SPEEDY GAINER LTD v. THE INCORPORATED OWNERS OF MALAHON APARTMENTS AND ANOTHER

LDBM 248 of 2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Building Management Application No. 248 of 2004

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J U D G M E N T

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Background

1. One Cogi Enterprises Ltd. (“Cogi”) was an owner of certain shop units in Malahon Apartments.  By a sale and purchase agreement dated 18^th March 2004 made between Cogi as the vendor and the Applicant as the purchaser, Cogi agreed to sell all those units to the Applicant.  The Applicant sub-sold some of those units to another purchaser and retained shop No. 4 for itself.  The sale and purchase was completed on 31 May 2004.  From that date onwards, Cogi had no more interest in Malahon Apartments.

2. By a letter of 11 May 2004 issued by Deacons on its behalf, Cogi asked the 2^nd Respondent as the manager of Malahon Apartments for inspection of financial statements.  The relevant part of the letter read:

“We are instructed that the financial statements for the management of the Building displayed by you recently involve a number of questionable transactions, in particular, in relation to the expenses for engagement of professionals.  We are therefore instructed hereby to request inspection of the books or records of account in relation to those expenses since January 2003 to date.  In this connection, we would like to refer you to clause 2(5) of the 7^th Scheduled to the Building Management Ordinance.”

3. The 2^nd Respondent did not respond to the letter and Deacons issued a reminder to it on 25 May 2004 demanding confirmation on the time when and the place where the relevant books or records of account would be available for inspection by Cogi.

4. The solicitors for the 2^nd Respondent replied to Deacons on 27 May 2004.  The relevant part of the letter read:

“We are instructed to inform you that as our client is not the DMC manager of the Building, the questions raised in your said letter should be addressed to the Incorporated Owners of the Building.  Our client has taken the liberty to forward your letter to the Incorporated Owners for their consideration and response.”

5. On 15 June 2004, which was after Cogi had divested its interests in Malahon Apartments, Deacons replied to the solicitors of the 2^nd Respondent disagreeing with the contention as set forth in the letter of 27 May.  Deacons further threatened that if the 2^nd Respondent did not within the next 7 days indicate a time for the inspection, their client would commence legal proceedings against the 2^nd Respondent at this Tribunal.  However Deacons did not state that their client Cogi had ceased to be an owner of Malahon Apartments or that Cogi, in seeking the inspection, was doing it as the agent of the Applicant.  Deacons also did not say that the Applicant had become an owner of Malahon Apartments or that they were acting not for Cogi anymore but were for the Applicant in seeking the inspection. 

6. On 28^th June 2004, the 2^nd Respondent’s solicitors replied and maintained its stance that it was not the DMC manager but was only a contract manager.  In addition, the letter said:

“In any event, our client is now instructed by the Incorporated Owners to inform you that the Incorporated Owners agrees to let your client inspect the relevant accounts at 6:30 p.m., 7^th July 2004 in the Management Office of the Building and photocopies will be charged at the rate of HK$3.00 per page.”

7. This offer of inspection did not put an end to the dispute because Deacons revised its demand in its next letter of 6 July 2004.  The relevant parts of this letter read:

“4. We note that your client now agrees to provide the relevant documents for inspection by our client.  However, we are instructed that the time proposed by your client is beyond the usual office hours and should not be taken as the reasonable time as specified in clause 2(5)(a) of the 7^th Schedule to the Ordinance.

5. Without prejudice to any rights of our client, we are instructed hereby to counter-propose that the inspection take place on Monday 12 July 2004 from 11:00 a.m. to 5:00 p.m..  Our client anticipates that the inspection would take about two days and that it would be attended by its representatives including a solicitor and an accountant.  Further, we are instructed that the documents available for inspection by our client should include the audited/unaudited accounts for the management of the Building for the years 2002/2003 and 2003/2004.

6.  Please confirm by 1:00 p.m. Thursday 8 July 2004 that the above counter-proposal is acceptable to your client so that our client could make appropriate arrangements.”

8. On 7 July 2004, the solicitors for the 2^nd Respondent replied and maintained that the 2^nd Respondent was merely a contract manager and not a DMC manager.  The letter also said that the books and records were in the possession and control of the Incorporated Owners (“the 1^st Respondent”).  The letter did not respond to the counter-proposal of Deacons but said that the request for inspection had been passed to the 1^st Respondent which would consider it and asked Deacons to liaise with the 1^st Respondent direct. 

