KAUR PARAMJIT v. LI ON NA t/a 新長發快餐 AND ANOTHER

DCEC 1479/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

EMPLOYEES’ COMPENSATION CASE NO 1479 OF 2012

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D E C I S I O N

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A.　INTRODUCTION

1. These employees’ compensation proceedings arose from a personal injury the applicant, a dish washer, suffered in an accident(“Accident”) on 5 January 2012 at Ground Floor, 92 Tin Sam Chuen, Tai Wai, Shatin, NT, HK (“Premises”) allegedly in the course of her employment with the respondent - Li On Na (“Mdm Li”) trading as新長發快餐 (“San Cheung Fast Food”[1]) (“Business”).

2. The applicant, through her legally-aided assigned solicitors, Messrs Massie & Clement (“A’s Solicitors”), issued the Application of these proceedings on 23 August 2013 to claim for employees’ compensation againstthe respondent. Mdm Li did not enter any appearance in these proceedings.  Consequently, the applicant was granted an interlocutory judgment on 15 February 2013 and a final judgment on 17 October 2013 (collectively known as “Default Judgments”).

3. By a summons dated 11 April 2016, Mdm Li applied in person to set aside the interlocutory judgment on the ground that she was not the applicant’s employer after having sold the Business.

4. The Employees Compensation Assistance Fund Board (“Board”), being a party having an interest in the outcome of the respondent’s application, later applied by summons dated 21 July 2016 to be joined as a party as well as by summons dated 17 August 2016 to set aside the Default Judgments.

5. At the substantive hearing on 31 August 2016, Mdm Li was no longer acting in person, but represented by counsel, Mr Chan.  The court granted leave to Mdm Li to amend her summons by including an application to also set aside the final judgment in addition to the interlocutory judgment. The Board was represented by counsel, Mr Wang. By consent of the parties, the court granted leave to the Board to be joined as the 2^nd respondent in these proceedings. (Thus, the original respondent shall be referred to as the 1^st respondent in these proceedings.)

6. In the result, the only outstanding applications are the applications by Mdm Li and the Board to set aside the Default Judgments.  Mr Massie, for the applicant, opposed the setting aside applications.

7. Mdm Li’s setting aside application was supported by two Chinese affirmations filed on 15 April and 6 June 2016 (“Supporting Affirmations”) and the Board’s was supported by an affidavit of its solicitors filed on 17 August 2016. The applicant has not filed any affidavit evidence to oppose the setting aside applications.

B.　THE APPLICABLE LEGAL PRINCIPLES

8. It is common ground that the Default Judgments are regular judgments, and that the court has discretion under Order 13 rule 9 of the Rules of the District Court to set aside a regular judgment, which well-established legal principles can be found in the Hong Kong Civil Procedure 2016, Vol.1 paras 13/9/12-14. They are summarized as follows.

(1)  The court’s discretionary power to set aside a regular judgment is unconditional.

(2)  A defendant is required to satisfy the court that  he has “a real prospect of success” to enable a court to form a provisional view of the probable outcome of the action that  his case and the evidence  the defendant adduces in support of his application to set aside are potentially credible and carry some degree of conviction. If a court is unable to form a provisional view of the probable outcome of the action, the court would need to be satisfied that the defence “could well be established” at trial.  

(3)  A defendant who is able to demonstrate a defence which has a real prospect of success does not have an automatic entitlement to have the default judgment set aside. A court will need to weigh all relevant factors against the dominant factor of the merits in order to see where the justice of the case lies when exercising its discretion. The relevant factors will include:

(i)    why the default occurred;

(ii)  the defendant’s conduct after he had notice of the proceedings;

(iii)    an explanation for the time taken where there has been delay in making the application. However, the consideration of merits would usually transcend any reasons given by the defendant for the delay in making the application; and

(iv)    any prejudice that would be caused to the plaintiff or to third parties if the default judgment were to be set aside.

(4)  Exceptional circumstances have to be shown before a court will refuse to set aside a default judgment where a real prospect of success in the defence has been demonstrated.

9. Accordingly, the first and the foremost matter that Mdm Li and the Board need to establish is that Mdm Li’s proposed defence or answer to the applicant’s claim has “a real prospect of success”.

