THE GRANDE PROPERTIES MANAGEMENT LTD v. SUN WAH ORNAMENT MANUFACTORY LTD

cacv 316/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 316 of 2004

(on appeal from HCA NOS. 4741 of 2001 and 5207 of 2001)

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HCA 4741/2001

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(HCA 4741/2001 to be consolidated with HCA 5207/2001 pursuant
to the Order made by Mr Registrar C Chan on 5 December 2002)

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from a judgment of Deputy High Court Judge To given on 23 June 2004.  The matter before the judge was the trial of two actions by the plaintiff.  In the first action the plaintiff claimed the sum of $2,581,481.67 and alternatively the sum of $1,548,099.  The plaintiff also claimed interest on the sum of $1,548,099 from 1 September 2001 or alternatively 10 October 2001.  In the second action the plaintiff claimed $886,817.17 with interest from 26 October 2001.  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

2.  The plaintiff is the management company employed by the owners of Grande Building.  It is part of a group of companies which terms itself collectively as the Grande Group and which includes Grande Properties Ltd.  Members of the Grande Group now hold in total a majority of the shares in Grande Building.  That has not always been so.  The Grande Group became the majority owner on 20 August 2000.  In 1997, members of the Grande Group were major owners of the building but were not the majority owners.

3.  The plaintiff convened and held a meeting of the owners of Grande Building on 28 April 1997.  Whether it was by accident or design, many of the owners of the building did not attend the meeting, because, at least in some cases, they were unaware of the meeting to be held.  It suffices to say that the judge held that the meeting had been validly convened because the notice calling it had been placed in a position that was in accordance with the Deed of Mutual Covenant (“DMC”).

4.  Representatives from members of the Grande Group did attend that meeting but they represented only 302 shares out of a total of 622 shares.  At that meeting a resolution was passed that the manager should undertake what were referred to as the “projects”, which it had suggested.  It was also resolved that, in order to finance the “projects”, the owners of the building should contribute $2,500,000 in 1997 and $2 million in 1998 so that the “projects” could be carried out.  Again, it suffices to say that the judge held that the resolutions were invalid because the notice calling the meeting had not indicated the nature of the resolutions in a way that was sufficient to give adequate notice to the owners.  Against that decision no appeal has been made. 

5.  The defendant took exception to the expenditure and refused to pay its contribution which would have amounted to $1,548,099.  It would seem that it was not alone in taking exception to this.  Indeed two other owners have been sued for their contributions in separate proceedings.  There were earlier proceedings against the defendant in respect of the contribution which was claimed from it in respect of the “projects”.  Those proceedings were discontinued. 

6.  There were further works which were carried out in 1999 and 2000.  In respect of those the plaintiff spent a further $2,315,976.  These were referred to in the judgment below as the “1999/2000 Renovation Works”.  There was no meeting called to approve that expenditure and together with other work carried out in 2001,which was referred to as urgent repair work, a deficit amount of approximately $2.8 million was incurred.

7.  On 26 September 2001 a further owners’ meeting was held and a number of resolutions were passed.  Those included the following:-

“	a)	To resolve that all owners do pay the Manager of the Building their respective shares (determined in accordance with the Deed of Mutual Covenant and Supplemental Deed of Mutual Covenant of the Building) (“Respective Shares”) of the total sum of HK$4,490,9,924.00 (“the Total Sum”) being the total amount called for by the Manager in respect of the renovation works carried out in respect of the Building in 1997 and 1998 (“the Renovation Works of 1997 & 1998”), the particulars of the Respective Shares and the Total Sum set out in Column A-1 of Appendix A annexed to the Agenda.
	b)	To resolve that credit shall be given to those owners of the Building who have made advance payments to the Manager for their Respective Shares of the Total Sum already in the sum of HK$2,951,825.00, the particulars of which are set out in the Columns A-2 and A-3 of Appendix A annexed to the Agenda.
	c)	To resolve that Sun Wah (being the only one of the owners who have not made any advance payment to the Manager in respect of Respective Shares of the Total Sum called for by the Manager) do pay the Manager within 14 days from the date of the meeting the sum of HK$2,581,481.67.00, the particulars of which are set out in Appendix B annexed to the Agenda.
	d)	To resolve that upon payment of Sun Wah’s Respective Shares of the Total Sum in the sum of HK$1,548,099.00 the manager shall establish an interest bearing bank account in its name, but which shall be designated and referred to as the Special Fund Account for the Grande Building, and shall remit thereto the sum of HK$348,585.00 (being the surplus of the Total Sum over HK$4,151,339.00, which is the actual amount incurred (“the Amount Incurred”) in connection with the Renovation Works of 1997 and 1998).”

8.  There was also a minute of the 26 September 2001 meeting which read:- 

“A vote was called for the HK$2.8 million to be called.  367 shares voted for and 255 voted against this resolution by a show of hands.  The Property Manager declared that the resolution was passed.”

9.  That sum of $2.8 million was in respect of the “1999/2000 Renovation Works” and the works carried out in 2001.  It is pertinent to note at this stage that column A-1 of Appendix A of the notice of the meeting listed the owners as of 1997.  It is also pertinent to note that one other resolution was put to the meeting to approve future works which were referred to as renovation works in 2001.  It appears from the minutes of the meeting that there was some debate as to whether some of those works should be carried out and as to whether they were the responsibility of the owners in common.  As a result, the resolution which was passed approved only 6 out of the 10 proposed items and, indeed, that represented only 26 per cent of the original proposed works; works to the value of $3,480,000.00 were not authorised by the meeting consequent upon the discussions which took place.

