Redland Concrete Ltd. v. Hing Lee Construction Co. Ltd. and Another

1998, No. A8140

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 8140 OF 1998

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Coram: Hon. Mr. Justice A. Chung in Chambers

Date(s) of Hearing: 17 June 1999

Date of Judgment: 17 June 1999

Date of Handing Down Reasons for Judgment: 25 June 1999

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REASONS FOR JUDGMENT

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Introduction

1. On 22 April, 1998, the Plaintiff herein issued High Court Action No. 6319 of 1998 ("the Earlier Action") against the two defendants herein. On 20 May, 1998, the Plaintiff issued this action against the same two defendants.

2. The contents of the Statement of Claim in the Earlier Action were the same in substance as the one in this action save that:-

(a) in the Earlier Action it referred to 3 invoices dated sometime in February, 1998 but the one in this action referred to 2 invoices dated March, 1998;

(b) the amount claimed in the Earlier Action was $511,108.80 and the one claimed herein was $651,775.20.

3. In both actions, the Plaintiff's cause of action against the 1st Defendant ("D1") was based on an agreement evidenced by or contained in a Quotation No. 97-1422 dated 4 July, 1997. The cause of action against the 2nd Defendant ("D2") was based on a Deed of Guarantee dated 2 December, 1997("the Guarantee"). It was alleged that D1 was liable to the Plaintiff for the price of goods sold and delivered whereas D2 was liable for D1's debt under the Guarantee. Default Judgment has been entered against D1 in this action (the same appears to be the case in the Earlier Action). It seems that D1 is now in liquidation. Since the issues before me did not involve D1, I do not propose to deal with D1's position further here.

4. The legal representatives for the respective parties in both actions are the same. Prior to 20 May, 1998 (when the Writ herein was issued), D2's solicitors have been communicating with the Plaintiff's solicitors. In particular, on 12 May 1998, the Plaintiff's solicitors wrote to defence solicitors in effect giving a 48-hour notice pursuant to R.H.C. Ord. 19 r. 8A. The reply given by defence solicitors is set out below since this was a document relied upon by Mr. Shum (for the Plaintiff):-

"Thank you for your letter of 12 May 1998.

[D1] has resolved to a voluntary winding up under Section 228A of the Companies Ordinance at a meeting held at the offices of KPMG Peat Marwick on 12 May 1998. Mr. Alan Tang and Mr. Gabriel Tang were appointed provisional liquidators of [D1] and the resolution together with the relevant statutory declaration have been duly filed with the Companies Registry.

We have at the moment no specific instructions to deal with this matter."

5. It was not entirely clear (since no evidence was produced in this connection) but it was probable that time extension was given (either by consent or by court order(s)) for the filing and service of a defence. On 15 June, 1998, D2's solicitors filed a defence in the Earlier Action for D2. Unknown to D2's solicitors,

(a) on 20 May, 1998, the Plaintiff issued the Writ herein against the same defendants;

(b) on 21 May, 1998, the Writ herein was purportedly served on D2 by insertion into a letter box at an address said to be "the usual and last known address of [D2]";

(c) on 22 June, 1998, judgment was entered against D2 in default of notice of intention to defend (this was amended on 7 July, 1998);

(d) on 8 December, 1998, a bankruptcy petition was presented in B1457 of 1998 on the ground that D2 has failed to comply with a statutory demand served on 23 September, 1998 by advertisement.

6. In his affirmation filed in support of the applications for setting aside the Default Judgment and the service of the statutory demand, D2 stated he and his family had moved from the address where the Plaintiff attempted to serve him by inserting into the letter box thereat in early March, 1998. He exhibited the document from the removal company to support this statement. Mr. Shum did not concede this to be true but did not submit further on this point. I consider he was correct in doing so because the Plaintiff has not adduced any evidence to rebut D2's statement. For the purpose of the hearing before me, I found that D2 had moved from the said address in early March, 1998.

7. D2 further stated he did not learn of the bankruptcy proceedings until December, 1998. Similarly, this was not contradicted by the Plaintiff's evidence. I also found that D2 only learnt of the bankruptcy proceedings (and therefore the Default Judgment) since that time.

