Gainford International Ltd v. Kingbo Holdings Ltd and Others

DCCJ 5079 /2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5079 OF 2004

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BETWEEN

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Coram:  Deputy District Judge S. T. Poon in Chambers

Date of Hearing:  20^th January 2006

Date of Handing Down Judgment: 8^th February 2006

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J U D G M E N T

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Introduction

The default judgment was entered pursuant to an application under Order 84A of the Rules of District Court (“O.84A”).

Background

1.  The factual background of this case is not without complexity, not less than 19 affirmations had been incorporated into the agreed bundle for consideration.  However, for the purpose of the present applications I would only give an outline of the relevant facts to put the discussions below sufficiently in context.

2.  D1 was used as a vehicle to operate a factory in Huia Chou, Guangdong Province in the mainland for manufacturing of printed circuit boards (“PCB”).  At the material times, D2 and D3 were holding altogether 55% of the shares of D1 and Mr. Tse Chun Yip (“Tse”) controlled the other 45%. D2 and D3 were Taiwan residents.  D3 had his own company in Taiwan dealing with PCB in the name of Yu Chia Ta Enterprise Company Limited (“YCT”) and the Huia Chou factory was named after it as HCYCT.

3.For the purpose of the joint venture, YCT supplied certain machines (“the Equipment”) to D1 for use in HCYCT and D1 eventually placed them as security for a loan (“the Lease Agreement”) from Dah Sing Bank Limited (“DSB”). D1, D2 and D3 were signed as personal guarantees (“the Guarantees”) thereto.  During the course of events there was a single default of repayment on the part of D1 and DSB considered it as repudiation and accepted it. 

4.Instead of repaying the outstanding amount to DSB to release the Equipment from the Lease Agreement, Tse caused the Plaintiff (“P”), a company controlled by himself, to buy out the Lease Agreement and the Guarantees from DSB and an assignment thereof was executed (“the Assignment”). The Lease Agreement and the Guarantees became the subject matter of the O.84A application. 

5.It was not in dispute that the purchase price of the Equipment had not been fully paid to YCT and the money due from D1 to YCT amounted to NT$4,138,000 (about HK$1,000,000).  A significant part of the evidence filed by parties is the previous correspondences between Tse and D2 and D3 as regard the financial situation of D1.  It is however in my view unnecessary to set them out for the present purposes.

6.P eventually took out the present action.  A Writ of Summons was served on the registered address of D1, which was the same as that of P.  Leave was also granted to serve concurrent Writs out of jurisdiction against D2 and D3. 

7.Without receiving any Notice of Intention to Defend or Acknowledgement of Service, P proceeded to take out a summons to enter judgment in default under O.84A.  Summonses were purportedly served out of jurisdiction to D1 and D2 without first obtaining leave from the Court.

8.On the returnable day of the O.84A application, D2 and D3 appeared in person before Temporary Deputy Registrar Yu (as he then was), there was no representation from D1.  D2 and D3 requested the learned Temporary Deputy Registrar to allow them time to seek legal advice and an adjournment of 14 days was duly granted.  It later transpired that an Amended Writ of Summons was served on D2 and D3 personally by P’s solicitors on the same day outside the court room.  The O.84A summons was however not served.

9.None of the Defendants appeared on the adjourned hearing day and judgment was entered in default.

10.Subsequent to the entering of judgment against the Defendants, P took out various proceedings in execution of the judgment including, inter alia, petition for winding up of D1 and applications for prohibition orders against D2 and D3.  The winding up proceedings was adjourned pending outcome of the present application.

Issues

11.The first issue is whether a default judgment is liable to be set aside as of right if it has been obtained irregularly.  This issue had been discussed thoroughly by all levels of Courts.  A very useful summary of the relevant case law can be found in Cosec Nominees Ltd. v. Lau Hon Ming Alan [2001] 3 HKC 290 (“Cosec”) by Deputy Judge Poon.  It was common ground that the leading authority is the Court of Appeal Judgment in Po Kwong Marble Factory Ltd. v. Wah Yee Decoration Co. Ltd.  [1996] 4 HKC 157 which is binding on me. 

