Re H Khemchand Kundamal (HK) Ltd.

HCCW 548/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 548 OF 1999

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J U D G M E N T

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1. This is a petition for winding-up against H. Khemchand Kundamal Bros. (H.K.) Limited ("the Company") on the ground that it is insolvent and unable to pay its debts. The Company was the developer of a building known as Kundamal House ("the building") at Nos. 2 to 4 Prat Avenue, Tsimshatsui, Kowloon, Hong Kong, which was constructed in the late seventies or early eighties. The petition was brought by Jones Lang LaSalle Management Services Limited, the present manager of the building. The debt on which the petition was brought is HK$370,678.62, being the total arrears of management fees in respect of Portion A and Portion B on the roof of the building ("the roof") with interest thereon from June 1988 to January 1999. The Company was and is at all material times the registered owner of the roof.

2. The petition is opposed by Mr Hiro Kundamal, who is a contributory, and by the Company. At the outset of the hearing, an application was made on behalf of the contributory and the Company to adjourn the hearing, as their solicitors would require more time to prepare for the case due to the change of solicitors only the day before the hearing. This undesirable state of affairs was brought about solely by Mr Kundamal. I note that this was not the first time he had instructed solicitors shortly before a hearing, so he would have known the consequences of failing to act in a timely manner. The other ground for seeking an adjournment was that more time was needed for the Company to obtain evidence concerning an alleged settlement agreement between the Company and the petitioner in July and August 1996. Mr Maurellet, who appeared for the contributory and the Company, told me that there might be further letters from the Company to the petitioner relating to the alleged settlement. An order was made back in November 1999 giving leave to the contributory (the Company had only just filed a notice of intention to appear on the petition on 7 November 2001) to file a further affidavit limited to the new matters raised in the petitioner's affidavit in reply within 21 days of the order. That order was not complied with. The alleged settlement was apparently important to Mr Kundamal's case and he had deposed to this in his first affirmation filed in October 1999. If he had not searched for any further letters relating to the alleged settlement in the past two years, there is no reason to give him time to do so now.

3. As the grounds advanced for seeking an adjournment were entirely without merit, I had refused the application. I did, however, give leave to the contributory and the Company to file the second affirmation of Mr Kundamal made on 7 November 2001 out of time. This was not opposed by the petitioner.

4. The hearing then proceeded on the basis that the affirmations filed were received as evidence and counsel on both sides chose not to cross-examine the deponents of the affirmations filed by the other party.

5. Two broad grounds were advanced in opposing the petition. Firstly, it was contended that on the proper construction of the Deed of Mutual Covenant ("the DMC") entered into by the Company as the first owner, the second owner and the then manager on 18 December 1981, the Company was not liable to pay the management fees demanded in respect of the roof. Secondly, it was argued that by virtue of a settlement agreement in July and August 1996 between the Company and the petitioner, the Company was liable to pay only 25% of the management fees demanded and not the full amount which was the debt in the petition. What I would have to resolve is whether there is a bona fide dispute of the debt on substantial grounds. Before I turn to the grounds of opposition, it would be convenient to set out the background matters and the facts not in dispute.

6. The first manager appointed under the DMC was a company with a registered office same as the registered office of the Company at that time. There is no evidence before me when the petitioner was appointed manager after the first manager had ceased to act. It is alleged by Mr Kundamal that from January 1982 to May 1988, there was no demand for any management fees for the roof, and no payment was made by the Company. As the petitioner does not have any record of the management account of the building prior to June 1988, the staff of the petitioner cannot say what had happened before that time. The demand for the management fees of the roof was from June 1988 onwards.

7. In November 1994, the petitioner registered a memorandum of charge against the roof for the Company's failure to pay management fees in respect of the roof for the period from June 1988 to October 1994. In December 1994, a copy of the memorandum was served on the Company at its then registered office. By a letter dated 15 May 1996, the petitioner gave "final notice" to the Company that it had failed to pay outstanding management fees since June 1988 and the total outstanding fees up to May 1996, not including interest, were HK$89,220.00. It was stated that legal action would be taken if there were no payment by 21 May 1996. This letter was sent to the 17th floor of the building, which at that time was owned and occupied by the Company. On 11 October 1996, the petitioner issued to the Company a "reminder" for the outstanding management fees of the roof from June 1988 to October 1996 with a detailed breakdown of the same. The reminder was sent to the Company at the roof. Between the final notice in May 1996 and the reminder in October 1996 were various letters in July and August, which, according to the Company, contained the settlement agreement by which the Company was to pay only 25% of the amount demanded. I shall deal with these letters below.

