Right Margin Ltd v. Tian Liang Ltd and Others

HCA 265/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 265 OF 2013

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DECISION
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INTRODUCTION

Introduction

1.There are two summonses taken out by the 2^nd and 3^rd Defendants.  By their first summons dated 24 July 2014 as amended by their summons dated 16 January 2015, the 2^nd and 3^rd Defendants apply to set aside the default judgments, which the Plaintiff obtained against them pursuant to Order 13 rule 9 of the Rules of the High Court on 9 and 15 April 2013 respectively (the “set aside summons”). By their second summons dated 16 January 2015, the 2^nd and 3^rd Defendants made a similar application, as interveners, to set aside the default judgment obtained against the 1^st and 2^nd Defendants on 9 April 2013 (the “interveners summons”).

2.As the interveners summons has not been served on the 1^st Defendant, Mr Hung, counsel for the 2^nd and 3^rd Defendants and for the interveners, applies to have the application to set aside the default judgment against the 1^st Defendant adjourned.

The legal principles applicable to setting aside a default judgment

3.Order 13 rule 9 gives the court wide discretion in setting aside a judgment in default of notice to defend.  However, that discretion, like any other judicial discretion, must be exercised according to legal principles.  In general, if a default judgment was obtained regularly, it may only be set aside if the defendant is able to show a defence on the merits to which the court should pay heed, not as a rule of law, but as a matter of common sense.  In addition, the defendant has to explain the time taken where there was a delay in making the application to set aside the judgment.  In setting aside the judgment, the court has wide discretion to impose terms such as requiring the defendant to pay the plaintiff’s costs, to give security for costs or to make payment into court where the defence is considered shadowy: see Hong Kong Civil Procedure 2014[1]. If the default judgment was obtained irregularly, the defendant is entitled to have it set aside unconditionally, save the court has residual discretion to impose terms depending on the conduct of the parties which caused the irregularity: see Po Kwong Marble Factory Ltd v Wah Yee Decoration Co Ltd[2].  A recent principle developed by the English Court of Appeal is that despite that the default judgment was obtained irregularly, it will not be set aside if the defendant has no defence: see: Faircharm Investments Ltd v Citibank International Plc[3].  This principle has yet to be considered by the Hong Kong Court of Appeal.

The issues

4.The issues raised by the application to set aside the default judgments are:

(1) whether the default judgments are regular;

(2) whether the 2^nd and 3^rd Defendants have a reasonable explanation for the delay in making the application to set aside the default judgments; and

(3) whether they are able to show a meritorious defence. 

The background

5.The Plaintiff is a company incorporated in Hong Kong and a member of the Chinachem Group of companies, of which Dr Kung Yan Sum is the chairman.

6.The 1^st Defendant is a company incorporated in the British Virgin Islands (“BVI”).  It was held by the 3^rd Defendant until 15 April 2013 when the Plaintiff caused its shares issued to the 3^rd Defendant to be transferred to the Plaintiff and had the 3^rd Defendant replaced by its own personnel as director of the 1^st Defendant.  The arrangement was made pursuant to a share mortgage entered into between the Plaintiff and the 3^rd Defendant (see paragraph 9 below).  Since then, the 1^st Defendant has been under the control of the Plaintiff.

7.The 2^nd Defendant is a foreign-owned limited liability company incorporated in the People’s Republic of China (the “PRC”).  It was the developer of a residential and commercial development known as “International Plaza” in Xiamen City.  It is owned by the 1^st Defendant.

8.The 3^rd Defendant was, until 15 April 2013, the owner of all the issued shares of the 1^st Defendant.

9.On 16 January 2009, the Plaintiff, 1^st and 2^nd Defendants entered into an exclusive sales agency agreement in relation to the sale of 34 units in International Plaza (the “Agency Agreement”).  It was agreed, inter alia, that:

(1) under clause 2, the Plaintiff would be appointed as the exclusive sales agent of the units;

(2) under clause 5.1, the agency would be for a period of 24 months from 1 April 2009 to 31 March 2011 (the “agency period”);

(3) under clause 4.1, the benchmark selling price of the units would be RMB18,000 per square metre (the “unit benchmark price”) and the Plaintiff would be entitled to keep the portion of the proceeds of sale of the units sold in excess of the bench mark price (the “excess proceeds”);

(4) under clause 4.2, in consideration of the 2^nd Defendant granting the exclusive sales agency right to the Plaintiff, the Plaintiff would pay the 1^st or 2^nd Defendant or their designated entity a sum of RMB120,330,603, which is agreed to be HK$134,770,275.36 (the “said sum”);

(5) under clause 4.3, the 1^st and 2^nd Defendants irrevocably and unconditionally agree to repay the Plaintiff “the amount paid to them under clause 4.2” upon expiry of the agency period;

(6) under clause 15, the Agency Agreement would governed by the laws of Hong Kong and the parties agreed to submit to the exclusive jurisdiction of the Hong Kong courts; and

(7) under clauses 12.8 and 14.1, the 3^rd Defendant was irrevocably appointed as process agent for the 1^st and 2^nd Defendants to accept any service of writ or legal proceedings at a designated address in Nan Fung Tower in Hong Kong.   

These are the terms of the Agency Agreement relevant to the present dispute.

10.The following securities were provided by the Defendants to the Plaintiff:

(1) a share mortgage dated 16 January 2009, executed by the 3^rd  Defendant in favour of the Plaintiff with respect to all the issued shares in the 1^st Defendant;

(2) an equity pledge agreement dated 16 January 2009, made between the Plaintiff and the 1^st Defendant in respect of 100% of the equity interest owned by the 1^st Defendant in the 2^nd  Defendant;

(3) a personal guarantee dated 19 January 2009 pursuant to which the 3^rd Defendant personally indemnified the Plaintiff with respect to any loss and damage incurred and caused by breaches of the Agency Agreement committed by the 1^st and/or 2^nd Defendants (the “guarantee”).

