THE INCORPORATED OWNERS OF GOUGH PLAZA v. WONG CHING KONG AND ANOTHER

DCMP 1673/2021 & DCMP 1674/2021
(Heard together)

[2022] HKDC 982

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 1673 OF 2021

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 1674 OF 2021

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JUDGMENT

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1.  The plaintiff (“IO”) is the incorporated owners of Gough Plaza, No 33 Gough Street, Hong Kong (“the Building”). The two defendants in DCMP 1673/2021 (“Unit 5B Owners”) are the registered owners of Unit 5B and Roof B of the Building (“Unit 5B”), and the defendant in DCMP 1674/2021 (“Unit 4A Owner”) is the registered owner of Unit 4A of the Building. (“Unit 4A”)

2.  This is IO’s application against Unit 5B Owners and Unit 4A Owner for enforcement of charges registered for outstanding contribution to Building funds and management expenses and for an order for sale.

Background

3.  There is no dispute that the Building is subject to a Deed of Mutual Covenant dated 3 March 1992and by Clause E 1 of Section VI of the DMC, the defendants covenanted to pay contributions to a contingency fund managed by the IO for capital expenditures from time to time.

4.  There is also no dispute that the IO has resolved in various owners’ meeting for contribution of funds and both Unit 4A Owner and Unit 5B Owners did not pay the relevant contributions to various funds (eg lift funds, renovation/repair funds, legal fund, management fund etc) and fees despite IO’s demands since 2016.

5.  According to the DMC, the defaulting owners are also liable to interest, collection charge and all costs and expenses which may be incurred in recovering the outstanding contribution.

6.  The DMC further provides that IO is entitled to register a Memorial of Charge against the defaulting owner’s property (DCMP 1674/2021 Hearing Bundle (“1674 Bundle”) page 128 paragraph 4). Such were registered against Unit 4A and Unit 5B in the land registry (1674 Bundle pages 143 to 166, DCMP 1673/2021 Hearing Bundle (“1673 Bundle”) pages 105 to 134).

7.  No disagreements were raised regarding the calculation for the sums and interest due in both cases: Unit 4A Owner: HK$699,724.02 plus interest (up to 30 April 2021) at HK$10,190.98 (1674 Bundle page 26 to 29); Unit 5B Owners: HK$788,373.04 plus interest (up to 30 April 2021) at HK$11,154.91) (1673 Bundle page 28-1 to 31). A summary of the memorandum of charges, resolutions and outstanding contributions by Unit 4A and Unit 5B are tabled out in Annex A of the Submission for the plaintiff.

Considerations

8.  The defendants are “ready and willing to pay contributions which are properly incurred, and lawfully approved and requested by the IO.” (paragraph 3c of Affirmation of Li Wing Sun (“Li”): 1674 Bundle page 33, the content of which is agreed and adopted by Unit 5B Owners, paragraph 4 of Affidavit of Wong Ching Kong: 1673 Bundle page 35).

9.  However, the defendants objected to these contributions and managements fees on the basis that the IO has failed to discharge its duty of “sufficient information”. They raised numerous allegations of inadequate book-keeping and inconsistent financial records. They also alleged that a resolution passed in 2014 required the IO to provide yearly audited financial report.

10.  Indeed, the position of the defendants, as stated in letters dated 1 September 2017 to the IO, was that they would only pay monthly management fees but not contributions to any funding until audited financial records were made available (paragraphs 8(b) and (c), Affirmation of Li: 1674 Bundle page 35-36)

11.  The defendants alleged that a purportedly audited report was eventually provided, but only of the year ending 31 December 2020. And even then, the defendants disputed whether it was really “audited”.

12.  Further, the defendants alleged that the IO was majority-controlled by the Law family (76 out of 99 undivided shares) and ran like a “family business” so the resolutions were rubber-stamped despite insufficient information provided. The defendants disputed that the resolutions were irregular (due to lack of “sufficient information”) so they were not bound. As a fallback position, they also advanced a case of minority suppression.

13.  There were plenty of other disagreements raised by the defendants (in the Affirmation of Li) regarding the management of the IO, eg the need for a tendering process when finding legal process, why the yearly “management fund” increased despite suspending the night security guard service, the need to engage a management company at all, and the justifications for “lobby renovation funds”, “general repair funds” etc.

14.  Mr Lai, counsel for the plaintiff, drew a parallel with company law under the context of the need for directors to disclose sufficient information in a circular for a shareholder’s meeting. He argued that even if there is an omission, the defendants still needs to show reasonable grounds that the majority shareholder had been misled and would have voted differently otherwise (Re Smith of Smithfield Ltd [2003] EWHC 568, CAS (Nominees) Ltd v Nottingham Forrest FC plc [2002] BCC 145). In this case, according to Law Yiu Chung Jimmy, the Chairman of the IO (“Law”), he and his family members “being the owners of more than 76% of the undivided shares (and in turn more than 76% of the voting rights), would have made the same decisions and passed the same resolution even if the alleged irregularities complained of were regularized.” (1674 Bundle page 72, 2^nd Affirmation of Law Yiu Chung Jimmy (“Law”) paragraph 15).