C.　DOES THE RESPONDENT’S INTENDED DEFENCE HAVE MERITS?

C.1　Evidence in support of the setting-aside applications

10. Mdm Li’s case, according to the Supporting Affirmations, is that before 15 November 2011 (“Cut-off Date”), when Mdm Li was the sole-proprietor of the Business that operated a restaurant at the Premises,the applicant was the 1^st respondent’s employee.  However, as from the Cut-off Date, Mdm Li’s ownership of the Business was sold and transferred to a lady called He Xiao Ying (“Mdm He”) by an agreement in Chinese dated 11 November 2011 (“Agreement”). On the same Cut-off Date, Mdm Li terminated all the existing employment contracts of the 1^st respondent’s employees including that of the applicant.

11. To support Mdm Li’s proposed defence that the applicant was not the 1^st respondent’s employee on the date of the Accident, both Mdm Li and the Board relied on a number of documents exhibited by the former to the Supporting Affirmations as well as those disclosed in the applicant’s list of documents (“LOD”) filed on 21 March 2013 in these proceedings and those from a concluded civil action, DCCJ 1523/2012 (“Civil Proceedings”) involving Mdm He as the plaintiff and Mdm Li as the defendant.  It is submitted that these documents provide credible evidence in support of Mdm Li’s assertions that the Business had been validly transferred to Mdm He and that the 1^st respondent’s employees were dismissed upon the transfer of the Business.

C.1.1　That there was a genuine agreement for the transfer of the Business

C.1.1.1　The Agreement itself

12. It is submitted that the terms of the Agreement show that it was a genuine commercial business transfer agreement. The Agreement not only, counsel suggested, provided for two of the terms fundamental in  a transfer agreement, i.e. the agreement for the amount of the consideration to be paid and the date on which the transfer was to take effect, it further contained provisions for the transfer of the legal liability between the transferor (Mdm Li) and the transferee (Mdm He) on matters concerning employer-employees disputes, expenses, profits and losses arising out of the Business and arrangement of insurance for the employees  (clauses 7, 8  and 9 of the Agreement).

C.1.1.2　Documents filed in the Civil Proceedings

13. The Civil Proceedings were instituted by Mdm He on 9 May 2012 for damages against Mdm Li for misrepresentations and the breach of the Agreement.  The underlying disputes in these Civil Proceedings are not relevant to the present claim; they nonetheless, submitted the Board, provide cogent evidence for the genuineness of the Agreement. The statement of claim, Mdm He’s witness statement and various documents Mdm He had produced in these proceedings all show that Mdm He had relied on the validity of the Agreement to found her claim. 

C.2　  That the respondent dismissed its staff upon the transfer

C.2.1 　Declarations by two of the respondent’s former employees

14. To support Mdm Li’s assertions that she had terminated the employment of her employees upon the transfer of the Business to Mdm He, Mdm Li produced the declarations of two of the respondent’s former employees in which the employees stated that they had been dismissed and were paid severance payments upon the transfer of the Business.  

C.2.2　The applicant’s witness statement filed in these proceedings on 2 April 2013 (“A’s Statement”)

15. In support of Mdm Li’s assertion that the applicant had been dismissed by the 1^st respondent after the transfer of the Business,  Mdm Li and the Board rely on a part of A’s Statement in submitting that even the applicant’s own evidence in these proceedings  is in line with Mdm Li’s case. The relevant parts of A’s Statement they refer to can be summarized as follows:

(i) Since 2007 until early 2011 the applicant worked on and off as a dishwasher in a restaurant called “Loi Loi Hotpot Restaurant” at the Premises.

(ii) On 17 December 2011, the applicant was re-employed to work in the same hot-pot restaurant at the Premises. All the staff in the restaurant were also newly hired by a boss “Miss Li”.

(iii) During the time of the applicant’s employment to work at the Premises, including the re-employment in December 2011, the name of the hot-pot restaurant was not changed although it seemed to have been “managed by … different people”.  

