Zhongtai International Securities Ltd v. First Concord Investment Ltd

HCMP 1837/2017

[2018] HKCFI 2653

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1837 OF 2017

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DECISION

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Background

1.This is an application to set aside a default judgment granted by Master Lai on 1 December 2017 (“the Default Judgment”). There is also an application by the plaintiff to adduce new evidence, which I will deal with at the end of this judgment.

2.The Default Judgment concerns a Legal Charge dated 24 August 2016 (“the Legal Charge”), over a property known as Duplex A on the 29^th and 30^th Floors of Kennedy Park (including the adjacent terrace and flat roof with swimming pool) at No 4 Kennedy Road, Hong Kong, together with three car parks on the Lower Ground 2 Floor (“the Property”).

3.The Default Judgment is for, among other things, vacant possession of the Property, and a money judgment against the defendant in the sum of $153,060,295.93 plus interest.

4.The defendant is and was at all material times the registered owner of the Property.  At all material times, Tin Shuk Chun (“Madam Tin”) is and was the sole shareholder and sole director of the defendant.

5.The defendant is the mortgagor under the Legal Charge.  The plaintiff is the mortgagee.  The Legal Charge, on its terms, secures the liabilities of Madam Tin’s brother Mr Tian Xiaobin (“Mr Tian”) to the plaintiff. 

6.There is a provision in the Legal Charge which has been referred to as “the Special Provision”.  This provision expressly states that the Legal Charge covers all present and future obligations and liabilities of Mr Tian “whether actual or contingent and whether owed jointly or severally or alone or in any other capacity whatsoever including the capacity of the guarantor of third parties’ indebtedness” (emphasis supplied).  It is therefore clear that on the terms of the Legal Charge, the defendant has guaranteed the obligations of Mr Tian qua guarantor of other people’s indebtedness.

7.The plaintiff is a securities firm which offered, among other things, security margin financing to its clients.

8.At all material times, the following persons were clients of the plaintiff: (i) Lo Hung (“Mr Lo”); (ii) Tam Siu Leung (“Mr SL Tam”); (iii) Cheung Sung Kei Civic; and (iv) Tam Suk Yi Fanny (“Ms Fanny Tam”).  These accounts are collectively referred to as “the Four Accounts”.  For reasons which will become apparent later, these four account holders are referred to as “the Four Debtors”.

9.At all material times:

(1) Li Wing Sang (“Mr Li”) is the chairman of Tech Pro Technology Development Ltd (“Tech Pro”), a Hong Kong listed company with stock code 3823.

(2) Mr Li is married to Madam Tin.

(3) Mr Tian, as mentioned above, is the brother of Madam Tin.

(4) Mr Tian is a friend of Mr Lo.

(5) Mr Tam Siu Ki (“Mr SK Tam”) is a long-time business associate of Mr Li.

(6) Mr SL Tam and Ms Fanny Tam are siblings of Mr SK Tam.

10.It would appear that Mr Lo became a client of the plaintiff in October 2013 when his account was opened; and the other three of the Four Debtors became clients of the plaintiff in 2015 when their accounts were opened.

11.The Four Accounts had sizeable holdings in Tech Pro.  In around July 2016, the share price of Tech Pro fell substantially, and this caused the plaintiff to make margin calls on the Four Accounts, resulting in liabilities being incurred by the Four Debtors to the plaintiff.

12.As mentioned above, the Legal Charge was executed by Madam Tin on behalf of the defendant on 24 August 2016.  The circumstances leading up to the execution of the Legal Charge are the subject of dispute.

13.But there is no dispute that:

(1) On the terms of the Legal Charge, as noted above, the defendant has agreed to pay and guarantee the liabilities of Mr Tian to the plaintiff, including liabilities as a guarantor.

(2) The Legal Charge was executed in the offices of Messrs Ho Wong & Wong (“HWW”).  Also present on the occasion of the execution were Mr Li, Ms Bianca Hung (Credit Manager of the plaintiff), Mr Winson Law (“Mr Law”) (then Chief Business Officer of the plaintiff), Ryan Ho (then legal counsel of the plaintiff) and Mr Chau Cham Kuen (“Mr Chau”), a partner of HWW. 