12.In this well-known judgment Sears J had this to say (at p.161):-

“The provisions of O.13, r.9, as I have said, are wide in their context. In my judgment, whilst it can be rightly said that a judgment which has been obtained irregularly ought to be set aside as of right, in other words that the merits of the particular defence to the claim do not have to be entered into by the court, nevertheless, there is always a residual discretion in the court to have regard to the conduct of the parties. For example, if a judgment has been obtained irregularly and the writ comes to the notice of the defendant, he may delay for a certain period of time before taking any action on the writ. In my judgment, the court still has a discretion - having regard to what the defendant himself has done - to deprive him, if necessary, of that judgment or alternatively, to impose terms upon the setting aside of the judgment which accord with justice having regard to the facts of the particular case.” (my emphasis)

13.It is crystal clear that the Learned Judge had expressed his view that the court still has a discretion to impose terms upon the setting aside of the default judgment even for one obtained irregularly without going into the merits of the case.  However, it is not clear whether it was his view that the court still has a discretion not to set aside an irregular judgment in consideration of the parties’ conducts.  It is difficult to understand fully what the Learned Judge meant when he said, “…to deprive him, if necessary, of that judgment…” (my emphasis), if we read these words in context.  The words “him” and “that judgment” obviously refer to the defendant and the default judgment.  One might query under what circumstance a defendant would be deprived of a default judgment as apparently mentioned by the Learned Judge.

14.My view is that, what the Learned Judge intended to say was “to deprive the defendant of the right to set aside that judgment” rather than “to deprive the defendant of that judgment”.  This interpretation is consistent with what Bokhary JA (as he then was) said in the same judgment :-

“Another thing I might have done was to underline the nature of the statutory jurisdiction. "Ex debitio justitiae" or as of right means without going into the actual merits of the defence. It does not mean shutting one's eyes the circumstances surrounding the question of service and why things went wrong in that regard. The court's statutory jurisdiction is unfettered” (at 162)

15.In Guangdong International Trust & Investment Corp HK (Holdings) Ltd v Yuet Wah (HK) Wah Fat Ltd [1997] 2 HKC 696 (“Guangdong”), Keith J (as he then was) had this to say (at p.702D):-

“I accept that there are passages in the judgment of Sears J. (p.5I-K of the transcript) and Bokhary J.A. (p.6O-Q) which suggest that the court has power, in an extreme case, to refuse to set aside a judgment even if it has been obtained irregularly.”

16.Keith J shared the view that Sears J suggested that the court has a discretion to refuse setting aside a irregular default judgment but without going into detail how he came into this view.   

17.In Desirable International Fashions Ltd (in liq) v. Chiang Shi Chau  [1997] 3 HKC 170, having regard to the long line of authorities on irregular judgment, Waung J. summarized the relevant principles as follows at p.178:-

(1)       the Court should not go into the merits of the defence in considering the setting aside of irregular judgment, as otherwise the distinction between irregular and regular judgment disappears and the defendant of an irregular judgment will be in an invidious position of having to go fully into the merits of the defence and such a defendant would be worse off as result of no proper service having been effected on him;

(2)       if there was such fundamental defect in the service such as that mentioned by Godfrey JA in [Fok Chun Hung v Lo Yuk Shi [1995] 2 HKC 648], then the Court can take such matter into account and normally would arrive at a result of setting aside without imposing any terms;

(3)       the conduct of both parties in relation to the proceedings could be taken into account in deciding whether the default judgment should be set aside and if so on what terms.  (at page 178)

18.It is noted that Waung J also had the view that the court can still refuse to set aside an irregular judgment having regard to the conduct of the parties but without going into the merits. 

19.This approach is not the same as suggested in the English authority Faircharm Investment Limited v Citibank International PLC, 1998, The Times, 28 February 1998, which allows the court to take into account merits in considering whether to set aside an irregular judgment.  As mentioned by Deputy Judge L. Chan in Kerry Freight (Hong Kong) Limited v. Del Prado Asia Ltd HCA2660/2004, the Faircharm approach is inconsistent with Po Kwong and shall not be followed by the lower courts. 

Regular or Irregular?

20.Mr. Wong contended that the service of the Writ against D1 was irregular.  He submitted that by serving the Writ to the registered address of D1, which was in fact the address of P, P had secured that there would be no Notice of Intention to Defend filed by D1.  However, Mr. Wong admitted that there is no authority directly supporting his submission and he relied only on the general principles set out in Cosec.  Mr. Wong was also unable to suggest an alternative address for service apart from the registered address of D1. 

21.Mr. Wong submitted that the whole basis of the requirement of service of proceedings is to bring notice of the claim to the defendant, in order for a judgment to come properly within the ambit of O.13 r.1, the defendant must have been properly served and afforded the opportunity to give notice of intention to defend within the prescribed time. 

22.I entirely agree to the above proposition.  Nevertheless, for the present case the Writ was served on the registered address of D1which was still in use for D1’s business.  The fact that the director (Tse) of D1 who had knowledge of the Writ chose not to react did not render the service ineffective.  The service was in accordance with the prescribed procedure under Section 356 of the Companies Ordinance, Cap.32.  Tse might have in breach of fiduciary duty against D1 by not acting promptly to respond to the claim but this did not by itself make the service ineffective.  The situation might be different if there existed an element of fraud perpetrated by P, but the case of the Defendants did not go so far to such an extent.