8. The Company did not pay the 25% or any part of the outstanding fees. Why it had not done so is a matter in dispute. What followed then was that the petitioner demanded payment of the full amount by a letter of its solicitors dated 15 November 1996 in the sum of HK$255,346.14 which included interest. It was stated that if no payment were received within seven days, the petitioner would apply to court to enforce by sale the charge registered against the roof in 1994. This letter was sent to the Company at the 17th floor of the building. No payment was made at all for the fees in arrears or for any part of the management fees that had become due after November 1996.

9. The management committee of the incorporated owners of the building passed resolutions on 18 September 1998 and 11 December 1998 authorising the petitioner to instruct solicitors to petition for the winding-up of the Company. A statutory demand was issued by the solicitors on 1 April 1999 for the arrears in management fees being HK$370,678.62 as mentioned earlier and it was stated that a petition for winding-up would be brought if the debt was not paid or secured or compounded to the satisfaction of the petitioner within three weeks. The statutory demand was not served by leaving the same at the registered office of the Company, as required under section 178(1)(a) of the Companies Ordinance, Cap. 32 but was sent to the Company at Flat A, 15th floor of the building. There is good explanation for this.

10. Before the petitioner's solicitors effected service, they had conducted a search of the Company at the Companies Registry and they discovered that the latest documents filed were a notice of situation of registered office in December 1986, a notice of change of directors in November 1984 and the annual return in November 1984. A visit was made to the registered office as notified in 1986 and there was no address in that building that matched the registered office. A business registration search was conducted and this gave the same address as notified to the Companies Registry in 1986. Further, it was marked on the business registration record for the Company that the business was "untraceable as per inspection report dated 29 November 1988." The Company had not collected the demand notes for management fees sent by the petitioner to the roof. Hence, the statutory demand was sent to the address at Flat A on the 15th floor of the building as the directors of the Company have been carrying on business at that address.

11. On 23 April 1999, the petitioner's solicitors received a letter from Mr Kundamal in which he stated that he was the former director of the Company when that was not the case. He referred to the statutory demand and said it should be delivered to the Official Receiver as the Company "has been under the control of the Official Receiver since 1985". It would appear from his second affirmation that the Company has been dormant for more than 15 years without any business activity. That might be the reason for his erroneous belief that the Company had been wound up and that he had ceased to be a director.

12. The petitioner obtained an order for substituted service of the petition by advertisement in newspapers and by leaving the petition at the address at Flat A, 15th floor of the building.

13. On 20 October 2000, the Registrar of Companies caused the Company to be struck off the register under his power to strike off defunct companies in section 291 of Cap. 32. This petition was adjourned on several occasions in 2001 to give an opportunity to the Company to apply to court to restore the Company to the register. Eventually, such an order was made on 25 May 2001 and the petition for winding-up was once again brought up for hearing.

Construction of the DMC

14. I will first set out the provisions under the DMC by which the owners are required to pay monthly contribution or management fees to the manager and they are as follows:

"4A POSITIVE COVENANT

Each of the owners shall:-

(a) pay its or their due proportion of:-

...

(iii) Any other costs and expenses charged or assessed on or payable in respect of the building."

"MANAGEMENT

7.(f) For the purpose of contribution to the maintenance of the said building each owner shall pay and contribute to the Manager a monthly sum proportionate to the number of undivided shares held by him towards the costs and expenses for the management of the said building (including the remuneration of the Manager) as hereinafter mentioned...."

15. Under clause (3) of the recitals in the DMC, it was provided that "for the purpose of sale the said premises and the said building have been divided into 1,000 equal undivided shares" and that Portion A and Portion B on the roof were allocated a total of 12 shares. The petitioner had demanded management fees for the roof on the basis of this allocation.

