.Thus, Mr Chan submitted that by virtue of Section 98(1), Clause 3.1 in the memorandum is taken to be a provision in the articles of association for the purpose of article 9.2.

60.With respect, the fallacy of that line of argument was pinpointed by the judge at [102] of the judgment:

“ Again this is a bad point. Section 98 is a new section which was not in existence in 2011. In any event, s 98 does not have the effect of making the object clause ‘conditions’ of the Articles. Section 98 is a new section to cater for the fact that under the new Ordinance, a company no longer requires a memorandum, and provisions like the registered office and share capital, which hitherto were found in the memorandum, are now to be provided for in an incorporation form as specified in s 67 of the new Ordinance. For existing companies, those, but not the object clause, would be deemed to be part of the articles. Further, Art 3 of the Memorandum provides for the objects of the Koon. It has nothing to do with the regulation of the conduct of individual members the breach of which would attract the penalty of expulsion. Hence, s 98 cannot assist the Defendants’ case.”

61.We cannot see any flaw in the judge’s conclusion as to the lack of proper basis under article 9.2 to pass the Termination Resolution.  Once we reach such conclusion, there could not be any doubt as to the correctness of paragraphs 1 and 2 of the order of 30 August 2016 made in the Membership Action.  The Defendants’ appeal must therefore fail.

62.We can therefore discuss the remaining grounds very briefly. Ground 7 relates to the constitution of the Board and estoppel.  We have already said at [42] to [46] above what needed to be said regarding estoppel. The rest is a matter of little moment in the context of CACV 192 of 2016. Little had been said regarding Ground 8 and again we do not find it necessary to address the same.

63.Ground 9 is directed towards the judge’s determination of the Natural Justice Issue.  The Defendants advanced the following grounds:

(a)   Issue of natural justice had not been pleaded;

(b)   The principle of natural justice was excluded;

(c)   The court will refrain from intervention before exhaustion of other remedy when a fair domestic procedure of appeal was available.

64.We have already dealt with (c) at [34] to [37] above.

65.As regards the applicability of the principle of natural justice in a corporate setting, we were only referred by counsel to the judgment of Megarry J in Gaiman v National Association for Mental Health [1971] Ch 317.  In that case, His Lordship reached the tentative conclusion[8] that the principle of natural justice was not applicable to a situation where a council was empowered by the articles of association to have absolute discretion in making a request to resign, see p. 337-338.

66.The judge considered this question at [121] to [130] of the judgment.  He held that the rule of natural justice was applicable in the present case because article 9.2 did not give an absolute discretion to the Councillors to expel members and the Plaintiffs had vested interests in the operation of the Koon. 

67.Like Megarry J in Gaiman and Jonathan Parker LJ in Coleg Elidyr (Camphill Communities Wales) Ltd v Koeller [2005] 2 BCLC 379, we do not find it a straightforward question.  Since Gaiman (which was decided in 1971), there have been several authorities on the issue and counsel have not addressed us on the same: Thorborn v All Nations Club (1975) 1 ACLC 127; McNab v Auburn Soccer Sports Club Limited [1975] 1 NSWLR 54[9]; Australian Securities Commission v The Multiple Sclerosis Society of Tasmania (1993) 10 ACSR 489; Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1997) 25 ACSR 783; McClelland v Burning Palms Surf Life Saving Club (2002) 191 ALR 759; Coleg Elidyr (Camphill Communities Wales) Ltd v Koeller [2005] 2 BCLC 379 and Eclairs Group Ltd and another v JKX Oil and Gas plc [2014] 1 BCLC 202.

68.Since we do not need to decide this question to resolve these appeals, we prefer not to express any concluded view on the same in the absence of full arguments from counsel.

69.In light of this conclusion, we would not address the pleading point except to observe that the judge had heard counsel for the parties before he decided to include the Natural Justice Issue as one of the preliminary issues and counsel for the defendants agreed to such a course[10].  Further, after such decision was made on 21 January 2015, the defendants had ample time to make whatever preparation in response as the trial continued up to 17 February 2015.  Counsel for the Defendants made full substantive submissions on the Natural Justice Issue in his closing submissions.  Hence, the situation comes squarely within the comment of Ma CJHC (as he then was) in Wing Hang Bank Ltd v Crystal Jet International Ltd [2005] 2 HKLRD 795 at [7]:

“ … Nor will objection as to pleadings have much force where the parties have chosen to disregard the pleadings and conduct the hearing on some unpleaded basis. As Issacs and Rich JJ said in Gould & others v Mount Oxide Mines Ltd (1916) 22 CLR 490 at p.517:

‘  But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge the, or to disregard them and meet each other on issues fairly thought out, it is impossible for them to hark back to the pleadings and treat them as governing the area of contest.’ …”

70.Viewed in that light, the pleading point is a matter of no moment in the present case.

71.For the above reasons we dismissed the appeals with costs on 29 June 2017. 

Mr Benjamin Chain, instructed by Kenneth CC Man & Co, for the plaintiffs in both cases

Mr Edward Chan SC and Mr Kwok Kam Kwan, instructed by Johnnie Yam, Jacky Lee & Co, for the defendants in both cases

Mr Aaron Lam GC of the Department of Justice, for the 17^th defendant in CACV 192/2016