Lam Kin Chung v. Soka Gakkai International of Hong Kong Ltd

HCMP 1002/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1002 OF 2017

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Before:  Hon Harris J in Chambers

Date of Hearing:  1 November 2017

Date of Delivery of Decision:  2 November 2017

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D E C I S I O N

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Introduction

1.I have before me an amended originating summons seeking leave to bring proceedings against various persons in connection with the affairs of the respondent company, Soka Gakkai International of Hong Kong Limited (“Company”). For reasons which will become apparent later in these reasons it is not necessary to describe the claims. 

2.I have already given leave on an interim basis (31 May 2017) to the Applicant to issue the writ for the reasons explained in my decision of 31 May 2017.  Leave was given on the basis of undertakings by the Applicant to withdraw the writ if leave was not given at the substantive hearing of the amended originating summons.

3.On 25 May 2017 the Company issued a summons seeking the determination of the following issue:

“The following question of law be determined without a full hearing of the Origination Summons herein, namely:

‘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 Applicant 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?’ ”

4.It has been agreed between the parties that this issue should be determined before the consideration of the issues which the amended originating summons requires the court to consider. 

5.It is not in dispute that:

(1) The Company was set up for exclusively charitable purposes, principally the promotion of the Buddhist faith.

(2) It is limited by guarantee and that pursuant to clause 6(a) of the original Memorandum of Association, its income and property cannot be distributed by way of dividend or capital to its members.  The only financial interest members have in the Company is a liability pursuant to clause 5 of the Articles in the event of its liquidation to contribute $20.  This is de minimis and irrelevant to the determination of the issue before me.

(3) The Company has been granted a tax exemption under section 88 of the Inland Revenue Ordinance, Cap 112 as a charitable institution.

(4) The Applicant was at all material times registered as a member of the Company.

6.The Company’s argument in support of its contention that the answer posed in para 1 of the summons is in the negative can be divided into two parts:

(1) 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.

(2) Such rights and interests (other than private rights such as compliance with the Articles of Association) as exist in ensuring that the company conducts its affairs lawfully are public rights which can only be asserted by the Secretary for Justice. 

The 1^st Argument

7.The Company argued that it is clear from the authorities that allowing a member to bring a derivative action, whether a common law or statutory derivative action, can only justified if the member has suffered a personal financial loss (albeit reflective of the loss to the company) which will go unremedied unless the member pursues a claim on behalf of the company.  As the Applicant does not suggest he has suffered any economic loss, by virtue of the matters of which he complains, it necessarily follows that leave should be refused.  Further, the rationale for permitting any form of derivative action is that otherwise the wrong will not be remedied. That is not so in the present case because the Secretary for Justice can be invited to take action or agree to a relator action being commenced. 

8.The first part of this argument assumes, first, that it is an established requirement of a common law derivative action that the member has suffered economic loss, and, secondly, that the requirement applies to a statutory derivative action.

9.The first requirement emerges, argued the Company, from the line of authorities culminating in this jurisdiction in the Court of Final Appeal’s judgment in Waddington Ltd v Chan Chun Hoo.[1]  It is convenient to quote from the judgments of Mr Justice Ribeiro PJ and then Lord Millet NPJ:

“11. It is a fundamental principle of company law, expressed as part of the rule in Foss v Harbottle, that where a wrong has been done to a company, it is the company itself which is the proper plaintiff. That principle does, of course, admit of exceptions, the exception generally relevant to derivative actions being the ‘fraud on the minority’ exception. Jenkins LJ explained the position in Edwards v Halliwell,¹² as follows:

… where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring what is known as a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.

12. It follows that where a wrong is alleged to have been done to a company and a minority shareholder purports to bring a derivative action on the company’s behalf, it is incumbent on the shareholder to show that the general ‘proper plaintiff’ rule is displaced and that the case falls within the relevant exception.

…

The common law derivative action

47. A company is a legal entity separate and distinct from its members. It has its own assets and liabilities and its own creditors. The company’s property belongs to the company and not to its shareholders. If the company has a cause of action, this represents a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. This is the first rule in Foss v Harbottle (1843) 2 Hare 461. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: see Wallersteiner v Moir (No 2) [1975] 1 QB 373 CA at p.390; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 CA (Prudential) at p.210; Johnson v Gore Wood & Co [2002] 2 AC 1 at p.61 et seq.

