YUE WAH CHUK RICHARD AND ANOTHER v. MCKEON BRENDAN HUGH

DCCJ 7088/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7088 OF 2003

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D E C I S I O N

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Introduction

1.  I have before me an application by the Defendant to set aside a default judgment entered against him on 30 March 2004 and two appeals by the Defendant against the orders of Master Ko dated 5 July 2004 and 23 July 2004 respectively refusing to hear the Defendant’s application to discharge all prohibition orders issued against him (the “First Prohibition Order”) and granting a further order prohibiting the Defendant from leaving Hong Kong (the “Second Prohibition Order”).  As counsel for the Defendant, Mr William Wong, commented, this is an extraordinary case for a most ordinary dispute about outstanding rent in a sum just above the lower limit of the jurisdiction of the District Court for which the Plaintiffs have taken the very unusual step of obtaining draconian prohibition orders preventing the Defendant from leaving Hong Kong.

Background

2.  The Plaintiffs and the Defendant are respectively the landlords and tenants of a property in Robinson Place (the “Premises”).  By a written tenancy agreement dated 1 November 2001, the Plaintiff leased the Property to the Defendant for a fixed term of two years from 1 November 2001 to 31 October 2003 at a monthly rent of $33,000.  Clause 10 of the tenancy agreement is a usual break clause permitting the tenant to terminate the tenancy by giving three months notice to the landlord provided such notice shall not expire at a date earlier than fifteen months from the commencement of the tenancy.  The Defendant has not been an easy tenant.  He was late in rent, un-cooperative and refused to comply with his obligations under the tenancy agreement.  He forced his own terms on the landlord.

3.  On 28 July 2002, the Defendant gave notice to terminate the tenancy with effect from 31 October 2002.  That notice was ineffective as it would expire within fifteen months of the commencement of the tenancy.  He made good the notice in his letter dated 20 August 2002 by amending the effective date of termination to 31 January 2003.  It is common ground that this notice was effective and in accordance with Clause 10 of the tenancy agreement.

4.  Since 30 October 2002, the Defendant started negotiation with the Plaintiffs for a new tenancy at a reduced rent.  The parties could not reach full agreement on all the terms of the tenancy.  The Defendant did not vacate the Premises upon expiry of the notice on 31 January 2003 but continued in possession of the Premises until 10 November 2003, but paying the Plaintiffs only $28,000 a month.

5.  The Plaintiffs commenced action against the Defendant on 16 December 2003.  Service of the writ and statement of claim were effected by insertion into his letter box on 11 February 2004.  The Defendant acknowledged service on 3 March 2004 but did not file any defence.  On 15 March 2004, the Plaintiffs served a Notice of Intention to Enter Judgment in Default of Defence on the Defendant pursuant to Order 19 rule 8A of the Rules of District Court.  Despite the notice, no defence was filed by the Defendant.  Default judgment was obtained by the Plaintiffs against the Defendant on 30 March 2004.  The sealed judgment and demand for payment of the judgment debt were served on the Defendant on the same day.  The Defendant does not dispute that the judgment was regularly obtained.

6.  On 26 April 2004, the Plaintiffs made an ex-parte application and obtained the First Prohibition Order against the Defendant.  On 17 May 2004, they applied for and obtained two Garnishee Orders against the Defendant’s bank accounts. 

7.  On 30 June 2004, the Defendant applied to set aside the default judgment, discharge the Garnishee Orders and discharge the First Prohibition Order. The two garnishee orders had been discharged on 2 July 2004 as the net balance of the relevant bank accounts of the Defendant was zero.  At the hearing before the Practice Master on 5 July 2004, Master Ko refused to discharge the First Prohibition Order and adjourned it to be heard together with the setting aside application.  The Defendant is now appealing that order. 

8.  The First Prohibition Order including the two extensions expired on 25 July 2004.  At an inter-partes hearing on 23 July 2004, Master Ko made the Second Prohibition Order.  This order is due to expire on 25 August 2004.  The Defendant is also appealing this order.

setting aside default judgmenT

The relevant legal principle

9.  Counsel are in agreement that the following principles are applicable to an application to set aside a default judgment regularly obtained.   The Court’s power to set aside a regular default judgment is entirely discretionary.  The major consideration is whether the defendant is able to show a defence on the merits to which the Court should pay heed.  In addition, the Court shall consider all relevant circumstances such as the reason for the default, the length of the delay in filing defence, the delay in making the application to set aside, the prejudice to the plaintiff and the defendant’s conduct.  The Court shall weigh all these factors against the merits of the defence to see where the justice lies: see paragraph 13/9/13 of Hong Kong Civil Procedure 2004, Premier Fashion Wears Ltd v Chow Cheuk Man [1994] 1 HKLR 377 and Young Bing Ching v Chow Yung Fong [2001] 2 HKLRD 394. 

10.  Where the judgment is regular, the burden on the defendant is substantial: see paragraph 13/9/21 of Hong Kong Civil Procedure 2004.  It is not sufficient to show a merely arguable defence.  The defendant must show that he has a real prospect of success in that the evidence he adduces is potentially credible and carries some degree of conviction or that the defence could well be established at trial: see paragraph 13/9/14 of Hong Kong Civil Procedure 2004 and L&M Specialist Construction Ltd v Wo Hing Construction Co Ltd [2000] 3 HKLRD 262. 

11.  In exercising its discretion in setting aside a default judgment, the Court has power to impose terms such as requiring the defendant to pay the plaintiff’s costs or making a payment into Court: see paragraph 13/9/15of Hong Kong Civil Procedure 2004.

The Plaintiffs’ pleaded case

12.  Before considering the Defendant’s defence and its merits, it is important to look at what the Plaintiffs’ pleaded case is.  That is the case which the Defendant has to meet.  The Plaintiffs’ pleaded the tenancy agreement, that it was terminated, that the Defendant delivered possession of the Premises on 10 November 2003 and that wrongfully and in breach of the tenancy agreement, the Defendant failed and/or refused to pay rent amounting to $63,440.  The Plaintiffs’ statement of claim made no mention about the Defendant’s notice to terminate the tenancy in accordance with Clause 10.  The Plaintiffs’ cause of action as pleaded is the based on the tenancy agreement.