8. D2 complained that it should have been apparent to the Plaintiff before the purported service of the Writ on him that he had already left the address in question. The Plaintiff responded by saying that D2 had still used that address in a lot of documents even after D2 had left there. I do not consider fruitful to engage in such kind of fault-finding exercise. The matter can be sufficiently dealt with on sound legal principles which will be set out below.

9. There is one matter which I must mention. The Plaintiff's solicitors have chosen, for reasons best known to themselves, not to notify D2's solicitors about this action. This is an unusual case where two actions were commenced based on exactly the same causes of action as well as the same agreements. D2 has through his solicitors indicated that the Earlier Action would be defended. In these circumstances, it must be obvious to any right-thinking solicitor that D2 and his solicitors would take the same position in relation to this action. Under such circumstances, there was no valid reason for not notifying D2's solicitors, or sending a copy of the Writ to them.

10. Mr. Shum did not enthusiastically defend this failure on part of his solicitors (I doubt if he would be able to). He merely said that there was no legal requirement to do so. While that may be true, common sense and fairness requires litigants (and more so their lawyers) to act with candour and openness. If they fail to, the courts should condemn such failure. I regard what the Plaintiff's solicitors had done here as very akin to sharp practice, if not sharp practice indeed.

11. Mr. Shum also relied on the defence solicitors' said letter of 13 May, 1999 as leading his solicitors to believe the defence solicitors had no instruction to act for D2. I do not agree at all. All that that letter said was D1 was about to be wound up. When it was said therein "We have ... no specific instructions to deal with this matter", the words "this matter" must refer to the winding up of D1 and nothing else.

12. Against the background set out above, D2 applied to:-

(a) set aside the Default Judgment entered against him on the ground that the service of the writ herein was bad and/or he had a good defence;

(b) set aside the service of the statutory demand; and

(c) dismiss the Petition for his bankruptcy.

13. At the end of the hearing on 17 June, 1999, the following orders were made:-

(a) the Default Judgment was set aside unconditionally;

(b) the service of the statutory demand was set aside;

(c) the Petition for bankruptcy was dismissed.

Brief reasons were given then and I indicated full reasons would be given later. These are the reasons.

Application to Set Aside Default Judgment

14. There were three issues between the parties relating to this part of the application:-

(a) whether the service effected herein was good or not;

(b) related to (a) above, whether the Default Judgment entered was a regular one;

(c) irrespective of the regularity of the Default Judgment, whether the merits of the defence needed to be considered (and if so, to what extent).

15. Points (a) and (b) will be considered under one heading and point (c) will be consider under a separate heading.

(1) Was the Default Judgment Regular?

16. Quite some time of the parties' submissions was spent on whether the Default Judgment was a "regular" one. In order to determine this question, it is useful to examine the relevant authorities first before applying them to the facts of this case.

17. Most of these authorities were related to service of originating process other than by way of personal service. Under the Hong Kong R.H.C. Ord. 10 r. 1(2), service can also be effected by registered post or by inserting through the letter box.

18. The first of these authorities was Honour Finance Co. Ltd. v. Chui Mei-mei [1989] 2 H.K.L.R. 146. There the writ was sent by post to the defendant's last known address but she had in fact left it earlier and was unaware of the writ. The Master set aside a default judgment there on the ground of "irregular service" and the appeal to the Judge was dismissed. On the plaintiff's appeal to the Court of Appeal, counsel for the defendant "elected to address no argument to the court or to seek to uphold the dismissal". The following passages appeared in the judgment of the Court of Appeal:-

"[After reviewing a number of earlier decisions in England, including A/S Cathrineholm v. Norequipment [1972] 2 Q.B. 314] The result so brought about by the combined effect of the presumptions in s. 8 [of Cap. 1] and in Order 10, rule 1 seems to us to be identical to that which the court developed for itself in relation to substituted service. Any legal system has to operate within the parameters of practical realities. ... No one, court or party, would for one moment guarantee success [to bring the proceedings to the defendant's notice]. ... At that time [when Watt v. Barnett was decided in 1878] service by post was a recognised form of substituted service. Now it is a permissible variant to personal service [under Ord. 10 r.1(2)]. It is not a second class variant, but an effective variant, given proper compliance with the rules. Then the deeming provisions give service by post a quality again 'equivalent to actual service' in the absence of evidence to the contrary. A default judgment entered then is regular ... " (at pp. 149-50).

