XCHRX HOLIDAY RESORTS (MANAGEMENT) CO. LTD. v. GRANDCORP LTD.

HCA 4978/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 4978 and 17643 OF 1998

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(Consolidated)

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J U D G M E N T

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1. The Plaintiff, in this case, Holiday Resorts (Management) Co. Ltd., is the manager for the Sea Ranch on Lantau Island, and the Defendant is The Incorporated Owners of The Sea Ranch. The Plaintiff is seeking an interlocutory injunction to restrain the Defendant from inciting the owners of the Sea Ranch not to pay the management fees to the Plaintiff and, from collecting the management fees by itself.

Background

2. Under the Conditions of Exchange dated 2nd September 1975, the grantee of the land on which the Sea Ranch stands is Holiday Resorts (Hong Kong) Ltd. ("the Parent Company"). Under Special Condition 6 thereof, the parent company is responsible for the maintenance of all buildings, structures and other facilities in the Sea Ranch. If in breach, the Government can re-enter the land under General Conditions 8 and 9 thereof. The Sea Ranch was developed and the Plaintiff was incorporated for the purpose of carrying out the management duties under the said Conditions of Exchange. In the event, the Plaintiff was a party to the Deed of Mutual Covenant governing the Sea Ranch under which the owners for the time being agreed to pay to the Plaintiff monthly management fees and ferry service charges. As usual, these terms contained in the Deed of Mutual Covenant is biding upon all subsequent owners. Furthermore, the Plaintiff is empowered to sue any of the owners for non-payment of management fees.

3. In about 1984, Hutchison Whampoa Ltd., the actual developer of the Sea Ranch, no longer wanted to operate the management of Sea Ranch and the individual apartment owners of the Sea Ranch at that time incorporated a new company called Holiday Resorts (Holdings) Ltd. ("the Holdings Company") to acquire all of Hutchison's shares in the Parent Company and in the Plaintiff. Each apartment owner was subscribed one share in the Holdings Company irrespective of his shares in the divided interest in the Sea Ranch. However, as time went on, some of the apartment owners sold their apartments without selling their shares in the Holdings Company, and in time although the great majority of the existing shareholders of the Holdings Company are still apartment owners of the Sea Ranch, some of the shareholders of the Holdings Company have no more property interest in the Sea Ranch.

4. For long it has been the practice of the Plaintiff to request the owners to pay their management fees not to the Plaintiff but directly to the Parent Company who collected it on the Plaintiff's behalf. Up to about December 1996, the management committee of the Defendant was mainly composed of members who were also on the board of directors of the Plaintiff. In those circumstances, since the Plaintiff and the Defendant were managed and controlled by more or less the same group of people, there was no supervision on the Plaintiff's management of the Sea Ranch by an independent body. Some owners were not satisfied with the performance of the Plaintiff in their management of the Sea Ranch. Some of these complaints included the non-functioning sewage treatment plant, the deteriorated condition of the pier, the improperly maintained clubhouse premises and the general deterioration in quality of the Sea Ranch under the Plaintiff's management. There was also a complaint that no summary of accounts has ever been sent to the owners as required under the Deed of Mutual Covenant.

5. As the dissatisfaction of these owners with the Plaintiff's management mounted, some of the owners decided to do something about it, and in December 1996, a Mr Chong Lap Fu and a few others were elected to the board of directors of the Defendant, Mr Chong, being elected as the chairman, and thereby ousting the former persons who controlled the board of the Defendant. The first step this newly elected board of directors of the Defendant wanted to take was to oust the Plaintiff as managers of the Sea Ranch. For this, they had to secure over half the vote of the then existing owners, but as most of the owners do not normally reside at the Sea Ranch, it being a holiday resort, and due to the fact that, for some reasons, the newly elected board to the Defendant did not have a list of the then existing owners, the Defendant wrote to the Plaintiff requesting to be supplied with a list of addresses of the owners. This request was not met.

