MOK PING CHEONG ADOLF AND ANOTHER v. THE INCORPORATED OWNERS OF MA’S MANSION

LDBM 331 OF 2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT Application No. 331 of 2004

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LDBM 339 OF 2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

BUILDING MANAGEMENT Application No. 339 of 2004

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Between

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REASONS   FOR   JUDGMENT

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1.  This judgment deals with 2 Applications which have been ordered to be heard together.  In the first Application No. LDBM 331 of 2004, Mok Ping Cheong Adolf and Chan Sau Chun (hereinafter called “Mok & Chan”) sue the Incorporated Owners of Ma’s Mansion (hereinafter called “the IO”) for 2 declarations.  The first declaration sought is that the management fees collected from the owners are not being handled in accordance with the mandatory requirements of the Building Management Ordinance, Cap. 344 (hereinafter called “the BMO”).  Consequential to that is a prayer for direction from the Tribunal on how the fees so far collected should be handled.  The second declaration sought is that the resolution passed on 20August 1999 for increase in management fees from HK$600 to HK$630 was not properly sanctioned by the procedures and requirements laid down in the BMO and the resolution is thus null and void.

2.  In the second Application No. LDBM 339 of 2004, the IO sues Mok & Chan for payment of arrears of management fees with interest from February 2004. 

3.  There is in fact a third issue of dispute in relation to the removal of a steel frame erected on the external wall of the building.  That issue and the associated question of costs have been settled before the commencement of the trial.  Nothing more will be said about it. 

4.  For the first issue, there is no dispute that the management fees have been collected and deposited into a bank account maintained by the IO with a bank.  Mok & Chan rely on paragraph 3 of the Seventh Schedule of the BMO and argue that the fees should have been collected and paid into a bank account maintained by the manager.  The building is currently maintained by a professional manager.  The fees are currently deposited into the IO’s bank account under section 20 of the BMO. 

5.  For the second issue, there is no dispute that the increase of management fee by HK$30 per month was effected by a resolution of the owners of the IO in general meeting and not by a resolution of the management committee under section 22 of the BMO.  Mok & Chan thus argue that the resolution should have been made by the management committee and not by the owners in general meeting.  The IO relies on paragraph 4 of the Seventh Schedule.   

