KEY STEP VENTURES LTD v. FUGUINIAO GROUP LTD AND OTHERS

HCA 2327/2017

[2018] HKCFI 2667

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2327 OF 2017

________________________

_______________________

_______________

D E C I S I O N

_______________

Introduction

1.  The plaintiff in this action applies for default judgment against the 2^nd defendant (“D2”) and 3^rd defendant (“D3”), the directors of 1^st defendant (“D1”).  Master Ho refused to grant default judgment on 21 May 2018.  P lodged a Notice of Appeal on 1 June 2018.

2.  The appeal was first fixed before this Court on 11 July 2018 (“Hearing”).  This Court raised two issues at the Hearing, (i) on service and (ii) as P has to proceed to trial against D1 which has filed a defence and counterclaim, whether the cause of action against D2 and D3, as guarantors, is severable from that against D1[1]. The Notice of Appeal was later adjourned sine die with liberty to apply. Subsequent thereto, a 3^rd affirmation of the service clerk Tam Kai Ho (“Tam”) was filed and P’s Counsel Mr Kenneth KY Lam lodged further written submissions for written disposal of the matter.

The claim, defence and counterclaim

3.  P is a company incorporated under BVI laws and D1 is a company incorporated under HK laws. D2 and D3 are brothers.   According to P, D1, D2, and D3 all held shares in a Mainland Chinese company Fuguiniao Co Ltd, which is listed in the Hong Kong Stock Exchange as 1819 HK (“Listco”), and at material times, D2 and D3 were directors of the Listco.  

4.  It is not disputed that on 3 July 2015, P as the “Lender” and D1 as the “Borrower” entered into a Chinese written facility agreement (“Facility Agreement”) with an initial credit limit of HK $150m and the 1^st Loan was drawn down on about 3 July 2015. The Facility Agreement was later varied by 6 Supplemental Deeds (collectively “Supplemental Deeds”) and pursuant to the 4^th Supplemental Deed, the 2^nd Loan was lent by P to D1.  As a security for the two Loans, D2 and D3 each executed a Deed of Guarantee on 3 July 2015 (“Deed of Guarantee”) and 6 Deeds of Confirmation between 6 October 2015 16 May 2016 (“collectively “Deeds of Confirmations”). 

5.  The Facility Agreement contains, amongst other provisions, the following provisions on payment of interests:

(i) D1 must pay interest to P in accordance with the terms of the Facility Agreement;

(ii) Interests shall be at 20% per year, accrued daily (“Non-Default Interests”)[2];

(iii) The suspension of trading of the shares of the Listco on the Hong Kong Stock Exchange for a continuous period of 15 days or more shall be an event of default;

(iv) If D1 is in default, D1 must pay P default interests at the rate of 59% per year, accrued daily (“Default Interests”);

6.  The trading of D1’s shares on the Hong Kong Stock Exchange was suspended on 1 September 2016.  According to P, (i) the due date for the 1^st Loan in the Facility Agreement was 6 October 2015 which was subsequently extended to 4 April 2017 under the 5^th Supplemental Deed; and (ii) the due date for the 2^nd Loan advanced on 18 February 2016 was 16 May 2016 which was subsequently extended to 16 May 2017 under the 6^th Supplemental Deed.  However, due to the suspension of D1’s shares, an event of default had occurred and a written notice was issued and served by P to D1 on 28 September 2016, which was also the date of default (“Date of Default”).  According to P, demand letters dated 28 September 2016 were served on D2 and D3 and duly received by them.

7.  Later, on or about 23 December 2016, D1 executed a share charge in favour of P in respect of 212,550,000 shares of the Listco (“Share Charge”). 

8.  It was not until 9 October 2017, over a year after the Date of Default that P issued the writ herein (“Writ”).  Its statement of claim was filed on 17 November 2017 (“SOC”) and later on 4 December 2017, the Writ was amended (“Amended Writ”) and so was the SOC (“ASOC”). 

9.  In the ASOC, P claims against each of the defendants for a total sum of HK$413,583,692.61 being principal of the 1^st Loan and the 2^nd Loan and Default Interests from Date of Default less part payment of a sum of HK$12,082,247.44, as certified by P’s “Certificate on Quantum” at 16 November 2017, and thereafter at daily interests.  P’s claims against D1 are based on D1’s breach of the Facility Agreement as varied by the Supplemental Deeds, and P’s claims against D2 and D3 are based on their breach of their respective Deeds of Guarantee and the Deeds of Confirmations.

