LIU CHONG HING BANK LTD v. LEE CHAU KUN AND ANOTHER

DCMP 2362/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 2362 OF 2004

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JUDGMENT

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1.  This is an application by the 1^st and 2^nd Defendants to set aside the Amended Order of Master R Yu dated 20 September 2005 (“the Amended Order”).

2.  The 1^st and 2^nd Defendants are the registered owners of the property known as Flat 03 on 5^th Floor of Tak Shing House (Block 7), Tak Tin Estate, No. 223 Pik Wan Road, Kowloon (“the Property”).  

3.  By way of a facility letter dated 15 July 1999 (“the Facility Letter”), the Plaintiff (“the Bank”) agreed to provide the 1^st and 2^nd Defendants a fixed instalment loan (“the Loan”) of HK$218,900.00, secured on the Property by way of a legal charge dated 16 July 1996 (“the Legal Charge”). 

4.  By way of the Amended Order, the Master granted (a) judgment in favour of the Plaintiff for a sum of HK$167,788.43 (“the Judgment Sum”) with interest, (b) an order against the Defendants for deliver up of the Property within 28 days of the service and the order.   The Amended Order was obtained by default in that the Defendants had not filed an acknowledgment of service nor attended the hearing where the order was made.

5.  The Amended Order is an order in a mortgagee action taken out by the Bank by originating summons  (“the Originating Summons”) dated 12 July 2004 under O. 88 of the Rules of the District Court (Cap. 336H) based on the Legal Charge.

6.  On 14 January 2006, the Bank obtained a Praecipe for Writ of Possession and Fieri Facias Combined to enforce the Amended Order.

7.  The Defendants took out a summons dated 27 January 2006 (“the Setting Aside Summons”) (i.e., some 4 months after it was made) to seek to set aside the Amended Order.  By way of another summons dated 15 February 2006 (“the Stay of Execution Summons”), the Defendants further asked for a stay of execution of the Order until the determination of the Setting Aside Summons.  On 1 March 2006, Master J Ko granted, inter alia, an interim stay of execution of the Amended Order until 6 April 2006.

8.  Both parties have filed various affirmations under the Setting Aside Summons.

9.  On 3 April 2006, the Bank filed a further affirmation of Lau Pak On (“Lau’s 2^nd Affirmation”) said to be in reply to new points raised by the Defendants in D2’s 2^nd Affirmation.  At the first hearing before me, as Ms. Yau acting for herself and the 1^st Defendant did not object to the same, I granted leave for the Plaintiff to rely on Lau’s 2^nd Affirmation subject to the Defendants’ right to file evidence in reply.  Subsequently, the 2^nd Defendant filed her third affirmation on 19 April 2006 (“D2’s 3^rd Affirmation”) in reply thereto.

Background

10.  The Loan was provided to the Defendants for the purchase of the Property under a scheme with the Housing Authority.  

11.  The Loan was subject to the terms of the the Facility Letter, which provided, inter alia, that:

(1) the Loan was to be repaid over 180 fixed monthly instalments, and the amount of the monthly payment was HK$2,045.00;

(2) the loan account number was 278-40-251853-7 (“the Instalment Loan Account”)  and the autopay account (which must mean the bank account from which the monthly instalment sum would be automatically debited to the credit of the Instalment Loan Account) was 278-20-105212-6 (“the Autopay Account”).

(3) extra interest would be charged on all late payments;

(4) the Loan was to be secured by the Legal Charge. 

12.  The Second Schedule of the Legal Charge further provided that the monthly instalment sum was to be paid on the 15^th of each month.

13.  By a letter dated 29 April 2004, the Bank demanded the 1^st and 2^nd Defendants to repay the total sum of HK$176,242.96.  It is the Bank’s case that the Defendants had been in default of repayment of the instalments.

14.  Upon the Defendants’ failure to pay as demanded, on 12 July 2004 the Bank issued the Originating Summons. 

Service of the Originating Summons

15.  By an affirmation of service of Ho Wai Ming dated 6 July 2005, it was affirmed on behalf of the Bank that the Originating Summons was served on the Defendants by way of inserting the same through the Letter-Box for the address (“the Property’s Address”) of the Property on 13 July 2004.  It was further affirmed that a copy of the Originating Summons was also posted up at a conspicuous place of the main entrance of the Property.

