XCHRX HANG YICK PROPERTIES MANAGEMENT LTD. v. THE INCORPORATED OWNERS OF WINNER BUILDING

H.C.A. No. 4089 of 1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4089 OF 1996

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J U D G M E N T

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PRELIMINARY ISSUE

1. On 27-4-99 Mr Justice Sakhrani on the application of the Plaintiff, ordered that the following question be determined as a preliminary issue in these proceedings;

"Whether the Defendant incorporated to act for all the owners of Winner Building is liable to reimburse the Plaintiff for all the expenses incurred in the management of Winner Building, even though some of the expenses might be incurred prior to Defendant's incorporation"

FACTS

2. There was agreement on the basic facts. The Plaintiff began to manage the Winner Building in 1978. The building has 24 floors with 14 units on the ground floor and 6 flats on each of the other floors. Occupiers of shops and flat units change constantly.

3. A Deed of Mutual Covenant (DMC) was in force from 20-3-78. Under Cl.4(a) Plaintiff was appointed as Manager for an initial term of one year and thereafter until resignation, or removal by a meeting of owners, in each case with one month's notice. The Plaintiff was not named as a party to the DMC.

4. Cl.4(f)(ix),Cl.4(I) and Cl.4(m) of the DMC covered, variously, the payment of legal fees, insufficiency of contribution and failure to pay amounts due while Cl.4(n) confirmed Plaintiff's position, as agent of the owners, to recover amounts unpaid.

5. On 29-11-94 the Defendant (D) was incorporated under s.8 of the Building Management Ordinance Cap.344(BMO). On 31-12-94 D's solicitors gave Plaintiff 3 month's notice of termination as manager with effect from1-3-95.

6. Thereafter Plaintiff claimed that while it still managed the building the costs and expenses incurred prior to termination, exceeded the management fees it had received since 1990 and that a deficit of $315,666.40 was due and owing, less any sums earlier recovered.

PLAINTIFF'S CASE

7. Plaintiff relied on s.26 of the Conveyancing and Property Ordinance Cap.219 (CPO) as establishing that even if Plaintiff was not a named party in the DMC, it could benefit from Cl.4(a) which provided that its appointment as Manager bound the covenantors and their successors in title until Plaintiff's termination as Manager. Incorporation under the BMO would not automatically terminate the Manager, nor undermine the DMC. The 7th Schedule to the BMO contained mandatory terms which were incorporated automatically into the DMC(s.34 BMO). Plaintiff contended that its appointment as Manager continued despite the incorporation, until formally terminated.

8. That Defendant accepted that position is shown by notice of termination given by Defendant to the Plaintiff one month after the incorporation. The requisite period of notice under the DMC was given and there had been no attempt by Defendant to manage the building in opposition to the Plaintiff (Incorporated Owners of South Seas Centre v. South Seas Centre Management Co. Ltd. [1985] HKLR 457).

9. Plaintiff relied on s.16 BMO which provides that when the owners of a building have been incorporated under s.8, the rights, powers, privileges and duties of the owners in relation to the common parts of the building shall be exercised and performed by, and the liabilities of the owners in relation to the common parts of the building shall subject to the provisions of the Ordinance be enforceable against, the corporation to the exclusion of the owners.

10. Plaintiff claimed from Defendant reimbursement for expenses incurred before its termination as Manager, as after termination as Manager the Plaintiff, having no interest in the building, could not enforce the DMC, whereas the Defendant could. The Plaintiff's claim was not under the DMC but for expenses incurred in the course of its position as agent of the owners.

11. Plaintiff argued that if at the date of incorporation the corporation disregarded arrears of management charges, it could not do so on the grounds that such arrears accrued prior to the incorporation, because to do so ignored the spirit and intention of the DMC and the corporation would be in breach of its statutory duty to enforce the DMC, imposed by the BMO.

12. Section 18(1)(c) BMO provides that a corporation shall do all things reasonably necessary for the enforcement of the obligations contained in the deed of mutual covenant (if any) for the control, management and administration of the building.

13. Plaintiff claimed that regardless of when the alleged deficit occurred, the covenant under the DMC to pay outstanding and further contributions to management expenses bound the covenantor and any successors in title, and as Plaintiff was not entitled after incorporation to enforce the DMC, that the duty to do so and thereby recover the deficit was laid on Defendant by the mandate of s.18(1)(c) BMO. Accordingly it argued that Defendant was the proper body to represent all owners in respect of Plaintiff's attempt to recover the deficit.

DEFENDANT'S CASE

14. Defendant rested its argument on the proposition that s.16 did not and could not cover liabilities incurred before the incorporation of the owners, but only those that occurred afterwards. In support (recognised as of persuasive effect only) Defendant relied on the case of Koo Sun Yiu v. Victorison Delivery Ltd & Others 1996 4 HKC where Cheung J. considered s.16 BMO.

15. The Plaintiff in that case sustained serious injuries in the common parts of a building. The second defendant was a corporation registered under the BMO, the incorporation having taken place 5 months after the accident. The second defendant obtained an order for trial of a preliminary issue as to whether s.16 BMO bore the construction that the liabilities of the owners in relation to the common parts, which accrued prior to the incorporation, could be enforceable against the incorporated owners.

16. In examining s.16 BMO Cheung J. noted that it neither dealt specifically with liabilities prior to the incorporation, nor specifically restricted the extent of the liabilities. It simply provided that "when the owners of a building have been incorporated" liabilities of the owners are enforceable against the corporation. By virtue of s.8(2)(a) BMO the corporation is a distinct legal entity and as a creature of statute it could only assume prior liabilities if the Ordinance expressly provided that it should.

17. Cheung J. distinguished Koo Sun Yiu from the case of Grenville House Ltd & Others v. Incorporated Owners of Grenville House {1978}HKLR 235, to which he was referred and, acknowledging the Grenville House case as binding authority in respect of liabilities arising after incorporation, pointed out that in Koo Sun Yiu the tortious liability bad arisen before the incorporation. Defendant argued that the same analysis was pertinent in the present case.

18. At common law a company is not bound by a contract purporting to be entered into on its behalf by its promoters or other person before its incorporation. After incorporation it cannot ratify or adopt any such contract because in such cases there is no agency and the contract is that of the parties making it. (Hals. Laws of Hong Kong Vol. 6 Para. 95-0158)

19. Here the Plaintiff could not rely on any contractual relationship between the Plaintiff and the Defendant because none existed either under the DMC, or under any contract to pay expenses incurred before Defendant was incorporated.

20. No agency relationship existed between the Plaintiff and the Defendant before or after the Defendant's incorporation.

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

22. I am persuaded by the reasoning of Cheung J. in Koo Sun Yiu. It follows therefore that I answer the question posed as the preliminary issue by stating that Defendant is not liable to reimburse the Plaintiff for the expenses incurred in the management of the Winner Building where those expenses were incurred prior to the Defendant's incorporation.

23. The summons seeks an order that the costs of and occasioned by this application be costs in the action - I make an order nisi in those terms.