PEARL ISLAND HOTEL LTD v. LI KA YU AND ANOTHER

Company law - objects clause in Memorandum of Association - whether business of estate manager ultra vires - each of 37 alphabetically listed objects separate and independent objects - first alphabetically listed object not the main or primary object to which other objects merely ancillary or incidental - Held: Business of appellant estate manager was intra vires carried on by the Company within the powers contained in its objects clause.

Property law - recovery of management and repair fees by management company from 1 of several owners of residential multi-storey building - conflict between Deed of Mutual Covenant giving management company wide powers and provisions of Multi-Storey Buildings (Owners Incorporation) Ordinance - relationship between management company and owners Management Committee - whether in case of conflict contractual powers in Deed of Mutual Covenant or statutory powers under Ordinance prevail - Held: 1. Under Deed of Mutual Covenant the powers of Owners Management Committee subject to Management Company's contractual powers; 2. Where conflict arises, the contractual powers under the Deed prevail over the statutory powers under the ordinance;

3. Appeal from Small Claims Tribunal upheld; 4. Judgment for appellant for management and repair fees of $9022.46.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

Small Claims Appeal No. 46 of 1987

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JUDGMENT

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1. This is an appeal from orders made in the Small Claims Tribunal by the learned Adjudicator Mr. Z.E. Li, dismissing claims totalling $9022.46 brought by the appellant against the respondents. Under Claim H7342/87 the appellant had claimed $1260 being monthly management fees of $210 for the period from February to July 1987 inclusive.  In Claim H7343/86 the appellant claimed $7762.46. After giving the respondents credit for an electricity deposit of $104.25, this sum was made up of management fees of $7560 from February 1984 to January 1987 at the rate of $210 per month; and $170 for exterior wall and staircase repairs.

2. The appellant was incorporated on 13th January 1970. Under its memorandum of Association one of its objects was to carry on the business of a hotelkeeper. For a period it appears to have carried on that business at the Pearl Island Hotel, situate at the 17½ Milestone, Castle Peak Road, near Tuen Mun. During that period another company, Pearl Island Investment Ltd. owned and developed a considerable area of land at Pearl Island. Among the developments were buildings containing 224 residential units known as Pearl Island Holiday Flats.

3. Pearl Island Investment Ltd. in 1971 sold one of those residential units, known as Flat 7, 1st Floor, Block F3 of Pearl Island Holiday Flats, to the respondents predecessors in title. In terms of the sale of Flat 7, Pearl Island Investment Ltd. entered into a Deed of Mutual Covenant (hereinafter called the "DMC") with, inter alia, the respondents predecessors in title. The DMC was in common form, providing for the management, maintenance, repair and insurance of the buildings, including their common areas. Under the DMC the appellant was appointed the manager of the buildings. It is common ground that is the appellant's sole remaining business.

4. It appears that disputes arose between the parties to the present appeal, due in part to the appellant's alleged unsatisfactory management of the buildings. The refusal of the respondents to pay the management and other fees already referred to resulted in the two separate claims, brought by the appellant, in the Small Claims Tribunal. During the hearing the learned Adjudicator informed the parties that the proceedings before him were not concerned with the respondents complaints relating to mismanagement.

5. The learned Adjudicator based his dismissal of the claims on two main grounds. First, he held that the appellant's business of managing the buildings, was not within the objects contained in the appellant's Memorandum of Association and was therefore ultra vices.   Secondly, that the contractual provisions in the DMC, under which the appellant purported to found its claim, were void as they were in conflict with the statutory provisions of the Multi-Storey Buildings (Owners Incorporation) Ordinance, Cap.344. The submissions advanced before me in the present appeal were mainly concerned with those two issues.

6. Appeals from Small Claims Tribunals are limited by Section 28 of the Small Claims Tribunal Ordinance, Cap.338, to questions of law or jurisdictional grounds. The grounds of appeal ultimately relied on by the appellant concerning the ultra vires and DMC issues, were clearly questions of law. Leave to appeal was granted by this Court on 30th October 1987.

