INCORPORATED OWNERS OF HIP WO HOUSE v. GALANT KING DEVELOPMENT LTD

HCCW248/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS

NO. 248 OF 2006

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D E C I S I O N

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1. This is a creditor’s petition presented by the Incorporated Owners of Hip Wo House against Gallant King Development Limited. 

2. The petition was based on an unpaid judgment debt of some $35,965.07 together with unpaid costs of slightly in excess of $440,000, arising out of earlier Lands Tribunal proceedings, being LDBM95/2003 between the Incorporated Owners and Gallant King and 19 other owners of units in Hip Wo House.  The balance of the judgment debt has now been paid so that the only remaining basis for the petition is the unpaid costs. 

3. The company has resisted the petition on the basis that it disputes its liability to pay such costs bona fide on substantial grounds.  It says that it is not liable to pay any costs to the Incorporated Owners because the Incorporated Owners themselves were not obliged to pay costs to their own solicitors as the contract for legal services under which such costs were charged to the Incorporated Owners was void because it was, it is said, in breach of section 20A(2) of the Buildings Management Ordinance, Cap. 344. 

4. It is, I think, necessary first to set out briefly the background to these winding-up proceedings.  The Land Tribunal proceedings to which I have referred involved a dispute as to the method of calculating contributions for renovation works to Hip Wo House, pursuant to the deed of mutual covenant that governed the relationship between the owners of units in that building.  It appears that in the past there were occasions on which renovations were carried out when the owners of ground floor commercial units in Hip Wo House paid substantially less than the contribution that was paid by owners of units on the upper floors, paying about 50 per cent of the amount paid by owners of smaller units on the upper floors notwithstanding that the number of undivided shares in the building attributable to the ground floor units was greater than those attributable to the upper floor units. 

5. The basis for this arrangement may have been that it was felt that the owners of ground floor units stood to benefit to a lesser extent from the renovations than the owners of the upper floor units in question.  However, notwithstanding this apparent prior practice, when certain further renovations were carried out between 2002 and 2003, the owners of the ground floor units were asked to pay or to contribute to the cost of such renovations on the basis of the proportion calculated by reference to their undivided shares in the property, resulting in their having to pay an amount which was approximately four times the amount to be paid by owners of units on the upper floors.

6. The owners of units on the ground floor indicated that they were unwilling to pay on this basis and refused to pay.  This led the Incorporated Owners to commence the Lands Tribunal proceedings against them.  In those proceedings the Incorporated Owners instructed Messrs W K To & Company to act as their solicitors.  It is not disputed that Messrs W K To & Company were retained without any invitation to tender having previously been issued.

7. One of the ground floor owners appears to have requested that a meeting of the Incorporated Owners should be convened to consider the matter to obtain information as to likely costs involved in the proceedings and raise the question of whether or not there should have been an invitation to tender as was, he suggested, required under the code of practice relating to building management.  However, this request was declined by the Incorporated Owners on the basis that they considered that no invitation to tender was required in the circumstances of the case.

8. The proceedings having commenced, an attempt to settle the proceedings was made by the owners of the ground floor units through their solicitors.  However, this was rejected by the Incorporated Owners, on the basis that there was no scope for settlement since any reduction in the amount payable by the ground floor owners would result in increased contributions having to be obtained from the upper floor owners.  In the event, no settlement was reached and the matter proceeded to trial.

9. Shortly prior to the hearing in the Lands Tribunal there was a suggestion of a challenge to Messrs W K To & Company’s authority to act on behalf of the Incorporated Owners, apparently on the basis of section 20A(2).  But this challenge, which took the form of an application for an injunction restraining the solicitors from acting, was not in the end proceeded with as the respondents to the Lands Tribunal proceedings did not feel that they had sufficient evidence to successfully mount such an application at that stage.

10. It is material at this stage to note the terms of the relevant parts of section 20A(2).These provide that:

“	Any supplies, goods or services required by a corporation … the value of which exceeds or is likely to exceed:
	(a)	The sum of $100,000 or such other sum in substitution therefor as the authority may specify by notice in the Gazette, shall be procured by invitation to tender. …”

Subparagraph (b) is not relevant as it is not relied on in these proceedings. 

11. It now turns out that the total costs incurred by the Incorporated Owners exceeded HK$700,000, that being the bill of costs that was submitted by Messrs W K To & Company for the purposes of taxation.  Following the taxation the amount that is still outstanding is, as I have noted, in excess of HK$440,000. 