9. By a further letter dated 8 July 2004 to the solicitors of the 2^nd Respondent and copied to the solicitors of the 1^st Respondent, Deacons took issue with the 2^nd Respondent on the distinction between a DMC manager and a contract manager.  Deacons also took issue with the 2^nd Respondent on whether the books and records were in the possession and custody of the 1^st Respondent.  The letter contained an ultimatum that if neither Respondent would confirm by 1:00 p.m. Saturday 10 July 2004 that the relevant books and accounts (including the audited/unaudited accounts for the management of the Building for the years 2002/2003 and 2003/2004) would be available for inspection at the time proposed by them in their previous letter of 6 July 2004 or at some other time during office hours within the following week, their client would commence legal proceedings against both Respondents.

10. The 1^st Respondent’s solicitors replied to Deacons on 9 July 2004 saying that they had no instructions to deal with the matter raised by Deacons.

11. Deacons then issued a further letter on 9 July 2004 to the 1^st Respondent and the solicitors for the 2^nd Respondent repeating the ultimatum aforesaid.

Pleadings

12. No confirmation came from either Respondent and Deacons duly issued a Notice of Application on 19 July 2004.  The Application pleads section 18(1)(c) of the Building Management Ordinance (“the Ordinance”) as against the 1^st Respondent.  The section reads:

“the corporation shall -

(c)  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. The application further pleads paragraphs 2(1) and 2(5) of the 7^th Schedule of the Ordinance as against the 2^nd Respondent.  They state:

“(1) The manager shall maintain proper books or records of account and other financial records and shall keep all bills, invoices, vouchers, receipts and other documents referred to in those books and records for at least 6 years.

(5) The manager shall-

(a)  permit any owner, at any reasonable time, to inspect the books or records of account and any income and expenditure account more balance sheet; and

(b) on payment of the reasonable copying charge, supply any owner with a copy of any record or document requested by him.”

14. The Application then pleads that the 1^st Respondent has breached section 18(1)(c) of the Ordinance and the 2^nd Respondent has breached paragraphs 2(1) and 2(5) of the said 7^th Schedule.  It therefore prays for an order that the Respondents do make available all the relevant books and records of accounts in relation to the management expenses for the financial years of 2002/2003 and 2003/2004 (including but not limited to the audited and/or unaudited accounts) for inspection by the Applicant at a reasonable time and for the Applicant to make copies thereof upon payment of reasonable charges.  It is note worthy that the Notice of Application was not issued on behalf of Cogi (in whose name the letters of demand were made), but was on behalf of the Applicant.

15. I should also mention that on 3 August 2004, the 1^st Respondent replied to Deacons by a Chinese letter.  The letter said that the 2^nd Respondent was responsible for the accounts of Malahon Apartments and any request to inspect the accounts should be addressed to the 2^nd Respondent.  It further said that if the 2^nd respondent should decline the request, the 1^st Respondent would take the appropriate action to enable owners of Malahon Apartments to exercise their rights.  The letter further complained that Deacons was unreasonable as they only gave the 1^st Respondent less than 1 day to respond to the request, and that the 1^st Respondent had to liaise with the 2^nd Respondent before replying to them on the proposed time for inspection.  However before the 1^st Respondent could clarify the question with the 2^nd Respondent, Deacons had already served on them a Notice of Application made by Speedy Gainer Limited, another client of Deacons.  The letter finally pointed out that Cogi had ceased to be an owner of Malahon Apartments on 31 May 2004 and the 1^st Respondent had no need to respond to Cogi’s request for inspection of accounts. 

16. The 1^st Respondent in its Notice of Opposition takes the point that the Applicant has never made any requests to either Respondent for inspection of the said books and records of accounts.  The 1^st Respondent therefore denies the relief prayed for by the Applicant.  The 1^st Respondent also takes the point that the Notice of Application has disclosed no reasonable cause of action.  However, it does not provide any particular or broad ground to support this plea.  There is thus only one ground of defence. 

17. The 2^nd Respondent’s Notice of Opposition takes the same point as taken by the 1^st Respondent.  In addition, the 2^nd Respondent says that it was only engaged by the 1^st Respondent to manage Malahon Apartments and therefore was only a contract manager but not a manager as defined in the Ordinance or a DMC manager.  It further argues that the 1^st Respondent, under the Ordinance, has the duty to manage the Apartments and therefore is the manager as defined in the Ordinance.  It therefore says that obligations in paragraphs 2(1) and 2(5) of the 7^th Schedule should be discharged by the 1^st Respondent and not by the 2^nd Respondent.

