CCM EARTH LTD AND OTHERS v. ALFA GCM LTD

HCA 1210/2016
[2018] HKCFI 85

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1210 OF 2016

_________________________

_________________________

_______________

D E C I S I O N

_______________

INTRODUCTION

1.  This is the defendant’s application for an order that the interlocutory default judgment entered herein on 20 September 2016 be set aside, by summons filed on 20 June 2017.

2.  There is no dispute that the default judgment was a regular judgment. On established principles, the court’s primary consideration is whether the defendant can demonstrate a real prospect of success in its defence with some degree of conviction.

3.  The court is not required to conduct a mini-trial on affidavits.  What it is required to do is form a provisional view as to whether or not the defendant has a realistic prospect of successfully defending the action: see Maryo Development Ltd v Tsang Yau May & Ors (unreported) CACV 101/2015; 11 January 2016 at paragraphs 12‑14.

4.  Such an exercise involves assessing whether or not the defendant’s evidence on disputed factual matters has a realistic prospect of being accepted and if it does, that the defendant has a realistic prospect of establishing a defence in law.  The assessment should be carried out mindful of the interlocutory nature of the application with a sense of proportionality.  See also Maryo Development Ltd (supra).

5.  While merits of the defence is the primary consideration, it has to be balanced against other factors such as the reason why judgment was allowed to be entered, and any delay in making the application to set aside.  The court’s discretion is unfettered.

MERITS OF THE DEFENCE

6.  As disclosed in the statement of claim, the 1^st to 3^rd plaintiffs are BVI companies engaged in the business of wealth management, offshore tax and estate planning and/or capital investment, and the 4^th plaintiff is a businessman engaged in business consulting.  The defendant is a Hong Kong company carrying on the business of capital management.

7.  The plaintiffs’ case is that at various meetings held in the period from October 2011 to February 2012, the defendant’s director, a Mr Joseph Chen (“Mr Chen”), made 3 representations to one or more of the plaintiffs which induced them to purchase 9,541,000 shares in a Hong Kong company called MpayMe Limited (“MPM”) (“MPM Shares”) (representing approximately 32% of MPM’s shareholding) at the total price of US$16,099,817.41 (“Investment Sum”).

8.  The 3 representations are pleaded in paragraph 7(c) of the statement of claim and are respectively referred to as the “Investment Representation”, the “International Investors Representation” and the “Commission Representation”. 

9.  The plaintiffs’ primary case is that each of those representations was false and Mr Chen made them fraudulently (see paragraph 12 of the statement of claim).  In the alternative, the plaintiffs contend that they are entitled to relief under section 3 of the Misrepresentation Ordinance(Cap. 284) (see paragraph 13 of the statement of claim).

10.  At paragraphs 15 and 16 of the statement of claim, the plaintiffs say that they have suffered loss and damage to be assessed.  The plaintiffs plead that, but for the defendant’s representations, they would not have paid the Investment Sum to receive the MPM Shares but instead:

(a) They would have paid the same Investment Sum in exchange for more shares than they actually received; or

(b) Alternatively, they would have paid less than the Investment Sum but received the same number of shares in MPM.

11.  Pausing here, I note that it is not the plaintiffs’ pleaded case that they or any of them were induced into entering into a contract with the defendant by the alleged misrepresentations.  Given that section 3 of the Misrepresentation Ordinance only caters for misrepresentations made between contracting parties, I consider that the viability of the plaintiffs’ alternative cause of action is, to say the least, questionable.

12.  The defendant has put forward its defence through a draft Defence as well as its affirmations filed for the purpose of this application.  The defendant’s case is that Mr Chen did not make the Investment Representation and the Commission Representation.  As regards the International Investors Representation, although Mr Chen did mention it, the defendant says that its contents were true.  Furthermore, the defendant also disputes the mental element of the alleged fraud, liability under section 3 of the Misrepresentation Ordinance and the question of inducement.

13.  Having fully considered the parties’ submissions and evidence, I have come to the view, for the reasons below, that the defendant has discharged its burden of showing that there is a realistic prospect of successfully defending the action with a certain degree of conviction.

14.  It is important to note that all the alleged misrepresentations were made orally, and neither parties suggested that there were documents evidencing the same. 

15.  When the two sides made diametrically opposed allegations as to whether something was uttered orally, it is not possible for the court to resolve this at the interlocutory stage.  This is particularly so where I do not regard the defendant’s case on the 3 alleged representations as being inherently incredible.

16.  In this regard, I am guided by the case of Allen v Taylor [1992] PIQR P255, in which the English Court of Appeal recognized that where the issue turns entirely on the assessment of the facts at trial: each party’s case would carry conviction if it stood alone and without conduct of a trial the court is not able to say which will succeed.  This in my view applies in the present case.