19. The emphasis of the Court of Appeal in Honour Finance was apparently placed on the "delivery" of the originating process rather than "notice" of that.

20. In the English Court of Appeal decision of Forward v. West Sussex County Council [1995] 1 W.L.R. 1469, the holding in the headnote read:-

"... on a true construction of R.S.C. Ord. 10 r. 1(2) service was duly effected when the proceedings were brought to the notice of a defendant and not on mere delivery of the writ to his last known address; that since personal service guaranteed that the proceedings came to a defendant's attention the alternatives provided by the rule were permitted because they founded a good working, but rebuttable, presumption that they also would achieve that result ..." (italics and underline supplied).

The reasons for such holding can be found in the following passages:-

"The issue which we now have to resolve arises on the construction of R.S.C. Ord. 10 r. 1(2)(a). Is service duly effected if the proceedings are duly sent by ordinary first class post to the defendant at his usual or last known address and delivered at that address? The plaintiff argued that it is. If judgment were entered in default following such service and the defendant were able to show that he had never received the proceedings and so had had no opportunity to defend, he would have strong grounds for asking that the judgment should be set aside. But that would not impugn the validity of the service as service, only the fairness of allowing the judgment to stand. Counsel for the fourth defendant challenged this approach. It was a cardinal rule of procedure that a party should not in ordinary circumstances be answerable for a claim of which he had had no notice. If he could show that the proceedings, although sent to and delivered to the last of his addressed known to the plaintiff, had not in fact come to his notice then good service had not been effected. The real test was one of notice not delivery."(at p. 1475) (italics and underline supplied).

After summarizing the parties' argument, the Court of Appeal continued:-

"So far as the post [under Ord. 10 r. 1(2)(a)] is concerned, we could understand seven days being allowed [under Ord. 10 r. 1(3)(a)] as a safe if rather gloomy estimate of the time taken for delivery of a letter by ordinary first class post. So it would be a possible construction of paragraph (3)(a) to hold that in order to show that the letter had not been delivered by the seventh day ... it being irrelevant ... if it had come to the defendant's notice or note. But it is not possible to apply this construction to insertion through the letter box: if a letter is inserted through a letter box it can make no sense to treat the seventh day after insertion as the deemed date of service if service takes place on delivery and is not concerned with notice. Reading paragraph (3)(a) ... it seems to us that the generous time limit provided for ... and the allowance of seven days after insertion though the letter box are to allow for the possibility that the letter may not come to the defendant's notice at once. If this is the correct construction, a defendant could show the contrary by showing either that the letter had not come to his notice until after the seven day or that it had not come to his notice at all.

This construction is in our view strongly reinforced by paragraph (3)(b). An affidavit proving due service must contain a sworn statement not simply that there has been compliance with paragraph (2)(a) or (b) but also of the deponent's opinion that the letter ... 'will have come to the knowledge of the defendant within seven days thereafter.' On the plaintiff's argument the requirement for this expression of opinion would be unnecessary ... " (at p. 1476).

The Court of Appeal declared at the end of the judgment "that the writ has not been duly served on the fourth defendant" (at p. 1477F). Thus, the court agreed with the Defendant's argument therein that "The real test was one of notice not delivery".

21. The Forward decision has been applied in Hong Kong in:-

(a) the High Court case of Desirable International Fashions Ltd. v. Chiang Shi Chau [1997] 3 H.K.C. 170;

(b) the Hong Kong Court of Appeal decision of Chu Kam Lun v. Yap Lisa Susanto, Civ. App. No. 86 of 1999.

Further, there were two Hong Kong Court of Appeal decisions subsequent to the Honour Finance case which discussed when service was good and whether a default judgment should be set aside "as of right": Fok Chun Hung v. Lo Yuk Shi [1995] 2 H.K.C. 648 andPo Kwong Marble v. Wah Yee Decoration [1996] 4 H.K.C. 157.

