Bank of China (Hong Kong) Ltd v. Certain Aim Ltd

HCMP 1272/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1272 OF 2007

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JUDGMENT

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1.By the originating summons (“the OS”) filed on 5 July 2007 the plaintiff (“P”) brought these proceedings against the defendant (“D”) for payments owing to P under two charges whereby two properties of D were charged to P and for delivery up of vacant possession of the charged properties namely, Duplex B and the open yard thereof of 9, Cambridge Road, Kowloon and Car Park Nos 5 and 6 (“the car parks”) on ground floor, 7 – 9, Cambridge Road, Kowloon.

2.In default of an acknowledgement of service by D of the OS, P applied for and obtained default judgment against D by the order of Master de Souza dated 25 September 2007 (“the judgment”).  It was ordered that P do recover against D the sum of HK$72,483,431.11 together with interest as set out at para 1 of the judgment and with costs of the proceedings.  An order was also made by para 2 for delivery of vacant possession of the two charged properties.

3.On 27 March 2008 the praecipe for writ of possession and fieri facias was filed by P in respect of the two charged properties and on 7 April 2008 the writ of possession and fieri facias was filed.

4.By a summons filed on 28 October 2008 (“D’s summons”) D applied to set aside the judgment and for leave to file its defence.

5.The hearing of D’s summons came before Master K Lo.  By the order of Master K Lo made on 17 May 2010 it was ordered that D’s summons be dismissed with costs to P.

6.By a notice of appeal filed on 28 May 2010 D gave notice of its intention to appeal against the decision of Master K Lo dismissing D’s summons with costs to P (“the appeal”).

7.By a consent order which I made dated 9 August 2010, it was ordered, inter alia, that the execution of the judgment by the writ of possession and fieri facias be stayed until determination of the appeal on condition that D do on or before 19 August 2010 pay P the sum of HK$42,000,000 in partial payment of the debt due to P. Pursuant to the said consent order D paid HK$42,000,000 to P before 19 August 2010. 

8.By a consent order made by Recorder P Fung SC dated 12 October 2010 it was ordered that the hearing of the appeal, which was set down for hearing before the Recorder on 13 October 2010, be adjourned sine die with liberty to restore.

9.The appeal was only recently restored for hearing before me.  No explanation has been provided for the delay in restoring the hearing of the appeal.

10.This is the hearing of the appeal.

11.The questions to consider are:

(1) Whether the judgment was a regular or irregular judgment;
If it was irregular, then it should be set aside without regard to the merits of the defence.

(2) If it was a regular judgment, whether D has shown that it has a defence with a real prospect of success.

12.Mr Wong Yan Lung SC, with Mr Mike Lui, for D submitted that the judgment was an irregular judgment as the OS was not properly served.  Mr Jat Sew Tong SC, with Mr Richard Khaw SC and Mr Julian Lam, for P, submitted that the OS was properly served on D and that the judgment was a regular judgment.

13.As to the service of the OS on D, Li Kam Tong (“Li”), the process server and clerk of Gallant Y T Ho & Co, P’s then solicitors, in his affirmation filed on 20 July 2007, gave evidence of the service by him of the OS and two sets of acknowledgement of service on 6 July 2007 by leaving them at D’s registered office.  He also gave evidence that he posted a sealed copy of the OS at the main entrance of the two charged properties.

14.In his 2^nd affirmation, Li said that on 1 August 2007 he served D with a true copy of the notice of appointment to hear the OS returnable on 25 September 2007 by ordinary post addressed to D’s registered office.  Li said that he also posted up a sealed copy of notice to occupants upon a conspicuous place at the main entrance of the two charged properties.  Li also said that he served a copy of the 1^st affirmation of Luk Shing Chuen (“Luk”) on 18 September 2007 with the exhibits by leaving the same at the registered office of D.

15.In his 3^rd affirmation, Li said that on 3 October 2007 he served D with a sealed copy of the judgment by ordinary post addressed to D at its registered office.

16.D is and was, at all material times, a company incorporated in Hong Kong.  Its two directors are and were, at all material times, Wong Chi Nang (“Wong”) and his wife Yeung Chi Hung (“Yeung”).  D is engaged in the jewellery business.