The defence

13.  The defence according to the Defendant’s affidavit is that the tenancy was effectively terminated on 31 January 2003 pursuant to his letter dated 28 July 2002 as clarified by his letter dated 20 August 2004.  Thereafter the parties entered into a new tenancy agreement at a reduced monthly rental of $28,000 or the prevailing market rent (which was also $28,000) from 1 February 2003 until his vacation of the Premises.  And all such rentals have been duly paid.

14.  At the hearing, Mr Wong detracts partially from that defence. He argues that the notice has effectively terminated the tenancy after 31 January 2003.  Thereafter, the Defendant continued to stay in the Premises pending the negotiation of a new tenancy but no new tenancy agreement had been reached.  The defence is therefore that the Plaintiffs cannot found their cause of action on a tenancy which has been terminated.  At most the Plaintiffs may recover mesne profit for the Defendant’s occupation of the Premises which was the market rent, which the Defendant had already paid.  In addition, he said the Defendant is entitled to counterclaim for the landlords’ breach of covenant of quiet enjoyment.  On the facts, the defence as suggested by counsel is more sound in law.  I shall consider the Defendant’s application on the basis of the defence as suggested by counsel.

Merits of the defence

15.  The Plaintiffs do not dispute that the Defendant had given notice to terminate the tenancy but argue that the Defendant had by conduct waived the notice and the Plaintiffs consented to the waiver.  Thus the tenancy ran its course to 31 October 2003 with the Defendant staying over until 11 November 2003.  The issue raised by the defence is essentially the basis upon which the Defendant remained in occupation after the notice took effect.  The issue involves both questions of law as to the effect of the service of the notice and question of fact as to whether the notice has been waived.

16.  The classic statement of the law as to the effect of serving a valid notice to quit is Tayleur v Wildin (1868) LR 3 Ex 303 at 305 where Kelly, CB said:

“The question is, whether … if the notice to quit was a notice that could be withdrawn and done away with at the option of the party giving it, and it was in fact so withdrawn whilst the tenancy subsisted, the tenancy would not have been determined.  But it is clear that, whether the notice to quit is given by the landlord or the tenant, the party to whom it is given is entitled to insist upon it, and it cannot be withdrawn without the consent of both.  If that is so, then the consent of the parties makes a new agreement, and if there is a new agreement there is a new tenancy created to take effect at the expiration of the old tenancy.”

17.  Despite some criticism in later decisions in England and in Lord Inchiquin v Lyons (1887) 20 LR Ir 474 by the Court of Appeal in Ireland, this statement has survived the test of time.  It was approved by the English Court of Appeal in Freeman v Evans (1922) 1 Ch 36, where Lord Sterndale MR said at 45:

“As Tayleur v Wildin has stood for so long without being disapproved of and has found its way into the text-books, and has no doubt, as Brett LJ said, been acted upon for a great number of years and as it has been before the Court of Appeal in England and has never been in any way doubted or criticised by that Court, I think we ought to act upon it.”

18.  The effect of a notice to quit has been stated by the learned authors of Hill and Redman’s Law of Landlord and Tenant at paragraph 2384 as follows:

“A notice to quit may be withdrawn or abandoned during its currency; or the right to enforce it may be waived, either expressly or by implication, before it has expired, but no withdrawal, abandonment, or waiver is effectual without the consent of the party to whom the notice is given. 

It has been held that a withdrawal of the notice by consent during its currency does not nullify the notice, but operates as evidence of an agreement for a new tenancy to take effect on the determination of the old.  Where the notice has expired, it is technically wrong to speak of a waiver, though this convenient expression is commonly used.  If the relationship of landlord and tenant continues thereafter it is by agreement between the parties constituting a new tenancy, since the old tenancy is already at an end.”

19.  The above statement is also echoed by the learned authors of Woodfall’s Law of Landlord And Tenant at paragraph 17.200 where the authors wrote:

“It is implicit in the nature of a periodic tenancy that it may, apart from any special terms agreed, be brought to an end by the unilateral act of either party.  Thus, once a valid notice to quit has been served, the tenancy will automatically come to an end on the expiry of the notice, even though the party giving it has purported to waive or withdraw it.  The parties may, by a new contract, create a new tenancy which is what is sometimes meant by “waiving” a notice to quit, but the old tenancy no longer exists.  Unless a fresh tenancy is subsequently created, the landlord cannot distrain for subsequent rent, even though the tenant continues in possession for a year or more after the expiry of the notice.”

20.  Tayleur v Wildin has also been consistently followed in Hong Kong: see for example, Lai Mai-yu And The Attorney General [1997] HKLR 382.  It has also found its way into our local text-books.  The learned writer of Hong Kong Tenancy Law, 4^th Ed, wrote at 142:

“The effect of a valid notice to quit is to terminate the landlord-tenant relationship.  Though the tenant may stay on the premises, he does so as trespasser, not as tenant.  He may be sued for damages (mesne profits) for his illegal use and occupation.  ... a notice to quit cannot be unilaterally withdrawn and its effect (termination of the lease) cannot be waived.”

21.  Thus the prevailing view under the English common law as well as that of this jurisdiction is that service of a valid notice to quit by a party to a tenancy agreement to the other effectively terminates the tenancy on the expiration of the notice.  The service of a notice to quit is a unilateral act.  The party who received the notice is entitled to insist on it.  Once validly served, it is beyond recall.  It puts an end to the tenancy relationship at the time the notice expires, just as night follows day.  It cannot be withdrawn or waived by the party serving it even with the consent of the recipient party.  Where a tenant continues in occupation after the notice expires, he does so either as a trespasser if he has not obtained the consent of the landlord or pursuant to a new agreement or licence if he has his consent.  Thus technically, “waiver” is a misnomer.  As “waiver” is essentially a consensual arrangement in respect of property, all necessary ingredients of a tenancy agreement must exist to constitute a waiver, i.e. the four certainties of parties, property, term and rent.

