DESIRABLE INTERNATIONAL FASHIONS LTD (IN LIQUIDATION) v. CHIANG SHI CHAU

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JUDGMENT

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1. This is an application by the Defendant to set aside a judgment entered on 14th August 1995 for default of notice of intention to defend. Service was purported to be effected by the solicitors for the Plaintiff on the 18th of July 1995 by their sending the Writ by registered post to an address at 1st Floor, Park Sun Factory Building, 103-107 Wo Yi Hop Road, Kwai Chung, New Territories ("Plaintiff Kwai Chung Office"), which was the previous office of the Plaintiff. On the 18th July 1995, the Defendant was not in Hong Kong and from the travel documents of the Defendant, it is quite clear that the Defendant who was and is a resident of China, did not come to Hong Kong until the 9th of August 1995 and that he left Hong Kong the same day. So during the critical period between 18th July 1995 and the 8th of August 1995, the Defendant was not in Hong Kong.

2. The Defendant was an employee of what has been called during the hearing TDC, a Mainland Chinese company. The Defendant came to Hong Kong in 1992 to assist on behalf of TDC in a number of business transactions between TDC and the Plaintiff and from the evidence, it is reasonably clear that the Defendant did not live in Hong Kong on a regular basis but made frequent short trips to Hong Kong, staying only a few days at a time and very often not even a day, leaving the same day he entered Hong Kong.

3. The Plaintiff Kwai Chung Office was the office of the Plaintiff up to 1993 and in 1993 the Plaintiff moved its office to another place in Kwai Chung which I will call hereinafter the Plaintiff New Office. The evidence is clear that the Defendant went to the Plaintiff Kwai Chung Office to work from time to time when he was in Hong Kong but this was of course up to 1993 and after the 1993 move by the Plaintiff from the Plaintiff Kwai Chung Office to the Plaintiff New Office, the Defendant adopted the same pattern of going into the Plaintiff New Office from time to time to work when he was in Hong Kong and presumably his work was in respect of the business dealings between the Plaintiff and TDC. So whatever might be said about the last known address of the Defendant, it could not possibly be said that the Plaintiff Kwai Chung Office address was known to the Plaintiff in July 1995 as the usual address or the last known address of the Defendant. It is to say the least bizarre if not perverse for the Plaintiff to attempt to effect service of proceedings on the Defendant by sending a registered letter to the Plaintiff Kwai Chung Office, which they knew the Defendant had stopped going to after 1993.

4. What led to the present dispute is when the Writ sent by registered post to the Plaintiff Kwai Chung Office was not returned to the Plaintiff's solicitors, Plaintiff's solicitors proceeded to obtain default judgment on the 14th August 1995 (supported by an Affirmation of service of Lee Pak Ho dated 10th August 199 to the effect that the Writ sent by registered post to the Plaintiff Kwai Chung Office on 18th July 1995 had not been returned and that in the opinion of the Plaintiff. the said Writ so posted would have come to the knowledge of the Defendant within 7 days after the date of posting). The Default Judgment was followed by Garnishee proceedings taken out by the Plaintiff leading to the Garnishee Order Nisi made on the 11th October 1995. Garnishee Order Absolute made on the 28th November 1995 and payment out from the Defendant's bank account of some HK$318.658.97 and US$14,057.15 by the Hong Kong Bank to the Plaintiff on the 20th December 1995. On the 21st May 1996, the Defendant applied to set aside the Default Judgment which application was vigorously opposed by the Plaintiff.

5. At the hearing, at the Court's invitation the parties confined their arguments to whether the Default Judgment entered was regular or irregular and what should be the consequence if the judgment was irregular. The issues raised are:-

6. It is conceded and in fact it cannot be disputed under Issue B that the Default Judgment was entered for too much. Even on the admitted case of the Plaintiff, the Default Judgment in the sum of $12,748,354.95 should be corrected either to $3,500,000 or some $7.9 million as prayed for in the two Summons issued by the Plaintiff. On the incontestable case before the Court that Judgment was entered for too much, there is really no doubt that the Default Judgment entered was irregular.

7. Strictly speaking therefore, it is not necessary for me to go into Issue A of whether the Judgment was irregular because there was not good service on the Defendant. However as the matter had been argued and this aspect also has some bearing on the exercise of my discretion, I will just briefly state my reasons for concluding that there was not good service.

