Tam Lai King v. The Incorporated Owners of Malahon Apartments and Others

HCA189/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 189 OF 2005

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Before : Hon Au J in Court

Date of Hearing : 24 – 27, 31 May & 1 June 2010

Date of Judgment : 14 September 2010

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JUDGMENT

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A. INTRODUCTION

1.Ms Tam (the Plaintiff) is an owner of one of the units of Malahon Apartments.  She was before December 2002 the Treasurer of the Management Committee (“the Management Committee”) of the Incorporated Owners of Malahon Apartments (“the IO”) (the 1^st Defendant).

2.Mr Au (the 2^nd Defendant) is an indirect owner[1] of various units of Malahon Apartments.  Since December 2002, he has been the Chairman of the Management Committee.

3.In February 2002, Mr Au and five other members of the Management Committee were sued in their personal capacity under HCA488/2002 (“the Trespass Action”) for trespassing the toilet and a storeroom located on the ground floor and lobby area of the Malahon Apartments by the owners of these premises.  The Management Committee or the IO were not sued or joined as a defendant or third party.

4.After issuing the claim, the plaintiffs in the Trespass Action applied for summary judgment and also an interim injunction for delivery up of these properties. 

5.Mr Au and the others initially opposed the claim and the interlocutory applications on the basis that there had not been factual trespass and that the toilet and the storeroom were common parts of Malahon Apartments and not the plaintiff’s properties.

6.With some expressed reluctance, on 8 July 2002, the judge hearing the summary judgment granted leave to the defendants to defend[2].

7.In relation to the interim injunction sought by the plaintiffs,  Mr Au and the other defendants eventually agreed to the terms of the injunction leaving costs to be argued before Deputy Judge Saunders (as he then was) again on 13 July 2002.  In giving his decision on costs, the learned judge recorded that the defendants acknowledged that they would not defend the proceedings as to the ownership of the property in those premises and that the plaintiffs could retain possession of the premises, save as any issues as to damages[3]. The learned judge ordered the defendants to pay the plaintiffs’ costs on the proceedings for the interim injunction (“the Costs Order”). 

8.In about January 2003, the IO issued a cheque in the sum (“the Sum”) of $682,000.00 to settle the liability under the Costs Order.  Apparently the payment was approved by a resolution passed by the Management Committee.  This payment now forms the principal complaint and the subject matter of the present claim.

9.Essentially, Ms Tam now claims that there were no legal or otherwise justifications for the IO to use the owners’ money to settle Mr Au’s personal liability (for costs) incurred in the Trespass Action.  It is said that, in causing the payment, Mr Au was in breach of his fiduciary and trustee duties owed to the IO. 

10.In these claims, Ms Tam therefore asks for[4]:

(1)    A declaration that Mr Au was in breach of his fiduciary duty owed to the IO or statutory duties under section 18 & 20(3) of the Building Management Ordinance (Cap 344) (BMO).

(2)    Mr Au to repay the IO the Sum as constructive trustee or otherwise, and an order for inquiry as to damages for breach of the said fiduciary and/or statutory duties.

I will elaborate on Ms Tam’s various bases of the claim later in this Judgment.

11.Mr Tam also seeks against the IO the following reliefs[5]:

(1)    The IO do indemnify Ms Tam all costs of and/or incidental to her claim against Mr Au on an indemnity basis.

(2)    Alternatively, an Order that the IO do commence legal proceedings against Mr Au to recover the Sum.

12.In summary, Mr Au defends the claims under the following main grounds:

(1)     Ms Tam’s claims can only be properly brought under a derivative action as the alleged duties were owed to, and the alleged loss (if any) of the Sum is suffered by the IO but not Ms Tam personally.  However, the present claims have not been properly so constituted.  She therefore has no locus to bring them.

(2)     Further, the trespass was committed while Mr Au and the other defendants were reasonably carrying out their duties as members of the Management Committee for the purpose and benefit of proper building management. The defence of the Trespass Action was also taken out reasonably for those purposes.  It was therefore fully justified for the IO (as their the principal) to settle or reimburse the costs liability incurred in their proper discharge of duties as agent.

(3)     In any event, even if the payment was initially improperly made, it was eventually endorsed or rectified by a resolution (“the Owners Rectification Resolution”) passed at an owners general meeting held on 30 August 2006.  There is therefore no question of repayment of the Sum.

13.In reply, Ms Tam contends that:

(1)     She either herself has a proper locus to bring the present claims, or if not, the present claims have been properly constituted as a derivative action.

(2)     The trespass of the toilet and the storeroom by Mr Au (and the others) could not have been regarded as falling within the reasonable discharge of duties as members of the Management Committee.  In any event, the continued defence of the Trespass Action also could not have been regarded as falling within the reasonable discharge of duties as members of the Management Committee.

(3)     The Owners Rectification Resolution is also invalid as:

(a)     Mr Au did not make full and frank disclosure at that meeting.

(c)     It had the effect of condoning an illegal act (the trespass), a criminal act of damage (relating to the trespassing acts) or dishonesty.

14.In view of the above contentions, the core issues for trial are thus:

(1)     Whether Ms Tam has a proper locus or a properly constituted claim against Mr Au.

(2)     If so:

(a)     Whether the entering and locking up of the storeroom and the toilet, as well as the subsequent acts of defending the Trespass Action in the circumstances amounted to acts for the reasonable discharge of duties as members of the Management Committee and for the benefit of the IO.

(b)     If rectification of the payment is required, whether there are any grounds to invalidate the Owners Rectification Resolution.

B.      BACKGROUND

15.The following is the relevant background leading to the present proceedings.  Unless otherwise stated, this is largely uncontroversial.