16.  On 15 August 2005, the Bank through its solicitors issued a Notice of Appointment to hear the Originating Summons (“the Notice of Hearing”) stating that the Originating Summons would be heard before Master R Yu on 20 September 2006.  A Notice to Occupants concerning the said hearing was also issued by the Bank.  The Originating Summons was supported by the affirmation of Lee Fook Tin filed on 11 August 2005 (“Lee’s Affirmation”).

17.  By an affirmation of service of Ho Chi Ming John B dated 31 August 2005, it was affirmed on behalf of the Bank that a copy of the Notice of Hearing and a copy of Lee’s Affirmation were served on the Defendants by posting the same by ordinary post to the 1^st and 2^nd Defendants separately at the Property’s Address.  It was further affirmed that (a) the said letters as posted had not been returned to the Bank’s solicitors, and (b) on 16 August 2005 at about 11:00 a.m., a copy of the Notice to Occupants was also posted up at a conspicuous place of the main entrance of the Property.  Exhibited to this affirmation were copies of record of posting issued by the post office. 

18.  The Defendants did not file any acknowledgment of service of the Originating Summons.  They also did not appear at the hearing of the Originating Summons before Master R Yu on 20 September 2005, whereby the Master made the Amended Order.

Applicable principles in setting aside

19.  The Amended Order was made pursuant to O. 28 r. 4 of the Rules of the District Court.   

20.  Although strictly speaking, O. 13 r. 9 of the District Court Rules does not apply to a proceedings commenced by originating summons, in seeking to set aside a judgment or order made by default under O. 28 r. 4, the applicable principles are the same as or similar to that in governing the setting aside of a default judgment made under O. 13 r. 9:  Wong Wing Tak t/a Loi Kee Marine Store v. Euro-America Insurance Ltd [1995] 1 HKC 88, 94C-E; Liu Chong Hing Bank Ltd v. Union World (HK) Ltd [2004] 1 HKC 622, 627G-628A, para 25 (affirmed on appeal, CACV 285/2003, 25 October 2004, paras 10-13 per Rogers VP, para 14 per Yuen JA).

21.  Under the authorities, the Court retains a wide and unfettered discretion in deciding whether to set aside an order or judgment obtained by default under O. 28 r. 4. 

22.  Where the judgment is obtained irregularly, that is where it is shown that the defendants have not been properly served with the originating summons, although the judgment should be generally set aside “as of right” and that the merits of the defence should not be taken into account, the Court is still entitled to look at all the circumstances of the matter including, for example, why things went wrong on the question of service and what the defendant has himself done:  Liu Chong Hing Bank, CACV 285/2003, supra, paras 11, 12 citing Po Kwong Marble Factory Ltd v. Wah Yee Decoration Co Ltd [1996] 4 HKC 157, 161 and 162; Hong Kong Civil Procedure 2006, paras 13/9/3 – 13/9/4.

23.  Where the judgment was obtained regularly, the burden is on the defendant to show a defence with a “real prospect of success”.  If the defendant cannot demonstrate that he has a defence with a “real prospect of success”, this is usually the end of his application.  However, even if the defendant can show that he has a meritorious defence, although this generally constitutes a dominant factor in the Court’s exercise of its discretion, in order to see where the justice lies in the case, the Court is still entitled to and should have regard to all the relevant circumstances of the matter, including why the default occurred; the defendant’s conduct after he had notice of the proceedings; an explanation for the time taken where there has been delay in making the application; any prejudice that would be caused to the plaintiff or to third parties if the default judgment was to be set aside: Euro-America Insurance Ltd, supra, pp. 94-96E; Hong Kong Civil Procedure 2006, paras 13/9/12 – 13/9/14.

The present case

Regular or irregular judgment

24.  The Defendants have not set out in any of their affirmations filed in support of the present application to say that the Amended Order was not properly served on them.  It thus appears that it is not the Defendants’ case the Amended Order was obtained irregularly. 

25.  However, at the hearing when I asked Ms. Yau why the Defendants did not turn up at the hearing of the Originating Summons before Master R Yu, she explained that they had neither received or had notice of the Originating Summons nor the Notice of Hearing.  She also said that the Defendants had not seen any copies of the same posted up near the entrance of the Property.