14.Mr Tian became a client of the plaintiff only two days earlier, on 22 August 2016, when he opened an account with the plaintiff.  Before that, Mr Tian had no relationship with the plaintiff.

15.On the day following the execution of the Legal Charge, ie 25 August 2016, at around 1:30 pm, Mr Tian attended the plaintiff’s office and executed a document entitled “Security Deed”.  This is a bilingual document, rendered in both English and simplified Chinese.  On its terms, Mr Tian had undertaken, among other things, to pay and discharge the obligations owed by Mr Lo to the plaintiff up to HK$100 million.

16.Further, at around 4:30 pm on 25 August 2016, Mr Lo also attended the plaintiff’s office and executed another document entitled “Security Deed”.  This is an English document, the effect of which is that Mr Lo charges a number of assets, and undertakes to pay the obligations owed by the other three of the Four Debtors to the plaintiff up to HK$100 million.

17.Accordingly, on the terms of the documents executed:

(1) the defendant guaranteed the obligations of Mr Tian;

(2) Mr Tian guaranteed the obligations of Mr Lo; and

(3) Mr Lo then guaranteed to be obligations of the other three of the Four Debtors.

The defendant’s case

18.The defendant’s case, at its very core, is that:

(1) In or around mid-August 2016, there were a number of discussions among Mr Law, Mr Tian and Madam Tin in relation to the defendant’s charging of the Property as security for the plaintiff’s allowing Mr Tian to trade in shares on margin.

(2) It was eventually agreed that the monetary limit of the defendant’s exposure was HK$40 million.  This was agreed to by Mr Law, Mr Tian and Madam Tin.  This agreement was reached on or about 22 August 2016.

(3) At no time, during any of the discussions or thereafter, was there any mention by anyone that the defendant was to guarantee anyone else’s indebtedness.

(4) On the occasion of the execution of the Legal Charge on 24 August 2016, Mr Law told Madam Tin that the Legal Charge was a standard document charging the defendant’s Property to guarantee Mr Tian’s margin trading.

(5) In sum, therefore, the defendant’s case is that there was an oral agreement between Madam Tin and Mr Law that (i) the defendant was only to guarantee the obligations arising out of Mr Tian’s trading; and (ii) such guarantee was subject to the monetary limit of $40 million (“the Alleged Agreement”).

19.Mr Horace Wong SC (leading Mr Norman Nip) for the plaintiff, and Mr Benjamin Chain for the defendant, agreed that:

(1) My conclusion on the credibility of the Alleged Agreement would be determinative of whether the defendant’s defence has real prospects of success. 

(2) In other words, if I am satisfied that the evidence adduced by the defendant has reached the requisite threshold of believability, then the defence has a real prospect of success.

20.There is no suggestion that the Alleged Agreement, even if made out to the requisite degree of believability, would not amount to a defence in law.

21.Mr Chain submitted that the Alleged Agreement would give rise to a viable case of rectification and/or collateral agreement.  In light of the position of the plaintiff, it is unnecessary for me to express any view on the legal viability of these two arguments.

The applicable principles

22.Mr Wong submitted that the relevant principles concerning the setting aside of a regularly entered default judgment are restated by Harris J (sitting in the Court of Appeal) in Maryo Development Ltd v Tsang Yau May(CACV 101/2015, 11 January 2016) §§12 – 15, as follows:

(1) A defendant who seeks to set aside a regular default judgment must at least show that his case has a real prospect of success that carries some degree of conviction.  It is generally not sufficient for a defendant to show an arguable defence (even though that would justify leave to defend being given under Order 14).  Unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success.

(2) Whilst it has been said that the court would be required to form a view on the “probable outcome of the action”, it is not required to undertake a mini trial on affirmations.  What is required is for the court to form a provisional view as to whether or not the defendant has a realistic prospect of successfully defending the action.