The 3^rd Defendant accepts the validity of the Agency Agreement and the above security documents.

11.On 19 January 2009, the Plaintiff paid the said sum in the amount of HK$134,770,275.36 to King Base Engineering Limited (“King Base”) in Hong Kong, pursuant to the Agency Agreement and in accordance with the direction of the 1^st Defendant.

12.The agency period expired on 31 March 2011, without the Defendants repaying the Plaintiff the said sum.  The parties negotiated for extension of the Agency Agreement, but the negotiation fell through.  By a letter of demand dated 6 December 2012 addressed to the 1^st, 2^nd and 3^rd Defendants, the Plaintiff’s solicitors, Norton Rose Fulbright Hong Kong (“NRF”), demanded payment of (1) a sum of RMB116,260,953, being repayment of the said sum of RMB120,330,603 after deducting a payment of HK$5,000,000, converted into Renminbi, made by King Base on 23 May 2012; and (2) a sum of RMB23,961,033 being excess proceeds payable to the Plaintiff under clause 4.1.  NRF demanded the total sum of RMB140,221,986 (ie RMB116,260,953 + RMB23,961,033) be paid by 20 December 2013, failing which legal action would be taken against the 1^st and 2^nd Defendants pursuant to the Agreement and/or against the 3^rd Defendant pursuant to the guarantee.

13.No payment was made.  On 7 February 2013, the Plaintiff commenced legal proceedings against the Defendants claiming the total sum of RMB140,221,986.  Sealed copies of the writ were duly served on the Defendants in accordance with the Agency Agreement and the guarantee.  There is no dispute that the 2^nd and 3^rd Defendants received those documents.  The 3^rd Defendant said he did not have notice of them until October 2013.  No acknowledgement of service or notice of intention to defend having been filed, the Plaintiff obtained judgment by default against the 1^st and 2^nd Defendants on 9 April 2013 and against the 3^rd Defendant on 15 April 2013.

14.In May 2013, the Plaintiff exercised its rights under the share mortgage and became the 100% owner of the shares in the 1^st Defendant and assumed full control over the 1^st Defendant.

15.In early 2014, the Plaintiff took steps to enforce the default judgments in Xiamen.  On 19 March 2013, the 3^rd Defendant’s assets in Xiamen were frozen by the PRC court.

16.On 24 July 2014, Messrs B C Chow & Co (“BCC”) issued an inter-parte summons to set aside the default judgments on behalf of the 1^st, 2^nd and 3^rd Defendants.  In a series of correspondence NRF advised BCC that it had no authority to take out the application on behalf of the 1^st Defendant as it had been transferred to the Plaintiff and the 3^rd Defendant had ceased to be its director.  On 16 January 2015, BCC took out a summons to amend the set aside summons by limiting it to the default judgments against the 2^nd and 3^rd Defendants only and took out a separate application by the 2^nd and 3^rd Defendants to apply for setting aside the default judgment against the 1^st and 2^nd Defendants as interveners.

17.A procedural issue raised by Mr Fung SC, counsel for the Plaintiff, is the locus standi of the 2^nd and 3^rd Defendants in intervening on behalf of the 1^st Defendant, which is not before the court.  Though the 1^st Defendant is now under the control of the Plaintiff, the solicitors acting for the Plaintiff has declined to accept service on behalf of the 1^st Defendant.  The summonses have yet to be served on the 1^st Defendant in BVI.  The application to set aside the default judgments as against the 1^st and 2^nd Defendants stand on the same footing, whereas that as against the 3^rd Defendant stands on a different footing.  Under the circumstances, it would be convenient to deal with the application as against the 2^nd Defendant first, which is the least complicated, then the locus standi issue and the application as against the 1^st Defendant and finally the application as against the 3^rd Defendant.  

APPLICATION TO SET ASIDE AS AGAINST THE 2^ND DEFENDANT

Explanation for delay

18.The default judgments were obtained in April 2013.  The 1^st, 2^nd and 3^rd Defendants, through their solicitors, discovered the default judgments in December 2013.  But it was not until 24 July 2014, a lapse of 15 months, that they applied to have the default judgments set aside.  Again, they took a further six months to amend the application and to take out the interveners summons.  The court would require an explanation for the long delay before entertaining the application.

19.In essence, the explanation of the 3^rd Defendant is that he had no notice of the default judgment until March 2014.  The Plaintiff did not demand payment of the judgment debt.  Instead, senior management of the Chinachem Group was engaging regular meetings with him to discuss another project.  He said that was done by the Plaintiff as part of its stalling tactics to take advantage of the reciprocal enforcement of judgment arrangement between Hong Kong and the PRC to freeze his assets in Xiamen.  Eventually, when negotiations broke down, he took out the application to set aside the default judgments on 24 July 2014.

20.The 3^rd Defendant said that although he is a Hong Kong citizen, he was resident in China most of the time for business purpose.  He stayed in Hong Kong only for six to seven days in a month, particularly during February to April 2013.  And while he was in Hong Kong, he may not go to his office.  His secretary would just leave the mails addressed to him at the office, impliedly without opening or attending to them at all.  His secretary received three large envelopes addressed to the Defendants, presumably in February or March 2013 when the proceedings commenced.  She did not know what was inside and treated them as ordinary mails.  She kept the envelopes intact and put them aside.  Such an account does not strike me as credible.  Would a businessman engaging in a business of that magnitude, maintaining an office in Hong Kong not attend to his Hong Kong office on the few occasions he came to Hong Kong?  Given such modus operandi, would a businessman engage a secretary just to put mails aside waiting for his occasional return?  Would he not have instructed the secretary to open mails, do some filing and alert him of any particular business which needed his attention or immediate attention?  If he would not, would he have found it necessary to engage a secretary or maintain an office in Hong Kong at all? Would he not have engaged an office attendant or a watchman instead?  Such an explanation is hardly credible.