12. The Company’s argument is that the alleged liability under the petition relates to the costs of the land tribunal proceedings.  However, such costs are given by way of an indemnity to the party to whom they are awarded so that if that party does not actually incur any costs, whether by agreement or because it is not liable to pay such costs to its own solicitors, there is nothing against which the successful party to whom costs have been awarded requires to be indemnified against and nothing is therefore payable under the indemnity so that there is no obligation to make any payment pursuant to the order for costs.

13. Thus, it was submitted that as the contract between the Incorporated Owners and Messrs W K To & Company was entered into in contravention of section 20A(2), it is void and nothing is payable to Messrs W K To & Company under it.  Therefore, there was no basis on which the Company should be held liable for the costs which were awarded against it. 

14. In order to resist the making of a winding-up order it is necessary for the Company to demonstrate the existence of a bona fide dispute of substance as to the debt claimed.  So far as the argument as to the effect of a breach of section 20A(2) is concerned, there is Court of Appeal authority (Wong Tak Keung, Stanley v The Management Committee of Incorporated Owners of Grenville House, unreported, CACV 244/2003) for the proposition that it is at least arguable that a breach of section 20A(2) should be construed as a breach of a provision that requires mandatory compliance.  That decision also indicates that it is arguable, at least, that the effect of a contravention of section 20A(2) is to invalidate the transaction that had been carried out, although the Court of Appeal did not indicate any view as to whether the effect would be that the contract entered into in contravention of subsection (2) would be wholly void, or merely voidable, saying that that might depend on the particular circumstances of the case.  However, it does seem clear that it is at least arguable that the effect of a breach of section 20A(2) may be to render the contract in question wholly void.  

15. Mr Lee, who appeared today for the incorporated owners submitted that the argument based on section 20A(2) could not succeed for two principal reasons: first, because the point was, he submitted, res judicata, having already been determined in the course of the Lands Tribunal proceedings; and second, that in any event section 20A(2) had no application in this case because at the time when the contract of retainer was entered into, it could not be said that the costs involved, or the value of the services to be provided there under were likely to exceed $100,000.

16. I shall deal first with the res judicata point.  In respect of this point Mr Lee submitted that in the light of the costs order, which was one of the items of relief sought in the Lands Tribunal proceedings, it was incumbent on the respondents to those proceedings, which included the Company, to have taken the point concerning section 20A(2) in the course of the Lands Tribunal proceedings.  He submits that the point not having been taken then, it is now no longer open to the Company to raise the point in the context of these winding-up proceedings.  Mr Leung, for the company, submits that the point could not have been taken at that stage because there was no sufficient evidence available of any breach of section 20A(2) and that in the circumstances no question of res judicata arises.

17. In my view, the issue as to section 20A(2) did not in fact arise for determination by the Lands Tribunal in the case before it.  The only issue for substantive determination in those proceedings was the question of the true construction of the deed of mutual covenant– in particular, whether it was the Incorporated Owners’ construction of the relevant clauses relating to payment of contributions for renovation works that was correct, or whether the alternative construction contended for by the owners of the ground floor units was to be preferred.  That was the substantive dispute between the parties and it was that dispute which the Lands Tribunal determined. Although it is true that there was an abortive attempt to restrain the solicitors from acting, which was, I have noted, abandoned because it was felt that there was no sufficient evidential basis for it, that formed no part of the matters for decision by the Lands Tribunal. 

18. In making its costs order in the Lands Tribunal proceedings the tribunal was, in my view, simply making a decision as to the incidence of the costs of the proceedings between the parties before it.  In doing so, it would not have addressed its mind to whether or not the party to whom costs were awarded had in fact incurred any costs.  This is not normally a matter which arises for consideration by a court or tribunal at the point of determining the question of who, as between the parties, should be liable for the costs of the proceedings. 

19. One can take the following example: in an ordinary case where costs are awarded against a party and it is later discovered that the successful party has not, in fact, incurred any costs, it seems to me that it must be open to the party against whom costs were ordered to resist the actual payment of the costs at a later stage when it was in a position to do so with proper evidence.  While it is possible that had there been a proper basis for raising the question at an earlier stage, it might conceivably have been argued and determined by the tribunal, the fact that it was not raised or argued in circumstances where there was no sufficient basis for it, does not, in my view, give rise to an estoppel by way of res judicata that has any effect on the Company’s resistance to the present petition.