7. I record that one of the grounds of appeal was that neither party raised the ultra vires issue at the hearing. As parties are not entitled to be represented before the Tribunal by Counsel or solicitors, this was hardly surprising. Furthermore, under section 16(3) of the Ordinance the Tribunal, as one element of its informal nature, is given the investigatory power, to inquire into any matter which it may consider relevant, whether or not it has been raised by a party. Counsel for the appellant properly abandoned this ground of appeal. I hold that it was proper for the learned Adjudicator to raise and consider the ultra vires and DMC issues, whether or not they had been raised by the parties at the hearing. I will now consider those issues in turn.

Ultra vires issue.

8. Clause 3 of the appellant's Memorandum of Association, contains that Company's object clause which is divided into 38 paragraphs. The first paragraph being clause 3(a) empowers the appellant to carry on the business of hotelkeepers and similar businesses. The learned adjudicator accepted that business was no longer carried on and that from 1984 the sole business of the appellant was that of an estate manager. The learned Adjudicator further held, that none of the objects enabled the appellant to carry on the sole business of estate manager. As a consequence the learned Adjudicator held that the appellant had no right to collect management fees from 1984.

9. On the construction of object clauses and the ultra vices doctrine I was referred to Gore-Browne on Companies (44th Edn) paragraph 3.2 and to 'Charlesworth and Cain Company Law' (12th Edn) 71. The ultra vires doctrine, of course, applies in Hong Kong. The early historical restrictive intention of an objects clause, to limit a company's powers and make those actual powers clear to third parties, has largely been defeated by the widespread practice to include in each Company's Memorandum of Association, a wide variety of objects, far beyond those contemplated as probable future businesses, by those who initially created the company.

10. Where the objects clause is carefully drafted, each paragraph constitutes a separate object, not limited by the nature of any prior or other paragraphs. The combined skills of company draftsmen and the liberal approach of the Courts, over a long period means that many companies can in effect carry on nearly the same wide variety of businesses as a natural person. Indeed, in at least one common law country, the legislature has recently recognised this trend, to the perhaps surprising extent of enacting, that a company may carry on all the businesses that may lawfully be carried on by a natural person.

11. Against that background, I turn to consider Clause 3. It is true that Clause 3(a) only refers to hotel and similar businesses. It is also true that there is no express Cotman v. Brougham (1918) AC 514 clause, stating that each paragraph of the objects clause is to be construed separately and independently of the first or other paragraphs. However, the final paragraph of Clause 3 provides that the appellant has power:

12. In the case of each company it is necessary to construe the objects clause as a whole and I so approach the provisions of the appellant's object clause. Counsel for the respondents agreed that the effect of the final paragraph (11), is that each of the foregoing paragraphs, containing widely different objects, were to be considered separately. After considering Clause 3, I hold that the foregoing 37 paragraphs are to be construed separately. Accordingly, Clause 3(a) is not the principal or main object, with the following paragraphs, other than paragraph (11), merely providing subsidiary powers incidental to the Clause 3(a) powers. The fact that the first paragraph of the objects clause is concerned with hotel and similar businesses, does not give those alphabetically first listed businesses, any legal primacy or make the following powers merely incidental to the hotel or similar businesses.

13. Counsel for the appellant submitted that the appellant had power under Clause 3 to carry on its sole business as an estate manager. It was submitted that such a business was within the powers contained in several of the paragraphs of Clause 3. It was also submitted that the relevant date, was when the DMC was executed in 1971, when the appellant was also carrying on business as an hotelkeeper under Clause 3(a). I do not need to consider the latter submission because apart from other paragraphs such as paragraph (g), under which it is at least arguable the business of estate manager would be intra vires, I was also referred to paragraph (p) which empowers the appellant:

14. I hold that the appellant had the power under Clause 3(p) to carry on the sole business of estate manager.

Deed of Mutual Covenant Issue

15. In accordance with widespread Hong Kong practice, the DMC provided, under Clause 6, for the owners of the various flats to elect a Management Committee and under Clause 7 for the appointment of professional managers. Clause 7(iv) expressly appointed the appellant as the first manager for 10 years from 14th February 1971 with a right of renewal for a further period of 15 years. It is common ground that the right of renewal has been exercised. Under the DMC the appellant is therefore the contractual manager of the buildings until 13th February 1996. The typical factual position has arisen where the developer, as the original owner, has appointed a manager of its choice for a very long period, in respect of a multi-owned residential building, of which it is no longer the owner. Further, only the developer and not any of the new flat owners, is given the contractual right to terminate the employment of the appellant as manager.