6.  The relevant provisions are: -

“34E	(1)	Subject to subsection (4), the provisions in the Seventh Schedule shall be impliedly incorporated—
		(a)	into every deed of mutual covenant made on or after the material date; and
		(b)	as from the material date, into every deed of mutual covenant made before that date.
	(2)	The provisions incorporated into a deed of mutual covenant by virtue of this section shall—
		(a)	bind the owners and manager of the building; and
		(b)	prevail over any other provision in the deed that is inconsistent with them.
Seventh Schedule
3.   Manager to maintain bank account
	(1)	The manager shall maintain an interest-bearing account and shall use that account exclusively in respect of the management of the building.
	(2)	Subject to subparagraphs (3) and (4), the manger shall without delay pay all money received by him in respect of the management of the building into the account maintained under subparagraph (1).
	(3)	Subject to subparagraph (4), the manager may, out of money received by him in respect of the management of the building, retain or pay into a current account a reasonable amount to cover expenditure of a minor nature, but that amount shall not exceed such figure as is determined from time to time by a resolution of the owners’ committee (if any).
	(4)	The retention of a reasonable amount of money under subparagraph (3) or the payment of that amount into a current account in accordance with that subparagraph and any other arrangement for dealing with money received by the manager shall be subject to such conditions as may be approved by a resolution of the owners’ committee (if any).
	(5)	Any reference in this paragraph to an account is a reference to an account opened with a bank within the meaning of section 2 of the Banking Ordinance (Cap 155), the title of which refers to the management of the building.  (Amended 49 of 1995 s. 53)
20.	(1)	A corporation shall establish and maintain a general fund—
		(a)	to defray the cost of the exercise of its powers and the performance of its duties under the deed of mutual covenant (if any) and this Ordinance; and
		(b)	to pay Government rent, premiums, taxes or other outgoings (including any outgoings in relation to any maintenance or repair work) which are payable in respect of the building as a whole.  (Amended 27 of 1993 s. 19; 29 of 1998 s. 105)
	(2)	A corporation may establish and maintain a contingency fund—
		(a)	to provide for any expenditure of an unexpected or urgent nature; and
		(b)	to meet any payments of the kind specified in sub-section (1) if the fund established thereby is insufficient to meet them.
	(3)	A corporation shall maintain an interest-bearing account and shall use that account exclusively in respect of the management of the building.  (Added 27 of 1993 s. 19)
	(4)	Subject to subsections (5) and (6), a corporation shall without delay pay all money received by the corporation in respect of the management of the building into the account maintained under subsection (3).  (Added 27 of 1993 s. 19)
	(5)	Subject to subsection (6), the treasurer of a management committee may, out of money received by the corporation in respect of the management of the building, retain or pay into a current account a reasonable amount to cover expenditure of a minor nature, but that amount shall not exceed such figure as is determined from time to time by a resolution of the management committee.  (Added 27 of 1993 s. 19)
	(6)	The retention of a reasonable amount of money under subsection (5) or the payment of that amount into a current account in accordance with that subsection and any other arrangement for dealing with money received by a corporation shall be subject to such conditions as may be approved by a resolution of the management committee.  (Added 27 of 1993 s. 19)
	(7)	Any reference in this section to an account is a reference to an account opened—
		(a)	with a bank within the meaning of section 2 of the Banking Ordinance (Cap 155); and
		(b)	in the name of the corporation.  (Replaced 49 of 1995 s. 53)
21.	(1)	Subject to subsection (4), a management committee shall determine the amount to be contributed by the owners to the funds established and maintained under section 20 during such period—
		(a)	in the case of the first such period after the date of registration of the corporation, not exceeding 15 months; and
		(b)	in any other case, not exceeding 12 months,
		as the management committee may determine.  (Replaced 27 of 1993 s. 21)
	(1A)	Subject to subsection (3), any amount (“subsequent amount”) determined by a management committee under subsection (1) after the first such amount (so determined under that subsection) shall not exceed a sum equivalent to 150% of the preceding amount (so determined under that subsection) unless that subsequent amount is approved by the corporation by a resolution passed at a general meeting.  (Added 27 of 1993 s. 21)
	(2)	Subject to section 14(1) and to subsection (3), a management committee shall not increase the amount determined in accordance with subsection (1).  (Amended 27 of 1993 s. 42)
	(3)	A management committee may increase the amount required to be contributed by the owners to the extent to which the funds established and maintained under section 20 are insufficient to meet any payment due by the corporation in respect of the cost of complying with—
		(a)	an order of the tribunal; or (Amended 27 of 1993 s. 42)
		(b)	any notice, order or other document served upon the corporation in relation to the common parts by a public officer or public body under any Ordinance.
	(4)	The Fifth Schedule shall have effect with respect to the amount to be determined under subsection (1), the preparation of budgets by the management committee for such determinations and the supply of copies of any documents in respect of those budgets.  (Added 27 of 1993 s. 21)
	(5)	In the event of any inconsistency between this section (which shall be construed to include the Fifth Schedule) and the terms of a deed of mutual covenant or any other agreement, this section shall prevail.  (Added 27 of 1993 s. 21)
Fifth Schedule
	1.	The amount to be determined by the management committee under section 21(1) shall be based upon a budget prepared by the management committee for the period specified by the management committee under that subsection.
	2.	The budget referred to in paragraph 1 shall set out the sums which in the opinion of the management committee will be reasonably necessary to meet payments of the kind specified in section 20(1) and shall, if a contingency fund is established under section 20(2), set out the sums which in the opinion of the management committee will be reasonably necessary to meet payments of the kind specified in that subsection.
	3.	A revised budget may be prepared if the management committee is of the opinion that any sum set out in a budget in respect of which the revised budget is to be prepared is insufficient to meet the proposed expenditure which that sum was intended to meet.
22.	(1)	The amount to be contributed by an owner towards the amount determined under section 21 shall be—
		(a)	fixed by the management committee in accordance with the deed of mutual covenant (if any);
		(b)	payable at such times and in such manner as the management committee may determine.  (Amended 27 of 1993 s. 22)
	(2)	If there is no deed of mutual covenant, or if the deed of mutual covenant does not provide for the fixing of contributions, the amount to be contributed by an owner towards the amount determined under section 21 shall be fixed by the management committee in accordance with the respective shares of the owners.
	(3)	The amount payable by an owner under this section shall be a debt due from him to the corporation at the time when it is payable.
	(4)	A certificate in writing signed by the chairman of the management committee stating the amount to be contributed under this section by an owner and when it is payable shall be admissible in evidence in any proceedings as prima facie evidence of the facts stated therein without further proof.”  (emphasis supplied)

