CHEUNG CHI PO v. KE JUN XIANG

HCA1168/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1168 OF 2009

____________________

BETWEEN

____________________

_________________

J U D G M E N T

_________________

Introduction

1.  This is an appeal from a decision of a master, allowing  a default judgment to be set aside.  It comes about in the following way. 

2.  On 11 May 2009, the Plaintiff issued a writ against the Defendant claiming the sum of HK$25 million as pleaded in paragraph 1 of the specially endorsed statement of claim, which stated that “The Plaintiff’s claim is for $25 million, money payable by the Defendant to the Plaintiff, being the sum of $25 million lent by the Plaintiff to the Defendant on the 1st day of November 2007 and repayable on 31 December 2007, together with interest on the said sum of $25 million at the agreed rate of prime rate plus 2.5 per cent per annum from 1 November 2007 until repayment pursuant to a Chinese promissory note dated 1st day of November 2007, signed by the Defendant”.

3.  On 10 June 2009, final judgment was entered against the Defendant as a result of his failing to file a notice of intention to defend.  On 17 December 2010, the Defendant applied to set aside that default judgment and sought an extension of time within which to file an acknowledgement of service and within which to file a defence to the claim.

4.  The matter came before the master on 20 April 2011 when the master set aside the default judgment and gave leave to file an acknowledgement of service out of time.  He also gave leave to the Plaintiff to amend his statement of claim in accordance with his affirmation dated 25 January 2011.  The reason why the master did that was because it seems that he decided the default judgment should be set aside because the pleaded case on which judgment had been entered was inconsistent with the affirmation evidence filed by the Plaintiff, such that the Plaintiff should have leave to amend his claim to bring his pleading in line with his evidence.

5.  By notice of appeal dated 12 May 2011, the Plaintiff asks for the order of the master to be set aside and, in effect, for the default judgment to be reinstated.  The notice of appeal also asks for an enlargement of time for filing the notice because it was actually filed eight days after the period within which an appeal was able to have been brought under the Rules. 

6.  Mr Isaac Chan has appeared for the Plaintiff and Ms Connie Lee for the Defendant, and I am grateful to both of them for their clear skeleton arguments and economic and clear oral submissions.

Applicable Principles setting aside Default Judgment

7.  The principles applicable to the setting aside of a regular default judgment, such as the judgment with which I am concerned in this case, are well settled and need not be set out at any great length. 

8.  In short, the burden is on the Defendant to satisfy the court that his case has a real prospect of success.  To do so, he must satisfy the court that his case and the evidence that he adduces in support of it carry some degree of conviction.  Unless potentially credible affidavit evidence from the Defendant demonstrates a real likelihood that he will succeed on those facts, he cannot show that he has a real prospect of success.  Necessarily, this requires the court to form a provisional view of the probable outcome of the action.  However, it is clear that the burden upon a defendant seeking to set aside a regular default judgment is higher than the burden which is applicable on a defendant seeking to avoid summary judgment under Order 14.

9.  As to extensions of time, the court’s approach to the consideration of granting an extension of time is not mechanistic nor rigid, rather, it is evaluative and the court will take into account at least the following matters:  (1) the length of delay; (2) the reason for the delay; (3) the prospects of injustice, including of course the prospects of success on the merits of the appeal; and (4) the degree of prejudice to the other party.  The greater the delay and the weaker the excuse for the delay, the better the merits that are likely to have to be shown in order to justify the grant of an extension.  Where the delay is inexcusable, the party seeking an extension must show a real prospect of success on the merits.

10.  Because of the nature of this appeal and the need for the application to extend time within which to bring the appeal, there is necessarily an overlap in the principles.  The question then arises as to which of the applications need to be dealt with first.  Logically, the request for the extension should be dealt with first but, as that requires a consideration of the merits of the appeal, inevitably, I will have to look at the merits of the actual argument on the appeal.

11.  This has thrown up in argument a question as to where the burden might lie.  Understandably, Ms Lee has sought to emphasise that where the Plaintiff requires an extension of time within which to bring this appeal, the burden is on the Plaintiff to show sufficient merit in the appeal as might, against the other factors, justify the grant of the extension.  She says there is no burden on the Defendant to show again the merits that were demonstrated to the master. 

12.  On the other hand, Mr Chan says that any appeal would be a hearing de novo so, just as before the master, the burden is on the Defendant to show a real prospect of success in his proposed defence if the claim is permitted to go to trial.

13.  In my view, the case is not likely to turn upon particular burdens and, inevitably, I must form a view on the merits of the substantive argument on the appeal in deciding whether or not it is of any real benefit or appropriate to allow an extension of time within which to bring that appeal.  That is, in my view, the key area for consideration on this application, namely looking at the substantive merits. 