8. Order 10 rule 1(2)(a) of the Rules of the Supreme Court authorised service on "a defendant within the jurisdiction" under the alternative method of "sending a copy of the writ by registered post to the defendant at his usual or last known address". What is important is the words "a defendant within the jurisdiction" and Barclays Bank v Hahn [1989] 1 WLR 506 made it clear that the defendant had to be within jurisdiction at the time of service for good service under this provision. The first point of Mr. Cheung for the Defendant on this point of no good service is that the Defendant was not in Hong Kong on the 18th July 1995 when the service was purported to be effected and that he was not in Hong Kong even within 7 days of such service. On that basis the purported service did not come within rule 1(2)(a). accept this submission.

9. Secondly, Mr. Cheung also said that the Defendant had no knowledge of the Writ at any time before the entering of Judgment on the 14th August 1995 and this again seems to be well supported by the evidence. There is simply no evidence of when, either in July or August 1995, the Defendant could be said to have knowledge of the Writ. Even on the 9th August 1995 when the Defendant came in and went away the same day, there was nothing to indicate that the Defendant had any knowledge of the Writ. Furthermore, it goes of course without saying that the knowledge of the Writ must be at least 14 days before the Judgment was entered as otherwise the Defendant would not be given the full 14 days to enter notice of intention to defend.

10. The third point of Mr. Cheung is that by applying the principle laid down in Forward v West Sussex County Council [1995] 1 W.L.R. 1469, the Court must hold that there was no good service when the evidence shows that the purported service was not effective to bring the proceedings to the notice of the Defendant. Here the evidence clearly shows that the Defendant did not know about the Writ or the proceedings until after the payment out of the money in the Hong Kong Bank Account in late December 1995 pursuant to the Gamishee Order Absolute. The movements of the money in the bank account from August 1995 onwards suggest very strongly that the Defendant was not aware of the Default Judgment or the proceedings or that his Bank Account was being the subject of Garnishee proceedings. Even in December 1995. close to $100,000 seemed to have been paid in by the Defendant to his Bank Account and Mr. Mak rightly conceded that the Defendant was not aware of the Judgment (and by necessity the proceedings) until probably sometime in late December 1995 or January 1996.

11. The fourth point made by Mr. Cheung on the matter of no good service is that the usual or the last known address of the Plaintiff was not the Plaintiff Kwai Chung Office address and the Plaintiff knew very well that this was the case. So service was not effected on the usual or the last known address of the Defendant and the purported service on the 18th July 1995 was therefore bad. I accept this submission. I must say that I do find it astonishing that professional accountants and solicitors dealing with this matter could ever allow service to be effected at an address where they knew that the Defendant was no longer working or living and what is even worse they could allow an Affidavit of service to be filed which they must know to be untrue.

12. The result is therefore that I do find and accept that no good service had been effected on the Defendant and it follows that the normal consequence of irregular judgment ought to follow, namely setting aside the Default Judgment and consequential execution without regard for the merits of the defence to the claim. But Mr. Mak in a hard and unrelenting submission argued that even in the teeth of the irregular judgment, I still have the jurisdiction and wide discretion to deny the Defendant any unconditional setting aside and that I should exercise my discretion by refusing to set aside the Default Judgment or at least by imposing a condition of payment into Court the whole amount of Judgment. The wholly unjustified service by the Plaintiff was the source of the subsequent Default Judgment, execution and setting aside. What is now being fought on this application and which had taken up so much time is whether the Plaintiff should be allowed to retain the fruit of the unlawful and irregular service step taken and whether the Plaintiff should be given the additional advantage of forcing the Defendant to pay into court the Judgment sum as a condition for defending the proceedings of which he was never given proper notice.

13. The intense disagreement at the hearing between the parties is the discretionary power of the Court as a result of irregular judgment. Three possibilities were put forward:-

Mr. Mak for the Plaintiff argued for the No Right Principle under (3) or alterntaively for the Limited Right Principle under (2) above. Mr. Cheung for the Defendant submitted that the correct principle is the Limited Right Principle under (2) above or alternatively (though he did not strongly press for this) it should be the Absolute Right Principle.

14. The disagreement of parties arise as result of the somewhat confusing state of the law in Hong Kong of the consequence of irregular judgment. In Volume 5 of Halsbury Laws of Hong Kong on Civil Procedure at paragraph 90.0861, this is said:-

"In the case of an irregular judgment, it used to be thought that the defendant was entitled to have it set aside ex debito justitiae, and the court should not impose any terms whatever on the defendant, although the irregularity must be specified in the summons of notice of motion. More recent decisions however, have propounded the view rather that the applicant has a 'confident expectation' rather than a right to have the judgment set aside."