Notice of Application to Stand as Demand

18. The Applicant in its written opening submissions relied on two grounds.  It says firstly, Cogi had previously applied through Deacons to the Respondents for inspection of the books and accounts and Cogi did so as the agent of the Applicant.  Secondly, it says that it has, by the Notice of Application filed herein, applied to the Respondents for inspection of the books and accounts.  This 2^nd ground is not apparent from the Notice of Application.  It was not raised at any time before the delivery of the written opening. 

19. In order to support this second ground, Mr Law counsel for the Applicant said at the opening that this point had been made by those instructing him at the call-over hearing on 6 September 2004.  In his final submissions, he corrected himself by saying that this point was ventilated in the exchange between the Tribunal and the solicitor for the 1^st Respondent in that call-over hearing.  In order to properly understand what had taken place at the call-over hearing, I would set forth the relevant part of the dialogue between the Tribunal and the legal representatives of the parties below.

“MR NGO:  Your Honour, I do not expect that the trial will last more than a half a day.  But, on top of that, your Honour, you have rightly encapsulate the present scenario and the case of the parties.  In fact, there’s one more point I will like to submit. 

In relation to the request point, whether or not this point will be determined in favour of the respondents or, otherwise, I will submit that is the -- that relates to the issue of cost.  In those circumstances, that would affect the legal rights confer upon the applicant to inspect books and accounts as set out in Schedule VII to the Building Management Ordinance. 

COURT:  Right.  And whether the request -- whether there has been any proper request made by the respondent, and I’m now addressing to Miss Lam, in particular.  Whether there has been any proper request -- take a seat, take a seat.

MISS LAM:  Yes.

COURT:  Whether there has been any proper request by the applicant to the 1st respondent for inspection.  I think the 1^st respondent can take it that a request has already been made now by way of the application in the tribunal.  And I think it would serve the interest of all parties by the 1^st respondent now telling the applicant, on a without prejudice basis, that is without prejudice to the outcome of this application, they can come at whatever time to inspect whatever that’s been kept by the 1st respondent. 

And if a fee is required by virtue of the DMC or the Second Schedule, or whatever, you better set out those fees in the invitation, so that they can, in the meantime and without prejudice to the proceeding of this application, deal with the inspection. 

MISS LAM:  Yes, your Honour.  But, actually, I would be most appreciate if the applicant has state this in their application.

COURT:  Well, let me ...

MISS LAM:  But they have not state that.

COURT:  Let me invite the parties to deal with that matter on a without prejudice basis.

MISS LAM:  Yes.

COURT:  If this should come from the bench, I don’t think it should prejudice the outcome of the action ...

MISS LAM:  Yes.

COURT:  ... or prejudice the interest of any party.

MISS LAM:  In fact, we are instructed by the 1^st respondent that it was 1^strespondent is always willing/ready to make the ...

COURT:  Then ...

MISS LAM:  ... accounts ...

COURT:  ... parties should ...

MISS LAM:  ... available for inspection.

COURT:  ... put their heads together and have that matter resolved, ...

MISS LAM:  Yes.

COURT:  ... without prejudice to this application.

MISS LAM:  Yes.

COURT:  Right?

MISS LAM:  Yes, thank you.  Thank you.

MR NGO:  I’m grateful your Honour direction.  In fact, this will expedite the resolution of this matter.

COURT:  Right.

MR NGO:  In fact, ...

COURT:  But there’s no need to draw to my attention whatever that’s going to happen on the inspection.

MR NGO:  Yes, I’m grateful.  I’m grateful.

COURT:  I just hope that that matter can be resolved.  But I don’t want that or that resolution to affect the outcome of this.

MR NGO:  I appreciate ...

COURT:  That’s why I say that assume that it comes from me. 

MR NGO:  Yes.

COURT:  Right? 

MR NGO:  Yes, I appreciate that.  That will be dealt with on a without prejudice basis.

COURT:  Right, right.

MR NGO:  And, in fact, I would respectfully submit, if the inspection issues could be dealt with, I would say the whole -- the substantially whole chunk of the case will go.

COURT:  Right.

MR NGO:  Then the outstanding matters to be determined by the court will be the issue of cost. 

COURT:  Well, ...

MR NGO:  And I would say ...

COURT:  ... that will still be the whole matter.

MR NGO:  Yes, yes, I ... 

COURT:  Because if I have ...

MR NGO:  ... appreciate that but ...

COURT:  ... to decide the question of cost, I have to decide the merit of the application ...

MR NGO:  Exactly.  But ...

COURT:  ... right from the start. 

MR NGO:  But, probably, your Honour will appreciate that when we comes to the issue of cost, parties tend to be more conciliatory when the main issues ...

COURT:  Yes.

MR NGO:  ... has been dealt with.