10.  D1’s defence and counterclaim (“D&C”) was filed on 29 January 2018.  Essentially, in the D&C, D has pleaded that the Facility Agreement as varied by the Supplemental Deeds is unenforceable for reasons set out in paragraphs 21 to 25 in the D&C and that P is not entitled to demand for repayment pursuant to the Facility Agreement.  In particular, D1 has made no admission to P’s allegations regarding breaches on the part of D2 and D3 but has averred that P is not entitled to demand payment against D2 and D3 under the Facility Agreement which is unenforceable for reasons set out in paragraphs 21 to 25 in the D&C.

11.  Under paragraphs 21 to 25, D1 says the Default Interests are either prohibited under section 24(1) of the Money Lenders Ordinance, Cap 163 (“MLO”) or deemed to be extortionate under section 25(3) of MLO.  According to D1, the effective Default Interest rate as reflected in P’s Certificate of Quantum comes to 61.14% per annum which exceeds 60 percent per annum.  Although it is not disputed that there was a payment of HK$12,082,247.44 made by D1 to P, it is D1’s case that P has unlawfully applied the entirety of that payment towards settlement of Default Interests.

12.  Further, according to D1, under section 2 of the MLO, the “principal” in relation to a loan means the actual amount lent, and it is D1’s case that the principal of the 1^st Loan actually lent by P and received by D1 was a sum of HK$145,850,000, and subsequently D1 received only HK$100,000,000 as the 2^nd Loan, and that the total principal amount actually lent to D1 was HK$245,850,000, and not HK$255,764,398 as stated in P’s “Certificate on Quantum”.  D1 also counterclaims that the Share Charge is unenforceable and/or otherwise of no effect.

13.  Notwithstanding that D1 has filed its D&C and later a statement of truth signed on 29 January 2018 by D3 as Executive Director, there has been no acknowledgment of service nor defence filed by either D2 and D3.

14.  P first applied for default judgement on 28 December 2017, which was supported by two affirmations of service by P’s solicitors’ service clerk Tam Kai Ho (“Tam”).

15.  There were requisitions raised by the Master’s office on 11 January 2018 (“Requisitions”), to the following effect: -

(1) P was required to provide information under sections 25(4)(a), 25(5)(a) & (b) and 25(6)(a) & (b) of the MLO for the consideration of the Master as to whether the transaction was extortionate under section 25(3) of MLO;

(2) As P’s claims for damages in prayer (1A) of the amended endorsement of claim in the Amended Writ and prayer II of the ASOC are for an unliquidated sum, why was Form 16 for liquidated amount annexed to the Amended Writ used instead of Form 16C;

(3) Why was the amount claimed in the Amended Writ and the ASOC different, and P was to show calculation of the amount of HK$397,934,876.72;

(4) whether P was abandoning the claim for damages sought in the prayer (1A) of the amended endorsement of claim the Amended Writ and prayer II of the ASOC.

16.  On 8 May 2018, P’s director Mr Ma Suen Yee Andrew (“Ma”) filed an affirmation to respond to the Requisitions and on 9 May 2018, P applied for default judgment again.  P has abandoned any claim for damages for the purposes of the application for default judgment against D2 and D3 and without prejudice to P’s claim for the same against D1.

17.  On 9 May 2018, Master Ho refused to grant default judgment in that the amount claimed by P against D1 and guaranteed by D2 and D3 may be regarded as extortionate, if not prohibited, under the MLO and unenforceable and therefore it would be undesirable if the Court were to grant default judgment against D2 and D3.

18.  P lodged its Notice of Appeal on 1 June 2018. 

19.  It is trite that an appeal from the master to the judge in chambers is dealt with by way of an actual rehearing of the application which led to the order under appeal and the judge treats the matter as though it came before him for the first time[3].