15.  Mr Lai further argued that under the context of Incorporated Owners’ Committee under the Building Management Ordinance, Cap 344 (BMO), there is no equivalent duty to disclose sufficient information: for example, there is no requirements for circulars in the BMO (BMO Schedule 3, paragraph 2(1AA)). Under this paragraph, the notice of meeting is required to specify only:-

“(a) the date, time and place of the meeting; and

(b) the resolutions (if any) that are to be proposed at the meeting or other matters that are to be discussed at the meeting.”

16.  There are no allegations by the defendants that the IO has breached this provision. Indeed, the defendants did not raise any allegations (or supportive evidence) that any procedures in the owners’ meetings or the voting etc were conducted improperly.

17.  Further, Mr Lai submitted that the requirement for disclosure of accounts is limited in the BMO.

18.  I note that Schedule 6 of BMO provided that:-

“1. All bills, invoices, vouchers, receipts and other documents referred to in the books or records of account and other records maintained under section 27(1) shall be kept by the management committee for such period, being less than 6 years, as the corporation may determine.

1A. The management committee shall-

(a) at the request of not less than 5% of the owners, permit those owners or any person appointed by those owners to inspect any bills, invoices, vouchers, receipts or other documents referred to in paragraph 1 at any reasonable time; and

(b) permit any person authorized by the court to inspect any bills, invoices, vouchers, receipts or other documents referred to in paragraph 1 at any reasonable time.

1B. For the purpose of paragraph 1A(b), an owner may apply to the court for an order authorizing the owner, or any other person named in the application, to inspect any bills….or other documents referred to in paragraph 1.

1C. The court may make an order under paragraph 1B only if it is satisfied that –

(a) the application is made in good faith; and

(b) the inspection applied for is for a proper purpose.”

19.  There is a dispute on whether the IO has disclosed all documents requested by the defendants.

20.  I note that Law submitted that the documents and information requested have been reasonably provided by way of monthly posted summary of income and expenditure, balance sheets and statements, the audited financial statements for the year ending 31 December 2020. In addition, the IO has written to the defendants on 28 May 2021 inviting them to come to the IO office to inspect the documents they wished to see but the defendants never came (1674 Bundle pages 69-70, paragraphs 10 and 11 of the 2^nd Affirmation of Law).

21.  On the other hand, Li submitted that “relevant contributions sought were unsupported by contemporaneous documents despite repeated requests” and “only very recently…that the IO belatedly produced documents…and even then only in a piecemeal and inadequate manner” (1674 Bundle page 33, Affirmation of Li paragraph 3(b)). Further, in his Affirmation, Li also submitted various non-disclosure eg there was no “contemporaneous documents” to justify the “legal funds”, various “lift funds”, “lobby renovation fund” and “repair funds”; “contracts with the management company and the invoices issued were never disclosed”, various allegedly missing invoices regarding payments to the lift renovation contractors etc.

22.  However, I would make the following observations, the dispute in seeking disclosure has been ongoing since 2016. Yet, all through these 6 years, neither Li nor any defendants ever made an application to the court for disclosure and inspection under paragraph 1B of Schedule 6 of BMO as stated above.

23.  It is also important that paragraph 1C of Schedule 6 provides that the court will order inspection if the application is made “in good faith” and “for a proper purpose”.

24.  As such, if the defendants had made such an application, the court would be in a position to scrutinise whether such an application was genuine, proper and reasonable, and not for the purpose of, say, deliberately being oppressive or troublesome for an ulterior motive not to pay (or stalling the payment of) contributions to the IO.

25.  Further, paragraph 1 of Schedule 6 provides that the management committee to keep all bills etc “for such period, being less than 6 years, as the corporation may determine.” As such, the defendants were clearly making an unreasonable and oppressive request seeking “the IO to disclose all books and accounts for the past 10 years” (1674 Bundle page 35, Affirmation of Li paragraph 8(a)) and such a request was rightly refused by the IO.

26.  I also agree with Mr Lai that Section 27(1A) of the BMO that the Building, being a building which contains less than 50 flats, is not required to produce audited financial statements.

27.  I note in the case of The Incorporated Owners of Flora Garden v Li Do Wai & Others, LDBM 283/2014 at paragraph 24:-

“In any event, even if the IO failed to respond to the owners’ request for further information, I cannot see how this can be a ground for the respondent not to pay for the contributions towards the Works when such was approved and duly resolved at an owners’ meeting and shall be binding on all owners including the respondents (s.14 BMO refers).”