6. In July 1997, the Defendant issued a writ in HCA No. A7953 of 1997, naming the Plaintiff as 1st Defendant, and the Parent Company as 2nd Defendant. In that High Court Action, the Defendant attempted to seek a declaration that the management of the Sea Ranch by the Plaintiff ceased on 31st July 1997. However, two days before the hearing of an inter partes summons in that matter, the parties to that action entered a settlement agreement on 25th September 1997, and under Clause 3 of that settlement agreement, it was agreed that the present Plaintiff is entitled to collect management fees and ferry fees in accordance with the Deed of Mutual Covenant, and that it shall continue managing the Sea Ranch in the ordinary course as before, By Clause 7 thereof, the parties agreed that the present Plaintiff do provide the correspondence addresses of the owners for the use by the present Defendant under lawful conditions.

7. At an Extraordinary General Meeting of the Defendant held on 15th February 1998, two resolutions were passed, namely :-

"(1) THAT the Management Committee of the Incorporated Owners of the Sea Ranch, be and it is hereby authorised to collect the management fee and any other related fees from the apartment and facilities owners of the Sea Ranch to keep in custody in a designated bank account for and on behalf of the owners, with effect from 1st March, 1998.

(2) THAT the Management Committee, be and it is hereby authorised to release such fees collected from owners to settle the Sea Ranch operating expenses as it thinks fit and proper."

At that meeting, the chairman of the Defendant expressly stated that the purpose of the two resolutions were to gain control of the owners' fund and to bring pressure to bear upon the management company to be responsive to the owners' demands for the management information to which they are entitled.

8. On 26th February 1998, the Parent Company wrote to all registered owners to the effect that despite the resolutions passed by the EGM of the Defendants on 15th February, the Defendant has no authority to collect management fees which are payable to the managers under the Deed of Mutual Covenant. It further reminded all owners to pay management fees to the Parent Company for and on behalf of the Plaintiff, otherwise any unpaid management fees may be recovered by legal proceedings.

9. On 9th March 1998, the Defendant then wrote to the Plaintiff informing them that the Defendant had taken over the responsibility to collect the management fees from owners of the Sea Ranch pursuant to the resolutions passed at the EGM on 15th February 1998. That letter further reminded the Plaintiff that the Plaintiff has no authority to deal with, and must not harass owners for collection of outstanding management fees after 1st March 1998. It also invited the Plaintiff to contact the Defendant to work out a system whereby the Defendant will reimburse the Plaintiff with management fees to settle the Sea Ranch operating expenses after 1st March 1998.

10. As a result of the confusion, on 11th March, the Defendant wrote to all owners, residents and shareholders of the Sea Ranch in an attempt to clarify the position. In that letter, it is stated :

" IO hereby clarifies that once the owners have paid their management fees by addressing it to the IO they have already fulfilled their duties and liability. IO resumes the responsibility to remit it to the management company but at an amount meeting what has been budgetted and approved. The members of IO, are actually the owners, definitely would not authorise the management company to demand a repeated fee, nor interests from owners. Therefore all owners can disregard any demand note from Holiday Resorts commencing March 1, 1999 [sic]. IO is informing Holiday Resorts to stop disturbing owners further."

This therefore led to the Plaintiff issuing the present proceedings and the present application for the interlocutory injunction.

The Plaintiff's arguments

11. In a nutshell the Plaintiff's argument is that firstly, it is common grounds that there is a serious question to be tried between the parties. Secondly, that it is wrongful of the Defendant to usurp the Plaintiff's function in collecting the management fees as provided for by the Deed of Mutual Covenant. This is particularly so since to date the Plaintiff has not been terminated as the mangers of the Sea Ranch. Moreover, it is submitted on behalf of the Plaintiff that there are legitimate methods for the Defendant to obtain information from the Plaintiff which it alleges to be entitled to under the Deed of Mutual Covenant, but that it is wrong for the Defendant to have gone about it the way that they have which is tantamount to in effect blackmailing the Plaintiff. It is also submitted, on behalf of the Plaintiff, that it is wrongful of the Defendant to induce the owners to act in breach of the Deed of Mutual Covenant in refusing to pay management fees to the Plaintiff. Lastly, the Plaintiff, in reliance on the decision of Mayo J in the case of The Incorporated Owners of South Seas Centre, Mody Road v. South Seas Centre Management Co. Ltd. and Others [1985] HKLR 457, argues that as long as there is no disruption or discontinuance of the essential services performed by the management company, then there cannot be said to be a fundamental breach by the management company such as to exclude the management company from the management duties, and therefore at best it can only be said that the Plaintiff company has delegated the collection of the management fees to its Parent Company.

