RIGHTOP INVESTMENT LTD AND ANOTHER v. YU TSUI SHEUNG AND ANOTHER

HCA 2691/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2691 OF 2001

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J U D G M E N T

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I.  Introduction

1.  The question before me is whether the services of the 1st Plaintiff (RIL) as manager of a commercial development in part of a building were properly terminated.  The answer depends on a construction of a Deed of Mutual Covenant (DMC), a Sub-Deed of Mutual Covenant (Sub-DMC) and the Building Management Ordinance (Cap.344) (BMO).

II.  Background

2.  Shau Kei Wan Plaza (the SKWP Building) is a residential and commercial development.  The residential area consists of 3 towers.  The commercial area, known as Smiling Shau Kei Wan Plaza, comprises the car park, lower ground floor, ground floor, 1st floor, 2nd floor, and podium of the SKWP Building.  The commercial area constitutes some 62,760 undivided shares of the SKWP Building.

3.  The SKWP Building (including the commercial area) is governed by a DMC dated 21 April 1992.  The commercial area is also regulated by a Sub-DMC dated 30 April 1992.

4.  Kolot Property Services Limited was (and remains) the SKWP Building's manager.  Kolot appointed RIL as sub-manager for the commercial area.  RIL in turn delegated some of its management duties to the 2nd Plaintiff (RPSL).  RPSL is in liquidation.  It did not participate in the trial of this action.

5.  RIL (but not RPSL) is a party to the Sub-DMC.

6.  The SKWP Building owners (including the owners of commercial area units) formed an owners corporation on 31 July 1996.  The corporation supervises Kolot's management of the SKWP Building.

7.  On 29 January 1995 the owners of the commercial area units (the commercial owners) formed a committee to oversee the affairs of the commercial area.  Such matters included supervision of RIL.  The 2 owners identified in the title of this action are sued as representatives of the commercial owners.

8.  At an extraordinary general meeting (EGM) on 29 September 2000, the commercial owners (by 51.5% of all undivided shares in the commercial area) voted to end RIL's services as manager.  The commercial owners also resolved (this time by 59.8% of all undivided shares in the commercial area) to appoint Fulico Property Management Ltd. to replace RIL.  The EGM ran from 7.45 pm to 9.45 pm.

9.  RIL contends that the commercial owners' vote was irregular.  It says that any resolution to terminate its services must follow procedures set out in the DMC, Sub-DMC and the BMO.  It submits that the EGM resolutions did not comply.

10.  In particular, RIL argues that, by the Sub-DMC, a majority vote was required to end its tenure as manager.  But there was no majority here.  This was because a significant number of the votes at the EGM were (RIL alleges) defective.

11.  RIL says that the votes were defective for one or more of the following reasons:-

(1)	Contrary to BMO Schedule III cl.4(2) and Schedule VIII cl.14(1), the proxies used at the EGM did not bear the common seal of the companies lodging them. RIL says that this ground vitiates proxies corresponding to some 22,295 undivided shares.
(2)	Contrary to BMO Schedule VIII cl.14(2), the proxies used were not lodged with the chairman at least 24 hours before the meeting.  RIL is unable to say precisely how many proxies are avoided on this ground.
(3)	The votes of commercial owners who failed to pay management fees and who consequently were not entitled to vote under DMC Section VIII cl.2(n), were nevertheless counted.  RIL says that this ground nullifies proxies corresponding to some 35,947 shares.
(4)	The proxies used were "misleading" in that they only allowed the agent appointed "to vote for all the resolution but not against any of the resolution".  If correct, this ground would presumably annul all proxies.

12.  RIL submits that (if right in its complaints) less than half of those attending in person or by proxy could have validly voted for RIL's termination.  There is no dispute that a majority vote is needed to displace RIL as manager.

13.  If (contrary to RIL's case) I find the vote valid, RIL says that it was not properly notified of termination as required by BMO Schedule VII cl.7(2).  This is because the commercial owners:-

(1)	did not include a copy of the resolutions in its termination letter to RIL dated 31 October 2000; and,
(2)	did not formally notify RIL of its termination until more than 14 days after the EGM,

The result (RIL contends) is that the resolutions would still be of no effect.

14.  The termination letter of 31 October 2000 just mentioned said that RPSL's appointment as manager would cease as from 1 February 2001.

