CHOW CHUI CHUI AND OTHERS v. KAFULL INTERNATIONAL LTD AND OTHERS

CACV 33/2015 AND CACV 34/2015
CACV 33/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 33 OF 2015

(ON APPEAL FROM LDBM NO. 299 OF 2012)

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CACV 34/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 34 OF 2015

(ON APPEAL FROM LDBM NO. 108 OF 2013)

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(Heard together)

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REASONS FOR JUDGMENT AND
DECISION ON COSTS

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Hon Yuen JA:

1. I agree with Kwan JA’s Reasons for Judgment and Decision on Costs.

Hon Kwan JA:

2. We are concerned with two appeals on a point of law from the judgment of the Lands Tribunal given by the Presiding Officer, Deputy Judge Tracy Chan, on 4 September 2014.  Stated shortly, the point of law is whether each of the owners of sub-divided units in the non-domestic portion of a building owning undivided shares in the land and building pursuant to two sub-deeds of mutual covenant (“Sub-DMCs”) would fall within the definition of “owner” of a “flat” under the Building Management Ordinance, Cap 344 (“BMO”), for the purpose of being counted towards the necessary quorum at a general meeting of the corporation of owners.

3. We allowed the appeals at the conclusion of the hearing and reserved our decision on costs.  These are my reasons for our judgment and my decision on costs.

Background

4. The relevant background matters may first be related as follows.

5. Ka Wing Building (“the Building”) is situated at Nos 534 to 538 Nathan Road, Kowloon, Hong Kong.  It consists of four levels of non-domestic floors from the ground floor to the 3^rd floor (“the Non-Domestic Portion”) and residential units from the 4^th to 21^st floors (“the Domestic Portion”).  The occupation permit of the Building was issued on 3 December 1973.

6. A deed of mutual covenant (“the Main DMC”) was made on 16 January 1974.  Under the Main DMC, the land and the Building have been notionally divided into 155 equal undivided shares and allocated in the following manner:

(a)  48 shares to the shop on the ground floor;

(b)  36 shares (12 shares each) to the non-domestic accommodation on the 1^st to 3^rd floors;

(c)   70 shares to the 4^th to 21 floors being one share for each domestic flat (there are four flats on each of the 4^th to 20^th floors and two flats on the 21^st floor); and

(d)  one share to the main roof, external walls and the spaces on the ground floor.

7. It was provided in the Main DMC that the management of the non-domestic units shall be entirely separate and distinct from the management of the remainder of the Building and shall not be undertaken by the manager appointed under the Main DMC for the remainder of the Building (clause 4(a)).  Owners of units in the Non-Domestic Portion do not have to pay management fees and expenses to the manager appointed for the Domestic Portion (clauses 7V(A) and (D)).

8. Two first assignments were executed by the developer to the same purchaser on 16 January 1974.  By one assignment, 64 equal undivided shares were assigned to the purchaser with the exclusive right to use and occupy portions A and C of the ground floor and the 1^st to 4^th floors.  By the other assignment, 24 equal undivided shares were assigned with the exclusive right to use and occupy portion B of the ground floor.

9. The corporation of owners (“the IO”) of the Building was incorporated on 4 March 1974.

10. On 15 September 1997, the 1^st Sub-DMC was executed, by which the ground floor (then divided into portions A, B and C) was re-divided into five shops and each was allocated undivided shares in this manner:

(a) Shop 1A with 5% of the 48 equal undivided shares (or 5/100^th of and in 48/155^th shares);

(b) Unit 1B with 5% of the 48 equal undivided shares (or 5/100^th of and in 48/155^th shares);

(c) Unit 9 with 5% of the 48 equal undivided shares (or 5/100^th of and in 48/155^th shares);

(d) Shop 2 with 40% of the 48 equal undivided shares (or 40/100^th of and in 48/155^th shares); and

(e) Shop 3 with 45% of the 48 equal undivided shares (or 45/100^th of and in 48/155^th shares).

11. On 16 December 1998, the 2^nd Sub-DMC was made with the creation of a new commercial complex called In’s Point Plaza (“the Plaza”).  The Plaza was formed by merging Unit 1B and Unit 9 on the ground floor and the 1^st to 3^rd floors of the Building with certain floors on the same level of two adjacent buildings, Wing Kiu Building and Cheung Hing Building.

