THE INCORPORATED OWNERS OF GREENLAND VILLAS v. WONG SUI FUNG AND ANOTHER

LDBM 321/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Building Management Application No. LDBM 321 of 2000

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D E C I S I O N

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1. This is an application by the Respondents to strike out the entirety of the pleadings in the Applicant's Notice of Application (Grounds and Particulars) and the Applicant's Amended Reply on the ground that they disclose no reasonable cause of action.

2. The Applicant's claim is for the balance of unpaid Management Expenses from 1 April 1989 to March 1990, in the month of January 1998 and from 1 February 1998 to 17 July 2000 totalling $114,537.57. The Applicant was however incorporated on 18 July 2000. The Respondents submitted that the alleged outstanding sums and the accrued cause of action took place before the incorporation of the Applicant. As the obligation to pay the Management Expenses was one of contract and arose out of the Deed of Mutual Covenant of the Estate, the Respondents submitted that the Applicant had no locus standi to bring this claim.

3. The Respondents submitted that an owners' corporation could not assume those benefits and burdens attached under a deed of mutual covenant prior to its incorporation unless by a specific act of the corporation or by specific legislation. In making this submission, the Respondents relied on the cases of Hang Yick Properties Management Ltd. v. Incorporated Owners of Winner Building [1999] 3 HKC 574 and Koo Sun Yiu v. Victorison Delivery Ltd. & Ors. [1996] 4 HKC 152. In the case of Hang Yick, the plaintiff was appointed manager of a building in 1978 when a deed of mutual covenant was in place. The plaintiff was not a party to the deed of mutual covenant but the deed of mutual covenant confirmed that the plaintiff, as agent of the owners, was able to recover amounts unpaid. In 1994 the defendant was incorporated and the plaintiff was given notice of termination. The plaintiff claimed that the costs and expenses incurred prior to termination exceeded the management fees received and sued the defendant for the deficit. The court was asked to decide the issue of whether the defendant was liable for the expenses incurred prior to its incorporation.

4. Beeson J. in the Hang Yick case held that there was no contractual relationship between the plaintiff and the defendant, nor was there an agency relationship before or after the defendant's incorporation. In her judgment, Beeson J. said this:-

"The liabilities for management fees incurred prior to the termination of the plaintiff's appointment as manager could not be enforceable against the defendant in the absence of specific legislative provision requiring an owners' corporation to assume responsibility for pre-existing debts of that nature, or by some specific act of the corporation, once it came into existence, assuming responsibility, for debts previously incurred."

5. In fact, Beeson J. applied the decision of Cheung J. (as he then was) in the earlier case of Koo Sun Yiu, where it was also held that the corporation did not assume liabilities incurred prior to its incorporation. The ratio and deciding factor in the Hang Yick case was based upon fundamental principles of company law. At common law a company was not bound by a contract purporting to be entered into on its behalf by its promoters or other person before its incorporation. After incorporation it could not ratify or adopt any such contract because in such cases there was no agency and the contract was that of the parties making it. The Respondents submitted that one could also use the fundamental principle of privity of contract to make a similar argument.

6. In the present case, as submitted by the Respondents, there was no agency pleaded as between the former Owners' Association and the Applicant, nor was there any pleading of any act of the Applicant to ratify the contract or of any assignment as between the Owners' Association and the Applicant. The Respondent further submitted that there was nothing in the Building Management Ordinance, or anything pleaded, which provided for the automatic assignment of debts from one management entity to the next. The proper plaintiff in this case would have to be the former managers. However, the former managers did not have a locus standi to sue based on the Building Management Ordinance and the Hang Yick Case. The former Owners' Association might have abandoned its right to sue for the alleged outstanding management fees.

7. By reason of the aforesaid, the Respondents submitted that the Applicant did not have a right to sue the Respondents, and the Applicant's pleadings ought to be struck out as disclosing no reasonable cause of action.