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¹² [1950] 2 All ER 1064 at p.1067.

48. The injustice which would result if a derivative action were not available where the company is controlled by the alleged wrongdoers is vividly described by Lord Denning MR in Wallersteiner v Moir (No 2) (supra) at p.390:

But suppose [the company] is defrauded by insiders who control its affairs — by directors who hold a majority of the shares — who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress. (Emphasis added.) ”

10.Waddington itself and the authorities referred to in it concern commercial companies with share capital.  It is, therefore, unsurprising that the wrongs that the common law derivative actions were intended to correct were financial in character, and that the decisions talk in terms relevant to such claims.  Neither team of counsel have found an authority in which the court has been required to consider whether a common law derivative action can properly be commenced by a member of a non‑profit‑making company incorporated by guarantee.

11.Chung Sau Ling v Asia Women’s League Ltd & Ors [2]  is an example of a common law derivative action brought by, what appears from the decision to be, a member of a company incorporated by guarantee (p.418B) although the plaintiff is earlier in the judgment (p.413A) described as shareholder.  However, no issue appears to have been taken that the plaintiff had insufficient interest to justify prosecuting an action on behalf of the company, and the decision makes no reference to this issue and is, therefore, of no assistance.

12.I cannot, however, see why in principle a member of a company incorporated by guarantee, and with no economic interest in the financial affairs of a company, cannot commence a derivative action to remedy wrongs done to the company which would not otherwise be corrected.

13.Mr Yin, who appeared for the Company, suggested that the only relevant interest a member of such a company has is in the right to receive financial statements and exercise voting rights at general meetings. Such interests as he may have in the activities of the company and which may, as in the present case, have led people to become members of the company, are totally irrelevant.   It seems to me that this is wrong.

14.People become members of companies which promote and facilitate non-commercial activities and purposes such as religion, education, sport and culture because they have an interest in those activities.  I cannot see why if they discover that a wrong is being done to such a company which inhibits it properly fulfilling its purpose and the board, because it is implicated in the alleged wrongdoing, will not take action to remedy it, that the members, however egregious the conduct and however genuine the members’ interest in the matter, should be unable to commence a common law derivative action because of insufficient relevant interest.

15.In my view, the argument that a common law derivative action can only ever be commenced if a member can demonstrate that the wrong complained of negatively impacts his economic interest is wrong.  It also seems to me that even if there is such a restriction on the availability of a common law derivative action, it does not apply to statutory derivative actions.  As Ribeiro PJ notes in paras 28 and 32 of his judgment in Waddington:[3]

“28. Two points should be made as regards the statutory derivative action when compared to the common law derivative action:

(a) Since s.168BC(3)(b) makes the grant of leave conditional on the court being satisfied that ‘there is a serious question to be tried’, the Prudential test regarding the sustainability of the company’s cause of action has been modified by adoption of the lower threshold of ‘a serious question to be tried’ and abandonment of the more stringent ‘prima facie case’ test.³⁷

(b) Similarly, the second Prudential requirement, that is, the requirement of showing prima facie that the case falls within a relevant (usually the fraud on the minority) exception to the rule in Foss v Harbottle, has been jettisoned by the statutory scheme. The often difficult question of whether a Foss v Harbottle exception applies no longer needs to be determined in establishing locus to bring statutory derivative actions given that the company must now be given notice enabling it to make known its position regarding the action;³⁸ and given that the court now has a discretion to decide whether the proceedings are prima facie in the interest of the company.³⁹ In exercising its discretion, the court is effectively deciding, on the basis of criteria laid down by statute, whether the plaintiff should exceptionally be

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³⁷ Cf American Cyanamid Co v Ethicon Ltd [1975] AC 396 at p.407. In F & S Express Ltd, Kwan J at p.747B–C referred to the threshold of a serious question to be tried as a relatively low threshold as in the case of an application for an interlocutory injunction.

³⁸ Under s.168BC(3)(d) and s.168BD.

³⁹ Section 168BC(3)(a).

allowed to sue in place of the company which is normally the proper plaintiff, rendering the common law exceptions to the rule in Foss v Harbottle otiose in this context. The discretion is also obviously a safeguard against vexatious and inappropriate proceedings by disgruntled members.