The actions

10.  The writ in High Court Action No. 4741 of 2001 was issued on 2 November 2001.  The Plaintiff claimed recovery in respect of the costs of the “projects” referred to in the resolutions as the Renovation Works of 1997 & 98.  As already stated the amounts claimed were $2,581,481.67 or in the alternative $1,548,099 with interest.  The Defendant denied liability on a number of grounds in particular that the 1997 Resolution purportedly passed at the meeting was invalid because (a) the notice of the 1997 Meeting had not been properly served on all the owners of the building and (b) the notice calling the meeting was not a proper notice in that it failed to specify the intention to pass the resolution and that, in consequence, the Plaintiff had no authority to undertake the 1997/98 Renovation Works because it did not have the requisite authorisation.

11.  The writ in High Court Action No. HCA 5207 of 2001 was issued on 4 December 2001.  In that action the Plaintiff claimed the sum of $886,817.17 as recovery in respect of the deficit of about $2.8 million in the building fund.  The Defendant’s defences are: (1) the Plaintiff had no power to undertake the 1999/2000 Renovation Works without the authorisation of a properly convened owners’ meeting and (2) the 2001 Resolution was retrospective and ineffective.

12.  As already noted, the judge held that the resolutions passed in 1997 were invalid because the notice convening the meeting did not indicate the nature of the resolutions sufficiently to give adequate notice.  For that reason the plaintiff’s claim, in so far as it was based upon work intended to be carried out as a result of the 1997 resolutions, failed.  The judge then went on to consider the position in respect of work which had already been contracted for at the date of the 1997 resolutions.  He held that because they were retrospective in effect, the resolutions were also invalid for that reason.  It might be said at this stage that that holding was hardly surprising in the light of the fact that it had been pleaded by the plaintiff in the amended reply that neither the DMC nor the Building Management Ordinance, Cap. 344 empowered the passing of resolutions with any retrospective effect.  The judge, however, did not content himself with simply relying upon the pleadings and concessions by the parties.  He analysed the situation on the basis that if the plaintiff wished to execute works which were not otherwise authorised it had to seek prior authority from the owners if the owners were to be liable for the costs incurred.

13.  For that reason also, the judge dismissed the claim in respect of the “1999/2000 Renovation Works”.  In respect of those the plaintiff had simply gone ahead and carried out the works and sought to charge the defendant in respect thereof.  Although the judge indicated that he was satisfied that in respect of the works carried out in 2001 that had been referred to as urgent repair work, all except one item were repair and maintenance works for which no express authorisation was required from an owners’ meeting, he declined to make any order for contribution from the defendant in respect thereof because the plaintiff had made one claim in the statement of claim and, furthermore, the court could not re-write the resolution for the owners.

This appeal

14.  On this appeal, Mr Ho SC, who appeared on behalf of the plaintiff in this court but not in the court below, in answer to a question at the outset of the hearing, sought to indicate that it was the plaintiff’s position that it did not need authorisation of a resolution of the owners to carry out the “projects”.  It was his case that the works carried out, even if they constituted improvements, were covered by the authority given to the manager under the DMC.  This position had not been predicated on any of the submissions or documents filed on behalf of the plaintiff.  Indeed, the plaintiff’s case had all along been based upon the authority given to it by the 1997 and 2001 resolutions.  It had not been argued in the court below that the plaintiff did not require the authority of those resolutions in order to bring its claim.  The plaintiff’s claim in both actions was based upon the authority given by the various resolutions to charge the defendant the sums claimed.  In those circumstances it appeared to this court that merely amending the notice of appeal would be insufficient but the case would have to be remitted to the Court of First Instance if the plaintiff wished to pursue that line of argument. 

15.  Two adjournments were accorded so that the plaintiff could consider whether it wished to have the matter remitted to the Court of First Instance or whether it would proceed upon the basis of the claim which had been brought.  In the event counsel indicated that on this appeal the plaintiff did not wish to pursue the argument that it did not require authorisation from a meeting of owners to carry out the projects and it was therefore indicated that the matter would have to proceed on that basis.  This court is in no position to indicate either way as to whether the plaintiff would have been entitled to bring an action without having to rely on any of the resolutions.  That may well be the case, but the plaintiff, or perhaps those advising the plaintiff, have only themselves to blame for the way in which the case has been framed and prosecuted.

16.  Mr Ho’s major contention was that the various resolutions were not retrospective in effect because they took effect from their own date.  The plaintiff having abandoned any reliance upon the 1997 resolutions, his primary argument was that liability which arose under the 2001 resolutions only arose from that date and not earlier.  As a subsidiary point Mr Ho argued that there was nothing which prevented the resolutions taking effect retrospectively.  To that extent reliance was placed upon the amended notice of appeal which had been filed shortly before the hearing of this appeal.  It would be observed at once that that amendment was in sharp contradiction to the plaintiff’s pleaded case in the replies.

17.  In my view, the judge was correct in holding that the resolutions passed in 2001 could not impose a liability on the defendant to pay the amounts claimed.  On the basis that the 1997 resolutions were invalid, the 2001 resolutions simply ordered the defendant to pay the plaintiff amounts which had been incurred by the plaintiff undertaking unauthorised works.  The resolutions themselves do not, in any event, on their strict wording, sanction the carrying out of the works.  In so far as the resolutions require the defendant to make contributions, they would thus fall outside the purposes of the DMC and no resolution of the owners could compel an owner to make payments in respect of matters which are outside the purview of the DMC.