17.D disputes that the OS was properly served. D relies on the evidence of Wong who, in his 1^st affirmation filed on 28 October 2008, said that it was only in September 2008 that he was aware of the judgment against D.  He also disputed the posting of the notice to occupants at the properties which Li said he posted.  Yeung also said in her 1^st affirmation that she did not know of the judgment until shortly before the summons was issued.

18.D also relies on the affirmation of So Kam Lau who denied that the OS was left at the registered office on 6 July 2007.  It was also denied that the notice of appointment to hear the OS was received by post and that Luk’s 1^st affirmation was left at the registered office as Li said.

19.D also relies on the affirmation of Wong Shing Leung, a security guard, who was working at 7 – 9 Cambridge Road, Kowloon at the material time.  Relying on the absence of entries in an occurrence book kept at the security guard station, Wong Shing Leung said that there were no visitors to 7 – 9 Cambridge Road on 6 July 2007 and also on 3 August 2007.  He said that he would have made entries of the visit of Li on those days in the occurrence book if Li had made the visits there on those days as he said.  He denies that there was any posting up of notices at the premises on those days. He also denied that there was any entrance to the car parks.

20.It does not seem to me that the evidence of Wong Shing Leung is credible or reliable.  As Mr Jat SC submitted, correctly in my view, the entries in the occurrence book for 6 July 2007 and 3 August 2007 produced as exhibit WSL-5 to Wong Shing Leung’s affirmation contradict his assertion that all visitors to 5 – 7 Cambridge Road were required to give their particulars and purpose of visit and that an entry of this would be made in the occurrence book.  As shown in the said exhibit, the entries in the occurrence book related only to matters of property management.  There are no particulars recorded of any visitor to the premises.  It is inconceivable that no one visited 5 – 7 Cambridge Road on those dates.

21.It seems to me that the evidence of Li is credible and reliable. 

22.A document may be served on a company by leaving it at the registered office of the company. On the evidence of Li this was done.  It is not necessary to show that the OS should have come to the notice of the directors of D (Best Joint Investments Ltd v Kagani Ltd CACV 417/2007, 23 August 2011; Kwan JA and Suffiad J; see Kwan JA at para 51).

23.I am satisfied that the OS was duly and properly served on D.  I am satisfied that the judgment that was entered was a regular judgment.

24.In order to set aside the judgment D, therefore, has to show that it has a meritorious defence with a real prospect of success or carries some degree of conviction (Premier Fashion Wears Ltd v Li Hing Chung) [1994] 1 HKC 213; Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Ltd v Yuet Wah (Hong Kong) Wah Fat Ltd [1997] HKLRD 489).

25.In Manolakaki v Constantinides [2003] EWHC 401 Deputy Judge Alan Boyle QC said at para 46:

“ … whether in any particular case there is ‘a real prospect of successfully defending the claim’ must ultimately turn on a judgment to be made on the particular facts of the particular case, applying commonsense, and taking account of the requirement that the defence should carry some degree of conviction. The court should not attempt to judge questions of fact on conflicting statements which have not been tested by cross-examination and should avoid attempting to try issues of fact where apparently credible facts are advanced by each side. There may be cases where the court can reach the view that there is no real prospect of successfully defending the claim, in which case the judgment must be allowed to stand. But if the court is unable to reach that conclusion on the materials before it, it may be, depending on the circumstances of the particular case, that the court has to conclude that there is a real prospect of successfully defending the claim. At all events, it appears to be wrong to require the defendant to show a ‘real likelihood that he would succeed’, as suggested in the note to the Supreme Court Practice 1999.”

26.Where the outcome depends upon whose evidence is likely to be accepted so that it is not possible to form a provisional view at the interlocutory stage, the court will ask whether the defence could well be established at trial and, if the defendant’s version could well be believed at trial, it follows that the defence has a real prospect of success (Kwan J (as she then was) in El Vince Ltd v Wu Wen Sheng [2001] 3 HKLRD 445 at para 25).

27.In Choi Chung Bun Vincent v Australia China Holdings Ltd [2011] 3 HKLRD 622 it was held that as it could not be said that the defendant’s defence had no real prospect of success, the default judgment would be set aside.  At paras 28 to 35 of his judgment, McWalters J (as he then was) helpfully analysed the relevant authorities on the question of whether a defendant has a defence with a real prospect of success. And at para 36 he said:

“ Whatever qualifying word is employed, whether it be ‘prima facie’, ‘serious’ or ‘real’, it is clear that its purpose is the same, namely to convey the idea that the defence must be more than merely arguable. In making this assessment the court is obliged to give consideration to the merits of the defence in order to reach a conclusion on whether it is possessed of the necessary degree of conviction so that it becomes a defence to which the court should pay heed.”