Affirmations of service on D2 and D3

20.  There are now 3 affirmations of service filed by Tam, the first two were filed prior to the Hearing.

21.  As seen in Tam’s 1^st and 2^nd affirmations of service, the mode of service of the Writ and the Amended Writ and accompanying documents on D2 and D3 respectively on 10 October 2017 and 4 December 2017 was by way of registered post to an address at Unit 2006, 20/F, West Tower,  Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong (“Unit 2006 Shun Tak Centre”), and that Tam had said in his two affirmations that the said envelopes containing the Writ and the Amended Writ and accompanying documents had not been returned by the Post Office.  Thus, in the opinion of Tam, the Writ and/or Amended Writ so posted would have come to the knowledge of D2 and D3 within 7 days after the date of posting.

22.  At the time of executing the Facility Agreement and the Supplemental Deeds (the 6^th Supplemental Deed being dated 16 May 2016), D1’s registered office was stated to be at Unit L on the 19^th floor, Block 2 of Kam Fung Industrial Building in Kwai Chung (“Kam Fung Building”).  As for D2 and D3, on the Deeds of Guarantee and Confirmation (the last one dated 16 May 2016), their addresses for service of any notice on them were stated to be Unit 1908, 19^th floor, West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong (“Unit 1908, Shun Tak Centre”).

23.  At the Hearing, one of the queries raised by this Court in relation to service was that there was no supporting evidence from P or in Tam’s first two affirmations to explain why Unit 2006, Shun Tak Centre was the usual and last known address of D2 and D3.

24.  Tam’s 3^rd affirmation was subsequently filed on 9 October 2018 confirming that the Writ and the Amended Writ served by registered posts to D2 and D3 at Unit 2006 Shun Tak Centre had by then still not been returned by the Post Office or by any entity.

25.  In Tam’s 3^rd affirmation he exhibited, amongst other things, copies of annual returns of D1 filed in 2017 and 2018 and company particulars of the Listco from the Companies Registry.

26.  The annual returns of D1 were respectively dated 9 April 2017 and 9 April 2018 and indicated that D1’s registered address has since 9 April 2017 been at Unit 2006 Shun Tak Centre.  D2 and D3 remained directors and shareholders of D1 as at those dates.  However, their addresses stated in the annual returns were at Flat A, 18/F, Block 2, Majestic Park, 11 Farm Road, Tokwawan, Hong Kong (“Majestic Park Address”).

27.  Tam only disclosed in his 3^rd affirmation that service had been attempted at the Majestic Park Address, but according to Tam, this address appeared to be a “false” address and this was because P’s solicitors had attempted service at that address, and the service envelopes were later returned to P’s solicitors marked “addressee unknown 查無此人” by the Post Office, and therefore no further documents had been sent by Tam to the Majestic Park Address, and Tam said P did not rely on the attempted service at the Majestic Park Address for the default judgment application.

28.  From the company particulars of the Listco which Tam obtained from the Companies Registry, as at the date of 7 November 2017, the registered principal place of business of the Listco was at Unit 2006 Shun Tak Centre and both D2 and D3 were directors of the Listco, but as of the date of 6 October 2018, D3 has ceased to be a director of the Listco while D2 has remained a director. 

29.  According to Tam, he had also visited Unit 2006 Shun Tak Centre on 10 October 2017 and on 5 October 2018.  He took 2 photographs on 10 October 2017 which only showed that Unit 2006 was the office of Fuguiniao (Hong Kong) Limited and/or Listco and that lights in the office were turned on but no one was at the reception.  The photographs did not show the address or Unit 2006 Shun Tak Centre was the office of D1.

30.  On 5 October 2018, according to Tam, he attended Unit 2006 Shun Tak Centre again at around 4:20pm and when he rang the bell, a male person came out and that the staff was there and he was just the younger brother of someone who worked there.  When asked by Tam whether the office was still that of D1, the male person said yes.

31.  Clause 12 of the Deeds of Guarantee provides that, amongst other things, any notice issued to D2 or D3 under their respective Deed of Guarantee has to be delivered, or sent to the office address/email address/fax address stated therein.  The office address stated in Clause 12 was Unit 1908, Shun Tak Centre and the email address stated thereunder was “jyang@fuginiao.com” (“Email Address”).  The Email Address was according to P that of Jane Yang, Vice General Manager of the Listco.  As for Unit 1908 Shun Tak Centre, it was not clear what address this was, as it was not the registered address of D1 stated on the transaction documents.  No service seemed to have been attempted on D2 and D3 at the Unit 1908 Shun Tak Centre.