Which is the proper bank account?

7.  The terms contained in the Seventh Schedule and implied by section 34E into every DMC are terms that have to be observed by the manager and the owners as a matter of contract.  Paragraphs 3 and 4 require the manager to maintain a bank account for deposit of contributions of management fee by the owners.  The bank account referred to in paragraph (3) is for the exclusive use in respect of the management of the building (paragraph 3(1)).  It is for the deposit of money received by the manager in respect of the management of the building (paragraph 3(2)).

8.  The provisions in sections 20 to 22 and the Fifth Schedule are statutory provisions that have to be complied with by the IO and the manager.  Section 20 requires the IO to maintain a bank account also for deposit of contributions of management fee by the owners.  The bank account referred to in section 20(3) is also for the exclusive use in respect of the management of the building.  It is for also the deposit of money received by the corporation in respect of the management of the building (section 20(4)). 

9.  It thus appears that the bank account maintained by the manager under paragraph 3 of the Seventh Schedule and that maintained by the IO under section 20 are for the same purpose; namely for the exclusive use in respect of the management of the building and for deposit of money received in respect of the management of the building.  There is thus the question of why there should be the same provisions requiring the same thing to be done by the IO and by the manager. 

10.    Section 20 and paragraph 3 of the Seventh Schedule however appear to cater for different situations.  Paragraph 3 appears to provide for the situation when the owners have not incorporated into a body corporate.  It talks about the owners’ committee but not a corporation or its management committee.  An owners’ committee is normally set up by the DMC.  It is not a legal entity.  The BMO does not set up such committee.  The BMO refers to a corporation and its management committee.  Though sections 34D and 34K equate the management committee with an owners’ committee, that is only for the purpose of performing the terms of the DMC after the owners have incorporated.  When there is already a management committee, sections 34D and 34K obviate the need for the owners to appoint an owners’ committee.  The duties and rights in the DMC can be discharged and exercised by the management committee.  The reference in paragraph 3 to an owners’ committee in that context does not necessarily amount to a reference to management committee as well.  On this analysis, paragraph 3 does not deal with the situation when the owners have incorporated. 

11.  When the owners have not incorporated, it is convenient to have a bank account for management purpose in the name of the manager alone.  If the manager does not maintain any bank account for deposit of management fees, the owners themselves or the owners’ committee on their behalf will have to maintain a bank account for the same purpose.  Such is less convenient as there may be changes in owners or members of the owners’ committee.  However, once the owners have incorporated, it is a legal entity and can conveniently maintain a bank account in its own name.  It is not necessary for the manager to maintain a bank account anymore. 