26.  On the other hand, Ms. Yau confirmed that the Defendants had at all material times been residing at the Property’s Address.

27.  None of the matters set out in paragraph 25 are contained in any of the Defendants’ affirmations, and thus they are not evidence before the Court.  Moreover, the Defendants have never alleged in any of their affirmations that they were not aware of the proceedings being instituted against them. 

28.  In any event, in light of the evidence on service as set out in paragraphs 15 to 18 above, and that fact that the Defendants at all material times had been residing at the Property, I do not accept Ms. Yau’s bare assertion that the Defendants had not received copies of the Originating Summons and the Notice of Hearing.  In the premises, insofar as necessary, I conclude that there has been a proper service of the Originating Summons and the Notice of Hearing on the Defendants.  The Amended Order was thus obtained regularly.

29.  For the purpose of this application, I therefore proceed to consider whether the Defendants have a meritorious defence with a real prospect of success.

Whether there are meritorious defences raised

30.  By way of D2's 1^st, 2^nd and 3^rd Affirmations, the Defendants raised essentially two main grounds to oppose the Bank’s present claim:

(1)  First, they said that they had not defaulted in repaying the monthly instalments to the Bank and, in any event, the Bank had failed to show how the Judgment Sum was calculated. 

(2)  Second, the Defendants said that they were told by one Mr. Leung of the Housing Authority that Mr. Lau had sent a letter (“the Alleged Letter”) to the Housing Authority in April 2004 falsely alleging that the Defendants had given up the Property.  The Defendants thus further asked this Court to order the Bank to disclose the Alleged Letter.

31.  In the premises, there are principally 3 issues before me, namely whether the Defendants have shown that there is a real prospect of success in their defences that:

(1)  They had not defaulted in any of the instalments repayment and that the Bank was not entitled to demand the Defendants for the repayment of the entire outstanding loan.

(2)  The sums claimed by the Bank are unclear and/or incorrect.

(3)  There existed the Alleged Letter which would render the Defendants not liable to repay the entire outstanding loan.

32.  For the reasons below, I have come to the conclusion that the Defendants have failed to show that any of these defences has a real prospect of success.

The defence that the Defendants had not defaulted in any of the repayment

33.  For the purpose of this application, the Bank had produced the yearly statements of the Instalment Loan Account for the period between 1 April 2003 and 31 March 2005 (collectively “the Loan Account Yearly Statements”). They were exhibited to Lau’s 1^st Affirmation as exhibit “LPO-3”.

34.  The Loan Account Yearly Statements show that the Defendants had not made any monthly payments for the months of January to July 2004 (collectively “the Defaulted Instalments”).

35.  Under clause 1(a) of the Legal Charge, the Defendants shall pay to the Bank on demand the whole of the Loan as outstanding if, amongst others, any of the number of instalments or any part thereof remain unpaid on the due date.

36.  As a result, the Bank sent the demand letter dated 29 April 2004 by registered mail and by hand to the Defendants at the Property’s Address notifying them that the then total outstanding sum owed by the Defendants to the Bank under the Instalment Loan was HK$176,242.96, which included HK$175,906.57 as the outstanding principal, and HK$336.39 as the interest accrued up to 29 April 2004.  The Bank further formally demanded the Defendants to repay the entire outstanding sum immediately, failing which the Bank might, inter alia, take proceedings against the Defendants.

37.  The Defendants did not deny having received this demand letter in their affirmations.  There is also no evidence that the Defendants had replied to this demand letter either orally or in writing to deny that they had defaulted in the repayment, which in my view any reasonable persons in the position of the Defendants would have done so if there were in fact no default. 

38.  Moreover, the Defendants had not provided any evidence on the timely repayment of the instalments to contradict their defaults as shown in the Loan Account Yearly Statements. 

39.  In light of the aforesaid, there is no credible evidence other than bare allegations to support the Defendants’ case that they had not defaulted in the repayment of any instalments.  The said defence does not have a real prospect of success.

The defence that the outstanding sums claimed by the Bank was unclear or incorrect

40.  The Bank has set out in paragraphs 8 and 9 of Lee’s Affirmation the basis of the calculation of Judgment Sum, being the then outstanding principal and interest as at the time when the Amended Order was originally made.