22. The Desirable International case concerned a writ sent by registered post at a time when the defendant was not in Hong Kong. The writ was not returned to the plaintiff's solicitors who obtained default judgment and subsequently a garnishee order. Mr. Justice Waung held that the judgment was no doubt entered irregularly on two grounds: it was entered for too much and service of the writ was purportedly effected when the defendant was not in Hong Kong. As to the latter ground, the learned Judge observed that Ord. 10 r. 1(2)(a) required inter alia "a defendant within jurisdiction" at the time of service (relying on Barclays Bank v. Hahn [1989] 2 All E.R. 398). The decisions in Honour Finance and Fok Chung Hung were distinguished..

23. The most recent Hong Kong Court of Appeal referred to herein was the Chu Kam Lun case. There the Court of Appeal said:-

"[After reciting the purported service of the writ by insertion through the letter box at a time when the defendant was out of Hong Kong] The authorities are clear that for service under this rule to be effective, the defendant has to be physically within the jurisdiction at the time of service [citing the cases of Barclays Bank v. Hahn and Desirable International]. Other authorities have held that service is effective when the proceedings are brought to the notice of the defendant and not on mere delivery of the writ of the last known address ... [citing the Forward case and the Fok Chun Hung case] ... the plaintiff must have known that the [defendant's last known address] could no longer be regarded as the defendant's usual address and very likely, a writ left at the [defendant's last known address] would not reach the defendant at all ... For these reasons, service of the writ was bad and the judgment was an irregular judgment." (at pp. 4-5 of the transcript).

24. It appears since the decisions in Desirable International and Chu Kam Lun, the Hong Kong courts also shared the view expressed in the Forward case that whether service of an originating process was good should not be decided by "delivery" but by "notice". It also seems clear that the Court of Appeal in Chu Kam Lun also considered whether a judgment was regular depends on whether service was good.

25. However, Mr. Shum argued that there is a difference between (a) service of process at a time when the defendant was outside jurisdiction and (b) service of process by the alternative modes which the defendant can show was ineffective to notify him of the process. In the former case, the defect was one of jurisdiction, that is, the defendant's absence prevents Ord. 10 r. 1(2) from being properly invoked. In the latter case, however, the service was good because, at the time when the plaintiff effected service, everything under Ord. 10 r. 1(2) has been complied with. What the defendant was able to show subsequently only rebuts the presumption of notice created by the alternative modes of service. I agree with Ms. Vee's submissions that Mr. Shum's argument was in effect reiterating what the plaintiff in the Forward case had argued: see Forward at p. 1475 (cited above). This was rejected by the court in the Forward case. I also rejected it.

26. Relying on the court's observations in the Fok Chun Hung case, Mr. Shum further argued that the Default Judgment entered herein was a regular one. In the Fok case, the writ was served by post which turned out to be unsuccessful. After default judgment was obtained, the posted writ was returned to the plaintiff's solicitors. It can only be inferred from these facts that the defendant did not have notice of the writ until later. Despite that, the plaintiff did not apply for setting aside the judgment (pursuant to Ord. 13 r. 7(3)) but proceeded to obtain a charging order. The passages relied on by Mr. Shum were:-

"... I would not hold that the plaintiff's judgment was irregularly obtained; the copy writ was not returned to the plaintiff until after he had obtained his judgment ... He had no knowledge or notice, on that date, that his attempt to serve the writ had not succeeded, and he had not been guilty of any failure to comply with any of the rules governing the obtaining of judgments in default ... " (at p. 652D-E).

27. Mr. Shum submitted the Court of Appeal decided the default judgment in Fok Chun Hung was regular and this decision was binding on me. This is because the Plaintiff herein also had no reason to believe service of process was unsuccessful at the time of obtaining default judgment.

28. I should point out that the Forward case was not referred to by the court in the Fok Chun Hung case. The Fok case was heard in February, 1995 and the judgment in Forward was officially reported only in November, 1995. The difficulty which I faced, however, was that the reasoning in Fok Chun Hung did not appear to have been doubted or changed in the subsequent cases even though it has been referred to. Ms. Vee agreed that I am bound by the decision in Fok Chun Hung.