16.An owners meeting of the Malahon Apartments was held on 22 November 2001.  One of the purposes of this meeting was for the re-election of the members of the Management Committee.  At that time, the Chairman of the Management Committee was one Mr Chan Tong and the Treasurer was Ms Tam.  Ms Tam had been the Treasurer since about 1987. 

17.According to the minutes, at this meeting, various questions were raised with Mr Chan, Ms Tam and other members of the then Management Committee about the accounts and financial matters of Malahon Apartments.  The atmosphere could not be said to be harmonious.

18.Eventually, Mr Chan, Ms Tam and some other members of the then Management Committee left the meeting.  Mr Chan, Ms Tam and the other old members also did not stand for re-election.  

19.The meeting continued in their absence.  At its end, Mr Au and eight other owners were elected to become the new members of the Management Committee.   Mr Au also became the Chairman of the new Management Committee.

20.After the election of the new Management Committee, on about 23 November 2001, Mr Au engaged a locksmith to open the locked doors of the toilet located on the ground floor of Malahon Apartments.  Mr Au then kept the duplicate keys of the door. 

21.In early December 2001, Mr Chan, the former Chairman, through his solicitors wrote to the new Management Committee asking them to take delivery of all the documents, books of accounts and movable properties of the IO at the management office located on the ground floor of Malahon Building on 12 December 2001.

22.The handover did take place as scheduled.

23.In the early afternoon of 12 December 2001, Mr Au and five other members (“the 5 New Members”) of the new Management Committee were present at the management office for the handover.  Mr Chan and Ms Tam for the old Management Committee were there.  There were also other representatives from the Home Affair Bureau and the presence of the caretakers of Malahon Apartments.

24.At the occasion, Mr Au and the 5 New Members however were not satisfied with the quantity of the documents that had been handed over to them.  It is unchallenged evidence that they were given two shoeboxes of documents.  It was their view that that could not have included all the documents, including the books of account and audited reports, of the IO for the past 20 years or so under the old Management Committee.  They formed that view without in fact checking through the documents contained in the shoeboxes to find out what they believed were missing.  Mr Au said it was too obvious that documents of the IO collected over 20 years simply could not have been so little to be able to be all contained in two shoeboxes.

25.After failing to get Ms Tam to hand over the “missing documents”, Mr Au and the 5 New Members themselves started to look for them.  They eventually came to what they understood to be the storeroom located near the management office.  The storeroom door was locked and they could not locate the key to it.  As a result, they summoned a locksmith to open the wooden door.  After the door was opened, they found that there was another folding gate at the entrance which was also locked. 

26.Mr Au said they did not ask the locksmith to open the gate for them to enter into the storeroom to check out the documents kept inside. But according to him, through the folding gate, they could see various bulky envelopes addressed to the IO were kept inside the storeroom. They could also see being kept inside an aluminium ladder labelled with “For Malahon Apartments Use”, spare florescent lights and various cleaning tools.

27.Mr Au and the 5 New Members at that time believed that the storeroom was a common area of Malahon Apartments, and thus under the control and management of the IO.  They then asked the locksmith to change the locks of the gate and the door and kept the keys to the new locks. After that, they caused a metal chest of drawers to be put against the door to block the entrance.  Mr Au said this was done to “protect” the properties and documents of the IO kept inside the storeroom.

28.On the other hand, it is Ms Tam’s case that at that time, Mr Au and the 5 New Members were told by the other people present that the storeroom was not common area and was owned by someone else.  She also said Mr Au and the 5 New Members did enter into the storeroom by opening the gate.

29.On 29 January 2002, Mr Au and the 5 New Members separately received a letter issued by Deacons acting on behalf of one Mr Chang Bing Kei (“Mr Chang”) and Cogi Enterprises Ltd (“Cogi”).  In the letter, Mr Chang and Cogi stated that they were the registered owners of the toilet and the storeroom.  They pointed out that Mr Au and the 5 New Members’ above acts concerning the premises amounted to trespass.  It was also said that the documents and properties kept inside the storeroom belonged to the owner.   They asked Mr Au and the 5 New Members to surrender the two premises and the properties kept inside the storeroom.

30.Mr Au and the 5 New Members passed the matter to the lawyers, Pang, Kung & Co (“PKC”) for advice and handling. It is noted that PKC were at that time also the IO’s retained lawyers.

31.Mr Au and the 5 New Members through PKC did not accept that there was any trespass of those properties.  They also said that these properties were, and had been so used as, parts of the common areas.

32.In early February 2002, Mr Chang and Cogi issued the Trespass Action against Mr Au and the 5 New Members personally for trespass of the storeroom and the toilet. 

33.On 7 February 2002, in a meeting of the new Management Committee, the members (with Mr Au and the 5 New Members forming the majority) resolved that the Management Committee was to engage PKC to handle the defence for them in the Trespass Action and to issue a counterclaim against the plaintiffs.  Mr Au’s case is that this counterclaim was issued on behalf of the IO.  It was purportedly also resolved at this meeting that the actions taken by Mr Au and the 5 New Members since 22 November 2001 in relation to the toilet and the storeroom were authorized by the Management Committee and were in discharge of their duties as members of the committee, and they should incur no personal liability under those actions[6]. I would call this the February 2002 MC Resolution.

34.The Trespass Action then proceeded as follows:

(1)    In March 2002, the plaintiffs amended the writ and then served their Statement of Claim.

(2)    In early April 2002, the plaintiffs took out a summary judgment application and an application for interim injunction supported by their affirmation.

(3)    In between April and July 2002, on behalf of all the defendants, Mr Au filed his two affirmations to oppose the plaintiffs’ applications.  The opposition was also supported by two affirmations filed by two other owners of Malahon Apartments.   The grounds of opposition were that there had not been factual trespass of the toilet, and also that both the toilet and the storeroom had been used as parts of the common areas.  It was not accepted that the plaintiffs owned those premises.