8. The Applicant, on the other hand, submitted that the applicable principles in striking out were well founded and set out in the Hong Kong Civil Procedure 2002, Volume 1, Order 18 rule 19. The Applicant summarized the relevant principles as follows:-

"a. The application should always be made promptly and as a rule before the pleadings are closed.

b. It is only in plain and obvious cases that the Court should exercise its power summarily to strike out the claim.

c. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the Court will strike it out.

d. If there is a point of law which requires serious discussion an objection should be taken on the pleadings and an application made for determination of the point of law under Order 33 rule 3.

e. It is for the party seeking to strike out a pleading to demonstrate that the case is a plain and obvious one in which the other party's claim is bound to fail.

f. A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered. The mere fact that the case is weak and not likely to succeed is no ground for striking it out."

9. The Applicant submitted that the Respondents had failed to satisfy the Tribunal of the matters referred to in the above principles and the burden was on them to do so. In particular, the Respondents were late in making this application. The Notice of Application was issued on 12 October 2000. The present Application was made more than 2 years later and no explanation was given for the lateness. The Applicant submitted that on this point alone, the Tribunal should exercise its discretion not to entertain such an application.

10. The Applicant also submitted that it had at least a good arguable case. The Applicant referred to section 16 of Building Management Ordinance, Cap. 344 ("the BMO"), which reads as follows:-

"When the owners of a building have been incorporated under section 8, the rights, powers, privileges and duties of the owners in relation to the common parts of the building shall be exercised and performed by, and the liabilities of the owners in relation to the common parts of the building shall, subject to the provisions of this Ordinance, be enforceable against, the corporation to the exclusion of the owners, and accordingly-

(a) any notice, order or other document which relates to any of the common parts of the building may be served upon the corporation at its registered office; and

(b) any proceedings in the tribunal in respect of any of the common parts of the building may be brought and pursued by or against the corporation."

11. In Grenville House Ltd & Ors v. Incorporated Owners of Grenville House [1978] HKLR 235, McMullin J. found that under section 16 of the Multi-storey Buildings (Owners Incorporation) Ordinance (now the BMO), the rights and duties of the corporation in matters of suit touching the common parts of the property were limited to circumstances which concerned all the owners as a result of their joint interest in the due maintenance management and control of those parts. At page 243, McMullin J. concluded that :-

"For those limited purposes the body of the owners may be said to consist of every individual who ever has been a constituent of the corporation. It matters not that at the time of issuing the writ the body of the constituents is not the same as it was at the time of accrual of the action any more than it would matter that that body is not the same at the time of judgment even though it had been the same at the time of issue of the writ. In pursuing those purposes it is serving the interests of all including those who are no longer constituents but have been damnified and those who are now constituents and have never been damnified. For a major purpose of the incorporation of the owners is to facilitate convenience in suit."

12. In the Koo Sun Yiu case, Cheung J. considered the Grenville House case and said that:-

"It is clear from the facts of Grenville House that the corporation there came into existence before the tort was committed. Although McMullin J said that it matters not that at the time of issuing the writ the body of the constituents is not the same as it was at the time of accrual of action, the learned judge was not dealing with a situation such as the present where the corporation only came into existence after the tort was committed."

13. Whilst Cheung J. acknowledged the Greenville House case as binding authority in respect of liabilities arising after incorporation, he pointed out that in the Koo Sun Yiu case the tortious liability had arisen before the incorporation and therefore distinguishable. Accordingly Cheung J. held that the corporation was not responsible for the tort committed prior to its incorporation.

14. The Applicant submitted that the Estate in the present case, i.e. Greenland Villas, was previously managed by Chiap Hua Property Management Limited as the Manager appointed under the Deed of Mutual Covenant. Chiap Hua was the Manager from 1986 to 1989 and thereafter resigned from the job. The Owners' Association was then managing the Estate until the incorporation of the Applicant on 18th July 2000. But the fees collected by the Manager did not belong to the Manager. The Manager was only acting as agent collecting the fees on behalf of all the owners in the Estate. With or without the appointment of the Manager, the Respondents were required to pay the fees to the owners.

15. Just before the date of incorporation of the Applicant, all the owners in the Estate would have a cause of action against the Respondents for the arrears of fees and therefore could have joined in to sue the Respondents. With the incorporation, the owners had a further choice under the BMO to sue the Respondents in the name of the Corporation (i.e. the Applicant) as the owners have a common interest in the management fees as provided under section 18(2)(g) of the BMO.

