VALUE CAPITAL LTD v. KE JUNXIANG

HCA1679/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1679 OF 2008

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BETWEEN

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DECISION

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1.  The defendant appeals against a Master’s decision refusing to set aside the default judgment.

BACKGROUND

2.  By action commenced on 6 September 2008, the plaintiff sued the defendant on 2 dishounoured cheques in the amount of $21.6 million and $10.8 million respectively.  The defendant obtained 3 extensions of time to file a defence. The last one was granted by a Master who ordered that unless the defendant filed and served his defence by 4:00 pm on 10 November 2008, the plaintiff was at liberty to enter judgment (“the unless order”).

3.  On 6 November 2008, acting in person, the defendant, though his assistant, filed a notice to act in person and the defence.  The defendant served the former but not the latter on the plaintiff.  The defence was received by the Court on 7 November 2008.

4.  The plaintiff applied for judgment on the ground that the defendant had failed to serve his defence in breach of the unless order.  Judgment was entered on 9 December 2008 (“the judgment”).  After the judgment was entered, the defendant re-engaged his former firm of solicitors, Messrs. Chong & Partners at the end of December 2008.

5.  About 1 ½ years later, by summons dated 22 June 2010, the defendant applied to set aside the judgment.  Master Kwang dismissed it. 

6.  The defendant now appeals on the following grounds:

A.   That his non-compliance with the unless order was not intentional or contumelious;

B.   That he can demonstrate a defence with a real prospect of success;

C.   That his delay in applying for setting aside is explicable.

A. NON-COMPLIANCE WITH THE UNLESS ORDER WAS NOT INTENTIONAL OR CONTUMELIOUS

The Law

7.  For an unless order that has the effect of debarring a party from defending, the court will consider whether or not his failure to comply could be described as showing perverse and obstinate resistance of authority:

“In my judgment, in cases in which the court has to decide what are the consequences of a failure to comply with an “unless’ order, the relevant question is whether such failure was intentional and contumelious.  The court should not be astute to find excuses for such failure since obedience to orders of the court is the foundation on which its authority is founded.  But if a party can clearly demonstrate that there was no intention to ignore or flout the order and that the failure to obey was due to extraneous circumstances, such failure to obey is not to be treated as contumelious and therefore does not disentitle the litigant to rights which he would otherwise have enjoyed.”

Re Jokai Tea Holdings Ltd. [1992] 1 WLR 1196; adopted in PT Bank Pembangunan Indonesia (Persero) v. Tan Eddy Tansil [1997] HKLRD 57.

8.  The test was elaborated in Chan Chun Lung Allen & Anor v. Ryland Ltd. & Ors, HCA 4904 of 1996, by Ribeiro J as he then was:

“The dual requirements of (i) the lack of contumelious conduct and (ii) the existence of extraneous circumstances excusing non-compliance, overlap. … For non-compliance to be contumelious, there is no necessity for it to involve anything akin to a contempt of court. Non-compliance is contumelious where it is the result of the litigant’s conscious and deliberate decision to ignore or disobey the court’s order in the absence of any extraneous excuse. Such deliberate conduct may be contrasted, for instance, with cases where the litigant has made a serious effort to comply in good faith but has been unsuccessful through bad luck or incompetence (c.f., Ka Wah Bank Ltd. v. Lo Chung-song & anor [1989] 1 HKLR 451), or with cases where the litigant has not complied because of circumstances outside his control (including cases where his solicitor has negligently or otherwise missed the deadline through no fault of the litigant).”

Application of the Law to the Facts

9.  At the time when Master Lung made the unless order, the defendant was represented. He claimed that it was due to the shortness of time that his solicitor could not prepare the defence in time, so he had to act in person.  He served the notice to act in person on the plaintiff by post.  He filed a home-made defence pleading that there was total failure of consideration.  He thought he could subsequently amend it.  He was not aware that he had to serve it on the plaintiff. He claimed that he did not intentionally flout the unless order.

10.  His explanation was inconsistent with his then solicitors’ version in correspondence. Messrs. Chong & Partners had invited the plaintiff to set aside the judgment. They stated in a letter dated 27 December 2008 that they were “further instructed that apart from the said registered speed post [sending the Defence and Notice to Act in Person to the Court], the Defendant’s assistant also sent the Defence and Notice to Act in Person both signed by the Defendant to your firm at the same time by registered post, which were arrived at your firm at November 11, 2008 2:37 pm.  In the premises … the Defendant has duly complied with the [unless order] and the [judgment] should be set aside.”  No explanation was proffered by the Defendant as to why Messrs. Chong & Partners would have written that letter in a way contradictory to the Defendant’s present explanation for breach of the unless order.

