Re The Incorporated Owners of Kai Tak Mansion (Block Three)
Read the full judgment text of HCCW 268/2008 on BabelCite. This High Court CFI judgment was delivered on 21 January 2011.
1. On 27 August 2008, Master Ko made a winding up order against The Incorporated Owners of Kai Tak Mansion (Block Three) (“the Company”).
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HCCW268/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING UP NO. 268 OF 2008 ---------------------
Before : Hon Fok J in Chambers (Open to Public) Date of Hearing : 11 January 2011 Date of Judgment : 21 January 2011 ------------------------ JUDGMENT ------------------------ INTRODUCTION 1.On 27 August 2008, Master Ko made a winding up order against The Incorporated Owners of Kai Tak Mansion (Block Three) (“the Company”). 2.By Notice of Motion dated 7 October 2010, seven contributories of the Company (“the Applicants”) apply to stay the winding up of the Company under s. 209 of the Companies Ordinance, Cap. 32 (“CO”). 3.The joint and several liquidators of the Company, Messrs Victor Chiu Koon Shou and Tsang Fan Wan (“the Liquidators”), issued their own summons dated 30 September 2010 seeking an order under s. 209(1) of the CO that the winding up be stayed, alternatively that the Company be dissolved under s. 227(1) of the CO. 4.When the Notice of Motion came on for hearing before Barma J on 26 November 2010, directions for the filing of evidence were made and the hearing was adjourned. The hearing before me is the adjourned hearing of that Notice of Motion. 5.Notwithstanding their own summons, the Liquidators did not consent to the application for a stay at the hearing before Barma J and sought to adduce further evidence on the application. In effect, they opposed an order staying the winding up at that stage. Since then, their stance appears to remain the same, although this is somewhat qualified in the latest affirmation filed on their behalf in which Mr Chiu states the Liquidators “still take a neutral position” regarding the stay. 6.A group of opposing owners (“the Opposing Owners”) also appeared before me, represented by Mr Alvin Tsang. In written submissions filed on their behalf, their position was described as being “essentially the same as the Liquidators”. 7.The Official Receiver does not object to the stay. FACTUAL BACKGROUND 8.Kai Tak Mansion (Block 3) is a 50-year old building which comprises one of four blocks in a development in To Kwa Wan. There are 82 units in Block 3, 72 of them residential, 4 of them commercial and there are 6 car parking spaces. Each of the blocks of Kai Tak Mansion has its own DMC. 9.Until 2005, the management of Kai Tak Mansion, including Block 3, was carried out by a company called Housing Management Agency Limited (“HMAL”). That company became insolvent in 2005 and the Company took over the management of Block 3. A Madam To Mei Chun (“Madam To”) was the chairlady of the Company, Mr Ho Wai Chuen (“Mr Ho”) was its treasurer and there was one other owner on the management committee of the Company. 10.In 2002, a company called Po Fat Construction Co. Ltd (“Po Fat”) undertook renovation and construction work for Kai Tak Mansion. Po Fat sued the Company for outstanding renovation costs and these were subsequently settled. However, the Company did not settle the outstanding costs in the sum of HK$90,367.67 and, on the basis of this debt, Po Fat petitioned for the winding up of the Company in HCCW 268 of 2008 on 17 June 2008. 11.As noted above, a winding up order was made on 27 August 2008 and the Liquidators were appointed by order dated 4 December 2008. 12.Since then, a joint sale has been negotiated with a property developer who wishes to re-develop Kai Tak Mansion. On 15 July 2010, various owners of Kai Tak Mansion entered into an agreement with a company called Oriental Generation Limited for the sale of the whole of Kai Tak Mansion for HK$1.5 billion. 13.The owners of units in Block 3 must deliver good title if they wish to participate in the joint sale. The winding up order has been registered against all units in Block 3, hence the Applicants’ desire to stay the order. THE RELEVANT PRINCIPLES 14.Section 209(1) of the CO provides :
15.The principles on which the court will stay a winding up order under s. 209(1) of the CO are now well-established.