18.  If, on the other hand, the resolutions are read as giving sanction to the plaintiff for having carried out the “projects” and the 1999/2000 works that would clearly be a sanction in respect of work which had already been carried out.  Such a sanction, even on the basis that it was a sanction authorised by the majority of the owners at the 2001 meeting appears to me to violate the rights of the defendant. 

19.  The defendant, as an owner, is entitled to require that any work not specifically authorised under the DMC should be sanctioned by a resolution.  That would entail the defendant having an opportunity of addressing the meeting at which such a resolution was to be passed.  The importance of the defendant having the ability to address a meeting is exemplified by what happened at the 2001 meeting.  As already set out above in paragraph 9 although the Grande Group had majority voting rights at the meeting, the meeting was still prevailed upon to reduce the proposed expenditure by nearly three quarters. 

20.  Had a meeting been held prior to the “projects” and the 1999/2000 Redecoration Works being carried out the defendant might well have been able to persuade the meeting either not to carry out the works or perhaps to carry out the works in some less expensive way or to reduce the scope of the works.  Such a situation is by no means fanciful in view of what actually happened at the 2001 meeting.  Furthermore, it has to be borne in mind that at the time the “projects” were carried out the Grande Group did not have an overall majority of the voting rights amongst the owners.  Given the fact that the plaintiff appears to have had difficulties with other owners which required recourse to litigation, again, it was by no means a fanciful proposition that the defendant might have been able to avoid or at least reduce some of the expenditure.

21.  It might be added that the plaintiff can hardly be in any better position, having failed to obtain a proper resolution because of lack of notice, than it would have been had it given adequate notice and the resolution voted down.  In those circumstances it would be extraordinary if it could be supposed that the Group which controlled the management company could put itself in the position of having a majority and then retroactively sanction the carrying out of work which had not been approved earlier.  Furthermore, the position of the Grande Group was clearly very different once one of its members had carried out work and incurred expenses, thus putting itself in a position of requiring reimbursement, from a situation where a member of the Group simply proposed work to be carried out and had not yet incurred that expenditure.

The procedural point

22.  Mr Ho sought to argue one further point in relation to the 2001 works.  Although, as already indicated, the action in respect of which the amounts incurred in carrying out the works was based on resolutions, it was said that the judge should have ordered the defendant to pay the amount which he had indicated had been in respect of repair and maintenance work.  At the hearing of this appeal the defendant was not called upon to answer this point.  In my view, the judge was correct in the way he approached the matter.  The plaintiff’s claim had been based upon a single resolution and not upon the basis that the plaintiff had been entitled to carry out the works under the provisions of the DMC without any resolution.  If the plaintiff had sought to differentiate those items of work which it contended it was entitled to carry out without a resolution, the pleadings should have been so framed so that the issues could have been dealt with at the trial.  Because the issues were not so framed it was impossible for them to be decided without clear lines being drawn.  Moreover, as indicated above, similar considerations may well apply to all the works carried out, some the plaintiff may well have been entitled to carry out and some it may not.

Conclusion

23.  In the circumstances I would dismiss this appeal and make an order nisi of costs in favour of the defendant.

Hon Le Pichon JA:

24.  I have had the advantage of reading in draft the judgments of the Vice President and Reyes J.  I agree with the Vice President that this appeal should be dismissed for the reasons he gives.  I have the following comments to add.

25.  The resolutions, the validity of which arises, are those set out in paragraphs 7 and 8 of the judgment of Rogers VP.  In the course of the hearing, the plaintiff abandoned the resolution set out in sub-paragraph (c) of paragraph 7, effectively abandoning its claim for interest on the sum of $1,548,099 amounting to a little over $1 million.  For convenience, the remaining resolutions are hereafter referred to as “the 2001 resolutions”.  It is to be noted that the reason why the resolution claiming interest was invalid was because the interest claimed exceeded that allowed under the provisions of clause 16 of the DMC which governed the payment of interest.  It was thus contrary to the provisions of the DMC, and thus a matter which could not have formed the subject matter of a valid resolution.

26.  The 2001 resolutions sought the payment by the owners of sums which corresponded to the amount sought by the plaintiff management company in respect of the 1997/98 Renovation Works, the 1999/2000 Renovation Works and the works carried out in 2001 all of which were unauthorised works.  The 1997 Resolution relating to the 1997/98 Renovation Works had been held to be invalid and against that holding there is no appeal.  As regards the 1999/2000 Renovation Works and the 2001 works giving rise to the $2.8 million deficit, no meeting was ever called to approve the expenditure.  To my mind, the approach of the management company in incurring the expenditure for unauthorised works can only be described as ‘cavalier’ in terms of the duties and obligations it had under the DMC and the Buildings Management Ordinance, Cap. 344.  Prior to August 2000, the Grande Group held 302 out of 622 shares or approximately 48.5%.  In August 2000, it increased its holding to 367 shares or approximately 59%.  The inescapable inference is that the plaintiff was put in a position to adopt such an attitude because it was part of the Grande Group which wanted the work done and were willing to finance it upfront. 