28.The power to set aside a default judgment which has been regularly entered is discretionary.  The purpose of the discretionary power is to avoid the injustice which may be caused if judgment follows automatically on default (para 13/9/12, Hong Kong Civil Procedure 2017). 

29.By a letter dated 10 November 1995, P (by its predecessor Po Sang Bank Ltd) granted to D an instalment loan of HK$18,000,000 and a gold loan of HK$5,000,000 on the terms set out therein.  The letter was acknowledged and signed by D.

30.Pursuant to a gold loan agreement (“the gold loan agreement”) and a facility letter both dated 24 February 2000, P granted to D a gold loan facility whereby P lent to D 440 kgs of gold bars on the terms contained therein.  The facility letter dated 24 February 2000 confirmed that the balance of the instalment loan was HK$5,232,094.84 as at 13 January 2000 and that the limit of the gold loan was HK$34,710,000.  Among the securities provided to P were the 2 charged properties.

31.Clause 1 of the gold loan agreement provided that the quantity of the gold bars lent to D, in addition to the gold bars previously lent, should not exceed 440 kgs and that the value of the additional gold bars lent to D should not exceed HK$34,710,000, whichever is lesser in value.

32.Interest on the loan of the gold bars to D was to be paid at the rate which was left in blank at clause 3(A) of the gold loan agreement but there is no dispute that this was to be at 3.75% p.a. as later documents show.   The interest was payable at that rate “on the value of the gold bars (calculated at the selling price of the gold bars as quoted and determined by the Bank as of the date when the gold bars are lent to the Borrower)”.  The interest or fee was payable for each period of one calendar month.

33.Clause 3(B) of the gold loan agreement provided that D should return all gold bars at or before the expiration of one calendar month but that the period of borrowing may be renewed as set out therein.

34.Clause 3(C) provided for the payment of a higher rate of interest or default interest in addition to the interest payable under clause 3(A) namely, prime rate plus 6% p.a. or at such higher rate as P may determine.

35.Clause 7 of the gold loan agreement provided that the value of gold bars shall unless otherwise specified, be calculated or determined on the basis of the selling price of gold quoted by P on the date on which the gold bars are to be returned or demanded to be returned by P subject to fluctuation from time to time as at P’s discretion.

36.Clause 9 provided that P was entitled at any time by written notice to demand immediate repayment and return of all or any gold bars owing by D together with interest thereon.  It also provided that in the event of default by D to comply with the demand, D was to pay P the full HK dollar value of the gold bars owing by D at the closing selling price of the gold bars quoted by the Bank as on the last date when the gold bars should have been returned to P pursuant to the demand with all interest accruing and outstanding.  This was described as “the Liquidation Value”.   

37.P relied on clause 9 to make the demand by the letter from its solicitors Gallant Y T Ho & Co dated 27 June 2007 to D (“the demand letter”) and to bring the OS against D which led to the judgment.

38.It was on the basis of the Liquidation Value of the remaining gold bars with accrued interest that was due to P that these proceedings were brought by P against D.

39.The facilities that were granted to D were secured by the charge and the further charge on the two charged properties.

40.There is no longer any dispute on the instalment loan, which was also described as the mortgage loan, granted to D which has been repaid with interest.

41.The dispute between the parties centres on the gold loan agreement and whether the parties agreed on a locked price agreement in respect of the value of the gold bars lent to D.

42.The main dispute is whether, as D contends, P and D had reached a locked price agreement to lock in the price of the gold loaned to Pat HK$3,524 per tael since 30 August 2003 (“the locked price agreement”). D accepts that it is liable to P on the basis of the locked price agreement and contends that it has already paid what is due to P on this basis.  As I have said, D has in fact paid HK$42,000,000 to P before 19 August 2010 as a condition for a stay of execution of the judgment.

43.P denies that there was the locked price agreement. P’s case is that D was liable to pay P the sums claimed in the OS resulting in the judgment that was entered.  Taking into account the sum of HK$42,000,000 that was paid by D to P before 19 August 2010, Mr Jat SC submitted that D still owed P as at 24 April 2017 the outstanding sum of HK$42,151,285.05 as set out in the certificate of indebtedness signed by Mr Fung Tsz Bun of P.