16. In the case of Incorporated Owners of Block F1-F7 Pearl Island Holiday Flats v. Incorporated Owners of Pearl Island Garden & Anor. [1997] 4 HKC 424, the Court of Appeal had to consider the meaning of section 18(2)(g) of the BMO. At page 428, Liu J.A. said:

"I agree with my Lord Godfrey JA's conclusion on locus standi on a purposive construction of s18(2)(g). It would seem to be an interpretation endorsed by common sense for avoiding the joinder of a great many flats owners in litigation and other matters.

Section 18(2)(g) of the Building Management Ordinance (Cap 344) reads:

A Corporation may, in its discretion - act on behalf of the owners in respect of any other matter in which the owners have a common interest.

In the other paragraphs of sub-s (2), the corporation may act on its own to 'pay', 'retain and remunerate', 'retain and remunerate', 'insure and keep insured', 'purchase, hire or otherwise acquire' and 'establish and maintain'. There is little to be said for the proposition that the corporation must not sue in its own name in the last paragraph. Section 18(2)(g) has not sought to introduce the relationship of agency which would necessitate the observance of the robust common law rule for suing in the names of the principals. After all, the phrase 'on behalf of' has no strict legal meaning and may be used in conjunction with a wide range of relationships.....

In the long title of the Building Management Ordinance (Cap 344), its purpose is given as facilitating 'the incorporation of owners of flats in buildings or groups of buildings, to provide ... for matters incidental thereto or connected therewith'. In this way, a multitude of flat owners may simply be represented by the body corporate. When introducing this legislation in the Legislative Council, Sir Denys Roberts, the then Attorney General stated its object as enabling 'the owners of multi-storey buildings to form themselves into a corporation which would have the power to deal on their behalf with matters of common interest to them as co-owners'."

17. The Applicant further submitted that in the Hang Yick case, the Court was concerned with liabilities of the corporation. The manager there sued the corporation for arrears of fees before its incorporation and failed. But the manager could have sued all the owners for the respective period of default. Section 16 of the BMO did not deal specifically with liabilities prior to the incorporation nor did it specifically restrict the extent of the liabilities. Similarly, the Koo Sun Yiu case was concerned with liabilities of the corporation. The injured plaintiff there could have sued all the owners of the property at the time of the tortious act.

18. The Applicant also referred to the recent case of Incorporated Owners of Million Fortune Industrial Centre v. Jikan Development Ltd & Anor [2002] 4 HKC 33, where the major point taken on behalf of the first defendant was that the plaintiff could not sue in respect of any wrongs which had been committed prior to its incorporation. The Court of Appeal in that case did not find favour with the restriction on the right to sue for wrongs committed prior to incorporation and held that the plaintiff incorporated owners had the right to take action on behalf of the owners collectively by virtue of section 16 of the BMO to enforce reimbursement of the parking fees which had been passed to the first defendant. At page 40, Rogers VP said this:-

"However, the major point taken on behalf of the first defendant was that the plaintiff could not sue in respect of any wrongs which had been committed prior to its incorporation. It was said that any right of action was a personal right which did not run with the land but was a right which belonged to each individual owner at the time that the wrong was committed. The upshot of the argument, from which Mr. Ho did not shrink, was that if parking fees which should have been paid into the management sink fund were otherwise diverted, the right of action lay in each individual owner. If the manager were not prepared to take action, then every person or company who was an owner at the relevant time would have to take action to enforce the provisions of cl 8(b) of the DMC in order to ensure that the monies were paid over. This, it was said, was despite the fact that the owners individually were not entitled to any sums and that claimed monies recovered were required to be credited to the management sink fund.

This wholly unattractive argument would lead to litigation which could only be described as inconvenient and cumbersome. But in my view there is a short answer to this point. The monies which the manager received as parking fees in respect of car and lorry parking in the common parts was money which was impressed with a trust."

19. The Applicant therefore submitted that the Respondents owed the Management Expenses under the Deed of Mutual Covenant to all the other owners of the Estate and the owners were pursuing their claim in the name of the Applicant by virtue of the BMO. This case was not concerned with liabilities of the Applicant. The Applicant had taken over the duties and rights of the owners and was suing for outstanding Management Expenses.

