Li Ngan Kwan v. Gao Li Hui and Another

HCA 276/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 276 OF 2007

______________________

BETWEEN

______________________

Before : Hon A Cheung J in Chambers

Date of Hearing : 9 August 2007

Date of Judgment : 22 August 2007

______________________

J U D G M E N T

______________________

Background

1.I have no less than 5 summonses before me.  But apart from the last summons taken out by the plaintiff only 3 days before the hearing for various interlocutory relief, the hearing of which I have adjourned, the central application before the Court is for the setting aside of a default judgment entered against the 2^nd defendant on 22 March 2007.

2.In relation to that application, although the 2^nd defendant is formally represented by a firm of solicitors (Yip & Partners), essentially the application to set aside the default judgment has been made by the 1^st defendant and run by Mr Denis Chang SC, Mr Andrew Mak with him, counsel for the 1^st defendant, at the hearing, the plaintiff having accepted that the 1^st defendant has the necessary standing to make the application.

3.Very briefly, at the centre of the dispute between the parties is a hotel in Shenzhen.  It is owned by a Mainland company known as Grandview Hotel (Shenzhen) Company Limited.  Grandview is in turn owned by a Hong Kong company which may simply be referred to as BHP.  BHP is in turn owned by two BVI companies, which one may conveniently refer to as BHIP and BHI (HK).  The shares in the two BVI companies are owned by a third BVI company, namely the 2^nd defendant.

4.Prior to the purported execution of the documents under dispute, the plaintiff was the sole shareholder and director of the 2^nd defendant.  Indeed it is common ground that through the chain of BVI, Hong Kong and Mainland companies, the plaintiff owned, controlled and managed the hotel in Shenzhen.

5.The subject documents are corporate documents purportedly signed by the plaintiff.  The net effect of the documents was the transfer of the plaintiff’s only share in the 2^nd defendant to the 1^st defendant, the allotment of further 9 shares in the 2^nd defendant in favour of the 1^st defendant and the resignation of the plaintiff as the sole director of the 2^nd defendant (in his place the 1^st defendant and another person were appointed as directors).  The documents were dated 16 February 2004, but according to the 1^st defendant, in fact they were signed by the plaintiff on 13 February 2004 at the office of a firm of solicitors before a partner of the firm, Mr Loong.

6.It is the plaintiff’s case that he has never signed the subject documents.  The documents are false documents.  He has obtained an expert report which suggests that the purported signatures on the documents are forged ones.  The plaintiff makes serious allegations of fraud, misappropriation of assets belonging to the hotel and other wrongdoing against the 1^st defendant, who he maintains was only a member of the senior management at the hotel.  The plaintiff also makes serious allegations of fraud and collusion (in conjunction with the 1^st defendant) against Mr Loong, the solicitor, who has made an affirmation to set out how the subject documents were executed by the plaintiff in his presence, quite contrary to the plaintiff’s case.

7.The 1^st defendant, of course, denies that the documents are false.  Her story, in short, is that the hotel and indeed the businesses of the plaintiff were in deep financial difficulties by the time the subject documents were executed, the plaintiff was in extremely poor health and he was generally in a depressed mood.  He had attempted to commit suicide once and had practically lost all interest in continuing to struggle in his businesses.

8.The 1^st defendant says that she was in fact the “lover” of the plaintiff in whom he trusted.  It was in those circumstances that in early 2004, the plaintiff came up with the idea of gifting 40% of his interest in the 2^nd defendant in favour of her together with making a loan of RMB 30 million to her so as to enable her to carry on with the business of the hotel.  The remaining 60% interest in the 2^nd defendant was to be held by her on trust for him.  However, slightly more than 2 months later, the plaintiff decided to make a gift of, amongst other things, the remaining 60% interest in the 2^nd defendant to her as well, as is evidenced by a letter purportedly signed by the plaintiff to that effect.

9.The 1^st defendant has also obtained her own expert handwriting report which suggests that the subject signatures are genuine ones.

