Fidelity Realty Ltd v. Management Committee of the Incorporated Owners of Hong Chiang Building

LDBM 241 of 2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Building Management Application No. 241 of 2004

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Between

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Coram: H. H. Judge Chan, Presiding Officer of the Lands Tribunal

Date of Hearing: 6^th September, 2004

Date of Reasons for Decision: 14^th September, 2004

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REASONS FOR DECISION

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1.This is an application by a member of The Incorporated Owners of Hong Chiang Building (“the IO”) against some other members who have been purportedly appointed as members of the management committee (the “MC”) of the IO.  The Applicant pleaded in its Notice of Application that the Respondents have not been validly appointed as members of the MC of the IO.  The Respondents denied the allegation in their notice of opposition.

2.This application came before me for directions on 6^th September, 2004.  I took the view that the title of the Respondents was improperly constituted and that the Respondents should be individually named and not sued as a particular management committee of the IO.  I asked the parties to express their views on this.  The solicitors for the Respondents opposed my proposal to change the title of the Respondents to the names of the individuals on the ground that such change would expose the individual Respondents personally to adverse costs orders.  It was further submitted to me that without such change, only the IO would be exposed to adverse costs orders as it was an MC of the IO that was being sued.  I did not agree with these submissions.  I now give my reasons.

3.No claim or allegation is being made against the IO itself in this application.  This application is fought between members of the IO on the validity of the election of the Respondents to the MC of the IO.  It is a battle between two groups of members of the IO.  They should thus sue and be sued in their own names.  It is wrong to sue the IO in such disputes.  It would likewise be wrong to sue the MC as a representative of the IO.  The IO should only be joined as a nominal Respondent so that it would be bound by the order to be made.  It should not play any active role either for or against this application. 

4.I refer to a well established principle in company law that “where a company is a nominal party to a petition (for winding up) but in substance the proceedings involve a dispute between shareholders, the company’s money should not be spent on disputes between shareholders save for proper costs incurred, for example, on giving discovery, on an application for a validation order, and such further costs as may be expedient and necessary in the interest of the Company as a whole(Re:Crossmore Electrical and Civil Engineering Ltd. (1989) 5 BCC 37; Re:CG & L Investment Ltd v. Wyatt Estates Ltd. [1992] 1 HKC 78.)”(see Re: Wah Ying Cheong Company Ltd. HCCW 225/1996). 

5.This principle has been acknowledged in other Hong Kong company winding up cases.  They include Re: Wyatt Estates Ltd. [1993] 1 HKLRD107, Re: Mandarin Resources Corporation Ltd.CWU 348 of 1996, Re: Ideaction Strategic Investment Ltd.CWU 187 of 1997 and Re: Perfect Trade Ltd.CWU 1147 of 1999. 

6.This principle was discussed at length by Barma J in Re: Core Pacific-Yamaichi International (Hk) Ltd. CWU 804 of 2003: -

“42.    Mr Tong and Mr Graham cited to me all of the principal cases in the line of authority starting with Pickering v Stephenson (supra).  Thus, I was taken to the decisions of the English High Court in Re Kenyon Swansea Ltd [1987] BCLC 514, Re Crossmore Electrical and Civil Engineering Ltd [1989] BCLC 137, Re Hydrosan Ltd [1991] BCLC 418, Re Milgate Developments Ltd [1991] BCC 24, Re a Company (No. 004502 of 1988) ex parte Johnson [1991] BCC 234 and Re a Company (No. 1126 of 1992) [1994] 2 BCLC 146. I was also referred to the decision of the Hong Kong Court of Appeal in Re C G & L Investment Ltd and Wyatt Estates Ltd [1992] 1 HKC 78.

