The decision of the Horizon Towers Appellate Court should be compulsory reading for all sale committee members. It sets out the very high standards of accountability and conduct expected of any SC vis-a-vis not only the consenting, but also the objecting subsidiary proprietors.
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The relationship between an SC and subsidiary proprietors
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104 In our view, the SC is the agent of the subsidiary proprietors collectively in relation to the collective sale of their strata units.
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107 As the SC is the agent of the subsidiary proprietors collectively, there is no point at which the SC may act solely in the interests of any group of subsidiary proprietors, whether they are consenting or objecting proprietors. When an SC is first appointed, it is with a view to achieving a collective sale for the benefit of all the subsidiary proprietors. When an SC is first appointed, it is with a view to achieving a collective sale for the benefit of all the subsidiary proprietors. At this stage, the interests of the subsidiary proprietors are not yet clearly differentiated. Thus, the SC’s initial paramount responsibility is simply to obtain the requisite consent for the collective sale as well as appoint competent professional advisers. The SC’s members and advisers also have the duty to avoid any possible conflict of interest (see [137]–[145] below). However, once the requisite consent is obtained and the interests of the objecting subsidiary proprietors become distinguishable from those of the consenting subsidiary proprietors, the SC’s role becomes that of an impartial agent acting for both camps. In other words, the SC must hold an even hand between these interests.
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108 A fiduciary relationship between an SC and the subsidiary proprietors arises from the underlying agency relationship
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110 The raison d’être of fiduciary obligations is that an agent who has undertaken to act in the interests of another person (the principal) should not be permitted to act against his principal’s interest. Indeed, a distinguishing characteristic of recognised fiduciary relationships (see [108] above) is the peculiar vulnerability of a party to be affected by an abuse of a power or duty that has been entrusted to another.
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113 An agent may affect the rights of his principal in various degrees of detriment to the principal. Obviously, as a matter of principle and policy, an agent who has the potential power to cause greater damage to his principal’s interest should be held to a higher degree of accountability. In the present case, the SC’s power to sell the Property collectively is a strong power as it may result in the objecting subsidiary proprietors losing their units without their consent (in exchange for compensation which may not be their preferred right). The objecting subsidiary proprietors (who may have objected to the appointment of the SC) are invariably placed in a vulnerable position as the SC usually comprises the very same consenting subsidiary proprietors whose objective is to sell the property contrary to the wishes of the objectors. There would naturally be an in-built inclination (or bias) on the part of an SC to sell rather than not to sell. The need for the imposition of high standards of accountability and conduct upon an SC vis-à-vis not only the consenting, but also the objecting, subsidiary proprietors is therefore even more pressing than in the case of ordinary common law agency.
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123 ...... The present case is one where, in so far as the SC is concerned, it represents the interests of all subsidiary proprietors and therefore it must exercise the power of sale granted to it in the same way as a trustee of his power of sale. The SC is a neutral agent, even though its members are, to an extent, entitled to have regard to their own personal interests in the collective sale. Similarly, a trustee may also be a beneficiary of the trust property but, in selling it under his power of sale, he must act in the interest of the whole body of beneficiaries.
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124 In our view, in the context of the collective sale regime under the LTSA, the SC’s duties qua agent, fiduciary and trustee of the power of sale include, inter alia: (a) the duty of loyalty or fidelity; (b) the duty of even-handedness; (c) the duty to avoid any conflict of interest; (d) the duty to make full disclosure of relevant information; and (e) the duty to act with conscientiousness
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123 ...... The present case is one where, in so far as the SC is concerned, it represents the interests of all subsidiary proprietors and therefore it must exercise the power of sale granted to it in the same way as a trustee of his power of sale. The SC is a neutral agent, even though its members are, to an extent, entitled to have regard to their own personal interests in the collective sale. Similarly, a trustee may also be a beneficiary of the trust property but, in selling it under his power of sale, he must act in the interest of the whole body of beneficiaries.