(4)    The plaintiffs then filed their evidence in reply.

(5)    As I mentioned above:

(a)    On 8 July 2002, after hearing the summary judgment application, Deputy High Court Saunders (albeit with some reluctance) granted unconditional leave to the defendants to defend.  He also ordered costs to be in the cause.

(b)    On 13 July 2002, after the defendants effectively conceded to the issue of ownership of the premises and agreed to the terms of the interim injunction, the learned judge gave the Costs Order requiring the defendants to pay the costs of the proceedings on interim injunction.

35.Following the concession mentioned above and the agreement to the terms of the injunction, on 16 July 2002, Mr Au and the 5 other defendants handed over the storeroom and the toilet to Mr Chang and Cogi through the lawyers.

36.On 3 October 2002, at a meeting of the Management Committee, a resolution was passed (again with Mr Au and the 5 New Members forming the majority) to re-confirm the February 2002 MC Resolution and that all costs of Trespass Action shall be borne by the IO, since these were incurred by them in discharge of their duties as agents of the IO.  I shall call this the “October 2002 MC Resolution”.

37.On 9 January 2003, the Management Committee further resolved (again by Mr Au and the 5 New Members in majority, with one other member attending the meeting abstaining to vote) that it should pay the Sum to the plaintiffs in the Trespass Action for the defendants under the costs order.  A cheque of the IO in the Sum was then issued and signed by Mr Au and the treasurer (being one of the 5 New Members), and paid to the plaintiffs’ solicitors.

38.On 25 January 2003, at an owners’ meeting, the Management Committee reported that it had paid the Sum to settle the legal costs under the Costs Order.  Questions were raised by various owners on whether it was correct and in the interest of all owners for the IO to have paid the legal costs incurred by Mr Au and the others under the Trespass Action.  Some requested the IO to “disclose the whole story” of the Trespass Action.  Mr Au was recorded[7] to explain that it was inappropriate for the IO to discuss it in detail in order to avoid another potential litigation, as the plaintiffs in the Trespass Action had written through their lawyers[8] to the IO warning against such disclosure on the ground of privacy.

39.Then, on 6 April 2006 (more than 3 years after the payment was made), Ms Tam through her solicitors wrote separately to the IO and Mr Au questioning the appropriateness of the payment of the Sum by the IO for Mr Au and the 5 New Members.   She asked Mr Au to justify the payment or to repay the Sum.  She also demanded the IO to recover from Mr Au the Sum. 

40.It is noted that Ms Tam only wrote to Mr Au asking for the repayment of the Sum, but not the other 5 New Members. 

41.Between April and June 2006, the IO and Mr Au respectively through their solicitors exchanged correspondences with Ms Tam’s lawyers, both denying any wrongdoing for the IO to pay the Sum.  They  stated that the payment was justified as the Trespass Action was a result of Mr Au and the 5 New Members acting for and on behalf of the IO and for the proper discharge of their functions and duties as members of the Management Committee.  They also said the payment had been approved and authorized by the relevant resolutions of the Management Committee.

42.In July 2006, Ms Tam amended the Statement of Claim of the present proceedings to add the claim against Mr Au for the repayment of the Sum for breach of fiduciary duty.

43.It is also noteworthy that when the action was first brought in January 2005, it had nothing to do with the payment of the Sum by the IO.  Ms Tam then was suing the IO, Mr Au, one other member of the new Management Committee (a Mr Tang) and a firm of solicitors (TMTH) on various allegations concerning the appointment of the solicitors to act for the IO.  It was only by the amendments made in July 2006 that Ms Tam included the present claims concerning the payment of the Sum.  However, as the matter developed, those original parts of the claims were eventually withdrawn by Ms Tam. She then discontinued the action against Mr Tang and TMTH, leaving only Mr Au and the IO as the defendants with the claims for the repayment of the Sum as the only remaining matter. 

44.At the same time, apparently in light of Ms Tam’s claims in relation to the payment of the Sum, Mr Au, as Chairman of the Management Committee, proposed a resolution to be passed at an owners’ meeting held on 30 August 2006 to rectify, if needed, the payment of the Sum by the IO (i.e., the Owners Rectification Resolution).  Ms Tam did not attend the meeting.

45.As mentioned above, the Owners Rectification Resolution was passed at the meeting.

46.Notwithstanding that, Ms Tam pursues the claims and they have now come to trial. 

C.      THE ISSUES

C1.    Does Ms Tam has proper locus to bring the present action against Mr Au as pleaded

C1.1  The arguments

47.Ms Tam’s pleaded causes of action are mainly premised on Mr Au’s breach of trust and fiduciary duties.  She also says there was no proper authorization of the payment by the Management Committee Resolutions or the Owners Rectification Resolution.

48.Mr Andrew Mak, counsel for Mr Au, however contends that Ms Tam does not have any locus to bring the present claim in the way as pleaded.  Mr Mak’s principal submissions run as follows:

(1)     The IO is a separate legal entity from Ms Tam.  At the same time, the alleged loss of the Sum was suffered by the IO but not Ms Tam personally, and the alleged trustee and fiduciary duties are also owed by Mr Au to the IO but not Ms Tam.  Applying the trite principles (in company law) of Foss v Harbottle and that no personal cause of action is to be brought for reflective loss, Ms Tam simply cannot bring a personal action against Mr Au for the repayment of the Sum.

(2)     Insofar as if Ms Tam is seeking to bring a derivative action, she must plead, amongst others, that Mr Au was in control of the Management Committee or the owners meeting which had prevented the IO from bringing a claim against him[9].  This is however lacking in Ms Tam’s pleading and thus her purported derivative claim must also fail.

49.Although accepting that the IO is a separate legal entity and can sue and be sued on its own, Mr Wright for Ms Tam counters Mr Mak’s above contentions on 3 main bases. 

