Soka Gakkai International of Hong Kong Ltd (香港國際創價學會有限公司) v. Lam Kin Chung

FAMV No. 333 of 2022

[2022] HKCFA 21

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 333 OF 2022 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL FROM

CACV NO. 103 OF 2018)

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BETWEEN

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Appeal Committee: Mr Justice Ribeiro PJ, Mr Justice Fok PJ and Mr Justice Lam PJ

Date of Hearing and Determination: 30 September 2022

Date of Reasons for Determination: 6 October 2022

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REASONS FOR DETERMINATION

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The Appeal Committee:

1.At the hearing we refused leave to appeal with reasons to be given later.  These are our reasons.

2.Soka Gakkai International of Hong Kong Limited (“the Company”) is a company limited by guarantee set up for exclusively charitable purposes involving the promotion of the Buddhist faith.  At all material times, its management was in the hands of a Committee which was the equivalent of a board.  It also had members whose liability was limited to contributions of up to $20 to the Company’s assets to meet its liabilities in the event of its winding-up.  The Court was informed that at the time of the proceedings before the Court of Appeal, there were 1,089 members.

3.Mr Lam Kin Chung, the respondent in this application for leave to appeal, is a member who complains about two property transactions entered into on behalf of the Company between July and October 2011.  A property known as the Eastern Culture Centre was sold for $80 million which the respondent alleges was at a substantial undervalue, relying on a valuation (obtained in 2015) stating that its market value was $127.5 million – $137 million in 2011.  The second property, known as the Sai Wan Ho Culture Centre, was purchased for $23.8 million which, relying on his subsequent valuation report, the respondent says was only worth $18.5 million.  Those representing the Company dispute those valuations and contend on the basis of their own subsequent valuations that the prices achieved were reasonable reflections of market value.  The respondent also complains of the manner in which the Committee entered into those transactions.

4.Two other complaints regarding remuneration paid to Committee members and undisclosed contracts with a Committee member are now no longer pursued except in a minor respect affecting two individual Committee members.  Those complaints do not require further mention here.

5.The respondent sought leave under section 733 of the Companies Ordinance (“CO”)[1] to bring a statutory derivative action against 19 Committee members alleging (in a draft statement of claim) that they were in breach of their duties to the Company to act in its best interests and to exercise reasonable care and skill in their dealings with the abovementioned properties. It is alleged that the Company suffered a loss totalling $62.3 million due to their breaches.

6.In response, by an application lodged in the name of the Company, it was sought to challenge by way of a preliminary issue, the respondent’s locus standi to bring a derivative action.  Harris J, on 2 November 2017, rejected that challenge.[2]

7.The question of whether the member should be granted leave to bring a derivative action came back before Harris J.  The Company resisted the grant of leave, disputing the valuations factually.  More importantly, it relied on EGM resolutions passed in 2017 by the great majority of the members to ratify the property transactions complained of.

8.CO sections 732 and 733 lay down the requirements for the grant of leave to bring a derivative action, materially stating as follows:

“732. Member of company or of associated company may bring or intervene in proceedings

(1) If misconduct is committed against a company, a member 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.

…

733. 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 ...”

9.Accordingly, as Harris J noted: “Before granting leave the court must, therefore, be satisfied principally that the proposed proceedings raise a serious issue to be tried, and that it appears to be in the Company’s interests that it be tried.”[3]  Citing the Court of Appeal in Zhang Heng v Kingstone International Wealth Management Limited,[4] his Lordship observed that the threshold of the “serious question to be tried” issue “is relatively low”, the Court of Appeal having pointed out that, “The prospects of the company’s success are to be investigated only to a limited extent, and the court should be slow to find against the applicant unless such prospects are so slim that the company cannot be said to have any expectation of success.”[5]  The Court of Appeal also held that the question of whether the matter in question was in the company’s interest also has a low threshold, to be determined on the face of the application, adding: “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.”[6]

10.Citing Zhang Heng (and the cases there referred to), the Judge noted further that:

“At the leave 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.”[7]

11.Harris J rejected the Company’s reliance on the 2017 EGM as a basis for refusing the leave application.  Such reliance brought CO section 734 into play.  It relevantly provides:

“734. Approval or ratification of conduct does not bar derivative action

(1) If a company’s members approve or ratify any conduct, the approval or ratification —

(a) does not prevent a member of the company, or of an associated company of the company, from—

(i) bringing proceedings under section 732(1) or (2);

(ii) intervening in proceedings under section 732(3); or

(iii) applying for leave for the purposes of section 732(1), (2) or (3);

(b) is not a ground for the Court to refuse to grant leave for the purposes of section 732(1), (2) or (3); and

(c) is not a ground for any court to determine the proceedings brought or intervened in by the member in favour of the defendant.

(2) Despite subsection (1), the court may, after having regard to the matters specified in subsection (3), take the approval or ratification into account in deciding what judgment or order to make in respect of—

(a) any proceedings brought or intervened in under section 732(1), (2) or (3); or

(b) an application for leave for the purposes of section 732(1), (2) or (3).