C.3　Evidence after the applicant’s injury

C.3.1　The employer’s notice of Accident to the Labour Department dated 18 May 2012 (“Form 2”)

16. The authorized signature of the Business on Form 2 appeared to be the same signature as that of Mdm He in the Agreement.  Thus, this signature, it is  submitted on behalf of Mdm Li and the Board, tends to support Mdm Li’s proposed answer that she was not the employer at the time of the Accident, who was likely to have been Mdm He.

C.3.2　Two cheques respectively dated 6 February 2012 (“February Cheque”) and 7 March 2012 (“March Cheque”) (collectively “Cheques”)

17. The Cheques were disclosed as item 5 in the applicant’s LOD, which are described as “[c]opies of cheque(s) received by the Applicant as a periodical payment made by her employer”.  The Cheques, it is stated, showing payments having been made to the applicant after the Accident, were issued and signed by Mdm He and an unknown person, but not Mdm Li, further provide credible evidence that Mdm He was likely to have been the applicant’s employer at the time of the Accident.

C.3.3　Two unsigned letters purportedly from the applicant’s employer to the applicant

18. These two letters, one being hand-written in Chinese dated 31 May 2012; and another in English dated 11 June 2012, are both addressed to the applicant. The letters are stated to be from the person-in-charge of Loi Loi Hotpot Restaurant, which was stated to be the applicant’s employer. The contents of the letters seem to be an inquiry about the applicant’s injuries and an arrangement for her to be medically examined. The one thing that counsel suggested showed Mdm He to have likely been the applicant’s employer, rather than Mdm Li, was a contact telephone number stated in these letters, which is the same telephone number as that of Mdm He as recorded in the Agreement.

D. 　Applicant’s arguments   

19. On behalf of the applicant, Mr Massie puts forward a number of  counter-arguments as follows :

(1)  Whilst the applicant, being a non-party to the Agreement, is not in a position to challenge the validity of the alleged sale of the Business, the judgment entered against Mdm Li for misrepresentation in the Civil Proceedings, Mr Massie contended, casts doubt on the credibility of Mdm Li’s proposed defence[2].

(2)  Referring to the relevant business registration documents of the Business, Mr Massie pointed out that, despite the alleged transfer of the Business, Mdm Li is still recorded as the proprietor of the Business. Prima facie, Mr Massie suggested,  Mdm Li was/is the owner/proprietor of the Business at all material times according to s19(2) of the Business Registration Ordinance (Cap 310)[3].

(3)  Insofar as the authorized signature of the Business in Form 2 is concerned, Mr Massie stated that the signature is illegible. It should not therefore be accepted as evidence that Mdm He was the applicant’s employer at the time of the Accident. It is suggested that all that it can be deduced from the signature “is that the Form 2 was signed and filed on behalf of” the Business by someone.

E.　The court’s provisional view

E.1　Effect on employment contracts on change of ownership

20. It is a settled legal principle that in the event of the change of ownership of a business, the initial employment contracts will terminate automatically by operation of law at the time as the change occurs. The previous or initial owner should there and then terminate the employee’s contract in accordance with the provisions of the Employment Ordinance (Cap 57) and pay the employee statutory payments, including severance payments to the employee in accordance with Part VA (on severance payments) of Cap 57. A new owner to whom the business has been transferred will be able to conclude new contracts of employment with those employees who continue to be employed by the business after the transfer of ownership in the business and the proper termination of the employees’ contract by the initial owner: s.31 J of Cap 57[4].

21. Implicit in Mdm Li’s defence is her assertion that upon the valid transfer of Business to Mdm He and the termination of the employees’ contracts by the respondent, any contracts of employment after the Cut-off Date, including that of the applicant, would have been concluded by the new owner, Mdm He.  Thus, I should first determine whether there is evidence in showing that Mdm Li had, by the Agreement, validly sold and transferred the Business to Mdm He, and next whether there is credible evidence showing that Mdm Li had terminated the employment contracts with her employees on the Cut-off Date.

E.2　Whether there was a valid transfer of the Business?