50.First, Mr Wright submits that when justice requires, it is not strictly necessary to plead and prove control of the board or the meeting by the wrongdoers. Alternatively, Mr Mak’s complaint on lack of locus based on the Foss v Harbottle rule is only a procedural but not a substantive bar to a derivative clam for lack of plea or proof of control by the wrongdoers over the meeting.  This (the procedural complaint) has now come too late for the present case when the trial has completed, and the Court has heard the evidence.  Mr Wright relies on the authority of Prudential v Newman Industries (No. 2) [10] to support these submissions.

51.Second, Mr Wright submits that in the case of See Wah Fan v Incorporated Owners of Ki Tat Garden (Phase I) [11], the Hong Kong Court of Appeal has confirmed that where the incorporated owners have unreasonably or unjustifiably refused to bring a claim against a prima facie wrongdoers, an owner dissatisfied with it could bring a claim on his or her own right.  Ms Tam (Mr Wright further says) can therefore bring a personal claim in the present case.

52.Third, under the Deed of Mutual Covenant (“DMC”) of Malahon Apartments, the IO’s funds are created by the owners’ contribution solely for the purpose of proper management of the common areas of the building, and should be distributed back to the owners when the IO is dissolved or when the purpose cannot be performed.  The fund is thus subject to a Quistclose trust, and Ms Tam being one of the contributors to the fund has a beneficial or equitable interest in it.  She is therefore entitled to bring a claim personally against the wrongdoers who have breached the trust. 

C1.2      Discussion

53.In Prudential v Newman (No. 2), the plaintiff minority shareholders brought both a derivative and a personal claim against the personal defendants, who were respectively the chairman and vice-chairman of the subject matter company (N).  It was the plaintiffs’ case that the personal defendants had wrongfully caused the board and the general meeting of N to resolve to purchase assets of another company (TPG) at a much higher price.  TPG was majority owned by the two personal defendants.

54.Before trial, the personal defendants applied by summons for determination of a preliminary issue as to whether the plaintiffs, as a minority shareholder in N, were entitled under the rule in Foss v Harbottle to maintain the claim against them.  Vinelott J refused the application not on the merits but on the ground that it was more convenient to decide that issue after the action had been tried. 

55.The matter then proceeded to trial.  The judge found after trial that the personal defendants had conspired to injure N and indirectly the shareholders, as a result of which N had purchase TPG’s assets at a much higher price.  The learned judge also ruled that, although the personal defendants did not have control of N, it was doubtful whether the shareholders had the necessary independent advice to enable them to exercise a proper judgment to decide that N should not bring an action against the defendants.  In those circumstances, the judge further held that justice required the court to entertain the action of a minority shareholder brought on behalf of the company.

56.The defendants appealed the judgment to the Court of Appeal.  In the appeal, the defendants repeated their objection that the plaintiffs had no proper title to bring a derivative claim under the Foss v Harbottle rule and the board of N was independent in making the decision not to pursue any claim against the personal defendants in relation to the complained transaction[12]. The Court of Appeal also observed that it was not pleaded, and could not have been alleged, that the personal defendants had voting control[13]. 

57.After reviewing the authorities, including Foss v Harbottle, the Court of Appeal said as follows at 219D-222A:

“       It is commonly said that an exception to the rule in Foss v. Harbottle arises if the corporation is ‘controlled’ by persons implicated in the fraud complained of, who will not permit the name of the company to be used as plaintiffs in the suit : see Russell v. Wakefield Waterworks Co., L.R. 20 Eq. 474, 482. But this proposition leaves two questions at large, first, what is meant by ‘control,’ which embraces a broad spectrum extending from an overall absolute majority of votes at one end, to a majority of votes at the other end made up of those likely to be cast by the delinquent himself plus those voting with him as a result of influence or apathy. Secondly, what course is to be taken by the court if, as happened in Foss v. Harbottle, in the East Pant Du case and in the instant case, but did not happen in Atwool v. Merryweather, the court is confronted by a motion on the part of the delinquent or by the company, seeking to strike out the action? For at the time of the application the existence of the fraud is unproved. It is at this point that a dilemma emerges. If, upon such an application, the plaintiff can require the court to assume as a fact every allegation in the statement of claim, as in a true demurrer, the plaintiff will frequently be able to outmanoeuvre the primary purpose of the rule in Foss v. Harbottle by alleging fraud and ‘control’ by the fraudster. If on the other hand the plaintiff ahs to prove fraud and ‘control’ before he can establish his title to prosecute his action, then the action may need to be fought to a conclusion before the court can decided whether or not the plaintiff should be permitted to prosecute it. In the latter case the purpose of the rule in Foss v. Harbottle disappears. Either the fraud has not been proved, so cadit quaestio; or the fraud has been proved and the delinquent is accountable unless there is a valid decision of the board or a valid decision of the company in general meeting, reaching without impropriety or unfairness, to condone the fraud.

