Lam Kin Chung v. Soka Gakkai International of Hong Kong Ltd
Court of First Instance
Miscellaneous Proceedings No 1002 of 2017
Harris J in Chambers
14–15 March 2018

Company law — statutory derivative action — application for leave to commence statutory derivative action on behalf of charitable company limited by guarantee — whether in best interests of company — members’ resolutions ratifying impugned transactions — distinction between ratification of impugned transaction and breach of duty by director authorising such transaction — ratification legally effective if members sufficiently informed about conduct when voting — Companies Ordinance (Cap.622) ss.733, 734 

C was a charitable company formed to promote Buddhism and limited by guarantee. P, a member of C, was granted interlocutory leave under s.733 of the Companies Ordinance (Cap.622) to commence a statutory derivative action against 19 former and present directors (Ds), alleging that in breach of, inter alia, their duties as directors: (a) Ds procured the sale at an undervalue of a property and the purchase at an overvalue of a property by C (the Property Claims); and (b) Ds received remuneration from C; and D4 had wrongly profited from contracts between C and X, a company of which he was a director and shareholder (collectively, the Conduct Claims). C objected, relying on s.734 of the Ordinance, arguing that the Board’s independent directors and C’s members had decided it was not in C’s interests for the proceedings to continue. Four resolutions were passed, each by a majority of over 91% of the members at an extraordinary general meeting which ratified the two property transactions and approved the Board’s decision that it was not in C’s best interest to pursue directors for repayment of their salaries (the Resolutions).

Held, granting leave for the action to continue in respect of the Property Claims, but not the Conduct Claims that:

1) Where a company ratified an impugned transaction, this did not mean it had released the director who authorised that transaction from liability for breach of duty. Here, none of the Resolutions was worded as a release of the directors’ liabilities and none extinguished such cause of action as existed (Nordic International Ltd v Morten Innhaug [2017] 3 SLR 957 applied). (See paras.8–10.)

2) Members of a company incorporated by guarantee for charitable purposes had an obligation to use their rights and exercise their vote in the best interests of the charity, not in their own interests or in a manner detrimental to the company’s charitable objects. However, this did not prevent members from either ratifying a transaction or excusing a breach of duty, provided any recommendations to do so by the board were framed with regard to relevant considerations and sufficient accurate and relevant information. If ratification were resolved on the relevant criteria, it would be legally effective (The Children’s Investment Fund Foundation (UK) v AG [2018] 2 WLR 259 considered). (See paras.12, 14.)

3) Here, the issues were not adequately or accurately explained to members and they did not reach a well-informed decision. The notice of general meeting contained insufficient information and was clearly slanted towards the Resolutions. A properly advised board would have formed a committee of independent directors who would have obtained independent advice to determine whether it was in C’s interests to proceed with any of the claims; they would have prepared a paper for the board and called on it to vote for the committee’s recommendation. A meeting of members might then have been convened to vote on resolutions to ratify the transactions, or excusing any alleged breach of duty. The notice of general meeting would have been accompanied by the committee’s recommendations containing relevant documents such as the statement of claim. (See para.16.)

5) Notwithstanding, it was not in C’s interest to allow the Conduct Claims. These were due to oversights, and if the facts had been properly explained, the members would have released the directors from liability for the breaches. Given C’s charitable objects, it was probable most members would consider these claims objectionable and most third parties would consider them ethically questionable. (See para.17.)

Application

This was an application by a member of a charitable company limited by guarantee for leave to continue a statutory derivative action against 19 intended defendants. The facts are set out in the judgment.

Jurisdictions: 

Thomson Reuters – Sweet & Maxwell are the publishers of the Authorised Hong Kong Law Reports & Digest ("HKLRD") and the Authorised Hong Kong Court of Final Appeal Reports ("HKCFAR"), and providers of Westlaw HK (www.sweetandmaxwell.com.hk / www.westlaw.com.hk).