22.  Miss Tong argues for a different view by referring to the Irish Court of Appeal decision in Lord Inchiquin v Lyons and other authorities following that decision.  She submits that service of a notice to quit does not have the effect of terminating the tenancy and while consent from the party receiving the notice is required for the notice to be waived, there is no need to have a new tenancy to constitute a waiver.  She referred to the following statement of Sir Morris, CJ at 477 and 478:

“Taking the two points made by the defendant in their order:- 1^st, Did the notice to quit, coupled with the arrangement entered into, operate to create a new tenancy?  In support of his proposition, Tayleur v Wildin was cited.  If such an abstract proposition is laid down in Tayleur v Wildin, as that the mere service of a notice to quit, which is abandoned by the consent of both parties before the determination of it and while it is running, determines the tenancy, I for one dissent from it and decline to follow it.  The consequences of holding such a rule would be tenants most momentous; for the effect of it would be that tenants, by being so served with notice to quit, which notices are abandoned, would thus be turned into future tenants and deprived of their rights as present tenants under the Land Act. However, those consequences cannot of course control our decision if we come to the conclusion that such was the state of the law.  But I have come to the conclusion, looking into the peculiar circumstances of Tayleur v Wildin, that it was right on its particular facts.”

23.  Gibbon, LJ agreed with the Chief Justice and tried to explain the speech of Kelly CB in Tayleur v Wildin by giving it a restrictive meaning on the basis of its facts.  He said at 481:

“Now, I agree with my Lord Chief Justice in saying that if that passage means that it is absolutely impossible to get rid of a notice to quit, and that nothing remains possible after its service but the creation of a new tenancy, I disagree with it and I decline to follow it.  But I do not think Chief Baron Kelly really meant this:  he was speaking of the impossibility of the withdrawal of the notice to quit by one party without the consent of the other, and he drew the inference that a new contract by both was necessary to get rid of it.  He meant, as it strikes me, nothing more than this: the defendant guaranteed rent payable under one contract, the rent sued for accrued under another contract, after an act had been done which necessitated a new contract in place of that the performance of which the defendant guaranteed, and therefore he was not liable.

Chief Baron Kelly’s language may not very accurately express this view; but if he meant to decide that the parties to the contract of tenancy could not, as between themselves and before its expiration, agree that the notices to quit should not take effect, I do not think his judgment is law, and I believe that Lord Chancellor Sullivan took the same view in Boyd v Phelan.”

Gibbon, LJ, then referred to his earlier decision and said at 482 to 484:

“… My judgment in Listowel v Kelly was as follows: - ‘I wish to say that I do not find it necessary to hold that in no case can a notice to quit be waived, or that the effect of its mere service can never be intercepted before its expiration.  I see no reason to think that the parties cannot, before the time named for quitting has arrived, agree that their existing relations shall continue uninterrupted.  We have had occasion more than once to consider Tayleur v Wildin, and it seems to me that, perhaps without adopting all the language of the judgments, the decision may be supported, without holding that the mere service of a notice to quit necessarily has the irrevocable and inexorable efficiency stated by my Lord Chancellor on the authority of that case.’

… there is nothing unlawful in the parties to the contract of tenancy agreeing to withdraw a notice to quit; one of them who has served the notice may tell the other, or give the other to understand, that he has changed his mind, and thereupon the notice may be treated by both as abandoned.  This cannot be done without the consent of both; but if both agree, the old tenancy may go on as if there never had been a notice.

24.  At 485, Barry, LJ said even more strongly:

“I am very glad that the case has come before this Court in a manner which enables us to put an end, I hope, for the future to the use which has been made of Taylor v Wildin.  … Whatever operation the case was to have, they lay down distinctly that the service of a notice to quit determines the tenancy, and that if that notice to quit be withdrawn during the tenancy, a new tenancy is created – a proposition which I confess, from the first moment I ever heard it advanced, always seemed to me to be inconsistent with the principles of law, and certainly inconsistent with the law of landlord and tenant as existing from the earliest time in this country.  The phrase ‘withdrawing a notice to quit’ is to be found in the Irish cases as far back as reports are to be found on the subject.

I am glad that once and for ever, until this or some similar case is taken to the House of Lords and reversed, Tayleur v Wildin will no longer be referred to as upsetting the settled law of this country as between landlord and tenant.”

25.  To further support her argument that the decision in Lord Inchiquin v Lyons is preferred to Tayleu v Wildin in other common law jurisdictions, Miss Tong referred to Emery v Commonwealth of Australia [1963] VR 586 and Arnold v Mann (1957) 99 CLR 462.  In the former decision, the Supreme Court of Victoria expressed preference to Lord Inchiquin v Lyons.  That was a decision about waiver of notice to terminate an employment contract.  I do not think it has any relevance to the law of landlord and tenant, which has developed technical rules different from those of the law of employment.  Besides, both areas of law are subject to different statutory inputs.  The second decision is a decision of the High Court of Australia on landlord and tenant. Tayleur v Wildin was mentioned.  But the decision is not directly on the point.  Miss Tong also referred to the local decision of Tse Luk Mui v Shing Shun Firm SJ Action No 937 of 1938 (unreported, 4 November 1938).  In this case, neither Tayleur v Wildin nor Lord Inchiquin v Lyons had been referred to.  This case is also not directly on the point whether a notice to quit has the effect of terminating the tenancy and that a new tenancy was created by the waiver.