21.On his account, after seven months, he came to notice the three large envelopes in October 2013.  Those envelopes are large and conspicuous.  Why would he not have noticed them earlier?

22.The 3^rd Defendant said he was educated in China and did not read English.  He realized that the documents were legal documents and instructed his secretary to pass them to BCC for further handling.  Yet, it still took him two more months until December 2013 to instruct BCC to act for him and to search the court files.  Once in the hands of BCC, his solicitors must have informed him what those documents were and the need for immediate attention as the writs had been issued on 7 February 2013.  Then, after knowing about the default judgments, it still took him another seven months before issuing the summonses.

23.He said he was regularly meeting senior management of the Chinachem Group in Xiamen discussing a project in Shanghai and had no idea why another member of the group was suing him.  He was also seeking assistance from the senior management of the Chinachem Group to recover a sum of $50,000,000 paid to Madam Song which was used by its Chairman, Dr Kung Yan Sum, to fund the litigation between Chinachem Charity Foundation and Chan Chun Chung.  He said in paragraph 7 of his second affirmation that until March 2014 he had no idea that default judgments had already been entered.  Later, in paragraph 47 of the same affirmation, he said after learning about the default judgments, he tried to liaise with representatives of Chinachem Group in February 2014 and invited them to come to Xiamen for discussion but they declined.  On 31 March 2014, he learned that his assets in Xiamen were frozen. He suggested that the Plaintiff was stalling for time to proceed surreptitiously to enforce the default judgments by the PRC court in Xiamen. 

24.The Plaintiff denied.  The 3^rd Defendant’s assertion that he only knew about the default judgment in March 2014 is obviously false.  Paragraph 47 of his second affirmation betrayed him.  According to that paragraph, he was liaising with representatives of Chinachem Group in February 2014 about the default judgment.  His assertion that he had no knowledge of the default judgment until March 2014 could not be true.  More importantly, he forgot he had said in his first affirmation that he instructed his secretary to refer the matter to BCC in October 2013 and that he instructed BCC to act for him in December 2013.  His assertion is further contradicted by his counsel’s chronology that he instructed BCC to search the court’s file in December 2013 which must have revealed the default judgment.  Thus, he must have known about the default judgment in December 2013.  That is incontrovertible.

25.As for the 3^rd Defendant’s assertion that the Plaintiff was stalling for time to take enforcement action against him in Xiamen, it is irrelevant.  The issue is whether he has a valid explanation for the delay since December 2013.  Even if that was the Plaintiff’s intention, it is not the Defendants’ case that the 3^rd Defendant and the Plaintiff had resolved their dispute or had discussion leading him to the belief that the Plaintiff will not enforce the judgments.  Yet, when every hope of negotiation broke down and he issued a writ against Dr Kung Yan Sum in HCA 832/2014 on 14 May 2014, it still took him another two months before filing the summonses seeking to have the default judgments set aside.  Without having to make any finding if the explanation offered is credible, what the 3^rd Defendant proffered for himself and on behalf of the 2^nd Defendant failed to explain, at least, the seven months’ delay between December 2013 and July 2014 in making the applications.

Whether the default judgment is regular or irregular

26.The 2^nd and 3^rd Defendants’ only contention that the default judgments are irregular is that the judgment sum of RMB140,221,986 entered is grossly excessive.  It is not their contention that no sum was due and payable.  Indeed, they admit that they are liable to the Plaintiff for HK$129,770,275.36 as the amount to be repaid upon expiry of the agency period and for RMB10,547,503.16 as net excess proceeds payable under the Agency Agreement.  In that connection, they raised five defences, which I shall deal with later.  For the purpose of this subsection, it suffices to say that the 2^nd and 3^rd Defendants’ only ground is that the judgment was entered for a grossly excessive amount.  Besides that, they have no other grounds and they admit liability for a lesser amount.

27.For the purpose of setting aside a default judgment, there is a distinction between a regular judgment and one which is irregularly obtained.  In the case of an irregular judgment, the defendant is entitled to have it set aside as of right, without having to show he has a meritorious defence.  A judgment irregularly obtained are those in which service of the writ was bad or ineffective, where the judgment has been entered prematurely, and those where judgment has been entered for too much.  However, the cases have shown that for the purpose of setting aside a default judgment, a judgment entered for too much has a technical meaning.  It means one which fails to give credit to undisputed payments made after the issue of the writ.  Where no undisputed payments have been made after the issue of the writ, the dispute as to the amount entered is a matter of defence.  Such a judgment is not irregular. To have it set aside, the defendant has to show he has a real prospect of success: see Hong Kong Civil Procedure 2015 Vol 1, §13/9/14.  These legal principles and the supporting authorities had been fully canvassed by Barma J (as he then was) in Re Mai Xi Hong[4].  He held at paragraphs 17 to 20:

“17. Where default judgment has been entered against a defendant, the defendant can apply to have the default judgment set aside pursuant to RHC Order 13 rule 9.  However, in exercising its power to set aside a default judgment, the courts in Hong Kong have drawn a distinction between a judgment that was obtained irregularly, and one that was obtained regularly. Typical instances of a judgment irregularly obtained are those in which service of the writ was bad or ineffective, where the judgment has been entered prematurely, and those where judgment has been entered for too much.  In such cases, it has traditionally been held that the defendant is entitled to have the judgment set aside as of right, without having to show that he has a defence on the merits to the claim against him.