COURT:  I hope that the scale of the quarrel will become narrower and narrower.

MR NGO:  I am grateful, your Honour.

COURT:  Yes. 

MR NGO:  And if, your Honour, ...

COURT:  Now, I’ve not made up my mind on anything. 

MR NGO:  I agree.

COURT:  I still have some more enquiries to make.

MR NGO:  Yes.

COURT:  Now, Miss Lam, what do you think as to the time required for the trial of this application?”

20. I did say that the 1^st Respondent could take it that a request had already been made by the Applicant by way of the Application in the Tribunal.  However, Miss Lam for the 1^st Respondent quickly pointed out that the Applicant had not stated that as its case in the Notice of Application.  I then invited the parties to deal with the matter on a without prejudice basis.  I further said that since the invitation came from the bench, I did not think that it should prejudice the outcome of the Application or prejudice the interest of any party.  I also said that the parties should put their heads together to resolve the matter and the resolution would be without prejudice to the outcome of the Application.  I told the parties that it was not necessary to draw to my attention whatever that was going to happen on the inspection. Mr Ngo for the Applicant also confirmed that the inspection would be dealt with on a without prejudice basis.  He also commented that once that was done, the outstanding matters to be decided by the Tribunal would only be on the merit of the application and costs.  He did not say that the Notice of Application as lodged with the Tribunal would stand on its own as a demand for inspection and that this Application was brought on that basis in addition to any other basis. 

21. I understand that an inspection had indeed taken place.  Before the adjourned hearing, the solicitors for the 1^st Respondent filed with the Tribunal a bundle of correspondence on this inspection.  The letter which initiated the dialogue appeared to be on a without prejudice basis.  That however may have been waived subsequently.  In any case, I did not think it was necessary for me to refer to the correspondence as I have already made it clear at the call-over hearing that the inspection should not prejudice the interests of any party and it was not necessary to inform me about the inspection.  Indeed, Mr Law for the Applicant drew my attention to paragraph 27-57 of The Law and Practice of Compromise, 5^th ed. by David Foskett and asked me to perform mental gymnastics to ensure exclusion of that correspondence from my mind and pay no regard to it in my judgement.

22. In the light of the above, I do not think the Applicant can say that the Notice of Application is in itself a demand for inspection independent of the previous requests.  Miss Lam for the 1^st Respondent had at the call-over hearing expressly taken the point that the Notice of Application did not say so and Mr Ngo did not demur.  The parties also agreed that there should be a without prejudice inspection which should not affect the outcome of this Application.  If the Notice of Application can indeed serve as a demand, the demand might well have been satisfied by the inspection that has taken place.  However, Mr. Law has asked me to exclude the correspondence on the inspection from my consideration and everybody agreed with that.  It would not be right for Mr. Law to ask me to exclude that inspection from my consideration but still argue that the Notice of Application can stand as a demand for inspection in its own right. 

23. If I should allow the Notice to stand as a demand, the inspection already taken place may have satisfied it.  If there has already been an inspection pursuant to the demand by the Notice, I should not order any further inspection but should dismiss the Application altogether.  I should also order the Applicant to pay the costs of the Application as there was no prior demand and the demand by the Notice has been satisfied without order of the Tribunal.  However, Mr. Law has requested me to ignore the inspection and everybody else agreed with him, it would therefore not be right for me to treat the Notice as a demand in itself.  I thus reject the Applicant’s second ground.  

Evidence

24. I now turn to the evidence.  The Applicant has called one witness Mr Chang Ping Kay.  Mr Chang has made a witness statement and adopted it as his evidence in chief.  He was and is at all material times a director of Cogi.  He has been a good friend of one Ching Kam To for several decades and Mr Ching is a director of the Applicant.  Cogi used to owned several shops in Malahon Apartments.  On 18 March 2004, Cogi entered into a sale and purchase agreement with the Applicant agreeing to sell those shops to the Applicant.  Completion of the sale was scheduled to take place on 31 May 2004.  The Applicant sub-sold some units to other sub-purchasers and reserved shop No. 4 to itself.  Completion of the sale and purchase duly took place on 31 May 2004 and henceforth, Cogi ceased to have any interest in Malahon Apartments. 

25. Mr Chang further said that in early May 2004, Mr Ching noted that he was concerned about the management of Malahon Apartments and he was then (through Cogi) requesting the 2^nd Respondent for inspection of the management accounts.  Mr Ching therefore requested Cogi to continue with the request for inspection on behalf of the Applicant.  Cogi accepted the request.  Mr Chang also produced a resolution by the board of the Applicant made on 25 September 2004 confirming and rectifying that Mr Chang and Cogi had been duly authorised to act for the Applicant in requesting for inspection of the accounts.  The resolution further confirmed and rectified that the requests and replies made by Deacons on behalf of Cogi were in fact made for an on behalf of the Applicant.