26.  I have quoted the judgment in Lord Inchiquin v Lyons extensively as it was relied on heavily by Miss Tong.  However, it is quite unnecessary for the purpose of the present application.  As a matter of precedent, the statement of Kelly CB in Tayleur v Wildin represents the law of this jurisdiction.  However strongly it was criticised in Lord Inchiquin v Lyons by the Irish Court of Appeal, the Defendant is entitled to rely on it for the purpose of the present application and it is up to the Plaintiff to argue that Tayleur v Wildin is not to be followed.  It is not appropriate for me to decide on that question for the purpose of the present application.  However appealing may be Miss Tong’s argument, those points have to be fully argued at trial and it would be wrong for me to shut the Defendant out on the basis of the common law of Ireland back in 1887.  If anything Miss Tong has achieved by referring to Lord Inchiquin v Lyons, it is that she has shown an arguable case that as a matter of law a notice to quit does not have the effect of terminating the tenancy and that it may be waived with the consent of the party receiving the notice as if it had never been served at all so that the tenancy survives the notice to quit on the same terms.  I shall therefore proceed on the basis that Kelly CB’s statement in Tayleur v Wildin is good law.  In order to succeed in this action, the Plaintiffs have to show the parties reached a new tenancy agreement at a monthly rent of $33,000.  For the purpose of the Defendant’s application to set aside the default judgment, the Defendant has to show there was no such agreement or the parties reached an agreement at a monthly rent of $28,000 only.

27.  I now turn to the facts.  When the Defendant started to negotiate for an extension of the tenancy on 30 October 2002, he wrote:

“… I am enquiring if despite our differences in the past, you would be interested in extending the tenancy beyond 31 January 2003. 

The basic terms I would be looking for would be a further year contract with a 2-month notice period at any time after 4 months, and a reduced rental to reflect current market conditions.

In the interest of bringing our previous dispute to a close and entering into new tenancy and a renewed relationship, I would …”

28.  No new tenancy agreement was reached.  The Defendant wrote again on 9 January 2003 renewing his offer to continue leasing at a reduced rental.  The Plaintiffs replied on 14 January 2003 that they were not inclined to consider any rent reduction.  On 20 January 2003, the Defendant repeated his request for tenancy and suggested a reduced rent of $24,000.  That was rejected by the Plaintiffs.  The Defendant offered $25,000 on 30 January 2003.  That offer was also rejected by the Plaintiffs on 6 February 2003.  By then, as a matter of law, the tenancy had been determined by the notice.  No agreement for new tenancy was reached.  In essence, the parties were unable to reach agreement on the amount of rent.  The Defendant continued in occupation.

29.  The parties continued corresponding but without any success.  On 3 March 2003, the Defendant sent a cheque of $25,000 as rental for the month of February 2003.  He wrote:

“I enclose payment of HK$25,000 in rental for February 2003.  This does not mean that we have a new tenancy agreement and is not intended to set any precedent with respect to any new tenancy agreement we enter into in the future.”

30.  The Plaintiffs replied on 11 March 2003 as follows:

“Thank you for your cheque of HK$25,000 dated March 10, 2003. I have accepted it as partial payment against your February rental.  Kindly note that the balance February payment of HK$8,000 along with the March rental of HK$33,000 is now due.

As far as I am concerned, our Tenancy Agreement dated November 1, 2001 is still valid.  Your previous notice to terminate by January 31, 2003 has been waived indefinitely.”

31.  These correspondences evince that the parties were at a difference.  The Defendant sought to force a tenancy at a monthly rent of $25,000 on the Plaintiffs, while the Plaintiffs insisted that the original tenancy agreement was still valid and that the rent payable was $33,000.

32.  The Defendant increased his offer to $26,000 on 11 March 2003.  The Plaintiffs counter-offered $29,000.  On 24 March 2003, the Defendant offered $27,500. On 23 April 2003, the Plaintiff counter-offered $28,000, effective from 1 May 2003 until the expiry of the original tenancy agreement and demanded the outstanding balances for the months from February to April 2003.  Presumably, the effective date for the reduced rent was not agreeable to the Defendant.  On 25 April 2003, the Plaintiffs made a second offer.  They wrote:

“As a compromise, I will reduce the rental to $28,000 effective April if I receive your acknowledgement and post-dated cheques before April 30, 2003.  However, I must insist on the two months rental deposit.”

That was not acceptable to the Defendant, presumably because of the effective date and the issue of post-dated cheques.

33.  On 7 May 2003, the Plaintiffs made further concession on the effective date.  They wrote:

“In the interest of reaching an agreement, I will further effect the reduction of rental to HK$28,000 as of March 1^st.  This will be my final offer.

Again, I must insist on the two months rental deposit and up-front receiving all the postdated cheques.”

34.  That was not acceptable to the Defendant who insisted that the reduced rent to take effect from 1 February 2003.  He wrote:

“I regret to inform that 28K effective 1 February 2003 until end of October 2003 with one month deposit (since only a short lease) is my maximum.”

This therefore rejected the Plaintiffs’ offer.  The Plaintiffs’ offer was indeed their last.  Thereafter the parties negotiated on the date of the Defendant’s vacation of the Premises and viewing arrangements for incoming tenants.  But effectively, the Defendant held over until 11 November 2003.

35.  It is obvious from these correspondences that the parties never reached any agreement for a new tenancy, though the word “rent” was used by the Defendant when making monthly payments to the Plaintiffs.  The rent was never agreed.  The differences were small: only $5,000 for the month of February 2003 and an additional month’s rental deposit.  There was nevertheless no agreement.  The legal consequence that follows is that as the original tenancy was determined as of 31 January 2003, the Plaintiffs are not entitled to claim rent on the basis of a tenancy which has been determined.  The Defendant therefore has a defence which has good prospect of success.  He is entitled to leave to defend.