…

32. The co-existence of both the statutory and common law regimes is unusual in an international context⁴²and is a source of confusion and complication. It would appear to be appropriate for the statutory regime to replace the common law derivative action altogether. This question deserves to be addressed by the Administration and the Legislature as soon as possible.”

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⁴² In Australia, Canada, New Zealand and the United Kingdom, the statutory regime has replaced the common law one. See Company Law in Hong Kong : Practice and Procedure (2007) para.8.056 footnote 312.

16.It seems to me that when faced with an application for leave to commence a statutory derivative action, the court is only concerned with whether the statutory criteria have been satisfied and that it is a proper case for the court to exercise its discretion if they are.  The relevant criteria are contained in section 733 of the Companies Ordinance, Cap 622. The relevant parts of which are as follows:

“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) an application for leave to intervene in proceedings under section 732(3), the company has not diligently continued, discontinued or defended the proceedings; 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).”

The court is given a discretion to grant leave when it is satisfied that:

(1) the applicant is a member;

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

(3) on the face of the application it appears to be in the interest of the company that leave is granted.

17.The Company argued that if the three criteria are satisfied leave should never be granted to a member of a company incorporated by guarantee. This I reject.  I accept, however, that the fact that a company is a charity may be relevant to the exercise of the court’s discretion.  It is at the discretionary stage that the remainder of the Company’s argument, in my view, becomes relevant.

The 2^nd Argument

18.The Company’s argument that the derivative action is unnecessary because of the availability of the Secretary for Justice to remedy any wrong, which is closely associated with the second part of the Company’s case that the Company’s charitable purpose is public in nature and only the Secretary for Justice can take legal proceedings to protect it.

19.The Applicant accepts that the Secretary for Justice can, as parens patriae, intervene to protect charitable interests and should do so if the interests would not otherwise be represented as in the case of a gift to charities generally.  However, said the Applicant, if the interest is adequately represented, the Secretary for Justice is not obliged to act. The Applicant said that it is clear that it is not in all charity cases that the Secretary for Justice is the only proper person to protect a charitable interest—see Tudor on Charities: [4]

“The Attorney General’s role in relation to charities has been described in a number of ways:

•  He is the representative of the Sovereign whose duty it is as parens patriae, to protect property devoted to charitable uses.

•  He acts on behalf of the Crown as parens patriae and represents all the objects of the charity.

•  As a rule the Attorney-General is a necessary party to all actions relating to charities. It is the duty of the Queen, as parens patriae, to protect property devoted to charitable uses, and that duty is executed by the Attorney‑General as the officer who represents the Crown for all forensic purposes. He represents the beneficial interest, in other words the objects, of the charity.

•  His duty (as representative of the Crown as parens patriae) is to intervene for the purpose of protecting charities and affording advice and assistance to the court in the administration of charitable trusts.

•  Duty to represent all absent charities; where those charities are identified individual charities and are not parties, the Attorney General is in the nature of a trustee for them.

•  Where property affected by a trust for public purposes is in the hands of those who hold it devoted to that trust, it is the privilege of the public that the Crown should be entitled to intervene by its officer for the purpose of asserting, on behalf of the public generally, that public interest and that public right which probably no individual could be found willing effectually to assert, even if the interest were such as to allow it.

•  It is the duty of the Attorney General to assist the court, if need be, in the formulation of a scheme.

•  The Sovereign as parens patriae is the protector of every part of his subjects. It is the duty of the A-G as the Sovereign’s officer to watch every proceeding from the commencement to the end.

•  Duty to see that justice is done to every part of the Queen’s subjects who she protects as parens patriae.

•  Duty not to suffer oppression to affect the interests of defendants, who are equally his Majesty’s subjects.

The existence of a duty on or power in the Attorney General in relation to charities does not require the Attorney General necessarily to take action in all cases to which that duty or power literally extends. In particular, his duties do not require the Attorney General to act in the perceived selfish interests of one specific charity or set of charity objects in all cases. Firstly, he might not do so if he considered that that would be contrary to the wider interests of charity.  Secondly, he might form the view that the charity or its objects were or could or should be adequately protected in some other way. Thirdly, the Attorney‑General’s role in relation to charity is to represent the Crown in its parens patriae or quasi-parental role. As with all parental relationships there will be occasions when the parent (in this case the Crown as represented by the Attorney General) considers that a child (a particular charity or charitable interest), in its own interest and/or that of charity or the public more generally, should or will have to get by, or even perish, without full or any quasi-parental support. Fourthly, there must be an element of proportionality, as between the perceived problem and the cost of the Attorney General attempting to resolve it.”

