XCHRX CHIN CHUN KWOK AND ANOTHER v. YAN KWOK WING AND ANOTHER

HCA No. 1309/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1309 OF 1999

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J U D G M E N T

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1. I have before me an application on behalf of the Defendants to set aside a default judgment entered against them on 3rd March 1999.

2. On 23rd January 1999, the Plaintiffs issued a Writ against the Defendants, giving as their common address (they being husband and wife) Flat 6, 14th Floor, Block A, King Cheong House, King Lai Court, Ngau Chi Wan, Kowloon.

3. It was endorsed with a Statement of Claim which alleges that in May 1997, the Plaintiffs and the 1st Defendant entered into a partnership agreement to start and to operate a shop selling bird's nest products and trading under the name of "Golden Swallow". It is alleged that they agreed each to contribute $300,000 towards the partnership's capital, with the 1st Defendant also working full time as managing partner and drawing a salary of $13,000 per month. It is said that the 1st Plaintiff lent the 1st Defendant $150,000 and thereby financed half of his contribution to the firm's capital, such loan being repayable on 7th October 1997 and guaranteed by the 2nd Defendant.

4. The Plaintiffs complain that the 1st Defendant failed to provide the remaining $150,000 due as his contribution to capital and also that he suddenly and unilaterally stopped working as from 10th November 1997 and so disrupted the business and ultimately caused it to fail. It was closed down on 26th February 1998. The Plaintiffs say they lost their investment in the business in consequence and they sue for recovery of $300,000 each. Additionally, the 1st Plaintiff sues to recover the alleged debt of $150,000 and both sums are claimed with statutory interest.

5. The Prayer in the Statement of Claim includes a pray for damages. However, by a letter to the Senior Judicial dated 25th February 1999, the solicitors for the Plaintiffs waived that claim on behalf of their clients and asked for default judgment to be entered in the alleged liquidated claims in default of acknowledgement of service.

6. There is an Affirmation of service made by Cheung Mei Kam, a process server employed by the Plaintiffs' solicitors, stating that the Writ was served on 27th January 1999 upon the Defendants by inserting the Writ in each case through the letter box at the address I have mentioned. The Affirmation states:

"That in the opinion of the Plaintiff, the said Writs of Summons so inserted in the letter box for the address of the 1st and 2nd Defendants will have come to their knowledge within 7 days after the said date of such insertion thereof".

There is no indication as to the basis upon which the process server was able to make that statement.

7. In any event, on 3rd March 1999, Judgment was entered in default of notice of intention to defend. Such Judgment was against the 1st Defendant in favour of each of the two Plaintiffs in the liquidated sum of $300,000 and against both Defendants in the single sum of $150,000. All such sums were ordered to bear interest at the rate of 12.86%. Fixed costs were also awarded.

8. After an unsuccessful application by the Defendants to the Legal Aid Department, Messrs Wong & Chu filed a Notice to Act on their behalf on 9th April 1999. They then took out a summons to set aside the default judgment on the grounds that the Writ had not been validly served and that the Defendants had in any event a good defence to the action.

9. The application is supported by an Affirmation made by the 1st Defendant dated 15th May 1999. This shows, from the documents exhibited, that the address at which the Writ had been purportedly served, was originally occupied by the Defendants who had bought the property from the Housing Authority. However, they had sold the property back to the Authority and, according to the Defendants, they had vacated the premises by 13th May 1998, about 7 months before the purported service. They say that the premises had remained vacant after they left so that the 1st Defendant occasionally returned to see if there was any post for them there. It was by this means that on 12th March 1999 that he found the Writs in the letter box. This was, however, about 9 days after the default judgment had been entered.

10. The Defendants claim that the Plaintiffs well knew that they were no longer at the address in question, or, perhaps more accurately, that they were alerted to the fact that the Defendants were unlikely to be there. The Defendants point out that a search at the Land Registry would immediately have revealed that as from 13th May 1998 ownership of the premises had reverted to the Hong Kong Housing Authority.

11. In his Affirmation, the 1st Defendant explains in detail the difficulties that he had in trying to raise his share of the partnership contribution and how, as part of a proposed solution to this problem, he undertook to sell his flat back to the Housing Authority to raise the necessary funds. He affirms that it was in this context that on about 8th December 1997, he showed the 1st Defendant a letter in which the Housing Authority informed him that it was prepared to accept his offer to sell the property back to the Authority. It is also his case that on 23rd February 1998, he informed the 1st Plaintiff orally that he had received a further letter from the Authority telling him the price at which they were willing to re-purchase the property. It is on this basis that the Defendants say the Plaintiffs well knew that they were unlikely to be at those premises at the time of the purported service.