We think that this brief look at the authorities is sufficient for present purposes. For it so happens that this court cannot properly on this appeal decide the scope of the exception to the rule in Foss v. Harbottle. The reason is this. Vinelott J. permitted the action by the plaintiffs on behalf of Newman to proceed, and there was no appeal from that decision. In the result he found that Newman was entitled as against Mr. Bartlett and Mr. Laughton to damages for conspiracy and breach of fiduciary duty, and he directed an inquiry as to damages subject to a stay in case of an appeal. Thereafter, Newman had three choices, subject to the operation of the stay. First, it might do nothing. In this case the plaintiffs would be entitled, if they so desired, to issue a summons to proceed with the inquiry. Secondly, Newman might decide for some proper reason, assuming that a proper reason might exist, and duly resolve at a proper board or general meeting, to proceed no further with the claim against Mr. Bartlett and Mr. Laughton. In this event, assuming that the resolution of the board or of the company in general meeting was in all respects proper, the plaintiffs would be unable to proceed with the inquiry because a valid release could be pleaded by Mr. Bartlett and Mr. Laughton. Thirdly, Newman might adopt the order which the plaintiffs had obtained on its behalf and pursue the inquiry accordingly. This would occasion no procedural problem nor even any special procedural step. Any party, plaintiff or defendant, can issue a summons to proceed upon an order. It would not be necessary for Newman to apply to be made a plaintiff, or to start a fresh action and rely upon the principle of res judicata, as was suggested at one time in the course of the argument. The order has been made. Newman is a party to the action. Newman can enforce the order. If this course were adopted, the rule in Foss v. Harbottle is irrelevant. The rule has no room to operate where the company itself is proceeding with an action, or to enforce a judgment, pursuant to a valid board or company resolution.

Newman by its counsel, acting (as we must assume) upon due authority conferred by the company, stated before us that if the finding of fraud stood it would accept the benefit of the order made in its favour. That is the end of Foss v. Harbottle so far as this appeal is concerned. It is plainly impossible for Mr. Bartlett and Mr. Laughton to prevent the board of Newman instructing its solicitors to proceed with the inquiry, and recovering from Mr. Bartlett and Mr. Laughton what may be certified to be due.

It was in the light of these considerations that we declined to hear any argument from Mr. Caplan and Mr. Curry on the topic of Foss v. Harbottle. However desirable it might be in the public interest that we should express our conclusions on Vinelott J.’s analysis of the rule in Foss v. Harbottle and what he saw as the exception to it, it was necessary for us to bear in mind that the rule had ceased to be of the slightest relevance to the case. It would have been a grave injustice to all parties to increase the already horrendous costs of this litigation by allowing time for argument on an interesting but irrelevant point. Such consideration of the law as appears in this judgment is, apart from a few submissions made by Mr. Bartlett, merely a reflection of our own thoughts without the benefit of sustained argument.

In the result it would be improper for us to express any concluded view on the proper scope of the exception or exceptions to the rule in Foss v. Harbottle. We desire, however, to say two things. First, as we have already said, we have no doubt whatever that Vinelott J. erred in dismissing the summons of May 10, 1979. He ought to have determined as a preliminary issue whether the plaintiffs were entitled to sue on behalf of Newman by bringing a derivative action. It cannot have been right to have subjected the company to a 30-day action (as it was then estimated to be) in order to enable him to decide whether the plaintiffs were entitled in law to subject the company to a 30-day action. Such an approach defeats the whole purpose of the rule in Foss v. Harbottle and sanctions the very mischief that the rule is designed t prevent. By the time a derivative action is concluded, the rule in Foss v. Harbottle can have little, if any, role to play. Either the wrong is proved, thereby establishing conclusively the rights of the company; or the wrong is not proved, so cadit quaestio. In the present case a board, of which all the directors save one were disinterested, with the benefit of the Schroder-Harman report, had reached the conclusion before the start of the action that the prosecution of the action was likely to do more harm than good. That might prove a sound or unsound assessment, but it was the commercial assessment of an apparently independent board. Obviously the board would not have expected at that stage to be as well informed about the affairs of the company as it might be after 36 days of evidence in court and an intense examination of some 60 files of documents. But the board clearly doubted whether there were sufficient reasons for supposing that the company would at the end of the day be in a position to count its blessings; and clearly feared, as counsel said, that it might be killed by kindness. Whether in the events which have happened Newman (more exactly the disinterested body of shareholders) will feel that it has all been well worth while, or must lick its wounds and render no thanks to those who have interfered in its affairs, is not a question which we can answer. But we think it is within the bounds of possibility that if the preliminary issue had been argued, a judge might have reached the considered view that the prosecution of this great action should be left to the decision of the board or of a specially convened meeting of the shareholders, albeit less well informed than a judge after a 72-day action.

So much for the summons of May 10.  The second observation which we wish to make is merely a comment on Vinelott J.’s decision that there is an exception to the rule in Foss v. Harbottle whenever the justice of the case so requires.  We are not convinced that this is a practical test, particularly if it involves a full-dress trial before the test is applied.  On the other hand we do not think that the right to bring a derivative action should be decided as a preliminary issue upon the hypothesis that all the allegations in the statement of claim of ‘fraud’ and ‘control’ are facts, as they would be on the trial of a preliminary point of law.  In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle.  On the latter issue it may well be right for the judge trying the preliminary issue to grant a sufficient adjournment to enable a meeting of shareholders to be convened by the board, so that he can reach a conclusion in the light of the conduct of, and proceedings at, that meeting.”

58.In summary, the Court of Appeal was of the views that:

(1)    Vinelott J was wrong in refusing the defendants’ summons to determine the right to bring a derivative action as a preliminary issue by deferring the issue to the end of trial.

(2)    However, given that there was no appeal from the judge’s said refusal, and the matter had proceeded to a full trial, the objection on the title to bring a derivative claim for lack of the defendants’ control of the board or general meeting was no longer of any significance since it had by then been proved whether (a) there was the alleged wrongdoing by the defendants, and (b) if so, whether it had been condoned or approved by a valid decision of the board or the company in general meeting reached without impropriety or unfairness.

(3)    It had reservation on Vinelott J’s ruling that there was an exception to the rule in Foss v Harbottle whenever justice required.  But it did not think that this was the right occasion for the Court of Appeal to determine the proper boundaries of the exception.