Delay

14.  But I think I can usefully deal with the other points first.  As regards the delay, the length of delay is eight days after the end of the 14-day period within which the notice of appeal ought to have been filed in accordance with the Rules.  The explanation that has been offered is that it took time to obtain instructions to bring the appeal and that the 14-day period straddled the Easter holiday period which made communication between Plaintiff and solicitor more difficult.

15.  Ms Lee has pointed out that even after the end of the holiday period, there was a period of five working days within which to have been able to take instructions, and that the filing of a notice of appeal against a master’s decision requires only a short one or one and a half page document, rather than any lengthy detailed drafting consideration or process.

16.  The Rules of Court as to the timing within which to bring appeals are there to be obeyed and the explanation that has been put forward in this case is, in my view, rather weak.  On the other hand, the delay is not very long and ultimately, in considering the question as to whether or not to grant the extension, as I have pointed out, I must still look at the merits. 

17.  In considering whether there is a real prospect of success on the appeal, I am necessarily looking at whether or not, ultimately, the Defendant is able to demonstrate a real prospect of success of his potential defence.  I do not think that the delay of itself is fatal to the grant of an extension of time within which to bring this appeal.

18.  As to the question of prejudice, none is alleged but I accept that the absence of prejudice to a would-be respondent is not a ground for extending time.  On the other hand, that there is no prejudice suggested is a factor that I can take into account.  In any event, in this case, any real prejudice is, in effect, in facing a de novo argument on the merits of setting aside a default judgment which can be fully argued and, indeed, has been fully argued.

The Merits

19.  I turn then to consider the particular merits.  The pleaded case of the Plaintiff I have already identified.  In seeking to set aside the default judgment entered on that pleaded case, the Defendant acknowledged that he had indeed signed the Chinese promissory note, but his explanation as to why he signed it is as follows. 

20.  He said that in running a company, the trading of whose shares had been suspended by the stock exchange, he had been forced to borrow money in his personal capacity and to use it for the company’s purposes in the hope that, ultimately, the company would be able to meet the requirements of the stock exchange to allow resumption of trading in its shares. 

21.  One of the persons whom the Defendant approached to help with the raising of funds was the Plaintiff.  After discussions between them, the Defendant says the Plaintiff agreed to raise a sum of around $25 million and to lend it to him on condition that it be secured, in advance, by the signing of a promissory note for repayment.  The Defendant says he therefore signed the promissory note, relying on the Plaintiff’s assurance that if the loan could not in fact ultimately be provided, that document would be destroyed.

22.  The key part of the defence is that, notwithstanding what is said on the promissory note, which includes an express acknowledgement in the following terms:  “I have personally received the sum of HK$25 million correctly and made this Agreement,” in fact, the Plaintiff had never lent $25 million, nor any part of it, in any manner.  The thrust of that defence is obvious.  Notwithstanding that the Defendant appears to have acknowledged that he was lent the money, he says no money was actually given to him.

23.  In the face of that case, one might have expected the Plaintiff to meet it by demonstrating with evidence that at least some of the $25 million had been paid, if not by demonstrating the totality of it having been paid.  The Plaintiff’s evidence in response, however, deals with a slightly different point.  What he says is that the loan was not a one-off transaction, rather, the Plaintiff says that he was one of a group of people from whom the Defendant had from time to time sought to borrow money to help with his business and that, since about 2003, the Plaintiff had provided various loans varying in amount from a few hundred thousand dollars to a few million dollars.  Sometimes these were paid in cash in Mainland China when the Plaintiff and the Defendant met there, sometimes the payments were made directly to debtors on behalf of the Defendant, and sometimes the Defendant asked for money to be transferred to his wife’s account. 

24.  The Plaintiff says that the total amount of loans accumulated to about $25 million by 2007 and as he became increasingly insecure that the Defendant would repay that sum, he asked for his interests to be better protected by the Defendant’s signing the promissory note for repayment.  He says the note was signed in a restaurant when the Defendant signed it and his signature was witnessed by a Mr Shao, another executive director of the relevant company.  The Plaintiff says also present was his own assistant.  I note here that neither Mr Shao nor that assistant have given any affidavit evidence.

25.  Mr Chan, on behalf of the Plaintiff, acknowledges that the Defendant’s case is a total denial of indebtedness rather than a technical denial of the basis of indebtedness.  He argues that the Defendant’s case, based on mere assertions in the face of the clear acknowledgement of indebtedness on the face of the promissory note, falls far short of showing the necessary degree of conviction as might permit the order to set aside the default judgment.  He says the defence is obviously incredible and is simply an attempt to play for time.  He argues that the suggested arrangement behind the promissory note, as put forward on behalf of the Defendant, is totally devoid of commercial sense if not also commonsense. 