(3) Such determination will involve the court assessing whether or not the defendant’s evidence on disputed factual matters has a realistic prospect of establishing a defence in law.  The assessment has to be carried out mindful of the interlocutory nature of the application with a sense of proportionality.

(4) Although the merits of the defence is the primary consideration, it has to be balanced against other factors such as the reason why judgment was allowed to be entered, and any delay in making the application to set aside.

23.Mr Chain, in my view rightly, does not dispute these principles.  However, he submitted that in real life there are seldom cases where the difference in threshold between summary judgment applications and default judgment applications would yield different outcomes.

24.I am unable to agree with this submission.  I do think that there is a real and practically relevant distinction between the different thresholds.  I further regard that as being consistent with principle, because there is obviously good reason why it is more difficult for a defendant in the case of a regularly entered default judgment to face a higher hurdle than a defendant who has not acted in default, but is at the receiving end of a summary judgment application.

25.Mr Wong also drew my attention to the Court of Appeal’s decision in Cheung Chi Po v Ke Jun Xiang (CACV 170/2011, 22 May 2012).  

26.In that case, the plaintiff sued on a promissory note for $25 million signed by the defendant.  The defendant admitted that he signed the promissory note, but he denied that he received the $25 million.  The promissory note, however, expressly states but the $25 million had been lent by the plaintiff and received by the defendant.

27.The judge at first instance accepted that there were inherent improbabilities in the defendant’s story.  However, he held that in light of the defence that no money was actually lent, the plaintiff should have produced at least some evidence that some part of the $25 million had actually been lent.

28.Cheung JA, with whom Yuen JA agreed, held that this was the wrong approach.  He said that this was an error identified by Godfrey JA in Premier Fashion Wears Ltd v Chow Cheuk Man [1994] 1 HKLR 377, 383:

“ The Judge seems to have thought that, if the defendant can show he has an arguable defence, a default judgment against him ought to be set aside unless there is incontrovertible evidence before the court to negate it. With all respect to him, that approach is not the correct approach.”

29.In the event, in Cheung Chi Po, the default judgment was conditionally set aside, the condition being that the defendant be required to make payment into court of $25 million. That was because the plaintiff had originally claimed that the $25 million was lent on the date of the promissory note, but later changed his case to say that money had been lent from time to time before the date of the promissory note.

30.As I understand it, Mr Wong's point on Cheung Chi P ois that the burden lies squarely on the defendant to raise a defence with realistic prospect of success.  Even if he can show an arguable case, that is not sufficient.  Further, even if the defendant can show an arguable case (as opposed to a case with realistic prospect of success), this does not shift the burden in any way.  Put another way, even in the face of an arguable case (as opposed to a case with realistic prospect of success), the plaintiff is not obliged to provide any further details of his case or answer any “arguable points” raised by the defendant.

31.I think these submissions are correct as far as they go.  But I agree with Mr Chain that in assessing whether the defendant’s case has a realistic prospect of success on the facts, I should not ignore the story which has been advanced on behalf of the plaintiff.

32.In other words, the court’s approach is to look at all the evidence filed, and assess whether the defendant’s case, in the light of the rival contention by the plaintiff, has a realistic prospect of success on the facts.  If the court then forms the view that there is a realistic prospect that the defendant’s factual contention will be preferred over the plaintiff’s at trial, and that there is a realistic prospect that the defendant’s factual contention will be accepted as being proved on the balance of probabilities at trial, then the court should conclude that the defendant’s case has a realistic prospect of success on the facts.

Whether the defendant’s case has a realistic prospect of success on the facts

33.For the reasons I will endeavour to state below, my conclusion is that there is a realistic prospect that the Alleged Agreement will be accepted by the court after trial.

34.First, on the face of the Legal Charge, the defendant guaranteed the obligations of Mr Tian, who had only become a customer of the plaintiff two days ago.  It is therefore probable that the understanding was that the Legal Charge was to be executed to secure the obligations of Mr Tian in respect of his newly opened account.  I am also of the view that there is nothing inherently unbelievable about the Alleged Agreement.