23.Another important fact to note is that, D2 and D3 had in fact been served with the same copies of Writ and no action had been taken by them to act for D1.  At the hearing on the returnable day of the O.84A summons, D2 and D3 did not show any interest to represent D1 to defend the proceedings.  I agree with the argument advanced by Mr. Lee, counsel for P, that should P intended to conceal the proceedings from D2 and D3, P would have chosen to proceed against D1 separately instead of suing all Defendants altogether.

24.I find the default judgment against D1 was regularly obtained.

25.As regard the default judgment against D2 and D3, Mr. Wong submitted that since the O.84A summons was served out of jurisdiction without leave, the judgment entered as a result was irregularly obtained.  Mr. Lee admitted that the service was defective.

26.O.84A, r.3(2) provides that:-    

(a) An application for the grant of leave under this rule must be made by summons supported by an affidavit which must-

(i) give the particulars required by rule 2; and

(ii) exhibit a true copy of the hire-purchase or conditional sale agreement, the original of which must be produced at the hearing of the summons.

(b) The summons and a copy of the affidavit in support and of any exhibits referred to therein must, notwithstanding anything in Order 65, rule 9, be served on the defendant not less than 4 clear days before the day fixed for the hearing of the summons.

27.As evidenced by the affirmation of Chang Fung, the summons and the affirmation in support together with the exhibits were sent to Taiwan to D2 and D3 by post.  D3 in his affirmation admitted that he and D2 received the documents.

28.Under O.11, r.9, “…service out of jurisdiction of any summons, …in any proceedings is permissible with the leave of the Court…”  The service of the O.84A summons out of jurisdiction to D2 and D3 was without leave and Mr. Lee accepted that the service was therefore defective.

29.As submitted by Mr. Wong, the whole basis of the requirement of service of proceedings is to bring notice of the claim to the defendant.  One might argue that the summons and affirmation had in fact been served on D2 and D3 and they did appear at the first hearing, their absence at the second hearing was their own choice giving up their opportunity to oppose the O.84A application. 

30.The conduct of D2 and D3 might well be subject to criticisms.  However, there existed a procedural irregularity that had not been cured rendering the service of the summons and affirmation defective.  Bearing in mind that the service of summons and supporting affirmation is a must under O.84A, the judgment granted against D2 and D3 was obtained irregularly, the matters set out under paragraph 30 above do not make a judgment obtained irregularly a regular judgment.

Whether to set aside the judgment?

31.Having ruled that the judgment against D2 and D3 is an irregular judgment, I should then move on to consider whether to set aside the judgment and whether to impose terms if judgment is to be set aside, taking into account the conducts of the parties but without considering the merits of the defence.

32.As mentioned under paragraphs 30 and 31 above, the conducts of D2 and D3 are subject to criticisms.  They had full knowledge as to the O.84A application against them; they had been granted time to seek legal advice at the first hearing but chose not to attend at the adjourned one.  No explanation had been given for the absence and the setting aside application was taken out some months later after P had proceeded on with execution. 

33.There was no prejudice caused to D2 and D3 as a result of the irregularity.  As submitted by Mr. Lee, leave to serve outside jurisdiction would probably be granted by the court given the fact that the leave to serve the Writ outside jurisdiction had been granted already.  On the other hand, the conducts of D2 and D3 reflected their lax attitude towards the action.  Because of their delay P had already spent a lot of effort and expenses on executing the judgment.

34.Taking into account the conducts of parties but without considering the merits of the Defence, I opine that unconditional leave to defend shall not be granted in the circumstances.

35.As can be seen from the example given by Sears J in Po Kwong under paragraph 12 hereinabove, the degree of delay is a relevant and in my view significant factor for consideration in exercising the court’s residual discretions.  The delay in applying to set aside the default judgment is 3 months for the present case and as I have mentioned above, the delay was inexcusable.  However, a delay of this scale shall not be the “extreme case” as described by Keith J in Guangdong.  I am of the view that the improper conducts of D2 and D3 are not grave enough to allow this court to refuse to set aside the default judgment irregularly obtained.

36.On the other hand, this is certainly a case where the court ought to impose conditions in setting the default judgment aside.  Considering the fact that D2 and D3 are not residing in Hong Kong and the efforts P had made in execution of the judgment, the proper term to impose is for D2 and D3 to pay into court the judgment sum as a condition for leave to defend.