44.In support of the OS, P relied on the 1^st affirmation of Luk.  At para 19, Luk particularized the amounts owing by D under the mortgage loan facility and the gold loan agreement and it was on this basis that the judgment was entered.

45.D disputes that it is liable for the amounts claimed under the gold loan agreement. D’s case is that there was the locked price agreement between the parties.  At para 6 of Wong’s 1^st affirmation, he said that as the gold price varied from time to time, for the sake of convenience, D and P agreed that the gold price be locked in at HK$3,524 per tael commencing from 30 August 2003.  Yeung at para 19 of her 1^st affirmation also said that she was able to confirm that the gold price was locked in at HK$3,524 per tael through an agreement with Mr Eric Lee Ping Kwan (“Mr Lee”) of P.  Mr Lee in his affirmation denied that he ever agreed on any locked price of gold with either Wong or Yeung. 

46.Although the locked price agreement has not been fully particularized, Mr Wong SC submitted that the existence of the locked price agreement is supported by internal documents of P and by objective circumstantial evidence.

47.The expiry date of the gold loan agreement was extended a number of times as can be seen from the letters sent by P and countersigned by D which are in evidence.  By the letter dated 16 October 2002, the interest rate was also specified at 3.75% p.a. on the value of the gold bars lent for each period of one calendar month, and by the letter dated 25 November 2002, the interest rate was reduced to 3% p.a.

48.By the letter dated 20 June 2003, the expiry date of the gold loan facility was extended to 30 August 2003.  Collateral security in the form of personal guarantees from Wong and Yeung as well as legal charges on the two properties were also required by P.  Clause 2 of this letter also contained the condition that if at any time the price of gold exceeded HK$3,325 per tael, D was required:

“ …to pay in additional cash deposit from time to time and at any time to us in such amount to cover the exposure suffer by us.”

49.The undisputed evidence of Yao Lap Devon shows that between 30 August 2003 and 1 January 2007 the price of gold fluctuated from HK$3,624 per tael to HK$6,156 per tael.  As the evidence shows, P did not require D to pay in any additional cash deposit to cover their exposure.  D’s case is that the reason why no further cash deposit was required from D was because of the locked price agreement.  As the price of gold was locked in at HK$3,524 per tael, P was not exposed to the higher fluctuations of the price of gold and there was no reason to require further cash deposit.  Mr Jat SC submitted that the gold loan facility was no longer on foot after August 2003 and that as the gold loan facility had expired on 30 August 2003, there was no question of any additional cash deposit to be provided. 

50.Mr Wong SC submitted that the facts show that the gold loan facility did not expire on 30 August 2003. He relied on the spreadsheet exhibited as exhibit WCN-3 to Wong’s 1^st affirmation (“the spreadsheet”).  There is no dispute that the spreadsheet is P’s internal document.  D relies on this spreadsheet is support of its case that there was the locked price agreement and also that the gold loan facility did not expire on 30 August 2003. 

51.Mr Jat SC submitted that the spreadsheet only supports the fact that interest was calculated on the basis of the value of the gold bars being fixed at HK$3,524 per tael but does not support the fact that the principal value of the gold bars was fixed at HK$3,524 per tael. 

52.The spreadsheet shows in the column headed “Gold Price per tael” that the price of gold as from 30 August 2003 to 1 January 2008 was fixed at HK$3,524 per tael.  D says that this supports its case that there was the locked price agreement made between the parties. 

53.P says that the fixed price of HK$3,524 per tael as shown in the spreadsheet was only for the purpose of calculating the interest based on the fixed price but not for the purpose of showing the principal value of the gold bars lent.  Law Kin Fan, the loans manager of P, in his affirmation said that he was one of the officers of P responsible for checking and confirming the calculation of interest payable by D under the gold loan agreement.  He went on to explain why interest was charged on the value of gold at HK$3,524 per tael.  He explained that this was default interest as D had defaulted in returning the gold bars or the HK dollar value by 30 August 2003 by reference to the price of gold bars per tael quoted by P on 30 August 2003 ie HK$3,524 per tael relying on clause 3(C) of the gold loan agreement.