12. In so far as the balance of convenience is concerned, the Plaintiff submitted that it would be impossible for the Plaintiff to continue to provide management services if the Parent Company had not extended a short term loan of $1.6 million to the Plaintiff. Furthermore, unless the injunction is granted, the quality of service provided will deteriorate and will seriously affect the Plaintiff, as well as the owners of the Sea Ranch, with the ultimate result that the Government may step in for re-entry under the said Conditions of Exchange. In the meantime, the Defendant is holding onto a sum of $800,940 as at 30th November 1998, being the amount of management fees paid to the Defendant by some of the owners of the Sea Ranch. The Plaintiff says that applying the principle of taking whichever course that appears to carry the lower risk of injustice in case it should turn out to be wrong, the circumstances are in favour of granting the relief sought.

The Defendant's arguments

13. Firstly, the Defendant accepts that there is a serious question to be tried and that there are issues which can only be resolved at trial. The main thrust of the Defendant's arguments is that the Plaintiff had failed to show daily running accounts for the management of the Sea Ranch, and have persistently refused to produce to the Defendant, for its inspection, accounting information of such management. In this connection, I was referred to Clause 7(19) of the Deed of Mutual Covenant which reads :-

"To keep proper accounts of all expenditure incurred by and of all payments made to the Management Company in respect of carrying out their duties hereunder and to permit each owner at any time during office hours to inspect such accounts and to take extracts therefrom."

and also Clause 9(b) thereof, which reads :-

"All monies collected by the Management Company in the exercise of their powers and duties hereunder (save and except sufficient petty cash for day to day requirements) shall be paid into separate bank accounts and the Management Company shall keep true and proper accounts of all such monies and the expenditure thereof and shall send to each owner a summary of such accounts together with copies of the Annual budgets for the ensuing year in respect of the Estate Management Account and a Ferry Services Account. The Management Company shall further produce all such accounts and the vouchers supporting the same for the inspection of any owner on reasonable notice being given."

14. Secondly, it is submitted that the Plaintiff is dormant, and being dormant, it can carry on no activities and could not and did not manage the Sea Ranch. Therefore that is a fundamental breach of the Deed of Mutual Covenant and the settlement agreement. The basis for this submission came about because the Plaintiff, in its directors' reports and financial statements filed with the Inland Revenue, had stated therein that it was dormant.

15. Lastly, it was submitted that because of the Plaintiff's breaches, the Defendant has taken these steps to pass the resolution on 15th February 1998 to adopt interim measures to protect the interests of the owners pending steps to be taken to terminate the Plaintiff's management of the Sea Ranch. In this connection, it is submitted by Mr Liao that the Plaintiff can receive management fees collected by the Defendant by submitting to the Defendant expense claims. It was emphasized that what the Defendant has done was a just measure to protect the owners in the light of the Plaintiff's repeated and continued refusal to provide proper accounts to the owners; that if the Plaintiff is prepared to be accountable as it was required under the Deed of Mutual Covenant, then management fees collected by the Defendant are available to the Plaintiff for use as management expenses. Under these conditions, Mr Liao submits that there can be no damage, let alone irreparable damage to the Plaintiff by the measures that have been adopted by the Defendant, starting with the passing of the resolutions on 15th February.

16. It was further urged upon me that the Plaintiff, being a limited company, and looking at its balance sheet as at 31st March 1997 which shows a capital deficit of $160,145, the Plaintiff would not be good on any undertaking in damages, and that in all the circumstances of this case, there would be a lower risk of injustice to refuse the injunction sought. But that the interim measures adopted by the Defendant are just, fair and reasonable in the circumstances.

