Archive for the ‘liability’ Category

Each owner potentially liable for owners’ corporation’s entire indebtedness

November 13, 2017

In Wong Tak Man Stephen v Chang Ching Wai ([2017] HKEC 2266) Ps were the liquidators of the Incorporated Owners (‘the IO’) of a building (‘the Building’). The IO was wound up following a petition by a construction company that carried out refurbishment works at the Building. The IO had net liabilities of just over HK$3.64 million.

The first and second defendants (‘the defendants’) were two of the owners of the Building. The defendants were among a substantial number of owners who had failed to make the contributions due from them towards the cost of the refurbishment work.

The liquidators successfully sought a declaration that the defendants were jointly and severally liable for the IO’s debts and obligations. The defendants were ordered to pay the plaintiffs the sum necessary to meet the IO’s liabilities.

The basis of the plaintiffs’ claim was section 34 of the Building Management Ordinance:

‘In the winding up of a corporation under section 33, the owners shall be liable, both jointly and severally, to contribute, according to their respective shares, to the assets of the corporation to an amount sufficient to discharge its debts and liabilities.’

The court was presented with two rival interpretations of section 34:

  1. The owners were individually liable but only for a proportionate share of the IO’s liabilities calculated by reference to their shares in the Building; or
  2. Each owner was jointly and severally liable for all of the IO’s debts and liabilities but with a right of recovery from co-owners.

The court (Deputy Judge Anson Wong SC giving the judgment) accepted the second interpretation:

  1. The phrase ‘jointly and severally’ was introduced in 1993 when the Building Management Ordinance replaced earlier legislation. The phrase evinces an intention that each owner is liable for all of the IO’s debts and obligations.
  2. The phrase ‘according to their respective shares’ in section 34 refers to the right of recovery from co-owners.
  3. This interpretation of section 34 is consistent with section 17(1) of the Building Management Ordinance which allows the entire indebtedness of an IO to be enforced against an individual owner with a right of recovery from co-owners. There are dicta in the Court of Final Appeal decision in Chi Kit Co Ltd v Lucky Health International Enterprise Ltd ([2000] 2 HKLRD 503) to this effect. It would be strange if this position were not to be mirrored on a winding up.
  4. The first, rival, interpretation would make liquidation expensive and time-consuming. It would pass the risk of non-payment to creditors.

Michael Lower

 

Effect of disclaimer on surety covenant

February 14, 2013

In RVB Investments Ltd v Bibby ([2013] EWHC 65) RVB granted two leases to CT. B, as surety, covenanted, among other things, to take a new lease for the residue of the lease terms if the leases were disclaimed. One lease was disclaimed by the liquidator and the other, after CT’s dissolution, by the Treasury Solicitors. RVB sought specific performance of B’s covenant to take new leases. RVB was successful.

As regards the lease disclaimed by the liquidator, the effect of section 178 of the Insolvency Act 1986 was that the guarantee remained alive even after disclaimer of the lease ([22] – [23]). The same was true of the lease that was disclaimed by the Treasury Solicitor after CT’s dissolution. The company’s own liability was brought to an end but not of the guarantor ([27] – [29]).

Nor was CT a ‘former tenant’ for the purposes of the Landlord and Tenant (Covenants) Act 1995 so there was no need for RVB to serve a notice before recovering any sums owed by CT to RVB ([35] – [36]).

Duty of managers and incorporated owners to take proper steps

November 22, 2012

In Lee Ming Yueh v Broadway-Nassau Investments Ltd ([2012] 5 HKLRD 208, CA) water leaked through the walls and roof of a top floor flat. The managers asked contractors to look at the problem. Initial remedial efforts were not effective but eventually the problem was identified and resolved. The water seepage damaged the walls and floor of the flat. The owner of the flat claimed damages against the managers and the incorporated owners alleging breach of the Deed of Mutual Covenant and section 18 of the Building Management Ordinance (imposing duties on the Manager and the incorporated owners to keep common parts in repair). The claim failed both in the Lands Tribunal and in the Court of Appeal. The duty was one of ‘proper management’. The managers had promptly engaged contractors to investigate and remedy the problems when they received complaints. They could not delegate their duty to contractors but there was nothing to suggest that they had been negligent in their choice of contractor.

Owners corporation liable under BMO s.16 even in respect of pre-incorporation debts

November 13, 2012

Hang Yick Properties Management Ltd v Tuen Mun Kar Wah Building ([2005] 2 HKLRD 499, CA) concerned a claim by the managers of a building against an owners corporation for reimbursement of management expenses alleged to have been incurred by them. Such expenses could be recovered by the managers against individual owners under the terms of the Deed of Mutual Covenant. The liability to pay ran with the owners’ undivided shares by virtue of section 41 of the Conveyancing and Property Ordinance. The owners corporation argued that it could not be liable since this was a pre-incorporation debt. The Court of Appeal held that if the alleged liability was a liability of all of the owners  in relation to the common parts of the building then it was enforceable against the owners corporation even though the liability was incurred before incorporation (Building Management Ordinance, s.16 and [40] of the judgment).

‘Owner’ for the purposes of section 17(1)(b) of the Building Management Ordinance.

November 22, 2011

Section 17(1)(b) of the Building Management Ordinance empowers the Lands Tribunal to give leave for the execution against any owner of a judgment given or order made against a corporation. In this context, ‘owner’ means any owner for the time being. Very large and unanticipated liabilities of the corporation that have not been disclosed in the contract are encumbrances. They amount to a defect in title and this title cannot be forced on a purchaser in the absence of a clear contractual provision to the contrary.

In Chi Kit Co Ltd v Lucky Health International Enterprise Ltd ([2002] 2 HKLRD 503, CFA) a workman was rendered quadriplegic when he fell from scaffolding on the common parts of a building when acting under the directions of an employee of the incorporated owners. The litigation was pending at the time when R agreed to buy an 11.5% share in the building from A. Judgment was given between the date of the contract and the contractual completion date.  The matter only came to R’s attention after contract and R refused to complete.

The first question was whether R, had it completed, would have faced a real risk of an order being made against it personally under section 17(1)(b) of the Building Management Ordinance in respect of the workman’s claim. A argued that there was no such risk and that ‘owner’ in that section meant an owner at the time that the liability was incurred. This failed. ‘Owner’ means an owner for the time being.

Since this liability ran with the ownership of the relevant shares it was an encumbrance. It amounted to a defect in title since the potential liability was much larger than would be anticipated by a purchaser (as proof of this potential lenders and sub-purchasers had lost interest when they learned of the workman’s claim). In the absence of a clear contractual provision to the contrary, the title, thus encumbered, could not be forced on a purchaser.