54.Luk in his 2^nd affirmation denied the existence of the locked price agreement.  At the time of his 2^nd affirmation, Luk was still employed by P and his 2^nd affirmation was filed on behalf of P.  At para 8 Luk said that P had been calculating interest on the gold loan facility on a nominal gold price of HK$3,524 per tael for some time since 30 August 2003 which he said should only be treated as a concession given by P to D.  Luk’s explanation in his 2^nd affirmation was that HK$3,524 per tael was used for the period from 30 August 2003 to 4 July 2007 (being the date for D to return the gold lent pursuant to the demand letter) only for the calculation of interest but not for the calculation of the principal value of the gold bars lent. 

55.Luk, however, in his 3^rd and 4^th affirmations (filed on behalf of D) recanted his earlier evidence in Luk’s 1^st and 2^nd affirmations with the benefit of independent legal advice from his solicitors and counsel.

56.In his 3^rd affirmation, Luk supports D’s case that there was the locked price agreement although he has no personal knowledge of the making of the agreement.  He also said that in all the internal documents of P from September 2003 to August 2008 which he had seen, the price of the gold loaned to D was fixed at the locked price of HK$3,524 per tael and this was used to calculate not only the interest payable by D but also the principal value of the gold loaned to D.  The only internal document of P in evidence before me is the spreadsheet.  Mr Wong SC submitted that the spreadsheet supports D’s case that there was the locked price agreement.  It seems to me that the fact that the spreadsheet shows that the price of gold was fixed at HK$3,524 per tael tends to support D’s case. 

57.P relies on the fact that on 3 Feb 2004 the price of 30 kgs of gold bars returned by D was taken at HK$3,742 per tael and not at the locked price of HK$3,524 per tael thereby undermining D’s case.  This is dealt with at paragraph 4 of the 1^st affirmation of Yeung Yuk Lan, P’s senior section head, risk management department of P.  She was the officer who took over D’s file from Luk in about August 2008. 

58.There is an explanation for this as set out at paras 9 to 17 of Luk’s 4^th affirmation.  Luk explained that what happened was that before 30 August 2003 the price of the gold loaned to D had not been locked in and that whenever the price of gold rose in the market, D was required to put in additional funds as further securities.  There was a fluctuation in the price of gold and by February 2004, Luk said that there was a surplus of HK$3,000,000 in D’s gold loan account.  He said that on his calculations that amount was equivalent to about 30 kgs of gold bars at the time.  He advised Yeung to make a partial return of the gold loaned as no interest was payable on the surplus cash in the gold loan account and that was why he advised D to return 30 kgs to P.  He said that Yeung called him up angrily after she received the fax notification from P mentioning that the 30 kgs of gold bars that was returned was at the price of HK$3,742 per tael. Luk said that he explained to Yeung that he was not the one responsible for executing the transaction.  He realized that his colleague in the dealing room had made a mistake by failing to follow the stipulated locked price and, as the notice had been issued, he suggested a solution.  He told Yeung that P had made a mistake and that he would persuade P to reduce the gold loan interest by 1% ie from 5% p.a. to 4% p.a. to make up for the mistake.

59.The spreadsheet also shows that there was a reduction of interest from 5% p.a. to 4% p.a. in February 2004.  The facility letter dated 6 February 2004 shows that the default interest rate was reduced to 4%.  The facility letter also shows a continuation of the gold loan agreement up to the extent of HK$34,710,000 and the only revision of the facility was the reduction of the interest rate.  This is another document which appears to contradict P’s case that the gold loan facility expired in August 2003.  If, as D contends, the gold loan agreement was on foot throughout the period from August 2003 until the demand letter which had the effect of liquidating the value of the gold lent, there does not appear to be any plausible explanation from P as to why interest was charged on the locked price value of HK$3,524 per tael instead of the fluctuating gold price over this period.  It may be that P has a satisfactory explanation but at this stage none has been provided in the evidence.

60.The spreadsheet also records that from 3 February 2004 interest rate of 4% p.a. was charged on the gold lent based on the value of HK$3,524 per tael.  According to the spreadsheet, this remained the position from 3 February 2004 up to 1 January 2007 when the interest rate was further reduced to 3% p.a.  From 1 January 2007 right up to 1 January 2008, according to the spreadsheet, the interest was charged at the rate of 3% p.a. on the same principal amount of HK$38,601,790.28 based on the value of gold at $3,524 per tael.  Judgment was obtained on 27 September 2007.  No explanation has been provided by P as to why for the period after the judgment P did not charge D interest at judgment rate but relied on the contractual rate right up to January 2008. This also undermines P’s case that the gold loan agreement had expired in August 2003.