43.     In all of those cases (with the exception of Pickering v Stephenson, which was decided well before the English equivalent of section 168A of the Ordinance was first enacted) the courts have reiterated that the nature of claims by a shareholder, whether under section 168A, or section 177(1)(f), or their English equivalents, involve only claims against the shareholder said to be in control of the company concerned, and do not involve claims against the company itself, which is a nominal party, and which should not, ordinarily, participate or expend its funds in a partisan way in those proceedings. Where such funds are so expended, that will usually involve a misfeasance on the part of those who authorised such expenditure.

44.     Although it is possible to detect differences of emphasis in the approaches of the different judges deciding the cases, I am content to adopt the views expressed by Lindsay J in Re a Company (No. 1126 of 1992) (supra) as an accurate statement of the law in this area.  In that case, Lindsay J, having reviewed all of the principal English authorities, concluded in relation to them (at 155h to 156f) that: -

“ ... As a body they suggest to me the following.

Firstly, that there may be cases (although it is unlikely nowadays when wide objects clauses are the norm) where a company’s active participation in or payment of its own costs in respect of active participation in a s 459 petition as to its own affairs is ultra vires in the strict sense.

Secondly, leaving aside that possible class, there is no rule that necessarily and in all cases such active participation and such expenditure is improper.

Thirdly, that the test of whether such participation and expenditure is proper is whether it is necessary or expedient in the interests of the company as a whole (to borrow from Harman J in ex parte Johnson).

Fourthly, that in considering that test the court’s starting point is a sort of rebuttable distaste for such participation and expenditure, initial scepticism as to its necessity or expediency.  The chorus of disapproval in the cases puts a heavy onus on a company which has actively participated or has so incurred costs to satisfy the court with evidence of the necessity or expedience in the particular case.  What will be necessary to discharge that onus will obviously vary greatly from case to case.

Fifthly, if a company seeks approval by the court of such participation or expenditure in advance then, in the absence of the most compelling circumstances proven by cogent evidence, such advance approval is very unlikely.

Mr Moore would have me add that such participation and expenditure should never be approved in advance, or at all, unless there is a clear demonstrable and unchallenged independence between the company and the protagonists under s 459.  Obviously, where that independence is present the task of satisfying the tests I have described is likely to be easier than in those cases where it is absent, but I am reluctant to specify that independence as either a sufficient or a necessary condition.  It is not sufficient because even truly independent board members can be swayed by partisan or other considerations they should not have entertained.  It is not necessary because even where that independence is lacking, directors, for all their lack of independence, could arrive at a true view of what was necessary or expedient in the interests of the company as a whole and might even arrive at that view for the right reasons.

Finally on the law, I comment that I do not see this analysis as opening floodgates such that the courts will be swamped with applications of the kind before me.  In the vast majority of s 459 petitions there will, I think, be no real prospect of satisfying the tests I have mentioned and applications of the kind before me will be so hopeless as not even to be embarked upon.”

47.     In my judgment, quite apart from questions as to the independence of the Company’s board of directors, the source of its funding and its motivation for participating actively in the opposition to the Petition, it will ordinarily be inappropriate for a company which is involved in a section 168A or section 177(1)(f) petition in respect of the conduct of its affairs by a majority shareholder whose actions in that regard are under attack by a petitioner to participate actively in the proceedings either to support or to oppose them, regardless of the source of funding for such participation.  I have come to that view because it seems to me to follow from the nature of the company’s position as a necessary and nominal party to such proceedings.  Given that there are no claims or allegations made against the company itself, and that the proceedings are in reality a contest between the opposing camps of shareholders, it seems to me to follow that the prosecution and defence of the proceedings is a matter that should be left to the respective camps of shareholders alone.  In ordinary civil litigation, while a party is entitled to employ as many legal representatives as he likes (in terms of the number of solicitors or counsel engaged upon his litigation), he is only entitled to one set of representation (whatever its size) in the course of the particular proceedings.  Where there are several counsel instructed for one party, the court is careful to ensure, so far as it can, that there is no overlap or repetition in the submissions made (or in rare cases, cross-examination of a witness conducted) by different counsel for the same party.  That being so, it seems to me in principle to be objectionable to permit the company, a nominal Respondent, to participate in the conduct of the petition, and thus support one side or the other, particularly in a manner involving additional and separate representation, unless there are demonstrated good reasons for it to do so.”