59.I do not think the Court of Appeal in Prudentialis saying that, whenever justice requires, it is not necessary to plead or prove control by the wrongdoers over the board or the company in general meeting for the purpose of properly constituting a derivative claim.  The Court in fact affirms the need to plead the same.  However, it accepts that when the matter has been allowed to proceed to completion at trial, it might not be desirable to rule the matter purely on procedural objection when there is already proof or disproof of the underlying allegation of wrongdoing and the validity of any condoning of the wrongdoing by the board or a meeting of the company.  Such issue on validity includes whether the wrongdoers had unfairly or improperly controlled the meeting. 

60.Adopting the Court of Appeal’s above decision and approach in Prudential v Newman (No. 2), I also accept that in the present case, it is undesirable and unsatisfactory to determine the matter based solely on the procedural objection that Ms Tam has failed to properly plead control of the owners’ meeting given that the matter has been fully tried.  I would instead proceed to deal with substantively on the evidence as to whether Mr Au had wrongfully caused any loss to the IO and, even if so, whether the Owners Resolution condoning it is a valid one. 

61.Given my above conclusion, I will only deal with Mr Wright’s other two bases briefly.

62.Insofar as the authority of See Wah Fun is concerned, I do not think it supports the submission that Ms Tam could bring a personal claim in the present case.

63.See Wah Fun is a case where the plaintiff claimed that certain parts of the building were common areas and that another owner (a Mr Tam) had wrongfully turned those common parts into his own private use.  It was part of the plaintiff’s allegations that the incorporated owners had failed to enforce on behalf of the owners the right over the alleged common areas.  He therefore took out the proceedings seeking an order to compel the incorporated owners to enforce the provisions of the deed of mutual covenant to stop Mr Tam from continuing to turn to his own use the common parts.  The plaintiff lost at first instance before the Lands Tribunal.

64.When the matter came before the Court of Appeal, prompted by the court, the defendant raised the question as to whether the plaintiff had a right to bring the claim.  The concern was raised in light of s. 16 of the BMO, which provides in mandatory terms that the rights and obligations of the owners in respect of the common parts of the building are to be enforced by and against the corporation to the exclusion of the owners[14].

65.The Court of Appeal allowed the appeal.  In doing so, it concluded that the complained areas were common parts and that notwithstanding s. 16 of BMO, the 10^th Schedule of the BMO also provided that the Tribunal had jurisdiction to hear proceedings relating to any question of law concerning ownership, occupation or possession of the whole or any part of the building.  Thus, where there was a dispute, the owner might seek a determination from the Tribunal on whether a particular part of the building was a common part or not.  The plaintiff therefore was entitled to bring the claim against the incorporated owners[15].

66.After concluding the above, the Court of Appeal then went on to observe at para 23 the situation where if the majority of owners had acted in bad faith in a matter concerning the management of the common parts.  Cheung JA said as follows:

“23. While the owners may exercise control of the management committee of a corporation in the meetings of the owners and they can also apply to the Tribunal to dissolve the management committee and to appoint an administrator by a resolution passed at a general meeting, the legislation has not expressly prohibited an owner to take action in a situation such as the present one. To take an extreme case, if the majority of the owners had decided to act in bad faith in a matter concerning the management of the common parts, is the minority owner precluded from seeking redress in the court? The answer must be no. This cannot be the intention of the legislation. This being the case, if a minority owner can show he has a legitimate complaint regarding the common parts of the building and yet the management committee had chosen to ignore him, we see no reason why he cannot seek relief from the court. This must be one of the means to ensure that the corporation will observe the intention and requirement of the Ordinance in the proper management of a multi-owner building.”

67.It can thus be seen that See Wah Fun(including Cheung JA’s observation at paragraph 23 of the judgment) is an authority solely on the scope of the operation of s. 16 of the BMO in reserving to the corporation the rights to sue and be sued for the enforcement of the rights and obligations in relation to the common parts of the building.  It has nothing to do with the question as to whether an owner could bring a personal claim against another owner who has allegedly caused loss to the corporation’s assets. 

68.I therefore do not accept that See Wah Funis an authority to show that Ms Tam in the present case has a personal right to bring the claim against Mr Au for the alleged loss of the Sum from the IO’s funds.

69.In relation to Mr Wright’s submissions based on a Quistclose trust, this is only raised in his written closing submissions and is not pleaded. It is not a proper issue between the parties. I do not think it is now open to Ms Tam to raise it.

C2.    Whether the entering and locking up of the storeroom and the toilet as well as the subsequent acts of defending the Trespass Action in the circumstances were acts of Mr Au for the reasonable discharge of duties as a member of the Management Committee

C2.1   Ms Tam’s case and evidence

70.Ms Tam herself gave evidence.  It is her evidence that when Mr Au and the others changed the lock to the storeroom, they were told that the storeroom was not part of the common area but belonged to another owner.  She also told them that there were no other documents kept by the IO and stored in the storeroom other than those already handed over to Mr Au under the two shoeboxes. 

71.Mr Wright for Ms Tam further also submits that there is no basis for Mr Au and the others to continue to lock up the storeroom and the toilet after the true owners had written to them to demand for delivering up of these premises.  Mr Wright says the title documents provided by the true owners under the Trespass Action show clearly that these premises are not part of the common areas of the building.

72.Mr Wright also puts to Mr Au in cross-examination that, after he had been told that the storeroom was not common area, the proper thing for him to do was to consult lawyers instead of locking and continuing to lock up the storeroom.  The same also applied to the toilet when they were put on notice by the owners that it did not form part of the common area.

C2.2   Mr Au’s evidence and case

73.Mr Au’s relevant evidence can be summarized as follows:

(1)    He had been under the impression and belief that the storeroom was part of the common areas of the building, as he understood that the room had been used by the IO and the caretakers as a store. 

(2)    Similarly, he was also under the impression and belief that the toilet at the ground floor of the building was also common parts, because it had always been used by the caretakers, tenants and occupiers of the shops and visitors to the building.

