KEUNG SHEK CHEUNG AND OTHERS v. PT ARPENI PRATAMA OCEAN LINE Tbk. AND ANOTHER

HCA 678/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 678 OF 2014

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D E C I S I O N

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Introduction

1.  The master’s order dated 3 August 2016 giving rise to the appeal of the 2^nd defendant (“Grand Bulk”) in gist granted leave to Grand Bulk to defend this action conditional upon a payment-in.  Grand Bulk now appeals against the said condition.  On the other hand, the plaintiffs contend that the master ought not have given leave to defend at all, and the default judgment dated 19 June 2014 should stand (“cross appeal”).

Background

2.  This action has its origin in a vessel (“the Vessel”) which was registered in the name of a company abbreviated as PSHL. The 4 shareholders of PSHL are the plaintiffs and Grand Bulk.  The Vessel was rented out and the profits therefrom were distributed among the shareholders.

3.  International shipping market has been quiet resulting in difficulties for the Vessel to be employed.  A plan was conceived whereby the Vessel would be re-flagged with an Indonesian flag so as to enable it to enter the domestic Indonesian shipping trade.

4.  The said plan was implemented by way of a registration transfer from PSHL to another company abbreviated in this action as SBS (“the Transfer”).

5.  Both Grand Bulk and SBS are 100% owned by the 1^st defendant, a company incorporated in Indonesia (“APOL”).

6.  The Transfer was effected through the following documents:

(a)  a Memorandum of Agreement dated 22 October 2008 between PSHL and SBS (“the MOA”);

(b)  a letter of undertaking dated 13 November 2008. The parties named therein were PSHL and SBS;

(c)  a letter of undertaking dated 14 November 2008 (“the LOU”).  The parties named therein were Grand Bulk and APOL;

(d)  a minutes of meeting dated 20 March 2013 (“the Minutes”);

(e)  a document dated 7 October 2013 whereby Grand Bulk confirmed the said document to be an agreement between APOL (as debtor) and the plaintiffs (as creditors).

7.  As regards profit distribution, the Minutes stated that APOL agreed to pay US$800,000 to the plaintiffs (by reason of their 25% interest in the profit).  The plaintiffs accept that US$446,000 has been paid, and contend that they are owed US$354,000 (the subject-matter of this action).

This appeal (and “cross-appeal”)

8.  Because this is Grand Bulk’s appeal and the plaintiffs’ “cross appeal”, it is unnecessary to consider the claim by the plaintiffs against APOL (except by way of background).

9.  As regards the plaintiffs’ claim against Grand Bulk, it is based essentially on a verbal agreement made on 14 November 2008 among the plaintiffs, APOL and Grand Bulk to the effect that:

(1)  the plaintiffs would remain entitled to their 25% interest in the Vessel (and hence the income of the Vessel);

(2)  Grand Bulk promised to pay (or guarantee the payment to) the plaintiffs their share of the Vessel’s income.

(“the alleged agreement”)

10.  Because the alleged agreement was verbal, naturally no documentary evidence can be (or has been) adduced.  What has divided the parties in this action (and this appeal) is whether the alleged agreement is:

(a)  inherently plausible (or implausible);

(b)  consistent (or inconsistent) with the contemporaneous conduct of the parties (which is to be inferred from the contemporaneous documents and/or circumstances).

11.  On the part of Grand Bulk, it contends that the alleged agreement is inherently implausible and/or inconsistent with the objective circumstances:

(1)  the plaintiffs and Grand Bulk are (and were) all shareholders of PSHL.  There was no sensible reason why Grand Bulk, as one of the shareholders, should pay (or guarantee) any payments of SBS’s profits to its fellow shareholders;

(2)  even the statement of claim itself is ambiguous about the alleged agreement (para 7 thereof); the averment is only that the defendants were to finally account for (among other things) the earnings from the Vessel, through PSHL, when the Vessel was sold/scrapped.  Further, an alleged implied term has been pleaded (para 8 thereof);

(3)  sub-para (2) above is not supported by affirmation evidence;

(4)  in any event, courts have looked at alleged verbal agreements with suspect;

(5)  although there were ample opportunities to record the alleged agreement in writing, none of the documents (including those set out in para 6 above) have done so.

12.  On the plaintiffs’ part, they contend that:

(a)  Grand Bulk was not purely one of SBS’s shareholders (as the plaintiffs were) but SBS’s sister company.  APOL is (and was) the parent company of both Grand Bulk and SBS;

(b)  after the Transfer, APOL still retained full control of the Vessel (through controlling SBS) but the plaintiffs no longer had control;

(c)  the LOU (signed by the defendants) expressly provided that “the rights of [the plaintiffs] as stipulated in the Memorandum and Articles of Association of PSHL will always be maintained” (para 1 thereof):

(d)  the deponent for SBS was not someone who has direct knowledge of the relevant events;

(e)  it can be inferred SBS intentionally allowed default judgment to be entered against it.  The only reason given by Grand Bulk for not complying with the procedural rules was that it mistakenly thought that APOL would pay the plaintiffs (or at least, Grand Bulk did not know if APOL had done so).  However, this assertion cannot be truthful because the affirmant deposing to this was the same individual who earlier denied payment liability on APOL’s part.