…

19. As to this, I think it necessary first to look more closely at what is meant by entering judgment for too much, in the context of setting aside a default judgment on the ground of irregularity.  RHC Order 13 rule 1(1) permits a plaintiff to enter judgment “for a sum not exceeding that claimed by the writ in respect of the demand and for costs”.  The commentary to this rule at paragraph 13/1/2 of Hong Kong Civil Procedure 2004, Vol. 1, states that “the amount for which judgment is entered should be carefully limited to the amount actually due at that time, and credit should be given for payments made after action brought”.  All of the authorities cited by Mr Griffiths to show that a judgment entered for too much was irregular, and thus liable to be set aside as of right, were cases in which the judgment was entered for too much having regard to payments which had been made after the issue of the writ.  Thus, in Hughes v Justin [1894] 1 QB 667, a writ having been issued for a liquidated demand, the parties subsequently agreed that the matter should be settled on payment of an agreed sum, which was duly paid, in ignorance of the fact that the writ had been issued.  The defendant did not enter an appearance, and the plaintiff signed judgment for the amount claimed plus costs, but sought to execute the judgment only in respect of costs.  The judgment was set aside as being for too much, as the debt itself had been settled by the payment which was made, leaving only the costs outstanding.  In Bolt & Nut Co. (Tipton) Ltd v Rowlands Nicholls & Co. Ltd [1964] 2 QB 10, a default judgment was held to be irregular when it failed to take account of the amount of a cheque which had been tendered and accepted after the issue of the writ, and which had not yet (but in due course was) cleared.  In Muir v Jenks [1913] 2 KB 412, credit was not given for a payment made after issue of the writ, but before default judgment was entered.  Moreover, in none of the cases was there any question but that the payments had been made, so as to reduce the amount of the plaintiff’s claim against the defendant.

20. In my view, these authorities establish only that a default judgment which is entered for an amount which fails to give credit for undisputed payments made after the issue of the writ is irregular.  It seems to me that by issuing a writ claiming a liquidated sum, a plaintiff will necessarily be asserting that the defendant owes him the amount claimed.  Where there are, after issue of the writ, payments made to the plaintiff in respect of his claim, it is entirely proper that credit should be given for them if default judgment is entered after such payments have been made.  However, where no such payments are made, but the defendant simply contends that the amount claimed is more than is due (or where he asserts that no debt is due at all) that would seem to be a matter of defence, in relation to which (assuming the default judgment to have been otherwise regular) it will be necessary for the defendant to demonstrate some merits, and to persuade the court to exercise its discretion to set aside the default judgment against him.”

(My emphasis added)

28.In the present case, the 2^nd and 3^rd Defendants are not alleging that a sum of money had been paid to the Plaintiff after the issue of the writ and has not been taken into account in entering the judgments.  All they are saying is that the amount entered is more than what was due.  According to Re Mai Xi Hong, this is a matter of defence which does not render the default judgments irregular.  The 2^nd and 3^rd Defendants are not entitled to have the default judgments set aside as of right.  They have to show merits.  With that observation, I turn to examine their defences.

Undisputed part of the default judgments

29.The 2^nd and 3^rd Defendants admit they are liable to repay the said sum in the amount of HK$129,770,275.36 after giving credit to the sum of HK$5,000,000 repaid by King Base, but not the said sum in Renminbi after giving credit to the sum of HK$5,000,000 repaid but converted into Renminbi.  The dispute is whether the said sum is denominated in Renminbi and has to be repaid in Renminbi. 

30.In addition, the 2^nd and 3^rd Defendants raise four other issues to dispute the validity of the default judgments.  These five issues in dispute are:

(1) whether the said sum is denominated in Renminbi and has to be repaid in Renminbi and that the judgment sum entered should be in Reiminbei (“the denomination issue”);

(2) that the Plaintiff has not taken into account the sum of HK$5,000,000 paid by King Base (the “part payment issue”);

(3) that the Plaintiff has not taken into account the incidence of tax to be paid to the Xiamen authority in relation to the sale of the units in International Plaza (the “tax issue”);

(4) the excess proceeds should be RMB22,732,939 and not the amount sought by the Plaintiff (the “excess proceeds issue”); and

(5) the Plaintiff’s liability to pay RMB4,121,792.23 to the 2^nd Defendant for having used the services of its sales team in marketing the units (the “service fee issue”).

The burden is on the 2^nd and 3^rd Defendants to show a real prospect of success in relation to each of these five issues.

The denomination issue

31.This dispute is related to the sum of money to be paid by the Plaintiff under clause 4.2 of the Agency Agreement and to be repaid by the 1^st and 2^nd Defendants under clause 4.3 at the expiration of the agency period.  There is some dispute as to the nature of this payment, whether it was an advance or a deposit.  That dispute is irrelevant. The original Chinese text of clause 4.2 used a neutral term ‘pay’ (「支付」) and clause 4.3. The 3^rd Defendant alleged that because the payment was in Hong Kong currency, any repayment should also be in the same currency and not in Renminbi. 

32.The question raised by this issue is one of construction of contract, ie what was the intention of the parties which a reasonable reader with knowledge of the factual matrix would ascertained from reading the Agency Agreement as a whole: see Investors Compensation Scheme Ltd and West Bromwich Building Society[5] andJumbo King Ltd v Faithful Properties Ltd & Ors[6].

33.Clauses 4.2 and 4.3 provide as follows:

“4.2 Since [1^st and 2^nd Defendants] granted the exclusive sales agency right to [the Plaintiff], [the Plaintiff] is required to pay RMB120,330,603 (agreed to HK$134,770,275.36) to [the 1^st and 2^nd Defendants] or the person or company designed by [the 1^st Defendant] within 3 days since this Agreement has been signed by [the Plaintiff] and the conditions precedent under clause 7.1 to 7.6 of this Agreement has been satisfied.”

4.3 The amount stated in clause 4.2 above paid by [the Plaintiff] to [the 1^st and 2^nd Defendants] shall be returned to [the Plaintiff] under clause 9 when the agency period expired and/or [the Plaintiff] submitted a written notice to [the 1^st and 2^nd Defendants] for the termination of the agency.”

On the face, the Plaintiff’s payment obligation under clause 4.2 was payment of RMB120,330,603, and the 1^st and 2^nd Defendants’ repayment obligation was the same amount in Renminbi. What was the factual matrix?