10.All this is denied by the plaintiff.  However, he admits in the voluminous evidence filed in relation to these summonses that he had indeed agreed to gift 40% of the interest in the hotel (not 40% interest in the 2^nd defendant) to the 1^st defendant as an encouragement to her to carry on running the business of the hotel, to whom he had entrusted its management during his absence for recuperation from his illnesses.  He maintains that he had no other relationship with the 1^st defendant whatsoever, who was only an employee, in whose loyalty and management ability he trusted.

Application to set aside default judgment

11.The application to set aside the default judgment is based both on the ground of irregularity as well as merit.

12.The principles governing the setting aside of a default judgment are not in dispute.  They are set out conveniently in Hong Kong Civil Procedure 2007, Vol 1, para 13/9/1 et seq, and need not be repeated here.

13.However, it must be remembered that the statutory power to set aside a default judgment gives the court a wide discretion, and established principles on how that discretion should be exercised are mere guidelines on how the wide discretion should normally be exercised.  It cannot be over emphasized that the ultimate consideration is what is just and fair in the circumstances of a particular case.  See Evans v Bartlam [1937] AC 473, 479-480, 488-489 (regular judgment); Po Kwong Marble Factory Ltd v Wah Yee Decoration Co Ltd [1996] 4 HKC 157, 161B/C-E, 162D-E (irregular judgment).

14.This is a somewhat unusual case in terms of how the default judgment against the 2^nd defendant came to be entered in the first place.  As mentioned, the 2^nd defendant is a BVI company.  It is not registered with the Registrar of companies with a place of business in Hong Kong pursuant to section 333 under Part XI of the Companies Ordinance (Cap 32).  The plaintiff has sought to serve the writ on the 2^nd defendant by relying on section 338 of the Ordinance.  Essentially the plaintiff’s case is that the 2^nd defendant has indeed established a place of business in Hong Kong, although it has not been duly registered with the Registrar under section 333.  That place of business is located at 18^th Floor, 2 Chinachem Plaza, 68 Connaught Road, Central, Hong Kong.  The plaintiff maintains that his service of the writ at that address, being the place of business of the 2^nd defendant in Hong Kong, complied with section 338 of the Ordinance and was good service.  In other words, the default judgment obtained was a regular one.

15.However, the matter is much more complicated than the plaintiff would like the Court believe.  In fact, the address at Chinachem Plaza is the registered place of business of a BVI company, which may be referred to as TCSA.  TCSA is the agent of a BVI company, which is referred to as TTC, which in turn is the registered agent of the 2^nd defendant in BVI.  Thus, it is argued on behalf of the 1^st defendant that there was never any service of the writ at the place of business of the 2^nd defendant in Hong Kong.  In fact, it is her case that the 2^nd defendant has no place of business in Hong Kong.  Service on the 2^nd defendant can only be done by leave obtained under Order 11, rule 1 of the Rules of the High Court (Cap 4).

16.But more importantly, and this makes the present case a very unusual one, there is the fact that by an arrangement (not under challenge), TCSA, on which the writ was served, had standing instructions to forward all documents served on it for the 2^nd defendant to the plaintiff, the 2^nd defendant’s contact person in Hong Kong.

17.What happened in the present case is that pursuant to those standing instructions, after the writ was purportedly served on TCSA at its Chinachem Plaza address, it was forwarded by TCSA back to the plaintiff himself as the contact person for the 2^nd defendant.

18.The plaintiff claims that he was unaware that the standing instructions were still in place when he commenced proceedings.  Put another way, that he should himself have received back the writ meant to be served on the 2^nd defendant was an unintended result.  I am prepared to accept his assertion.

19.Be that as it may, still the undeniable fact is that when he appeared before Burrell J to apply for default judgment against the 2^nd defendant, the writ had in fact already been forwarded by TCSA back to him as the contact person for the 2^nd defendant.  In other words, he knew full well that the management of the 2^nd defendant, namely the 1^st defendant as director (and her fellow director) – at least on record, had not received the writ.

20.But not only that.  The plaintiff had also through his solicitors sought to serve the writ on the 1^st defendant in her own capacity as such by registered post at her last known address in Hong Kong (an address at Argyle Street).  The registered mail had subsequently been returned undelivered.  In other words, by the time the plaintiff appeared before Burrell J, he knew that the purported service of the writ on the 1^st defendant had not been effective – in fact the 1^st defendant was not in Hong Kong at the material time.