7.I am of the view that the present application is analogous to the company winding up cases referred to above as this application is essentially a contest between members of the IO.  Hence, the funds of the corporation should not be spent to support the cause of either side.  The litigants themselves should appear as parties and bear the consequence as to costs.  

8.Furthermore, it is also wrong to sue a management committee as a respondent as it is not a legal entity.  The Building Management Ordinance, Cap. 344, has only provided a machinery for the incorporation of the owners for the time being of a building or group of buildings (s. 8).  It has not allowed the incorporation of a management committee.  There are provisions in the Ordinance to deal with matters relating to incorporation of the owners (ss. 9 to 13).  The register of the Land Registrar contains the particulars of such corporations.  The register also contains the names of some members of the management committees (s. 12(2)(d)).  It however does not contain the names of all the members of the committees.  The Land Registry also does not keep a separate registration or record of management committees.  The registration of the names of some members of committees as part of the Land Registry’s record of the corporations does not thereby make the committees legal persons. 

9.I also note that paragraph 5 of the 2^nd Schedule of the Ordinance stipulates how a management committee is to retire (except for a tenants’ representative) at the AGM of the corporation and a new committee elected.  After this procedure has been carried out, the previous committee will be replaced by a new one.  However, it will be a new committee of the same corporation.  There are also provisions for the removal and replacement of the members of a committee (s. 14) and for the dissolution of the entire committee and the appointment of an administrator to arrange for the election of a new committee for the corporation (ss. 30 and 31).  The committee as dissolved and the new committee as elected are all committees of the same corporation.  In the winding up of a corporation, the members of the committee are treated as directors of a limited company (s. 33).  There is no procedure for the winding up of a management committee. 

10.The Ordinance also imposes a duty on a corporation to manage the common parts of the building and to enforce the obligations in a deed of mutual covenant for the control, management and administration of the building.  It empowers a corporation to engage and remunerate staff as well as the chairman, vice-chairman, secretary and treasurer of the management committee (s. 18).  A management committee has to maintain proper books and accounts, but such books and accounts belong to the corporation (s. 27 and 6^th Schedule).  A corporation should also maintain an interest bearing bank account for the management of the building (s. 20(7) but not a committee.  The amount of management expenses to be paid by the owners is determined by the committee but paid to the corporation and not the committee (s. 21).  The committee is just an organ of the corporation elected by the corporation’s members to exercise and perform the powers and duties of the corporation (s. 29). 

11.I appreciate that section 45 of the Ordinance has included a management committee as a competent person to bring proceedings.  It is certainly competent to bring proceedings on behalf of its corporation.  I do not rule out that the possibility that a committee may bring proceedings in its own right.  However, I doubt if it is proper for a committee to sue as a legal person in its own right.  The fact that section 45 of the Building Management Ordinance, Cap. 344 has included a management committee as one of the persons who is competent to commence proceedings in the Tribunal under that section is, without more, insufficient to make the management committee a legal person. 

12.For the above reasons, it is wrong to name a management committee as a Respondent as it is not a legal person which is capable of being sued.  If a claim or allegation is being made against a corporation, the corporation should be sued.  If it is only a battle between different groups of members of the corporation, the members should be named as parties.  There are of course instances like the present one where the corporation should be named as a nominal Respondent so that it would be bound by the order. 

13.For the above reasons, I ordered, inter alia, the title of the respondents be amended by substituting the present title with the individual names of the members of the purported management committee which was led by Kenneth Leung Sai Wing, Yuen Moon Ting and Sandra Chan Yee Hung as its Chairman, Secretary and Treasurer respectively.

The Applicant : Represented by Mdm. Rebecca Lau of M/S Yau & Lau, Solicitors.

The Respondents : Represented by Mr. Willy Lim of M/S Henry Wan & Yeung, Solicitors.