26. Mr Chang also said that he had told Deacons that Cogi had already sold its properties in Malahon Apartments and Cogi would carry on with the request for inspection for the Applicant.  However, Deacons did not mention in any of its letters to the Respondents issued after 31 May 2004 that the request was then being pursued on behalf of the Applicant or on behalf of Cogi acting as the agent of the Applicant.

27. Mr Chang also produced a supplemental agreement made between the Applicant and Cogi dated 31 May 2004 which was supplemental to and survived the completion of their sale and purchase agreement.  The supplemental agreement acknowledged that the shops to be sold by Cogi to the Applicant were subject to High Court Action No. HCA 816 of 2004 and that if any court order should be made against the owner of those shops in that action, Cogi would carry out such order at its own costs.  This agreement further provided for an indemnity of costs and expenses by Cogi to the Applicant or its sub-purchaser in the event of claims by tenants of the shops for Cogi’s non-compliance with such court order.  It also provided for the making of novation agreements with the tenants and the custody of the rental deposits if the novation agreements were not made.  However, it has not referred to Cogi’s request to the 1^st or 2^nd Respondent for inspection of accounts.  Mr Chang said that he had promised Mr Ching to deal with all outstanding matters relating to the shops and they included the said High Court action and the request for inspection of accounts.  

28. In cross-examination, he disagreed that when he made the request after 31 May 2004 for the inspection, he did it for Cogi’s own purpose.  He further explained that the supplemental agreement did not mentioned about the request for inspection because he did not think at that time that the Respondents would refuse the inspection and there was not yet any litigation for inspection.  He was also unaware that Deacons had not mentioned in their letters issued after 31 May that Cogi was acting for the Applicant.

Cogi as Agent of the Applicant

29. Can the applicant say that when Cogi applied to the 2^nd Respondent for inspection of accounts, Cogi was doing so as its agent although Cogi never mentioned that fact to either Respondent before the Application was lodged with this Tribunal?  If that is permissible, then any party which has no interest in an estate can seek inspection of the management accounts from the incorporated owners or manager of the estate.  If the incorporated owners or manager should decline the demand, it runs the risk of contravening the provisions in the Ordinance as the prima facie uninterested party may in fact be acting for an undisclosed principal which has interest in the estate.  That would put the incorporated owners and managers of housing estates into an embarrassing position. 

30. Mr. Law argues that the incorporated owners or manager can respond by saying that the uninterested party has no interest in the estate and not entitled to inspect.  What if the uninterested party should come back and say that it is acting for an interested party but would not like to disclose his identity?  What can the incorporated owners or manager do?  The right to inspect is conferred on an owner and I cannot see why the owner when exercising such right should remain anonymous.  I also do not see why the incorporated owners or manager should be under an obligation to investigate whether the party requesting for an inspection of the accounts is or is not an owner.  I am of the view that any party wanting to inspect the management accounts of a housing estate should disclose his identity and interests in the estate in his demand to the incorporated owners and/or manager of the estate.

31. Mr Law has also submitted that as a matter of contract, the undisclosed principal is entitled to sue or be sued upon a contract made on his behalf by its agent.  Regarding the basis of this doctrine, The Law of Agency by Fridman, 7^th ed., at p. 257 says:

“Obviously, the development of the doctrine of undisclosed principals is quite at variance with the general approach of the law to contractual rights and liabilities.  Ordinary agency, ie where the principal is disclosed, can be reconciled with the common law doctrine, that only parties to a contract can acquire rights and liabilities under it, on the ground that the principal is really a party to the contract (either in substitution for, or in addition to the agent): the agent may be regarded as being only an instrument, by whose hand and act the principal contracts.  Since the third party does not know of the existence of the undisclosed principal, the same cannot be said of this form of agency.  The fiction of the identity of principal and agent is inapplicable in this context.

Consequently, other rationalisations and explanations have been suggested not to bury the undisclosed principal, but, as Professor Stoljar said, ‘to save and sustain him’.  According to Ames, the undisclosed principal is to be treated as a cestui que trust, the relationship between agent and undisclosed principal being that of trustee and beneficiary, and of equitable origin.  Though the fiduciary nature or aspect of the agency relationship is clearly established, there seems little point in trying to explain what is really a common law relationship in terms which have an equitable flavour.  What similarity there is between the position of an agent and that of a trustee ought not to be carried too far.  Professors Goodhart and Hamson suggest that the undisclosed principal is an implied assignee of the agent.  Stressing the similarity between assignment and the position of an undisclosed principal, they consider that the doctrine is ‘best considered as a primitive and highly restricted form of assignment’.  Professor Stoljar strongly criticised this idea and, in line with his general views about the agency relationship, preferred to talk in terms of the transmission of rights.