32.  Ma had produced in his 1^st affirmation some 181 pages of email correspondence between P and Jane Yang through the Email Address but those emails appeared to be during the period between 25 June 2015 and 7 July 2015, ie the period surrounding the 1^st Loan.  No emails/communications between the parties after July 2015 seemed to have been produced, even though there must have been further communications between P and D1, as according to D1’s D&C, D1 executed the Share Charge in favour of P on 23 December 2016.

33.  Anyway, according to Tam, he had taken the extra step of emailing PDF copies of the Writ to D2 and D3 on 12 October 2017 to the Email Address and that there was an email issued to Tam by his computer software Microsoft Outlook on 19 October 2017 indicating delivery was complete.

34.  What is clear from Tam’s 3 affirmations that P relies on Unit 2006 Shun Tak Centre, ie the registered company address of D1 and the Listco since 9 April 2017, being the usual and last known address as of D2 and D3 and that the service effected on D2 and D3 at Unit 2006 Shun Tak Centre to be due service. 

35.  P also relies on the fact that there was a a Public Notice dated 25 July 2018 which was issued by D2 as Chairman of the Listco under the Listing Rules indicating that as at that date, D2 was still an executive director of the Listco, although D3 was not.

36.  Mr Lam submits that D3 has signed a statement of truth for the D&C filed on behalf of D1, and that as D2 and D3 remained directors of D1 and in particular D3 had signed the statement of truth of the D&C, and that D2 and D3 are brothers, it is Mr Lam’s submission that the Writ and the Amended Writ must have come to the knowledge of both D2 and D3. 

37.  As Stone J said in Transamerica Occidental Life Insurance Co (Hong Kong Branch) v King Sound Industry Co Ltd [2005] 1 HKLRD 125, at paragraph 45 :

“The object of service of process upon a party is to bring the process to the notice of the party to be served, and such manifestly has occurred. The manner in which service has been effected has caused no prejudice, and none is alleged.”

38.  Having considered the above, I am of the view, as D3 had signed the statement of truth and that D2 and D3 are brothers, and further that in the D&C, it was pleaded that P was not entitled to demand payment against D2 and/or D3 due to unenforceability of the Facility Agreement, the Writ and the Amended Writ must have come to the notice of D2 and D3.

Whether P entitled to default judgment against D2 and D3

39.  Mr Lam argued that P is entitled as of right to the liquidated sum claimed when D2 or D3 does not file any notice of intention to defend, and that P is entitled to judgment of the debt as of right.  Mr Lam quoted a passage from what was said by Barma J, as he then was, in paragraphs 15 and 16 of Re Mai Xi Hong, HCB 550/1996, 17 December 2004.  The applicant in that case Mr Mai sought to annul an adjudication order made against him pursuant to the then section 33 of the Bankruptcy Ordinance which was made on the basis of a petition of the creditor who alleged that Mr Mai had committed an act of bankruptcy by failing to make payment to the creditor under a default judgment.  As said by Barma J, the creditor’s claim against the applicant was for a liquidated demand plus interest and costs and on failure of the applicant to give notice of intention to defend the claim, the creditor was entitled as it did to enter judgment for the amount claimed by the writ and costs.

40.  Mr Lam also referred to Bpost Hong Kong Ltd v Jade Incorporation Ltd [2017] 5 HKLRD 453 where Deputy Distrct Judge Benny Lo had said in paragraphs 46-48 thereof, as follows:

“46. To the extent relevant, O 13 contains the following provisions: -

‘1. Claim for liquidated demand (O 13, r 1)

(1) Where a writ is indorsed with a claim against a defendant for a liquidated demand only, then, if that defendant fails to give notice of intention to defend, the plaintiff may, after the prescribed time, enter final judgment against the defendant for a sum not exceeding that claimed by the writ in respect of the demand and for costs …’

‘6A. Prescribed time (O 13, r 6A)

In the foregoing rules of this Order, “the prescribed time” (訂明的時限), in relation to a writ issued against a defendant, means the time limited for the defendant to acknowledge service of the writ or, if within that time the defendant has returned to the Registry an acknowledgment of service containing a statement to the effect that he does not intend to contest the proceedings, the date on which the acknowledgment was received at the Registry.’