17.  As mentioned, I have doubts on the application of section 3 of the Misrepresentation Ordinance, which the defendant disputes and I see at least a real prospect of succeeding.  As to the only other cause of action of deceit, proof of the defendant’s fraudulent state of mind, and inducement or reliance is necessary to establish liability.

18.  On the fraudulent state of mind, the only pleaded particulars relate to the fact that the defendant had entered into a commission agreement with MPM.  This fact is something the defendant accepts. But whether or not this agreement makes the Commission Representation fraudulent would also depend on whether the representation was made in the first place.

19.  The defendant is in the business of capital management and it is not surprising that it makes money from receiving commission payments.  Viewed in this context, I cannot say that the defendant’s defence as to the Commission Representation is devoid of credibility.  On the contrary, it is not inconceivable that Mr Chen had told the plaintiffs that the defendant would not charge them commission, while being silent on whether or not the defendant would receive commission from MPM.

20.  Looking at the defendant’s case in this regard, I cannot say that the defence carries no real prospect of success and no degree of conviction.

21.  This in my view also applies to the issue of inducement or reliance.  In Mr Chen’s affirmations, the defendant says that it supplied presentation materials to the plaintiffs or Mr Sasago or Mr Katagiri about MPM, and the plaintiffs should have done their own assessments of the profitability of the potential investments.  In one of those presentations, MPM’s business and financial data were indeed presented in some detail. 

22.  The issue of whether and to what extent the plaintiffs relied on the presentations, their own due diligence and/or any of the 3 alleged misrepresentations is a highly fact sensitive matter.  In light of the level of details in the information supplied, I cannot say that the defence of non-inducement carries no real prospect of success. 

23.  It is indeed not impossible that while the plaintiffs may have initially been attracted by what were said in those meetings, what they relied on ultimately were the objective data and their own assessment.  This is in my view a matter for trial.

24.  Accordingly, the defendant has shown a real prospect of defending the case.

REASONS FOR DEFAULT

25.  On the defendant’s reasons for default, the long and short of it is that at the time the Writ of Summons was served in July 2016 it was in the course of moving offices to a different floor in the same building, and a Mr Hui and a Ms Tsang of the defendant were not aware of such service.  Mr Chen even went as far as suggesting that the Writ of Summons was served at the wrong place.

26.  I do not accept Mr Chen’s speculation that Messrs Gall may have served the Writ of Summons at the wrong place or on the other tenants of the Regus Business Centre.  Messrs Gall’s covering letters effecting service clearly state the defendant’s name in capital letters with the correct address at the material time.  That speculation also does not sit well with the defendant’s acceptance that the default judgment was a regular judgment.

27.  Although Mr Chen asserted that none of the staff signatures match the one on the back of the Writ of Summons, the available evidence does not rule out the possibility of the receptionist of the business centre having taken delivery when the Writ of Summons was served. 

28.  Mr Hui’s and Ms Tsang’s evidence that they were not aware of the service of the Writ of Summons is in my view neither here nor there.  Absent any evidence showing that the delivery was made to the wrong place, I do not think those explanations would render the defendant’s default excusable.

DELAY, ELECTION AND PREJUDICE TO THE PLAINTIFFS

29.  Mr Chen says that as soon as he was aware of these proceedings in October 2016, he was too busy to deal with the same due to various business trips.

30.  Despite that suggestion, Mr Chen has notably adduced no documentary evidence to support his assertion that he was engaged in business trips.  Absent such evidence which should be readily available, I attribute no weight to Mr Chen’s assertion. 

31.  In any event, as Mr Brown for the plaintiffs submitted, the defendant is not a “one man band”, and being “too busy to deal with legal proceedings” cannot possibly be a valid excuse.

32.  The defendant retained its present solicitors in January 2017.  But the defendant has given no explanation as to why it had not taken out its setting aside application until June 2017.  Worse still, in between April and June 2017, the defendant through its solicitors positively engaged in the assessment of damages process under Order 37, including by signing consent summonses regarding exchanging lists of documents on quantum.

33.  In the absence of any explanation, such delay and conduct would in my view operate against the defendant.

34.  Insofar as election is concerned, the plaintiffs rely on the case on Evans v Bartlam [1937] 1 AC 473, which concerned whether a request for time to pay by a judgment debtor under a default judgment amounted to a binding election not to dispute liability.  On the facts of that case, the House of Lords answered the question in the negative, one basis being that there was no evidence that the debtor who was unrepresented at the time did so elect.  The plaintiffs say that this does not apply to the defendant in the present case as it was represented by its present solicitors at all material times.

35.  The defendant accepts that there is no evidence to explain why it chose to participate in the Order 37 procedure on assessment of damages.  Mr Yeung for the defendant nevertheless submitted that this is only a subsidiary consideration if the defendant has demonstrated a meritorious defence.