11.  From Messrs. Chong & Partners’ version, it was clear that the defendant knew of the obligation to serve the defence on the Plaintiff.  Even on his solicitor’ version, the service was only effected on 11 November 2008, which was still beyond the time imposed by the unless order. 

12.  I find that the defendant’s assertion that he was ignorant of the obligation to serve the defence was a fabrication.  He had made a deliberate decision not to comply with the unless order fully and there were no extraneous circumstances to excuse his conduct.  This ground alone is sufficient to uphold the judgment and dismiss the appeal.

B.    REASONABLE PROSPECT OF SUCCESS OF THE DEFENCE

The Law

13.  A defendant who wants to set aside a default judgment has to show by credible evidence reasonable prospect of success of his defence: Premier Fashion Wears Ltd. v. Chow Cheuk Man [1994] 1 HKLR 377. 

14.  Ms. Lee, counsel for the defendant, relies on Chow Kai Sang v. Toi Samuel & Samuel & Ors [1996] 4 HKC 330 for the proposition that it is not necessary for the defendant to show a defence on the merits once it is shown that his breach of the unless order was not intentional or contumelious. The passage she relies on was as follows:

“… once the failure to obey an ‘unless’ order is not regarded as contumelious, the action should proceed as it would have done if the default had not taken place. After all, Sir Nicholas Browne-Wilkinson had already said that ‘the relevant question is” (and the use of the singular suggests that this is the only relevant question) ‘whether such failure is intentional and contumelious’.”

15.  In Chow Kai Sang, it was the plaintiff who failed to comply with an unless order to deliver further and better particulars and his claim was struck out.   He applied for leave to file and serve the particulars out of time.  Keith J (as he then was) did not consider it necessary to see whether the plaintiff has demonstrated by a real prospect of success.  It was because the plaintiff’s application there was in effect an application for an extension of time to file and serve further and better particulars, although the consequence of refusal of that application was that the action would be brought prematurely to an end.   The principle that a party in default has to demonstrate by credible evidence that he has a real prospect of success has only been applied in the past to judgments entered in default against defendants. That is because, save in the case of a plaintiff who has failed to serve a statement of claim, the nature of the plaintiff’s claim was known, whereas the defence of the defendant who has not given notice of an intention to defend was not.  Keith J also pointed out that the only issue in the Jokai Tea case was whether the failure to obey the unless order was intentional and contumelious, not the merits of the case. 

16.  In Golden Tech (Asia) Ltd v. Po Yuen (To’s) Machine Factory Ltd, HCA 4517 of 2001, the proposition similar to what Ms Lee has advanced, based Chow Kai Sang, was rejected.  Deputy Judge Poon, as he then was, explained as follows:

“ …it is obvious that the learned judge was considering whether the general rule applied to the facts of the case before him. I doubt if it really supports the very general proposition stated in the Hong Kong Civil Procedure 2002 above (which appears to be a repetition of the head note in part).^[1] In any event, the facts in Chow Kai Sang v. Toi Samuel & Others are clearly distinguishable from those in the present case. The Setting Aside Summons is not and should not be regarded as a time summons. The default is by the defendant and not by the plaintiff. The consequences of default are also different. The Default Judgment here being a regular judgment (subject to the point about damages to be assessed), the general rule that the defendant needs to demonstrate a defence with a real prospect of success, in my view, applies. This is the test that I will adopt when examining the merits of the defence.”

17.  This view was adopted by Fung J in China Dragon International Ltd v. Pang Hong [2007] 2 HKLRD 655.  The learned judge said that if the judgment were simply entered in default of defence without any unless order, the defendant would need to show merits.  He should not be in a better position where he was actually in breach of an unless order.

18.  I entirely agree with the analyses of Deputy Judge Poon and Fung J reject the proposition of Ms Lee.  Accordingly, the defendant does have to show real prospect of success on his defence.