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124 In our view, in the context of the collective sale regime under the LTSA, the SC’s duties qua agent, fiduciary and trustee of the power of sale include, inter alia: (a) the duty of loyalty or fidelity; (b) the duty of even-handedness; (c) the duty to avoid any conflict of interest; (d) the duty to make full disclosure of relevant information; and (e) the duty to act with conscientiousness
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134....As, under s 84A(9)(a)(i) of the LTSA, the price of the collective sale is an ingredient of good faith in the transaction, the SC must act with conscientiousness to obtain the best price reasonably obtainable for the property – in short, to behave as a prudent owner would.
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138 It is important to note that these proscriptive duties are targeted against potential (not merely actual) conflict. A fiduciary should not even contemplate procuring a personal advantage, let alone secure one. The law has thus focused essentially on whether the performance of a duty by the fiduciary may be influenced or tainted by a conflict of interest. As it is virtually impossible to know what considerations have gone into an act or a decision of the fiduciary, the law sensibly does not require proof of an actual conflict of interest where such an allegation is made (see [142] below). The law only requires that there is a reasonable perception of a conflict of interest arising, since it is impossible to conduct an inquiry into the subjective motives which influenced a fiduciary’s conduct to determine whether a genuine conflict of interest occurred.
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147 The fiduciary must disclose the personal interest as soon as a possible conflict arises, or as soon after as practicable. An “interest” may be constituted by “the presence of some personal concern of possible significant pecuniary value in a decision taken, or transaction effected, by a fiduciary”
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152 In our view, an SC member who acquires additional units in the strata development (especially if they are financed by bank loans) before or after he becomes a member of the SC must disclose such interest to all the subsidiary proprietors including the objecting owners.
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154 The duty to obtain the best price arises out of the SC’s duty to act conscientiously as well as to act even-handedly in the collective interest of all the subsidiary proprietors. The duty to obtain the best sale price is particularly crucial for the objecting subsidiary proprietors
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156 There may be situations where the adage “a bird in the hand is worth two in the bush” holds true. An SC’s duty to obtain the best price is counterbalanced by its overarching mandate, which is to bring about a collective sale (see [104]–[107] above). However, the SC must consider in each case whether there is an urgent need to sell the property at the offered price (and under the other terms of sale) in the prevailing market conditions. This is a challenging duty but a necessary judgment call for an SC to make in each instance. But, first and foremost, it must take the necessary steps to ensure that the best price is being offered for the development. In our view, to do that, it must take the steps which we will now describe.
(A) INCREASING THE PROSPECTS OF OBTAINING THE BEST PRICE
157 In order to increase the prospects of obtaining the best price for the property, an SC qua prudent owner ought to exercise due diligence in appointing a competent property agent to market the property and negotiate with potential purchasers. An SC ought to market (through the property agent) the property for a reasonable period of time to the largest number of potential purchasers in order to create the widest catchment of offers.
158 The SC should follow up on all expressions of interest and offers that result from its marketing efforts. It should carry out sufficient investigations and due diligence to determine their genuineness, and not ignore them merely on the basis of its own perception or judgment.159 Where reasonable, it should try and create competition between interested purchasers so as to obtain the best sale price, for instance by alerting a potential purchaser to the existence of other expressions of interest or offers (at the same or higher price) for the property.
(A) INCREASING THE PROSPECTS OF OBTAINING THE BEST PRICE
157 In order to increase the prospects of obtaining the best price for the property, an SC qua prudent owner ought to exercise due diligence in appointing a competent property agent to market the property and negotiate with potential purchasers. An SC ought to market (through the property agent) the property for a reasonable period of time to the largest number of potential purchasers in order to create the widest catchment of offers.
158 The SC should follow up on all expressions of interest and offers that result from its marketing efforts. It should carry out sufficient investigations and due diligence to determine their genuineness, and not ignore them merely on the basis of its own perception or judgment.159 Where reasonable, it should try and create competition between interested purchasers so as to obtain the best sale price, for instance by alerting a potential purchaser to the existence of other expressions of interest or offers (at the same or higher price) for the property.