12.  Taking this analysis to the extreme, once the owners have incorporated, the contractual arrangement in paragraph 3 will expire and become inapplicable, it has to give way to the statutory machinery set up by sections 20, 21, 22 and the Fifth Schedule for collection of management fees.  The manager should stop using the bank account set up under paragraph 3 for management purpose and all management fees should be deposited into the IO’s bank account set up under section 20.  Furthermore, once the owners have incorporated themselves into a separate legal entity, that entity should have the right to collect and keep its own money.  The management fees payable by the owners are treated as debts due to the IO (section 22(3)) and have to be deposited into a bank account opened by it under section 20(3).  The manager should not keep such money for the IO.  However, it is only necessary in these Applications to consider whether it is appropriate to deposit management fees into the IO’s bank account.  It is not necessary to consider whether it is appropriate to deposit management fees into a bank account set up by the manager under paragraph 3 when the owners have already incorporated.  I would therefore refrain from coming to such conclusion. 

13.  I would therefore conclude that once the owners have incorporated, it is legitimate for the corporation to maintain a bank account in its own name for collection and withdrawal of management fees.  This is compatible with the scheme for collection of management fees as provided for in sections 20 to 22 and the Fifth Schedule.  I do not think there is any problem for the IO to deposit the management fees into its own bank account and not the bank account of the manager. 

14.  I would also note the submissions on behalf of Mok & Chan that sections 20 to 22 and the Fifth Schedule would only operate when the management is undertaken by the owners corporation without the help of any professional manager.  It is further submitted to me that once a professional manager has been engaged, as in this building, paragraph 3 of the Seventh Schedule would come into play and displaces the statutory scheme.  But I cannot see why the corporation should lose control over its money when it engages a professional manager to discharge its management duties.  After all, the management fees are deemed to be debts due to the corporation and not to the manager and the manager only collects the fees on behalf of the corporation.  I cannot see any reason why the corporation should litigate in its own name to recover unpaid management fees and then to hand over the same to the manager. 

15.  It has also been submitted to me that the general and contingency funds referred to in section 20(1) and (2) are to be deposited into the bank account set up under section 20 and these funds are different from the fund deposited into the bank account set up by the manager under paragraph 3.  If that is right, the logical deduction will result in the need for both the IO and the manager to set up bank accounts for deposit of management fees.  The owners will have to make separate payments to the IO and the manager.  I do not agree with this submission.  Regardless of whether the owners have incorporated, the expenses for which the general fund is set up to pay will have to be paid.  Even if there is no owners incorporation, the manager will still have to pay them.  I would also repeat that the bank account, whether it is set up under paragraph or section 20, is for deposit of contributions of management fee by the owners.  The reference to general and contingency funds in section 20 is just to guide and regulate the management committee in the discharge of its obligations. 

16.  My attention has also been drawn to the case of The Incorporated Owners of Allway Gardens v. Allway Gardens Management & Services Ltd. and Anor LDBM 154/1999 which contains a decision which is not in all fours with my decision herein.  However, a reading of that case shows that the analyses above have not been proffered to the learned Judge and that might explain the cause for the difference. 

17.  For the above reasons, I would not grant the first declaration as sought by Mok & Chan. 

Validity of resolution for the increase?

18.  The minutes of owners’ in general meeting on 20 August 1999 recorded, inter alia, the following: -

“(五)	調整管理費事項：
	政府宣佈，每五年須要進行一次電力測試(WR2)，工程費用甚大，為免到時科款困難，提議增收管理費，每單位30.00元(即540元改為570元，而600元改為630元)作為電力測試基金，由01-10-1999開始生效，一致通過。
5.	Adjustment of management fee:
	The Government has announced that there should be an electricity test (WR2) once every five years.  The fees for the project are substantial.  In order to avoid the difficulty of collecting funds when the time comes, it is suggested to increase management fees by $30 per flat (i.e. $540 becomes $570 and $600 becomes $630) as the fund for the electricity test.  The commencement date is 1 October 1999.  Unanimously passed.” (translation)