(3) The matters are—

(a) whether the members were acting for proper purposes, having regard to the company’s interests, when they approved or ratified the conduct;

(b) to what extent those members were connected with the conduct, when they approved or ratified the conduct; and

(c) how well-informed about the conduct those members were, when they decided whether or not to approve or ratify the conduct.”

12.While accepting that by virtue of  CO section 734(2), ratification of a transaction by the members could provide a basis for refusing leave, Harris J held that in the present case, “the issues were not adequately or accurately explained to members and they did not reach a well-informed decision”.[8]  Moreover, he held that the resolutions had sought to ratify the transactions but did not seek to absolve the Committee members of liability.  He proceeded to outline the arrangements that he would have expected to have been made to enable the issue properly to be considered by the members at an EGM.  He concluded that leave should be granted for the derivative action to be commenced in relation to the two property transactions.

13.Both sides appealed to the Court of Appeal.[9]  We need not dwell on the respondent’s appeal.  The Company appealed against the Judge’s rejection of its challenge to the respondent’s locus standi and also his granting of leave to pursue the derivative action.  Its appeal was dismissed by the Court of Appeal.  We need say no more about the locus standi appeal since it is no longer pursued.

14.As Yuen JA (giving judgment for the Court of Appeal) noted, the Company did not dispute that the proposed derivative action raised serious questions to be tried.  At first instance, it had pinned its resistance on the 2017 EGM, arguing that since the members had voted that it was not in the Company’s interests for the proceedings to continue, their decision should not be overridden by the Court.[10] As we have seen, that argument had failed before the Judge who applied the approach mandated by CO section 734. 

15.By the time the matter came on for hearing before the Court of Appeal, the Company had sought to buttress its position by calling a second EGM in 2019 designed to address the deficiencies in the 2017 EGM identified by Harris J.  The Court of Appeal agreed to accept fresh evidence of the steps taken since his Lordship’s decision.

16.Yuen JA emphasised the context in which the issues were being raised before the Court of Appeal, namely, whether the Judge was entitled to find that there was a serious question to be tried and that proceedings appeared to be in the Company’s interests, so as to justify the exercise of his discretion to grant leave to the respondent to institute a derivative action.  Her Ladyship framed the issues before the Court of Appeal as follows:

(a)  “... our case involves a statutory derivative action and it is the statutory criteria only which should be considered ...”[11]

(b)  “... 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.”[12]

(c)  “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.  I respectfully agree with those observations.”[13]

17.Noting that the argument had centred on the EGM resolutions, in particular on the 2019 EGM, her Ladyship stated:

“In the present case, the real issue is whether in the exercise of the court’s discretion ... leave should be given for the Allowed Claims [ie the property claims], in particular since the 2019 EGM Resolutions.”[14]

18.It is therefore in that context that, applying CO section 734, her Ladyship held that the 2019 EGM did not preclude the grant of leave, pointing to possible defects in the manner in which the members had been informed of the issues and of the duties they owed in voting on the resolutions.[15] She rejected the suggestion that the question of leave should be remitted to the Judge for it to be reconsidered in the light of the 2019 EGM, since she was not satisfied that a remitter “would make any difference to the grant of leave”.[16]  The Court of Appeal thereafter refused leave to appeal to this Court.[17]

19.In their present application, the applicant Company seeks leave to appeal on four questions of law said to be of great general or public importance, which are set out in the Annex to this Determination.  Leave is also sought on the “or otherwise” ground.

20.However, a glaring deficiency is that the application loses sight of the issues with which the Judge and the Court of Appeal were actually concerned, namely, whether there is a serious question to be tried and whether the proposed derivative action is apparently in the Company’s interests so as to justify exercise of their discretion in favour of granting leave to bring such an action, taking account of the subsequent EGM resolutions.

21.The questions set out in the Annex seek instead to raise substantive legal issues as to the nature and scope of members’ obligations when voting on resolutions in relation to charitable companies, as well as regarding the applicability of the principle of non-intervention in that context.  On the “or otherwise” ground, leave is sought to argue that, for a variety of reasons, the Court of Appeal “proceeded on an erroneous factual basis” in holding that the 2019 EGM was deficient.  In the applicant’s skeleton argument, it is submitted that:

“... there is a strong public interest element involved in the intended appeal, which extends beyond the interests of the Company. The implications of the intended appeal are not limited to the specific facts of this case, but have much wider implications, in general, and in relation to the administration of other charitable companies limited by guarantee which do not have profit-making or other monetary or commercial goals as their primary objective.”[18]

22.With respect, that submission is misdirected.  Under challenge are the interlocutory decisions of the Judge and the Court of Appeal to grant leave in accordance with provisions of CO sections 733 and 734.  It is only after the derivative action proceeds with pleadings, discovery and evidence, etc, that the factual and legal issues mentioned in the Annex may fall to be decided, leading then possibly to consideration of substantive issues of the kind identified by the applicant. 