21.Realising that the purported service of the writ on the 1^st defendant had not been successful, the plaintiff did not apply for default judgment against her before the judge.  Yet he did not disclose the fact that the writ that he had purportedly served on the 2^nd defendant had in fact ended up with him, under circumstances where the purported service of the writ on the 1^st defendant in her own capacity had also been unsuccessful.  The judge granted the plaintiff his application for default judgment against the 2^nd defendant in ignorance of those circumstances.

22.To cut a long story short, the plaintiff eventually effected service of the writ on the 1^st defendant’s solicitors.  There was delay in acknowledging service on the part of the 1^st defendant, resulting in an application by the plaintiff for default judgment against the 1^st defendant, and a cross application by the 1^st defendant for an extension of time to acknowledge service.  The upshot of all this is that at the hearing before the Court, Mr K M Chong, Ms Emma Wong with him, appearing for the plaintiff, informed the Court that the plaintiff did not oppose the 1^st defendant’s application for time, subject to the payment of costs.

23.What this means is that regardless of the outcome of the application to set aside the default judgment against the 2^nd defendant, the claim by the plaintiff against the 1^st defendant will be defended.  Mr Chong accepted at the hearing that in those circumstances, if at the trial the 1^st defendant should be successful in defending the authenticity of the subject documents, the existence of a default judgment against the 2^nd defendant (assuming it was not set aside) would not take the plaintiff’s case anywhere.  Mr Chong indeed submitted that the default judgment against the 2^nd defendant, which is in the form of a declaratory judgment on the nullity of the subject documents and on the plaintiff’s status as the sole shareholder and director of the 2^nd defendant, is not binding on the 1^st defendant as such.  In those circumstances, the Court enquired of Mr Chong the purpose for resisting the application to set aside the default judgment against the 2^nd defendant – apart from the obvious question as to costs.  Mr Chong told the Court in reply that the subsistence of the default judgment, although stayed under a subsequent order by Burrell J pending the hearing of the application to set it aside, would continue to serve some real purposes on the Mainland.

24.I have already described the circumstances in the present case as highly unusual.  I am of the view that regardless of whether one should label the default judgment in the present case as a regular or irregular one, it should be set aside unconditionally.

Unusual circumstances – writ ending up with the plaintiff

25.First, leaving aside whether the writ can be served at the Chinachem Plaza address pursuant to section 338 of the Companies Ordinance, the peculiar facts in the present case are such that the writ, after “service”, went straight back to the plaintiff.  As I said, I am prepared to proceed on the assumption that this happened through no fault or design on the part of the plaintiff.  But it remains a fact.  Moreover it was a fact well known to the plaintiff when he appeared before Burrell J by lawyers.  If the facts had been that the service of the writ on the 1^st defendant, his main opponent, had been successful, the fact that the writ purportedly served on the 2^nd defendant went straight back to the plaintiff would have little if any significance in the present case, because the 1^st defendant would have had an opportunity to defend the action not only in her own capacity as 1^st defendant but also in the name of the 2^nd defendant of which she was, at least on the record, the sole shareholder and a director.

26.Yet the fact remains that the purported service of the writ on the 1^st defendant by registered post was unsuccessful.  Again this was well known to the plaintiff when he appeared before Burrell J.

27.Unfortunately none of these were disclosed to the judge.  It made the obtaining of the default judgment in such circumstances both unfair and unjust, irrespective of whether strictly or technically speaking, the judgment was a “regular” one in the conventional sense of the word or not.  It matters not.  The company and its management on record, to the knowledge of the plaintiff, simply had no opportunity to defend the action.

28.Given the wide discretion of the court under the rules to set aside a default judgment, I think this first matter is sufficient by itself as a ground to set aside the judgment against the 2^nd defendant.