27.  In my view, the substance of the 2001 resolutions was to require the defendant who is one of the owners to pay for works which have not only already been undertaken and completed but which had not been authorised in accordance with the DMC.  It could therefore be said that the 2001 resolutions were invalid as being “contrary to the provisions” of the DMC within paragraph 10 (iii) of schedule 5 to the DMC.  This is because under the provisions of the DMC, an owner is not liable to contribute to works that have not been properly authorised.  Put differently, there is no power to levy contributions to defray the cost of unauthorised works.  The 2001 resolutions are therefore no different from the abandoned resolution seeking the payment of interest that was not authorised by the DMC. 

28.  In any event, on no view could it be said that the point of the exercise undertaken in September 2001 was to regularise or remedy a mere procedural irregularity.  To characterise it as such would be to put form before substance. 

29.  The acid test of what is form and what is substance is whether an owner would be prejudiced or his rights adversely affected if the resolutions were held to be valid.  As to the real prejudice that the defendant would suffer, I cannot improve on the analysis made by Rogers VP in paragraphs 19 to 21 above.  

30.  The 2001 resolutions were not framed in terms of ratifying acts that had been done without authority.  For one thing, that would have entailed at the very least, a description of the items of work and corresponding cost being put before the owners at the meeting.  See, for example, Appendix E attached to the agenda for the owners meeting convened for 26 September 2001 relating to proposed renovation works for 2001.  Had the resolutions been framed as ratifying past unauthorised acts and had there been no change in ownership in the interim, I can see no intrinsic difficulty in such resolutions, if passed, taking effect.  But that does not arise in the present case because the 2001 resolutions were not so framed. 

31.  Even if they had been properly framed as ratifying unauthorised acts, there is the further difficulty that ownership had changed in the interim: at the time the 1997 and 1999/2000 Renovation Works were carried out, there was no majority owner who could have forced the resolutions through had there been properly convened meetings.  The question which would arise in the assumed scenario would be whether ratification remains possible notwithstanding a fundamental change in circumstances.  I leave this question open for determination in an appropriate case since it does not arise on the facts.

32.  Finally I would add that the decision of this court in So Chun Man Paul v Incorporated Owners of Chee On Building [2000] 1 HKC 732 is not on point and does not assist in the determination of the issues that arise in the present case. 

Hon Reyes J:

I.   Introduction

33.  Grande says that Judge To wrongly held that certain resolutions passed by a majority of Grande Building (the Building) owners on 26 September 2001 were invalid.  Some 10 resolutions were passed.  The resolutions on which Grande’s appeal now focuses required Building owners (including Sun Wah) to pay their respective shares of:-

(1)	a total of $4.5 million for renovation works in 1997-98; and,
(2)	a $2.8 million budget deficit attributable to additional renovation work in 1999-2000 and repair work in 2001.

34.  In the alternative, Grande complains that Judge To did not identify which items of the 1997-98 or 1999-2000 renovations constituted maintenance under the Building’s Deed of Mutual Covenant (DMC).  Grande asks for the matter to be remitted to the judge to make findings on which items were maintenance and which were not.

II.   Discussion

A.   Issue 1: Were the 2001 resolutions effective?

35.  Judge To reasoned that, the 1997 resolution being a nullity, it was impossible in 2001 to authorise the 1997-98 renovation retrospectively.  In coming to this conclusion, Judge To followed this Court’s decision in So Chun Man Paul v Incorporated Owners of Chee On Building [2000] 1 HKC 732.

36.  Likewise, since the 1999-2000 renovation works had not been authorised at their inception, the Building owners (Judge To thought) could not in 2001 vote to cover deficit due to those works.  That would be tantamount to ratifying a void act contrary to So Chun Man.

37.  The validity of the 2001 resolutions thus depends on the applicability of So Chun Man.

38.  In So Chun Man owners first passed Resolution X increasing management fees from $600 to $660 from a future date.  But Resolution X was void under the Building Management Ordinance (Cap.344) (BMO) due to insufficient notice.  The majority of owners later passed Resolution Y, purporting to validate Resolution X retrospectively.

39.  The Court of Appeal held that, being void in the first place, Resolution X could not have been revived by Resolution Y.  The owners had no power to pass retrospective resolutions in the absence of express provision in the BMO or their DMC authorising them so to do.

40.  I think that So Chun Man is distinguishable from the present case in at least 2 respects.

A.1   1^st distinction from So Chun Man

41.  Resolution Y attempted to impose a liability on owners to pay management fees from a date past.

42.  Here retrospectivity does not arise.  Nor is the situation one of back-validating a previously void resolution.

43.  Grande initially carried out the 1997-98 and 1999-2000 renovation works on behalf of the Building owners without proper reference to the Building owners.  Grande thereby risked being personally liable for the cost of the entire works if the Building owners did not later approve requisite funds.  The purpose of the September 2001 resolutions was to make Building owners liable (if the majority at the meeting so voted) to contribute towards the 1997-98 and 1999-2000 renovation costs as from 26 September 2001.   

44.  Not all of the funds voted by the September 2001 resolutions were earmarked for the renovations previously executed.  The 1997-98 renovations actually only cost some $4.1 million, not $4.5 million.  Any surplus resulting from the passage of the September 2001 resolutions was to go to a special fund for future works at the Building.  I do not think that detail affects the analysis above.

A.2   2^nd distinction from So Chun Man

45.  Assume (contrary to my view) that the 2001 resolutions operated retrospectively.  So Chun Man states that owners cannot pass retrospective resolutions unless their DMC permits.