(3)    As far as he knew, the keys to the storeroom and the toilet had been kept by the caretakers.

(4)    On 23 November 2001, he was told by the caretakers that the toilet had been locked and they could not open the door with their keys.  After consulting with some other members of the Management Committee, he then asked a locksmith to open the door with a new key.  He was later given two duplicate keys for the toilet.

(4)    On 12 December 2001, he found that it was obvious that the two shoeboxes of documents handed over to him by Ms Tam were insufficient.  These could not have contained all the books and accounts and relevant documents of the IO for the past 20 years or so. 

(5)    As Ms Tam refused to give him and his members any more documents, and he also could not find the keys to the door of the storeroom, a locksmith was summoned to open the door to the storeroom to look for the missing documents.

(6)    When the door was opened, there was another folding gate at the entrance to the storeroom.  The gate was also locked.  Through the perforated gaps of the gate, he could see various things that were being kept inside storeroom, which included various documents and envelopes addressed to the IO, as well as a ladder and cleaning equipment labelled for the IO.

(7)    He however did not go in to look closely at or to take away the documents.  He instead asked the locksmith to change the locks to the gate and the door of the storeroom to keep things in status quo.  He further caused a metal chest of drawers to be put against the door of the storeroom, to block the entrance and to keep the matters status quo.

(8)    After he (and the 5 New Members) received the demand letters from Chang and Gogi for the delivery up of the storeroom and the toilet, they passed the letters and the matter over to PKC for handling and advice. 

(9)    They had engaged PKC to act for them to defend the Trespass Action on the, inter alia, basis (and belief) that the storeroom and the toilet were common parts of Malahon Apartments.  By July, PKC advised them effectively to settle the matters by negotiations and to agree to the terms of the injunction sought by the plaintiffs in the action.  These were what they did.

(10)    He believed that they were acting on behalf of the IO on 12 December 2001 and in locking up the storeroom and the toilet.  When they were sued under the Trespass Action, PKC also advised the same in a meeting of the Management Committee.  

C2.3   Discussion

74.Mr Au’s evidence on how the storeroom and the toilet had been used before he locked them up is unchallenged.  In any event, I also do not find anything at trial that could rebut this part of his evidence.

75.Given this part of the evidence (which I accept), I hold that before he received the demand letter from Mr Chan and Cogi claiming ownership, it was objectively reasonable for Mr Au to be under the belief that the storeroom and the toilet were parts of the common areas.

76.I also accept Mr Au’s evidence and find that, given there were only two shoeboxes of documents handed over to them (this is unchallenged), it was reasonable for them at that time to doubt that there might be missing documents of the IO, and thus they needed to look for them. 

77.After receiving the demand letter and until the costs judgment was given under the Trespass Action, Mr Au (and the 5 New Members) had been legally represented and advised by PKC.  There is nothing to suggest that the defences so run was contrary to any legal advice they were receiving.  The minutes of the Management Committee meetings also do not show that PKC had advised them that there was no defence to the Trespass Action. 

78.In the premises, I am similarly of the view that it was objectively reasonable for Mr Au and the 5 New Members to believe (under legal advice) that there was a valid defence to the Trespass Action on the basis that the storeroom and the toilet were common areas of Malahon Apartments. 

79.As such, I further hold that under the circumstances and the state of affairs at that time, the locking up of the toilet and the storeroom, and the subsequent defence of the Trespass Action were reasonable acts on the part of Mr Au and the 5 New Members in discharge of their functions and duties as members of the Management Committee to seek to enforce the rights and obligations of the owners over disputed areas of the Malahon Apartments as to whether they were common areas and to recover potential documents belonging to the IO.  

80.Given that my above conclusions are formed based on the objective and unchallenged or uncontroversial evidence, I do not think the conflict between Ms Tam’s evidence and Mr Au’s evidence on what happened on the day of the handover on 12 December 2001 is of any material relevance[16]. This conflict essentially relates to (a) whether Mr Au did enter into the storeroom by opening the folding gate, and (b) whether Mr Au was told that the storeroom did not belong to the IO. 

81.But if and insofar as necessary I need to rule on this part of the evidence, I would have preferred Ms Tam’s evidence to that of Mr Au.  In other words, I would have held, on the balance of probabilities, that (a) Mr Au had entered into the storeroom, and (b) he was told that the storeroom did not belong to the IO, although he did not accept it.  I prefer Ms Tam’s evidence because that is inherently more probable in light of the following:

(1)    There was no good reason why Mr Au would not have entered into the storeroom after the gate was opened to check the things stored therein.  To me, it was natural for him or the others do so, since the purpose of opening the door to the room was to look for the “missing documents”. 

(2)     It is common ground that Mr Au locked the folding gate and the door of the storeroom thereafter, and even used the metal chest of drawers to block its entrance to keep the status quo.  This is consistent with the fact that he was aware of a dispute as to the ownership of the storeroom, as he locked everything up to (in Mr Au’s own evidence) keep the status quo pending determination. 

C2.4   Conclusion

82.For the above reasons, I conclude and find under this issue that the entering and locking up of the storeroom and the toilet as well as the subsequent acts of defending the Trespass Action in the circumstances amounted to acts by Mr Au and the 5 New Member for the reasonable discharge of their duties as members of the Management Committee and for the benefit of the IO.

83.In the premises, I further hold and find that the IO should settle or reimburse the liability of Mr Au and the 5 New Members under the Costs Order.  There is therefore nothing inappropriate or wrongful for the IO to pay for the Sum to discharge the liability of Mr Au and the 5 New Members under the Costs Order.

C3.    Whether there are any grounds to invalidate the Owners Rectification Resolution, if rectification was required

84.Given my conclusion in the above issue, it is irrelevant as to whether the Owners Rectification Resolution is a valid one, as it is not necessary to rectify the payment of the Sum by the IO. 