36.  This conclusion does not mean the Defendant is free from all liabilities.  The Defendant remained in occupation of the Premises.  He was either a trespasser or a licensee holding over pending conclusion of a new tenancy.  If he was a trespasser, he is liable to pay mesne profits.  The amount will have to be assessed preferably on the basis of valuation reports, though the amount of $28,000 offered by the Plaintiffs may be some indication of the then market rent.  If he was a licensee, the questions arise as to the terms of his licence, especially the amount of licence fee he has to pay.  On the analogy of Thetford (Mayor) v Tyler (1886) LR 32 Ch D 366, it would not be difficult to infer from the circumstances that the rent payable under the original tenancy will continue to be payable as licence fee in the event that no new tenancy agreement at reduced rent was reached.  There is also the further issue of estoppel by convention.  According to the doctrine of estoppel by convention, when the parties to a transaction proceed on the basis of an underlying assumption (either of fact or of law, and whether due to misrepresentation or mistake, makes no difference), on which they have conducted the dealings between them, neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so: per Lord Denning MR in Amalgamated Investment & Property Co Ltd v Taxas Commerce International Bank Ltd [1981] 3 All ER 577 at 584. The Defendant knew full well as early as 11 March 2003 that the Plaintiffs were acting on the assumption that the notice was waived indefinitely or of no effect, that the original tenancy agreement was still binding on them, that they were negotiating a rent reduction under that tenancy and that rent under the original tenancy agreement was still payable until the reduced rent was agreed.  The parties conducted their affairs on that basis.  It may well be unjust or unfair to allow the Defendant to go back on that assumption.  Thus, while the Defendant has good prospect of success in his defence on the basis of the Plaintiffs’ statement of claim as it now stands.  He is not at all free from liability.   This is not an appropriate case for unconditional leave to defend to be granted.

37.  Having considered merits of the defence, I now turn to examine the other relevant circumstances.  The delay in filing defence was three months, not a particularly long delay.  But it was deliberate.  The Defendant had received the writ and statement of claim.  He had been served with the Notice of Intention to Enter Judgment in Default against him.  He said he was busy with his job and business ventures and had no money to instruct solicitors.  He said he had written to the Plaintiffs’ solicitors seeking extension of time, but that was refuted by the Plaintiffs’ solicitors.  I do not think I have any reason to doubt the honesty of the Plaintiffs’ solicitors.  As a matter of courtesy and practicality, such extension of time would usually have been consented to, at least for the first request.  There was no need for the solicitors, as officers of the Court, to be dishonest about having received the Defendant’s request for extension of time.  The Defendant said he had no time to issue a summons for an extension of time for filing his defence.  Despite that, he had taken care to ensure that there was no money in his bank accounts known to the Plaintiffs.  I consider his explanation incredible.  He has no good reasons for the time limit not having been observed and for the delay in applying for an extension.  His conduct is strongly suggestive that he did not regard the court’s process seriously, he did not intend to contest the action and he intended the Plaintiffs to be left with empty judgment by withdrawing all the money from his bank accounts.  It appears to me that but for the prohibition orders he would not have sought to set aside the default judgment at all.

Setting aside default judgment

38.  Having weighed on the one hand the merits of the defence and the Defendant’s likely liability and on the other his lack of explanation for not complying with the time limit, the delay in making the application and his conduct, I consider justice would be best served by granting the Defendant conditional leave to defend upon the Defendant making payment into Court within 14 days of the amount of $80,000, such sum shall not be paid out without the leave of the Court.  This sum would cover the Plaintiffs’ costs thrown away in the course of enforcing the judgment.  The Defendant shall have leave to file and serve his defence within 14 days from the date of the said payment into Court.

39.  Though conditional leave to defend is granted, this is an appropriate case that the Defendant shall pay the Plaintiffs’ costs.  His default in filing defence is deliberate and he had notice of the consequence of his failure to do so.  As a result further costs are wasted, including all unnecessary costs of enforcement of the judgment.  The Defendant should pay the Plaintiff’s costs including those wasted and thrown away.  Though an offer has been made by the Defendant on 2 July 2004 to pay in full the judgment sum in the amount of $67,000 into court in return for the Plaintiffs consenting to discharge the First Prohibition Order and to set aside the default judgment, this does not cover the wasted costs and was rightly refused, though the amount counter-offered by the Plaintiffs’ solicitors was excessive.  Accordingly, I make an order that the Defendant shall pay the Plaintiffs’ costs of the application with certificate for counsel and all costs thrown away.  Such costs shall not include the costs of the two prohibition orders for which there shall be separate costs orders.  The costs are to be taxed, if not agreed.

The first prohibition order

Introduction

40.  Though this order has expired, the Defendant seeks to have them discharged as a matter of principle and for the purpose of determining the issue of costs. 

41.  The circumstances leading to the issue of the First Prohibition Order are as follows. The Plaintiffs’ solicitors took very prompt action in enforcing the judgment.  They served a copy of the sealed judgment and a letter of demand on the Defendant on 30 March 2004.  The judgment was not satisfied.  On 26 April 2004, they applied ex-parte for the First Prohibition Order.  The order was granted on the basis of the 2^nd Plaintiff’s affirmation in support.  It was extended twice until 25 July 2004.  After the Defendant was legally represented, he applied to set aside the default judgment and to discharge the First Prohibition Order.  At the hearing before the Practice Master on 5 July 2004, the Defendant requested to have the order discharged so that he may travel with his brother out of Hong Kong.  He was unable to produce any evidence in support of his travel arrangement.  Master Ko refused to discharge the First Prohibition Order and adjourned it to be heard together with the setting aside application.  That has the effect of dismissing the application to discharge as the Prohibition Order would have expires before the date of hearing.

