NEW CASTLE INVESTMENTS LTD v. WFC HOLDING LTD AND OTHERS

HCA 1632/2018

[2020] HKCFI 829

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1632 OF 2018

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D E C I S I O N

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1.  By summons dated 6 April 2020, the plaintiff applies for leave to appeal against the order of 25 March 2020 whereby I ordered that (1) the time limit for the Ds to appeal against the Order of Master Queenie Lau be extended; (2) save for the last paragraph giving possession of the Premises to the plaintiff, the Default Judgment entered against the Ds be set aside unconditionally; and (3) the Ds be at liberty to defend the action (“25/3/2020 Order”). The plaintiff also seeks a general stay of this action including the execution of the costs order pending final determination of its intended appeal[1].

Leave to appeal

2.  It is well established that leave to appeal would only be granted if the Court is satisfied that the intended appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard.  This means the prospects of succeeding must be more than “fanciful”, without having to be “probable”.  Even if this threshold requirement is met, the Court has a discretion to refuse leave (Hong Kong Civil Procedure 2020 §59/2A/4).   

3.  Where, as here, the intended appeal is an appeal against the exercise of discretion of the judge, the applicant would have to show that it has an arguable case with reasonable chances of success that the relevant decision exceeds the generous ambit within which reasonable disagreement is possible, and is in fact plainly wrong, and not merely the appellate court would prefer a solution which the judge had not chosen (RS v YS, unrep., HCMP 1969/2012, 1 November 2012 (CA)).  This is because an appeal court will not interfere with a judge’s exercise of discretion unless the judge has misunderstood the law or the evidence or the exercise of discretion was plainly wrong (北京橙天嘉禾影視製作有限公司 v 張承勷, unrep., HCMP 2666/2016, 11 November 2016).

4.  Under Ground 1, the plaintiff contends that this Court’s holding that the Default Judgment was entered for incorrect amounts is  erroneous, having regard to the following matters:

(1)  Clause 5.03 of the Tenancy Agreement did not create “a mandatory set-off of the amount of arrears of rent due up to 29 November 2018”. The Court “mischaracterised or misinterpreted” the meaning of §16 of Wong 1^st where it was said that “the Plaintiff exercised its right to set-off under Clause 5.04 of the Tenancy Agreement on 28 November 2018” and “[t]he Deposit was therefore applied to offset the outstanding indebtedness of D1”.  The plaintiff was merely exercising its right under Clause 5.04 by applying the Deposit “to settle the last outstanding claim by the Plaintiff”, and the same was not the result of any “automatic” or “mandatory” set off by operation of Clause 5.03.

(2)  The Deposit held by the plaintiff was in the nature of security for the Ds’ performance of obligations under the Tenancy Agreement (Pendex Industries Ltd v Wong Wan Chu, unrep., HCA 1194/2000, 28 November 2001 §43).  The Deposit is an “earnest” which guaranteed performance of the contract (Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 §9).  

(3)  The Court ought to have stayed or adjourned the action pending determination of the Bankruptcy Appeals.

5.  I do not think these points meet the threshold required for an appeal against exercise of discretion in that:

(1)  The arguments ignore the plaintiff’s own evidence (§16 of Wong 1^st) where it characterised its right to apply the Deposit to offset the Ds’ indebtedness as a right of set off. 

(2)  It has never been the plaintiff’s case that the Deposit was in the nature of a security.  Such contention would be untenable as the provisions under Clause 5 in particular, the plaintiff’s right to use the Deposit “as his own money” do not conform with the characteristics of a consensual security, which has been stated in Goode and Gullifer on Legal Problems of Credit & Security, 6^th ed, §§1 – 17 as: (i) it is a right given by a debtor to a creditor in an asset; (ii) the right is by way of grant of an interest in the debtor’s asset, not by way of reservation of title to the creditor; (iii) the right is given for the purposes of securing an obligation; (iv) the asset is given in security only, not by way of outright transfer; and (v) the agreement restricts the debtor’s right to dispose of the asset free from the security interest.

(3)  There was no suggestion by the plaintiff that the action ought to have been stayed or adjourned pending determination of the Bankruptcy Appeals. 