61.No explanation has been provided by P as to why there was the reduction of interest of 1% p.a. in February 2004.

62.There are letters from D to P which P rely on to support its case that there was no locked price agreement.

63.In the letter dated 28 September 2006 from D to P there is the suggestion that the settlement of the gold borrowed would be settled within 6 months at an appropriate gold price as the price of gold was fluctuating.  This tends to support P’s case that the price of gold was not locked.  P also relies on the letter dated 31 December 2007 from D to P where D referred to the high price of gold in recent days as being a reason why it was difficult to repay the debts in a short time.  Luk confirmed that he drafted the letter for D.  Yeung in her 1^st affirmation confirmed that she and Wong were busy in Guangzhou taking care of their son who was battling cancer and receiving treatment there at the time.  This is not disputed.  The letters relied on by P were drafted by Luk which Wong and Yeung signed without paying much attention to their contents as they were preoccupied with their son’s illness.  They also believed that Luk was trying to help them.  These are matters which call for an explanation and, in my view, can only be resolved at trial after cross-examination.

64.P also relies on D’s audited accounts for the financial year ended 31 March 2004 which stated that HK$43,366,767.23 was owing on the gold loan account.  The balance sheet was signed by both Wong and Yeung.  According to the notes to the accounts, the gold price was the price prevailing at the close of business on the balance sheet.  The amount of HK$43,366,767.23 reflect a gold price of HK$3,959 per tael and not the locked price of HK$3,524 per tael. This is a matter which calls for an explanation.

65.In further support of P’s case that there was no locked price agreement, P also relies on P’s audit confirmations to D’s auditors in May 2005, December 2006 and June 2007 which state that the gold loan was for 410 kgs of gold bars plus interest or the HK dollar equivalent.  It was submitted that this contradicted D’s case that there was the locked price agreement.  As submitted by Mr Wong SC, the audit confirmations for 2005, 2006 and 2007 did not state the principal amount of the value of the gold bars according to the prevailing market price.  Only after judgment was entered did P, for the first time, certify in the audit confirmation dated 13 May 2008 that at the close of business on 31 March 2008 D maintained a gold loan with the principal amount of HK$67,531,255.05.  When D’s accountant sent a fax to P on 12 January 2009 querying the amount of the gold loan principal set out in the said audit confirmation, P sent a replacement audit confirmation to D’s accountant also dated 12 January 2009 removing the principal amount and replacing it with the statement, as in previous years, that the gold loan was for 410 kgs of gold bars plus interest or HK dollar equivalent.  Yeung Yuk Lan in her 1^st affirmation explained that the replacement audit confirmation sent by P was a mistake made by her colleague. This is not a matter that can be resolved at the interlocutory stage.

66.The evidence also shows that after 30 August 2003, at a time when, on P’s case, the gold loan facility was no longer on foot, P revised the gold loan agreement by the facility letter dated 29 November 2003.  By this facility letter P revised the terms and conditions of the “existing” gold loan facility granted to D.  This is stated in the box headed “Important Notice”.  The facility letter clearly states that P was pleased to revise the “existing” gold loan facility granted under the same loan account number as the gold loan agreement.  Nowhere is it suggested that the gold loan facility had already expired on 30 August 2003 nor is it suggested that this was a new gold loan facility.  It was clearly also stated in the facility letter that save for the amendments to the interest rate, the other terms and conditions of the gold loan were valid and enforceable. 

67.There was another revision by the letter dated 6 February 2004 which revised the default interest rate from 5% p.a. to 4% p.a. 

68.It seems to me that the letters dated 29 November 2003 and 6 February 2004 do provide support for D’s case that the gold loan agreement was still on foot after 30 August 2003 and had not expired by 30 August 2003.