35.Secondly, the evidence of the plaintiff, taken at its highest, is that on the occasion of the execution of the Legal Charge on 24 August 2016, Mr Chau had only explained that the defendant would also guarantee the liabilities of Mr Tian in his capacity as guarantor.  But there is no allegation by the plaintiff that there was any express explanation that Mr Tian had guaranteed (or was to) guarantee the obligations of Mr Lo, who was in turn a guarantor (or was to become a guarantor) of the obligations of yet further persons.  I therefore do not think that the Mr Chau’s explanation would deprive the defendant of a realistic prospect of success in making out the Alleged Agreement.

36.Thirdly, the plaintiff’s case is that it was the suggestion of Mr Li and Mr SK Tam that the Property be put up as security for the obligations of the Four Debtors.  I believe that the defendant has a realistic prospect of success in defeating this factual case at trial:

(1) I agree with Mr Chain that it is not at all clear why this convoluted mechanism (ie the defendant guaranteeing Mr Tian’s obligations, Mr Tian guaranteeing Mr Lo’s obligations, and Mr Lo guaranteeing the obligations of the other three of the Four Debtors) should be put in place.

(2) If the true understanding was that the defendant was to guarantee the obligations of the Four Debtors, one would have expected a simple document saying exactly that to be prepared and signed.

(3) There would also be no reason to involve Mr Tian, who was neither one of the Four Debtors nor even an existing customer of the plaintiff before 22 August 2016.

(4) Nor would there any reason to arrange Madam Tin, Mr Tian and Mr Lo to execute the Legal Charge and the two Security Deeds on different occasions.

(5) I also accept Mr Chain’s submission that if the true understanding was that the defendant was to guarantee the obligations of the Four Debtors arising out of the fall of the share price in Tech Pro, one would have expected the guarantee to cover also the obligations of Mr Li (who is after all the husband of Madam Tin, the sole director and shareholder of the defendant), who was indebted to the extent of over $6 million to the plaintiff at the time.  Although $6 million was not a large figure in the scheme of things, there would be no reason why it should not also be covered by the defendant’s guarantee.

37.Fourthly, I reject Mr Wong’s criticism that the Alleged Agreement is devoid of particulars:

(1) Mr Wong argued that the defendant’s evidence of the Alleged Agreement has no particulars on the place where the agreement was reached; whether it was reached by phone or at a meeting; the words used by the parties; and persons present when the agreement was reached.

(2) Madam Tin has deposed that she has reached the Alleged Agreement with Mr Law.  She further said that Mr Tian also agreed to that.  She has also said that the agreement was reached on or about 22 August 2016.

(3) I regard the defendant’s case on the Alleged Agreement as a sufficiently particularised allegation raising a realistic prospect of success.  I do not think that the absence of the matters enumerated by Mr Wong which I have sought to summarise above detracts from that.

(4) Mr Wong also argued that although Madam Tin said that the agreement was reached “on or about 22^nd August 2016”, Mr Tian only deposed to a meeting at the plaintiff’s office with Madam Tin’s secretary on 22 August 2016, without stating that Madam Tin was also there.  He submitted that this should cast doubt on the defendant’s case.  I am unable to agree with this submission.  In my view, Madam Tin has sufficiently deposed that the Alleged Agreement was reached on or about 22 August 2016.  The possibility Mr Tin had gone to the plaintiff’s office on that day without Madam Tin does not make this allegation unrealistic.

38.Mr Wong persuasively argued that the conduct of the defendant after the demand was made militates against the credibility of its defence:

(1) A demand letter was issued to the defendant on as early as 24 August 2017.  It was clearly mentioned in that letter that the plaintiff regarded that the defendant as liable for the obligations of Mr Tian and of the Four Debtors.  The documentation executed by Mr Tian and Mr Lo was also set out in this letter.