The law

42.  Section 52E of the District Court Ordinance gives this Court jurisdiction to make prohibition orders.  The section provides:

“	(1)	The Court shall have jurisdiction to make an order prohibiting a person from leaving Hong Kong (a prohibition order) to facilitate the enforcement, securing or pursuance of –
		(a)	a judgment against that person for the payment of a specific sum of money;
		(b)	a judgment or order against that person –
			(i)  for the payment of an amount to be assessed; or
			(ii) requiring him to deliver any property or perform any other act; or
		(c)	a civil claim (other than a judgment) –
			(i)  for the payment of money or damages; or
			(ii) for the delivery of any property or the performance of any other act.
	(2)	The Court shall not make an order under subsection (1)(b) unless it is satisfied that there is probable cause for believing that -
		(a)	the person against whom the order is sought is about to leave Hong Kong; and
		(b)	by reason of paragraph (a), satisfaction of the judgment or order is likely to be obstructed or delayed.
	(3)	The Court shall not make an order under subsection (1)(c) unless it is satisfied that there is probable cause for believing that -
		(a)	there is a good cause of action;
		(b)	the person against whom the order is sought –
			(i)  incurred the alleged liability, which is the subject of the claim, in Hong Kong while he was present in Hong Kong; or
			(ii) carries on business in Hong Kong; or
			(iii) is ordinarily resident in Hong Kong;
		(c)	that person is about to leave Hong Kong; and
		(d)	by reason of paragraph (c), any judgment that may be given against that person is likely to be obstructed or delayed.

43.  Initially, Mr Wong formulated his appeal on the basis that the present case is one to which section 52E(1)(b) applies and hence the order may only be issued if the judgment debtor is about to leave Hong Kong as a result of which satisfaction of the judgment or order is likely to be obstructed or delayed.  Upon realising that the prohibition orders were made under section 52E(1)(a), he argues that the safeguards in section 52E(2) are equally available to the Defendant.  I think the section is peculiar.  The section distinguishes between three categories of cases: a judgment for a specific sum of money, judgment on liability to be assessed or an order requiring certain acts to be performed and a civil claim other than a judgment.  The limitation applicable to the second category of cases (i.e. sub-paragraph (1)(b)) is equally applicable to the third category but not to the first.  For myself, I cannot see any justification for differential treatment between a judgment debtor for a sum certain and a person whose judgment debt awaits to be assessed or who is ordered to perform any act, except perhaps the likelihood to abscond is higher where the debt has been quantified.  But that is the law on the statute book.

44.  The purpose of the section 52E is to facilitate enforcement of judgment and not to punish a judgment debtor for having attracted a judgment debt.  Prohibition orders are draconian orders.  They have the effect of restricting the freedom of the person subject to the order from leaving Hong Kong, which is a freedom guaranteed by article 31 of the Basic Law.  Thus, giving the section a purposive interpretation and bearing in mind the freedom guaranteed by article 31 of the Basic Law, I think the limitations applicable to the cases referred to in section 52E(1)(b) and 52(1)(c) are mandatory safeguards to the freedom of the individual, whose liability to the debt has not yet fully crystallised by restricting the exercise of the jurisdiction by the Court if the judgment debtor is not about to leave Hong Kong and if his departure is unlikely to result in the satisfaction of the judgment being obstructed or delayed.  But it does not necessarily follow from the absence of these safeguards in respect of the category of cases referred to section 52E(1)(a) that the Court shall as a matter of course make prohibition orders irrespective whether the judgement debtor is about to leave Hong Kong or whether such order is necessary for the purpose of facilitating enforcement of the judgment. 

45.  The exercise of that jurisdiction is a matter of discretion: see Order 44A rule 3(1) of the Rules of the District Court.  As with the exercise of any discretion, the Court must be guided by legal principles.  Two principles which apply to all exercises of judicial discretion are, firstly, that the Court will not act arbitrarily and, secondly, that the court will not exercise its discretion in vain.  The purpose of section 52E is not to punish a judgment debtor for having attracted a judgment debt but to facilitate satisfaction of the judgment.  Where judgment for a sum certain has been obtained, the Court is not prohibited from making the order if the judgment debtor is not about to leave Hong Kong.  But the Court will not exercise that discretion arbitrarily or unnecessarily.  Thus before the discretion is exercised, the Court will consider three questions: (1) whether there is a real likelihood that the judgment debtor will leave Hong Kong; (2) whether there is a real risk that he will not return for a substantial period of time and (3) whether as a result of his absence enforcement of the judgment would be obstructed or delayed.   Thus, if there is no likelihood of the judgment debtor leaving Hong Kong or if his departure will not prejudice the judgment creditor’s chances of enforcement, the discretion will not be exercised.  For example, if a judgment debtor has no means to satisfy the judgment in any event, there is no reason why the order will be made to prevent him to leave Hong Kong to retire in China or to reunite with his family overseas.  If the debtor has to travel regularly for work to China, such as a cross border truck driver and there is every likelihood of his returning to Hong Kong everyday or every now and then such that his absence or presence in Hong Kong does not make any difference to the judgment creditor’s chances of enforcement one way or the other, there is no reason why the discretion should be exercised.  A prohibition order issued under these situations would serve no useful purpose, while one issued under the latter situation is arbitrary as well. 

46.  Another relevant principle is that where an order is made ex parte, the party making the order is under a duty of full and frank disclosure to the Court.  If the party seeking the order is in breach of this duty, the ex parte order is liable to be discharged with costs on indemnity basis: see Auto-Treasure Ltd trading as Albert Jewelry Creation v Pyramid International & Ors Civil Appeal No 24 of 1992 (unreported).

The appeal against the First Prohibition Order

47.  Mr Wong submits that if leave to defend is granted, the prohibition orders cannot stand.  I do not think this follows as a matter of course.  On the day the application for the First Prohibition Order was made, there was a regular default judgment which remained unsatisfied.  The Court has jurisdiction to make the order under section 52E(1)(a) of the District Court Ordinance. 

48.  Mr Wong submits that it was not appropriate to make the application ex-parte as there was no urgency and there was no reason for the secrecy.  The quick answer to that complaint is that Order 44A rule 2 expressly permits a plaintiff or judgment creditor to apply ex-parte for such an order.