See per Kwan J (as she then was) in Re Outboard Marine Corp Asia Ltd [2003] 1 HKLRD 585 at §6. 16.In exercising its discretion, the court will take into consideration matters such as the following : (i) whether the debts and expenses of the liquidation had been paid, (ii) whether the debts of the company are paid or satisfactorily provided for, and (iii) whether the affairs of the company call for investigation. Where there is doubt as to whether or not the company is solvent, a stay is unlikely to be granted: see, per Barma J in Re Highfit Development Co. Ltd [2009] 5 HKLRD 134 at §12. THE BASIS OF THE APPLICATION 17.The Applicants, represented before me by Mr Alan Leong SC and Mr Alfred Cheng, refer to the fact that the debts of the Company and the costs of liquidation are now provided for. They refer to the fact that, on the Liquidators’ application, Poon J made an order dated 17 August 2009 by which he ordered that each unit of Block 3 should contribute HK$30,000 to a contingency fund to be used to pay the fees and expenses incurred by the Official Receiver and other court fees, the Company’s debts and daily operating expenses and the costs and reasonable expenses of the Liquidators. 18.On the basis of the Liquidators’ evidence, it appears they collected a sum of HK$2,672,288.56 for the Company from which they have made payments totalling HK$720,131.68. This leaves a balance in the contingency fund of HK$1,952,156.90. 19.In addition, owners of units in Block 3 convened a meeting on 11 September 2010 in which they passed a resolution requiring each owner to contribute HK$70,000 towards the expenses required to stay the winding up order. The total contribution will come to HK$5,740,000 and the Applicants’ solicitors have been authorised to use the money to discharge any liabilities for staying the winding up order. 20.The Applicants have also pointed out that their solicitors, who also act for the owners under the joint sale agreement referred to above, have received the first instalment of deposit, representing 10% of the purchase price, from the purchaser. It is proposed that the Applicants’ solicitors will retain HK$5,740,000 out of that deposit, thereby enabling them to hold this sum in accordance with the resolution referred to in the preceding paragraph. 21.On this basis, the Applicants contend that any outstanding liability of the Company can be amply provided for. 22.So far as the costs and expenses of the winding up are concerned, the Liquidators have informed the Applicants’ solicitors that their fees and costs are around HK$3.6 million. The ad valorem fee of the Official Receiver is yet to be determined. Subject to their having the opportunity to examine the Liquidators’ costs, including by way of taxation if necessary, the Applicants agree to pay the Liquidators’ costs but contend that the further contribution of HK$70,000 per unit should be sufficient to pay the costs and expenses of the winding up. THE LIQUIDATORS’ AND OPPOSING OWNERS’ POSITION 23.By a letter dated 30 April 2010, the Liquidators confirmed that they did not have any objection to the Applicants’ then proposed application to stay the winding up proceedings. By a letter dated 17 September 2010, the Liquidators again informed the Applicants’ solicitors that they did not have any objection to the then proposed application for a stay. Indeed, in that letter, the Liquidators indicated that, in order to save time and costs, they would make an application to stay the winding up and, on 30 September 2010, the Liquidators duly issued their summons, to which I have referred above. 24.On 23 November 2010, the Liquidators filed a report with the court, the purpose of which was stated to be to provide a full picture as to the current financial position and the progress of the liquidation. In that report, the Liquidators set out, amongst other things, a summary of the conduct of the liquidation to date and a description of the Liquidators’ Investigations. They identified what was said to be 65 questionable transactions, which they suggested should be explained by Madam To. They also identified an alleged unfair preference to a Mr Chung Siu Kong in the sum of HK$50,000. Finally, they identified various breaches by the Company’s officers of the CO and the Building Management Ordinance, Cap. 344. Various outstanding administrative matters were then identified and also certain outstanding matters subject to further investigation. 25.In his skeleton submissions on behalf of the Liquidators, Mr Andrew Mak takes a number of points. First, the Liquidators question whether the Company is in fact now solvent. Assuming it is not, they submit that the Applicants have a heavy burden of proof because of the general principle that an insolvent company should be wound up. Secondly, the Liquidators submit that there is an unexplained delay in the present case between the date of the winding up order on 27 August 2008 and the Notice of Motion on 7 October 2010. Thirdly, the Liquidators refer to the fact that four creditors have still not collected their share of a dividend payment due to them in the sum of approximately HK$21,400 each. Fourthly, the Liquidators refer to the need for Madam To and Mr Ho to clarify outstanding questionable transactions to the value of approximately HK$920,000. 26.On the basis of these matters, which I have summarised briefly in the preceding paragraph, the Liquidators make the following submission in paragraph 54 of their skeleton :