26.  He also relies upon the fact that the Defendant has not filed any further evidence in response to the Plaintiff’s affidavit, despite having leave to do so.  No explanation is offered, says Mr Chan, of how Mr Shao came to sign the promissory note as a witness and it would be reasonable to have expected Mr Shao to have produced evidence supporting the Defendant’s case if it were true.

27.  Mr Chan also relies upon the way in which the Defendant has dealt with this case as undermining the Defendant’s credibility.  He appears to have broadly ignored a solicitor’s demand letter, apparently on the basis that the Plaintiff told him to ignore it, and then the commencement of proceedings which he says he did not take seriously.  There is also some delay to which Mr Chan can point in the Defendant’s even applying to set aside the default judgment. 

28.  It seems to me that there is force in Mr Chan’s argument that the explanation offered by the Defendant does not make much commercial sense.  I accept that there are inherent improbabilities in the story.  There is always a difficulty in getting round a clear acknowledgement of indebtedness signed by the debtor and I note that the promissory note itself is signed by the parties by reference to characterisation of ‘debtor’ and ‘creditor’ respectively. 

29.  On the other hand, ultimately, as I have pointed out, the defence is simply one that no money was actually lent.  To have demonstrated that there was no merit in that proposed defence, I would have expected the Plaintiff to have produced at least some evidence of at least some part of the $25 million having actually been lent.  When some of the money is suggested to have been made by bank transfer, the Plaintiff ought to be able to produce evidence demonstrating the transfer. 

30.  Ms Lee says that this is one of those cases where it may be that the Court will have doubt about both the cases of the Plaintiff and Defendant respectively.  She has referred to a decision of Keith J in Guangdong International Trust and Investment Corp Hong Kong (Holdings) Limited v Yuet Wah (Hong Kong) Wah Fat Limited & Anor [1997] 2 HKC 696 where, at 704, Keith J expressed that he found himself in something of a dilemma.  He said:

“On the one hand, the authorities require me to form a provisional view of the probable outcome of the action. On the other hand, it may not be possible to form even a provisional view when the outcome of the action is so dependent on whose evidence is likely to be accepted. In my judgment, this is one of those rare cases in which a provisional view of the probable outcome of the action cannot sensibly be formed without an assessment of the witnesses.

A not dissimilar problem was discussed by the Court of Appeal in Allen v Taylor[1992] 1 PIQR 255. At 259, Dillon LJ said: ‘It is quite impossible to be dogmatic about the extent to which the court must be satisfied of the validity of the suggested defence. There must be numerous cases where the issue will turn entirely on the assessment of the facts at trial. Each party’s case would carry conviction if it stood alone and without conducting a trial, the court is not able to say which will succeed’.”

Keith J continued:

“In such cases, an appropriate test to determine whether the defendant has a real prospect of success is to ask whether the defence could well be established at trial.”

31.  Mr Chan says that such cases are cases where each party’s case would carry conviction if it stood alone, and he says that if you look at the Defendant’s case alone, it does not carry conviction. 

32.  Ultimately, at the end of the day, it seems to me that the Defendant does demonstrate sufficient prospects of success that would entitle him to set aside the default judgment.  There are clearly questions that can arise in relation to the case for the Plaintiff and the case for the Defendant.  Those questions can only sensibly and appropriately be dealt with in the interlocutory process to and at a trial.

33.  For those reasons, it seems to me that the master’s order should be affirmed.  It may not matter whether or not I refuse the extension of time for that reason or whether I grant the extension of time but dismiss the appeal.  On balance, it seems to me that the correct order would be to accept that the Plaintiff could show sufficient prospects of success on the possible appeal that I would, in the exercise of my discretion, grant the extension of time within which to bring that appeal.  But on the appeal itself, and dealing with the setting aside application effectively de novo, for the reasons I have sought to articulate, I am satisfied that the default judgment should be set aside.

(Submissions on costs)

34.  On behalf of the Defendant, Ms Lee asks me not to interfere with the costs order made by the master, which was that the costs of the application should be costs in the cause with certificate for counsel, and she asks for the costs of the appeal. 

35.  On behalf of the Plaintiff, Mr Chan points out that the usual costs order when a regular judgment is set aside is for the Plaintiff to be awarded his costs in any event.  He therefore asks me to set aside the master’s costs order and to replace it with such an order as regards the costs before the master.  As to the costs of this appeal, he suggests that the costs should be in the cause.

36.  Costs are obviously in my discretion. In the exercise of that discretion, I will not interfere with the order made by the master in respect of the application before him, but in the particular circumstances of this case, I do not think that the costs should simply follow the event of the appeal and I will make a similar order, that the costs of the appeal should be costs in the cause.  In case I need to do so, I would also grant a certificate for counsel.