49.  I now turn to Mr Wong’s more substantial attacks on the First Prohibition Order.  Mr Wong submits that no such order should have been made in the circumstances on the strength of the affirmation of the 2^nd Plaintiff.  He referred to paragraph 4 of the 2^nd Plaintiff’s affirmation which reads: 

“4.     The Defendant is a British Citizen as well as a holder of Hong Kong Identity Card No. XXXXXXX(X) under employment in Hong Kong.  As far as I understand, the Defendant ceased to be employed in or about March 2004 and his Employment Permit is highly likely to be due to expire on 30 April 2004 when it was renewed for one year from 30 April 2003, the expiry of his last Employment Permit. …

5.      In the circumstances, the 1^st Plaintiff and I verily believe that pending settlement of the Judgment Debt, the Defendant is about to leave Hong Kong and enforcement of the Judgment against him is likely to be obstructed or delayed.”

50.  Mr Wong argues that such evidence is speculative in nature, the affirmation is defective and that there was material non-disclosure.  He submits that the affirmation is defective in that the 2^nd Plaintiff failed to set out the information or basis of her understanding or belief that the Defendant was unemployed since about March 2004.  The Plaintiffs knew the Defendant had his employment contract extended until 31 October 2003 and heard no more about his employment as the Defendant had vacated the Premises on 11 November 2003.  There is nothing to prevent the 2^nd Plaintiff from saying precisely just that and leave it to the Court to draw its own inference.  I agree with Mr Wong that to this extent the affirmation of the 2^nd Plaintiff in support of the application for the First Prohibition Order is defective.

51.  As for material non-disclosure, Mr Wong submits that the Defendant was granted permanent residence status and was issued a permanent Hong Kong identity card.  That is a fact which was unknown to the Plaintiffs at the material time.  As a result, the Defendant’s condition of stay, i.e. his employment visa endorsed on 20 April 2001 on page 31 his passport was removed by an endorsement made on 25 September 2001 on page 20 of his passport.  Both pages were exhibited to the 2^nd Plaintiff’s affirmation.  However, the endorsement containing the employment visa was high-lighted with a circle, while the endorsement removing that condition was not.  Miss Tong submits that the Plaintiffs have exhibited all they had in their possession and have complied with the duty of full and frank disclosure.  In my opinion, by high-lighting the employment visa but not the removal of the condition, the Plaintiffs unfairly drew the Court’s attention to one aspect of the case and not the entirety of the case.  The burden on the applicant in any ex-parte application is a very heavy one.   The Summons Judge or the Practice Master in a busy court has no time to put the applicant’s affirmation under the microscope.  The Court acts on the good faith of the applicant and those representing him to present as full and as fair a picture as possible.  It relies heavily on full and frank disclosure of all material facts which may affect the Court’s decision in the application.  The applicant has a duty to disclose to the Court all facts favourable to the other party including possible defences.  While I accept the failure to draw the Court’s attention to the endorsement removing the condition of stay was an oversight, it was a non-disclosure.  Further, it was wrong to suggest to the Court that it was highly likely that the Defendant’s employment visa would hence expire on 30 April 2004, implying that the Defendant will soon have to leave Hong Kong.  The duty of full and frank disclosure was clearly breached.

52.  The thrust of the affirmation is that the Defendant is an expatriate, whose employment has ceased in or about March 2004, whose employment visa is due to expire in a few days and he had a judgment debt which remained unsatisfied.  Reading the affirmation as it stands and accepting it on its face value, the Master must have a cause for concern that this expatriate with no family ties in Hong Kong, who is unemployed and whose employment visa is due to expire in a few days is likely to conveniently leave Hong Kong to evade his judgment debt.  The Plaintiffs’ breach of duty must have affected the Master in making the First Prohibition Order.  Even if it had not, the First Prohibition Order must be discharged for the breach of duty.

53.  The order was extended until it expired on 25 July 2004.  On 30 June 2004, when the Defendant applied to set aside the default judgment, he also applied to discharge the First Prohibition Order as he wished to travel with his brother.  Upon his failure to give proof of his travel arrangement, the Master refused to hear his application for discharge and adjourned the application to be heard with this appeal.  Thus in effect, the Master dismissed his application as by then the First Prohibition Order would have expired.  As the First Prohibition Order must be discharged because of material non-disclosure, I allow this appeal and formally discharge the order.

54.  The purpose of the Defendant’s appeal is to seek remedy for the infringement of his right and costs.  The general rule is that where an ex-parte order is discharged for material non-disclosure, the applicant of the order has to pay the respondent’s costs to be taxed on an indemnity basis.  As the application for the First Prohibition Order was occasioned by the Defendant’s deliberate act to allow a judgment to be made against him by default and bearing in mind his conduct in the litigation (also see below in relation to the Second Prohibition Order), I consider that he should be deprived of his costs, despite his success in this appeal.  Accordingly, I allow this appeal but make no order as to costs.

55.  Mr Wong asks for an order for assessment of compensation under Order 44A rule 5.  The jurisdiction to award compensation is also a discretionary one.  The Defendant has offered no evidence of any inconvenience or damage suffered apart from his mere allegation that he wished to travel with his brother out of Hong Kong.  In view of the totality of his conduct in this litigation, I am not prepared to exercise this discretion.  He shall be left to pursue his action for damages separately.

the second prohibition order

Introduction

56.  Prior to the expiration of the First Prohibition Order, the Plaintiffs applied for a further order.  At an inter-partes hearing on 23 July 2004, Master Ko made the Second Prohibition Order.  This order is due to expire on 25 August 2004.  The Defendant is also appealing this order.  As the order was made at an inter-partes hearing, there is no question of material non-disclosure.  The issues are whether there is a real likelihood that the Defendant will leave Hong Kong, whether there is a real risk that he will not return for a substantial period of time and that as a result of his absence the enforcement of the judgment would be obstructed or delayed, if no such order is made.

The appeal against the Second Prohibition Order

57.  In respect of this application, the Plaintiffs are on more solid grounds as the Court had the opportunity to consider all the evidence including the Defendant’s affidavit and all the circumstances leading to the litigation.