12. By the 2^nd Sub-DMC, the 1^st and 2^nd floors of the Building were sub-divided into shop units.  Units 139 to 181 (41 shop units) are on the 1^st floor of the Building and Units 239 to 281 (43 shop units) are on the 2^nd floor of the Building.  For the purposes of sale, the 1^st floor and 2^nd floor of the Plaza have been notionally sub-divided into various equal undivided parts or shares and sub-allocated to various units of the Plaza as set out in the 2^nd schedule to the 2^nd Sub-DMC.  Each owner shall have the fullest right and liberty without any consent of or reference to the other party to sell, mortgage or otherwise dispose of his share and interest in the land and Building and the unit of the Plaza of which he is entitled to exclusive use and occupation, but subject to and with the benefit of the Main DMC and the 1^st and 2^nd Sub-DMCs (clause 12 of the 2^nd Sub-DMC).  A manager was appointed for the management of the Plaza.

13. On 15 October 2011, at a general meeting of the IO attended by a number of owners of flats in the Domestic Portion, resolutions were passed for the renovation of the Building and the contributions to be paid by the owners for that purpose.  A number of owners then requisitioned a general meeting of the IO pursuant to paragraph 1(2) of Schedule 3 of the BMO.  As a result, the chairman of the IO convened the meeting on 4 August 2012.

14. The proposed resolutions as amended at that meeting included the invalidation of the contribution resolutions, the removal and replacement of the existing management committee and the election of a new management committee.  Before the resolutions were voted on, the chairman left the meeting with a group of owners.  The owners who remained were 14 owners from the Non-Domestic Portion and two from the Domestic Portion (one of them also owned a shop unit in the Non-Domestic Portion).  They passed unanimously the proposed resolutions as amended (“the 4 August Resolutions”).

15. The members of the management committee who were removed by the 4 August Resolutions brought proceedings in the Lands Tribunal on 9 November 2012 (LDBM 299/2012), seeking a declaration that the resolutions are null and void on the ground that the meeting on 4 August 2012 was inquorate by virtue of paragraph 5(1)(b) of Schedule 3 of the BMO, which provides that the quorum shall be 10% of the owners.  The new management committee then brought proceedings in the name of the IO on 17 April 2013 (LDBM 108/2013) against the members of the former management committee, seeking an order for the return of all books, records and properties of the IO and various injunctive reliefs, and a declaration that the members of the new management committee were duly appointed.

The judgment of the Lands Tribunal

16. Mr Paul Wu, who appeared for members of the former management committee before the Lands Tribunal and on appeal, contended that in the enumeration of owners for the purpose of the quorum, the only relevant document is the Main DMC, and on a proper construction of that document, the number of units in the Non-Domestic Portion is just four (one for each of the ground floor, 1^st to 3^rd floors).  As the total number of flats or units in the Building should be 74 (70 for the Domestic Portion and just four for the Non-Domestic Portion), the quorum for the meeting would be eight.  On his reasoning, notwithstanding 16 owners had cast their votes at the meeting, only four at most could be counted as owners from the Non-Domestic Portion and two from the Domestic Portion, so there was an insufficient quorum for the meeting.

17. The judge agreed with Mr Wu.  Her reasoning was along these lines.

18. Reading the two first assignments and the Main DMC together, although the ground floor was divided into portions A, B and C and conveyed under two assignments, the ground floor was considered just one unit in the Main DMC.  It was mentioned in paragraph (5) of the preamble that “By an assignment”, 88 equal undivided shares were assigned to the purchaser with the full right to hold, use and occupy the ground, 1^st, 2^nd, 3^rd and 4^th floors of the Building.  And there was no individual allocation of shares to Portions A and C of the ground floor in the Main DMC.  They were collectively counted as 24 equal undivided shares in the relevant first assignment.