12. It is also clear from the Affirmation of the 1st Defendant that he will seek to advance a substantially different version of the events that led to his departure from the business. Indeed, it will be his case that it was the Plaintiffs who were in breach of their agreements with him relating to the business and that they had wrongfully removed him from management of the business. He denies that any loan was ever advanced to him. It appears to be his case that although money was borrowed for the use of business, it was a loan made by a finance company to the 1st Plaintiff who in turn lent the money to the firm as a whole rather than to the 1st Defendant personally, as alleged by the Plaintiffs.

13. There is no dispute that in relation to the aforementioned loan from the finance company, the 2nd Defendant provided her personal guarantee. She denies, however, that she ever guaranteed any loan to the 1st Defendant and has filed an Affirmation to such effect. She says that on 19th May, she guaranteed the said loan of $180,000 from the finance company which was intended to help finance the purchase of a flat by the 1st Plaintiff in Shek Kong. It has been pointed out by Mr. Fan, who appears for the Plaintiffs, that this is inconsistent with the purpose of the loan as stated in the application form submitted by the 1st Plaintiff to the finance company. There, the loan is said to be for the purpose of starting up and financing the business. However, that is not a matter that has been explored in the evidence or before me. It is in any event a question bearing on the terms of a quite separate loan and a quite separate guarantee, and not on matters of defence which I will come to later in this judgment.

14. As I have stated, the Defendants argue that service was irregular because it should have been clear to the Plaintiffs that they were no longer at the premises or that, in any event, that there was no basis for them to believe that by insertion of the Writ through the letter box, it would come to the notice of the Defendants within 7 days as required under O.10 r.1(3).

15. I think it important to note that, although as the Plaintiffs rightly point out, details of the address given by the Defendant as at 20th May 1997 in the Business Registration application form were left un-amended as at 22nd April 1999, such address being the address where service was purportedly effected, the evidence filed by the 1st Plaintiff himself states that he had "no idea when the Defendants moved out from their said premises" and more importantly in para.7, states as follows:

"Both of the Plaintiffs have lost direct contact with the Defendants since May 1998 with their telephone line was disconnected. I attempted to contact the 1st Defendant through his brother, Mr. Yan Kwok Kit, Eddie on several occasions. When Mr. Eddie Yan refused to arrange for a meeting between the Plaintiffs and Defendants, he told me that he had related the Plaintiffs' demand to the 1st Defendant."

16. In such circumstances, it seems to me that there was no basis for the process server deposing as he has in the Affirmation service. Notwithstanding the entry in the Business Registration Office, the Plaintiffs did not in fact believe and had no reasonable basis for believing that by inserting the Writ through that letter box, it would come to the knowledge of the Defendants within 7 days after the date of such insertion.

17. It should be borne in mind that while O.10 r.1 of the Rules of the High Court permits service by insertion through a letter box at a defendant's usual or last known address, it is clear from O.10 r.1(3) that this is permissible only in circumstances where the plaintiff is able to depose to having the opinion that by such means, the Writ would have come to the knowledge of the defendant within 7 days thereafter.

18. The 1st Plaintiff affirms that after issuing the proceedings, he telephoned the 1st Defendant's brother informing him of that fact and was told that the message would be relayed to the 1st Defendant. That was of course not a valid means of service and tends in my view to reinforce the conclusion that there was doubt whether service through the letter box at the said address would result in the Writ coming to the Defendants' attention within 7 days or at all. Since the Plaintiffs had no knowledge of where the Defendants were, the letter box method was inappropriate and an order for substituted service, whether upon the brother or by some other means, should have been sought.

19. I therefore have no hesitation in holding that service was irregular and that the default judgment should, in my discretion, be set aside on that ground alone.

20. Furthermore, having considered the allegations and counter-allegations of fact made in the Affirmations, I have come to the conclusion that the default judgment should also be set aside on the ground that the Defendants have shown a sufficiently meritorious defence on the facts to justify this matter proceeding to trial. I might add that quite apart from factual disputes, it seems to me that there is genuine doubt, to say the least, that the sums of $300,000 were properly claimable as liquidated sums.

21. Since the 2nd Defendant's liability is dependent upon the 1st Defendant's liability on the alleged debt of $150,000, and since I held that that issue merits trial, it follows that the 2nd Defendant's liability should likewise be investigated at trial. I am therefore also of the view that the default judgment against her must be set aside.

22. I therefore order that the Judgment entered in this action on 3rd March 1999 be set aside and that the Defendants be at liberty to defend the action by giving notice of intention to defend within 7 days of today and that thereafter, the action proceed in accordance with the Rules of High Court.

23. I will hear the parties as to costs.

I order costs in favour of the Defendants on this application.