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160 An SC must take care to inform itself of matters relevant to the decision to sell the property and take advice from appropriate experts on when and at what price to sell the property
Although trustees may take the advice of a valuer they cannot simply delegate their duty to him, e.g. by agreeing to sell to a purchaser at a price to be fixed by a third party such as a valuer. The valuer might be shown to be unreliable or biased, e.g. acted also for the purchaser and negotiated the resale of the property before the completion at a much higher price. The effects of inflation and the erratic and sudden movements in the market are matters that trustees must most carefully consider in these times.
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163 The SC should certainly not settle for the reserve price or market value of the property, if there is a reasonable basis to believe (ie, with the benefit of independent expert advice) that a better price may be obtained within a reasonable time frame in the future. The SC has to choose the most propitious timing for the sale of the property for this purpose. It should ordinarily wait on a rising market or for a falling market to recover (ie, again with the benefit of independent expert advice).
164 Prior to making its final decision to sell the property, an SC, in discharging its duty of fidelity, should also ensure that any personal interests on the part of its members which might possibly conflict with its duty to obtain the best sale price have been fully disclosed to all subsidiary proprietors. Full disclosure in the context of an SC member acquiring another property would include the terms of the sale and any existing loan arrangements. Indeed, given that such conflicts should be disclosed as soon as practicable (see [147] above), any such pre-existing interests should be disclosed to the other members of the SC and all the other subsidiary proprietors prior to the appointment of the member having the interest, and conflicts that arise after appointment ought to be disclosed well before the SC makes a decision to sell the property.
164 Prior to making its final decision to sell the property, an SC, in discharging its duty of fidelity, should also ensure that any personal interests on the part of its members which might possibly conflict with its duty to obtain the best sale price have been fully disclosed to all subsidiary proprietors. Full disclosure in the context of an SC member acquiring another property would include the terms of the sale and any existing loan arrangements. Indeed, given that such conflicts should be disclosed as soon as practicable (see [147] above), any such pre-existing interests should be disclosed to the other members of the SC and all the other subsidiary proprietors prior to the appointment of the member having the interest, and conflicts that arise after appointment ought to be disclosed well before the SC makes a decision to sell the property.
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166 Finally, whenever there is reasonable doubt as to the proper course to adopt, the SC ought to seek fresh instructions or guidance from the consenting subsidiary proprietors from whom it draws its mandate. It is true that the LTSA and most collective sale agreements do not contain any specific provision requiring an SC to obtain approval from the consenting subsidiary proprietors of the sale price before the SC issues an option to the potential purchaser (para 7(1)(g) of the Third Schedule to the LTSA provides that an SC shall convene a general meeting for the purposes of considering the terms and conditions of the sale and purchase agreement, but para 7(4) states that this need only be convened after the close of a public tender or auction or after the SC has entered into a private contract for sale). However, an SC’s duty to consult with the consenting subsidiary proprietors arises out of its fiduciary obligations, independently of its contractual obligations (see [109] above).
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167 An SC cannot rely on a mechanistic or literal compliance with its statutory and contractual obligations to escape indictment for breach of its obligations as fiduciary of the subsidiary proprietors. The first principle is that an SC has to work for the benefit of all the subsidiary proprietors. This will no doubt involve going beyond just paying lip service to the relevant procedural rules under the LTSA and its mandate under the collective sale agreement. Indeed, in evaluating the conduct of an SC, the contextual conditions in which the power of sale is exercised is everything.
167 An SC cannot rely on a mechanistic or literal compliance with its statutory and contractual obligations to escape indictment for breach of its obligations as fiduciary of the subsidiary proprietors. The first principle is that an SC has to work for the benefit of all the subsidiary proprietors. This will no doubt involve going beyond just paying lip service to the relevant procedural rules under the LTSA and its mandate under the collective sale agreement. Indeed, in evaluating the conduct of an SC, the contextual conditions in which the power of sale is exercised is everything.
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