All these varied, and imaginative theories do not completely explain this strange, peculiarly English doctrine.  Perhaps the most satisfying attitude to adopt is that the idea of the undisclosed principal is and an anomaly, introduced into and accepted by the common law for reasons of mercantile convenience, and rigorously controlled by the law, so far as its scope and effects are concerned, lest this unusual relaxation of the strict attitude of the common law with regard to personal contracts be allowed to cause undue subversion.”

32. This application does not concern any mercantile convenience and I do not think I should allow the anomalous doctrine of undisclosed principal to feature in building management matters.  Such matters normally arise amongst neighbours.  I cannot see why neighbours in an estate should conceal their identities when exercising their rights as owners. 

33. I would also emphasised that the present Application does not concern any contractual dispute.  It is an attempt by an owner to exercise its statutory rights.  Mr Law argues that section 34E has incorporated the 7^th Schedule into every DMC.  Since the demand for inspection was made to pursuant to paragraph 2 of the 7^th Schedule, the demand was made pursuant to a contract.  However, the parties to a DMC are all disclosed and their identities verifiable from the records of the Land Registry.  They are not undisclosed parties to a DMC.  The manager normally has a list of all owners.  I cannot see why a disclosed owner should be allowed to make a request to inspect the account through an agent who is entitled to keep the identity of the owner anonymous.

34. For the above reasons, I reiterate that any party wanting to inspect the management accounts of a housing estate should disclose his identity and interests in the estate in his demand.  Since the requests before action were all made in the name of Cogi without stating that it was the agent of the Applicant, the Respondents were not obliged to allow an inspection by the Applicant.  The Applicant therefore fails in its first ground as well. 

Obligation of the Incorporated Owners to Allow Inspection

35. Though the Applicant has failed in all its grounds, I should also mention the position of the 1^st Respondent.  The 1^st Respondent’s Notice of Opposition does not argue that it has no obligation to allow the Applicant to inspect the accounts.  However, Mr. Ng for the 1^st Respondent has attempted to argue that section 18(1)(c) of the Ordinance does not impose on the 1^st Respondent an obligation to allow inspection.  I think this submission is misconceived.  Section 18(1)(c) requires the 1^st Respondent to enforce the obligations in the DMC.  Such obligations must include those contained in the 7^th schedule as implied into all DMCs by section 34E.  The 1^st Respondent thus has the obligation to procure the 2^nd Respondent to facilitate the inspection.  If the 2^nd Respondent should refuse to do so, the 1^st Respondent can take over the accounts and provide for the inspection.  After all, the accounts belong to the 1^st Respondent and not the 2^nd Respondent.  In any case, the 1^st Respondent should at least disclose the accounts or accounting documents which are in its possession.  There is undisputed evidence that the 1^st Respondent has at all material times in its possession the expenditure list and all the original bills and vouchers.  If I should have decided that the Applicant had properly requested for inspection of the accounts, I would have ordered the 1^st Respondent to comply with the request.

Is Manager Liable?

36. The position of the 2^nd Respondent is different.  I have already referred to the two lines of defence taken by the 2^nd Respondent.  The first line is same as that of the 1^st Respondent and I have already ruled in favour of it.  Regarding the second line, the 2^nd Respondent says that Malahon Investment Company Limited was the first owner and was appointed the manager of the apartments by the DMC.  It further says that upon the 1^st Respondent’s incorporation on 11 May 1977, all the rights, and duties, powers and obligations for the control and management of the apartments as conferred and imposed by the DMC on the manager had become vested in the 1^st Respondent.  The 1^st Respondent has thus become the manager as defined in section 34D of the Ordinance.  The 2^nd Respondent was only engaged by the 1^st Respondent to manage the apartments in accordance with the terms and conditions of the contract by which it was engaged.  It is thus not the manager as defined in section 34D.  Hence, the 2^nd Respondent has no obligations under paragraphs 2(1) and 2(5) of the 7^th Schedule of the Ordinance to keep accounts and to disclose the same to any owner.  Sections 14(1), 16, 18(1), 18(2), 27(1), 27(2), 27(4), 29, the 6^th Schedule, section 34D, 34L and paragraphs 2(1), 2(2), 2(3), 2(5), 2(6) and 8 of the 7^th Schedule of the Ordinance are also relevant to this argument. 