Balance of convenience

17. Since it is accepted by both parties that there is a serious question to be tried between them, what falls to be decided by me at this stage is whether I should exercise my discretion to grant, or to refuse, an interlocutory injunction based on the balance of convenience. Firstly, I take into consideration that if the interlocutory injunction is granted, the Plaintiff would be put back into the position it was in before the resolutions were passed on 15th February 1998, in that the Plaintiff would be able to resume collecting management fees by itself from the various owners of the Sea Ranch. In that event, there may arise a possibility of the allegation by the Defendant of the Plaintiff's mismanagement of funds. If this should happen, it can still be remedied at the trial of this matter by the Court ordering the repayment of such amounts as are found to have been overpaid, or those amount found to have been misappropriated.

18. On the other hand, if an interlocutory injunction is not granted, and the Defendant is permitted to carry on collecting the management fees directly from the owners, as well as exhorting the owners not to pay the management fees to the Plaintiff. This could well result in the risk of disruption to the management services being provided. Furthermore, it could also have an effect on the contractual obligations of the Plaintiff with other independent parties. At the extreme, breach of Special Condition 6 will enable the Government to re-enter the land. If such should happen, they are not capable of being satisfactorily remedied by damages.

19. As for the submissions made by Counsel for the Defendant, the main thrust of his submissions is really that the Plaintiff failed to provide accounts in respect of the management expenses, and that these measures taken by the Defendant are to arm-twist the Plaintiff into providing those accounts which they are obligated to provide under the Deed of Mutual Covenant. The point made about the Plaintiff being dormant, and therefore not in a position to perform the management services is a non-starter. I do not accept that because the Plaintiff has claimed itself to be dormant in its accounting documents lodged with the Inland Revenue, it must necessarily follow, therefore, that the Plaintiff is not in a position to perform any of its management services, and therefore in fundamental breach of its obligations. Whether or not the Plaintiff is in fundamental breach of its obligations to provide management services to the Sea Ranch must be a question of fact and not to be decided by the accounting treatment in its accounts lodged with the Inland Revenue. This argument, put forward by the Defendant, is inconsistent with his submission that right up to the end of November 1998, the Defendant has, at the end of each month, invited the Plaintiff to present its management expenses account so as to be paid the management fees by the Defendant. This invitation by the Defendant suggests to me that the Defendant acknowledges that basic management services have been performed (no matter how poorly) by the Plaintiff, or its agents, including its Parent Company. In those circumstances, it could hardly have been the case that the Plaintiff was in fundamental breach of its obligations to perform management services.

20. The Plaintiff was given the right to collect management fees under the Deed of Mutual Covenant. That right was further agreed to between the Plaintiff and the Defendant under the settlement agreement. It seems to me the only way in which that right could be taken away from the Plaintiff was if the Plaintiff was in fundamental breach of its obligations to provide management services, or if the Plaintiff's appointment as managers of the Sea Ranch was validly terminated. In the present case, it does not appear that either of those events have occurred. It follows therefore that whatever steps that have been taken by the Defendant to prevent the Plaintiff from collecting their management fees must be wrongful.

21. Lastly, having been referred to Clauses 7 and 9 of the Deed of Mutual Covenant, I cannot find any provision there to make the Plaintiff's collection of management fees conditional upon their providing the proper accounts. This in effect is what the Defendant is hoping to achieve by its resolution passed on 15th February 1998.

22. Accordingly, I shall grant the interlocutory injunction sought by the Plaintiff in terms of paragraphs 1, 2, 3 and 4 of the Plaintiff's inter partes summons dated 30th March 1998. There will be a further order that the Defendant do pay over to the Plaintiff the amount of $800,940, being the management fees collected by the Defendant as at 30th November 1998 together with any other management fees or charges so collected by the Defendant thereafter. There will be a costs order nisi that the costs of the application for interlocutory injunction be the Plaintiff's costs in the cause.