16. Clause 7(ii)(a) substantially reduces the apparent power of the contractual Management Committee elected by the several owners. For as the learned Adjudicator accurately observed, so long as the appellant or any other person is the manager, the Management Committee may not exercise any of the powers otherwise vested by the DMC in the Management Committee. The manager's contractual powers authorise it to recover from flat owners all moneys due by them under the DMC.

17. With respect to the learned Adjudicator, I am satisfied, in accordance with the principles set out in International Property Management Ltd. v. Lee Yung-sang (1975) HKDCLR 104, that the appellant is entitled, in its own name, to sue the respondents for the management and repair fees the subject of the Small Claims Tribunal proceedings. I was also referred to the helpful article 'The Enforcement of obligations relating to Control and Management of High-Rise Buildings' (1977) 7 HKLJ 81 by Professor P.G. Willoughby. I accept that a manager's right to sue a flat owner, who was not an original party to the DMC, for the recovery of fees, can also be founded on the principle laid down in Halsall v. Brizell (1957) Ch 169 which was later applied by the English Court of Appeal in Ives (ER) Investment Ltd. v. High (1967) 2 QB 379.

18. The learned Adjudicator held that there were serious conflicts between the contractual provisions of the DMC and the statutory provisions of the earlier enacted Multi-Storey Buildings (Owners Incorporation) Ordinance which came into force on 19th June 1970. I observe that this Ordinance has remained unamended, except for the alteration in 1985 of the name of the Secretary for Home Affairs to his subsequent title of Secretary for Administrative Services and Information. Where the learned Adjudicator found such conflicts, he held that the provisions of the Ordinance prevailed and that some of the corresponding contractual provisions in the DMC were void.

19. Counsel for the appellant submitted that where there was a conflict, the provisions of the DMC prevailed. Where the Legislature enacts statutory provisions which may affect private contracting parties legal relationships, it usually expressly states whether, if there is any conflict, the statutory provisions are to prevail. For example, under the Sale of Goods Ordinance Cap.26 there is provision that the statutory provisions as to price, time, and passing and delivery of property, shall only apply if the parties do not agree to the contrary. On the other hand, labour and consumer protection legislation usually provide that where there is a conflict between statutory and contractual provisions, the former shall prevail. The proviso to Section 69 of the Employment Ordinance, Cap.57 is such an example, providing that  where any express condition in an agreement is contrary to the Ordinance, "the express condition shall be void".

20. The Multi-storey Buildings (Owners Incorporation) Ordinance contains no express provision declaring what the position is if a conflict between the provisions of a DMC and the Ordinance occurs. This omission is the more unfortunate, in that the Ordinance deals with many matters which are also dealt with in DMC's and there are, as well, several references to DMC's in the Ordinance which makes the position more confusing. The failure of the original Ordinance to make such express provision, has not been cured by any subsequent amendment during the nearly 18 intervening years. As a result, the present dispute between the parties as to the proper resolution of any conflict, has arisen. Perhaps it is as a consequence not surprising, that Counsel for both parties were able to advance attractive competing arguable cases, whether the provisions of the Ordinance or the DMC should prevail.

21. I accept the observation of the learned Adjudicator that the Legislature would have been aware on the enactment of the Ordinance of the existing wide use of DMC's. At one stage Counsel for the appellant advanced his submissions on the basis that the instant DMC came into force before the enactment of the Ordinance but later accepted that the contrary was the position. I approach the issue on the basis that when the original parties executed the DMC, the Ordinance was already in force.