34.The 3^rd Defendant gave a detailed account in paragraphs 19 to 28 of his second affirmation as to the purpose of the payment, which he said was of the nature of a deposit, and how the amount was determined.  Between October 2008 and January 2009, he was negotiating with Mr Hui, Chief Executive Officer of Chinachem Group regarding the appointment of the Plaintiff as exclusive agent for the sale of 34 units in International Plaza.  It was the usual practice in China for a deposit to be paid for this type of transaction.  The deposit was carefully calculated from data and information in respect of the 34 units ending in an odd figure in Renminbi instead of a round sum.  At the final stage of the negotiation, he and Mr Hui realised that it was not feasible or practicable for Chinachem Group to remit the payment in Renminbi to the 2^nd Defendant in the PRC and later for the 2^nd Defendant to remit the money back to Chinachem Group in Hong Kong.  The 3^rd Defendant said that to overcome that difficulty he and Mr Hui “agreed to set the sum of deposit at HK$134,770,275.36 which according to the exchange rate at the time is equivalent to RMB120,330,603”.  He was of the understanding that the same amount in Hong Kong currency was to be repaid at the expiry of the agency period.

35.From the above factual matrix asserted by the 3^rd Defendant, it is clear that the deposit was related to property in China, it was calculated based on value of property in China and Renminbi was the currency of choice.  The payment to the Defendants’ nominee was to overcome the practical difficulties of remitting Renminbi in and out of China.  With knowledge of all these facts before them, Mr Hui and the 3^rd Defendant chose the language used in clause 4.2 and 4.3.  Had their intention or understanding been that the repayment shall be of the same amount in Hong Kong currency, what could have been simpler than to replace ‘RMB120,330,603’ by ‘HK$134,770,275.36’ in clause 4.2.  Instead, they chose to state the amount in Renminbi with an agreed amount in Hong Kong currency based on the then exchange rate, making Renminbi the currency of choice.  Under clause 4.3, the 1^st and 2^nd Defendants’ repayment obligation was to return the payment stated in clause 4.2, ie RMB120,330,603.  There was no agreement as to whether and how that repayment obligation could be discharged by payment in Hong Kong currency.  Thus, on the face, the 1^st and 2^nd Defendants’ obligation was to repay RMB120,330,603.

36.The 3^rd Defendant’s assertion that he and Mr Hui “agreed to set the sum of deposit at HK$134,770,275.36” is so inconsistent with the language of clause 4.2 that I consider it inherently incredible.  It is more likely than not that the truth is the other way round.  The sum of the deposit was fixed at RMB120,330,603 as stated in clause 4.2 and they agreed that the Plaintiff’s payment obligation may be discharged by payment of the equivalent amount of HK$134,770,275.36 based on the then exchange rate agreed.  Excluding the Plaintiff’s above assertion which is incredible, the factual matrix fully supports the above construction.  On that construction, the amount to be repaid by the 1^st and 2^nd Defendants was that sum in Renminbi.    

37.The 3^rd Defendant also relied on a letter dated 14 April 2011 issued by the Plaintiff’s then solicitors, Messrs Philip KH Wong, Kennedy YH Wong & Co (“PW”), in which they demanded the 1^st and 3^rd Defendants to provide collateral for HK$134,770,275.36 as condition for extending the Agency Agreement for 15 months.  Mr Hung argues that the amount of RMB120,330,603 was nowhere mentioned in the letter and hence this demand supports the 2^nd and 3^rd Defendants’ construction of clause 4.2 that the amount paid and to be repaid was HK$134,770,275.36.  This letter only mildly assists the 2^nd and 3^rd Defendants’ construction.

38.While this is not an occasion for trial on affidavit evidence, the language of clause 4.2 and 4.3 and the factual matrix suggest that the amount agreed to be paid and repaid was RMB120,330,603.  The 2^nd and 3^rd Defendants cannot establish any prospect of success in relation to the denomination issue.

The part payment issue

39.In his first affirmation, the 3^rd Defendant alleged that the Plaintiff has not taken into account a sum of HK$5,000,000 paid by King Base as part payment.  This is factually incorrect.  In the Plaintiff’s demand letter dated 6 December 2012, issued before commencement of the proceedings, NRF mentioned this sum.  It is clear that the Plaintiff has given credit to this part payment in calculating the amount claimed in the writ.  This issue has no prospect of success at all.

The excess proceeds issue

40.The excess proceeds claimed by the Plaintiff are RMB23,961,033.  According to the Plaintiff, this amount was calculated using figures obtained directly from the 3^rd Defendant and verified by the 1^st and 2^nd Defendants.  In his first affirmation, the 3^rd Defendant contended that the amount was only RMB22,315,266.  Now, in his second affirmation, he contends that the correct amount is RMB22,732,939.  Accepting his allegation, he has a partial defence in respect of a small amount of RMB1,228,094.  Mr Fung submits that the 2^nd and 3^rd Defendants’ evidence is inherently inconsistent and they cannot show a real prospect of success in relation to this issue. 

41.The 3^rd Defendant’s explanation is that some buyers cancelled their sale and purchase agreements and the inconsistencies arouse only as a result of updating the sales data.  The amount he quoted in his second affirmation, though lower than the amount claimed by the Plaintiff, is nevertheless higher than the amount he quoted in his first affirmation, suggesting a genuine effort to update the excess proceeds.  I think there is a real prospect of success.  But, the amount is only 0.85% of the total amount awarded in the default judgments.