41.  At this application, the Bank further sought to amend the Judgment Sum to HK$167,648.81 (“the Revised Sum”) by way of paragraphs 16 to 19 of Lau’s Affirmation, as the Bank admitted that it had previously over-calculated interest against the Defendants in the sum of HK$139.20. The Bank explained that the said miscalculation came about as a result of its mistaken adoption of its own best lending rate instead of the best lending rate of HongKong and Shanghai Banking Corp Ltd (“HSBC”) for the purpose of calculating the interest to be charged on the outstanding principal for the period from 15 April 2005 to 11 August 2005.  The Bank also sought to amend the further daily interest to be charged on the outstanding principle from HK$24.52 to HK$23.04, since the applicable interest rate should be 5.625% per annum instead of 5.875% as initially stated in paragraph 8(5) of Lee’s Affirmation.   

42.  The Bank therefore sought an order from this Court to amend the Amended Order to the extent as set out in paragraph 41 above.

43.  The calculation of the outstanding sum as set out in paragraph 40 above and the Revised Sum are supported by the Loan Account Yearly Statements and the respective schedules of best lending rates of the Plaintiff and HSBC (collectively “the Schedules of Best Lending Rates”) exhibited to Lau’s 1^st Affirmation as exhibit “LPO-7”.

44.  The Defendants did not make any substantive reply to the Bank’s aforesaid application to revise the Judgment Sum to the Revised Sum.  They however challenged generally the propriety of the Bank’s calculation on 4 bases.

45.  First, the Defendant said that they had deposited in cash a sum of more than HK$10,000 at the Bank’s Lam Tin branch sometime in December 2004 for making repayments of the monthly instalments, but the Bank had failed to take into account the said repayments in calculating the outstanding balance of the Loan.

46.  In reply to the Defendants’ said allegation, the Bank provided a copy of a cash deposit slip by way of exhibit “LPO-2” of Lau’s 1^st Affirmation to show that the Defendants in fact deposited a sum of HK$15,000 with the Instalment Loan Account on 29 December 2004.  At the same time, the Loan Account Yearly Statements show that on the date of the deposit, the said HK$15,000 had been recorded to have been used and treated by the Bank as the Defendants’ late repayments of the Defaulted Instalments by way of 8 separate payments at HK$1,709 each and 1 repayment at HK$1,328.  Mr. Lau also confirmed the same at paragraphs 6 and 7 of Lau’s 1^st Affirmation.  The Defendants had not provided anything to challenge the Bank’s evidence.

47.  It thus appears to me to be clear that the said HK$15,000 deposited by the Defendants had been fully utilized as part repayments of the Loan, and that the calculation of the Judgment Sum or the Revised Sum had already taken into account of the same.  There is therefore again no merit in this allegation of the Defendants.

48.  Secondly, the Defendants also said that the Bank had somehow unilaterally and without their consent altered the monthly repayment sum from HK$2,045 (as set out in the Facility Letter) to HK$1,709. 

49.  Mr. Yiu for the Bank submitted that this revision down of the monthly repayment sum was a result of the downward revision of the prime rate (and thus the contractual interest rate chargeable on the Loan).  Given that the Loan was a fixed term loan, the downward adjustment of the interest rate was reflected with a corresponding downward adjustment of the monthly repayment sum. 

50.  This explanation is in line and consistent with clause 1(c)(i) of the Legal Charge. This is also supported by the Schedules of the Best Lending Rates. I accept this explanation. 

51.  In any event, I also cannot see how the downward adjustment of the monthly repayment sum could have provided a valid defence to the Bank’s claim.  It is not the Defendants’ case that they had in fact been making monthly payments at HK$2,045 while the Bank had only taken into account HK$1,709 per month as repayments.   In the premises, I see no valid defence that can be raised by the Defendants by way of this allegation.