19. The judge noted that the ground to 3^rd floors were collectively referred to in the Main DMC as “the non-domestic units” (paragraph (4)(b) of the preamble) and the word “unit” in the Main DMC shall include “any flat, shop or other area of non-domestic accommodation in the said building … intended for separate use and occupation” (paragraph (4)(a) of the preamble).  She took the view that paragraph (4) of the preamble is not inconsistent with the meaning of “flat” as defined in section 2 of the BMO (being “any premises in a building which are referred to in a deed of mutual covenant whether described therein as a flat or by any other name and whether used as a dwelling, shop, factory, office or for any other purpose, of which the owner, as between himself and owners or occupiers of other parts of the same building, is entitled to exclusive possession”).  Hence, she concluded that one non-domestic floor in the Main DMC should be taken as one “flat” for the purpose of Schedule 11 of the BMO, which governs the enumeration of owners for the purpose of calculating the quorum.  She held that under the Main DMC, there were four “flats” in the Non-Domestic Portion (§36 of the judgment).

20. The judge further reasoned that the sub-division of units under the Sub-DMCs cannot increase the number of flat owners for the purpose of Schedule 11 of the BMO.  This is because owners under the Main DMC are not parties to the Sub-DMCs and cannot be bound, so only those units or flats referred to in the Main DMC can be counted as “flats” according to section 2 of the BMO (§42 of the judgment).  The sub-divided units cannot be counted for this purpose as they have not been referred to in the Main DMC.  In support of her analysis, the judge referred to the judgment of Reyes J in Rightop Investment Ltd & Anr v Yu Tsui Sheung & Ors [2005] 1 HKC 550 and the judgment of the Court of Appeal in Incorporated Owners of Po Lok Building v Leung Koon [2006] 1 CLRT 118.

21. As the judge held there are only four flats in the Non-Domestic Portion, only four owners could have been entitled to vote.  Since there was one common owner for a domestic flat and a non-domestic flat[1], only five owners could be counted towards the quorum.  This fell short of the number of eight to make up the quorum and the 4 August Resolutions were therefore invalid.

22. CACV 33/2015 was an appeal brought by two of the members of the new management committee against the judge’s decision in LDBM 299/2012.  CACV 34/2015 was an appeal brought by the IO against the judge’s decision in LDBM 108/2013.

These appeals

23. Mr Frederick Chan argued for the appellants that whether the Main DMC had expressly referred to the sub-divided shop units was irrelevant.  The proper inquiry should be whether the owners of the shop units in the Non-Domestic Portion have satisfied the statutory definitions of an “owner” of a “flat” in a “building” under a “deed of mutual covenant” in section 2 of the BMO.  He submitted that properly construed, the owners of the shop units do fall within the definition of “owner”, that the 2^nd Sub-DMC is within the definition of a “deed of mutual covenant”, and as each and every shop unit which had been carved out is carrying with it the respective number of undivided shares allocated under the 2^nd Sub-DMC and each owner is entitled to exclusive possession of his own unit, all the shop units would have satisfied the definition of “flat”.  The judge was wrong to just focus on the Main DMC to determine what is a unit or flat for the purpose of computing the quorum.  And the cases of Rightop and Incorporated Owners of Po Lok Building relied on by the judge do not assist because they were involved with different issues.

The statutory provisions

24. We are here concerned with the quorum for the general meeting of a corporation of owners.  It is provided in section 8(5) of the BMO that Schedule 3 “shall have effect with respect to the meetings and procedure of a corporation”.

25. Paragraph 5(1)(b) of Schedule 3 provides that the quorum of a meeting of the corporation shall be “10% of the owners in any other case”.

26. Section 5B of the BMO governs the enumeration of owners for this purpose and reads as follows:

“Schedule 11 shall have effect with respect to the enumeration of the percentage of owners referred to in the provisions of the Ordinance specified in that Schedule in the case where, in those provisions as so specified, a reference to a percentage of the owners is –

(a) to be construed as a reference to the total expressed percentage of the number of persons who are owners without regard to their ownership of any particular percentage of the total number of shares into which the building is divided; and

(b)  not to be construed as the owners of the total expressed percentage of the shares.”