The 1^st defendant will be defending the claim in any event

29.Secondly, I have already explained that given the plaintiff’s stance relating to the 1^st defendant’s application for an extension of time to acknowledge service, and the fact that the claim by the plaintiff against the 1^st defendant will be defended, there is really no point in keeping the default judgment against the 2^nd defendant in place.  Mr Chong has accepted that the judgment will not provide any obstacle to the 1^st defendant’s defence of the plaintiff’s claim or of the disputed documents.  The declarations made in the default judgment do not bind her.  In fact, if the 1^st defendant should be successful at trial, the continued existence of the default judgment against the 2^nd defendant regarding the documents or the plaintiff’s status in the 2^nd defendant would be extremely odd.  The 2^nd defendant would be put in a most embarrassing if not difficult position by the court’s inconsistent judgments.

30.On the other hand, setting aside the default judgment against the 2^nd defendant now would not add to any opposition that the plaintiff would face in this action, nor would it prevent the plaintiff from eventually obtaining judgment not only against the 1^st defendant but also against the 2^nd defendant (again) at trial on the merit.

31.Mr Chong has mentioned that the subsistence of the default judgment in the meantime would serve some usual purposes on the Mainland.  I totally fail to see his point.  The judgment has already been stayed by a subsequent order made by Burrell J.  For all practical intents and purposes, the judgment should be regarded as not having been entered, pending the resolution of the application to set it aside.  It should not be made use of for any purposes at all, whether in Hong Kong or on the Mainland.  I do not accept Mr Chong’s point.

32.For this reason also, and it is a very practical one, the default judgment should be set aside.

Bad service and irregular judgment

33.Thirdly, regarding whether service on the Chinachem Plaza address was technically good as being service on the 2^nd defendant’s place of business in Hong Kong, Mr Chong submits that the 2^nd defendant has indeed managed the Shenzhen hotel from Hong Kong, and in this context, “business” can mean any kinds of activity.  Mr Chong submits that maintaining a place for receipt of documents in Hong Kong as well as an office in Hong Kong for the 2^nd defendant’s management activities do constitute “business” within the meaning of the phrase.

34.I have two difficulties with the submission.  First, the alleged management activities only took place at an office situated at Convention Plaza, rather than the Chinachem Plaza address.  The writ was served at the Chinachem Plaza address, which was not the place where the 2^nd defendant allegedly carried out its management activities.  The fact that arrangement had been made for any documents served at the Chinachem Plaza address to be forwarded to the plaintiff at the office at Convention Plaza (as the 2^nd defendant’s contact person) did not turn the Chinachem Plaza address into a place of business of the 2^nd defendant.  Nor did that fact mean that service at the Chinachem Plaza address was equivalent to service at the Convention Plaza office.

35.My second difficulty is with the assertion that the 2^nd defendant carried on management activities in Hong Kong.  My reading of the evidence is that the 2^nd defendant is a mere holding/parent company.  The Shenzhen hotel, the only substantive asset of this BVI company, was managed in Shenzhen by Grandview and in Hong Kong by BHP (which arrangement predated all the BVI companies).  To assert, as the plaintiff has done in the evidence filed, that it was the 2^nd defendant who was managing the hotel in Shenzhen through the various companies down the chain is not helpful in this regard.  In reality, on my reading of the evidence, it was either the Hong Kong company (BHP) or the Mainland company (Grandview) which managed the hotel business in Shenzhen.  The BVI companies were merely holding companies, doing no real business either in BVI or in Hong Kong.

36.For the sake of completeness, I should also say expressly that I reject Mr Chong’s alternative argument that service in the present case may be said to be regular because the writ has been sent to the contact person designated by the solicitors acting for the 2^nd defendant to be the person to receive documents on behalf of the 2^nd defendant (paragraph 17 of Mr Chong’s written submission).  Mr Chong has cited no authority in support of his submission.  He has simply resorted to the “spirit and intent of the rules on service” to found his submission.  I do not accept the argument, particularly in the context of the present case where the contact person happens to be the plaintiff, the person who has purported to serve the writ in the first place.

37.Mr Chong’s second alternative argument is based on Order 65, rule 3, dealing with service on the chairman, president, clerk, secretary, treasurer or other similar officer of a body corporate where “provision is not otherwise made by any written law” for service of documents on a body corporate.

38.I do not accept Mr Chong’s argument, for provisions have indeed been made for the service of documents on foreign companies under Part XI of the Companies Ordinance, particularly section 338, insofar as it is said that the 2^nd defendant has or has had a place of business in Hong Kong.  Insofar as it is suggested that that is not the case, the case falls within Order 11, rule 1 governing service of a writ out of the jurisdiction.  Order 65, rule 3 is not engaged.