‘7. Proof of service of writ (O 13, r 7)

(1) Judgment shall not be entered against a defendant under this Order unless—

(a) the defendant has acknowledged service on him of the writ; or

(b) an affidavit is filed by or on behalf of the plaintiff proving due service of the writ on the defendant; or

(c) the plaintiff produces the writ indorsed by the defendant’s solicitor with a statement that he accepts service of the writ on the defendant’s behalf …’

47. Thus, the two key conditions for default judgment to be entered under O 13 r 1 are: - (i) a writ containing a liquidated claim has been duly served on the defendant, and (ii) the prescribed time for the defendant to acknowledge service has expired. Once the plaintiff demonstrates that those conditions have been met, the plaintiff is normally entitled to judgment. There is no requirement under O 13 for a statement of truth to be filed or served before default judgment can be entered. It is not apparent to this court why the irregular SoT filed in the circumstances of the present case would, as Mr Wan submitted, necessarily affect the plaintiff’s entitlement to judgment under O 13.”

41.  Mr Lam thus submitted that that it was P’s entitlement to enter judgment so long as (1) due service has been proved; and (2) the prescribed time for acknowledging service has expired.  Mr Lam also referred to Pendelton v Westwater [2001] EWCA Civ 1841 where Laws LJ of the English Court of Appeal had said that a default judgment required no consideration of the merits[4].

42.  Mr Lam further referred to the case of Football Dataco Ltd v Smoot Enterprises Ltd (Ch D) [2011] 1 WLR 1978 where Briggs J had said:

“Default judgment is not, in any circumstances, a judgment on the merits. It is in that respect to be contrasted both with judgment after a trial and with summary judgment. The essential distinction between default judgment and a judgment on the merits is that the court is not when asked to give default judgment called upon to form any view about the merits of the claimant’s claim, whether as a matter of fact or law[5].”

43.  However, none of the above cases indicates that it is mandatory under Order 13 rule 1 for the Court to give judgment upon application.  As seen in paragraph 19/7/13 pf the Hong Kong Civil Procedure 2019, Vol 1, even when Order 19 rule 7(1) is expressed in mandatory terms, the court still retains its discretionary power whether to give judgment or to extend a party’s time to plead when it is just to do so.  It may, for instance, where there are matters affecting other parties waiting to be decided, order the motion to stand over until trial.

44.  Having considered the provisions in those rules providing for default judgment, I agree with the Master that whether the court will give default judgment upon application by a plaintiff is a matter of discretion of the court.

45.  P has pleaded that under the express terms of the Deeds of Guarantee, D2 and D3 are now personally liable to indemnify P for all losses, damage and/or other expenses arising out of any non-performance and/or breach of the Facility Agreement and/or the Supplemental Deeds. 

46.  In relation to the issue of severability, Mr Lam referred the Court to the case of The China and South Sea Bank Ltd v Tan Soon-gin George [1990] 1 HKLR 546, a Privy Council judgment on appeal from Hong Kong and submitted a creditor with more than one person to sue is free to decide for himself who (if anyone at all) would like to go after and when, and there is no obligation on the part of the creditor to sue everyone at one go, or indeed to do anything.  Mr Lam had also referred to the case of HSBC Bank (China) Co Ltd and Yip Kim Po, HCA 2472/2007, (unrep) 16 May 2008, and also Re Yohan Chandra, ex p United Overseas Bank Ltd, CACV 671/2001, [2002] 1 HKLRD 404.

47.  Even if the claim against D2 and D3 may be severable from the claim against P, in the present case P is suing against 3 defendants and one of the defendants, namely D1, has filed the D&C in which D1, amongst other things, (i) disputes the amount of the principal amounts of the two loans and (ii) raises the defence that the Facility Agreement (as varied by the Supplemental Deeds) is unenforceable (iii) avers that P is not entitled to demand payment against D2 and/or D3 on the basis of alleged non-payment under the Facility Agreement due to its unenforceability. 

48.  In particular, the defence raised by D1 of unenforceability is an issue common to all the defendants.  If the Facility Agreement and the Supplemental Deeds are found at the trial to be unenforceable, this will affect the P’s claim against D2 and D3.  Further, a default judgement against D2 and D3 may affect the issue of unenforceability raised by D1.

Conclusion

49.  Having considered the above, I am not prepared to give default judgment as claimed by P.  I am of the view that the application should be stood over until trial.

50.  Costs of this appeal be costs in the cause.