69.It was submitted that Luk’s evidence should be disregarded as he is a self-confessed liar.  Ladd v Marshall[1954] 1 WLR 1489 relied on by P is distinguishable and, in my view, does not assist P.  In that case, there was an application to adduce fresh evidence on appeal where there had already been a trial with cross-examination.  That is not the situation in this case. There has been no trial on the merits with cross-examination of Luk.  It seems that P does rely on Luk’s evidence in Luk’s 1^st and 2^nd affirmations, when he made those affirmations on behalf of P, but not on his evidence in Luk’s 3^rd and 4^th affirmations which according to P, should be disregarded.  The trial judge will be in a position to determine which parts, if any, of Luk’s evidence should be relied on after hearing his evidence with the benefit of cross-examination.  I am of the view that Luk’s evidence cannot be disregarded at this interlocutory stage.  His evidence is not unbelievable.  Whether it would be believed is a matter to be resolved at trial.

70.It seems to me that the question of whether or not there was in existence the locked price agreement and whether the gold loan facility had expired on 30 August 2003 are matters to be investigated at trial.  These are not matters that can be resolved at the interlocutory stage without cross-examination.  I cannot say that D’s case on the locked price agreement is unbelievable.  If believed at trial, the defence has a realistic prospect of success.  This is a matter that can only be resolved at trial.

71.I am satisfied that a defence with a real prospect of success has been shown.

72.Mr Wong SC submitted that there were also discrete defences available to D namely, estoppel, waiver and accord and satisfaction.  As I have held that a defence with a real prospect of success has been shown, I shall deal briefly with the defences of estoppel and waiver.

73.D relies on the amendments to the gold loan agreement contained in the facility letter dated 11 October 2007.  This facility letter was issued by P to D at a time when P had already obtained the judgment on 27 September 2007.  This facility letter clearly stated in the box headed “Important Notice” that the letter sets out the terms and conditions upon which P would “provide/continue/renew/ banking facilities to [D]”.  The gold loan facility was said to be to the extent of HK$34,710,000.  However, on P’s case, the Liquidation Value as at 4 July 2007 was HK$67,531,255.05.  This facility letter revised the default interest to 3% per annum.  It was also provided that D should provide a partial prepayment of HK$2,000,000.  Also, under the heading “Conditions Precedent/Collateral Securities” legal charges were required for the same two charged properties.  By that date, judgment had already been obtained for vacant possession of the two charged properties.  A further corporate guarantee was required by an associated company Kai Yeung Jewellery Limited for HK$30,000,000.  Importantly, the letter stated that save for the amendments set out, all other terms and conditions of the loan shall be valid and enforceable.

74.It appears that by the facility letter dated 11 October 2007 P renewed the existing gold loan agreement with D.  Clearly the cause of action for breach of contract was already merged in the judgment.  Notwithstanding this, there is evidence to show that P renewed the gold loan agreement after the judgment.   The facility letter of 11 October 2007 provides support for D’s case that P was proceeding on the basis that the pre-existing gold loan facility was continuing and still on foot despite the entry of the judgment, subject only to the revision of the terms and conditions set out therein.  It also tends to contradict P’s case that in July 2007 P had liquidated and determined the facilities granted to D.

75.The conduct of P after the judgment and by the facility letter of 11 October 2007 does give rise to an issue as to whether there was an unequivocal representation to D that the gold loan agreement had been continuing up to 11 October 2007 and that it had not expired in August 2003.

76.As regards the defence of estoppel, D’s case on this discrete defence is that P had represented unequivocally that the rights and duties under the gold loan facility would continue and that the rights and duties of the parties would be governed by the facility letter of 11 October 2007 and not on any other basis. 

77.The demand letter by fax dated 14 July 2008 from P to D demanded outstanding interest in the sum of HK$3,279,565.89.  As Mr Wong SC sought to demonstrate in Appendix 2 of his speaking note, the sum demanded is very close to the sum of HK$3,277,988.16 as at 30 June 2008 as shown at p 2 of Appendix 2. This was based on 3% p.a. interest as shown in the spreadsheet and the facility letter of 11 October 2017.  On P’s case, however, as shown at p 2 of the said Appendix 2, the total interest accrued due as at 30 June 2008 would have been HK$7,059,247.52 and not the lesser sum of HK$3,279,565.89 which was the sum demanded by the demand letter by fax dated 14 July 2008.  There has been no evidence from P providing an explanation for the inconsistencies in P’s case.

78.Pursuant to the terms of the facility letter of 11 October 2007, D did pay a partial prepayment of HK$2,000,000 to P.