“14. (1) Subject to this Ordinance, at a meeting of a corporation any resolution may be passed with respect to the control, management and administration of the common parts or the renovation, improvement or decoration of those parts and any such resolution shall be binding on the management committee and all the owners.

16. When the owners of a building have been incorporated under section 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 this Ordinance, be enforceable against, the corporation to the exclusion of the owners, and accordingly-

(a)     any notice, order or other document which relates to any of the common parts of the building may be served upon the corporation at its registered office; and

(b)    any proceedings in the tribunal in respect of any of the common parts of the building may be brought and pursued by or against the corporation.

18. (1) The corporation shall-

(a)     maintain the common parts and the property of the corporation in a state of good and serviceable repair and clean condition;

(b)    carry out such work as may be ordered or required in respect of the common parts by any public officer or the body in exercise of the powers conferred by any Ordinance;

(c)     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.

(2) A corporation may, in its discretion-

(a)     engage and remunerate staff for any purpose relating to the powers or duties of the corporation under this Ordinance or the deed of mutual covenant (if any);

(c)  retain and remunerate a manager or other professional trade or business firm or person to carry out on behalf of the corporation any of the duties or powers of the corporation under this Ordinance or the deed of mutual covenant (if any);

(g)     act on behalf of the owners in respect of any other matter in which the owners have a common interest.

27. (1)  Subject to subsection (3), a management committee shall maintain proper books or records of accounts and other financial records and shall prepare, not later than 15 months after the date of the registration of the corporation and thereafter every 12 months, and income and expenditure account and a balance sheet which shall both be signed by the chairman and the secretary all the treasurer of the management committee and laid before the corporation at the annual general meeting of the corporation convened in accordance with paragraph 1 (1) of the Third Schedule.

(2)  The management committee shall permit the Authority, and authorized officer, the tenants’ representative, and owner, a registered mortgagee or any person authorized in writing in that behalf by an owner or registered mortgagee to inspect the books of account at any reasonable time.

(4)  The Sixth Schedule shall have effect with respect to the maintenance of proper books or records of account and other records (including the keeping of such accounts and records), the preparation of summaries of income and expenditure and the supply of copies of any documents in respect of those accounts and summaries.

29. Subject to this Ordinance, the powers and duties conferred or imposed by this Ordinance on a corporation shall be exercised and performed on behalf of the corporation by the management committee.

Sixth Schedule

1. All bills, invoices, vouchers, receipts and other documents referred to in the books or records of account and other records maintained under section 21(1) shall be kept by the management committee for such period, being not less than 6 years, as the corporation may determine.

2. Within 1 month after each consecutive period of 3 months, or such shorter period as the management committee may select, the treasurer shall prepare a summary of the income and expenditure of the corporation in respect of that period and shall display a copy of it in a prominent place in the building.

3. If the tenants’ representative, an owner, a registered mortgagee or any person duly authorised in writing in that behalf by an owner or registered mortgagee requests in writing the corporation to supply him with copies of-

(a)    an income and expenditure account and balance sheet of prepared under section 27(1); or

(b)    a summary of the income and expenditure of the corporation prepared under paragraph 2, the treasurer shall, on the payment of such reasonable copying charge as the management committee may determine, supply such copies to that person.

34D. (1) In this Part and the Seventh and Eighth Schedules, unless the context otherwise requires-

 “manager” in respect of a building, means the person who for the time being is, for the purposes of the deed of mutual covenant in respect of the building, managing that building.

34L.No provision in a deed of mutual covenant or other agreement shall operate to entitle the manager of any building to be indemnified by a corporation or by the owners of the flats in that building in respect of any legal costs, charges, expenses or fees relating to any civil or criminal proceedings (whether successful or otherwise) between or in respect of that manager and that corporation or those owners and any such provision shall be void and of no effect.

Seventh Schedule

2. (1)  The manager shall maintain proper books or records of account and other financial records and shall keep all bills, invoices, vouchers, receipts and other documents referred to in those books and records for at least 6 years.

(2)   Within 1month after each consecutive period of 3 month, or such shorter period as the manager may select, the manager shall prepare a summary of income and expenditure in respect of that period and shall display a copy of it in a prominent place in the building.

(3)   Within 2 months after the end of each financial year, the manager shall prepare an income and expenditure account and balance sheet for that year.

(5) The manager shall-

(a)    permit any owner, at any reasonable time, to inspect the books or records of account and any income and expenditure account more balance sheet; and

(c)    on payment of the reasonable copying charge, supply any owner with a copy of any record or document requested by him.