6.  In Ground 2, the plaintiff makes the same argument that the Ds had elected to comply with the Condition and, as such, should be estopped from appealing against the Master’s Order.  The point has been considered in §§46 – 47 of the Decision.  The plaintiff has not articulated any basis, whether in the draft Notice of Appeal (“NOA”) or written submissions, as to why the holding is plainly wrong. 

7.  As for Ground 3, it is submitted that even if the holding that by reason of Clause 5.03 (Deeming Provision) was correct, the plaintiff would only have been able to obtain a judgment in the amount stated in §16 of Decision.  The Court should not set aside the Default Judgment, but should have varied the same (applying Bank of Credit and Commerce International (Overseas) Ltd v Habib Bank Ltd [1999] 1 WLR 42 and Tian Yao (Xiamen) Property Development Co Ltd v Right Margin Ltd [2016] 2 HKLRD 175), as the Ds had not contended that the Default Judgment was entered for incorrect amounts.  I do not think the submission has a reasonable prospect of success.  As the authorities discussed in §§37 – 39 of Decision show, it was a matter for the Court to decide whether to set aside or vary a default judgment entered for too much.  Whether the point was specifically raised by the Ds is irrelevant. 

8.  As to Ground 4, the plaintiff argues that this Court plainly erred in failing to “reinstate the Master’s Condition” or to impose any other condition when setting aside the Default Judgment.  The matters which it is said that this Court failed to appreciate or take recognizance have all been considered in the Decision.  In any event, it was a matter within the discretion of the Court to set aside ex debito justitiae a default judgment obtained irregularly (see §37 of Decision).   

9.  In Ground 5, the plaintiff challenges the Court’s exercise of discretion in granting an extension of time of 29 days for the Ds to appeal against the Master’s Order.  The issue was considered in §§43 – 47 of Decision. The plaintiff has not identified why the exercise of discretion was plainly wrong.

10.  For the above reasons, I do not find the grounds set out in the NOA have a reasonable prospect of success. 

11.  Lastly, the plaintiff contends that leave to appeal should be granted on the “some other reason” ground, as the focus of the intended appeal turns on the construction of Clause 5.03 which, it is said, “substantially overlaps with the focus of the Bankruptcy Appeals”.  It is argued that granting leave to appeal would unlikely result in any additional costs and time, but refusing leave would “cause difficulties and prejudice” to the plaintiff in that it would have “to re-apply for leave out of time and/or to force the intended action to go ahead to trial for no good reason” (the latter is based on my holding that no meritorious defence has been demonstrated by the Ds)[2].  

12.  I do not find that the matters relied upon by the plaintiff constitute “some other reason” for leave to be granted:

(1)  Amongst the grounds of appeal, only Ground 1 partly overlaps with one of the issues raised in the Bankruptcy Appeals.  I say partly overlaps because in the Bankruptcy proceedings, Mr Lok, on behalf of the plaintiff, argued that the plaintiff “had no obligation to apply the Deposit to offset any debt or [sic] the tenant at any point in time”[3]. On the other hand, in this action, the plaintiff said that it had applied the Deposit to set-off the amount due and payable by the Ds[4]. 

(2)  The plaintiff acknowledges that if leave to appeal is granted, it will have to apply to the Court of Appeal for the intended appeal to be heard together with the Bankruptcy Appeals[5].  As the Court of Appeal will have to consider the plaintiff’s application in any event, it is difficult to see how additional costs and time will be wasted, as the plaintiff suggests.  

(3)  While I hold that all the other defences raised by the Ds in their affirmations do not meet the requisite threshold of a meritorious defence, such holding is not a final determination on the merit of the issues.  In any event, it does not preclude the Ds from formulating their defence and/or counterclaim when they file their defence to address the deficiencies identified in the Decision, if there is a proper basis to do so.  For example, the holding that the alleged repudiatory breach of the tenancy only constitutes a claim against Goodwell Property Management Limited[6] was a view I formed on the basis of the evidence then filed by the parties.  The point was not taken by the plaintiff, and the evidence filed did not distinguish the position between the plaintiff and Goodwell Property Management Limited. 