15.  By letter dated 13 January 2001 to the commercial owners's former solicitors, the plaintiffs' then solicitors stated that their clients were accepting the commercial owners' repudiatory breach and claiming damages.

16.  According to RIL, the measure of its damages is the remuneration it would have received from the time of breach to the expiry of the Government lease for the SKWP Building in 2047 or, at any rate, up to such time as Kolot ceases to be manager of the Building.

III.  Discussion

A.  Were proxies invalid for lack of a common seal?

17.  RIL first argues that the commercial owners failed to comply with BMO Schedule III cl.4(2). 

18.  That clause applies to meetings of an owners corporation. The owners may vote personally or by proxy.  Clause 14(2) states that, where proxies are used, "[t]he instrument ... shall be in writing signed by the owner, or if the owner is a body corporate, under the seal of that body".

19.  Assume (as RIL claims) that a significant number of proxies did not bear relevant company seals.  Even then I do not think that RIL's argument is tenable.

20.  BMO s.8 enacts the procedure for and effects of registering the owners of a building as a corporate body.  BMO s.8(5) provides that BMO Schedule III "shall have effect with respect to the meeting and procedure of a corporation".  BMO s.2 defines a "corporation" as "a corporation registered under section 8". 

21.  These proceedings concern the acts of the commercial owners.  They are only a sub-class of the totality of owners of the SKWP Building.  They have not incorporated themselves.  They are not the same as the owners corporation of the SKWP Building. 

22.  As an unincorporated body, the commercial owners cannot fall within the terms of BMO s.8(5).  It follows that BMO Schedule III does not affect the Sub-DMC and did not regulate the EGM in September 2000.

23.  RIL next argues that the commercial owners failed to comply with BMO Schedule VIII cl.14(1).

24.  That clause is similar in terms to BMO Schedule III cl.4(2).  But it relates to meetings of owners.  Proxies, when used at such meetings, "shall be in writing signed by the owner or, if the owner is a body corporate, under the seal of that body".

25.  I do not think that this argument is tenable either.

26.  The EGM was held pursuant to the procedure set out in Sub-DMC cl.17(c).  The regulations there only provide (in Sub-DMC cl.17(c)(iii)) that "[r]esolutions ... shall be passed by a simple majority of those present in person or by proxy..."  Nothing is said about any need for proxies lodged by corporate bodies to bear a seal. 

27.  It is thus necessary to determine whether the clauses in BMO Schedule VIII supplement the terms of the Sub-DMC.

28.  BMO s.34F stipulates that the provision in BMO Schedule VIII "shall, to the extent that they are consistent with the deed of mutual covenant, be impliedly incorporated ... into every deed of mutual covenant..." 

29.  BMO s.34F falls within BMO Part VIA, which (by BMO s.34C) "applies only to a building in respect of which a deed of mutual covenant is in force".

30.  Unless the context otherwise requires, BMO s.2 defines a "building" to mean:-

"	(a)	any building which contains any number of flats comprising 2 or more levels, including basements or underground parking areas;
	(b)	any land upon which that building is erected; and
	(c)	any other land (if any) which:-
		(i)	is in common ownership with that building or land; or
		(ii)	in relation to the appointment of a management committee under Part II or any application in respect thereof, is owned or held by any person for the common use, enjoyment and benefit (whether exclusively or otherwise) of the owners and occupiers of the flats in the building".

31.  Except where the context demands otherwise, BMO s.2 further defines a "deed of mutual covenant" to mean "a document which:-

(a)	defines the rights, interests and obligations of owners among themselves; and
(b)	is registered in the Land Registry".

32.  At first blush, the Sub-DMC, a registered document, falls within the definition of "deed of mutual covenant" in BMO s.2.  This is because, although the Sub-DMC does not concern all the owners in the SKWP Building, it regulates the rights, interests and obligations of owners (here the commercial owners) among themselves.

33.  But Part VIA applies only to "a building in respect of which a deed of mutual covenant is in force".

34.  The Sub-DMC plainly does not apply to the whole of the SKWP Building.  It merely relates to the commercial area of the SKWP Building, a small portion of the whole.  Conversely, since the commercial area does not fall within any limb of the definition of "building" in BMO s.2, the commercial area cannot be a "building" in respect of which a deed of mutual covenant is in force.

