SHANDONG XIXAKOU GROUP CORPORATION v. WONG YIM KAU

HCA9758/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9758 OF 1999

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D E C I S I O N

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1. This is the defendant's appeal against the decision of Master Kwan made on 11 June2001 ("Master Kwan's Order") dismissing the defendant's summons issued under Order 13, rule 9, Rules of High Court ("RHC").

Background

2. The events leading to this appeal can be summarized as follows.

3. On 14 June1999, the plaintiff issued the Writ herein against the defendant claiming for the balance of three loans due and owing together with interest. The defendant filed his Defence on 19 July 1999 denying the loans and the indebtedness.

4. The plaintiff then took out a summons for summary judgment ("the O.14 Application"), which was returnable for argument before Master Lung on 10 November 1999. On that occasion, Master Lung granted the plaintiff leave to amend the Statement of Claim. He further granted the defendant leave to file further affirmation and adjourned the application with costs against the defendant. The defendant's 2nd affirmation was filed on 18 November 1999, although it appears from the affirmation that it was in fact affirmed on 8 November 1999, two days before the hearing before Master Lung. The reason for this is unclear.

5. The adjourned hearing took place before Master Yuen on 28 January 2000. At the hearing, Mr William Leung ("WL") of the defendant's solicitors herein ("WKWL") informed the Master that his firm was unable to contact and to obtain further instruction from the defendant. After hearing arguments advanced on behalf of the plaintiff, Master Yuen gave the defendant leave to defend the action on the condition that he paid into court within 14 days the sum of US$608,127 ("Master Yuen's Order"). It is to be noted that WL was present throughout the hearing and had been invited by the Master to submit on the merits of the O.14 Application as well as the condition to be imposed. WL however made no submission on both matters.

6. Shortly after the hearing on 3 February 2000, WKWL applied for and was granted leave to cease to be the solicitors for the defendant.

7. The defendant did not comply with the condition in Master Yuen's Order. On 25 February 1999, upon the plaintiff's application by summons, Master Poon entered judgment for the plaintiff ("the Judgment").

8. For the purpose of enforcing the Judgment, the plaintiff issued a statutory demand, followed by a bankruptcy petition, which was presented on 27 November 2000. The petition was heard on 27 February 2001 and it was adjourned upon the defendant's indication that he would oppose it.

9. On 20 February 2001, WKWL came on record again as solicitors for the defendant. Then on 2 March 2001, a summons was taken out on behalf of the defendant under Order, 13 rule, 9 RHC ("the defendant's Summons") for the setting aside of Master Yuen's Order, the Judgment and for a stay of execution of the Judgment. The defendant's Summons also asks for an order that the O.14 Application be dismissed and for leave to defend the action.

10. On 11 June2001, Master Kwan heard the defendant's Summons and dismissed it with costs. It is against this order that the present appeal lies. By his Notice of Appeal filed on 12 June 2001, the defendant seeks to set aside Master Kwan's Order and asks for relief in terms of the defendant's Summons.

Appeal against Master Kwan's Order

11. The defendant states in his affirmations that after he had affirmed his 2nd affirmation, he was detained in the Mainland until 22 May 2000. Consequently, he could not give instructions to WKWL. On this basis, it is argued that Master Yuen's Order was effectively one made in default of appearance. Similarly, it is argued that the Judgment is a default judgment. The defendant therefore applies under Order 13, rule 9, RHC to set them aside.

12. I am of the view that the defendant's Summons and the appeal against Master Kwan's Order are all misconceived. At the O.14 Application hearing, WL had applied orally to Master Yuen to cease acting for the defendant. In my view, Master Yuen was quite right to refuse the application, given that it was not properly made and no evidence had been filed to support it. Notwithstanding that no less than seven affirmations had been filed for the defendant, it has not been identified what were the matters that necessitate specific instructions from the defendant to enable him to be properly represented at the O.14 Application. It could not be assumed that because the defendant could not be contacted, his legal representative would not be able to properly represent him or argue the O.14 Application on his behalf. This is particularly so when one considers that he had the opportunity to file a 2nd affirmation to deal with the plaintiff's affirmations, which were filed in response to the defendant's 1st affirmation. The last round of evidence was to come from the plaintiff since Master Lung had ordered that no further evidence was to be filed without leave. Additionally, Master Yuen had invited submissions from WL, who indicated that he had no submissions to make.