28.  The provisions under Schedule 6 do not state that until such request for inspection is satisfied, the owners would not need to comply with any relevant obligations in the DMC.

29.  The reason for such is clear.

30.  The position of the law in building management must be this: under the DMC, all owners are under a contractual duty to pay for contribution approved at an owners’ meeting. If there is a request for inspection of bills, invoices etc. relevant to the financial situation of the IO (thus supporting the necessity of the IO to raise money for funds etc as the defendants have been questioning) and such was refused, the defendants may apply to the court under paragraph 1B of Schedule 6 of BMO. It is for the court to decide whether such a request was made in good faith and for a proper purpose. In any case, such a request for information cannot absolve the owners from the contractual obligations to pay for contributions under the DMC, but only that if the subsequent disclosures reveal any wrong-doings which causes the owners to suffer from any loss and damages, it would be open for the owners to take legal action against the IO (or others) to recover such.

31.  Similarly, as stated above, the IO is under no requirement to obtained audited financial statements under the BMO. If the defendants are alleging that the IO failed to follow the resolution in 2014 to maintain audited financial statements, it is for the defendants to show what loss and damages they suffered due to this failure and to take separate legal action to recover such loss. Such alleged failure, again, cannot absolve the defendants from their contractual obligations under the DMC to pay contributions.

32.  Therefore, I find it entirely unreasonably for the defendants to maintain the position that they would only pay monthly management fees but not contributions to any funding until audited financial records were made available.

33.  It is self-evident that buildings cannot be managed properly otherwise: imagine the scenario when any owner can seek disclosure of any old or obscured invoice from the IO and then maintains that “until that document is disclosed, I will not pay anything.” He or she can repeat the discovery request of further documents indefinitely to postpone any payment. And what if the IO has accidentally misplaced an invoice under request? Would that mean that any owner who made that request would not need to pay any contributions or management fees forever?

34.  This is clearly not the intention of the BMO. As stated under paragraph 1 of Schedule 6 of the BMO, the IO itself may determine the period of time to keep such documents. So if the IO has determined that certain bills etc are no longer kept and this is disputed by an owner, it is for the owner to make the appropriate application to the court instead of continuing to ask the IO and using the “failure to disclose” as an excuse not to pay any further contributions or fees: the request for inspection is plainly not for a proper purpose.

35.  Thus, one important role of the court when an application to inspect is made under 1B of Schedule 6 is to scrutinize and put a stop to this type of argument: to make sure that the request is made in good faith and for a proper purpose.

36.  Similarly, the complaint raised by the defendants regarding the lack of tendering process for legal adviser has nothing to do with the contractual obligation to pay contributions under the DMC. If there is non-compliance to s 20A, that should be a separate legal action seeking the court to give orders and directions “in respect of the rights and obligations of the contractual parties” (s 20A(7) of BMO) and the owners might seek any remedies as required to make amends to any loss or damages etc caused by the lack of tendering process.

37.  As for the allegation of minority oppression, I am not sure what the defendants’ case is. Mr Lau appeared to suggest that this was linked to the failure to disclose sufficient information, that is, that the majority owners had all the information but failed to disclose it to the minority owners.

38.  Of course, this begs the question: why did the minority fail to make an application under 1B of Schedule 6 of BMO in the last 6 years (but instead continued to withhold payment of various contributions during this time)?

39.  Further, if the majority of the owners had the requisite information and voted according to that, there would simply be no grounds to assert that the majority voters were misled.

40.  On the other hand, if the defendants’ case is that the majority owners were misled due to non-disclosure of various crucial documents, then one must again question why the defendants failed to apply to court for disclosure of such documents. Indeed, if there is evidence for minority oppression, the defendants have failed to taken any action all this time.

41.  Of course, these are, again merely an observation. The crucial point is that such allegations are irrelevant: the mere allegation of minority oppression cannot absolve the defendants from the contractual obligation under the DMC. If there is supportive evidence of such which has caused loss and damages etc, it is for the defendants to initiate a separate legal action to seek appropriate remedy.

Conclusion

42.  Indeed, in my view, the DMC puts the obligation for the owners to pay contributions according to resolutions passed by the IO. That obligation to pay does not arise only when the IO manages to convince an owner to his or her personal satisfaction that the payment is justified in whatever dispute raised by that owner.

Order

43.  As such, I would grant judgment of DCMP 1673/2021 and DCMP 1674/2021 to the plaintiff.

44.  Both counsels wished to make further submissions regarding the directions to be given by the court. I would order that if there is no agreement as to the directions:-

(a)  The plaintiff should lodge and serve a submission for directions within 21 days of this judgment;

(b)  the defendants should lodge and serve their submissions for directions 21 days thereafter, and

(c)  the plaintiff should lodge and serve any reply submission for directions 21 days thereafter and the court will grant further directions by way of paper disposal.

DCMP 1673/2021

DCMP 1674/2021