35.  Accordingly, when BMO s.34F stipulates that the terms of BMO Schedule VIII are incorporated "to the extent that they are consistent with the deed of mutual covenant," BMO s.34F cannot be referring to the Sub-DMC.  Read in context, the expression "the deed of mutual covenant" in BMO s.34F must refer to a deed of mutual covenant which is applicable to a whole building as mentioned in BMO s.34C.

36.  In other words, BMO Schedule VIII only supplements the provisions (insofar as consistent) of a deed of mutual covenant governing a building as a whole.  BMO Schedule VIII does not apply to a sub-deed regulating the affairs of a discrete area of a building.  It follows that BMO Schedule VIII cl.14(1) is not to be read into Sub-DMC cl.17(c)(iii).

37.  Note that DMC Section VIII cl.2 itself provides for meetings of some owners of the Building (such as the commercial owners).  At such meetings, DMC Section VIII cl.2(e) states that the relevant owners may vote by proxy.  Nothing is said about proxies having to bear the seal of corporate bodies lodging them. Does BMO Schedule VIII supplement DMC Section VIII cl.2(e)?

38.  I do not think so.  As already discussed, the thrust of BMO Schedule VIII is to provide for terms to be incorporated into deeds of mutual covenants for the regulation of meetings of all the owners of a building.  I do not believe that, on its true construction, BMO Schedule VIII applies to that part (if any) of a deed of mutual covenant which solely caters for meetings among a mere sub-class of owners.

39.  In dealing with RIL's argument, I have so far assumed in RIL's favour that significant numbers of proxies do not bear a requisite seal. 

40.  However, I do not believe that this assumption is justified.  A cursory examination of the proxies criticised by RIL, shows that RIL's complaint is unmeritorious. 

41.  A large number of the queried proxies have been chopped with the words "For and on behalf of" and the name of the relevant company in either English and Chinese or in English alone.  An authorised signature appears underneath the chopped words. 

42.  In other disputed proxies, the companies concerned have used circular chops bearing their respective names in English and Chinese characters.

43.  In one of the proxies questioned, a plain stamp with the Chinese name of the company (Ocean Sense Development Ltd.) merely appears.

44.  It appears that only 3 proxies (those from Smiling Sky Holdings Ltd., China Growth Holding Ltd. and Fian Consulting Services Co. Ltd.) do not bear any stamp, chop or seal imprint at all.  Those proxies collectively correspond to some 3,958 undivided shares.

45.  The styles of chops on the disputed proxies are commonly used in Hong Kong.  If BMO Schedule III cl.4(2) or Schedule VIII cl.14(1) were applicable, in my view any form of chop (whether the "For and on behalf of", the circular, or the plain name version) would have met the stipulated requirement of a seal imprint on a proxy.

46.  In support of a case that chop imprints are not enough, RIL cites Companies Ordinance (Cap.32) (CO) s.93(1)(b). That provides that every company "shall have as its common seal a metallic seal on which it shall have its name engraven in legible characters".  But I do not see how the section advances matters.

47.  RIL says that the different chop marks found on the proxies here do not comply with the BMO requirement.  What is needed (RIL stress) is an embossed imprint from the company's common seal.  Only that and nothing else will do.

48.  RIL submits that common seals capable of producing an embossment are normally kept in secure custody and require a company resolution before they can be affixed.  RIL says that, because of this, a proxy marked with a common seal is more likely to be bona fide than one marked with the imprint of a mere chop. The chairman of a meeting can be more confident of the authenticity of a proxy embossed with the common seal, as opposed to one marked with a mere chop.

49.  I am not persuaded by RIL's argument. 

50.  First, I do not see how a requirement under the CO that every company should have a common seal can affect a determination whether proxies have been validly sealed for the purposes of BMO Schedules III or VIII.  Both BMO Schedule III cl.4(2) and Schedule VIII cl.14(1) only require a "seal" and say nothing about using a "common seal".

51.  Second, I do not accept that common seals invariably require company resolutions before they can be affixed.  Further, it seems to me that company chops, however humble, are normally themselves kept under lock and key.  Frequently, companies require such chops to be stamped and countersigned on their cheques.  Unless such chops are securely held, there will be an obvious risk of corporate fraud.  I am therefore not convinced that documents embossed with "common seals" are more secure and credible than those stamped with chops.