22. Counsel for the appellant submitted that the Ordinance was enacted to supplement and not to override existing DMC's and also to provide for the management of multi-storey buildings where no DMC existed. I was taken to the long title of the Ordinance but do not find its words very helpful. However, the appellant's submission seemed in part to adopt, the statement by Professor Willoughby, in the article already referred to, where he lists a number of circumstances where the statutory machinery for electing a Management Committee would prove useful. These circumstances include where a Management Committee has not been appointed, where the manager wishes to withdraw or where the management company has been wound-up.

23. There are numerous references in the Ordinance to DMC's. A DMC is defined in Section 2. There are other references to DMC's in Sections 3(1)(a)(b), 2(a)(b); 5(5)(a); 7(3); 18(1)(c), 2(c); 19; 20(1); 22(1)(a), (2); 39(a); Second Schedule 1(a)(b), 2(a); and the Third Schedule 3(3), 5(a). Section 3(1) authorises certain persons named in a DMC, to convene a meeting of owners to appoint a statutory Management Committee. I note that if a meeting is convened, the Committee is appointed in accordance with the provisions of the DMC if the DMC so provides.  It is only where there is no DMC or if the DMC is silent on the method of appointment, that the statutory machinery for appointment applies. These provisions of Section 3 support the appellant's submission, that generally the Ordinance merely fills in gaps not provided for by a DMC. Under Section 5(5) the DMC's voting provisions also expressly prevail over the Ordinance's previsions.

24. Counsel for the appellant submitted that it followed from the at least implied primacy given to the DMC, that a contractual Management Committee was a different and distinct body to the statutory Management Committee. Where under a DMC a Management Committee was elected, that contractual committee had the powers contained under the DMC and there was no need to have a Management Committee appointed under the Ordinance. Although it was recognised that the contractual Committee's powers might, where necessary, be supplemented by the statutory powers. On the other hand, where a DMC did not provide for a Management Committee or where the persons named in Section 3 so elected, a statutory Management Committee could be created. Counsel for the respondents agreed that the two committees were different but he strongly submitted that there existed between them what he described as a continuity of identity.

25. Counsel for the respondents further pointed out that the mandatory nature of Section 18(1), 20(1) and 21(1) were important indications that the statutory powers prevailed over less powerful contractual powers. In reply Counsel for the appellant raised two matters. First, he referred to the fact that the apparent mandatory nature of Section 18(1) was qualified by Section 18(1)(c) which expressly recognised DMC powers. I note that provision does not merely refer to those DMC powers but strengthens and supplements them.

26. The second and more important submission Counsel for the appellant made in relation to Section 18, was that the mandatory provisions of Section 18(1) were to be contrasted with the discretionary provisions of Section 18(2). The powers and duties under Section 18(1), it was pointed out, relate to the minimal matters DMC's customarily provide for and in the case of Section 18(1)(c) reinforce DMC powers. On the other hand, it was submitted that one of the reasons why the much wider powers and duties set out in Section 18(2) are discretionary, is to avoid any possible conflict with any similar contractual powers in a DMC. A similar explanation was advanced in relation to the contrasting mandatory and permissive powers of Section 20. I was also referred to Section 22(2), 39(a) and to the provisions already mentioned in the Second and Third Schedule, where the statutory provisions are expressly subject to any other provisions in a DMC.

27. On the other hand, Counsel for the appellant conceded that there remained some overlapping and that Section 19 did expressly provide that the statutory power in that section were to apply, notwithstanding any contrary provisions in a DMC. Counsel for the appellant attempted to explain. this provision as an exception to the general principle underlying the Ordinance. Counsel for the respondents referred to it as an example supporting his proposition that the Ordinance generally prevailed over a DMC subject to express and limited exceptions.