27.In paragraph 1 of their skeleton, the Opposing Owners stated that their position :
And in paragraph 9 of their skeleton, the Opposing Owners ask for the orders stated in paragraph 54 of the Liquidators’ skeleton. DISCUSSION (1) Solvency 28.I deal first with the issue of solvency, which is an important factor in this context. The Liquidators questioned the solvency of the Company. In their skeleton submissions, a question was raised as to the solvency of the Company on the basis of potential liability on the part of the Company in respect of litigation arising from the Liquidators having sold various properties in Block 3. However, this submission was not developed by Mr Mak in the course of his oral submissions and, given its speculative nature, I do not consider it necessary to consider it further. 29.Instead, Mr Mak advanced the argument that there was evidence to suggest the redevelopment of Kai Tak Mansion might not be possible and therefore it was possible the sale of units in Block 3 would fall through. If the sale and purchase agreement were rescinded, there might be doubt as to the receipt by the Applicants’ solicitors of the deposit monies and therefore the availability of the HK$5,740,000 fund to meet the fees and expenses of the liquidation. In other words, the solvency of the Company was in doubt. 30.The evidence in question is a letter dated 19 December 2010 written by a body called the Harmonizing Committee for the Joint Property Sale of Kai Tak Mansion Blocks One to Four addressed to all owners of residential units, shops and car parks of Kai Tak Mansion. It refers to the fact that the Town Planning Board published the Ngau Tau Kok & Kowloon Bay Outline Zoning Plan No. S/K13/26 on 19 November 2010, which includes restrictions on the redevelopment of Kai Tak Mansion. It states that there “is a high and real possibility that the joint sale agreement which has been striving for 5 years to be spoiled”. 31.However, I do not regard this letter as evidence that the deposit paid under the joint sale agreement is liable to be refunded to the purchaser under that agreement. Since I was informed by Mr Leong that the HK$5,740,000 has already been received by the Applicants’ solicitors and since the Applicants’ solicitors are prepared to undertake to pay the costs of the Liquidators (subject to taxation) from that fund, I do not think the doubts raised as to the viability of the redevelopment cast doubt on the solvency of the Company. (2) Delay 32.As to the delay referred to by the Liquidators, whilst it may be a factor against a stay, I do not consider that the time between the making of the winding up order and the Notice of Motion constitutes delay which should cause the court to refuse to exercise its discretion to stay the winding up in the present case. 33.First, the Applicants had already raised the question of a stay of the winding up in correspondence with the Liquidators in April 2010 and so the period of alleged delay is not from 27 August 2008 to 7 October 2010 as the Liquidators contended. 34.Secondly, some part of the period from the winding up order until April 2010 appears to have been spent in commencing and pursuing proceedings in the Small Claims Tribunal to recover outstanding sums due to the Company. I do not think this is unexplained delay on the part of the Applicants. 35.Thirdly, it was only after the conclusion of the joint sale agreement, which the evidence suggests was dated 15 July 2010, that this application was realistically viable on the basis that the Company would become solvent by virtue of the receipt of the deposit under that sale agreement. Once that deposit was due and receivable, the Company’s assets would exceed its liabilities, including the costs of the liquidation. (3) Uncollected dividends by creditors of the Company 36.Although this was identified in the Liquidators’ skeleton as one of the points relevant to the exercise of the court’s discretion, Mr Mak acknowledged that it is one which would weigh in favour of, rather than against, a stay. (4) Conduct of Madam To and Mr Ho 37.This was the main concern of the Liquidators and Opposing Owners and in this context they make essentially two groups of complaints. The first concerns various questionable transactions. The second concerns various breaches of statutory duty on the part of the pre-liquidation management committee of the Company. 38.As to the questionable transactions, the Liquidators initially suggested there were at least 15 to 25 such transactions in an affirmation dated 5 August 2009. However, the Liquidators then did not mention them when indicating in correspondence in April and September 2010 that they did not object to the proposed stay. Then, in the report dated 23 November 2010, the Liquidators suggested there were 65 questionable transactions. Later, in Mr Chiu’s affirmation dated 14 December 2010, 12 questionable transactions totalling HK$101,441 were identified. This contrasts with a figure of HK$920,000 as the value of the questionable transactions identified in the Liquidators’ skeleton. At the hearing, Mr Mak clarified that the Liquidators were relying on the 12 transactions totalling HK$101,441 identified in Mr Chiu’s affirmation and not contending that the questionable transactions were of the value of HK$920,000. 