Lam Kin Chung v Soka Gakkai International Of Hong Kong Ltd

HCMP 1002/2017

[2018] HKCFI 747

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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D E C I S I O N

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Introduction

1. On 28 April 2017, the applicant Lam Kin Chung issued an originating summons seeking leave under section 733 of the Companies Ordinance, Cap 622 (“Ordinance”), to issue a statutory derivative action against 19 former and present members of the Committee of the Company. The Company is a charitable company formed to promote Buddhism. It is incorporated by guarantee with limited liability. The Committee is the name given to what conventionally is called the board of directors, and members of the Committee are the Company’s directors. I will therefore refer to members of the Committee of the Company as directors in this decision and the Committee itself as the board.

2. On 31 May 2017 I gave interlocutory leave to issue a writ for the reasons explained in my decision of that date. On 1 November 2017, I heard an application by way of summons issued by the Company on 25 May 2017 for the determination of a preliminary issue which I decided on 2 November 2017 in Mr Lam’s favour, which, in short, concerned whether a member of a company incorporated by guarantee for charitable objects had sufficient interest in the company in invoke sections 732 and 733 of the Ordinance. I heard yesterday the originating summons in order to determine whether leave should be granted or my order of 31 May 2017 set aside.

3. I also had before me an application for leave to appeal my order of 2 November 2017 which I will deal with in the final section of this decision.

4. The application was supported, as is the present normal practice, by a draft statement of claim which, interlocutory leave being granted, is now endorsed on the writ that was issued on 1 June 2017 against 19 defendants but not served. There are four claims pleaded:

(i) On 11 August 2011, the defendants, in breach of duty, caused the plaintiff to sell property in Chai Wan for HK$80 million which was worth at least HK$127 million, causing substantial loss to the Company.

(ii) On 25 August 2011, the defendants, in breach of duty, caused the Company to acquire property in Sai Wan Ho Street in consideration of a purchase price of HK$23.8 million which was worth no more than HK$18.5 million.

(iii) Between about June 2011 to January 2014, the 1^st, 2^nd, 3^rd, 5^th, 6^th, 13^th, 15^th, 16^th, 17^th and 18^th defendants received remuneration from the Company in breach of clause 6B of the Memorandum of Association and clause 24 of the Articles of Association. The directors who received these payments profited wrongly to the extent of the sums paid to them, in breach of the aforesaid provisions, and section 162(1) of the Companies Ordinance, Cap 32, and their fiduciary duties as directors, and are liable to account for those payments.

(iv) During the period from about 2011 to the end of 2013, the Company entered into contracts for repair and maintenance works with Hang Foong Mechanical and Electrical Limited (“Hang Foong”) of which the 4^th defendant was a director and owned at least 66.67% of its issued shares. This was in breach of section 162(1) and the 4^th defendant’s fiduciary duties to the Company, and he is liable to account for the payments he received.

Principles relevant to granting leave

5. Section 733(1) specifies the circumstances in which the court may grant leave for the purposes of section 732(1). The two subsections state 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 or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the misconduct before the court on behalf of the company.

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733. Leave of Court to bring or intervene in proceedings

(1) On application by a member of a company or of an associated company of a company, the Court may grant leave for the purposes of section 732(1), (2) or (3) if it is satisfied that—

(a) on the face of the application, it appears to be in the company’s interests that leave be granted to the member;

(b) in the case of—

(i) an application for leave to bring proceedings under section 732(1) or (2), there is a serious question to be tried and the company has not itself brought the proceedings; or

(ii) 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).”

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. The issues are normally considered in that order. The correct approach to determining whether they have been satisfied has been considered in a number of authorities and I do not understand the principles to be controversial. They have been most recently summarised by the Court of Appeal in Zhang Heng v Kingstone International Wealth Management Limited:[1]

“11. There is no dispute about the law on the correct approach regarding the exercise of discretion to grant leave. This has been covered in a number of cases, including an earlier decision of the judge mentioned in the Judgment, namely, Hao Xioying v Green Valley Investment Ltd, HCMP 1394/2015, 10 August 2016, which quoted from relevant passages of the decision of Ng J in Re Primlak (HK) Ltd[2016] 2 HKLRD 31 and Ng J in turn drew on various decisions of judges at first instance[2]. The relevant legal propositions have been summarised by the judge in Green Valley Investment Ltd at §§10 and 11:

‘10. On serious question to be tried:

(a) The threshold is relatively low. 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. See Re Primlaks (HK) Ltd, HCMP 1789/2015, unrep, 28 January 2016, §§7-8 per Ng J.

(b) 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[3]. See Re Primlaks (HK) Ltd, §9.

11. As regard the interest of the company:

(a) Again, the threshold is low. In deciding whether it is prima facie in the interest of the company for leave to be granted, the court should have regard to the fact that “there should not be a trial within a trial and the court should not be forced to enter into the merits of claims where there are serious disputes”. See Re Primlaks (HK) Ltd, §21.

(b) 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. See Re Primlaks (HK) Ltd, §§20-21.

(c) In assessing whether it appears to be in the interest of the company that the derivative action be pursued, the court ought to take into account whether any practical benefit is likely to result, even in circumstances where it may be clear that, eg, a director has breached his duties to the company. This essentially involves assessing whether it appears that the company stands to gain in money or money’s worth in light of the costs which will have to be incurred. See Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at [56] to [60][4] per Palmer J; Pang Yong Hock v PKS Contracts Services Pte Ltd[2005] 2 LRC 72 at [21] per Tay Yong Kwang J (giving the judgment of the Singaporean Court of Appeal).’

12. The court would usually consider the serious question requirement first, because if this requirement is not satisfied, it would be difficult to see how it could be in the company’s interest to bring a derivative action. This was the approach adopted by the judge.

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19. The words of Megarry V-C in Mothercare Ltd v Robson Books Ltd[1979] FSR 466 at 474 quoted by Harris J in Re Li Chung Shing Tong (Holdings) Ltd at §33 bear special mention:

‘… the prospects of the plaintiff’s success are to be investigated to a limited extent, but they are not to be weighed against his prospects of failure. All that has to be seen is whether the plaintiff has prospects of success which, in substance and reality, exist. Odds against success no longer defeat the plaintiff, unless they are so long that the plaintiff can have no expectation of success, but only a hope. If his...