46.  Here DMC, Schedule V, cl.10 provides:-

“	Any resolution on any matter concerning ... the said building passed by a majority of the owners present in person or by proxy and voting at a duly convened meeting shall be binding on all the owners provided as follows:-
	(i)	The notice convening the meeting shall have specified the intention to propose a resolution concerning such matter.
	(ii)	Any resolution purported to be passed at such meeting concerning any other matter shall not be invalid.
	(iii)	No resolution shall be invalid if it is contrary to the provisions of this Deed.”

47.  The clause authorises owners to pass “any resolution” except for certain specified types.  A retrospective resolution is not one of the identified exceptions.  Accordingly, by cl.10, the Building owners had express power to pass retrospective resolutions.

48.  Note that plainly not all resolutions passed in September 2001 were valid. 

49.  Some 2001 resolutions purported to charge late payment interest on Sun Wah pursuant to DMC cl.16.  The latter provides:-

“(a)	In the event of any owner failing whether wilfully or not to pay any sum due and payable by him in accordance with the provisions of this Deed within 15 days of the date on which the same became payable the Manager shall be at liberty to disconnect all electricity and water supplies and all services to the defaulting owner’s factory unit or factory units of and in the said building.  Without prejudice to the above the Manager shall also be at liberty to demand:-
	(i)	interest on the sum due calculated at the rate of $1.50 for each $100.00 or part thereof for each period of 30 days or part thereof for which it remains unpaid; and
	(ii)	a collection charge of $150.00 to cover the cost of extra work occasioned by the default....”

50.  No payment would have been due from any owner (including Sun Wah) until 26 September 2001 when the relevant resolutions were passed.  Even then, cl.16 interest could only run after the principal due had remained unpaid for 15 days.  The 2001 resolutions could not have imposed interest liability until at least 11 October 2001.

51.  Mr Ambrose Ho SC (appearing for Grande) did not pursue Grande’s pleaded claim for cl.16 interest.  Mr Ho restricted his argument to principal sums due as a result of the 2001 resolutions.

52.  It was open for Mr Ho to do this because the resolution for cl.16 interest was independent from that for principal sums.  At the meeting on 26 September 2001 the cl.16 resolution was voted on separately from the other resolutions tabled.  Any “ultra vires” of the cl.16 resolution would not accordingly vitiate the validity of the 2001 resolutions relating solely to principal.

A.3   So Chun Man

53.  The foregoing is sufficient to dispose of the appeal in Grande’s favour.  But I cannot leave the discussion of So Chun Man without expressing doubts as to its correctness.

54.  Resolutions are often invalid for inadvertently failing to comply with some statutory provision or corporate article.  It is routine for companies finding themselves in such a situation later to pass a resolution validating the previously void act with retrospective effect.

55.  A remedial resolution will usually comply with whatever procedural requirement was formerly overlooked.  In addition, the amending resolution will typically declare that the initial resolution is to be treated as effective despite its procedural shortcomings.

56.  Company articles do not normally include an express term enabling a company to pass corrective resolutions of the sort just described.  Nor (as far as I am aware) does statute explicitly authorise companies to pass retrospective resolutions.  Such provision is unnecessary.  At common law a company is deemed to have all powers which are reasonably incidental to carrying out its objects.  The ability to pass a remedial resolution must be such an incidental power. 

57.  The incidental power is a convenient and beneficial one.  By their nature, procedural irregularities are discovered some time after a resolution has been passed and acted upon.  Unless a correction is retrospective, the action already taken may be void with the possibly unfair consequence that persons (for example, directors or other agents) who conducted themselves on the basis of a resolution being valid, may find themselves having personally to bear the expense of their actions.  This might be the outcome, notwithstanding that the void act was carried out bona fide on behalf and for the benefit of an association as a whole.

58.  Given that context, I do not see why So Chun Man should require an express power in the BMO or a DMC authorising owners to correct problematic resolutions retrospectively.  I do not see why there should be a distinction in this respect between company and building management law.  I cannot find compelling reason for reading the fetter into building management law.

59.  In So Chun Man, having found that the original resolution was void, Wong JA (with whom Yam and Waung JJ agreed) summarised the reasons for disallowing retrospective resolutions in the building management sphere as follows (in English translation):-

“As the first resolution is a void resolution without any legal force at all, the second resolution can only be regarded as an independent resolution.  The question is whether the second resolution is one with retrospective effect.  Mr. Kwong [solicitor for the incorporated owners] admitted that neither the [BMO] nor the DMC empowered the management committee to pass resolutions with retrospective effect and this is absolutely understandable.  In page 3 of his judgment, HH Judge Chow [of the Lands Tribunal] said:-

‘Is Resolution Proposal 3 (i.e. the second resolution as stated in this judgment) a valid resolution?  This would depend upon whether the [BMO] and the DMC empower the incorporated owners to pass resolutions with retrospective effect and whether it complies with the relevant requirements of the DMC.  The respondents stated in their defence that ss. 8, 18(1)(c) and 34J(2) of the [BMO] empower the incorporated owners to pass resolutions with retrospective effect.  However, retrospective effect may create all kinds of unreasonable circumstances: retrospective effect may cause the building owners in question to lose the rights which they have already obtained; or to change their originally legal action into illegal action.  Retrospective effect may also bring about unstable factors because the resolutions passed today may be overruled by subsequent resolutions.  Due to the transfer of property rights, the old property owner may be bound by resolutions with retrospective effect without any awareness.  Hence, save where the above-mentioned sections clearly show that they empower the incorporated to pass resolutions with retrospective effect, this court should not come to such a conclusion.  All the abovementioned sections do not empower the incorporated owners to pass resolutions with retrospective effect.  Hence the arguments of the respondents failed.’