13. In the circumstances, the suggestion that the defendant's case had not been presented at the O.14 Application hearing is simply not made out. There is no basis to equate the hearing with one carried out in the defendant's absence. It follows that Master Yuen's Order is not an order made in default of appearance of the defendant. If the defendant is dissatisfied with it, he should have appealed against it. The application to set it aside under Order 13, rule 9, RHC is therefore misconceived.

14. The application for judgment before Master Poon was consequential upon the failure to comply with Master Yuen's Order. Although the defendant was absent before Master Poon and WKWL had come off the record one day prior to the hearing, the Judgment was not a judgment entered in default of appearance. The application to set the Judgment aside on the basis that the defendant was absent per se is also misconceived.

15. For these reasons, Master Kwan was right to dismiss the defendant's Summons.

16. Indeed, Mr Chan who appeared for the defendant at the appeal did not insist on the course of appealing against Master Kwan's Order. Instead, he asked me to treat the appeal as if it were an appeal against Master Yuen's Order and the Judgment out of time. In the interest of saving costs, I accede to counsel's request and treat this appeal as an appeal out of time against Master Yuen's Order and the Judgment.

Appeal out of time

17. There can be no doubt that these appeals are seriously out of time. In deciding whether to extend the time for appeal, regards will generally be to:

(a) the length of the delay,

(b) the reasons for the delay,

(c) the merits of the appeal, and

(d) the prejudice to the respondent to the appeal :

Chiu Sin-chung v. Yu Yan-yan Angela [1993] 1 HKLR 225, 558, Wong Kam Hong t/a Continental Knitting Factory v. Triangle Motors Ltd [1998] 2 HKLRD 330.

18. In the present case, the earliest attempt by the defendant to overturn Master Yuen's Order and the Judgment was made almost one and a half years later. The defendant explains the delay on two grounds. Firstly, it is said that he was detained in the Mainland between 12 November 1999 and 22 May 2000, and he only learnt of the Judgment in June 2000. Secondly, the defendant says that he started discussions with Mr Tian Wen Ke ("W.K. Tian") of the plaintiff in October 2000 and eventually reached agreement on the settlement of the case, a matter that I shall return to later.

19. The plaintiff does not accept the veracity of the defendant's explanations. In particular, Mr Chau for the plaintiff doubts if WL would not have communicated Master Yuen's Order to the defendant's wife, with whom he had maintained contact after the defendant's detention. The plaintiff also denies having reached settlement agreement with the defendant.

20. That aside, even on the defendant's account, there is no explanation why he did not take any step to set aside or appeal against Master Yuen's Order or the Judgment between June and October 2000. Looking at the timing of the defendant's Summons, it is likely that it was prompted by the bankruptcy petition, which had been ordered to be served by substituted service on 16 February 2001.

21. In my view, the defendant has not afforded convincing reasons for the delay. The long period of delay has caused some prejudice to the plaintiff. The plaintiff had taken substantial steps to enforce the Judgment by issuing statutory demand and bankruptcy proceedings. To say the least, had the defendant acted promptly, the bankruptcy petition would not have been issued. Notwithstanding all these, the most important consideration remains to be the merits of the appeals, to which I now turn.

The plaintiff's claim

22. The plaintiff's claim, as appears by the Statement of Claim, is a simple debt claim. The plaintiff pleads that three loans, in the respective amount of US$120,000, US$60,000 and US$400,000, (collectively referred to as "the three Sums") were lent to the defendant. In respect of the last loan, it carries interest at 11.76% per 300 days and as at 20 September 1997, the interest accrued is US$158,368. After giving credit for a sum of US$130,151, the outstanding balance claimed is US$608,217. It is the plaintiff's case that the loans were evidenced by a Chinese document dated 21 September 1994, referred to by the parties as a statement of indebtedness ("the Statement of Indebtedness").