36.  Having considered Evans v Bartlam, it does not seem to me that the case is a direct authority to assist on whether the defendant’s positive participation in the Order 37 procedure for the assessment of damages would result, in law, a binding election.  In fact, as Mr Brown pointed out, Lord Wright in that case (at 485) seems to suggest that it is at most a discretionary factor to be taken into account.  In the absence of any direct authority or detailed legal analysis on this issue at the hearing, I would prefer to simply to take into account the defendant’s unexplained participation in the Order 37 procedure as part of my discretionary balancing exercise.

37.  In terms of prejudice, the plaintiffs refer to the fact that costs had been wasted in the Order 37 procedure.  The plaintiffs also rely on the fact that they had disclosed documents to the defendant under its List of Documents pursuant to Order 37. 

38.  However, Mr Brown for the plaintiffs was unable to pinpoint any particular document the disclosure of which would prejudice the plaintiffs.  In any event, any disclosure should exclusively relate to quantum and not liability.  While I can see that the defendant’s participation in the Order 37 procedure has led to some wastage of costs, I do not agree that the plaintiffs have suffered irreparable harm.

CONCLUSION

39.  Having balanced all of the above factors and considered the parties’ submissions and evidence, I would, for the reasons below, exercise my discretion to order that the default judgment should be set aside upon the defendant making a payment into court. 

40.  While the defendant has demonstrated a real prospect of establishing a defence, a condition should be imposed to reflect its unexplained and inexcusable delay, and its unexplained volte face from his earlier participation in the Order 37 assessment of damages procedure without disputing liability.  Though it does not in my view amount to an election, the defendant’s participation in that procedure has caused a not insubstantial delay and the wastage of costs in the present proceedings.

41.  According to HKCP (2018) Vol 1 §13/9/15, where a defendant has a reasonably arguable defence which ought to be allowed to go to trial, there must be something specific in the defendant’s conduct or in the case, which justifies the imposition of a condition, citing the Court of Appeal’s decision in L & M Specialist Construction Ltd v Wo Hing Construction Co Ltd [2000] 3 HKLRD 262.  

42.  In my view, the defendant’s participation in the Order 37 procedure coupled with its unexplained volte face in seeking to dispute liability, while being legally represented throughout, amounts to specific conduct that calls for the imposition of a condition by way of payment in.  Such condition is imposed for the purpose of ensuring the defendant’s proper future conduct of this litigation and to provide a measure of security for the plaintiff (see L & M Specialist Construction Ltd (supra) at §§31‑34).

43.  As regards the amount of payment in, the plaintiffs suggest that the defendant shall be required to pay the full amount of the commission the defendant received from MPM as set out in paragraph 25 of Mr Chen’s 1^st affirmation (i.e. US$997,559.61).  In this regard, it should be borne in mind that the plaintiffs’ claim is for common law damages but not an account of profit.  Upon this court’s enquiry, Mr Brown for the plaintiffs was unable to inform the court the precise quantum of the plaintiffs’ claim.  I do however bear in mind that this claim was commenced in the High Court, the Investment Sum exceeds the equivalent of HK$125 million and the way the plaintiffs’ loss is pleaded.

44.  On the other hand, Mr Yeung for the defendant submitted that the defendant could only pay into court the sum of HK$100,000.00.  However, the defendant has not made full and frank disclosure of its financial resources in evidence, which would be required if the defendant were to rely on a limitation of its financial means to pay (see HKCP (2018) Vol 1 §13/9/15, citing M V Yorke Motors v Edwards [1982] 1 WLR 444and Law Kwok Hung v Tse Ping Man & Anr [1999] 4 HKC 397 at 407F-I).  

45.  Having taken all these matters into account, including the size of the Investment Sum and the defendant’s conduct in these proceedings, I have come to the view that the defendant should be required to pay into court the sum of HK$1,000,000.00 within 28 days from today as a condition for having the default judgment set aside.

DISPOSITION

46.  Accordingly, the order I make is that:-

(1) Upon the defendant making payment into court of the sum of HK$1,000,000.00 within 28 days from today, the interlocutory judgment entered herein on 20 September 2016 be set aside;

(2) If the defendant defaults in complying with paragraph (1) above, the said interlocutory judgment do stand;

(Submissions on costs)

(3) Costs of and occasioned by the defendant’s summons dated 20 June 2017 be to the plaintiffs with a certificate for counsel on a party and party basis;

(4) Costs of and occasioned by the Order 37 proceedings herein to date be to the plaintiffs on a party and party basis; and

(5) The costs under para (3) and (4) above shall be summarily assessed on paper.  The plaintiffs shall file their summary statement of costs within 7 days from today.  The defendant shall file their list of objections, if any, within 7 days thereafter.  The plaintiffs shall file their reply, if any, within a further 3 days thereafter.