KOWLOON DEVELOPMENT FINANCE LTD v. PENDEX INDUSTRIES LTD AND OTHERS

HCA 813/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 813 OF 2006

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DECISION

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The appeal

1.  On 29 July 2010, the plaintiff (KDF) took out a summons to re-amend the Statement of Claim, and for leave to adduce two additional witness statements.  The application was opposed by the defendants. On 26 November 2010, the Master allowed the applications and gave consequential directions for an amended defence and witness statements in reply.

2.  The defendants now appeal against that order.

The background facts

3.  In January 1998, Pendex borrowed money from KDF, and gave as security, first a mortgage over a property it owned, situated in Canberra Villa, and, second, Mr Chan and Ms Yu both gave personal guarantees for the mortgage advance.

4.  Pendex fell into arrears and on 23 October 2003, KDF began legal proceedings against Pendex and Mr Chan and Ms Yu by way of an Originating Summons, in the usual way under Order 88, under HCMP 4679 of 2003 (the 2003 proceedings).  Those proceedings were compromised on 8 January 2004, by a Tomlin order, (the Tomlin order), which stayed the proceedings, and required the defendants, collectively, first, to pay outstanding loan installments, interest, costs and insurance totalling $377,600.  Second, the order required the defendants, again collectively, to pay 12 specified monthly installments by 24 post dated cheques.  Third, the defendants were collectively required to pay interest on the outstanding loan, stated as being $21,591,264.12 at the rate of 10% per annum from the date of arrears to 18 December 2003, and that the rate of 8% per annum thereafter.

5.  By clause 6 of the Tomlin order the arrangement was specified to continue until 21 December 2004.  The order provided that if the defendants made the payments totalling $2,537,600 prior to 21 December 2004, KDF agreed to review the amount of repayment mortgage installments annually thereafter.

6.  The defendants again fell into arrears. Negotiations took place, and by a further consent summons, the defendants, collectively agreed to pay an insurance premium and 12 equal monthly installments of $325,000 by way of 12 post dated cheques commencing from 21 January 2005, the day after the order, (the January 2005 order). 

7.  There were difficulties on the part of the defendants in having those cheques honoured.  Discussions took place between an officer of KDF and Mr Chan in respect of repayment in June and July 2005, but the matter did not progress and no repayment of the outstanding principal or any interest was made.

8.  On 15 September 2005, KDF, having changed its solicitors, took out a summons seeking payment of the sum of $19,861,731.26 being the balance of the principal payable under the mortgage as at 30 August 2005, or delivery of the mortgaged property, (the 15 September 2005 summons). Subsequently, some time prior to 12 December 2005, the new solicitors took out a summons seeking amendment of either of the Tomlin order or the January 2005 order, both of which contained orders staying the proceedings, (the December 2005 amendment summons).  It is not clear to me why that summons was taken up.  I assume that some issue had been raised as to the fact that proceedings had been stayed and no steps had been taken to lift the stay to allow recovery proceedings to continue.  In the event when the matter was heard on 12 December 2005, the 15 September 2005 summons was abandoned, and the December 2005 amendment summons proceeded, but was dismissed.

9.  On 31 December 2005, KDF demanded from the defendants are sum of $18,794,432.66, being the outstanding principal at 21 December 2005.  The defendants, by their solicitors, responded, asserting that as all payments had been made that were required to be made by the Tomlin order, and the January 2005 order, all claims made by KDF against the defendants had been satisfied and nothing further was due.

10.  If correct this would result in the somewhat remarkable proposition that in December 2005, KDF had agreed to accept 12 monthly installments totalling $3.9 million in full and final satisfaction of an outstanding debt of some $19 million, and at the same time apparently abandoned any rights they might have to recover the balance from the secured property.

The progress of the proceedings

11.  In the light of this position, and apparently recognising that there had been a stay in respect of the Originating Summons, in March 2006, KDF commenced the present action proceedings, asserting that neither the Tomlin order nor the January 2005 order extinguished KDF’s rights under the mortgage to pursue the balance of the principal or to exercise its rights as a mortgagee.

12.  Although leave to set the action down was given on 13 June 2007, the action had not been set down for trial.  An affidavit shows that KDF had been given misleading information by its then solicitors. Ultimately, with KDF being resisted at every step procedurally by the defendants, in July 2010, the action was set down to be heard in July 2011.

13.  The trial of the action has been fixed to be heard over 5 days commencing on 7 June 2011.  Although the re-amended statement of claim was filed on 29 November 2010, as were the 2 additional witness statements, the defendants did not seek to adjourn the trial, but instead appealed the decision of the Master, fixing the date for the appeal as 17 March 2011. Instead of serving an amended defence and filing any additional witness statements that might be required, the defendants, on 28 December 2010, applied for leave to file those documents within 21 days after the determination of the appeal.

14.  It is clear from the original statement of claim that an issue at the trial will be the meaning and intent of the Tomlin order and the January 2005 order.  Subsequent to the change of solicitors, KDF have located what appeared to be highly relevant documents which appear to record telephone conversations between officers of KDF and defendants which indicate that all understood that the principal sum remained due an outstanding.  These are documents which ought to have been discovered earlier but they were not so discovered.  That is a relevant factor.

15.  The re-amended statement of claim pleads circumstances said to rise from those documents.  It further goes to clarify the position of KDF as to its understanding of the Tomlin order and the December 2005 order.

16.  The principal objections from the defendants to the amendments are that they are late, after the trial date has been fixed, that they change the focus of the present proceedings, that post-CJR there is no entitlement, merely upon payment of costs to an amendment, and that a pleading ought not to be amended unless the court is of the opinion that the order is necessary that either disposing fairly of the cause or matter or for saving costs.

Discussion

17.  I am satisfied that the amendments do not introduce a new case.  From the very start of these proceedings it has been plain that a central issue is the meaning and effect of the Tomlin order and the January 2005 order.  I accept the submission of Mr Li that the proposed amendments go simply to clarify the matter and more clearly define the real issues.  It is right that the documents on which KDF now seek to rely were not discovered when they should have been, but this is not a situation where KDF should be punished for the sins of its former solicitors.

18.  The merits of KDF’s case are overwhelming.  As I have noted in paragraph 10, the scenario sought to be promoted by the defendants is truly remarkable and makes no commercial sense whatsoever.  If the position taken now by the defendants was the effect of the Tomlin order and the January 2005 order, then there is a very strong argument that a mistake was made by KDF at the least, if not both the parties, and KDF must have a proper opportunity of ascertaining whether that mistake is capable of rectification.

19.  The application is not late as was asserted.  It was made 11 months prior to the trial date, and the delay prior to that has been explained.  Indeed the failure of the defendants to seek an adjournment of the trial, but instead to apply for time to file their papers strongly indicates that they are taking procedural steps in such a way as to delay if possible the trial, but without yet making a formal application for an adjournment.  The position of the defendants bears all the hallmarks of a party readying itself to make application for an adjournment once the appeal is resolved.  I note that Mr Lin specifically disavowed any wish to have the trial adjourned.

20.  By allowing the amendment, the true controversy between the parties can be decided.  The only injustice that could reasonably be argued for by the defendants is that they have no records of the telephone conversations and should not therefore now be required to recall those conversations.  But in that respect they are in no different position than they would have been, had the documents recording the telephone conversations been discovered when they should have been discovered.  Any argument that might have been open that the records have been manufactured will still be open to the defendants.  In any event, the real issue will be the meaning of the Tomlin order and the January 2005 order.

Conclusion:

21.  For the foregoing reasons I am quite satisfied that the Master was correct, and I dismiss the appeal, with costs in the cause to KDF.