(Emphasis provided)

27. Schedule 11 provides that for the purposes of section 5B, paragraph 5 of Schedule 3 is one of the provisions specified and the enumeration of the percentage of owners mentioned therein shall be computed as follows –

“ Form of ownership	Illustration	To be counted as
1.  Multiple ownership of 1 flat	1 flat with 3 co-owners	1 owner
2.  1 owner owning more than 1 flat	1 owner owning 35 flats	1 owner
3.  1 person or more than 1 holding proxies from more than 1 owner	(a) 1 person holding proxies from 100 owners (b) 35 persons holding proxies from 100 owners in aggregate	Voting rights equal to the number of valid proxies held.  In the cases as illustrated, 100 owners.”

28. Some key words in the above statutory provisions have been defined in section 2.  The statutory definitions in section 2 apply “unless the context otherwise requires”.

29. “Owner” is defined to mean “(a) a person who for the time being appears from the records at the Land Registry to be the owner of an undivided share in land on which there is a building”.

30. “Share”, referred to in the above definition, is defined to mean “the share of an owner in a building determined in accordance with section 39”.  And section 39 provides that “an owner’s share shall be determined – (a) in the manner provided in an instrument including a deed of mutual covenant (if any) which is registered in the Land Registry”.

31. “Deed of mutual covenant” is defined to mean “a document which – (a) defines the rights, interests and obligations of owners among themselves; and (b) is registered in the Land Registry”.

32. “Flat”, referred to in Schedule 11, is defined to mean “any premises in a building which are referred to in a deed of mutual covenant whether described therein as a flat or by any other name and whether used as a dwelling, shop, factory, office or for any other purpose, of which the owner, as between himself and owners or occupiers of other parts of the same building, is entitled to the exclusive possession”.

33. And lastly, “building” referred to in some of the definitions above, is defined to mean “(a) any building which contains any number of flats comprising 2 or more levels, including basements or underground parking areas; (b) any land upon which that building is erected”.

Construing the statutory provisions

34. The question here is whether an owner of a sub-divided shop unit in the Building is an “owner” of a “flat” for the purpose of section 5B and Schedule 11.

35. An owner of a sub-divided shop unit was assigned an undivided share in the land and the Building as allocated in one of the Sub-DMCs, and is entitled to the exclusive possession of his shop unit as between himself and other owners and occupiers of the Building.  He is the registered owner of his undivided share or interest in the land and the Building as appears from the records of the Land Registry.

36. On the plain wording of the statutory definitions, it seems to me that an owner of a sub-divided shop unit in the Building should be an “owner” of a “flat” for present purpose, unless the context would indicate otherwise.

37. Mr Wu submitted that the statutory provisions should be construed differently.  He pointed to the definition of “flat”, which means “any premises in a building which are referred to in a deed of mutual covenant … of which the owner, as between himself and owners or occupiers of other parts of the same building, is entitled to the exclusive possession.”  He submitted that a sub-divided unit cannot be “premises in a building which are referred to in a deed of mutual covenant”, because (a) a sub-divided unit is not referred to in the Main DMC; and (b) the Sub-DMCs are not the deed of mutual covenant of “a building”.  Further, the right of exclusive possession is not “as between himself and owners or occupiers of other parts of the same building”, as the 2^nd Sub-DMC deals with shop units in the Plaza which consists of the premises in three buildings.

38. I do not agree with Mr Wu’s interpretation.

39. There is nothing in the statutory definitions that restricts a “deed of mutual covenant” to the deed of mutual covenant of an entire building so as to exclude the deed of mutual covenant for part of a building.  A “deed of mutual covenant”, as defined, is simply a document which “(a) defines the rights, interests and obligations of owners among themselves; and (b) is registered in the Land Registry”.  The owner of a sub-divided unit is clearly an “owner” as defined, being “a person who for the time being appears from the records at the Land Registry to be the owner of an undivided share in land on which there is a building”.

40. It is immaterial that there is no express reference in the Main DMC to the sub-division of the undivided shares attached to the Non-Domestic Portion of the Building.  What matters is that there is no prohibition against any such sub-division in the Main DMC.  Indeed, it is envisaged in the Main DMC there could be further division of the undivided shares. Clause 4(d) reads as follows:

“If at any time, the non-domestic units are in different ownership, the owner of each shall be responsible for the obligations hereunder in respect of his own unit and all joint obligations shall be shared in the proportion of 48 shares for the owner of ground floor and 12 shares for the owner of each of first to third floors (inclusive).”