39.In those circumstances, insofar as it may be necessary to classify the default judgment obtained in the present case, it must be regarded as an irregular judgment.

Merit

40.Fourthly, turning to the merit of the proposed defence, it is noted that even Mr Chong accepts that there are serious issues to be tried at trial.  It is fair to say that the focus of his submission in this regard is more on pointing out the unsatisfactory aspects of the 1^st defendant’s case generally, with a view to persuading the Court to impose conditions on setting aside the default judgment (infra).

41.It must be remembered that the Court is not here to decide the disputes, and there are many of them, mostly if not all factual in nature, on affirmation evidence.  It is true that in the case of a regular judgment, the general rule is that a defendant has to show a defence with a realistic prospect of success, yet it does not give the court a licence to try the case on paper.

42.I should say expressly that I have taken on board all the points made by Mr Chong in his oral as well as written submissions regarding the 1^st defendant’s case.

43.However, several matters need to be emphasized.  First and foremost, it is the plaintiff’s case that the subject documents are false documents and the signatures are forged.  Moreover, there are allegations of fraud in relation to many surrounding matters and disputes.  They are very serious allegations, on which the plaintiff bears squarely the burden of proof.  Although the standard of proof remains civil, it must be applied with particular regard to the inherent probabilities or improbabilities of the factual issues in question: see Re H [1996] AC 563, 586C-587G/H (per Lord Nicholls), followed in Hong Kong in HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336, 361-362, paras 70 and 71 (per Sir Anthony Mason NPJ).  As has been pointed out by Lord Scott in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387, 559E-561C, where allegations of forgery and conspiracy of a serious nature are made, the court demands a standard of proof commensurate with the seriousness of the allegations and evidence of a very high standard of cogency may be necessary to justify a finding of forgery or conspiracy.

44.In this regard, although after examination of the original documents, the plaintiff’s expert has come up with a handwriting report denying positively the authenticity of the signatures in question, it must be remembered that on the other hand, the 1^st defendant has also exhibited a handwriting report prepared by an expert who has also examined the original documents, which is to the effect that the signatures are genuine.

45.Needless to say, at this stage, it is impossible to tell how the case would go.

46.Moreover, it must also be remembered that the alleged execution of the documents as per the 1^st defendant’s story is indeed corroborated by the evidence of the solicitor involved (Mr Loong).  He has made an affirmation on the matter.  It is therefore noteworthy that it is part of the plaintiff’s case that Mr Loong acted in collusion with the 1^st defendant.  Again this is a very serious allegation against a professional person.  It is a serious matter that can only be resolved at trial.  But from the perspective of determining whether there is a defence with a real prospect of success, one simply cannot ignore the evidence of the solicitor.

47.Thirdly, there is the undisputed fact that even on the plaintiff’s own case, he has agreed to give, by way of gift, 40% of the hotel interest to a mere employee, when according to him the hotel business was running healthily at a profit at the time, and with a very substantial net capital worth.  As Mr Chang has attractively put it during submission, one does not normally make a gift of 40% of a hotel to a mere employee.  On the other hand, the 1^st defendant has been maintaining that she was the lover of the plaintiff (a married person).  The relationship between the plaintiff and the 1^st defendant is certainly a material matter to look into in order to decide the inherent probabilities or improbabilities of the plaintiff gifting his entire interest in the 2^nd defendant to her.  I do not see how that can be done without a trial.  Put another way, I do not see how one can brush aside the 1^st defendant’s case at this stage.

48.I have, as mentioned, considered the submissions made by the parties on the facts.  Bearing in mind the normal test to apply in the case of an application to set aside a regular judgment, if I had been of the view that the judgment in the present case should be labelled as a regular one, I would still have come to the conclusion that it should be set aside on the merit.

Conditions

49.Fifthly, a related matter is the imposition of conditions.  The discretion of the court to impose conditions is not disputed.  Mr Chong has indeed in his submission submitted that the Court should impose conditions – even though he has not spelt out clearly what those conditions should be.  This part of his submission seems to be linked to his client’s latest application for the appointment of receivers/managers and interlocutory injunction.