20.In Ware v Cumberlege, Sir John Romilly MR addresses the rules for the purposes of determining when the Attorney General would or would not be a necessary party to the proceedings: [5]

“… the Attorney-General represents all absent charities, and it is sufficient to have him here to represent all absent charities. But absent charities may obviously be of two different characters: they may either be under gifts to specified individual charities, or to charity generally. In case the gift is for charity generally, no one can represent it but the Attorney‑General, and he must be here to represent such general charities. When there are specified individual charities, then the Attorney-General’s presence is not univerally necessary; but it is required by the Court upon various occasions, as, for instance, where any rules are required for the regulation of the internal conduct of the charity itself, such as the establishment of a scheme and the like ; there the Attorney‑General is necessary for the purpose of aiding and assisting the Court in directing and sanctioning the general system and principle that ought to govern charities of those descriptions. But there are other cases where there is no question as to the conduct or management of the charities, but only whether the charity is entitled to a particular legacy or not. In those cases, the Attorney-General is rather in the nature of a trustee for those charities, and the Court prefers having before it the charities beneficially interested, for the purpose of putting their interests before the Court in the light which they consider most favourable to them. In those cases I think it preferable that the charity itself should appear, rather than that the Attorney-General should represent it. …”

This case was followed by Deputy High Court Judge Louis Chan (as he then was) in Cheung Man Yu v Lau Yuen Ching.[6]

21.Mr Yin argued that the members have no interest in the advancement and facilitation of the Company’s charitable purposes other than the interests that members of the public generally have in the promotion of charitable purposes and that this is part of the public interest giving rise to a public right to ensure that charitable companies’ affairs are properly protected. The public right can only be asserted by the Secretary for Justice, said Mr Yin, and he referred me to the following passage of Lord Wilberforce’s judgment in Gouriet and Others v Union of Post Office Workers: [7]

“A relator action—a type of action which has existed from the earliest times—is one in which the Attorney-General, on the relation of individuals (who may include local authorities or companies) brings an action to assert a public right. It can properly be said to be a fundamental principle of English law that private rights can be asserted by individuals, but that public rights can only be asserted by the Attorney-General as representing the public. In terms of constitutional law, the rights of the public are vested in the Crown, and the Attorney‑General enforces them as an officer of the Crown. And just as the Attorney-General has in general no power to interfere with the assertion of private rights, so in general no private person has the right of representing the public in the assertion of public rights. If he tries to do so his action can be struck out.”

22.I accept that there is a public interest in the protection of charities and as I have already noted there is no dispute that the Secretary for Justice could intervene if he considers it appropriate.  It does not, however, 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.  In my opinion, he does.  As I have already explained, in my view, such an interest may be sufficient for the purposes of a common law derivative action.  

23.I therefore reject the Company’s second argument.

24.As far as the suggestion that leave is not necessary because the Secretary for Justice can take action is concerned, this is in my view a non sequitur for the reasons explained in para 20.  If the Secretary for Justice will not intervene if there is somebody with the interest and ability to act to protect the charity’s interests, it cannot sensibly be said that leave is not necessary. 

Conclusion

25.I answer the question posed in para 1 of the Company’s summons in the positive.

26.The amended originating summons should be listed for a further hearing with one day reserved in consultation with the diary of one counsel for each party.  I grant leave to the Company to adduce at the hearing the 2^nd and 3^rd affirmations of Chong Ka Yee.  I grant the Applicant leave to file evidence in reply to those two affirmations within 21 days.  I will reserve the costs of the Company’s summons which can be dealt with when the amended originating summons has been finally determined.

Mr Wong Yan Lung SC, Mr Anson Wong SC and Mr Justin Lam, instructed by Rowdget W. Young & Co, for the applicant

Mr Michael Yin and Mr Justin Ismail, instructed by Yu, Tsang & Loong, for the respondent