41. In paragraph (4) of the preamble, it is provided that for the purpose of the deed, unless the context shall otherwise require, the word “unit” shall include “any flat, shop or other area of non-domestic accommodation” in the Building.

42. Unless there is clear indication to the contrary, having regard to the fact that provision has been made in the Main DMC for owners of sub-divided units to share in the joint obligations of the owners of the Non-Domestic Portion, it would not be reasonable to construe the relevant provisions in such a manner as to exclude the owners of sub-divided units from being counted in the quorum for a general meeting of owners.

43. Nor do I think the owners of sub-divided units would fall foul of the latter part of the definition of “flat” just because the 2^nd Sub-DMC deals with the units in three different buildings.  There is nothing to suggest that the exclusive possession conferred by the 2^nd Sub-DMC on the owner of a shop unit that is within the Building is not “as between himself and owners or occupiers of other parts of the same building”.  Clause 12 of the 2^nd Sub-DMC, by which exclusive use and occupation is conferred, is subject to and with the benefit of the Main DMC, the 1^st Sub-DMC and the 2^nd Sub-DMC.

44. Mr Wu also submitted that owners of shop units should be treated as akin to co-owners, so they should not be counted separately for the purpose of the quorum and could only be counted as one flat owner.  But that is to disregard the definition of “flat” in the counting of flat owners for the quorum.  An important feature of a “flat” is the right of exclusive possession of the flat owner as between himself and owners or occupiers of other parts of the building.  As each owner of a shop unit has exclusive possession of his unit, each should qualify as a flat owner.  There is no legal justification in treating just one out of a number of owners of shop units as a flat owner.

45. The judge made reference to the cases of Rightop and Incorporated Owners of Po Lok Building.  I agree with Mr Chan they do not assist in the construction of the relevant provisions.

46. As pointed out by Mr Chan, Rightop dealt with an entirely different issue, namely, whether Part VIA of the BMO applied to the non-domestic portion of a building such that the non-mandatory terms of Schedule 8 of the BMO could be impliedly incorporated into the sub-DMC pursuant to section 34F.  It was in that context that Reyes J, having referred to section 34C (which provides that Part VIA “applies only to a building in respect of which a deed of mutual covenant is in force”), said at §34 the words as quoted by the judge, namely, that the sub-DMC plainly does not apply to the whole of the building as it merely relates to the commercial areas being a small portion of the whole.  It does not follow from that, as contended by Mr Wu, that a sub-DMC is not a “deed of mutual covenant” as defined in section 2.  The applicability of Part VIA, which is governed by section 34C, has no bearing on the separate question whether the owner of sub-divided units allocated in a sub-DMC could be regarded as an “owner” of a “flat” for the purpose of section 5B and Schedule 11.

47. As for Incorporated Owners of Po Lok Building, the court was dealing with the question whether the incorporated owners had the right to interfere with the arrangements made by the owners in the commercial portion of the building in a sub-DMC.  It was in that context that Yeung JA (as he then was) said in §36 that the sub-DMC arrangement only concerned the owners of the commercial portion and had nothing to do with the other owners of the building and as long as the owners of the commercial portion as a whole performed their obligations under the DMC, the corporation had no right to interfere with the arrangements under the sub-DMC.  It is not relevant to the present debate.

48. For the above reasons, I hold that an owner of a sub-divided shop unit in the Non-Domestic Portion of the Building does fall within the meaning of “owner” of a “flat” for the purpose of section 5B and Schedule 11.  The judge was in error in holding that only those units or flats referred to in the Main DMC could be counted towards the quorum and an entire non-domestic floor in the Building should be taken as one “flat” for the purpose of the relevant provisions.

The total number of flat owners at the meeting and the quorum

49. The appellants’ solicitors have helpfully compiled a table setting out the total number of owners attending the meeting that should be counted on the appellants’ case, as taken from the sign-in sheets of the meeting.  The accuracy of the figures in the table was not disputed.