29. Applying the Forward case, I would have concluded that the Default Judgment was an irregular one. While I am bound by the Fok Chun Hung case, it was stated therein:-

"I have, for my part, no doubt that a judgment obtained in these circumstances, even if regularly obtained, must be set aside unconditionally, just as it would be if it had been irregularly obtained. To take any other course would be perversion of justice; whether the judgment was obtained before, or after, the return undelivered, of the copy of the writ, such a course would involve treating the defendant as one who is craving an indulgence, rather than one who is (rightly) protesting at having been given no chance to be heard" (at p. 653).

30. In the factual circumstances of this case (set out above), I find that the Default Judgment falls within the type described by the court in Fok Chun Hung cited in the paragraph immediately above. For this reason, it was set aside unconditionally.

(2) Merits of the Defence

31. I have concluded at the hearing on 17 June, 1999 that it could be set aside without regard to the merits of D2's defence, following what was said in Fok Chung Hung at p. 653B-I and Po Kwong Marble at pp. 161A-C and 161I-62B, and taking into account the facts of this case, including the conduct of the Plaintiff's solicitors.

32. The question of whether the merits of the defence need to be considered when an irregular judgment (or, as in this case, one which is in substance irregular) is to be set aside was extensively explored in the Desirable International case. In the course of his judgment, Waung, J. said:-

"[After finding that the service purportedly effected was bad] The intense disagreement ... between the parties is the discretionary power of the court as a result of irregular judgment. Three possibilities were put forward [The learned Judge called them respectively the "Absolute Right Principle", "Limited Right Principle" and "No Right Principle" by way of short-hand] ... " (at p. 175).

He then traced the authorities starting from the Honour Finance case and observed that there was a somewhat confusing state of the law in Hong Kong regarding this area. He then referred to the Fok Chung Hung case and continued:-

"Po Kwong Marble ... a judgment of the Court of Appeal ... provided a final twist to the tortuous path starting from ... first instance through ... the Court of Appeal in the Honour Finance case, Bokhary JA at first instance through Godfrey JA in the Court of Appeal in the Po Kwong case. The service which was effected in the Po Kwong case was by leaving the writ at an address which was not the registered office of the defendant and therefore the question for the court is what should be done in this situation of an irregularly obtained judgment. Sears J was of the view ... that there is a residual discretion in the court, apart from consideration of merits of the defence, to impose terms upon the setting aside of the judgment. In other words, the Limited Right Principle was what appealed to Sears J. Similarly, Bokhary JA was also for the Limited Right Principle and he read the Fok judgment narrowly as not having laid down any Absolute Right Principle. ... On my analysis of the ratio decidendi of the Po Kwong case, the Court of Appeal held that the correct principle in deciding the setting aside of irregular judgment is the Limited Right Principle ... Po Kwong is binding on me and ... I must apply the Limited Right Principle ... notwithstanding the powerful reasons stated in the Fok case. ... a similar opinion was also expressed by Keith J in Guangdong International Trust and Investment Corp v. Yuet Wah (Hong Kong) [1997] 2 H.K.C. 696 ... " (at p. 177).

33. The question was touched upon by the Court of Appeal in the more recent decision in Chu Kam Lun:-

"... counsel for the plaintiff argues that despite the judgment being irregular, it should not be set aside unless the defendant has a meritorious defence. Reliance is placed on Honour Finance ...

Ms. Wong, for the defendant ... argues that the legal position on setting aside irregular judgments has always been that the defendant is entitled to have an irregular judgment set aside ex debito justitiae―as of right, regardless of the merits of his defence or the conduct of the parties ... she submits that in the more recent cases of Fok Chun Hung ... and Po Kwong Marble the Court of Appeal took a different view ...

In my view, the Court of Appeal in Honour Finance appeared to have expressed a view different from those expressed in the two more recent cases of Fok Chun Hung and Po Kwong Marble ... Honour Finance was referred to in Fok Chung Hung but there, Godfrey, J.A. did not find it necessary to consider it for the purpose of his decision except to comment that it was decided without the benefit of adversary arguments, thus casting doubt on its weight. ...