Appling the Law to the Facts

19.  The defendant’s case is that he was and is the Chairman and major shareholder of a listed company called CIL.  Trading of CIL’s shares had been suspended since 1 April 2004.  In November 2007, the Stock Exchange of Hong Kong Ltd (“SEHK”) gave 6 months for CIL to obtain a restoration of listing, failing which the listing status would be cancelled.  The defendant borrowed money to work towards that restoration. In borrowing $30 million from the plaintiff, the defendant entered into an oral agreement with one Ms Tang for the plaintiff that the loan and interest would only be repayable within 60 days after resumption of trading of the CIL shares (“the oral agreement”).  (The allegation that Ms Tang was acting on behalf of  the plaintiff is disputed but it is irrelevant for present purposes. An assumption of agency will be made in favour of the defendant anyway.) A written loan agreement was signed between the plaintiff and the defendant on 28 February 2008 (“the written agreement”) which specified the dates of repayment to be 30 June 2008 for $21,600,000; and 31 August 2008 for $10,800,000.  The defendant had raised concern over signing a written agreement which might not contain the oral agreement.  He nevertheless signed the written agreement “in view of the urgency of the situation”.   The defendant further alleges that Ms Tang reassured him that the 2 cheques would not be presented for payment before the defendant became liable under the oral agreement.  It was on that reassurance that the defendant gave the 2 (post-dated) cheques to the plaintiff.  Trading of CIL shares has not yet resumed.  The defendant claims that he was not liable under the 2 cheques.

20.  In his home made defence, the defendant pleaded total failure of consideration.  In his affirmation in support of his application to set aside, he claimed that the 2 cheques were delivered as a formality on the suggestion of Ms Tang.  The delivery was subject to the condition that the plaintiff would not present the cheques for payment unless the defendant failed to repay the loan and interest within 60 days after the resumption of the trading of CIL’s shares at the SEHK  (“the Condition”).

21.  It is not disputed that the plaintiff did lend the money in return for interest and that the defendant had received the money.  In my view, the defence of total failure of consideration fails in entirety.  It is also contradictory to the defence of conditional delivery.

22.  Conditional delivery can be a valid defence under section 21(2)(b) of the Bills of Exchange Ordinance, Cap. 19. 

23.  As a written contract, a cheque is subject to the parol evidence rule the effect of which is to bind a party to his contract as written on the instrument.  Extrinsic evidence is, in general, inadmissible to prove that he terms of the contract differed from those expressed in writing on the cheque. Thus whilst parol evidence is admissible to prove a contemporaneous oral agreement that the contract was not to become operative except upon the fulfillment of a condition, such evidence if it be evidence in defeasance of a party’s liability on the bill is inadmissible.  Lam Tai Kwan v. Lo Wai Kit [2007] 1 HKLRD 367.

24.  For the following reasons, I am of the view that the defence of conditional delivery falls foul of the parol evidence rule:

(i)   The Condition meant that the cheques would be due on a date wholly uncertain. If there was no resumption of trading of the CIL shares, the cheques would be meaningless. This was not a condition suspending the operation of the cheques but in defeasance of the undertaking to pay: Prosperity Lamps & Components Ltd v. Rotegear Corp Ltd [2000] 2 HKC 638.  The oral evidence was an attempt to introduce into the written contract a condition contrary to its terms, i.e. to qualify the order for payment, to qualify the nature or tenor of the instrument itself and to operate in defeasance of it.  The oral evidence is not admissible: Great Sincere Trading Co. Ltd. v. Swee Hong & Co [1968] HKLR 660.

(ii)   If the Condition had existed, one wonders why the defendant needed to date the cheques at all, which dates tallied with the dates of repayment in the Agreement.

(iii)   The defendant’s case was self-contradictory.  The claim that it was a matter of formality shows an intention not to have the property in the cheque pass.  The condition that it could only be cashed when CIL could be re-listed was to the contrary.

(iv)   The Condition directly contradicts the written agreement which provided for 2 specific dates for repayment of the loan in 2 tranches.  The written agreement did not make any reference to the Condition and it was expressed to supercede any prior agreement.

(v)   Townearn Industrial Ltd v. Golden Globe Holdings Limited, CACV 205 of 2002 does not assist the defendant because in that case, there was a written agreement which specified the condition under which the cheque was to be presented for payment.  That cheque was in the form of a “collateral security” obliging the defendant to pay only if the primary obligor under the contract defaulted.  In the present case, the cheques were not collateral security but represented the primary obligation itself.