58.  The Defendant is a British citizen who has a permanent Hong Kong identity card.  His family ties are in the United Kingdom and he has no family ties in Hong Kong.  He has been in Hong Kong for about twelve years and has been in business for ten years. He operates his own company, “Hughie” which employs himself as a consultant for a job at the West Rail.  That consultancy job has now finished.  He said in his affidavit he was negotiating other consultancy position but nothing has materialised and he saw no urgency to find new employment.  He wished to take a six months break after the consultancy work with West Rail.  He has purchased a bar known as “The Wanch” on Jaffe Road in Wanchai and he is operating and receiving income from it.  The bar was purchased through a limited company, Polyaim Limited.  He has paid the purchase price for the shares of Polyaim Limited.  The formal purchase agreement has been signed by all shareholders except Mr Hasting who is in Malaysia and the agreement is now in Malaysia waiting for Mr Hastings’ execution.  Despite the details given about this bar, that he has paid the price and that he is now operating it and receiving income from it, he could offer not a single piece of documentary evidence in support of this two million purchase.  The document he exhibited is a draft sale and purchase agreement with numerous blanks to be filled.  Not even was the price and the number of shares to be sold stated in the document.  The draft agreement was dated January 2004.  It is incredible that for eight months this draft has not been finalised and signed.  There is no documentation from the Companies Registry in support of any share transfer to himself from the other shareholders. No business registration certificate was exhibited. This is not a case where one of many shareholders’ signatures is left to be signed.  Mr Hastings was one of the only two shareholders of Polyaim Limited selling the shares to the Defendant. It is also not credible that the Defendant would have paid the full purchase price before Mr Hastings signed the agreement and without ever effecting the share transfers and registering the same in the Companies Registry.  I give little weight to his evidence.  He was not prepared to disclose the whole of his financial affairs to the Court.

59.  The Defendant has entered into a two-year tenancy agreement and paid two months rental deposit.  Mr Wong submits that it is unlikely that he is about to leave Hong Kong.  As against that there is nothing to prevent him from arranging an early release with his landlady when his business in Hong Kong is finished or he could leave her with unpaid rents to off set his deposit.  Likewise, the fact that his company, “Hughie” is the plaintiff in another High Court action could not weigh heavily in his favour. 

60.  The Defendant deliberately ignored the time limit in filing defence and allowed judgment to be entered against him by default.  He had no credible explanation for non compliance with the time limit and for the delay of three months in making the application to set aside the default judgment.  In the meantime, he withdrew all his money from the bank accounts known to the Plaintiffs.  He said in his affidavit that it was his right to open as it was to close his bank accounts.  He would take care to withdraw all money from his bank accounts but would not care to file a defence.  His conduct suggests that he had no intention to contest the Plaintiffs’ action but only intended to frustrate the Plaintiffs’ effort in satisfying judgment.  The Court has to be very cautious with such a person when considering the prohibition order.

61.  The Defendant has shown remarkable ability in stalling for time.  He dragged on with his tenancy for over a year after its termination by negotiating for rent which eventually broke down for a very minor difference of a one-off payment of $5,000 in respect of the rent for February 2003.  Then he dragged on by negotiating a date for delivery of vacant possession of the Premises. His present action could well be another of his design in stalling for time so that he may leave Hong Kong when his business here is over and to leave the Plaintiffs with an empty judgment.

62.  Mr Wong emphasises strongly that the Defendant has a permanent Hong Kong identity card and is no different from any other local citizens. Though the Defendant has right of abode in Hong Kong, this does not mean he would not leave Hong Kong for good.  He is a British citizen with family ties in the United Kingdom.  He has no family ties in Hong Kong. His position is not the same as that of an ordinary local citizen. 

63.  Mr Wong also referred to the Defendant’s offer on 2 July 2004 to pay the judgment debt of $67,000 into Court in return for the Plaintiffs agreeing to discharge the First Prohibition Order and to set aside the default judgment.  But that offer was rejected by the Plaintiffs who demanded $97,000 to cover also their costs.  It is unfortunate that the parties did not take a step further to negotiate for a more reasonable settlement.  This offer is something which may be taken in his favour.

64.  On the totality, I do not think the Defendant is to be trusted.  He has already shown determination to frustrate the Plaintiffs’ effort in satisfying judgment instead of properly contesting his liability.  He has shown ability to stall for time.  He has no family ties in Hong Kong.  He is unemployed and I am not satisfied that he is conducting any business in Hong Kong.  His stay in Hong Kong is precarious.  Given his spurious conduct, the inference could readily be drawn that that he would leave Hong Kong any time it suits him and will not return for a substantial period leaving the Plaintiffs with an empty judgment.  This is not a case, which the Court would be comfortable not to issue the prohibition order.  I therefore dismiss the appeal.  As I have granted the Defendant leave to defend upon payment into Court the sum of $80,000, the amount stated in paragraph (1) of the Second Prohibition Order would have to be amended, if an application is made to have the order extended. The order, if extended, shall be discharged upon paying into Court of the said amount. 

65.  As for costs, the Defendant’s offer was less than the amount I set down for payment into Court.   I would not take that into account when making my costs order.   Accordingly, I order the Defendant to pay the costs of this appeal with certificate for counsel.

conclusion

66.  In respect of the Defendant’s application to set aside the default judgment, I set the judgment aside and grant leave to the Defendant to defend on condition that the Defendant makes payment into Court the sum of $80,000 within 14 days.  The Defendant shall pay the Plaintiffs’ costs of the application with certificate for counsel and all costs thrown away.  Such costs are to be taxed, if not agreed.

67.  In respect of the Defendant’s appeal against the order of Master Ko dated 5 July 2004, the appeal is allowed with no order as to costs.

68.  In respect of the Defendant’s appeal against the order of Master Ko dated 23 July 2004, the appeal is dismissed with costs.  Upon extension, the order shall be varied to the extent I indicated.