22. The various documents Mdm Li and the Board have relied on to demonstrate a valid transfer of the Business have already been referred to above.  In assessing the merits of this assertion, it suffices to only focus on several important aspects of the evidence without conducting a detailed or forensic assessment of each and every single piece of evidence they have been referred to.  Despite the prima facie evidence as disclosed in the business registration documents of the Business that Mdm Li was still recorded as the sole-proprietor of the Business carried on in the Premises despite the asserted transfer of the Business, there seems to be evidence from an updated business registration that shows that the Business was no longer operated in the Premises.  There was an entry in the business registration that shows that the address of the Business since September 2013 had been changed an address in Fo Tan[5]. Additionally, according to a bundle of business registration documents of various businesses registered in the name of Mdm Li under the same name as the Business, it would appear that Mdm Li seemed to have operated various fast food shops in various addresses under the same name as the Business. For these reason, I consider that there is some evidence that seems to be able to displace the prima facie evidence.

23. Looking at the evidence in the round, I’d be inclined to a provisional view that Mdm Li and the Board have adduced credible evidence to show that there was a valid transfer of the Business. The reasons are as follows. 

24. First, without attempting an analysis as to what amounts to a “change of ownership” in law, I’m inclined to agree with Mr Wang that the home-made Agreement, at the very least, appears on its face to be a genuine agreement that contains terms providing for the transfer of the Business. Provisions for, for example, the amount of the consideration ($300,000) to be paid, the stipulation of the Cut-off Date (15 November 2012) for the transfer of the rights and liabilities between the transferor and the transferee (clauses 7, 8 and 9 of the Agreement) show that the parties had intended nothing other than contracting for the assets and goodwill of the Business to be sold or transferred to Mdm He.

25. Second, in spite of the entry of a judgment against Mdm Li in the Civil Proceedings, I respectfully agree with Mr Wang’s submissions that the documents filed in the Civil Proceedings, namely the pleadings and the witness statement by Mdm He, tend to further fortify the genuineness of the Agreement.

26. Thirdly, a number of post-Accident documents also seem to lend further support to Mdm Li’s assertion that the Business had been validly transferred to Mdm He and that Mdm Li was not the applicant’s employer after the transfer.

(i)    Regarding the authorized signature of the Business on Form 2, I am unable to agree with Mr Massie that it is totally illegible. Although some of the characters may not be immediately discernable, I would say that anyone who reads Chinese characters should be able to discern the very distinctive character, “賀”, which is the surname of Mdm “He” (“賀”). Also, a naked-eye visual comparison of this signature with that of Mdm He’s in the Agreement seems to have also disclosed a striking likeness of these two signatures.  Form 2 is a prescribed form by which an employer is statutorily required to give notice HHzhHHHto the Labour Department of the accident of the former’s employee. The authorized signature that bears the resemblance to that of Mdm He’s, in my view, helps bolster Mdm’s Li proposed defence that Mdm He was the applicant’s employer after the Business had been transferred to her.

(ii)  The Cheques respectively in the sums of $6,480 and $7,248, in my view, seem to further exculpate Mdm Li’s liability. In spite of the fact that there was another unknown issuer of the Cheques, the fact that Mdm He was one of the named joint issuers who made payments (by the Cheques) that have been described in the LOD as periodical payments received from the applicant’s employer is pertinently in support of Mdm’s Li proposed defence.

E.3　Did Mdm Li dismiss the employees after the transfer of the Business?

27. The only direct evidence Mdm Li produces to support her assertion of the alleged dismissal of her employees were two short unsworn written declarations purportedly made by the former employees. I would have agreed with Mr Massie’s submission that these declarations were not probative evidence had they been the only evidence in support of Mdm Li’s case. There is however another piece of evidence that potently, though indirectly, substantiates Mdm Li’s assertion of having dismissed her employees upon the transfer of Business – A’s Statement.

28. As already discussed above in para 20 above, before a new owner can take the benefit of s 31J of Cap 57, two conditions have to be satisfied, namely, (i) there must have been a change of ownership in the business; and (ii) the initial owner must have terminated the employee’s contract.  In the relevant parts of A’s Statement referred to in para 15 above,  the applicant seems to have confirmed that  there was indeed a re-engagement of employees after the Cut-off Date, namely the re-hiring of the staff including herself on 17 December 2011.