13.  The test for deciding whether:

(1)  to set aside a default judgment and give leave to defend;

(2)  (if it is appropriate to set aside a default judgment and give leave to defend) to do so upon terms to be imposed (such as upon paying a sum into court),

is a matter of discretion.  The test is trite and well-known and will not be repeated in detail.  It should be exercised judicially; the factors most commonly considered when deciding how to exercise the discretion include:

(a)  the reason(s) which caused the applicant to earlier fail to comply with the procedural rules;

(b)  the applicant’s conduct after becoming aware of the default;

(c)  (in relation to a regularly entered default judgment) the defence has been shown to be potentially credible and carries some degree of conviction.

(Hong Kong Civil Procedure 2017, Vol 1, para 13/9/12 to 13/9/21)

14.  In this appeal, I agree with the plaintiffs that Grand Bulk’s explanation for its default is not satisfactory for two main reasons.  One, the assertion is incredible in view of the purported reason (erroneous belief) given by the same deponent, which purported reason is contradicted by the deponent’s earlier stance (para 12(e) above).  Two, in any event, a belief based on an erroneous view of the law (especially when the error is more concerned with the substantive merits (and not purely procedure)) is not a valid reason.

15.  Grand Bulk’s conduct subsequent to it becoming aware of the default judgment is (correctly) not a subject of great emphasis. I do not consider this to be a matter of such weight as would significantly affect the discretionary decision.

16.  As regards merits of the defence, the main ground put forth for denying liability is that the alleged agreement was made up by the plaintiffs.  This dispute is essentially factual in nature and very much dependent on the credibility of the witnesses who may later testify (if leave to defend is given).  I do not agree with the contention that this is not supported by affirmation evidence (para 11(3) above) (see Mr Keung’s affirmation filed on the plaintiffs’ behalf, especially at para 11 and 14 thereof).

17.  The expression used in the LOU (referred to in para 6(c) and 12(c) above) is rather vague, and may even be obscure.  Despite this, it can be understood to be supportive of the alleged agreement: a maintenance of the rights of PSHL’s shareholders may be capable of referring to the rights concerning PSHL’s only asset (or only substantial asset), that is, the Vessel (and/or the rights concerning dividends derived from the Vessel’s income).  This is an issue of mixed law and fact (see, for example, Ying Ho Co Ltd And Others v The Secretary For Justice (2004) 7 HKCFAR 333, para 213).  Because it is likely the parties’ respective case would differ regarding the circumstances leading to (and surrounding) the LOU (and the documents referred to in para 6 above), a proper resolution of the issue therefore will have to involve an assessment of the witnesses’ credibility.

18.  On the other hand, the plaintiffs’ case also suffers from various inadequacies, at least for the purpose of this appeal:

(1)  their case as presently pleaded refers merely to an ambiguous verbal agreement (para 7, statement of claim), as well as an implied term (para 8, statement of claim), rather than more definitive factual matters, for example, surrounding circumstances and/or course of dealings;

(2)  the fact remains (as has been pointed out in para 11(5) above) the alleged agreement, which ought to be the major concern to the plaintiffs when they agreed to the Transfer, was never expressly set out in writing, despite there being various documents relating to the Transfer.

19.  Bearing the above in mind, this is a case where leave to defend should be given to Grand Bulk.  The master is therefore entirely correct to give such leave.

20.  As regards whether a payment ought to be imposed as a condition for giving leave, the following matters tip the balance in the plaintiffs’ favour:

(a)  the reason given by Grand Bulk for the default has not been accepted, and is in any event invalid (see para 12(e) and 14 above).  Grand Bulk could well have earlier permitted judgment to be entered;

(b)   without lifting the corporate veil, but purely as a matter of commercial reality, it is undisputed Grand Bulk and APOL are closely connected, and, depending on the circumstances (to be investigated into later), Grand Bulk may even be treated as an alter ego of APOL;

(c)  through the same individual, Grand Bulk and APOL have shifted back and forth as regards whether APOL should be liable to pay the sum claimed in this action (para 12(e) and 14 above).

These reflect unfavourably on Grand Bulk’s bona fides for the purpose of this appeal.

21.  In light of these matters, I also agree with the master leave to defend should only be given upon a payment being made.  The amount of the payment is also appropriate.  Grand Bulk argues that a payment of 70% of the claimed sum is unjustified.  It has not proffered any other sum which is appropriate.  While Grand Bulk’s conduct does not warrant it to be shut out from defending this action, the lack of a credible reason and/or bona fides justifies the payment of a substantial sum; 70% of the claimed sum is within the range of such a sum.

Conclusion

22.  Grand Bulk’s appeal is dismissed.

23.  Because of the conclusions reached above, it is unnecessary to consider whether it is open to the plaintiffs to “cross appeal” without taking out a summons for such purpose.  Insofar as they may do so, the “cross appeal” is also dismissed.

Other matters

24.  Grand Bulk also seeks to strike out the plaintiffs’ claim against it, without taking out a summons.  Grand Bulk’s reliance on RHC Ord 1A for such purpose has no merit.  That provision is not intended to enable litigants to in effect ignore the other procedural requirements.  It is rather intended to give greater weight to matters such as costs-effectiveness, expediency and procedural economy (see, in particular, Ord 1A r 1(a)).

25.  The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs order nisi

26.  There is no apparent reason to depart from the usual rule that costs should follow the event.  Both the appeal and “cross appeal” have been dismissed.  Neither party can therefore be regarded as the successful party.

27.  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the parties are to bear their own costs here.  Nothing said herein affects the correctness of the master’s costs order.  Nor is there other valid reason to interfere with her discretion.  The master’s costs order should also stand.