(6)   If there is a corporation and the corporation decides, by a resolution of the owners, that any income and expenditure account and balance sheet should be audited by an accountant or by some other independent auditor as may be specified in that resolution, the manager shall without delay arrange for such an audit to be carried out by that person.

8.  If the manager’s appointment ends for any reason, he shall within 2 months of the date his appointment ends-

(a) prepare-

(i)   an income and expenditure account for the period beginning with the commencement of the financial year in which his appointment ends and ending on the date his appointment ended; and

(ii)   a balance sheet as at the date his appointment ended, and shall arrange for that accounts and balance sheet to be audited by an accountant or by some other independent auditor specified in a resolution of the owners’ committee (if any) or, in the absence of any such specification, by such accountant or other independent auditor as may be chosen by the manager; and

(b) deliver to the owners’ committee (if any) or the manager appointed in his place any books or records of account, papers, documents and other records in respect of the control, management and administration of the building that are under his control or in his custody or possession.”

37. It is obviously the intention of the Ordinance that once the owners are incorporated under it, the corporation shall have the rights and duties to manage the building or estate.  The corporation under the Ordinance is in many respects similar to companies incorporated under the Companies Ordinance.  In the day-to-day activities, a company does not normally act by the will of all its members.  These matters are normally dealt with by the board of directors.  For a corporation under the Ordinance, it likewise cannot act by the will of all the owners in all the day-to-day management activities.  These functions are normally carried out by the management committee of the corporation.  However, the members of the management committee are normally volunteers.  They usually have their own jobs or household chores to attend to.  The time that they can devote to the work of the committee is usually quite limited.  The actual task of managing the building or the estate is usually carried out by a professional manager with a management staff. 

38. It is therefore not surprising that the obligations on keeping of accounts and financial documents and preparation of accounting statements as imposed on the management committee by the 6^th Schedule are very similar to those obligations imposed on the manager by the 7^th Schedule.  If the manager should fulfil those obligations, the similar obligations of the management committee would be fulfilled thereby.  However, if the manager should default on those obligations, the management committee would have to comply with their obligations on their own. 

39. Whilst the Ordinance does not necessitate the engagement of professional managers, it certainly envisages the existence of managers who are independent of the corporations or the management committees.  The requirement in paragraph 8 of the 7^th Schedule for the manager to deliver all records of account, papers, documents and other records in respect of the management of the building to its successor or the management committee further confirms that the manager has its own duty to prepare and keep the accounts for the building or estate.  Such duty is not the same duty as imposed by the 6^th Schedule on the corporation or the management committee.  Furthermore, whether a manager is a manager within the meaning of the 7^th Schedule or section 34D depends on whether he is, for the purposes of the DMC, managing the building.  If he should fit into the definition of manager in section 34D, he will not cease to be so simply because he has a contract with the incorporated owners.

40. I have also been referred to the DMC of Malahon Apartments and note that clause 6 provides for the first owner to be the manager to manage the apartments for the first year from the issue of the occupation permit.  Clauses 7, 8 and 9 empower the owners by resolution to appoint discharge and remunerate the manager thereafter.

41. I have also been shown a Chinese building management contract made between the 1^st and 2^nd Respondents.  The obligations imposed upon the 2^nd Respondent by the contract include the provision of security personnel, the enforcement of the covenants in the DMC against illegal structures and obstruction of fire escape, the collection of management fees and maintenance charges pursuant to the instructions of the 1^st Respondent and in accordance with the DMC, the maintenance of common facilities with the consent of the 1^st Respondent, the collection of garbage for the owners, the cleaning of the common areas and the engagement of lawyers as instructed by the 1^st Respondent to litigate against contravention of the covenants in the DMC.  It can also make rules for the management after consulting the management committee.  In addition, the 2^nd Respondent has to handle the income and expenditure account of the apartments according to the law.  It is also responsible for handling the accounts of the 1^st Respondent and has to prepare accounting reports as may be required by the 1^st Respondent.  It is clear that under this contract, the 2^nd Respondent has the duty to manage Malahon Apartments for the purposes of its DMC.  It is thus the manager of the apartments within the meaning of section 34D and the 7^th Schedule.  It therefore has at all material times the obligations as imposed by paragraph 2 of the 7^th Schedule.  Its second line of defence therefore has no merit. 

Order

42. Since I have found against the Applicant on both grounds in support of this application, I therefore dismiss this application.  I further make an order nisi that the Applicant do pay the 1^st and the 2^nd Respondents their costs of this application on the District Court scale with certificate for counsel.