52.  Third, the purpose of sealing a proxy pursuant to BMO Schedule III or VIII is for purposes of authentication.  CO s.36 itself states that documents requiring authentication may be signed by a director, secretary or other authorised officer of a company and "need not be under its common seal".  In that light, it would be odd if proxies authenticated (as here) by any one of several types of chops, should be treated as invalid for lack of a common seal embossment.

53.  Fourth, I note that the Lands Tribunal (albeit not always consistently) has refrained from treating stipulations in the BMO that proxies bear a company seal, as strict requirements that a particular seal and only that seal can be used.  See U Wai Investment Co. Ltd. v. Au Tok Tai [1997] 4 HKC 200 (at 206); Triumphal Fountain Ltd. and another v. Chan Chi Lun and others LDBM 309/2001, 19 October 2001 (at §§38-9). 

54.  I have been referred to 嘉居樂物業管理有限公司 v. 家安花園業主立案法團 LDBM 188/2004, 21 October 2004 (at §§24-30) where Judge Chan declined to follow U Wai and Triumphal Fountain.  He apparently thought that an embossment by a common seal was required to comply with BMO Schedule III cl.4(2).  But the judge does not explain how the Court can read the bare word "seal" in cl.4(2) as a reference to a "common seal", so that no other type of seal will meet the provision.  Such construction of cl.4(2) seems unwarranted.

55.  As for the proxies without any chop, stamp or seal, these are limited to less than 4,000 shares. 

56.  The EGM counted 32,284 shares in favour of ending RIL's tenure as manager with 12,468 shares opposed and 0 abstentions.  Assume that all the 3,958 shares concerned voted for RIL's removal.  If one subtracts 3,958 from 32,284, then one arrives at 28,326 shares in favour of removing RIL.

57.  Under DMC Section VIII cl.2(k) or Sub-DMC cl.25(b), it is sufficient to carry a resolution if more than 50% of "those present in person or by proxy and voting by reference to the number of Undivided Shares held" vote in its favour.  Thus, even if one treats the proxies for the 3,958 shares as spoiled and the owners lodging then as not present in proxy or by person, the resolution to terminate RIL's services would still pass by a majority of the undivided shares present and voting.

58.  In fact, the evidence at trial was that the 3,958 shares were used by the appointed proxy to vote against termination of RIL's services.  Thus, if anything, the shares should be deducted from the 12,468 shares opposed to RIL's removal.

59.  Now take RIL's case to its extreme. 

60.  Treat as nullities the proxies of all 22,295 shares queried by RIL for lack of a common seal.  That would mean that only the vote corresponding to 9,989 (that is: 32,284 - 22,295) shares was validly for removing RIL.  Similarly, on the basis that they are not embossed with a seal, treat as nullities the proxies of the 3,958 shares mentioned above used in RIL's favour. That would leave 8,510 (that is: 12,468 - 3,958) shares voting for RIL. 

61.  The valid votes for removing RIL would still be greater than those in favour of retaining RIL.  A majority of commercial owners present in person or by proper proxy would still be for terminating RIL's services.  Such majority would carry a resolution by reason of DMC Section VIII cl.2(k) and Sub-DMC cl.25(b).

62.  Thus, however analysed, RIL's complaint based on a absence of common seal imprints has no substance.  The complaint fails.

B.  Were proxies invalid because lodged too late?

63.  RIL relies on BMO Schedule VIII cl.14(1) which provides that proxies are to be lodged "not less than 24 hours before the time for holding of the meeting ... or within such lesser time as the chairman shall allow".  Although pleaded, in closing submissions RIL did not vigorously press this ground.

64.  The question is once again whether BMO Schedule VIII augments the procedure for meetings in Sub-DMC cl.17(c).  Given the discussion in Section III.A above, BMO Schedule VIII cl.14(2) does not apply to the Sub-DMC.  This complaint of RIL must also fail.

65.  Even if BMO Schedule VIII cl.14(2) were applicable, RIL's criticism would still be wrong.  There are 3 reasons for this conclusion.