25.  It is also unbelievable that the plaintiff, who admittedly never had dealings with the defendant before, would be willing to leave the repayment date to a contingency when trading in CIL shares had been suspended for 4 years as at the date of the loan and delisting was threatened.   On the timetable put forth by the defendant, resumption of trading of shares should have taken place by May 2008 at the latest.  Sixty days would expire by July 2008.  The dates for repayment specified in the written agreement actually accommodated the defendant’s timetable.  The written agreement appeared in every respect a formal agreement and the defendant was given a draft to consider before signing.  Whatever the “urgency” one would not expect a borrower to note the absence of an important term therein whilst still signing the written agreement.  Though it was not apparent on the face of the written agreement that the defendant was represented by lawyers, he clearly was so represented as the cheques for the loan were issued to Messrs. Chong & Partners instead of to the defendant and the receipts therefor were issued by that firm of solicitors.

26.  Further, the defendant must have been aware of the plaintiff’s presentation of the 1^st cheque by virtue of the bank’s notification “refer to drawer”.  However, he raised no objection.  He even closed his account before the 2^nd cheque was presented and has never explained why. Such conduct showed that he had no conviction in his own defence and clearly intended to evade liability. 

27.  All the defences in this action were just fabrications which have no reasonable prospect of success.

C.    WHETHER THE DELAY IN APPLYING FOR SETTING ASIDE WAS EXPLICABLE

28.  Ms Lee submits that the defendant had been engaging in dealings with various representatives of the plaintiff after he had become aware of the defendant. He harboured under the impression that the plaintiff would honour the oral agreement. Any prejudice to the plaintiff caused by the delay could be compensated for by costs.

29.  Without disrespect, the impression of the defendant was misconceived.  Between January and October 2009, the plaintiff has been active in enforcing the judgment by applying for charging order on shares, garnishee order, examination of judgment debtor and an order for sale of shares under the charging order.  The plaintiff even took out bankruptcy proceedings based on the judgment.  The processes were served on the defendant and some of them also on Messrs. Chong & Partners. After the statutory demand was served on him, the defendant made no attempt to set it and the default judgment aside until the hearing of the petition for bankruptcy.

30.  It is clear from this course of events that the defendant was aware of the plaintiff’s intention to enforce the judgment.  So long as the plaintiff could not realize his assets through enforcement proceedings, he was content to let the judgment stand.  He took action only when he faced a bankruptcy petition which he could not find ways to evade.

31.  In addition, the defendant’s conduct in fact affirmed the validity of the judgment:

(i)   He alleged, to which the plaintiff denied, that he had paid RMB 500,000 “earnest money” to the plaintiff on 10 July 2009.  (It is not necessary to resolve whether the plaintiff actually received payment for the purpose of this summons.  For present purposes, an assumption is made in the defendant’s favour.) 

(ii)   He had also written to the plaintiff proposing to pay the judgment sum by instalments after the plaintiff attempted to serve him with a statutory demand on 24 March 2010.

These were evidence that the defendant acknowledged the validity of the judgment with which he was obliged to comply. Those acts were performed without asserting the plaintiff’s promise under the oral agreement and without reservation of any right to set aside the judgment.

32.  The plaintiff had taken steps and incurred costs to enforce the judgment. From the evidence disclosed, the defendant is facing at least 14 pieces of litigation.  He does not appear to be a person of sufficient means to meet the judgment in full.  His conduct, viewed in totality, was one of trying to evade his obligation and buy time.  His delay in taking out this application was inexcusable and will thwart the already limited chance of the plaintiff in recovering payment.

CONCLUSION

33.  The judgment was regularly entered.  The defendant’s failure to comply with the unless order was intentional and contumelious.  No reasonable prospect of success of the defence has been shown.  The delay in taking out the application was inexcusable.  I therefore dismiss the appeal.

34.  I make an order nisi that the defendant should bear all costs of the appeal to be made absolute 14 days after the handing down of this judgment. There shall be summary assessment of costs on the papers on 26 January 2011 at 9:30 am.  No attendance is required. The plaintiff shall file and serve its statement of costs by 18 January 2011.  The defendant shall file and serve his grounds in opposition by 25 January 2011.

35.  I thank counsel for their able assistance.