79.In Wilken & Ghaly’s The Law of Waiver, Variation and Estoppel 3^rd edition at para 17.11 it is stated:

“ The most likely form of unequivocal representation by the lending bank will be the acceptance of payments under the facility. It follows that the acceptance of interest payments by the lending bank may be evidence that it has waived its rights.”

80.D’s case is that it was induced into believing that its contractual relationship with P under the gold loan agreement would continue on the revised terms and that D acted to its detriment by paying the HK$2,000,000 and provided further securities under the facility letter of 11 October 2007.  By reason of P’s conduct, D’s case is that P is precluded from relying on the cause of action merged in the judgment.

81.It seems to me that a defence with a real prospect of success has been shown on the question of estoppel.

82.D also relies on waiver by election.  On the question of waiver by election, in Large Land Investments Ltd v Cheung Siu Kwai [2003] 1 HKLRD 313 Le Pichon JA said at para 15:

“ 15. The principles to be applied in this area of law are as follows:

(1) A waiver by election occurs:

… in the context of a binding contract, when a state of affairs comes into existence in which one party becomes entitled, either under the terms of the contract or by the general law, to exercise a right, and he has to decide whether or not to do so. His decision, being a matter of choice for him, is called in law an election (Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 at p.398).

(2) It is a prerequisite of election that the party making the election must first be aware of the facts which have given rise to the existence of his right (Motor Oil Hellas (Corinth) Refineries SAvShipping Corp of India (The Kanchenjunga) at p.398).

(3) It may be that the party must also be aware of his legal right of affirming or rescinding the contract when there has been a repudiation by the other party (Peyman v Lanjani [1985] Ch 457 — although this aspect was not disputed and therefore not considered by the House of Lords in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga).

(4) Further, since a party who elects not to exercise a right which has become available to him is abandoning that right, he will only be held to have done so if he has so communicated his election to the other party in clear and unequivocal terms (Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) at p.398).”

83.The facility letter of 11 October 2017 and the letter of demand by fax dated 14 July 2008 supports D’s case that P has also elected by waiver not to rely of the cause of action that was merged in the judgment.  The letter of demand by fax dated 14 July 2008 was sent after the judgment had been entered and P demanded payment of the unpaid interest in the sum of HK$3,279,565.89, which was based on the interest rate of 3% p.a. set out in the facility letter of 11 October 2007, and not on judgment rate of 8% p.a.  It is D’s case that P had elected to proceed on the basis of the said facility letter thereby waiving its right to enforce the judgment. 

84.I am satisfied that D has shown a reasonable prospect of success on its defence that there has been a waiver by election on the part of P to continue with the existing gold loan agreement with revised terms as set out in the facility letter rather than to enforce the judgment. 

85.It may well be that P has a satisfactory explanation for sending the facility letter of 11 October 2007 to D but this has not been provided in the evidence at this stage.  This is a matter that ought to be resolved at trial.

86.There is also the question of D’s delay in making the application by the summons which is a factor to be taken into account.  Wong said unconvincingly in his 1^st affirmation that he only became aware of the judgment in September 2008.  Yeung also said unconvincingly in her 1^st affirmation that she did not know of the judgment until shortly before the summons was issued.  Although there are disputed facts as to when D became aware of the OS and the judgment, it is unlikely, in my view, that D only became aware of the judgment shortly before the summons was issued.  There has obviously been delay in taking out the application.  Despite this, I am of the view that the discretion to set aside the judgment should be exercised in favour of D.  I have found that defences with a real prospect of success have been shown and in my view, it would be unjust not to set aside the judgment which was obtained by default without a determination of the merits.

87.I am satisfied that the appeal should be allowed. I allow the appeal and set aside Master K Lo’s order dated 17 May 2010.  The judgment is set aside.

88.As regards costs, I bear in mind what Yuen JA said in Choi Chung Bun Vincent v Australia China Holdings Ltd [2013] 2 HKC 361 at para 10.  I make an order nisi that

1)   D should pay costs to P for the application before Master K Lo with a certificate for counsel, such costs to be taxed, if not agreed; and

2)   P should pay costs to D for the appeal, with a certificate for two counsel, such costs to be taxed, if not agreed.

Mr Jat Sew Tong SC, Mr Richard Khaw SC and Mr Julian Lam, instructed by K W Ng & Co, for the plaintiff

Mr Wong Yan Lung SC and Mr Mike Lui, instructed by Yu, Tsang & Loong, for the defendant