HH Judge Chow also ruled that the second resolution was of no effect.  This court agrees with the judgment of HH Judge Chow.  The second resolution is a resolution with retrospective effect.  Thus, it is equally of no effect as the first resolution.”

60.  Let me examine each of the stated reasons.

A.3.1   1^st reason in So Chun Man

61.  It is suggested that “retrospective effect may cause ... building owners ... to lose rights which they have already obtained”. 

62.  But prospective resolutions can also deprive owners of rights.  The possibility of such abuse is not a sufficient basis for forbidding retrospective or prospective resolutions.

63.  Assume that (as here) a DMC allows a majority of owners to pass binding resolutions relating to a multi-storey building.  Consider the case where, on 1 January 2005, owners enjoy a Right X (for example, to park cars in common areas) under an owners’ resolution passed in 2004.  On 1 March 2005 the majority pass a resolution that henceforth Right X is to cease because its exercise has given rise to abuse or nuisance.

64.  Although abrogating a “right” conferred in 2004, I believe that the March 2005 resolution would be unimpeachable.  In buying a unit within a building, an owner expressly or impliedly agrees to abide by the terms of the DMC.  In the ordinary course of events, at the time of buying a unit, the owner would have had actual or constructive notice of the terms of the DMC, since DMCs are invariably registered in the Land Registry.

65.  In any situation where persons agree to be bound by a majority, there may be a minority which will be disappointed by the removal of Right X.  The minority may even feel that, in doing away with Right X, the majority voted selfishly with its own interest solely in mind.  But there is no statutory provision or legal principle which requires a person in an owners’ general meeting to vote in accordance with the interests of the owners as a whole or in any particular way.

66.  An individual owner is not in a fiduciary or quasi-fiduciary position towards other owners.  He is obliged by common law to take reasonable care not to cause damage or nuisance to his neighbours.  He is also bound by the DMC to observe express and implied covenants which regulate how unitholders are to conduct relations among themselves.  Otherwise a person is free to vote as he sees fit at a general meeting.

67.  I appreciate that, in building management, there may be minority oppression.  A majority may act in bad faith to force unreasonable measures on a minority.  I shall return to this theme below.  For now, I simply suggest that banning retrospective resolutions does not address the problem of minority oppression.

A.3.2   2^nd reason in So Chun Man

68.  So Chun Man argues that retrospective resolutions may transform originally legal actions into illegal ones.  I do not think that this is right.

69.  Assume that in January 2005 a building passes a resolution that management fees should be at $600.  In March 2005 the owners realise that $600 is too low and will not permit the budget to break even.  A new resolution is passed raising management fees to $700 with back effect from January 2005.

70.  It might be argued that, whereas previously an owner had “legally” discharged his obligations under the DMC by paying $600, with the passage of the new resolution the owner is now in “breach” and must pay an additional $100 for each of January and February 2005.  But the argument would be unpersuasive.

71.  First, no private resolution by building owners, however large the majority, can turn what was once legal into something illegal.  It is only the law as administered by the Courts which determines whether past or present conduct is “illegal”.

72.  Second, in my example, an owner could not have anticipated before March 2005 that fees would have to be raised by $100 per month.  In paying $600 for January and February 2005, that owner would have fulfilled his contractual obligation.  From March 2005, he would have incurred an additional liability to pay a total of $200 for the 2 previous months.  If he fails to pay the extra levy, he will be in breach of contract.  But he will be in breach only from the date of his failure to pay the additional levy.  He will not be in breach as from January 2005 on the basis that what was once “legal,” has now been declared “illegal” by the owners in general meeting.

73.  Third, it is difficult to think of a realistic (as opposed to fanciful) example whereby a “legal” act pursuant to some first resolution, becomes “illegal” because of a second resolution.  I cannot think of one.  Those that I have posited to myself to test So Chun Man, reduce themselves upon scrutiny to an owner being in breach from the date of failing to comply with the obligation created by the second resolution, and not from an earlier date.

A.3.3   3^rd reason in So Chun Man

74.  It is suggested that retrospective resolutions “bring about unstable factors because the resolutions passed today may be overruled by subsequent resolutions”.

75.  This is a restatement of the first and second reasons already examined.  Indeed, all 4 reasons in So Chun Man are essentially variations on a single theme: Retrospectivity means that what was once possible, can later cease to be so with detrimental consequence to one or more owners.

76.  The short answer is again that prospective resolutions can also cause rights and privileges previously enjoyed to be terminated.  Non-recognition of retrospectivity is not an efficacious means of dealing with the problem identified.  So Chun Man deprives building owners of a convenient procedure for curing inadvertent slips, but without really tackling the perceived problem of “instability”.

A.3.4   4^th reason in So Chun Man

77.  The final reason given is that “the old property owner may be bound by resolutions with retrospective effect without any awareness”.  I do not think that the reason can be valid as a matter of law.

78.  When Owner X sells his unit to Owner Y, Owner Y becomes subject to 2 sources of contractual obligation.  He is bound by the terms of the sale and purchase agreement between himself and Owner X.  He is also bound by the terms of the DMC.