85.However, in case I am wrong above, and that it was wrongful for the IO to pay the Sum for Mr Au and the 5 New Members, I would have concluded that the Owners Rectification Resolution was not validly obtained and thus there was no proper rectification. 

86.I accept Mr Wright’s submissions that Mr Au (as Chairman of the meeting and a fiduciary to the IO) in proposing a resolution which would benefit him (and the others) personally and exonerate what would have been his (and the others’) wrongdoing, he had a duty to make full and frank disclosure of all the material facts to those attending the meeting.  The law would examine any consent of the principal so sought with “infinite and the most guarded jealousy”.  The materiality of information required to be disclosed is not determined by whether it would have been decisive, but rather by whether it may have affected the principal’s consent See: Snell’s Equity(21^st ed.), paras. 7-32, p. 156.

87.I do not think in obtaining the consent under the Owners Rectification Resolution, Mr Au had discharged that duty:

(1)    From the minutes of the general meeting, it can be seen that when Mr Au (as Chairman of the meeting) proposed the resolution, he only presented to the owners attending the meeting his side’s version on why he and the 5 New Members were acting as agents and for the benefit of the IO in “trespassing” the storeroom and toilet and in defending the Trespass Action.

(2)    He had not however also informed the owners that (a) he had received letters from Ms Tam complaining about the payment of the Sum and requiring the IO to sue for the recovery of the Sum, and (b) the possible grounds and basis to say that he and the 5 New Members were not reasonably acting for the benefit of the IO in relation to the “trespass” and the defence of the Trespass Action as suggested by Ms Tam.

(3)    In failing to do so, and in then obtaining the passing of the Owners Rectification Resolution, I do not think the resolution was obtained fairly and properly, as the owners had not been given a balanced picture regarding the payment of the Sum to enable them to form an independent informed view as to whether to rectify and confirm the payment.

(4)    The fact that Ms Tam herself could have raised these if she had attended the meeting is neither here nor there, as the duty to disclose is on Mr Au personally.  In my view, given the strictness of the duty on a fiduciary, it was even more incumbent on and important for Mr Au to disclose the information when Ms Tam was not at the meeting.

88.In the premises, if necessary, I would have concluded that the Owners Rectification Resolution was not obtained properly and fairly and was invalid in rectifying the payment of the Sum.

89.However, I would not have held that the rectification resolution is invalid because it amounted to condoning an illegal act or dishonesty.  The rectification sought was to shoulder the legal costs in defending the Trespass Action.  In my view, it is stretching the argument to say that this amounted to condoning the acts of trespass even if I had held that there was no reasonable basis for Mr Au and the 5 New Members to believe that the storeroom and the toilet to be common parts of Malahon Apartments. 

D.      CONCLUSION

90.Ms Tam has failed to prove her case that Mr Au had wrongfully caused the IO to pay the Sum to settle the liability of Mr Au and the 5 New Members under the Costs Order.  I therefore dismiss her claims against Mr Au and the IO.

91.Costs is a matter of discretion, but should usually follow the events unless there are good reasons to justify departure. One of these reasons is that if the successful parties have raised but lost under certain issues at trial, which issues have substantially increased the costs of the trial[17].

92.However, in considering these principles under Re Elgindata, the Hong Kong Courts have emphasized again and again that (a) due and significant weight must be first given to the general principle that costs should follow the event and any departure from this normal rule should be approached with circumspection^[18], and (b) it is important not to decide costs according to a score sheet on how many issues had gone one way or the other^[19].

93.In the present case, Mr Au has relied in his pleading on the authority and validity of the two Management Committee Resolutions and the Owners Rectification Resolution to justify the payment of the Sum. 

94.Mr Mak (for Mr Au) has (rightly so in my view[20]) confirmed at trial that he would no longer pursue the defence based on the Management Committee Resolutions.  However, this concession was only made close to the end of the trial.  By then, much time and costs had already been spent by the parties preparing for the trial of this issue on the validity of these management committee resolutions. 

95.Mr Au has also lost after trial his defence on the Owners Rectification Resolution because of my ruling that he had not made full and frank disclosure at the meeting in breach of his fiduciary duty.

96.Similarly, significant time and costs have been spent on the issue concerning the validity of the Owners Rectification Resolution.

97.In the circumstances, applying the principles I have referred to above, notwithstanding that Mr Au has succeeded in defending the claims, in the exercise of my discretion, I think it is just to require Ms Tam to pay only half of Mr Au’s costs in this action.

98.Insofar as the IO is concerned, I do not see anything to justify a departure from the usual costs order which should follow the event.  It is important to note that (a) the IO has maintained a passive role in the proceedings and trial, and (b) its presence at the trial was required as Ms Tam insisted on seeking an order against it to indemnify her costs. 

99.At the same time, the present claims relate to the recovery of the Sum (i.e., $682,000.00), which is appreciably less than $1,000,000.00.  The matter should fall within the District Court civil jurisdiction.

100.I therefore make an order nisi that:

(1)     Ms Tam do pay half of Mr Au’s costs in this action to be taxed if not agreed, at District Court scale.

(2)     Ms Tam do pay IO’s costs in this action to be taxed if not agreed at District Court scale.

101.Unless any of the parties applies by Summons to vary it, the costs order nisi shall be made absolute 14 days from today.

102.Lastly, I thank counsel for their assistance in the matter.

Mr Colin Wright, instructed by Messrs Fried, Frank, Harris, Shriver & Jacobson, for the Plaintiff

Mr Lawrence Cheung and Mr Patrick Wong, instructed by Messrs Michael Pang & Co., for the 1^st Defendant

Mr Andrew Mak, instructed by Messrs T.Y. Lam & Co., for the 2^nd Defendant