(2) The Originating Summons was issued on 29 August 2017.  There is no dispute that it was regularly served.

(3) Default judgment was entered on 1 December 2017.  There is also no dispute that it was regularly served.

(4) The present solicitors of the defendants only filed a Notice to Act on 26 January 2018.

(5) The summons to set aside the default judgment was only taken out on 8 March 2018.

(6) Mr Wong submitted that the delay indicates that the defendant has no conviction in its defence, and it is only put up as a delaying tactic.

39.Mr Chain fairly accepts that there is no evidence on when the defendant first received the demand letter mentioned above.  Nor is there any evidence as to when the defendant first had notice of the Originating Summons.  There is also no explanation as to why the defendant did not act promptly.  The only submission he made in respect of the delay is that there is hardly any prejudice caused to the plaintiff.

40.I must confess that I was most concerned about the delay.  However, on reflection, my ultimate conclusion is that since, on the evidence before me, I am of the view that the defendant’s case does have realistic prospect of success, I should not draw the inference that the failure to act promptly is due to a lack of conviction in its merits.  

41.I therefore conclude that the Alleged Agreement has a realistic prospect of success of being established on the facts.  As noted above, it is accepted by the plaintiff that the Alleged Agreement, if proved, can realistically give rise to a defence to the claim.

42.Mr Chain has drawn my attention to §13/9/18 of Hong Kong Civil Procedure 2019 where it is said that “there is no rigid rule that the applicant must satisfy the court that there is a reasonable explanation why judgment was allowed to go by default, though obviously the reason,if any, for allowing judgment and thereafter applying to set aside is one of the matters to which the court will have regard in exercising its discretion.”  

43.I accept Mr Chain’s submission that the delay has not caused any prejudice to the plaintiff. Hence, in the face of my conclusion on realistic prospect of success, I do not think that the delay should prevent the setting aside of the Default Judgment, or cause me to set it aside only on conditions.

Conclusion

44.For the above reasons, I conclude that it would be appropriate to accede to the defendant’s application to set aside the Default Judgment.

45.Mr Chain submitted that if I am to set aside the Default Judgment, I should give parties a further opportunity to address me on the precise terms of the order.  I therefore direct that:

(1) The defendant should file and serve its suggested draft order (including the costs order), with explanatory submissions, within 7 days of this judgment.

(2) The plaintiff should file and serve its suggested draft order (including the costs order), with explanatory submissions, within 7 days thereafter.

(3) The defendant should file written reply submissions on the terms of the order (including the costs order), if any, within 7 days thereafter.

(4) Unless the court otherwise directs, the court will settle the terms of the order on the basis of the aforesaid materials without a further hearing.

46.I now turn to the application for new evidence that I mentioned at the beginning of this judgment.

47.By summons dated 30 October 2018, the plaintiff applied for leave to file the 2^nd Affirmation of Zhang Yanfeng. 

48.This affirmation essentially seeks to (i) update the court on the status of an earlier conditional interim stay, ie that the conditions were not complied with and that the plaintiff has taken possession of the Property; (ii) inform the court of the status of action taken by a prior mortgagee over the Property; (iii) refer to various matters showing the relationship between the defendant, Mr Li, Mr Tian and the Four Debtors; and (iv) explain why Mr Law has not filed any evidence in the present application.

49.Regardless of whether there is sufficient justification for only filing the evidence at this stage, I do not think that any of the matters referred to in this affirmation are significant to my determination.  Accordingly, I am of the view that “special circumstances" which are required under Order 32, rule 11A(4) are not made out.

50.I accordingly dismiss the plaintiff’s summons of 30 October 2018, with costs to be paid to the defendant by the plaintiff, to be taxed if not agreed.

51.It remains for me to thank counsel for their assistance.

Mr Horace Wong SC and Mr Norman Nip, instructed by Li & Partners, for the plaintiff

Mr Benjamin Chain, instructed by Johnny K K Leung & Co, for the 1^st and 2^nd defendants