RE THE INCORPORATED OWNERS OF FOREMOST BUILDING

HCCW 47/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) NO. 47 OF 2004

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REASONS FOR DECISION

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1.  This is an application by an ex parte summons taken out by the liquidators of the Incorporated Owners of Foremost Building (respectively “the Corporation” and “the Building”) seeking two kinds of orders:

(1)	directions pursuant to section 200(3) of the Companies Ordinance, Cap. 32 to aid the liquidators in determining the assets and liabilities of the Corporation; and
(2)	sanction pursuant to section 199(1) of Cap. 32 to take steps ultimately to discharge all the Corporation’s debts and liabilities and to bring the winding up of the Corporation to a conclusion.

2.  The summons was served on the Official Receiver and the Official Receiver has appeared by counsel at the hearing.

3.  I understand from Mr Korff, who appeared for the liquidators, that the liquidators were not aware of the order for appointment of a committee of inspection made on 23 May 2005 until that order was sealed on 5 July 2005.  Members of the committee of inspection have been informed of the liquidators’ present application and they have no objection.

4.  The Corporation was wound up by the Court on 29 March 2004 pursuant to section 33 of the Buildings Management Ordinance, Cap. 344 (“the BMO”).  The Corporation was wound up on a petition presented by judgment creditors on a debt of HK$3,997,047.00.  The judgment debt was founded on a personal injury action for the death of a Swedish tourist caused by debris falling from the external walls of the Building in about April 1996.

Determining the assets and liabilities of the Corporation

5.  The liquidators have identified two major components of the assets of the Corporation:

(1)	assets in hand of HK$220,009.78; and
(2)	a right of action against the owners in the Building under section 34 of the BMO.

6.  Section 34 of the BMO provides as follows:

“	34.	Liability of owners on winding up
		In the winding up of a corporation under section 33, the owners shall be liable, both jointly and severally, to contribute, according to their respective shares, to the assets of the corporation to an amount sufficient to discharge its debts and liabilities.”

7.  I agree with Mr Korff that this provision gives the liquidators a right of action against each of the owners and that a right of action or a chose in action may properly be regarded as an asset of the Corporation, see definition of “property” in section 3 of the Interpretation and General Clauses Ordinance, Cap. 1 and section 197 of Cap. 32.  I have therefore given a direction as per paragraph 1(c) of the summons that the right of action pursuant to 34 of the BMO can be regarded as an asset of the Corporation.

8.  The liquidators also sought a direction on determining the value of the right of action under section 34.  It was submitted that the amount recoverable by the liquidators is defined by section 34 to be an amount sufficient to discharge the Corporation’s debts and liabilities, that is, the total debts and liabilities less the value of the assets in hand.  On the premise that there is no need to provide for what is referred to as “Surplus Interest” as shall be dealt with below, the liquidators have quantified this amount at HK$16,296,852.60.

9.  The value of the right of action under section 34 would appear to be equivalent to the value of the owners’ assets available to meet any judgment obtained by the liquidators pursuant to that provision.

10.  The Building has a total of 116 undivided shares spread among 69 owners.  On a “desktop” valuation obtained by the liquidators, the open market value of the Building is approximately HK$210,000,000.00.

11.  I gave a direction as sought in paragraph 1(d) of the summons that the value of the right of action pursuant to section 34 of the BMO can be equated to the amount needed to discharge the debts and liabilities of the Corporation as defined in that provision.

12.  I turn to the liabilities.  The liquidators have identified two categories of liabilities:

(1)	external liabilities; and
(2)	estimated costs and expenses.

Again, this is on the premise that the Surplus Interest is not to be regarded as a liability of the Corporation.

13.  The external liabilities were determined by the proof of debt process.  There are three external creditors with a total claim of HK$8,643,993.82, of which the claim of the petitioning creditors of HK$8,585,146.16 represents the largest portion.

14.  For the estimated costs and expenses, this item is estimated at HK$8,050,739.60.  The estimated costs and expenses, save for the ad valorem fees payable in respect of recoveries from the owners, are of course subject to taxation and review by the court.  The liquidators propose to cover these estimated costs and expenses by collecting them from the owners in advance to form a contingency fund as explained below.  The principle remains that after taxation, any excess collected from the owners will be returned to them, while any deficit will also be sought from them.  Any refund to the owners will be made subject to the priority rules under rule 179 of the Companies (Winding-up) Rules.  To facilitate the adjustment process, funds collected from owners either from liquidation or from settlement will have to be accounted for separately, so that it is possible to compare each owner’s contribution to the contingency fund with his or her actual liability at the end of the winding-up process.