20. In the circumstances, the Applicant submitted that it had at least a good arguable case in respect of the defence of "incorporation".

21. I accept the submissions of the Applicant. I agree with the general principles in striking out applications as summarized by the Applicant above. I should therefore strike out the Applicant's claim only if it is plain and obvious that the Applicant cannot make a claim for debts owed to the owners of the Estate prior to the incorporation of the Applicant. However, from the above authorities, I cannot come to that conclusion. In particular, the case of Incorporated Owners of Million Fortune does give a strong support to the Applicant's contention that it can make a claim for the Management Expenses owed before its incorporation. The cases of Hang Yick and Koo Sun Yiu relied on by the Respondents are only in relation to pre-existing liabilities of owners' corporation. They are not direct authorities on whether an owners' corporation can bring an action for pre-incorporation debts. So I agree with the Applicant that there is at least an arguable case for the Applicant to bring the present action.

22. As the Respondents are not making an application to seek for a determination in this preliminary issue, it is not necessary for me to decide whether the Applicant can indeed make a claim for pre-incorporation debts. I shall therefore leave that decision to the appropriate stage. I do however find that the Applicant has a reasonable cause of action by virtue of section 16 of the BMO. Section 16 stipulates that when the owners of a building have been incorporated, the rights, powers, privileges and duties of the owners in relation to the common parts of the building shall be exercised and performed by the corporation to the exclusion of the owners. The Management Expenses were incurred in relation to the common parts of the Estate. Although section 16 does not expressly state that it applies to pre-existing rights, the case of Incorporated Owners of Million Fortune makes it at least arguable that the incorporated owners has the right to enforce reimbursement of pre-existing debts by virtue of section 16. By the same token, it is also arguable that the Applicant can claim the pre-incorporation Management Expenses in the present case. In fact, it is the Respondents' own submission that an owners' corporation cannot assume those benefits and burdens attached under a deed of mutual covenant prior to its incorporation, unless by specific legislation. Section 16 may well be such a specific legislation conferring the benefit and burden to the owners' corporation.

23. I do not agree with the Respondents that the Applicant has to plead in its pleadings the matters concerning agency, or any act of the Applicant to ratify the contract or of any assignment as between the Owners' Association and the Applicant. The Applicant's case is not based on agency or any act of ratification or assignment, but by the operation of section 16 of the BMO. The operation of section 16 is purely a matter of law. It is trite law that it is unnecessary to plead points of law in the pleadings. I therefore do not find any objection in the Applicant's pleadings when they do not contain the matters referred to by the Respondents.

24. Thus, I am of the view that the Applicant's pleadings are not bad in their present forms, and the issue concerning section 16 of the BMO does require serious discussion. I cannot say that it is impossible for the Applicant's claim to succeed at the trial, and as such there must be a reasonable cause of action for the claim to proceed.

25. Moreover, in their Notice of Opposition dated 4 November 2000, the Respondents have already raised the contention that the Applicant is not empowered by the BMO to recover the Management Expenses prior to its date of incorporation. Nevertheless, the Respondents have only taken out the application for striking out the Applicant's pleadings more than 2 years later on 6 November 2002. Although the Respondents have tried to explain at the hearing of the application that there were some negotiations going on between the parties, I do not accept that it is right for the Respondents to take out such an application at such a late stage when the case is in fact ready for trial. Negotiations should be conducted in parallel to the court proceedings, and there is no reason at all to wait for about 2 years for the outcome of the negotiations. I therefore agree with the Applicant that on this ground alone I should not entertain the application for striking out.

26. In the circumstances, I do not find any merit in the Respondents' application and I order as follows:-

(1) The Respondents' application by way of Inter Partes Summons dated 6 November 2002 be dismissed; and

(2) Costs order nisi: The Respondents do pay the costs of the said application to the Applicant in any event with certificate for counsel, to be taxed if not agreed. If there is no further application on costs by any party within 14 days from the date hereof, the costs order nisi shall become absolute.