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

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

 

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Do owners of sub-divided units count as owners for general meeting purposes?

In Chow Chui Chui v Kafull Investment Ltd ([2016] HKEC 1889, CA) the DMC for a building divided the building by allocating 48 shares to a ground floor shop, 12 shares to each of the first to third floors (the ground to third floors being described as the ‘non-domestic accommodation’), one share to each domestic flat on the floors above the non-domestic accommodation and one share to the main roof and external walls. There was a first sub-DMC that sub-divided the ground floor into five units and allocated the 48 ground floor shares amongst these units. There was a second sub-DMC that sub-divided the units on the first and second floors of the building and divided the shares in the main DMC among the sub-divided units. Resolutions were passed at an owners’ meeting. Present at the meeting were fourteen owners from the non-domestic portion and two from the domestic portion. The question was whether the meeting failed to meet the quorum requirements in schedule 3, para. 5(1)(b) of the Building Management Ordinance (requiring that 10% of the owners should be present).

The contention was that only those who were ‘owners’ in accordance with the main DMC could be considered ‘owners’ for this purpose. Thus, there could only be 4 owners from the non-domestic portion (one for each floor). The Court of Appeal  (Kwan JA giving the Court’s judgment) rejected this contention. Section 2 of the Building Management Ordinance defines an ‘owner’ as one who appears from the Land Registry to be the owner of an undivided share of land on which there is a building. Section 39 of the Building Management Ordinance provides that an owner’s share is to be determined in accordance with a DMC registered at the Land Registry. Here, the shares had been attached to the sub-divided units by the terms of a sub-DMC, the owners of the sub-divided units had the right to exclusive possession and the Land Registry records confirmed their ownership ([35]). They were owners and, as a result, the meeting was quorate.

There was nothing to limit the Ordinance’s references to a ‘deed of mutual covenant’ to the main DMC ([39]) especially where, as here, the main DMC contemplated the possibility of sub-division. In fact, it is enough that the main DMC does not prohibit sub-division ([40]).

Michael Lower

 

The duty to convene and participate in management committee meetings

In Tzeng Li Wen Judy v Tam Lup Wai Franky ([2013] 2 HKLRD 790, LT) one member of a management committee brought proceedings against the chairman complaining that meetings had not been held every three months as required by schedule 2 of the Building Management Ordinance. The chairman sought to have the proceedings struck out on the grounds that the proceedings should have been brought against the management committee as a whole, that there was no business to discuss and there had been an agreement that no meeting was necessary. This striking out application failed. The management committee was not a separate legal entity capable of being sued ([19]). The chairman had a duty to convene a meeting every three months (though of course he could not compel anyone to attend) ([24]) and on the face of it he was in breach of this duty.

The action against the secretary was struck out. The secretary only had a duty to convene a meeting if requested to do so by two committee members and the secretary had received no such request ([27]).

The action against the corporation was struck out since it had no power to convene a meeting of the committee ([28]).

The members of a management committee are under a duty to participate so far as reasonable in the operation of the corporation and part of this duty is to attend management committee meetings ([24]).