Re The Hong Kong Football Association Ltd

HCMP 3286/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO3286 OF 2013

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D E C I S I O N
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1.I have before me an application by the company, Hong Kong Football Association Limited, by way of originating summons dated 6 December 2013, for an order that the time for laying the accounts for the financial years ending on 30 June between 2007 and 2012 (inclusive) be extended to the dates on which the Association’s respective general meetings were held, that is on 17 July 2012 and 12 August 2013 respectively.

2.The Hong Kong Football Association was established in 1914 and was registered and incorporated in Hong Kong as a company limited by guarantee under the then Companies Ordinance in 1954.  I shall call the company ‘the Association’. 

3.The objects of the Association include organising and promoting football in Hong Kong, which involves encouraging public participation in football and promoting the development of players, coaches and referees from grassroots level to the professional game.  The vast majority of the Association’s activities are focused on amateur rather than professional football, although the Association also takes charge of the Hong Kong representative team and its international matches, and hosts the matches in the four divisions of the Hong Kong leagues.  In short, the Association was set up and is run for the benefit of the promotion and advancement of football in Hong Kong, both on a professional and an amateur level.

4.The Association is exempted from profits tax under section 87 of the Inland Revenue Ordinance, Chapter 112.  The members of the Association are those admitted for membership in accordance with the articles and now include all football clubs (professional and amateur) currently competing in the four divisions of the Hong Kong football leagues, a number of other recreational sports clubs as well as some associations ancillary to football administration.  The Association currently has 53 full members and between 26 and 28 associate members at any time.  All full members have equal voting rights, whereas associate members do not have voting rights.  The liability of each member is limited to $1,000. 

5.The Memorandum of Association, now regarded as part of the Articles of Association, provides that the income and property of the Association shall be applied solely towards the promotion of the objects and no portion thereof shall be paid or transferred by way of dividend, bonus or otherwise by way of profit to the members, and also provides that upon the winding-up or dissolution of the Association, any property remaining shall not be paid to or distributed among the members of the Association, but shall be given or transferred to some other institution having objects similar to those of the Association and which prohibits the distribution of its income and property among its members to an extent at least as great as is imposed by the memorandum on the Association, such institution to be determined by the members of the association at or before the time of dissolution and in default thereof, by a judge of the High Court.

6.The Association’s income is derived from gate sales from local and international matches and commercial sponsorships, as well as government support by way of subvention grants.  Since about 15 years ago, there had been a decline in football match attendance in Hong Kong, as a result of which the Association had had to rely increasingly on government funding to cover its operational expenses.  Finance of the Association became tight in the years leading to 2011.  One of the results is that the Association only had the resources to hire a very small full-time staff, which was supplemented by part-time and voluntary staff. 

7.Furthermore, there had been considerable turnover in the management and staff since 2007.  First, in 2007, the then Chairman of the Association stepped down from office and the then General Secretary resigned at the same time.  Afterwards, the Association’s financial matters were handled by the Deputy General Secretary, who, though experienced, was not qualified in accounting and finance.  The Deputy General Secretary was assisted by an Accounting Officer but she subsequently moved from being a full-time member of staff to working part-time and was redeployed as the Deputy General Secretary’s Personal Assistant in May 2008.  A new General Secretary was appointed in January 2008, but he was not involved in the Association’s financial matters and, in any event, he left the Association by October 2008.  No one then occupied the role of General Secretary until July 2009.

8.After Mr Yuen, the present General Secretary of the Association, took office in July 2009, he soon realised that the Association’s audited accounts had not been prepared since 2007.  He raised this issue with the chairman in a confidential report in November 2009.  However, during this period, the Association’s finance staff and auditors were preoccupied with the preparation of certain project and funding based reports, including the financial report that had to be submitted to the Government’s Leisure and Cultural Services Department regarding the spending of its annual subvention.  The continuation of such subvention grant was dependent on the prompt submission by the Association of an audited report for the previous year and this was the Association’s finance staff and auditors’ key priority.

9.Furthermore, at about this time, a total of six employees, including the Deputy General Secretary and his part-time Personal Assistant who were responsible for financial matters, all departed from their roles at the Association en masse.  In addition, the Association’s former auditors placed the Association’s jobs on a low priority and often cited other more urgent jobs and a relocation of their office as reasons for their delay in handling the Association’s work.

10.It was in these circumstances that the Association went into default of the obligation under section 122 of the previous Companies Ordinance (Cap 32) to ensure that its audited financial statements were placed before the members in general meeting within the prescribed period from the financial year end.