The tax issue

42.The 3^rd Defendant alleged that the Plaintiff had not taken into account the incidence of the Plaintiff’s tax liability in respect of the excess proceeds.  In relation to this issue, clauses 4.1 and 6.8 are relevant.  These clauses provide:

“4.1 The parties agreed that the selling price of the premises offered by [the Plaintiff] is RMB18,000/m². [The Plaintiff] can sell the premises to third parties higher than the selling price (i.e. RMB18,000/m²). If the selling price by [the Plaintiff] is higher than the aforementioned agent selling price, the excessive portion will be received and owned by [the Plaintiff]”

“6.8 The parties agree to share the tax in relation to the sales of International Plaza. Within the agency price, that is RMB18,000/m² or less, the tax will be responsible and paid by [the 1^st and 2^nd Defendants”]. Above the agency price, the tax will be [the responsibility of] and paid by [the Plaintiff]. The tax settlement will be agreed separately.”

43.The Plaintiff is entitled to keep the excess proceeds of sale in respect of premises sold in excess of the agency price but is liable for the tax thereon.  It does not dispute liability to tax but argues that it is something to be settled separately and not to be set off against the excess proceeds.  Mr Fung argues that clause 4.1 refers to the Plaintiff receiving and owning the excess proceeds, but neither clause 4.1 nor 6.8 makes any reference to the alleged setting off of tax against the excess proceeds.  He further argues that the 2^nd and 3^rd Defendants have adduced no evidence to support any separate agreement between the Plaintiff and the Defendants having been reached in relation to the alleged setting off of tax against excess proceeds.

44.The 2^nd and 3^rd Defendants rely on the letter from PW dated 14 April 2011 offering to have 10% of the excess proceeds withheld by the 1^st and 2^nd Defendants pending demand for payment of tax by the tax authority as evidence of such tax liability having accrued or settled.  I reject that argument.  In that letter the Plaintiff was proposing terms for extending the Agency Agreement.  What was offered was only a provision for tax.  It is clear that at the time of that letter the tax liability had not been determined.  It is amply clear from clause 6.8 that the tax settlement will be agreed separately from payment and receipt of the excess proceeds.  The Agency Agreement is silent as to when the excess proceeds would be paid.  In the absence of express provision to that effect, it would not be right to argue that the Plaintiff is not entitled to payment until after the tax liability is determined.  If no time is fixed for payment, it should be paid within reasonable time.  The Agency Agreement having expired, it would be time to finalise the accounts.  A sensible and common arrangement would be to withhold an amount slightly in excess of the estimated tax liability and pay the balance, leaving any difference to be settled upon the tax liability having been determined.  The Plaintiff is entitled to judgment in respect of the excess proceeds, leaving the tax liability to be resolved by subsequent agreement or by counterclaim.  The 2^nd and 3^rd Defendants have failed to show prospect of success on this issue.

45.Based on excess proceeds of RMB22,732,939, the 3^rd Defendant reckoned that the Plaintiff’s tax liability is RMB8,063,643.61.  However, this liability has not yet crystallised.  What the 2^nd and 3^rd Defendants have is just a potential counterclaim, which in any event is nowhere near the amount of the Plaintiff’s claim.

The service fee issue

46.The 3^rd Defendant alleged that under clause 6.5 the Plaintiff had an obligation to pay a service fee in the amount of RMB4,121,792.23 being 2.5% of the sale price to the 2^nd Defendants for using the services of their sales team in marketing the units.  He further claimed that the amount should have been deducted from the amount to be repaid by the 1^st and 2^nd Defendants under clause 4.3.

47.Mr Fung argues that this contention is expressly contradicted by the express provisions in the Agency Agreement.  First, Mr Fung argues, clause 4.3 does not in any way stipulate the amount to be returned to the Plaintiff by the 1^st and 2^nd Defendants should be subject to any set-off.  Second, clause 9.3 expressly provides that the amount to be repaid shall not be subject to any set off.  Clause 9.3 reads:

“If the back payment by [the 1^st Defendant] to the [Plaintiff] shall be subject to any tax or fee, [the 1^st Defendant] is responsible for such full payment. This ensures that the amount returned to [the Plaintiff] is not affected by such tax or fee.”

Therefore, Mr Fung submits that even if the fee has been incurred and for which the Plaintiff is liable, the amount to be repaid under clause 4.3 had nevertheless to be repaid in full.  It would then be a matter for the Defendants to decide whether to ask for payment of the fee separately.  On the face of clauses 4.3 and 9.3, this must be correct.  The 2^nd  Defendant has a right to make a counterclaim, but such a counterclaim is nowhere near the amount of the Plaintiff’s claim.

48.Mr Fung further argues that the fee had been waived in May 2011 in return for the Plaintiff’s agreement to waive the 1^st and 2^nd Defendants’ contractual obligations under clause 6.4 to spend not less than RMB3,000,000 on advertising costs.  He also suggests that the claim for service fee is incredible as the 3^rd Defendant never protested upon receipt of the demand letter from NRF, it was not raised in his first affirmation seeking to have the default judgments set aside, but was only raised for the first time in his second affirmation.  I think these are not matters which this court is in a position to resolve by way of affidavit evidence.  In any event, even if there is a valid claim, the amount to be repaid under clause 4.3 has to be repaid in full without deduction of the service fee.  The 2^nd  Defendant only has a counterclaim.

Conclusion

49.The 2^nd Defendant could offer no credible explanation for the delay in applying to have the default judgment obtained against it set aside.  The default judgment was obtained regularly.  The 2^nd Defendant has to show a defence which he has a real prospect of success.  However, it has shown no defence to the amount of RMB120,330,603 claimed under clause 4.3.  I reject its defence on the denomination issue, part payment issue and service fee issue as unmeritorious.  The amount has to be repaid in Renminbi.  In respect of the excess proceeds issue, the 2^nd Defendant has only shown prospect of success in its partial defence in the amount of RMB1,228,094 out of the amount of RMB23,961,033 awarded.  Possibly, the 2^nd Defendant has prospect of success in counterclaims, yet to be filed, in respect of the tax issue and service fee issue in the amount of RMB8,063,643.61 and RMB4,121,792.23, respectively.  Thus, of the total judgment sum of RMB144,291,636, the 2^nd Defendant has shown no defence to the amount of RMB143,063,542.  It has only shown a partial defence in the amount of RMB1,228,094 and possible counterclaims in the amount of RMB12,185,435.84, totalling RMB13,413,529.84 ie about 9.3% of the sum awarded under the default judgment.