16. The argument advanced for the Company and the contributory that the Company is not required to pay management fees for the roof is like this. Under clause 7(f), the obligation to pay such fees was imposed on "each owner". For the meaning of "owner", one turns to clause 15(b) and this reads as follows:

"The word 'Owner' shall include each person in whom for the time being the legal estate in any undivided share in the said Land together with the exclusive right to use occupy and enjoy any unit in the said building is vested..." (italics supplied)

17. When one looks at the clause for allocation of undivided shares in clause (3) in the recitals, one sees that each of the premises on the 1st floor to the 18th floor was described as "unit". In contrast, the premises on the open verandah on the 4th floor were described as "Section A" and "Section B" and the premises on the roof were described as "Portion A" and "Portion B". Further, in the provision for mutual grants in clause 1, it was provided that the first owner (i.e. the Company) shall have the full and exclusive right to hold, use, occupy and enjoy to the exclusion of the second owner "all those units" in the building save and except the unit assigned to the second owner, "the Roof the open verandahs and Flat Roof thereof and all other areas not intended for common use". It was submitted by Mr Maurellet that on a true construction of the DMC, the roof is not a "unit" because the premises were described as "portion" in clause (3) of the recitals and an apparent distinction was drawn between "units" and "the Roof" in clause 1. Hence, the owner of the roof does not have exclusive occupation and enjoyment of a unit and clause 7(f) should not apply to him. Mr Maurellet further submitted that there was good policy reason why the owner of the roof and the owner of the open verandahs should be exempted from paying management fees because these premises could be put to little use, unlike the "units" on the 1st to 18th floors.

18. This does not appear to me to be a tenable construction and I reject it for these reasons:

(1) Clause 15(b) did not contain an exhaustive definition of the word "owner", it was expressly provided that the word "owner" shall "include" each person in whom the legal estate in any undivided share together with the exclusive right to use occupy and enjoy any unit is vested.

(2) Clause (4) in the recitals provided that "for the purposes of this Deed, unless the context shall otherwise require, the word 'unit' where hereinafter used shall include any shop, office, unit or other area in the said building intended for separate use and occupation" (italics supplied). I do not think there is significance in clause (3) of the recitals in that the premises on the open verandah and the roof were described as "sections" and "portions" instead of units. The premises on the lower ground floor and upper ground floor were described in clause (3) as "shops", not "units". It cannot seriously be suggested that the owners of the "shops" on these floors are not owners of "units" and would have no obligation to pay management fees under clause 7(f), in view of the clear wording of clause (4) in the recitals. Similarly, the premises on the roof would clearly come within "other area in the said building intended for separate use and occupation" in clause (4) in the recitals and is a "unit" for the purposes of the DMC, unless the context shall otherwise require.

(3) The construction sought to be placed on the word "owner" in clause 7(f) as excluding the owner of the roof is entirely contrary to the purpose of the provisions in the DMC as a whole. Clause 3 provided for the rights, privileges and easements of the owners including the right to go pass and re-pass the entrance-halls, staircases, landings and passages in the building and to use the lifts for all purposes connected with the proper use and enjoyment of the part or parts of the building assigned to the owners. It was expressly provided in clause 3(i) that all the rights and privileges in clause 3 "are subject to and conditional upon the owner for the time being paying his due share of the management, operation, servicing, maintenance, repairing and replacement expenses as hereinafter provided." As the owner of the roof would have enjoyed the rights and privileges as provided in clause 3, clearly he would be subject to the obligation to pay his proportionate share of the management expenses.

19. For the above reasons, I reject the submission that on the construction of the DMC, there is a bona fide dispute on substantial grounds that the Company is not liable to pay any management fees in respect of the roof.

The settlement agreement

20. It is alleged by the Company that as a result of the exchange of letters between the Company and the petitioner in July and August 1996, a compromise was reached by which the Company was required to pay only 25% of the management fees and that it would not be required to pay interest, which was 3% per month on the overdue amount until full payment under clause 8(a) of the DMC. It was asserted by Mr Kundamal in his second affirmation that the Company is "ready and willing to pay the 25% of the management fees to the petitioner" as agreed and that he had deposited a cashier order with his former solicitors in 1999 for 25% of the outstanding fees.

21. By a letter written by one Danny Yip of the petitioner to the Company dated 19 July 1996, it was stated that the management committee of the incorporated owners had resolved on 11 July 1996 that it would "cease action" against the Company for recovering the outstanding management fee if the Company should pay 25% of the fee, being HK$23,085.00, by 1 August 1996. The letter however went on to say that such an arrangement would not "release [the Company] from the liability to pay the management fee of Roof Top under [the DMC]" and what it meant was that "all outstanding management fees cannot be written off although action against [the Company] can be postponed."