50.Leaving that late application aside, I see no ground for imposing conditions.  I do not accept Mr Chong’s submission.

Outcome of application to set aside default judgment

51.In the circumstances, I have come to the clear conclusion that the default judgment entered against the 2^nd defendant should be set aside unconditionally as a matter of discretion.  I so order.

Extension of time to acknowledge service

52.Turning to the position of the 1^st defendant, as described, the plaintiff does not really contest the 1^st defendant’s application for an extension of time to acknowledge service.  I see no reason why that application should be refused.  I make an order in terms of the 1^st defendant’s relevant summons filed on 17 April 2007.  Save as to the question of costs, I make no order regarding the plaintiff’s summons for default judgment filed on 16 April 2007.

The plaintiff’s latest application for interlocutory relief

53.As regards the plaintiff’s application by summons filed on 6 August 2007, as described, I have already adjourned the hearing to an early date to be fixed, with directions for the filing of evidence. 

54.At the hearing, I refused Mr Chong’s oral application for interim relief pending the hearing of that summons.  I did so principally on the ground of unexplained delay.  The application was obviously a late one, given that the disputes between the plaintiff and the 1^st defendant, particularly those relating to the alleged taking away of the company seal of the 2^nd defendant by the 1^st defendant, had happened for some time.  The present action was indeed commenced on 7 February 2007.  Yet the application for interlocutory relief was only taken out 3 days before the scheduled hearing before this Court.  Although Mr Chong was able to point to some exhibits in the supporting affirmation of the plaintiff to say that the relevant evidence (a report) was only supplied to the plaintiff several days before, yet in view of the strong protest made by the 1^st defendant about the plaintiff’s delay in making the application, I was in agreement with Mr Chang that it was incumbent upon the plaintiff to fully explain the delay in his evidence.  That was not done.  I have not been able to accept counsel’s explanation offered from the bar table as being satisfactory.

55.Moreover, both sides have agreed to continue the mutual undertakings that they have given to the court at the hearing before Burrell J on 19 April 2007 not to sell or procure to sell either directly or indirectly the assets of the hotel pending the hearing of the application to set aside the default judgment, until the resolution of the latest application by the plaintiff for interlocutory relief or further order.  I have considered that as affording protection to the parties’ respective positions.

56.Thirdly, I also bore in mind that one of my directions was for the fixing of an early date for hearing the summons.  Hopefully, the plaintiff’s application can be dealt with within a reasonable period of time.

57.Further, the interim relief sought by Mr Chong pending the hearing of his summons was essentially in terms of paragraphs 1-4 of the summons.  They were all one-sided matters that, in my view, were quite unfair to order against the 1^st defendant before the hearing of the plaintiff’s summons, particularly in the absence of reciprocal relief granted against the plaintiff’s side in the meantime.

58.Having balanced all relevant considerations and considered the matter in the round, I had come to the conclusion that no interim relief pending the hearing of the summons was warranted.  The oral application of Mr Chong was therefore refused.

Costs

59.As regards costs, I will make the following costs orders nisi. 

60.So far as the initial application for default judgment and the subsequent application to set it aside are concerned, which are covered by 3 summonses respectively – the plaintiff’s summons filed on 8 March 2007 and the 2 summonses filed by the defendants on 28 March 2007 and 18 April 2007, I order that costs be paid by the plaintiff to the defendants, to be taxed if not agreed, in any event.

61.As regards the 1^st defendant’s application for time and the plaintiff’s application for default judgment, I order that costs be paid by the 1^st defendant to the plaintiff, to be taxed if not agreed, in any event.

62.I have already reserved the costs of the plaintiff’s application by summons filed on 6 August 2007.  I need make no further order here.

63.I thank counsel for their assistance.

Mr K M Chong & Ms Emma Wong, instructed by Messrs Shea & Co, for the plaintiff

Mr Denis Chang SC & Mr Andrew Mak, instructed by Messrs Chan & Associates, for the 1^st defendant

Mr Yip Wai Chuen of Messrs Yip & Partners, for the 2^nd defendant