50.Mr Fung suggests that the default judgments should be revised to at least the undisputed figure of RMB116,260,953 with the specific issues which the court finds to have a real prospect of success being directed to trial.  On the other hand, Mr Hung argues, quoting Muir v Jenks[7], that as there is no application before the court by the Plaintiff for amendment of the default judgments, the default judgments should not be reduced but set aside.  He submits that the default judgments should be set aside with the Defendants’ admissions so that the parties may take advantage of Order 13A.

51.In my view, Muir v Jenks was a case of irregular judgment which was signed for a sum in excess of what was due.  It was liable to be set aside as of right, unless rectified by a proper application for amendment rendering the irregular judgment regular.  Hence, failure to apply for amendment was fatal in that case.  In the present case, the default judgment is regular.  This is a case where from the affidavits and exhibits the court is satisfied that although the amount entered might be wrong, the court knows there is no defence to a substantial part of the claim, especially the majority part of which is not disputed.  In respect of the relatively insignificant amounts in dispute, there is no certainty that the 2^nd Defendant will be successful in the excess proceeds issue and no certainty that it will make the counterclaims on the tax issue and service fee issue and succeed.  It will be a meaningless waste of time and costs to set the incorrect judgment aside because of the 0.83% error and make the Plaintiff start all over again: see Bank of Credit and Commerce International (Overseas) Ltd (In Liquidation) v Habib Bank Ltd[8].  

52.In view of the unexplained delay, that the default judgment was regularly obtained, and that the 2^nd Defendant has only shown prospect of success in respect of a very small part of the claim, he is not entitled to have it set aside.  The appropriate course, in my view, is to vary the judgment to the correct amount, ie RMB143,063,542, leaving it to the Plaintiff to decide whether to proceed in respect of the shortfall in the excess proceeds issue and to the 2^nd Defendant to decide whether to proceed on the counterclaims.  But, for the benefit of the 2^nd Defendant, there should be stay of execution in an amount equivalent to the amount of the possible counterclaims, say RMB13,500,000.  I make an order accordingly with a costs order nisi that there be no order as to costs as between the Plaintiff and the 2^nd Defendant.

APPLICATION TO SET ASIDE AS AGAINST THE 1^ST DEFENDANT

Whether the 2^nd and 3^rd Defendants have locus standi to intervene

53.The Plaintiff disputes the 2^nd and 3^rd Defendants’ locus as interveners in the setting aside application on behalf the 1^st Defendant and asks that the application be dismissed.  The Plaintiff produced a resolution by the 1^st Defendant that it does not wish to have the default judgment against it set aside.  Mr Fung refers me to the case of Jacques v Harrison[9] and submits that for the 2^nd and 3^rd Defendants to act as interveners to set aside the default judgment against the 1^st Defendant, they have to either obtain the 1^st Defendant’s consent or obtain leave of the court to make the Plaintiff and 1^st Defendant parties to that leave application.  He also quotes paragraph 13/9/22 of Hong Kong Civil Procedure 2015[10]:

“Application by third party – The rule is designed to enable judgment by default to be set aside by those who have, or can acquire, a locus standi; it does not give a locus standi to those who have none. … A third party who desires to apply to set aside a judgment must show that he has a direct interest in so doing and must either do so in the name of the defendant with his leave, or he must make both the plaintiff and the defendant parties to the application and ask for leave to intervene …”

Mr Fung therefore submits that as the 2^nd and 3^rd Defendants have done neither, they have no locus standi to intervene.

54.Now that the 1^st Defendant is under the control of the Plaintiff, it has every reason to resist the application to have the default judgment set aside and therefore to refuse consent for the 2^nd and 3^rd Defendants to act as interveners.  The 2^nd and 3^rd Defendants have not applied for leave to intervene.  However, Mr Hung submits that leave is not necessary because the procedure suggested in paragraph 13/9/22 of Hong Kong Civil Procedure 2015 is only applicable to a person who is not already made a party to the proceedings.

55.Order 13 rule 9 gives the court wide jurisdiction to set aside a default judgment.  Such jurisdiction may be exercised even upon the application of a third party provided he has locus standi.  Locus standi is derived from consent of the defendant against whom the judgment was obtained.  It may also be conferred by court upon an application to join as a party to the proceedings under Order 15 rule 6(2)(b)(ii), if there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the court would be just and convenient to be determined as between him and that party as well as between the parties to the cause or matter.  But, if the parties are already before the court, there is no need for an application for joinder to be made.  Jacques v Harrison does not assist Mr Fung as it was a case in which a non-party sought to set aside a judgment by which he was injuriously affected.  I agree with Mr Hung that the procedure suggested in paragraph 13/9/22 of Hong Kong Civil Procedure 2015 applies only to an intending intervener who is not already made a party to the proceedings.  In other words, the procedure is not applicable where the persons seeking to intervene are already parties to the proceedings. 

56.As the 2^nd and 3^rd Defendants are already parties to these proceedings, there is no need for them to apply to be joined in this action with the 1^st Defendant.  This is particularly so in a situation such as this where the 3^rd Defendant is sought to be made liable as a guarantor along with the primary party liable under the Agency Agreement.  It simply defies common sense that he cannot intervene when the primary party, for any reason including a change of camp, does not wish to dispute liability.  Needless to say, on the facts of this case, the conditions under Order 15 rule 6(2)(b)(ii) are satisfied; but that is quite beside the point.  I find that the 2^nd and 3^rd Defendants do have locus standi to intervene.  