29. It is noted, of course, that a reference in A’s Statement of “Miss Li” being the boss seems on its face to be adverse to Mdm Li. This nonetheless cannot be totally damaging to Mdm Li for it is quite explicable that the applicant could only describe her employer by a reference to the surname only without having positively identified her employer being the respondent or setting out Mdm Li’s full name were the “Miss Li” that she had mentioned were indeed Mdm Li. In my view, the applicant would have little difficulty in stating Mdm Li’s full name at the time when A’s Statement was being prepared.  

E.4　Conclusion on merits

30. In conclusion, for the reasons stated in the above, I accept both counsel’s submissions that Mdm Li and the Board have adduced credible evidence to support Mdm Li’s assertion that she was not the applicant’s employer at the time of the Accident.  In spite of having come to this provisional view,  it does not mean that I should automatically set aside the Default Judgments before also weighing all relevant factors against the dominant factor of the merits to determine where the justice of the case lies.

31. Two secondary factors are relevant considerations in this case – the reason for the delay, and prejudice that would be caused to the applicant if the Default Judgments were to be set aside.

F.　SECONDARY CONSIDERATIONS

F.1　Explanation for the default

F.1.1　Mdm Li

32. In the Supporting Affirmations, Mdm Li has given reason for the default and the steps she took after having had notice of the proceedings.  Mdm Li stated that in 2012 she did not have a fixed place of abode after she had moved out from her matrimonial home due to her marital problems. During this period, she had received on three occasions through the former landlord of the Premises documents relating to the proceedings. The first time was in late 2012. On that occasion she had asked her husband [6] to fax a copy of the Agreement to A’s Solicitors, informing them that the Business had been transferred. A staff of A’s Solicitors had confirmed having received the Agreement.  Mdm Li was led to believe that the Agreement would have ended the proceedings against her and in fact she was also later told by the applicant that she had settled her claim with Mdm He.

33. Mdm Li said that she had heard nothing about the proceedings until January 2015 when she was informed by the former landlord of the Premises that there were solicitors’ letters for her. The applicant asked a friend to again fax the Agreement to A’s solicitors. A female solicitor surnamed Yu of the A’s solicitors confirmed that the firm had received the Agreement.

34. On the third occasion at the end of 2015, the former landlord again told Mdm Li that there were documents from A’s Solicitors.  Mdm Li asked a friend to make request from A’s Solicitors for a full set of documents of these proceedings. It was only in around March 2016 that A’s Solicitors provided some documents to Mdm Li, who went to seek free legal advice. Shortly afterwards, Mdm Li issued the present setting-aside application.

35. I have no reason to reject Mdm Li’s explanation set out in the Supporting Affirmations particularly as A’s Solicitors have not filed any evidence to dispute Mdm Li’s assertions. I regard Mdm Li’s assertion that she had believed on the first occasion when she had notice of the proceedings that the matter had been settled appeared to be genuine as she was a layman.  I also find that Mdm Li had acted with reasonable expediency as soon as she realized in 2015 that the proceedings had not been settled as she had previously believed.  She had acted promptly in issuing the setting aside application after she had obtained legal advice. All in all, I accept that Mdm Li has provided a reasonable explanation for the default and for the delay in making the application.  I do not consider that Mdm Li has “walked away from this case” as Mr Massie has alleged in his written submissions.

F.1.2　The Board

36. According to the supporting affidavit of its solicitor filed in support of the Board’s joinder application, the Board already had notice of these proceedings before the Default Judgments were entered.  It had however decided not to intervene because it believed that Mdm Li was the sole-proprietor of the Business as the relevant business registration records have appeared to have so confirmed. When it subsequently had notice of Mdm Li’s set-aside application in early July 2016 and became aware of Mdm Li’s proposed defence, which was the same as the one she filed on 11 March 2016 in the related common law Personal Injuries action in the High Court, the Board then decided to intervene.

37. The Board being a statutory body is required to administer the funds of the Board, including whether to intervene in a proceeding, with caution. In the light of the information disclosed in the relevant business registration records of the Business (which have been discussed above), I consider that the Board has provided a reasonable explanation for its late intervention and making of the setting-aside application.

F.2　Any prejudice to the applicant?