15.  I now deal with the issue of Surplus Interest.

16.  The petitioning creditors are entitled to interest on the judgment debt at the rate of 8% per annum up to the date of payment.  They are the only external creditors entitled to interest.  In the usual course, interest would be payable on the judgment debt only up to the date of the winding-up order (Companies (Winding-up) Rules, rule 88(1) and (2)(b)(ii)).  By virtue of section 264A of Cap. 32, where the company being wound up is not an insolvent one, interest continues to be payable out of any surplus from the date of the winding-up order until the date of payment at the rate of 8% per annum, being the rate specified under section 49(1)(b) of the High Court Ordinance, Cap. 4.  For ease of reference, I refer to the portion of interest on the judgment debt that accrues after the date of the winding-up order until payment as “Surplus Interest”.

17.  Under section 34 of the BMO, the owners are liable in effect for the excess of “debts and liabilities” of the Corporation over the assets in hand.  The liquidators therefore sought a direction from the court as to whether the Surplus Interest is properly a debt or liability of the Corporation to be discharged as part of the Corporation’s winding up.  This is paragraph 1(a) of the summons.

18.  There is no Hong Kong case law on this, but I was referred by Mr Korff to the decision of Mervyn-Davies J in Re Lines Bros Ltd. [1984] BCLC 215.  There the judge had to decide whether for the purposes of section 317 of the Companies Act 1948 (equivalent to our section 264 of Cap. 32), post-liquidation interest should be included in determining whether a company was solvent or insolvent.  The judge examined section 10 of the Supreme Court of Judicature Act 1875, which was the predecessor to the 1948 Act section 317, and which imported the bankruptcy rules into the Companies Acts 1862 and 1867.  Section 10 of the 1875 Act provided as follows:

“… in the winding up of any company under the Companies Acts 1862 and 1867, whose assets may prove to be insufficient for the payment of its debts and liabilities and the costs of the winding up, the same rules shall prevail and be observed as to the respective rights of secured and unsecured creditors, … as may be in force for the time being under the Law of Bankruptcy with respect to the estates of persons adjudged bankrupt …” (emphasis supplied)

19.  The judge found that the words “debts and liabilities” did not include any statutory post-liquidation interest (interest payable pursuant to section 33(8) of the Bankruptcy Act 1914, which, in effect has the same operation as our section 264A, Cap. 32) for the following reasons:

“This is not a debt or liability within s.10 for two reasons: (1) the section speaks of ‘its’ debts and liabilities. At no stage can statutory interest be regarded as a debt or liability of the company. A liquidator’s obligation under s.33(8) to pay interest out of a surplus is pursuant to a statutory direction to him, being an obligation which is part of the statutory scheme for dealing with a company’s assets which comes into operation at the outset of the winding up…(2) it is not right to consider ‘insufficiency’ (or insolvency) by reference to any obligation to pay statutory interest under s.33(8) because that is to presuppose that s.33(8) applies in the winding up. The true position is that one decides whether or not the winding up is the winding up of an insolvent company before one takes account of the rules that will be brought into account if it is insolvent”(at 223 d-f).

20.  Although section 34 of the BMO is an entirely different provision to section 10 of the 1875 Act, I agree with Mr Korff that the first limb of the judge’s reasoning applies with equal force.  I rule that the obligation to pay the Surplus Interest under section 264A is an obligation imposed by statute on the liquidators and not an obligation of the Corporation.  I have made a direction under paragraph 1(a) of the summons that the post-liquidation interest under section 264A is not a “debt and liability” of the Corporation for the purposes of section 34 of the BMO.

21.  That being my ruling, it was not necessary to give any direction in respect of paragraphs 1(b) and (e) of the summons.

Establishment of a contingency fund

22.  The liquidators propose to establish a contingency fund pursuant to section 20(2) of the BMO to provide for the estimated costs and expenses.  Without this fund, the liquidators will not have sufficient funds to pursue the owners for the debts and liabilities of the Corporation under section 34.  It was submitted that the mechanism provided by the BMO allows the liquidator to convert an estimated liability, which is a feature of the estimated costs and expenses, into a presently due and owing sum.  I agree.

23.  Section 20(2) allows a corporation to establish and maintain a “contingency fund” in these circumstances:

“	(a)	to provide for any expenditure of an unexpected or urgent nature; and
	(b)	to meet any payments of the kind specified in subsection (1) if the fund established thereby is insufficient to meet them.”