Application for adjournment

57.The only problem now remaining is that the 1^st Defendant has not been served with the summons and is not before the court.  While respecting the principle of separate corporate personality, I cannot help feeling that a technical obstruction was being imposed by the Plaintiff instructing NRF to refuse to accept service of the summons on behalf of the 1^st Defendant under its control.

58.Mr Hung submits that there are two courses open to the 3^rd Defendant.  The first one is to proceed with the hearing and if satisfied that the default judgments are set aside against the 2^nd and 3^rd Defendants, the court may on its own motion set aside the default judgment against the 1^st Defendant.  The second option is to adjourn the application to set aside the default judgment as against the 1^st Defendant pending proper service of the summons abroad.  To err on the safe side, he applies for adjournment. 

59.I do not think the first course is open to the 3^rd Defendant.  There is, as Mr Fung submits, incontrovertible evidence that the 1^st Defendant does not wish to have the default judgment against it set aside.  Under the new management, the 1^st Defendant passed a resolution on 29 September 2014 resolving that “the company will not take any step or action for the purpose of and/or with the effect of (a) defending itself in the Action or (b) disputing/setting aside the Default Judgment pursuant to the Set Aside application or otherwise”.  While understandably that is the result of a change of camp, the fact remains that the summons had not even been served on the 1^st Defendant.  It would be improper to enter any judgment affecting it, although the effect would be to relieve it of liability.  Accordingly, I grant the adjournment.  The summons insofar as it relates to the application to set aside the default judgment as against the 1^st Defendant is adjourned.

APPLICATION TO SET ASIDE AS AGAINST THE 3^RD DEFENDANT

60.The Plaintiff’s claim against the 3^rd Defendant is based on the guarantee. Under the guarantee, the 3^rd Defendant undertook to indemnify the Plaintiff in respect of any loss and damage caused by the 1^st and 2^nd Defendants’ breach of the Agency Agreement.  The liability of the 1^st and 2^nd Defendants is joint and several.  As the 3^rd Defendant does not dispute the validity of the guarantee, the 3^rd Defendant could only set aside the default judgment obtained against it to the extent the default judgments against the 1^st and 2^nd Defendants are set aside.  Hence, Mr Fung submits that there is no basis for the 3^rd Defendant to set aside the default judgment, if the application as against the 1^st Defendant is adjourned.

61.I have no doubt that that must be correct in a normal situation. However, in the present case, the 1^st Defendant is a “nominal party” in that it is not interested in the outcome of the application.  It is contented with the default judgment made against it and does not wish to participate in the application to have it set aside.  It is, however, in the same position as the 2^nd Defendant as regards the default judgment.  In relation to that default judgment, the real dispute is between the Plaintiff on the one part and the 2^nd and 3^rd Defendants on the other with the 1^st Defendant as a “nominal party”.  In relation to the application to set aside the default judgment, the dispute is also between the Plaintiff and the 2^nd and 3^rd Defendants but with the 1^st Defendant as the Plaintiff’s “nominal party”.  The 1^st Defendant was a “nominal party” whether under the 3^rd Defendant’s camp or the Plaintiff’s camp.  More importantly, despite its absence, all issues in controversy between the Plaintiff and all the Defendants relevant to this action and this application could be properly argued and had been so argued and disposed of as between the Plaintiff and the 2^nd Defendant.  The position is the same among the Plaintiff, the 1^st and 3^rd Defendants.  The outcome would also be the same, if the 1^st Defendant had been served and is before the court.  No purpose would be served by having the application as against the 3^rd Defendant adjourned, pending service abroad on the 1^st Defendant.  All that could be argued has been argued.  From the evidence available before the court, the court knows what is incorrect in that default judgment.  For reasons as already explained that judgment needs to be corrected as between the Plaintiff and the 2^nd Defendant.  The same is true as between the Plaintiff and the 1^st Defendant.  But for the lack of service on the 1^st Defendant, the court is prevented from amending that default judgment as against the 1^st Defendant, which formed the basis of the 3^rd Defendant’s liability towards the Plaintiff under the guarantee.  For the purpose of doing justice as between the Plaintiff and the 3^rd Defendant, the default judgment needs to be amended in the same manner as that between the Plaintiff and the 2^nd Defendant, while leaving it to remain as it is as between the Plaintiff and the 1^st Defendant.  The Plaintiff and the 3^rd Defendant may proceed to trial in respect of the minor difference of RMB1,228,094 as result of the amendment, regardless of the position as between the Plaintiff and the 1^st Defendant.

62.I therefore think the appropriate course is to make a similar order as the one I have made in respect of the 2^nd Defendant’s application.  Accordingly, I amend the default judgment as between the Plaintiff and the 3^rd Defendant to the correct amount, ie RMB143,063,542, and order a stay of execution in an amount equivalent to the amount of the possible counterclaims, say RMB13,500,000.  I also make a costs order nisi that there be no order as to costs as between the Plaintiff and the 3^rd Defendant. I leave it to the Plaintiff to decide whether to proceed to trial in respect of the shortfall of RMB1,228,094 and to 2^nd and 3^rd Defendants to decide whether to proceed on the counterclaims.

CONCLUSION

63.For the above reasons, I adjourn the summons insofar as it relates to the application to set aside the default judgment as against the 1^st Defendant with costs reserved.  As between the Plaintiff and the 2^nd Defendant and as between the Plaintiff and 3^rd Defendants, I amend the default judgments to the correct amount, ie RMB143,063,542, and order a stay of execution in an amount equivalent to the amount of the possible counterclaims, say RMB13,500,000.  I also make a costs order nisi that there be no order as to costs as between the Plaintiff and the 2^nd Defendant and as between the Plaintiff and the 3^rd Defendant.

Mr Eugene Fung SC, instructed by Messrs Norton Rose Fulbright Hong Kong, for the Plaintiff

Mr Andy Hung, instructed by Messrs B C Chow & Co for the 2^nd and 3^rd Defendants and the 1^st and 2^nd Interveners