22. Mr Kundamal replied by a letter dated 26 July 1996 for the attention of Mr Danny Yip in which he referred to the petitioner's earlier letter and his telephone discussion with the chairman of the management committee Mr Mohanani. The petitioner was asked to confirm by return fax the arrangement on two matters. The first was that apart from reducing the amount owing to 25% (the words "by 25%" would appear to be a clerical error), it was also agreed that all future payments would be reduced likewise to 25%. The second matter was that the outstanding sum of HK$23,085.00 would be ready by 30 August 1996.

23. On 28 August 1996, one Ricky Luk of the petitioner wrote to the Company stating that the Company had agreed to settle 25% of the outstanding fees and if the Company should fail to pay by 5 pm on 30 August 1996, the petitioner would proceed to legal action for recovery without further notice.

24. On 30 August 1996, Mr Danny Yip signed and returned a copy of Mr Kundamal's letter dated 26 July 1996. On that letter, a chop was applied with words to the effect that Mr Kundamal's letter was confirmed and accepted by the petitioner for and on behalf of the owners.

25. Mr Kundamal asserted in his affirmations that the confirmation and acceptance of Mr Yip in writing was clear evidence of an agreement of compromise by which the Company was required to pay only 25% of the outstanding fees and 25% of the fees that would be charged in future. Mr Luk made an affirmation in these proceedings exhibiting the letters I have mentioned but he did not say whether there was any such agreement to settle as alleged by Mr Kundamal. Mr Yip did not make any affirmation and there was no explanation why he did not do so.

26. Mr Tommy Lo for the petitioner submitted that even if there was an agreement to settle at 25% as alleged, this would not assist the Company for two reasons.

27. Firstly, there was no payment by the Company of any part of the outstanding fees or of the fees that had become due after the settlement in August 1996. It is alleged by Mr Kundamal in his first affirmation that shortly after Mr Yip had signed the July letter to confirm acceptance, "payment for the management fee demanded was tendered by the Company to [the petitioner] but this was not accepted". In his second affirmation, he gave a different version and alleged that he had informed Mr Yip verbally "to have the cheque collected for the outstanding amount of HK$23,085.00 from the Company" and he also requested Mr Yip to send copies of the debit notes for 25% of the normal charge and to forward a formal confirmation letter signed by the chairman of the incorporated owners regarding future payments. Mr.Yip did not comply with any of the aforesaid requests and was in breach of the settlement agreement. Both versions are denied by the petitioner. Mr Luk stated in his affirmation that he had chased the Company many times for payment and the Company had simply failed to pay at all.

28. The fact remains that no payment whatsoever was made by the Company despite repeated demands in late 1996 and in 1999. Until Mr Kundamal filed his affirmation in opposition, it has never been alleged, in answer to any of the demands for payment, that the Company had tendered payment which was not accepted or that the petitioner had failed to collect the cheque from the Company as requested. The allegation was unsupported by any document. Besides, if the Company were serious about making payment of 25% to discharge its obligation under the settlement agreement, it could have done so in the three years since the settlement or even after the statutory demand was issued in 1999. I am not satisfied there is prima facie proof of the allegation that payment of 25% was ever tendered by the Company.

29. Secondly, it was submitted on behalf of the petitioner that there was no consideration at law for the settlement agreement in that the offer to pay a lesser sum cannot be satisfaction and discharge of the debt. Even if the petitioner had made the settlement agreement with the Company, the petitioner is not bound to accept 25%. Besides, in this instance, there was no detriment suffered by the Company and no reliance on its part of the settlement agreement as the Company had not paid anything at all.

30. I am satisfied there is no consideration for the settlement agreement. For the reasons I have given earlier, the Company is clearly liable under the DMC to pay management fees in respect of the roof. I do not accept there was any bona fide dispute as to the debt owing by the Company so that there was consideration moving from the Company in that the petitioner might derive a practical benefit in agreeing to accept a lesser sum in settlement for a genuinely disputed debt.

31. For the above reasons, I also reject the submission that there is a dispute in good faith on substantial grounds as regards the quantum or existence of the debt in the petition.

Conclusion

32. I am satisfied on the evidence that the Company is insolvent and unable to pay its debts. I make a winding-up order against the Company and an order nisi that the petitioner is to have its costs in the petition.