The basis of the above proposition in the Hong Kong Halsbury is the judgment of Hunter, J.A. in the case of Honour Finance v Chu Mei-mei [1989] 2 HKLR 146 at page 148. What happened there was that the service by registered post in that case was held in the lower court by the Master and by Godfrey, J. (as he then was) to be bad service and therefore the irregular judgment was set aside. The Court of Appeal, consisting of Cons VP, Hunter JA and Mortimer J. (as he then was) reversed the lower court's judgment and held that the service was good and regular and as no merit had been shown. the default judgment was not set aside. That case strictly speaking turned on the determination of whether the default judgment was regular or irregular. As the Court of Appeal held that the default judgment was regular. what was said by the Court of Appeal on the exercise of the Court's exercise of discretion consequent upon irregular judgment is obiter dicta but obviously deserving of the high respect due to observation from any considered judgment of the late Mr. Justice Hunter.

15. Six years after the Honour Finance Judgment a different Court of Appeal (Power, VP, Mortimer JA and Godfrey JA) in Fok Chun-hung v Lo Yuk-shi [1995] 1 HKLR 420 took a somewhat different view of Honour Finance although in the Judgment of Godfrey JA he did not go as far as to say that Hunter JA erred in Honour Finance. The facts of the Fok case are that the registered letter with the Writ was returned after the default judgment was obtained. At first instance, Bokhary JA (siting as an additional judge of the High Court) ordered the default judgment to be set aside on terms. The Court of Appeal however held that under Order 13 rule 7(3) there was a procedure for the plaintiff to set aside the default judgment or at least to seek the directions of the court neither of which steps was taken by the plaintiff in that case. The Court of Appeal therefore decided the case by ordering the setting aside of the default judgment without condition. Strictly speaking, the Fok case provided no binding precedent as to whether irregular judgment should be set aside as of right. Citing White v Weston [1968] 2 QB 647 at page 659, Godfrey JA rested his decision in the Fok case on the defect in the service being so fundamental as to entitle the defendant as of right ex debito justitiae to have the judgment set aside. But it is to be noted that in the course of the Fok Judgment, the Court of Appeal (notwithstanding the presence of Mr. Justice Mortimer in both Honour Finance and Fok) was inclined to the view on the basis of decisions such as White v Weston, Barclays Bank of Swaziland Ltd. v Hahn [1989] 1 W.L.R. 506 and Willowgreen Ltd. v Smithers [1994] 1 W.L.R. 832 that there was no discretion to impose conditions in the setting aside of default judgment which was obtained in circumstances where the process was not properly served on the defendant.

16. Po Kwong Marble Factory Ltd. v Wah Yee Decoration Co. Ltd. an unreported Judgment of the Court of Appeal (Nazareth VP, Bohkary JA and Sears J) delivered on the 20th November 1996 (CA153/96) provided a final twist to the tortuous path starting from Godfrey J. at first instance through Hunter JA in the Court of Appeal in the Honour Finance case, Bohhary JA at first instance through Godfrey JA in the Court of Appeal in the Fok case, to Bohhary JA and Sears J. in the Court of Appeal in the Po Kwong case. The service which was effected in the Po Kwong case was by leaving the writ at an address which was not the registered office of the defendant and therefore the question for the court is what should be done in this situation of an irregularly obtained judgment. Sears J. was of the view (having regard to Order 13 rule 9 which provided that the Court may on such terms as it thinks just set aside or vary any judgment entered in default of notice of intention to defend) that there is a residual discretion in the court, apart from consideration of merits of the defence, to impose terms upon the setting aside of the judgment. In other words, the Limited Right Principle was what appealed to Sears J. Similarly, Bokhary JA was also for the Limited Right Principle and he read the Fok judgment narrowly as not having laid down any Absolute Right Principle. The Vice President Nazareth while having misgivings, did not dissent and in fact allowed the appeal for the reasons given by Bohkary JA and Sears J. On my analysis of the ratio decidendi of the Po Kwong case, the Court of Appeal held that the correct principle in deciding the setting aside of irregular judgment is the Limited Right Principle and it was this principle and not the Absolute Right Principle which provided the whole basis of the justification and the foundation for the Court of Appeal imposing terms on the setting aside of the irregular judgment. Po Kwong is binding on me and it follows therefore that I must apply the Limited Right Principle and not the Absolute Right Principle, notwithstanding the powerful reasons stated in the Fok case. In reaching this conclusion, I am comforted by the fact that a similar opinion was also expressed by Keith J. in Guangdong International Trust and Investment Corporation Hong Kong (Holding) Ltd. v Yuet Wah (Hong Kong) Wah Fat Ltd. [1997] 1 HKLR 489.