... the weight of the Hong Kong authorities is where the judgment is irregular, it should be set aside without going into the merits of the defence. This would have disposed of the appeal. But there is still the question raised as to whether this court should adopt Faircharm [Faircharm Investments v. Citibank International (1998) Time Law Report, Feb 1998] ...

Faircharm seems to have decided that if the defendant to an irregular judgment is bound to lose for lack of a meritorious defence, setting aside the irregular judgment only prolongs the life of the action until the plaintiff applies to enter summary judgment which the plaintiff is bound to succeed. In these circumstances, to refuse to set aside is to do what is just and expedient and to achieve justice. Practical as this approach may appear to be, given the assertion of the defendant in the present case ... I am unable to say that the defendant is bound to lose ... That being the case it does not arise for a decision on whether it is appropriate to adopt Faircharm for the purpose of this appeal." (at pp. 5-9 of the transcript).

34. It appears there are arguments supportive of the approach which the court appeared to have adopted in Faircharm: the time and expenses of the courts and litigants should not be wasted to allow hopeless defence to be put up or to persist. On the other hand, there are arguments supportive of the so-called "Absolute Right Principle": litigants should be encouraged by the law to be scrupulous and abide by the rules of practice and procedure. If the courts were to say that merits of the defence will invariably be examined, plaintiffs may be encouraged (in extreme cases) to employ foul play to obtain default judgments.

35. The court is exercising a discretion in deciding whether to set aside a default judgment (including an irregular one). I do not consider that either of the two approaches sufficiently meets the potentially indefinitely variable factual circumstances of each case, or that the courts should be bound to adopt either of these approaches. Litigants can usually expect the courts to set aside irregular judgments without going into the merits of the defence. However, this does not mean the courts cannot in exceptional cases consider other matters including the question of merits. I consider this approach to be consistent with what Waung J. meant when in Desirable International he referred to the "Limited Right Principle" and what Sears J. meant in Po Kwong Marble when he referred to the court's "residual discretion".

36. In the circumstances of this case, I consider that the Plaintiff's solicitors' failure to notify D2's solicitors of this action to be a factor which tips the balance in D2's favour. Having so concluded, there is no need for me to deal with the question of merits of defence. However, if I needed to do so, I would have found that D2 has a good defence to the Plaintiff's claim relating to economic duress.

37. The law is not without difficulties regarding the test to be adopted in determining what defence is sufficient to justify setting aside a default judgment.

38. In Hong Kong this point seems to have been stated authoritatively in Premier Fashion Wears Ltd. v. Li Hing Chung [1994] 1 H.K.C. 213. The Court of Appeal said:-

"... it is generally not sufficient for a defendant merely to show an arguable defence although that alone would justify leave to defend being given under O. 14. A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so, he must satisfy the court that his case and the evidence he has adduced in support of it carries some degree of conviction. It seems to me that 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." (at pp. 219-20).

39. In Day v. Royal automobile Club Motoring Services Ltd., The Times, 24 November, 1998, the English Court of Appeal said:-

"... the proper approach to the application [for setting aside a regular judgment] was the view expressed in Alpine Bulk Transport Co. v. Saudi Eagle [1996] 2 Ll. Rep. 221, 224. ...

Sir Roger Omrod had said in Saudi Eagle (at p. 224): 'The primary consideration is whether the defendant has merits to which the court should pay heed, not as a matter of law but as a matter of common sense ... '

His Lordship said that the view expressed by Lord Justice Jenkins in Grimshaw v. Dunbar [1953] 1 QB 408,416 was a long way from the view expressed by Sir Roger Omrod in Saudi Eagle where it was held that in dealing with the question of construction the real question was whether it was a 'prima facie' defence (per Lord Atkins in Evans v. Bartlam, at p. 480), a 'serious' defence (per Lord Russell of Killowen at p. 482) or had merits to which 'the court should pay heed' (per Lord Wright at p. 489).