52.  Thirdly, the Defendants said in D2’s 2^nd Affirmation that they had not received the statements of the Instalment Loan Account from the Bank and were thus in the dark as to the calculation of the outstanding sum.  This was denied by Bank, which said at paragraphs 2 and 3 of Lau’s 2^nd Affirmation that the Bank had in the past sent the bank statements and payment advices in relation to the Instalment Loan Account to the Defendants at the Property’s Address.  In any event, at this application, the bank further provided by way of exhibits “LPO-9” and “LPO-10” copies of all the instalment loan payment advices issued since 1999 until 1 April 2002 and copies of the yearly statement for the period from 1 April 2002 to 31 March 2003.

53.  In D2’s 3^rd Affirmation, which was filed in reply to Lau’s 2^nd Affirmation, the Defendants had not challenged the correctness of these statements or payment advices.  In the circumstances, even if (but without deciding that) the Defendants had not received these statements before, this does not amount to any meritorious defence to the Bank’s claim, as the contents of the bank statements and payment advices have not been shown to be incorrect in any respect.

54.  Lastly, by way of D2’s 3^rd Affirmation and copies of extracted pages of the passbook of the Autopay Account exhibited thereto, the Defendants also said that there were 2 questionable deductions in the sums of HK$41.99 and HK$40.76 from the Autopay Account by the Bank respectively on 1 September and 2 September 2004, which were marked as Loan repayment to the Instalment Account.  These deductions were questionable, said the Defendants, as (a) they simply could not be loan repayments in light of their amounts and the fact that they were deducted soon after the actual monthly instalment repayment had been made, and (b) they were in any event made without the Defendants’ knowledge.  Ms. Yau submitted that such questionable examples showed that there were doubts on the Bank’s calculation.

55.  Mr. Yiu in reply submitted that these two deductions represented the deduction of interest charged on the outstanding instalment payment for January (outstanding for 205 days) and February 2004 (outstanding for 199 days) respectively at the interest rate of 4.375% (being the contractual interest rate on the Loan by reference to the prevailing Prime Rate at the material time).  Therefore, Mr. Yiu further submitted, there was nothing questionable about these items. 

56.  Mr. Yiu’s submissions and calculations are supported by the Schedules of the Best Lending Rates and are consistent with the interest provisions of the Facility Letter.  Ms. Yau in reply did not seek to rebut the said submissions and calculations.  There is also no evidence before me to suggest otherwise.  I therefore accept Mr. Yiu’s submissions. 

57.  In the circumstances, there is nothing in the Defendants’ said ground which would give rise to any meritorious defence to the Bank’s claim.

The defence of the Alleged Letter

58.  Mr. Lau denied at paragraph 9 of his 1^st Affirmation that he had ever issued the Alleged Letter to the Housing Authority. The Defendants by way of D2’s various affirmations deposed to otherwise.

59.  In the contention of the affirmation evidence, I of course cannot decide summarily whether or not Mr. Lau had issued the Alleged Letter.  But the proper question for me to decide is whether the existence of the Alleged Letter can constitute a valid defence to the Bank’s claim.

60.  However, with the evidence presently available to the Court, I do not see the relevance of the Alleged Letter, even if existed and wrongfully issued, to the Bank’s present claim. 

61.  When I asked Ms. Yau the relevance of the Alleged Letter to the Bank’s claim, Ms. Yau’s reply was that it would show the unacceptable way in which the Bank had conducted its business.  I am unable to accept that this would constitute any valid defence to the Bank’s claim.

62.  In the premises, I am also of view that the Defendants have failed to show that there is any merit in the defence based on the Alleged Letter.

Conclusion

63.  For the reasons set out above, I have therefore come to the conclusion that the Defendants have failed to show that they have a defence which has a real prospect of success. 

64.  In the circumstances, I dismiss the Setting Aside Summons.  I further order that the paragraph 1 of the Amended Order be amended to read as follows:

“1. The Plaintiff do recover against the 1^st and 2^nd Defndants the sum of HK$167,648.81 HK$167,788.43  being the total outstanding amount together with accrued interest calculated up to 11 August 2005 and (a) further interest on the outstanding principal balance of HK$152,334.73 at the daily rate of HK$23.04 HK$24.52 from 12 August 2005 to the date hereof (i.e. 20/9/2005) and thereafter at judgment rate until full payment.”

65.  There be an order nisi that costs in the Striking Out Summons and the Stay of Execution Summons, including any reserved costs be to the Plaintiff, to be taxed if not agreed.