66.  First, there is no evidence from RIL as to how many proxies were lodged late.  There is merely an assertion in the Amended Statement of Claim that "most of the proxies were not returned ... within 24 hours prior to [the EGM]".

67.  The EGM chairman was Mr. Samuel Yau Chi Man, the director of Sound Well Records Ltd.  His evidence is that proxies were all either sent directly to him or collected by him from the SKWP Building management office before 7.45 pm on 28 September 2000.

68.  That evidence thus indicates that all proxies were lodged 24 hours before the meeting on 29 September 2000.

69.  Second, assume to the contrary that some proxies were lodged late. 

70.  Clause 14(2) gives the chairman of a meeting a discretion to relax the time for lodging proxies.  Mr. Yau in gathering together and acting on the proxies must have impliedly exercised his discretion as EGM chairman to extend time for late proxies.  In such circumstances, the proxies were validly deployed.

71.  Third, DMC Section VIII cl.2(j), in relation to meetings of sub-classes of owners, provides that proxies "shall be deposited with the chairman at the meeting".

72.  BMO Schedule VIII only applies where it is consistent with the terms of a deed of mutual covenant.  The Sub-DMC is expressly subject to the terms of the DMC (including DMC Section VIII cl.2(j)).  BMO Schedule VIII cl.14(2) would clearly contradict the more generous time frame for lodging proxies allowed by DMC Schedule VIII cl.2(j).  In those circumstances, even if BMO Schedule VIII were relevant, cl.14(2) could not be impliedly incorporated into the DMC or Sub-DMC.

C.  Should the votes of delinquent owners have been counted?

73.  DMC Section VIII cl.2(n) provides, again in relation to meetings of sub-classes of owners, that:-

"The Owner who has failed to make any payment payable by him under this Deed shall not be allowed to be present in person or by proxy or vote at any meeting and he shall not be counted for the purpose of any written resolution under this Deed."

74.  On the basis of this clause, RIL says that a significant number of votes should have been disqualified.  Again, although pleaded, in closing submission RIL did not strongly pursue this ground.

75.  I do not accept the argument.

76.  It seems, purely as a matter of construction, that cl.2(n) was included in the DMC for the benefit of the body of owners or of a sub-class of owners in general meeting. 

77.  Enforcing prompt payment of management dues will always be a problem in a multi-storey building.  To deal with this problem, it is hardly surprising that a typical deed of mutual covenant should stipulate that, if an owner wishes to have a say in the running of a building or part of it, he should pay his management dues.  If an owner does not pay fees, he risks ostracism.  The consequence of that is his views will be ignored and his vote disregarded.  Provisions such as cl.2(n) give the general body of owners a stick to goad their members to payment.

78.  But the body of owners, at its discretion, whether through goodwill or other similar reason, must always be able to waive the right to disregard a delinquent member's vote.  Chitty on Contracts (29th ed.), I, §22-045 states:-

"Where the terms of a contract include a provision which has been inserted solely for the benefit of one party, he may, without the assent of the other party, waive compliance with that provision and enforce the contract as if the provision has been omitted."

79.  Given that cl.2(n) is solely for its benefit and a change of manager is an important decision affecting all commercial owners, the commercial owners in general meeting can decide to hear a non-paying member and to accept his vote.  The "shall not" in cl.2(n) cannot have been intended as an absolute and immutable prohibition.  Absent evidence of an objection from any commercial owner, I do not see how RIL can object to the counting of votes from non-paying owners towards the resolution.

80.  I have assumed in RIL's favour that it is right as to the number of commercial owners who have "failed to make any payment payable".  But, in actuality, the evidence on this point is obscure.

81.  RIL called evidence from Mr. Leung Chi Keung, RPSL's former manager.  Mr. Leung prepared a Schedule of allegedly delinquent commercial owners based on his study of records.  However, that evidence is at best hearsay and cannot be accorded much weight.

82.  For example, Mr. Leung believes that there were "[o]utstanding management fee due as at 29/9/2000" from the holders of 35,947 undivided shares.  But what precisely do the records consulted say and mean? 

83.  It is conceivable that some owners owed fees for (say) the month of August or even September 2000, but were fully paid up otherwise.  In such case, non-payment of August or September 2000 management fees by the EGM date might not constitute a "failure" to pay triggering the sanction in cl.2(n).  I doubt, for instance, that cl.2(n) was meant to operate in a situation where amounts invoiced (say) only a few days before the EGM, remain outstanding.  It is usual for commercial people to enjoy a credit period of about a month or so from invoicing before an account is treated as overdue. 