23.The Judge, as he was entitled to, held that the CO section 733 requirements were met and that leave to bring a derivative action should be granted.  The Court of Appeal, after a detailed consideration of the issues, taking into account the approach prescribed by CO section 734, endorsed his view.  There is no basis for us granting leave with a view to the Court of Final Appeal interfering with their leave decisions which are interlocutory and fact-specific, raising no questions of great general or public importance. 

24.In other words, the present application is premature.  Leave having been granted, the Court will be seized at the trial of the matters in controversy which have been held to give rise to serious questions to be tried.  These include disputed questions of fact regarding the competing valuations, the manner in which the transactions were decided upon by the Committee; and how the EGMs were convened and conducted.  There may also be arguments on substantial questions of law, such as regarding the nature and effect of any fiduciary duties resting on the members. The Courts below have not decided those substantive issues and it would be open to the Company, if so advised, to raise such issues as part of its case.

25.The EGM resolutions have assumed particular importance. It is notable that CO section 734(2) expressly provides for the court to take such resolutions into account both in deciding whether to grant leave and in deciding on its judgment in the proceedings where leave is given. Thus, leave having been given, the trial judge in deciding on the effect to be given to those resolutions in the context of the action, will have regard to the matters set out in CO section 734(3) including whether the members were acting for proper purposes in the light of the company’s interests and its exclusively charitable purposes; the extent to which members were connected to the conduct complained of; and how well informed about the relevant conduct members were when casting their votes.  The Court of Appeal decided that the 2019 EGM did not, at the leave stage, provide a decisive answer to the allegations of breach and the Company has sought leave on the “or otherwise” basis to challenge that view, arguing that it was arrived at on a factually erroneous basis.  But, as with many of the other matters in dispute, that issue can only be resolved after the facts are found.  An application for leave to bring a derivative action, including in the case of a charitable company, is not the forum in which extensive conflicts of evidence and substantial arguments of law can be dealt with.

26.Accordingly, leave to appeal was refused with costs.

Mr Clifford Smith SC, Mr Jose D’Almada Remedios and Ms Alice Lau, instructed by Yu, Tsang & Loong, for the Respondent (Applicant)

Mr Edward Chan SC and Mr Justin Lam, instructed by Haldanes, for the Applicant (Respondent)

ANNEX to DETERMINATION

Questions of law proposed:

(1)  In the case of a charitable company incorporated by guarantee (i.e., a charitable company) with a large and diverse membership, is the company entitled to give effect to a resolution passed by its members in a general meeting, when it does not have practical means of ascertaining whether the members have acted in accordance with the fiduciary duty owed by them to the charitable objects of the company when they voted for the resolution?

(2)  In the context of a member of a charitable company incorporated by guarantee, with a large and diverse membership, is the duty so owed by the member in deciding whether to vote in favour of or against the company pursuing a monetary claim confined to the duty of adequate deliberation (as explained by Lord Walker in Pitt v Holt [2013] 2 AC 108), or more extensive so as to include a requirement for the member to assess the propriety of the conduct which is the subject matter of the claim?

(3)  In the case of a charitable company with charitable objects of a spiritual and ethical nature, is it compatible with their fiduciary duties owed to the charitable objects, for members to decide by resolution in a general meeting to forego a substantial monetary claim by taking into account and giving priority to the broader, non-financial considerations of the charity, such as and in particular those of a spiritual or ethical nature and if so, whether the company is entitled to give effect to a resolution so passed by the members?

(4)  Further or in the alternative to the above question, in the case of a charitable company with charitable objects of a spiritual and ethical nature, given that a court will not interfere with the exercise of a discretion by a fiduciary unless that fiduciary has acted in breach of duty or if the circumstances attain a sufficient level of exceptionality and seriousness (as held by the UK Supreme Court in Children’s Investment Fund Foundation (UK) v. Attorney General and others [2022] AC 155), whether it is open to the Court to conclude (in the absence of any finding of breach of duty or circumstances of a sufficient level of exceptionality and seriousness) that resolutions passed by an overwhelming majority of independent members (who have decided that it would be in the interest of the company, in view of its spiritual and ethical objects, to forego the monetary claims) could be overridden by the Court in deciding whether to grant or withhold leave to a member to bring a statutory derivative action in the name of the company to pursue a monetary claim?

Application on the “or otherwise” basis, in part:

“The Court of Appeal plainly erred by failing to appreciate that the duty of a member of a charitable company, in deciding whether to vote in favour of or against the company pursuing a monetary claim, is confined to the duty of adequate deliberation (as explained by Lord Walker in Pitt v Holt [2003] 2 AC 108) and wrongfully proceeded on an erroneous factual basis in holding that the 2019 EGM Resolutions (as defined hereinbelow) were ‘deficient’(§138 of the CA Judgment ...”