23. Initially, the plaintiff pleads that the three Sums were lent on 2 August 1993, 15 December 1993 and 30 November 1994. These dates were subsequently amended to be 12 October 1993, 13 December 1993 and 20 June1994. I mention the amendments to the dates because they together with the Statement of Indebtedness are the subject matter of considerable submissions by Mr Chan, to which I shall return later.

The defence case as pleaded

24. The Defence filed is no more than a bare denial. But the defendant had made a total of six affirmations, in which a number of allegations were raised. Two of the affirmations were filed in the O.14 proceedings. Three additional affirmations were filed in support of the setting aside application. The 6th affirmation was in support of the present appeals. In this last affirmation, a draft Amended Defence was exhibited. In considering whether the defendant should be allowed unconditional leave to defend, it is important to see how the defence is being put on pleading and in his affirmations.

25. Put it simply, the defence is that the defendant is not personally liable for the three Sums. The case as appeared by the draft Amended Defence is threefold. Firstly, there was an agreement between W.K. Tian and the defendant that funds of the plaintiff would be transferred to Hong Kong for the personal use of W.K. Tian. For the purpose of disguising the transfers as legitimate investments, money was paid to the defendant's company called Jen Min Diary Food Products Co. Ltd ("Jen Min"), and this included the three Sums. The three Sums had been applied in various ways on the instructions of W.K. Tian. The defendant says he is therefore the agent of W.K. Tian in receiving and applying the money and incurs no personal liability. Secondly, it is pleaded that the defendant did not sign the Statement of Indebtedness in his personal capacity, but on behalf of one Forely Hong Kong Limited ("Forely") and at W.K. Tian's request. According to the defendant, Forely was beneficially owned by W.K. Tian with 45% of the shares held by W.K. Tian and the remaining 55% held by the defendant on trust for him. Hence, the defendant says that the Statement of Indebtedness was a document between the plaintiff and Forely, and any indebtedness mentioned therein was owed by Forely. The third defence pleaded is compromise. It is pleaded that the plaintiff had in October 2000 accepted delivery of a jade sculpture of about RMB8.8 million as settlement of Forely's indebtedness as mentioned in the Statement. The defendant says that there is thus no sum due or payable by him.

26. It is not necessary to deal with the third defence of compromise. As accepted by Mr Chan, it is not relevant for the present purpose, since the settlement agreement was said to be made after the Judgment was entered. It cannot afford the defendant a ground for unconditional leave to defend, though it may be relevant to the issues in the bankruptcy proceedings.

The affirmation evidence

27. The main dispute between the parties turns on the nature of the three Sums and whether the defendant is under any liability to repay the plaintiff. Although the defendant had maintained in his first two affirmations filed in the O.14 proceedings that he had no personal liability for the three Sums, his elaborations on the reasons are not quite the same as what are pleaded in the draft Amended Defence.

28. In his affirmations, the defendant first stated that the plaintiff is a "collective" enterprise owned ultimately by the state of the PRC, and W.K. Tian is its legal representative. At the initiation of W.K. Tian, Forely was set up to serve as a window company of the plaintiff. The defendant had agreed with W.K. Tian to be his agent and trustee by acting as a nominee shareholder and director of Forely. The defendant further said that W.K. Tian had caused the plaintiff to remit sums of money from the Mainland to Hong Kong to finance the expenses of Forely, which included the costs for acquiring properties in Hong Kong and also the expenses incurred by W.K. Tian and other officials of the plaintiff during their visits to Hong Kong.

29. Specifically on the three Sums, the defendant said that one Mr Tin Ming Chung ("Tin") paid the first two sums of US$120,000 and US$60,000 to Forely whereas the third sum of US$400,000 was advanced to Forely by the plaintiff's subsidiary company. All the money was however used by W.K. Tian.

30. As to the Statement of Indebtedness, the defendant explained that it was made out for the purpose of legitimizing the remittances to Hong Kong in contemplation of a takeover of the plaintiff by a conglomerate under the control of the PRC State Council. The takeover eventually did not materialize. The defendant pointed out that, in signing the Statement of Indebtedness, he had taken care to add a comment that the three Sums were all required by Forely for development in Hong Kong.