The rigour of the test in the Saudi Eagle was commented on by Lord Justice Dillon in Allen v. Taylor [1992] 1 PIQR 255,259 where he said that it was impossible to be dogmatic about the extent to which the court must be satisfied of the validity of the suggested defence. ...

The editors of The Supreme Court Practice 1999 commented at paragraph 13/9/18 on an apparent divergence of views between the Saudi Eagle and Allen v. Taylor and submitted that the view taken in the latter case 'was not easily reconcilable with the robust approach of the Saudi Eagle case and is a dilution thereof. The preferred view was that unless potentially credible affidavit evidence demonstrated a real likelihood that a defendant would succeed on fact no prospect of success was shown and relief could be refused.'

His Lordship was concerned by that note and stated that it was another move of the goal posts. It was largely a matter of semantics and the cases should be viewed as semantic differences of different facts of particular cases. ... ".

40. A reason underlining the Court of Appeal's concern was that:-

"There must be numerous cases where the issue will turn entirely on an assessment of the facts at trial: each party's case would carry conviction if it stood alone and without conducting a trial the court is not able to say which will succeed".

This observation applies most aptly to cases where the outcome of the case depends on credibility and each side's affidavit is as credible standing on its own as the other side's. A literal application of the "real prospect of success" test would almost invariably lead to a refusal to set aside the judgment because in such a case, since the court cannot properly conclude whether to believe the plaintiff or defendant, the defendant cannot be said to have shown a defence with a real prospect of success.

41. It could be that there was no real difference between the test propounded in the Day case and that in Premier Fashion apart from semantics. The language used in the two cases however was sufficiently different for it to be arguable that the Hong Kong court intended a different test should be applicable. This is particularly so when the Hong Kong Court of Appeal stated in effect that the hurdle for the defendant is higher in a setting aside application than in a summary judgment application.

42. I am bound by the Hong Kong Court of Appeal decision. For present purposes, I will determine the merits of the defence assuming that a higher hurdle must be surmounted by D2. D2 stated on oath that he was under the economic duress of the Plaintiff when he signed the Guarantee. The Plaintiff tried to refute this by showing that the document had been sent to D2 for some time before he signed it. While it may be true that D2 had the document from about 27 November, 1997 to about 2 December, 1997, there is nothing inherently implausible that D2 was under duress during this period. The contemporaneous documents could not assist me to decide on credibility. Further, the Plaintiff's affirmation in opposition was made by a Mr. Chan Kin Ho who described himself as its Credit Controller. Although Mr. Chan asserted he was responsible for dealing with D2 (at paragraph 6 of his affirmation), he kept on stating that he was "informed by the Plaintiff and he believed" in nearly all the matters addressed by him therein in answer to the points raised in D2's affirmation. I found it rather unusual that Mr. Chan appeared to keep a distance between himself and these matters in his affirmation and considered this to be in D2's favour.

Application to Set Aside Service of Statutory Demand

43. Mr. Shum accepted that once I set aside the Default Judgment, it follows that the service of the statutory demand must also be set aside.

44. There is however one matter about the affirmation filed by the Plaintiff's solicitors to prove service of the statutory demand which I must mention. It is common ground that in this affirmation, the Plaintiff's solicitors did not inform the court that D2 was represented by a firm of solicitors in the Earlier Action and that the causes of action in the Earlier Action are exactly the same as those in this action.

45. Mr. Shum argued that there was no need for his solicitors to do so because the affirmation was sufficient if it contains all the ingredients expressly required under Rule 49 of the Bankruptcy Rules, Cap. 6. I do not agree. First, Rule 46(2) requires: "The creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor's attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected". This rule expressly stipulates that the debtor's attention is of paramount importance. Further, I consider that the statutory demand should be served (because it was reasonable to do so) on D2's solicitors (who were actively defending the Earlier Action by that time) in order to satisfy the requirements of Rule 46(2).

46. Further, Rule 49(5) states "If [the statutory demand was not served personally on or acknowledged in writing by the debtor], the affidavit [proving service] must be made by a person having direct personal knowledge of the means adopted for serving the statutory demand, and must [give the various required particulars set out therein] ... ". Rule 49(6) is important and it states "The steps of which particulars are given for the purposes of paragraph 5(a) must be such as would have sufficed to justify an order for substituted service of a petition". Lastly, Rule 49(9) states "The court may decline to file the petition if not satisfied that the creditor has discharged the obligation imposed on him by rule 46(2)".