28. Faced with this conflict, which was reinforced rather than reduced, by the cogent competing submissions of Counsel, it is necessary to consider the scheme and fundamental nature of the Ordinance. Although the Ordinance has remained in force for many years without substantial amendment and deals with an often controversial aspect of Hong Kong property law, the narrow issue now raised has not, according to Counsel, yet been considered in any reported appellate decision. The leading Court of Appeal judgment on the Ordinance is Grenville Houses Ltd. v. The Incorporated Owners of Grenville House (1978) HKLR 235 which was not concerned with the present issue but primarily with the nature of the owners statutory incorporated body and its capacity to sue. The Court of Appeal held that a major purpose of the corporation was simply to facilitate the capacity to sue and be sued, for which purpose exceptional statutory rights had been created.

29. When I come to construe the effect of the Ordinance with the assistance of Counsels submissions and authority, I am satisfied that the scheme of the Ordinance, is to supplement by statute, the provisions which might otherwise be contractually provided in a DMC. The general scheme of the Ordinance is to strengthen management of multistorey buildings and to facilitate the incorporation of their owners, particularly where this has not been achieved contractually. While it is true that Section 19 applies notwithstanding any contractual provision in a DMC, I consider that an exception to the general provisions of ordinance and enacted to meet a particular special problem.

30. Although the issue is not without difficulty, I am reinforced in arriving at that conclusion, by the judgment of Mayo J., in The Incorporated Owners of South Seas Centre, Mody Road v. South Seas Centre Management Co. Ltd. HCA No.1432/85. That judgment proceeded on the basis that the incorporated owners would only be able to exercise their statutory managerial rights under the ordinance, as against the contractual manager, if the DMC under which the defendant manager was appointed, was first discharged. That same proposition may be stated in alternative terms, namely that so long as the DMC exists, its contractual managerial provisions prevail, over any conflicting statutory provisions in the ordinance.

31. I hold that, subject to any express statutory exceptions, the provisions of the DMC, prevail over any conflicting statutory provisions in the Ordinance. There are no statutory exceptions relevant to the present appeal. It therefore follows that, with respect, I disagree with the learned Adjudicator's finding that the contractual provisions he referred to are void. The effect of the DMC, is to place the appellant as manager in a very strong position, as against the owners. The owners Management Committee is subject to the generally superior powers of the appellant, as contractual manager so long as it holds that position. One of the consequences of the appellant's contractual position, is its power to recover management and repair fees and, if necessary, to sue for their recovery. In relation to those fees the statutory provisions of Sections 21 and 22 are, on the facts, simply not relevant.

32. The learned Adjudicator concluded his judgment by referring to Pearl Island Hotel Ltd. v. Incorporated Owners of Pearl Island Villas Eastern Block (Block B) HCA No.1628/87. The present appellant is the plaintiff in that action. The respondents are members of the owners incorporation sued as the 2nd Defendant. The action has not yet come on for trial but an interim injunction in favour of the appellant was granted by Power J., on 24th April 1987. I agree with the learned adjudicator, that none of the interlocutory determinations so far made in that action, are relevant to the present proceedings.

Conclusion

33. In the result I have therefore accepted the appellant's submissions that its sole business as estate manager was intra vires the Memorandum of Association and that the contractual powers under the DMC prevail, where there is conflict, over the statutory powers under the Ordinance. The appeal is therefore upheld. At the hearing before the learned Adjudicator it was undisputed that the amounts claimed had not been paid. In view of the conclusions I have arrived at, the matters advanced by the respondents in evidence before the Small Claims Tribunal, are not relevant to the issue of liability. I am satisfied that the appellant duly established its claim before the Tribunal, after the respondents had full opportunity to put forward their defence.

34. In those circumstances, it is proper that I should now finally dispose of the claims rather than remit the matter back to the Tribunal pursuant to Section 29(1)(c) of the Small Claims Tribunal Ordinance. There will be judgment for the appellant for the total sums claimed in the Small Claims Tribunal of $9022.46. There will be an order nisi for the respondents to pay the appellant's costs of and occasioned by the appeal to be taxed if not agreed, to become absolute, unless application to the contrary is made, within 14 days of the delivery of this judgment.