39.As to the breaches of statutory duty, these concern breaches of the requirement in the CO to keep proper books of account and the accounts themselves and also various breaches of the Building Management Ordinance, Cap. 344, in respect of requirements in that ordinance to keep proper books, records and accounts. 40.Taking the latter concern first, namely the breaches of statutory duty, I do not consider that these, on their own, justify or require the continuation of the liquidation. First, the nature of the Company is such that its operation on informal lines and without the keeping of all proper books, records and accounts as strictly required is not altogether surprising. It is not uncommon for the management committees of incorporated owners, particularly those of older buildings where the expenses are kept low, to be lax in their adherence to statutory requirements. This is lamentable and certainly not to be condoned but it is a fact of life. Its occurrence here reflects that reality but does not suggest to me that the wrongdoing is such as to merit further investigation. Secondly, as the Liquidators themselves point out, it is for the Official Receiver to consider whether to bring proceedings to prosecute Madam To and other members of the management committee for the offences in question. But it is clear here that the Official Receiver, even if minded to prosecute, does not consider this to be a sufficient reason to oppose the stay of the winding up. 41.I turn to consider the 12 questionable transactions to which the Liquidators have referred. In an appendix to the skeleton submissions for the Applicants, Mr Leong addressed the Applicants’ answers to the various allegations made by the Liquidators including the 12 questionable transactions and the breaches of statutory duty. 42.The explanations for the 12 transactions in question are various and I do not propose to set them out at length in this judgment. The first two transactions, totalling HK$27,372, predate the time when Madam To and Mr Ho were members of the management committee of the Company. At that time Block 3 was managed by HMAL. It is thought that the entries in question represented dishonoured cheques from an account earmarked to pay for the renovations in 2002, which have now been paid. Two of the transactions (Nos. 10 and 11), totalling $50,000, concern two payments made to a Mr Chung Siu Kong, one of which may be liable to be set aside as a fraudulent preference and both of which may or may not be supported by evidence that they are for the repayment of a loan made by him to the Company. However, the evidence in the liquidation discloses that Mr Chung sought to repay part of the sum to the Liquidators but his request for clarification went apparently unanswered. The last transaction (No. 12) concerns a payment of HK$8,000 which the Applicants contend has been repaid to the Liquidators. Leaving aside those five particular transactions, the remainder of the 12 transactions in question come to a total sum of HK$16,069. Each item is relatively small and one may justifiably question whether, even if questionable, the continuation of the winding up is necessary because of them. All but one is dated before Madam To and Mr Ho were members of the management committee of the Company. 43.In addition to these transactions, there are various other complaints made by the Liquidators regarding the refusal of Madam To to clarify questions raised by them. All the evidence for the Applicants comes from Mr Ho rather than Madam To, who was the chairlady of the management committee of the Company prior to its liquidation. The Liquidators have sought to interview Madam To but she has declined to attend. 44.I think it is important to keep some proportionality in mind when considering this application. Here, the Company’s assets are sufficient to meet its current liabilities so it is solvent. In particular, the costs of the liquidation are catered for. The nature of the Company is such that it will have to recommence operation at some stage, since the DMC in respect of Block 3 will require to be administered by the incorporated owners. The winding up order came about because of the failure to pay a relatively modest amount of costs in the sum of HK$90,367.67. Since the date of the winding up order, the expenses of the liquidation have come to over HK$3.6 million. There is clearly a risk of disproportionate costs being expended if the liquidation is allowed to continue indefinitely. 45.In my view, it is appropriate to stay the winding up order. However, as s. 209(1) itself makes clear, the winding up order may be stayed “on such terms and conditions as the court thinks fit”. In In re Baxters Limited [1898] WN 60, the stay was granted (under the relevant equivalent English section) on terms that there was liberty to any dissentient creditor or the official receiver to apply within three months to remove the stay. Also, in Practice and Procedure of the Companies Court by Boyle and Marshall (1997), the editors note (at §9.173) :