19.  The argument on the validity of the resolution for increasing the $30 per month is an argument of whether the resolution was made under paragraph 4 of the Seventh Schedule or whether it should have been made under section 22.  The effect of sections 20 to 22 and the Fifth Schedule is that the amount of management fee to be paid by individual owners should be determined by the management committee under section 22.  However, the IO argues that this $30 increase was resolved by the owners in general meeting under paragraph 4 of the Seventh Schedule.  Paragraph 4 provides as follows: -

“4.	Special fund
	(1)	The manager shall establish and maintain a special fund to provide for expenditure of a kind not expected by him to be incurred annually.
	(2)	If there is a corporation, the corporation shall determine, by a resolution of the owners, the amount to be contributed to the special fund by the owners in any financial year, and the time when those contributions shall be payable.
	(3)	The manager shall maintain at a bank within the meaning of section 2 of the Banking Ordinance (Cap 155) an interest-bearing account, the title of which shall refer to the special fund for the building, and shall use that account exclusively for the purpose referred to in subparagraph (1).  (Amended 49 of 1995 s. 53)
	(4)	The manager shall without delay pay all money received by him in respect of the special fund into the account maintained under subparagraph (3).
	(5)	Except in a situation considered by the manager to be an emergency, no money shall be paid out of the special fund unless it is for a purpose approved by a resolution of the owners’ committee (if any).”  (emphasis supplied)

20.  There is no dispute that if some powers are reserved to the directors by the articles, only the directors can exercise them.  The only way the general body of shareholders can control the exercise of such power is by altering the articles or by refusing to re-elect those directors whose actions they do not approve.  The shareholders in general meeting cannot usurp the directors’ powers as vested in them by the articles.  It is only when the directors cannot or will not exercise them that the general meeting may do so.  This happens when the board is in a deadlock or there is no quorum or the act in question conflicts with the directors’ duties to the company (see Shaw & Sons (Salford) Ltd. v. Shaw [1935] 2 KB 113, European Asian Bank AG v. Reicar Investments Ltd. [1986] HKC 350 and Miracle Chance Ltd. v. David Yuk Wah Ho CACV 298/1998).  Thus if the $30 increase should have been dealt with by the management committee, the resolution of the owners in general meeting on 20 August 1999 would be of no effect. 

21.  It has been submitted on behalf of Mok & Chan that the payments that can be resolved under paragraph 4 should be of a capital and non-recurrent nature.  Since this $30 increase is for setting up a fund for an expected and recurrent (though once every 5 years) expenses, it should not be dealt with under paragraph 4, but should be dealt with by the management committee under section 22. 

22.  I do not agree with this submission.  Paragraph 4 only deals with an expenditure that is not expected by him to be incurred annually.  The expenditure need not be non-recurrent, nor should it be of a surprise or urgent nature.  In fact, it should be an expenditure that can be anticipated but not of an annual nature.  The minutes clearly show that the expenditure for which the fund was set up is something that is expected but not of an annual nature.  I am of the view that this $30 increase is for setting up a special fund within the meaning of paragraph 4. 

23.  I would add that this fund should be set up and maintained by the manager regardless of whether there is a corporation or not.  By definition, this fund is not the general fund under section 20(1) or the contingency fund under section 20(2).  It should be kept by the manager in a special bank account maintained specially for it.  I can see that this requirement may conflict with the requirement in section 20(4) which requires the owners incorporated to pay all money received by it into a bank account set up by it.  But I think contributions to this fund, though of a different nature and possibly not fall within the items in the budget prepared under the Fifth Schedule or paragraph 1 of the Seventh Schedule, are also for the purpose of managing the building or estate.  Such contributions should likewise be recoverable as a debt due to the corporation under section 22(3).  I think as long as the law should stand as it is, such contribution can be kept either by the corporation in its bank account or by the manager in a special account opened by the manager for this fund.

24.  In the premises, I also do not grant Mok & Chan the second declaration sought by them.  I further order them to pay management fee at $630 per month from February 2004 with interest at the rate of $15 per $1,000 per calendar month on the arrears as and when they fell due.  Finally, I order that Mok & Chan do pay the costs of both Applications to the IO.