24.  Section 20(1) provides for the establishment of a “general fund”.

25.  It was submitted that the estimated costs and expenses are items of an “unexpected” nature within section 20(2) as they arise by reason of the Corporation’s winding up, which in turn, traces its cause ultimately to the accidental death of the Swedish tourist.  This chain of events is of an extraordinary and non-recurrent nature.  I accept that these are the types of events contemplated by section 20(2) to require provision for by way of a contingency fund.

26.  Under section 21(1) of the BMO, the management committee is empowered to determine the amount to be contributed to the fund established and maintained under section 20.  By virtue of section 33(2) (a), a reference to a member of the management committee is a reference to a director of the company.  On appointment of a liquidator in a court winding up, the powers of the directors come to an end, and are replaced by those of the liquidator’s.  Hence, a reference to the management committee for the purposes of section 21(1) should be regarded as a reference to the liquidators.

27.  The liquidators have summarized the regime, read together with sections 21(1A), (2), (3), (4), and (5), in this way:

(1)	The management committee is entitled to determine the amount to be contributed to the fund for a period not exceeding 15 months in the case of the first such period after the date of registration of the corporation, and in any other case, 12 months.
(2)	Any subsequent amount that the management committee asks to be contributed in the next period must not exceed 150% of the preceding amount unless that subsequent amount is approved by the corporation by a resolution passed at the general meeting.
(3)	To determine the amount for first contribution pursuant to section 21(1), the management committee must comply with the Fifth Schedule to the BMO.

28.  The Fifth Schedule requires that the amount to be determined by the management committee for contribution must be based on a budget prepared by the committee for the period specified.  Section 2 in the Fifth Schedule provides that the budget “shall set out the sums which in the opinion of the management committee will be reasonably necessary to meet payments of the kind specified in s.20(1) and shall, if a contingency fund is established under s.20(2), set out the sums which in the opinion of the management committee will be reasonably necessary to meet payments of the kind specified in that subsection.”

29.  The liquidators have explained in their supporting affidavit the reasonableness of the amount sought for estimated costs and expenses.  They propose to set the amount to be contributed to the contingency fund by a way of a budget in accordance with the Fifth Schedule and this will be circulated to the owners.  The owners’ liability to contribute to the contingency fund is governed by section 22.  The amount contributed shall be fixed either in accordance with the deed of mutual covenant or if there is no deed of mutual covenant, in accordance with each owner’s respective shares in the building.  In this instance, the deed of mutual covenant for the Building does not provide for the liability of the owners, so the amount for which each owner is liable to contribute will be determined in accordance with their shares in the Building.  Under section 22(1)(b), the liquidators have a discretion in fixing the time and manner of payment of the contribution.

30.  Importantly, under section 22(3), it is provided that “the amount payable by an owner under this section shall be a debt due from him to the corporation at the time when it is payable”.  The significance of this provision is that it converts an estimated liability into a presently due and owing debt.  Thus, by using this mechanism, the liquidators are able to demand contribution from the owners in respect of the estimated costs and expenses and to enforce payment as an ordinary debt.

31.  I accept the submission that the power to set up a contingency fund under section 20(2) is one that falls within the ambit of section 199(1)(b) of Cap. 32, as it is part of the function of carrying on the business of the Corporation.  I agree that the contingency fund is necessary for the discharge of the Corporation’s debts and liabilities, that is, the estimated costs and expenses, and this is a direct function of the winding up.

32.  The Official Receiver does not see anything objectionable in the liquidators’ setting up a contingency fund and thinks it a sensible course to take.  The only caveat put forward by Mr Harris for the Official Receiver is that if the liquidators should wish to raise funds under section 20(2), they must follow the procedure in section 20A.  I agree.  Thus, if the liquidators should wish to raise funds to pay fees of solicitors of more than $100,000.00, this work must be put out to tender.

33.  I have made an order under paragraph 2 of the summons that pursuant to section 199(1) (b), the liquidators do have sanction to establish a contingency fund under section 20(2) of the BMO.

Sanction to bring proceedings against the owners

34.  This is covered in paragraphs 3 and 4 of the summons.  The liquidators do not wish to pursue paragraph 5 of the summons at present.

35.  The liquidators sought sanction under section 199(1)(a) to commence proceedings in respect of the liabilities of the owners for the external liabilities and the estimated costs and expenses, sanction to bring the proceedings either against one of the owners that would appear most likely to be in a position to pay the entire debt, or against any or all of the owners for an amount in the proportions in accordance with their respective shares in the Building.  They also seek sanction to enforce any judgment obtained against the owners.

36.  The Official Receiver’s position was that sanction to bring proceedings should not be given at this stage and that it is preferable to adjourn paragraphs 3 and 4 of the summons.  The liquidators should first try to recover contribution from all the owners and if it becomes apparent that some owners would not contribute voluntarily, directions can then be sought from the court.