79.  The first obligation is self-evident. 

80.  As for the second obligation, positive and negative covenants in the DMC run with the land.  They bind new owners by reason of Conveyancing and Property Ordinance (Cap.219) (CPO) ss.39, 40 and 41.  Accordingly, where (pursuant to a DMC) a resolution is passed by building owners before an assignment to Owner Y, Owner Y will be bound by such resolution, however adverse it may be to Owner Y’s interest and despite Owner Y not having had actual notice or opportunity to make representations against the resolution.  That is merely a consequence of the CPO.

81.  If he wishes, Owner Y may seek a contractual indemnity against Owner X in respect of the adverse effects of any past or future resolution by building owners.  Such indemnity and its enforcement would be wholly a matter of personal contract between Owners X and Y.

82.  Consider the position of Owner X. 

83.  By CPO s.41(8) the covenants in the DMC (including (say) a covenant to be bound by the majority vote of building owners):-

“shall not bind a person after he has ceased to have any estate or interest in the land affected by that covenant except in respect of a breach of that covenant committed by him before that cessation”.

84.  Owner X cannot be bound by resolutions, even ones with retrospective effect, passed after ceasing to hold an interest in a building.  This is because the covenants in the DMC (including any provision binding an owner to follow a majority vote) would no longer be binding on Owner X.

85.  Owner X may be liable to comply with some resolution (including one having retrospective effect) if, in the assignment to Owner Y, Owner X agreed to be so bound.  But that would be purely a matter of contract between Owners X and Y.  Such term would only be enforceable by Owner Y against Owner X. 

86.  In light of the above, I cannot envisage how the problem suggested by the fourth reason in So Chun Man could arise in practice.

87.  The inapplicability of the fourth reason is more stark in the instant case.  This is because, echoing CPO s.41(8), DMC cl.18 itself provides:-

“No person shall, after ceasing to be the owner (as herein defined) of any undivided shares shall be liable for any debt, liability or obligation under the covenants terms and conditions of this Deed in respect of such shares and/or the factory or car parking space of the said building held therewith save and except in respect of any breach, non-observance or non-performance by such person of any such covenant or term or condition prior to his ceasing to be the owner thereof.”

88.  None of the 2001 resolutions purported to change DMC cl.18.  They did not seek to impose retrospective liability on previous owners (such as Batty).  Even if they did, they would not have had that effect in law in light of DMC Sch.V cl.10 and the CPO.

89.  Believing that the 1997 resolutions were valid, Batts Far East Ltd. (Batts) paid its proportionate contribution towards the 1997-98 renovations in advance, before selling its shares in the Building to a company within the Grande Group in August 2000.  How Batts’ contribution is to be treated as between Batty and the Grande company which acquired its shares, would be a matter of construing the sale and purchase agreement between those two entities.

A.3.5   Minority oppression

90.  I now consider minority oppression.  I do so, because underlying the submissions of Mr Kenneth Chan (appearing for Sun Wah) has been the suggestion that the Grande Group has been using its majority at owners’ meetings to push extravagant improvements to the Building lobby and unfairly impose expense on Sun Wah.

91.  I confine myself to 3 observations.

92.  First, Judge To refrained from making any finding of minority expression.  He said (at Judgment §30):-

“During the deliberations above, I have passed some comments critical of the way the Plaintiff and the Grande Group conducted the management of the building.  In addition, Mr. Kenneth Chan made other complaints of the Plaintiff’s conduct.  These include breach of the house rules of the building in that the tendering procedures were not adopted, paying excessive rental to the Grande Group for renting parking spaces as paid parking for use by visitors and incurring heavy losses, taking loans from and paying interest to another related company of the Grande group without disclosure, conversion of cargo lifts into passenger lifts for Grande group’s purposes at the inconvenience of the other industrial users and obstructing non-Grande Group owners from attending the owners meeting on 17 January 2001.  Mr. Kenneth Chan submits that these give an overall view of the way the Plaintiff and the Grande Group controlled the management of the building, their lack of impartiality and even integrity, and their oppressive conduct towards the minority owners.  Mr. Kenneth Chan submits that this is a classical and extreme case of majority owners imposing their will upon the minority owners through the vehicle of a property management company, which is their own subsidiary.  The evidence strongly suggests that the Grande Group was causing excessive renovation works to improve the aesthetic appearance of the building which carries its name at the expense of all the owners, including the minority owners who have not agreed.  There is probably some substance in the above complaints, but there is no need for me to rule on those matters as I consider them irrelevant and that I should not allow myself to be influenced by them.  As shown in the judgment above, I reached my conclusion without having to take those matters into account.”

93.  Given Judge To’s comments, the present case cannot be treated as a minority oppression case.  The majority must be assumed to be acting bona fide and the question is only whether they have the power under the BMO and DMC to pass resolutions with retrospective effect.

94.  Since the fraud or bad faith of the majority is not at issue, the law does not allow piercing the corporate veil so as to identify the various owners comprising the majority in favour of the September 2001 resolutions as Group companies.  If the corporate veil cannot be penetrated, all that can be posited is that a majority voted in favour of the September 2001 resolutions and a minority (including Sun Wah) are unhappy with the result.