46.In the present case, I think it is appropriate to impose certain terms and conditions on the stay of the winding up order. I consider that the winding up should only be stayed on conditions which include requiring Madam To to attend for an interview with the Liquidators to provide answers to the questionnaire attached to their letter to the Applicants’ solicitors dated 30 December 2010. Since she was the chairlady of the management committee and therefore responsible for the lax way in which the affairs of the Company were apparently conducted, it is appropriate, in my view, that she comply with her obligation as a former officer of the Company to cooperate with the Liquidators before the winding up order is stayed. However, since Mr Ho has addressed the issues raised by the Liquidators in his affirmations in support of this application, I do not consider it necessary to require him to attend an interview to answer that questionnaire. I also consider that the contents of Mr Chiu’s affirmations dated 14 December 2010 and 6 January 2011 be disclosed to each owner in Block 3 so that they are apprised of the matters raised by the Liquidators. This will enable any owner who wishes to seek advice as to whether any redress is available in respect of those matters to do so. It will also serve to ensure the members of the new management committee for Block 3 are apprised of the statutory obligations to which they are subject. 47.Mr Mak submitted that a further condition the court might impose for staying the winding up would be to require an owners’ meeting to be convened by the Liquidators within 45 days for the election of a new management committee. I do not think this is necessary or appropriate in this case. A meeting of owners of units in Block 3 was already convened on 8 May 2010 to discuss the proposed application to stay the winding up. A new management committee will be required in order to take over the management of the Company upon the stay of the winding up order. In anticipation of that stay, 7 owners were elected to form a new management committee. Mr Mak submitted, relying on Rule 114 of the Companies (Winding Up) Rules, that the meeting of 8 May 2010 was invalid but it seems to me that it was proper for the owners to resolve to form a new management committee to become effective as and when the Liquidators are released and the winding up order stayed. Such an approach was implicitly approved by Kwan J (as she then was) in In the matter of the Incorporated Owners of Casio Mansion (in liquidation), HCCW1/2007, unrep., 12.3.09, at §13. The alternative would be to have the Liquidators continue to manage the Company until the election of a new management committee but this, in my opinion, would be less convenient than permitting the putative management committee to take over the management of the Company immediately on the stay of the winding up order. 48.I would observe that, if the Opposing Owners are dissatisfied with the constitution of the new management committee, their remedy would be to seek to requisition a meeting of the Company in order to vote on a resolution to elect different members of the management committee. But that is a matter for them to pursue separately to this winding up and, in my view, is no reason to prolong the liquidation. 49.The Applicants seek an order for the return of the books, records, accounts and papers of the Company and other documents generated in the course of the liquidation to the new management committee. This is appropriate. Although the Liquidators suggested in a letter to the court dated 24 November 2010 that this should only be after the liquidation expenses are satisfied, as the Liquidators would have a lien on the Company’s property pending settlement of their remuneration, I do not think it necessary to delay the return of those books, records, accounts and papers since the Liquidators will have the benefit of an undertaking from the Applicants’ solicitors to pay their costs from the contingency fund created for that purpose. In an exchange of correspondence subsequent to the hearing, the parties indicated that if the court were minded to make such an order, the Liquidators should have a period of 35 days in which to comply with it. DISPOSITION AND COSTS 50.For the reasons set out above, I exercise my discretion to stay the winding up order in respect of the Company as follows:
51.As to costs, I consider that the appropriate costs order is that the Applicants should bear the costs of the application. The burden rests on the Applicants to justify the stay of the winding up order and, although I have acceded to the application, I have included a number of terms and conditions requested by the Liquidators. I therefore make an order nisi that the costs of the Notice of Motion be paid by the Applicants, to be taxed if not agreed.
Mr Andrew Mak, instructed by Messrs Victor Chiu Tsang & Partners, for the Liquidators Mr Alan Leong, SC and Mr Alfred C.P. Cheng, instructed by Messrs Anthony Siu & Co., for the Contributories Mr Alvin Tsang, instructed by Messrs K.M. Cheung & Co., for the Opposing Contributories Mr M. Wong, for the Official Receiver | |||||||||||||||||||||||||||||||||
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