37.  The liquidators would naturally prefer to have sanction granted at this hearing.  I see no reason to think that the liquidators would not exercise any sanction given to them to bring proceedings in a responsible and sensible way, and that they would be sensitive to the concerns of the owners in seeking to recover contribution from them.  Litigation should be viewed as a last resort, after the liquidators have made reasonable effects to recover contribution from all the owners.  I have therefore given leave to the liquidators to bring proceedings.

38.  As for the further direction sought that they should have sanction to proceed against one owner for all of the Corporation’s liability or proceed against all of the owners, this is due to an ambiguity in section 34, the full text of which has been set out.  The first part of section 34 provides that “the owners shall be liable, both jointly and severally, to contribute”.  This is followed by the words “according to their respective shares”.  It was submitted by Mr Korff that there are two possible and mutually exclusive interpretations of section 34:

(1)	the section allows the owners to be pursued individually, but only to the extent of his proportionate ownership of the shares in the building; or
(2)	the owners are jointly and severally liable for all of the corporation’s debts and liabilities, and may be pursued individually for the whole amount. They then have the right to sue each other for contribution so that at the end of the day, they have only paid a proportion of the liability equivalent to their shares in the building.

39.  Interpretation (1) effectively reads out the reference to “joint and several” liability, so the risk of some owners not contributing to the corporation’s debts would lie with the creditor.  Interpretation (2) ignores the limitation imposed on liability “according to [the owners’] respective shares”, so the risk of some owners not contributing to the corporation’s debts would lie with the delinquent owners’ co-owners. 

40.  There is no Hong Kong authority on the interpretation of section 34.  This provision is unique to Hong Kong.

41.  Section 34 was enacted to replace the old section 34 under the Multi-Storey Buildings (Owners Incorporation) Ordinance and the old provision was as follows:

“The owner shall be liable to contribute, according to their respective shares, to the assets of the corporation to an amount sufficient to discharge its debts and liabilities”.

42.  It was submitted by both Mr Knoff and Mr Harris that the fact that the reference to “joint and several” liability is missing from the old section 34 indicates that the Legislature may have intended for the limit and extent of an owner’s liability in a winding up of the corporation to be fundamentally different from the previous position.

43.  My attention was also drawn to some obiter dicta of the Court of Final Appeal in Chi Kit Co Ltd & Anr v Lucky Health International Enterprises Ltd [2000] 2 HKLRD 503, at 514H-J, per Bokhary PJ and Sir Anthony Mason NPJ.  The dicta would appear to suggest that the potential liability of an owner may exceed the level of his proportionate share in the winding up of an owners’ corporation.  The relevant extract is as follows:

“The consequence of this interpretation is that the liability to meet a notice of contribution fixed by the management committee goes with the unit and is imposed upon the owner for the time being.  The contribution liability, though proportionate to the share of the owner, has the potential to merge into a joint and several liability on a winding-up for an amount sufficient to discharge the corporation’s liabilities.  Moreover, there is the potential liability under s. 17(1)(b) to suffer an execution for a judgment against the corporation.  That liability is not expressed to be limited to the proportionate share of an individual owner”.

44.  On the other hand, there are arguments in favour of the interpretation in (2) that the ability to sue any one owner should be only up to the extent of his proportionate share in the building.

45.  The scheme underpinning the winding up of owners’ corporations is meant to mirror the winding up of companies under Cap. 32.  The corporation is to be treated as if it were a company, and individual owners as if they were shareholders of a company under section 33(2)(b) of the BMO.  Given that in the winding up of a company that the liability of its members is limited to their shares in the company or that portion of unpaid capital which the liquidator calls for, an interpretation of section 34 such that the liability of owners is limited to their proportionate shares in the building would seem to be consistent with this general scheme.

46.  The liquidators have not asked for a final determination at this hearing as to which is the correct statutory interpretation.  They have merely sought sanction to commence legal proceedings by one of two alternative means.  It seems to me at least arguable that the liquidators may proceed by one of the two alternative means.  I have therefore granted sanction in terms of paragraph 3 of the summons, leaving it to the liquidators to decide on which of the alternative course of action they should take.  In the event that action is commenced as against only one owner for all of the Corporation’s liability, it would be open to that defendant to raise the issue in its defence that the liquidators are not entitled to proceed in that manner but should proceed against all the owners.

47.  I have also granted sanction to enforce any judgment obtained against the owners in terms of paragraph 4 of the summons.

48.  I have provided for the costs of the liquidators and of the Official Receiver, of and incidental to this application, to be paid out of the assets of the Corporation.