47. Mr. Shum further argued that the court was performing an administrative act under Rule 49 and could not refuse the affirmation provided it contains all the ingredients expressly required thereunder. Again I do not agree. The provisions in Rules 49(6) and 49(9) show that the court has a discretion in this matter (which must be exercised judicially). In this connection, The Supreme Court Practice 1999, Vol. 1, para. 65/4/2 stated that the court is exercising a wide discretion in deciding whether to direct substituted service (which is relevant to Rule 49(6)). Further, one only has to examine The Supreme Court Practice 1999, Vol. 1, para. 65/4/9 to see the usual steps required by the courts before such an order can be obtained.

48. Quite apart from the statutory provisions, general principles show that a party must act with candour and openness, that is, make full and frank disclosure, whenever an ex parte application (or an application having that character) is made. I regret to say that the Plaintiff's solicitors have fallen far short of that duty to make full and frank disclosure. I would have set aside the service of the statutory demand for this reason alone if necessary.

Petition for D2's Bankruptcy

49. Mr. Shum also accepted that once the Default Judgment and service of the statutory demand are set aside, the Petition must be dismissed.

Costs of the Application to Set Aside Default Judgment

50. After hearing parties' submissions on costs of the setting aside application, I ordered that:-

(a) those costs up to and including 29 January, 1999 ( the day when D2 filed his affirmation in support which disclosed the irregularity) be costs in the cause of the action between the Plaintiff and D2;

(b) those costs from 30 January, 1999 to the date of hearing be to D2 in any event.

51. In the course of his submissions, Mr. Shum asked me to follow the costs order made in Fok Chun Hung. The Court of Appeal was critical of the plaintiff solicitors' conduct in that case but ordered the defendant's costs of the application and the charging order and costs of the appeal to be costs in the cause. As stated above, the Fok Chun Hung case was decided without reference to the Forward case. If it were decided now, it is quite probable the Court of Appeal might have made some different costs orders. However, it seems that although the Court of Appeal did not find the default judgment to be "irregular" in term, that judgment was very much regarded as "irregular" in substance. Nevertheless, defendant's costs were still ordered to be in the cause. While I did not consider that I am bound by such costs order, it seems important that some consistent approach ought to be maintained. For this reason, I considered it appropriate to order the costs of the summons prior to and including the date of filing and service of D2's affirmation in support to be in the cause. However, as regards those costs after that date, I found that there was no reason to depart from the usual rule that costs should follow the event.

52. Having reviewed the Fok Chun Hung case again after the hearing, the actual costs order made therein was "the defendant's costs be in the cause" and not simply "cost be in the cause". I understand that the formal order has not been drawn up or perfected yet. The court retains a general power to reconsider and amend judgments and orders before that happens: The Supreme Court Practice 1999, para. 20/11/9 (principle (6)) and 42/1/27. The order relating to costs of the setting aside application up to and including 29 January, 1999 should be D2's costs in the cause instead.

53. Mr. Shum also argued that costs should be in the cause because it was reasonable for the Plaintiff to have opposed the setting aside application. The usual costs order regarding costs of the action is that costs should follow the event. Mr. Shum submitted this rule should not be applied to costs of interlocutory applications. It is equally possible to argue that costs of an action should depend on whether it is reasonable for the proceedings to be carried on or defended (as the case may be). The policy reason behind the usual rule that costs should follow the event appears to be that it is simple, easy to understand and promotes certainty. I do not see any reason (whether legal or as a matter of policy) to depart from this rule in relation to costs of interlocutory applications.

Costs Relating to the Bankruptcy Proceedings

54. Mr. Shum did not raise any objection to these costs (including the costs of the statutory demand) being awarded to D2 and those costs should be so awarded.

Representation:

Mr. E. Shum i/s by Messrs. W.K. To & Co. for the Plaintiff

Ms. J. Vee i/s by Messrs. Hampton, Winter & Glynn for D2