Merits

37.At the hearing, Mr. Wong had narrowed down the proposed defence of D1 to the followings: -

(a) Ownership of the Equipment had not been passed to D1 from YCT and hence the Lease Agreement was ineffective;

(b) P had been unjustly enriched in that the Equipment was already in P’s possession and being used by P and the value of the Equipment can be set off; and

(c) The Lease Agreement cannot be validly assigned without the debtor being first notified of the assignment and D1 had not been notified.

38.It is for D1 to satisfy the court that it has a meritorious defence that has a real prospect of success and that the evidence it adduced is potentially credible and carries some degree of conviction.  Hong Kong Civil Procedure 2006, 13/9/14.

39.D1 alleged that there was an agreement between D1 and YCT that title of the Equipment shall not pass before the price of it being paid in full.  Initially, it was stated in the draft Defence and Counterclaim exhibited under the first affirmation of D3 that there was an implied term in the purchase agreement that YCT shall retain title of the Equipment until the full purchase price is paid.  However, under the lengthy Third Affirmation of D3 filed at the last minute, it was alleged that there was an express term to that effect.  No particulars of the said agreement had been given, not even the time, place and mode of the creation were mentioned.  There was no explanation provided for regarding the change of version.

40.I find this allegation incredible.  Should there be such an express agreement between D1 and YCT, it would have been included into the draft Defence and Counterclaim prepared by D1’s then solicitors.  It is also inconsistent to the fact that D2 and D3 agreed to D1’s entering into the Lease Agreement and be personal guarantees to it.  D2 and D3 were experienced commercial men, I find it unbelievable that they were being so ignorant as to the nature of the Lease Agreement and the guarantee.

41.I see no reason why the title of the Equipment should not pass together with possession.

42.As regard D1’s defence under paragraph 37(b) hereinabove, there is simply no evidence before the court to suggest that P had exercised repossession on the Equipment or even being in possession of it.  Mr. Wong can only refer me to the bare allegation by D1’s then solicitors that he was told by D2 and D3 that the Equipment was possessed and used by P.  There was no mention in the Defendants’ affirmations as to what enquiries had been done and how it came to their knowledge that it was so. 

43.P denied having possession of the Equipment. P explained that they chose not to repossess the Equipment because under the PRC law, they have to repay the tax allowance given when importing the Equipment if they were to repossess it from D1.    Although I was not satisfied that this represented the PRC law as there was no expert evidence before me, there was simply no evidence from the other side to suggest that P had obtained any benefit of the Equipment.

44.I simply cannot see any prospect of success in this defence.

45.Mr. Wong relied on Section 9 of the Law Amendment and Reform (Consolidation) Ordinance, Cap.23 (“LARCO”) to suggest that an express notice in writing shall be given to the debtor to make an assignment of debt valid in law.  Section 9 of LARCO reads: - 

“Any absolute assignment, by writing under the hand of the assignor (not purporting to be by way of charge only), of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this section, section 11 of this Ordinance and sections 25 and 49 of the Conveyancing and Property Ordinance (Cap 219) had not been enacted) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor:

Provided that if the debtor, trustee or other person liable in respect of such debt or chose in action has had notice that such assignment is disputed by the assignor or any one claiming under him or of any other opposing or conflicting claims to such debt or chose in action, he shall be entitled to call upon the several person making claim thereto to interplead concerning the same, or he may pay the same into the court under and in conformity with the provisions of any Ordinance relating to trustees.”

46.As I had indicated at the hearing, the section only deemed an assignment of debt to be a valid one if written notice has been given to the debtor, it does not go so far as to make written notice a pre-requisite for a valid assignment.

47.Even if written notice is a pre-requisite under LARCO, sufficient written notices had clearly been given by DSB and also P’s solicitors to D1 as exhibited under the First Affirmation of Leung Oi Yin Scarlette for P.

Conclusion

48.In view of the above, I find that D1 failed to show a defence with any prospect of success and therefore, I decline to set aside the default judgment obtained by P against D1.

49.On the other hand, the default judgment against D2 and D3 be set aside and leave to defend be granted to D2 and D3 on condition that D2 and D3 do pay into court the sum of HK$534,655.28 within 14 days from the date of this decision. 

50.Although D2 and D3 succeeded in setting aside the judgment against them, I am of the view that the proper costs order should be costs in the cause in view of their improper conducts I have referred to.  For costs in relation to D1, I see no reason that costs should not follow the event.

51.I make a cost order nisi that costs of this application in relation to D1 be to P to be taxed if not agreed and costs of this application in relation to D2 and D3 be costs in the cause, with certificate for counsel.  This order nisi will become absolute after 14 days.

Mr. Y. H. Lee instructed by Messrs W. K. To & Co. for the Plaintiff.

Mr. William Wong instructed by Messrs. Sit, Fung, Kwong & Shum for Defendant.