31. The plaintiff, in the round of affirmations filed in response to the defendant's 1st affirmation, pointed out that Forely is a company owned jointly by W.K. Tian (55%) and the defendant (45%). Indeed, the company record shows the two of them to be the directors and, at one time, the only shareholders of Forely. The defendant's shares were subsequently transferred to his company, Jen Min. Clearly, the transfer is at odd with the defendant's contention that he was a nominee shareholder and trustee. In his 5th affirmation, the defendant explained the 55% shareholding of Jen Min on the basis that it would enable part of the profits of Forely to be retained in Hong Kong. I find the explanation unconvincing. It is not necessary to effect a transfer of shares in order to achieve the purpose alleged.

32. As to the three Sums, the plaintiff exhibited banking documents showing that they were transferred from Tin's bank account into the bank account of Jen Min. According to the plaintiff, the money in Tin's account was held by Tin on trust for it. Consequently, the defendant, in his 2nd affirmation, no longer maintained that the three Sums were paid to Forely by Tin or the plaintiff's subsidiary, but accepted that they had been transferred from Tin's account into Jen Min's account. He explained that Jen Min was involved as an intermediary company for the purpose of channeling funds from the plaintiff into Forely.

33. The defendant further stated that Jen Min had over the years injected funds into Forely to finance its expenses. In particular, he exhibited deposit slips to show that two sums of HK$32,000 and HK$100,000 had been deposited into Forely's account by Jen Min in April and October 1995 for meeting mortgage payment obligations of Forely. However, it is apparent from TMC-9 exhibited to the affirmations filed by the plaintiff subsequently that although the mortgage loan was taken out by Forely, the initial payments for the purchase of the property in May 1994 came from the plaintiff's funds. The defendant had also acknowledged in another exhibit, TWK-4, that the property was beneficially owned by the plaintiff. The plaintiff accepts that the defendant did pay the mortgage payments until the end of 1995, but points out that the amount he paid had been taken into account and forms part of the US$130,151 set-off mentioned in the Statement of Indebtedness and pleaded in the Statement of Claim. The reference to these two payments, in the light of the available documentary evidence, does not advance the defendant's case that Jen Min had been injecting funds into Forely.

34. As to the Statement of Indebtedness, the plaintiff denies that it was prepared in contemplation of a takeover and says that the contents reflect the true position, namely, there was a settlement agreement between the plaintiff and the defendant whereby the plaintiff waived a RMB510,000 investment loan together with interest and also set-off the sum of US$130,151 against the three Sums.

35. Such was the state of evidence before Master Yuen on the O.14 Application. Up to that stage, the defendant's case is that the liability to repay the three Sums was that of Forely. The defendant maintained the same stance in the 3rd to 5th affirmations filed in support of the setting aside application. He continued to assert that "the loan" and "loan agreement" were made with Forely and that the plaintiff had sued the wrong party. This is to be contrasted with the first defence pleaded in the draft Amended Defence, namely, the defendant received and applied the three Sums as agent for W.K. Tian. Forely does not feature at all in this line of defence. Forely is only pleaded in the context of the second defence relating to the Statement of Indebtedness and the capacity in which the defendant signed it.

36. Additionally, in the 6th and last affirmations, the defendant exhibited the accounts and ledgers of his company, Jen Min, and endeavoured to account for the flow of the three Sums, which admittedly had gone from Tin's account to Jen Min. In respect of the first two sums of US$120,000 and US$60,000, they were paid into Jen Min's US currency account. Out of which, US$80,000 (equivalent to HK$617,480) was transferred into Jen Min's Hong Kong currency account. Two sums of HK$300,000 and HK$280,000 were paid out to one Peroci Limited (普樂斯有限公司) ("Peroci"). The defendant said that they were paid to Peroci on W.K. Tian's instructions. The third sum of US$400,000 (equivalent to HK$3,089,800) also went into Jen Min's Hong Kong currency account. The defendant claimed that out of it, HK$2,908,000 had been paid to one Mr Cheung (張小宇) on W.K. Tian's instruction and to discharge W.K. Tian's gambling debt.