95.  At the time of the 1997 resolution, the Grande Group did not hold a majority in the Building.  It has only been since August 2000 that the majority shares (367 out of 622) in the Building have been owned by the Group.  This position resulted from the sale in that month of 67 undivided Building shares held by Batts.

96.  It is plausible that, had Sun Wah received proper notice of the 1997 resolutions and attended the 28 April 1997 meeting, it could have spoken against the proposed $4.5 million renovations and persuaded a majority to vote against or reduce the envisaged works.

97.  The suggestion is that by September 2001, the Group having secured a majority of the Building’s shares, it was unfair to Sun Wah retrospectively to approve the 1997-98 works.  The unfairness (it is said) arises because Sun Wah has “lost” the chance (which it might have had in 1997) of swaying a majority to vote against the 1997-98 renovations.

98.  Within the parameters of this case (in particular the absence of bad faith), I have difficulty in seeing that there is unfairness to Sun Wah.

99.  Consider the position had Batts not sold its shares to the Group and the composition of Building owners remained the same in 1997 and 2001.  In that case Sun Wah would have the chance to argue against approval of the retrospective resolution.  There would clearly be no unfairness to Sun Wah.  A similar conclusion would hold if Batts sold its shares in the Building to a third party unconnected with the Group.  Why should there be a different conclusion merely because Batts sold its shares to a Group company? 

100.  The mere fact that the 2001 resolutions may be characterised as retrospective, does not introduce an element of unfairness in the equation.  It is only if one pierces the corporate veil and assumes bad faith on the part of the Group as a whole, that the question of oppression and unfairness can arise.  Whether Group companies were acting mala fide is a different question from the technical issue of whether, in building management law, retrospective resolutions are permissible.  The latter issue has here to be answered (as Judge To emphasised) independently of considerations of good or bad faith.

101.  Second, where there is a finding of bad faith, I accept that it would be a relevant question how building management law responds to oppression.

102.  But I do not believe that it is open to the law to deal with oppression by ruling out retrospective resolutions.  As a concept, the passing of retrospective resolutions is neutral in nature.  Such resolutions may be for good or bad, in the same way that prospective resolutions can benefit or harm.  A constant refrain of this Judgment has been that, for the common law to rule out certain types of resolutions because they can be mis-used, is akin to throwing out the baby with the bath water.  There is no general principle at common law that, solely because something can be abused, it should be entirely forbidden (in the absence of an express permission) so as to protect those who might be abused.

103.  This is not the place for a detailed analysis of minority oppression in building management law.  All I can usefully suggest here is that minority oppression has to be tackled more directly.  The starting point (I think) would be a rigorous construction of the rights and obligations enjoyed or owed by an owner towards every other owner as set out in individual DMCs.

104.  If (say) the question is whether the majority can in bad faith vote in extravagant renovations which are of no benefit to the building as a whole but only advance the commercial interests of the majority, one can assess whether the relevant DMC expressly or impliedly authorises the specific resolution.  Many DMCs will (as here) only confer a power on a majority to bind a minority by resolutions “concerning” a building.  A resolution aimed solely at advancing sectarian interests might not “concern” a relevant building (as opposed to a class of owners).  In that case, the resolution would fall outside the power conferred by the DMC.  This would be so, regardless of whether the resolution was proposective or retrospective.

105.  The previous paragraph is only intended to illustrate one possible direct approach.  There are myriad permutations.  It is not feasible to anticipate all situations and succinctly analyse how DMCs and the law can deal with them.  I merely suggest that minority oppression is not logically or effectively to be dealt with by ruling out retrospective resolutions. 

106.  Third, Mr Chan submits that Companies Ordinance (Cap.32) s.168A does not apply to incorporated owners.  From this, he infers that, but for the principle in So Chun Man, minority owners would be vulnerable to majority oppression.  I do not think that Mr Chan’s conclusion necessarily follows from his premise.

107.  Assume that Mr Chan is right in suggesting that Grande as manager acted in bad faith by putting forward resolutions only favouring the Group.  In such situation, the law does not need to look into whether a resolution is or is not retrospective.   That does not strike me as a helpful consideration.  Managers (as here) are usually parties to a DMC.  Under a DMC, they have an express or implied obligation to act fairly for the benefit of all owners.  Thus, an owner who believed that a manager was acting in breach of his obligation of impartiality should at least have his protection in the form of an action against the manager for breach of the DMC.

A.3.6   Conclusion on So Chun Man

108.  The nature of a resolution (whether retrospective or not) is too artificial a basis on which to determine rights among building owners.  Unfortunately, the ratio of So Chun Man compels one to draw such slender and refined distinctions.  Nonetheless, if a situation is “on all fours” with So Chun Man, that authority must be followed.  None of the exceptions to the rule that this Court is bound by its past decisions, readily applies here.

109.  It is thus necessary to see whether the present matter is distinguishable.  Since the circumstances do seem different, I do not believe it right to apply So Chun Man here.

B.   Issue 2: Should Judge To be asked to make further findings?

110.  On this issue, I agree with Rogers VP.  For the reasons he has stated, I do not think that remitting the case to Judge To is a practical option.

III.   Conclusion

111.  Grande is not entitled to charge interest in the way that some 2001 resolutions purported to do.  On the resolutions concerning the principal amounts of the 1997-8, 1999-2000 and 2001 works and the $2.8 million budget deficit, I would have allowed the appeal.

Hon Rogers VP:

112.  The appeal will therefore be dismissed and there will be an order nisi of costs in favour of the defendant.