11.The financial position and financial management of the Association have, however, dramatically improved since about 2011 because, following perceived signs of a revival in public interest in local football development, in 2009 the government decided to increase its support for football.  An independent consultancy report was commissioned.  The result was that a football development strategy was proposed which included a vision for football in Hong Kong with the highlight on a need for an “independent, strong, financially secure and well-managed governing body”.

12.The government approved the proposed strategy in 2010 and subsequently granted a special fund to the Association to commission independent consultants to produce a separate consultancy report to make recommendations for the purpose of enhancing the organisation and functioning of the Association.

13.In 2011, with a pledge of additional funding from the government every year, the Association implemented a number of suggestions made in the report and commenced the process of strengthening its organisation and internal governance.  This initiative was named Project Phoenix.  Among other things, the structure of management was substantially changed.  This included the nomination of a Board member as the Association’s Treasurer, as well as the appointment of a dedicated Finance and Strategy Committee within the Board.  The number of staff employed by the Association also increased, made possible by the increased funding.  This included an expansion of its finance department, whose size grew from three relatively junior full-time members of staff and one shared member with another department in 2009, to the current number of five full-time members, including some senior and professionally qualified staff.

14.Most importantly, in August 2011, the Association also appointed a Financial Controller to supervise its financial affairs.  The Financial Controller had to be a qualified accountant in Hong Kong and was charged with the responsibility of preparing annual financial accounts and of ensuring that external auditing was duly performed.

15.In the very special circumstances of this case, I think it would be appropriate to exercise the court’s discretion under section 122 of the previous Companies Ordinance to extend the prescribed period for laying the accounts before the members.  The Association is a non-profit-making company limited by guarantee.  It had, at any one time during the material years, around nine directors who all served as such on a voluntary basis.  They were neither remunerated professionals nor businessmen running the company with a view to profit.  The members have historically taken very little interest in the finances of the Association.  This is not surprising given they were members of a company limited by guarantee, with no possibility of any interest whatsoever in the surplus income or assets of the Association, nor any liability beyond $1,000 each.

16.As I have mentioned, there were specific factual circumstances explaining why the default in statutory compliance occurred. While those matters do not, of course, justify the non-compliance, they in my view take this case out of the category of cases involving sheer indifference on the part of the directors.  In fact, the evidence shows that the Chairman, the General Secretary, and an adviser to the Board have all taken steps to enhance the financial reporting from 2008 onwards.  Local audits of external funding were carried out on a regular basis to ensure that the money received by the Association was properly spent.  This had also enabled the funding bodies to monitor the Association’s spending history.  For example, local audits of the FIFA Financial Assistance Programme were performed annually between 2008 and 2012 to assist FIFA in supervising the payments made to the Association out of the Programme.  These audits were performed in accordance with Special Engagement Instructions agreed between KPMG Zurich and the management of FIFA.  It was recognised in all these audit reports that all disbursements had been made by the Association in compliance with the purposes approved by FIFA.

17.Statements of expenses subvented by the Leisure and Cultural Services Department were also prepared by auditors in accordance with standards issued by the Hong Kong Institute of Certified Public Accountants.  Again, in all the years in which audits were performed, the Association’s annual accounts were found to be properly prepared and compliant with the relevant Subvention Agreement and other agreements, codes and guidelines.  In addition, other Independent Assurance Reports in relation to event or programme-specific subventions and grants were prepared according to recognised accounting standards and verified by external auditors.  These reports also found that the relevant subventions were properly accounted for.

18.When the audited accounts for the relevant years were eventually placed before the members in July 2012 and August 2013 respectively, they were approved without any question or concern. 

19.The present application has been prompted by queries raised by the Companies Registry about compliance with the statute, who also suggested that the Association make an application to the court under section 122 of the then Companies Ordinance.  The application was made without unreasonable delay thereafter, though it had to be adjourned after the first hearing because additional information was required. 

20.The application has, during the adjournment I granted last year, been made known to the members who had been informed of the details of and the reasons for the application in advance of the 2014 AGM held on 28 March 2014.  The relevant item was passed at the AGM without any objection from any member. 

21.Steps taken pursuant to the Project Phoenix have now dramatically improved the financial management and reporting within the Association.  There have been, on the evidence, a determination, as well as enabling resources, to overhaul the system and, indeed, the evidence shows that the Association has been reformed so far as corporate governance is concerned.

22.For these reasons, I shall accede to the application.

(Discussion re terms of order)

23.I will make an order that the time for laying the accounts for the financial years ending on 30 June between 2007 and 2012 inclusive be extended to the dates on which the Association’s respective general meetings were held, that is on 17 July 2012 and 12 August 2013 respectively.

24.There will be no order as to costs.

Ms Elizabeth Cheung, instructed by Slaughter & May, for the applicant