37. W.K. Tian, in his 4th affirmation, denied giving instructions for the payments to Peroci and Mr Cheung.

Merits of the defence

38. What is plain from the account given in the defendant's 6th affirmation is that the three Sums, after going into Jen Min's account, did not go out to Forely. The ledgers of Jen Min certainly do not show this. On the contrary, they show that funds of Jen Min were deployed to meet the personal expenses of the defendant. There were payments of salaries to maid and miscellaneous expenses of Hong Lok Yuen, which according to the company record of Forely, is the residence of the defendant. All these are direct contradictions to the defendant's earlier assertions that Jen Min was involved as an intermediary company in that the plaintiff's money first went to Jen Min and then went out to Forely, and that this was necessary to give Forely an appearance of a company of substance.

39. As a matter of fact, the sums of HK$617,480 (equivalent to US$80,000) and HK$3,089,800 (equivalent to US$400,000) were credited to the director's account in the ledgers of Jen Min. Other than the payments to Peroci and Mr Cheung, there is no account as to what had happened to the balance of the three Sums, which is no less than US$100,000. While the bank passbook shows that the entirety of the three Sums had been transferred out of Jen Min's US currency account, the evidence adduced by the defendant does not reveal how the balance was applied.

40. Even for the HK$2,908,000 paid to Mr Cheung, despite the defendant's assertion that it was to discharge W.K. Tian's gambling debt, the payment was entered in Jen Min's ledgers as "director drawing" by the defendant to Mr Cheung.

41. All these leave one with considerable doubts as to the veracity of the reasons advanced by the defendant in support of his defence that he has no personal liability on the three Sums.

42. Likewise, the defence that the defendant signed the Statement of Indebtedness, not in his personal capacity, but on behalf of Forely is to be viewed with reservations. Although the defendant had elaborated on the comments he wrote on the Statement of Indebtedness in an attempt to show that the liability was Forely's, he did not explain why he signed the Statement of Indebtedness without qualification. Plainly, he had an opportunity to write whatever he like on the document. He could have simply stated that he was signing for Forely. Yet he signed without qualification, notwithstanding that he was allegedly very keen to clarify that the indebtedness was Forely's.

43. Mr Chan nevertheless submits that the perceived weaknesses in the defence case are immaterial. This is because, he says, the plaintiff's case is incredible.

44. One of Mr Chan's main criticisms relate to the amount of the three Sums. According to W.K. Tian, the three Sums were lent as a result of the defendant mentioning to him his financial problems. The amounts said to have been mentioned by the defendant were HK$1 million, HK$380,000 and HK$3 million respectively. W.K. Tian said that the sums paid over to Jen Min's account (i.e. US$120,000, US$60,000 and US$400,000) were slightly more than the amounts requested for by the defendant. Referring to the exchange rate of 1:7.8, Mr Chan submits that the three Sums were not just "slightly", but substantially more than the amounts allegedly required by the defendant. It is therefore argued that the figures just do not tally.

45. Another main criticism of Mr Chan is that the Statement of Indebtedness does not support the plaintiff's claim in that the dates of advancement as mentioned in the Statement of Indebtedness are different from those pleaded in the Amended Statement of Claim. Initially, the dates of advancement pleaded in the Statement of Claim were the same as those set out in the Statement of Indebtedness. The dates in the Statement of Indebtedness were in turn the same as the dates of three loan documents referred to therein. These dates are however not the same as the dates on which the three Sums were transferred from Tin's account to Jen Min's US currency account. In consequence, the Statement of Claim was amended to bring the dates of advancement in line with the dates of transfer as appeared in the bank documents. Based on the difference in dates, Mr Chan seeks to argue that the three loans set out in the Statement of Indebtedness and the three Sums are entirely different loan transactions.

46. In considering these submissions, it must be borne in mind that in an application for summary judgment, a defendant bears the burden of showing triable issues of defence. Where the defence relied upon is considered to be shadowy, leave to defend is to be granted on conditions.