50. According to the table, as at the date of the meeting, there were a total of 162 units in the Building[2], made up of:

(a)  five units on the ground floor;

(b)  41 units on the 1^st floor;

(c)   43 units on the 2^nd floor;

(d)  one unit on the 3^rd floor;

(e)   six units on the 4^th floor;

(f)   four units on each of the 5^th to 20^th floors; and

(g)  two units on the 21^st floor.

51. In accordance with Schedule 11, after excluding the overlapping owners holding more than one unit or “flat” of the 162 units in the Building, the total number of owners for the purpose of section 5B and Schedule 11 would be reduced from 162 to 85.  As the quorum for a general meeting of the corporation of owners is 10% of the owners, the figure yielded is nine.

52. As shown in the table, excluding the overlapping owners holding more than one unit or “flat” in the Building, the number of flat owners present when the meeting commenced was 39 and the number of flat owners present when the votes were cast was 16.

53. As the number of owners present throughout the meeting had exceeded nine to make up the quorum, the meeting was quorate.

54. All the owners present and voting had voted in favour of the 4 August Resolutions.

55. We were given to understand by the parties that apart from taking the point about the lack of a quorum, no other challenge was made to the validity of the resolutions.

56. After we announced that the appeals would be allowed, the parties were able to reach agreement on the consequential reliefs to be granted and we have made the orders as agreed.

Costs

57. We have heard arguments on costs.

58. Mr Wu urged the court to make no order as to costs or to award only part of the costs to the appellants here and below.  He prayed in aid section 29A(1) of the BMO, contending that the former members of the management committee had brought these proceedings in good faith as the renovation of the Building was for the common good of the owners.

59. I do not think the former members of the management committee can bring themselves within section 29A(1).  That provision is for the protection of members of a management committee in respect of any act done or default made by or on behalf of the corporation in the exercise or purported exercise of powers conferred by the BMO on the corporation, or in the performance or purported performance of the duties imposed by the BMO on the corporation.  That is just not the situation here.

60. I am not persuaded that costs should not follow the event both in the court below and on appeal.  And there is no sufficient justification to deprive the successful parties of part of their costs.

Orders

61. I set out the orders we made at the conclusion of the hearing and the orders I would propose to make on costs here and below.

62. In CACV 33/2015 (on appeal from LDBM 299/2012), the orders are:

(1)  the appeal be allowed;

(2)  paragraphs 1 and 2 of the judge’s order on 4 September 2014 and the costs order nisi be set aside;

(3)  the application under LDBM 299/2012 be dismissed with costs to the 1^st to 3^rd and 5^th to 6^th respondents, to be taxed if not agreed, at the District Court Scale; and

(4)  the 1^st to 6^th applicants do pay the 1^st and 3^rd respondents the costs of the appeal, to be taxed if not agreed, at the High Court Scale.

63. In CACV 34/2015 (on appeal from LDBM 108/2013), the orders are:

(1)  the appeal be allowed;

(2)  paragraph 1 of the judge’s order on 4 September 2014 and the costs order nisi be set aside;

(3)  an order against the respondents and each of them for the return of all books or records of account, papers, documents and other records in respect of the control, management and administration of the Building together with any movable property belonging to the IO that are under his/her control or in his/her custody or possession pursuant to paragraph 5A, Schedule 2, of the BMO (alternatively, pursuant to paragraph 8(1), Schedule 7 of the BMO), including and not limited to the documents and properties identified in Schedule 1 of the Notice of Application in LDBM 108/2013, within 28 days from the date of the order (being 18 August 2016);

(4)  an order that the respondents are not entitled to and should forthwith cease to purportedly act in the name of the IO;

(5)  a declaration that the current members of the Management Committee of the IO were duly appointed at the IO meeting of 4 August 2012;

(6)  the 1^st to 4^th and 6^th to 7^th respondents do pay the applicant’s costs in LDBM 108/2013, to be taxed if not agreed, at the District Court Scale; and

(7)  the 1^st to 4^th and 6^th to 7^th respondents do pay the applicant’s costs of the appeal, to be taxed if not agreed, at the High Court Scale.

 

Hon Chow J:

64. I agree with Kwan JA’s Reasons for Judgment and Decision on Costs.