84.  Without a more detailed breakdown of Mr. Leung's evidence, I cannot assume that large numbers of proxies were actually disqualified from voting even on a strict application of cl.2(n).

D.  Were the proxies "misleading"?

85.  I have looked at the printed proxies.  I do not believe that they can be characterised as misleading.  This ground is pleaded.  But RIL did not press the matter in closing submission.

86.  It is true that, in English translation, the proxies provide that the appointed agent "shall fully represent me/us to vote and pass all motions".  But one is dealing here with commercial people.  They are not innocents abroad. 

87.  It would be a simple matter, if anyone wished his delegate to vote in some specific way, to amend a proxy to say so.  This was done, for example, by the owners of Shop 1089 who modified their form with specific handwritten instructions.

E.  Was notice of termination invalid?

88.  For this complaint, RIL relies on BMO Schedule VII.  That provides as follows:-

"7.  Termination of manager's appointment by owners' corporation
(1)	Subject to sub-paragraphs (5) and (5A), at a general meeting convened for the purpose a corporation may, by a resolution of the owners of not less than 50% of the shares, terminate by notice the manager's appointment without compensation.
(2)	A resolution under subparagraph (1) shall have effect only if:-
	(a)	the notice of termination is in writing;
	(b)	provision is made in the resolution for a period of not less than 3 months notice or, in lieu of notice, provision is made for an agreement to be made with the manager for the payment to him of a sum equal to the amount of remuneration which would have accrued to him during that period;
	(c)	the notice is accompanied by a copy of the resolution terminating the manager's appointment; and
	(d)	the notice and the copy of the resolution is served upon the manager not more tha n 14 days after the date of the meeting.
...."

89.  RIL says that there was a failure to comply with BMO Schedule VII cls.7(2)(b), (c) and (d).

90.  I do not think that BMO Schedule VII is applicable.

91.  BMO s.34E stipulates that BMO Schedule VII shall be impliedly incorporated into deeds of mutual covenant.  But BMO s.34E falls within Part VIA.  Accordingly, for similar reasons to those stated above in relation to BMO s.34E, BMO s.34E only applies to a deed of mutual covenant which governs a building as a whole.

92.  The terms of BMO Schedule VII are not to be read into the Sub-DMC.  Nor are they to be read into that part of the DMC relating to meetings of a sub-class of owners within the SKWP Building.

93.  The conclusion that BMO Schedule VII cl.7(2) is inapposite is reinforced by the text of cl.7(1).  The resolution mentioned in cl.7(2) is one passed by a general meeting of an owners corporation pursuant to cl.7(1).  Indeed, BMO s.34D states that, for the purposes of Schedule VII, "a reference to a resolution of the owners is a reference to a resolution passed at a general meeting of the corporation convened and conducted in accordance with the Third Schedule".  The commercial owners here are not a corporation and the BMO imposes no obligation on them to incorporate.

94.  Accordingly, this ground of complaint by RIL also fails.

F.  Is RIL entitled to damages?

95.  RIL has not established any grounds for attacking the EGM resolutions. Consequently, RIL's services as manager were validly terminated.  RIL is not entitled to damages.

96.  Even if I had found that the EGM resolutions were invalid, I would not have held that RIL was entitled to the entire of the damages sought. 

97.  RIL claimed that it could not find alternative management opportunities to mitigate its loss.  Its witness, Mr. Leung, said that in early 2001 RIL tendered for the management of a building in Sham Shui Po and another building in Western.  Neither bid was successful.  Since then RIL has not tried to find other work, apparently because of a lack of funds.

98.  I am not satisfied on the available evidence that RIL has done all that it reasonably could have done to mitigate loss. 

99.  I am sceptical of any alleged entitlement on the part of RIL to recover damages for such remuneration as it might have received from the commercial owners between 2001 and 2047.  By any yardstick that is surely an excessive claim.

IV.  Conclusion

100.  The plaintiffs' action is dismissed. The commercial owners succeed in their defence.

101.  I shall now hear counsel on costs.