(4)  In any event, the action has not come to an end.  The Ds have not filed any pleadings in the action.  Nor have the plaintiff proceeded with assessment of damages in respect of the interlocutory judgment. 

(5)  I do not understand why refusing leave to appeal would have the effect of forcing the plaintiff to re-apply for leave out of time.  The time limit for the plaintiff to apply for leave to appeal from the Court of Appeal only starts to run when this Court refuses to grant leave.

13.  For the above reasons, leave to appeal is refused. 

Stay of proceedings

14.  The Summons was issued under Order 59 rule 13 and inherent jurisdiction of the court, but the plaintiff seeks a general stay of the entire action pending final determination of its intended appeal. 

15.  The plaintiff has not addressed why in circumstances where the action has not come to an end and it only seeks to appeal against the 25/3/2020 Order, there is a proper basis for the Court to stay the entire action.  An obvious point which has not been addressed by the plaintiff is why determination of its intended appeal will have any effect on the Ds’ right to file a counterclaim or third party proceeding against the other parties mentioned in their affirmations.   

16.  It is argued on behalf of the plaintiff that “no active steps would need to be taken in the meantime by either party including dealing with the costs order”.  If the plaintiff succeeds in its intended appeal, “all such steps taken in the interim will prove to be wasted” [7].  The argument must be rejected:

(1)  For the reasons identified in §12(3) – (4) above, I do not think that the suggestion that no active steps needs to be taken by the party is well founded.

(2)  As can be seen from the background fact set out in §§17 – 20, 29 – 32 of the Decision and the chronology in §18 of Wong 3^rd, it is clear that the plaintiff has taken many steps in pursuing all possible proceedings against the Ds including issuing multiple statutory demands and commencing bankruptcy proceedings against Mr Foo and Mr Yuan.  As matter now stands, the plaintiff was largely unsuccessful in their proceedings and substantial costs must have been incurred by both parties.  Looking at the matter in the round, the suggestion that the plaintiff is concerned about waste of costs rings very hollow. 

17.  The plaintiff also seeks an interim stay of the action pending determination of its renewed application to the Court of Appeal, in the event that I do not accede to its application for stay.  For the same reasons discussed above, I do not consider that there is justification to grant an interim stay of the action.   

18.  This leaves the application for stay of execution of the 25/3/2020 Order. 

19.  As I hold that the plaintiff has not demonstrated that there exists reasonable grounds of appeal, there is no proper basis to consider granting a stay (Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 at 88I – 89B).

20.  The purpose of seeking a stay is to ensure that the plaintiff does not have to pay the $123,700 awarded to the Ds.  The only justification advanced by the plaintiff is an assertion that “there would be no reasonable probability of getting the costs back if the appeal were to succeed”, having regard to the chronology set out in §18 of Wong 3^rd. 

21.  I do not think that the plaintiff has discharged the onus of showing that there would be no reasonable possibility of getting the costs back if it succeeds in the intended appeal. 

(1)  The chronology relies upon by the plaintiff concerns the $250,000 costs awarded under the Master’s Order, which has now been reversed[8]. Apart from that, the only costs order which has not been complied with is the $64,000 costs awarded by Au-Yeung J against the plaintiff in HCB 7480/2018.

(2)  As for the other matters identified in §19 of Wong 3^rd, they do not support the plaintiff’s contention that the Ds are so impecunious that there would be no possibility of their paying the costs back if the plaintiff were to succeed in its intended appeal. 

22.  As the plaintiff has not demonstrated any good reasons to justify a stay of execution of the 25/3/2020 Order, the application must be rejected. 

Disposition

23.  The Summons is dismissed.  I make a costs order nisi that the plaintiff is to pay the costs of and occasioned by the Summons to the Ds.

24.  The parties have submitted statements of costs for gross sum assessment, with the plaintiff claiming $447,508 and the Ds claiming $111,100.  My preliminary view is to award costs against the plaintiff in the amount of $100,000.  I give liberty to the plaintiff to provide its comments on the Ds’ statement of costs, if any, within 3 days hereof.