38. The applicant, in light of Mdm Li’s assertions, would likely need to join Mdm He to these proceedings if the Default Judgments were set aside, Mr Massie submitted. Unfortunately, the statutory two-year time limit for the bringing of the proceedings against a new party has elapsed. Thus, the applicant would be prejudiced as she would be left without recourse.

39. It is true that the applicant would need to, should she join a new party to these proceedings satisfy the court that “there was reasonable excuse for the failure”: s14(4) of the Employees’ Compensation Ordinance (“Ordinance”).  It is however suggested by Mr Chan that any prejudice was not caused by the applicant but had been self-induced. This is because, Mr Chan argued, the applicant and/or the A’s Solicitors would have had sufficient information to enable the applicant to identify Mdm He being the alleged new owner.

40. I am in agreement with Mr Chan. According to the evidence that I have discussed above, I tend to believe that the applicant and/or her solicitors would have had ample time and opportunity to carry out investigation in deciding the correct party/parties to sue. 

41. According to Mdm Li, A’s Solicitors had been provided with a copy of the Agreement at the end of 2012 and they should there and then have been alerted to the identity of the alleged new owner being Mdm He.  Apart from the Agreement, I also find that Form 2 and the Cheques would have also provided sufficient links to identify Mdm He as the applicant’s probable employer.

42. Whilst it may be reasonable for the applicant to claim against Mdm Li because of the information disclosed in the business registration records, this does not excuse her or the A’s Solicitors from carrying out investigations regarding the relationship of Mdm He to the Business as a result of the information disclosed in Form 2 and the Cheques.

43. In the circumstances, in order to do justice for the parties, I consider that it is unfair to deny Mdm Li the opportunity to put forward her answer in light of my provisional assessment on the merits.

44. Given the same positive defence Mdm Li has put forward in the related Personal Injuries proceedings involving identical parties, I would also add that there is an additional reason that I should set aside the Default Judgments. If the Default Judgments were allowed to remain, it may have the undesirable outcome of inconsistent findings between the Default Judgments and the Personal Injuries proceedings, which are yet to be adjudicated upon.

G.　CONCLUSION

45. For the forgoing reasons, the Default Judgments should be set aside. Although both counsel have confirmed that they do not dispute the amount of the compensation stated in the final judgment, I agree with them, and reject Mr Massie’s suggestion that only the interlocutory default judgment but not the final judgment should be set aside. The final judgment has adjudged that the respondent should pay the amount of compensation the court has assessed to the applicant with interest and costs. Since Mdm Li is now granted leave to defend the proceedings, the final judgment against her simply cannot stand. Thus, both Default Judgments have to be set aside.

H.　ORDERS AND DIRECTIONS

H.1　Orders

H.1.1　Regarding the setting-aside applications

(1)  The Default Judgments are set aside.

(2)  There be a costs order nisi that:-

(i)   The 1^st respondent do pay the applicant’s costs of the setting aside application including all costs reserved, to be taxed forthwith if not agreed.

(ii)  The 1^st respondent do pay the costs of the 2^nd respondent of the setting aside application in any event, including any costs reserved with certificate for counsel, which costs should be the 1^st respondent’s costs in the cause.

(iii)   The applicant’s own costs are to be taxed in accordance with the Legal Aid Regulations.

H.1.2　Regarding paras 4 and 5 of the 2^nd respondent’s joinder summons dated 21 July 2016

(1)  The applicant do file and serve on the 1^st and 2^nd respondents the Amended Application within 14 days of the handing down of this judgment.

(2)  The costs of the summons be costs in the cause of the proceedings.

H.2　Directions

(1)  There be leave to the 1^st and 2^nd respondents to file and serve an answer within 28 days of the handing down of this judgment.

(2)  The parties do file a mediation certificate within 28 days of the handing down of this judgment.

(3)  The 1^st respondent do file and serve, for the purpose of calculating the monthly earnings of the applicant under s11 of the Ordinance, a list of earnings of the applicant for the 12 month-period prior to the Accident or such lesser period of the employment with the 1^st respondent within 42 days of the handing down of this judgment.

(4)  The 1^st respondent do file and serve a list of documents within 56 days of the handing down of this judgment and there be mutual inspection within 7 days thereafter.

(5)  The parties do file a joint written application within 84 days of the handing down of this judgment.