47. In the present case, the plaintiff's claim is for repayment of the balance of three loans. The Statement of Indebtedness is pleaded as a document evidencing the loans, but not the loans themselves. Despite the many things that were said in the affirmations, the defendant does not dispute that he had, through Jen Min, received the three Sums and they were funds of the plaintiff. What the defendant says, however, is that he is not personally liable to the plaintiff to repay the money. Initially the reason given was that the three Sums had gone to Forely for investment purpose and the liability was therefore incurred by Forely. Lately in the draft Amended Defence and the 6th affirmation, the reason given is that the money had been applied on W.K. Tian's instructions and for his personal use. The two reasons are prima facie incompatible with each other.

48. Perhaps in recognition of the incompatibility, Mr Chan has sought, at the adjourned hearing, to argue that there are two different sets of loans, one pleaded in the Amended Statement of Claim and one referred to in the Statement of Indebtedness. It is further submitted that when the defendant mentioned the liability being Forely's, he was referring to the loans identified in the Statement of Indebtedness whereas when the defendant said that he received and applied the money as agent for W.K. Tian, he was dealing with the three Sums, the subject matter of the claim herein.

49. While it can be said that the dates in the Statement of Indebtedness do not tally with the dates of transfer as appeared in the bank documents and pleaded in the Amended Statement of Claim, it is not open to Mr Chan to argue that the three Sums are different from the loans identified in the Statement of Indebtedness. Not only has the defendant made no assertion of the kind in any of his affirmations filed subsequent to the amendment of the Statement of Claim, he has in fact not distinguished between the three Sums and the loans mentioned in the Statement of Indebtedness in his affirmations. The evidence filed by him simply does not bear this argument out.

50. Similarly, the argument that the defendant was referring to the loans identified in the Statement of Indebtedness when he said the loans were incurred by Forely is also not supported by the evidence. The defendant had in his affirmations repeatedly made specific reference to the three Sums and claimed that they had been paid or advanced to Forely to enable Forely to make investments.

51. I will also additionally observe that the merits of the defence pleaded, namely, the defendant received and applied the three Sums as agent for W.K. Tian, is doubtful. It is the defendant's own evidence that the plaintiff is a state enterprise and that W.K. Tian is its legal, meaning authorized or registered, representative. It must be doubtful whether W.K. Tian could apply the plaintiff's funds for his own use and personal purpose. If he could not, then even accepting that the three Sums were not loans to the defendant, the defendant might still be liable to he plaintiff in the law of trust. I am of course aware that the plaintiff's claim is currently not framed in trust, but that does not mean the overall merits of the defence should not be looked at.

52. On the above analysis, it will be fair to say that the defence put up by the defendant is a shadowy one. Leave to defend ought to be granted on condition.

53. Mr Chan submits that I should consider the propriety of the condition imposed by Master Yuen. While the terms of the condition for leave to defend can be reviewed on appeal, this should only be done when there is material before the court. There is none in the present case. Before imposing the condition, Master Yuen had invited submissions from the defendant's legal representative, but none was advanced. At the appeal, although Mr Chan asks me to consider the propriety of the condition, no evidence has been filed to show that the condition should be varied. I cannot agree with the submission that because the defendant has not satisfied the statutory demand, it can be inferred that he is not a man of means. After all, it is the defendant's case that he had in October 2000 reached settlement with the plaintiff. It is therefore not necessarily because of impecuniosity that he did not respond to the statutory demand.

Conclusion

54. For the reasons above, I am of the view that there are no merits in the appeals against Master Yuen's Order granting conditional leave to defend. The Judgment was also properly entered in view of the defendant's failure to comply with the condition imposed. In the circumstances, the court's discretion to enlarge the time for appealing against Master Yuen's Order and the Judgment should not be exercised. Leave to appeal out of time is accordingly refused.

55. There is no reason why costs should not follow event. I therefore make an order nisi that the defendant pays the plaintiff the costs of the appeal, to be taxed if not agreed.