20. Mr Lee also submitted that there was res judicata arising from the failure on the part of the company to take the point at the stage of taxation of the bill of costs in respect of the Lands Tribunal proceedings.  However, it seems to me that at that point, even though the amount of the costs involved would have been known, even if there had been a suggestion that costs should not be payable it would not have been an issue which the master dealing with the taxation could properly have considered, because the purpose of the taxation was to assess the actual amount of costs that should be paid, and the question of whether or not any costs should be payable in the first place would not, it seems to me, be a proper matter for consideration by the master.  That would be a matter that would require, it seems to me, separate proceedings (which have in fact been taken out in this context by a different owner of a ground floor unit in other High Court proceedings which are currently pending).  In my view, therefore, it cannot be said that the matter is res judicata or at any rate that it is sufficiently clearly so that there can be no bona fide dispute of substance arising on this ground alone. 

21. As to Mr Lee’s second point, this requires an assessment of what was likely to be the amount of costs involved at the time that the contract of retainer was entered into.  Mr Lee submitted that at that stage it could not possibly be said that the amount of the value of the services to be provided would be likely to exceed $100,000.  The most that could be said, he submitted, was that it was possible that they might exceed $100,000 but not that that was likely.  It seems to me that this is a matter which would require an inquiry into the circumstances at the time that the contract for legal services was entered into.  That is not an inquiry that can appropriately be undertaken in the context of the winding-up petition.  Thus, if there is a serious argument as to whether or not there was a breach of section 20A(2), it seems to me that the right course would be to conclude that there has been established a bona fide dispute of substance in this respect also. 

22. As to that, it seems to me that it could not be said that it was impossible to make an estimate of the likely costs that might be involved.  I have no doubt that most solicitors are well experienced and well able not just to provide an estimate or an indication of their hourly costs but also, if asked to do so, to provide a view as to the likely costs of any proceedings that will have to be taken.  Such information is generally necessary for a party to have available so that he can determine whether or not it is worth his while to take proceedings.

23. I also bear in mind that when the question of possible settlement was raised, it was indicated in response by the solicitors in question that there was no scope for them to advise their client to settle because of the impact of any settlement on the owners of upper floor units in that they would then be required each to pay a greater sum by way of contribution.  In the circumstances it seems to me that it is at least arguable that at the time when the contract for legal services was entered into it would have been appreciated or believed that there was a real risk or likelihood that the matter would not settle and would have to proceed to a full hearing, in which case the fees could well have exceeded $100,000 so that it might well have been the case that it could have been said even at that stage that the fees were likely to exceed $100,000. 

24. It is not, of course, for me to determine in these proceedings whether or not that is right.  All that I am entitled and required to do is to come to a view as to whether or not that is so seriously arguable as to give rise to a bone fida dispute of substance.  For the reasons which I have endeavoured to give, I am of the view that it is sufficiently arguable so as to give rise to a genuine dispute of substance in relation to the liability of the Company to make payment in respect of the costs allegedly incurred by the Incorporated Owners.

25. I would also add that Mr Lee also made the point in the context of the existing proceedings between another owner and the Incorporated Owners, in which the validity of the appointment of Messrs W K To & Company had been challenged, that the solicitors were not in fact parties to, or otherwise involved in those proceedings.  That does not seem to me to be a particularly relevant factor to take into account.  If either party, or indeed the solicitors themselves, had thought that it was desirable for the solicitors to be party to those proceedings so that they could be bound by the outcome of it, either party or the solicitors themselves could have applied for the solicitors to have been joined as a party to those proceedings.

26. I would also observe that in the present case, although the amount of the costs is some $440,000, given that there are some 20 ground floor units who are involved in the Lands Tribunal proceedings, it is likely that the amount to be paid by any single unit, if they all contribute, would be substantially less than that amount.  Indeed, as early as 30 March 2006, it was suggested by the solicitors representing the Company that they should collect the total amount of the costs and hold the sums received as stakeholders pending the outcome of the High Court Action, which is due to be tried at any time now, it having been now on the warned list for some two months.

27. Be that as it may, for the reasons which I have given I am satisfied that the Company has demonstrated the existence of a bona fide dispute of substance in relation to the debt asserted against it, and while I do not say that the Company will succeed in those proceedings, and I express any view only that its position is sufficiently arguable, it seems to me that in the circumstances the petition must be dismissed.

(Discussion on costs)

28. In the circumstances, having regard to my decision, I think the petition will have to be dismissed with the usual order for costs, so that the costs of the petition should be paid by the Petitioner to the Company, to be taxed on the party and party basis if not agreed.