17. Having regard to my conclusion as to the binding effect of the Po Kwong Judgment, it is therefore not necessary for me to consider the English authorities which Mr. Mak had so helpfully drawn to my attention. In my judgment, the express and clear words of Order 13 rule 9 (which by the way was the provision invoked by the Defendant in his Summons to set aside dated 21st May 1996) made it clear that the exercise of my discretion is not restricted and having regard to the long line of authorities on irregular judgment, it seems to me that:-

18. Having resolved the legal question that the Court should apply on the setting aside of an irregular judgment, the Limited Right Principle and not the Absolute Right Principle, the only issue which requires to be resolved is whether apart from the merits of the defence, there are matters in the conduct of the Plaintiff and the Defendant which should persuade the Court to exercise its discretion by denying the normal right of a defendant the subject of an irregular judgment to have the judgment set aside. Mr. Mak relied strongly on the following matters in support of his contention that I should impose terms, namely the paying into court of the whole amount of the claim:-

I will consider each question in turn

DELAY IN MAKING THE SETTING ASIDE APPLICATION

19. Accepting as I have done that the Defendant did not know about the Default Judgment until January 1996 when he was informed about the Garnishee Order, the question is had there been such unexplained delay which should lead to the conclusion that the Defendant had sat on his rights or that the Defendant should not be given an order of unconditional setting aside. The evidence from the Defendant on the explanation for the delay was that:-

By resorting to what might be called forensic cross-examination on Affirmation, Mr. Mak sought to discredit what was said by the Defendant on Affirmation. I do not accept these attacks. It is of course true that there had been something like 4 months delay between the Defendant knowing of the Default Judgment and his application to set aside but it is right to take into account the time lapse not only the explanations of delay which were given by the Defendant on Affirmation but also two other aspects namely that:-

I accept the explanations given by the Defendant for the delay and I reject the suggestion of the Plaintiff that the explanations are not to be believed or are to be dismissed as being wholly without substance.

RISK OF EMPTY JUDGMENT

20. Mr. Mak made much play of the fact that the Defendant was a foreign resident and that therefore if the Default Judgment and the execution on the Default Judgment were set aside there would be a serious risk that the Plaintiff would be left with an empty judgment. It is of course accepted that the Defendant was a foreign resident and that he does not live in Hong Kong but that by itself is no reason whatsoever for the Court to deprive a defendant of what he would otherwise be entitled to, namely having an irregular default judgment against a foreigner set aside.

21. The fact that the Defendant was a foreigner would normally suggest that it is a case of Order 11 where the stringent requirements of Order 11 had to be met. But instead of meeting these requirements, Plaintiff is seeking to bypass them and obtain by the back door of an irregular judgment what it could only obtain after a successful Order 11 application and Mareva Injunction Order. I therefore do not accept the fact that the Defendant being a foreigner was a valid or good reason for imposing terms.

22. As for the suggestion that if money which was the subject of the execution in the sum of $400,000 odd was paid out to the Defendant, then the Defendant could take such money out of Hong Kong and the Plaintiff would be left with an empty judgment, I see no merit whatsoever in this point. A defendant is entitled to do what he likes with his money before judgment. The Plaintiff if it wishes can seek a Mareva Injunction Order but until he succeeds in doing so, the mere fact that there is a possibility that the money would be taken out of Hong Kong by a foreigner does not provide a good reason for the court to impose terms on setting aside. In fact to do so would give to the wholly undeserving Plaintiff an advantage which in justice he should not enjoy. In any event, it seems to me that the circumstances of this case are such that the $400,000 execution money when released are more likely to go to the Defendant's solicitors to enable this litigation to continue rather than to be remitted immediately out of Hong Kong to be deliberately kept out of the Plaintiff's hands.

23. In the circumstances, I do not accept the criticisms made by Mr. Mak against the Defendant or his suggestions that having regard to the conduct of the Defendant, I should exercise my discretion by imposing terms on setting aside the default judgment. For me if conduct is to be taken into account, then the conduct of the Plaintiff:-

call for the setting aside unconditionally of this thoroughly bad default judgment.

24. In all the circumstances and having considered all the points made to me by Mr. Mak, I have no hesitation in coming to my conclusion that this Default Judgment and its subsequent execution must be set aside. The money of the execution together with interests thereon at 1% above prime must be immediately repaid by the Plaintiff to the Defendant. I also make an Order Nisi that the Defendant is to have in any event, the costs of this Summons to set aside.