NANYANG COMMERCIAL BANK LTD v. CHAN HON KEUNG and CHAU CHUN HIN t/a TAYOPA DECORATION CO AND OTHERS

HCMP 1500/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1500 OF 2001

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D E C I S I O N

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1.  This is an appeal by the plaintiff against the decision of a Master made on 19 June 2009 to strike out the plaintiff’s claim against the 2nd defendant.  This is a mortgage action started by the plaintiff on 17 March 2001. 

The Proceedings

2.  The 1st defendants are sued as borrowers and the 2nd and 3rd defendants are sued as mortgagors.  The default on the mortgages occurred on 27 October 2000.  The 2nd defendant filed an affirmation on 6 June 2001.  He alleged that the 2nd-named 1st defendant’s last known address was in Canada and that the plaintiff had not effected service on him.  He also alleged that,

“4.  I was sometime in 1995 being requested by the 1st defendants to provide my property known as … as security for their seeking of banking facilities from the plaintiff.  I did not intend nor I had agreed that my liability would be in any way beyond the current value of my property.  I had not given nor signed any deed of guarantee for any amount exceeding the value of my property.”

3.  He further alleged in a supplemental affirmation filed on 3 July 2001 that,

“3.  Sometime in 1995 I was being requested by the 1st defendants to provide my property known as … as security for their seeking of banking facilities from the plaintiff.  It was understood and agreed amongst the parties that I should only to furnish security for the said banking facility.  I did not intend nor I had agreed to extend my liability to cover any amount exceeding the value of my property.”

4.  However, the mortgage deed he executed provided that he, as the mortgagor,

“will, on demand in writing of the mortgagee,

(a)     pay to the mortgagee all present and future indebtedness of the principle to the mortgagee according to the books of the mortgagee on any current or other account together with all banking charges thereon.”

5.  He has not raised any allegation of non est factum, hence his allegation that he did not intend nor had agreed that his liability would be beyond the current value of his property or the alleged agreement amongst the parties that he should only furnish security for the banking facility does not appear to be relevant to the consideration of his liability.

6.  He further alleged that there was an agreement between the plaintiff and the 3rd defendant that the proceeds of sale of the mortgaged properties of the 3rd defendant at $450,000 should be applied to discharge some high interest bearing loans, but the plaintiff had, contrary to the agreement, misapplied them to some low interest bearing loans.  This is a matter of calculation of interest.

7.  In a further supplemental affirmation filed on 11 October 2001, the 2nd defendant further alleged that the plaintiff had delayed the completion of the sale of his mortgaged property which necessitated his paying an extra sum of $40,000 to the purchaser for postponement.  (This is a counterclaim of his.)

8.  As a result of the 2nd defendant’s challenge of service by the plaintiff on the 2nd-named 1st defendant, the plaintiff applied in May 2002 for an order to effect substituted service on the 2nd-named 1st defendant.  However, the application only succeeded on 5 August 2003.  It appeared that the plaintiff was not acting with a good sense of dispatch in answering the court’s requisition on this application.

9.  The plaintiff then effected substituted service of the proceedings on the 2nd-named 1st defendant on 11 September 2003 by advertising the proceedings in Canada.  However, all mortgaged properties had been disposed of by July 2002.  The plaintiff therefore could not  proceed further with these proceedings as a mortgage action under Order 88 of the Rules of the High Court.

10.  On 17 May 2004, the plaintiff took out a summons for leave to proceed with the originating summons as if it had been begun by writ.  However, the copies of the summons served on the defendants were returned to the plaintiff’s solicitors.  Hence, the plaintiff’s solicitors applied to withdraw this summons on 28 May 2004.  Thereafter, it seems that the plaintiff had done nothing to prosecute the proceedings until 20 November 2007, when it issued a Notice of Intention to Proceed.

The 2nd Defendant’s Application to Dismiss

11.  The 2nd defendant then issued a summons on 4 December 2007 seeking to dismiss the plaintiff’s claim for want of prosecution under the inherent jurisdiction of this court and Order 28 rule 10 of the Rules of the High Court.  The grounds are that the plaintiff was guilty of inordinate and inexcusable delay in prosecuting these proceedings to the prejudice of the 2nd defendant and the plaintiff has failed to comply with the order of the Master dated 7 September 2001.

12.  The 2nd defendant also made an affirmation in support of this application.  He said that when he received the plaintiff’s Notice of Intention to Proceed in November 2007, the plaintiff had held the proceedings in abeyance for over 6 years since his filing of a further affirmation on 9 October 2001.

13.  I think insofar as the 2nd defendant is concerned, he was not involved in any step in the proceedings since 9 October 2001 as the plaintiff’s application for substituted service did not involve him and he also did not seem to have received the summons issued by the plaintiff on 17 May 2004.

14.  The 2nd defendant also said that the plaintiff had failed to comply with an order of a Master dated 7 September 2001.  The order gave leave to the plaintiff to file and serve an affirmation in reply to the plaintiff’s affirmation.  The plaintiff did not make use of this leave.  After all the mortgaged properties were sold in July 2002, the plaintiff regarded that the order was no longer applicable as the proceedings could not continue as a mortgage action.  But in any event, the Master’s order was not a peremptory order that required the plaintiff to take any step in the proceedings.

15.  The 2nd defendant further said that the inordinate and inexcusable delay had seriously affected a fair trial of the issues in the proceedings, if it had not made a fair trial impossible.  He also said that the delay had caused or likely to cause him grave prejudice and/or injustice. 

16.  He said the delay had prejudiced him in his preparation of pleadings if the proceedings should proceed as if begun by writ, because his memory of the facts had faded as a result of the delay.  He was also not legally represented and had no means to professionally and systematically preserve his evidence and keep contact with his witnesses.

17.  He further said that because the plaintiff had not handled the proceedings with diligence, he had been led to believe that the plaintiff might have already abandoned the case against him.

18.  He also said that the 1st named 1st defendant had negotiated the mortgage of his property on his behalf with the plaintiff and was one of his key witnesses to testify what was represented during the negotiations and what was the understanding and promises in the conclusion of the mortgage, but he had lost contact with the 1st named 1st defendant since about 2003.

19.  He then elaborated on his problems with his witnesses.  He said,

“12.   As far as I can remember, the 1st named 1st defendant approached me and asked me to help him to resolve his financial disputes in Mainland China sometime in late 2004 (not 2003 as he said in the previous paragraph).  I have not met him again.  Upon recent inquiries after receiving the plaintiff’s notice about the whereabouts of the 1st named 1st defendant, I was told that he could no longer be contacted.  I even heard from one source that the 1st named 1st defendant had already emigrated from Hong Kong a long time ago.  All his contact telephone numbers has already been disconnected.  I have also lost contact with most if not all witnesses due to long lapse of time and the remaining contactable witness now refuses to be involved for the reason that they have already forgotten the entire matter and could not be helpful.  In the premises, without evidence from the 1st named 1st defendant and the other witnesses, it is unlikely that there will be a fair trial of the issues in these proceedings.  I am therefore gravely prejudiced in the circumstances.”

20.  Despite his assertion that the 1st named 1st defendant could no longer be contacted or that this defendant had emigrated from Hong Kong a long time ago, he did not say what efforts and by what means he had tried to contact this defendant.  Regarding the other witnesses, he did not say who they are, what evidence they may give, and the relevance of such evidence.  For those witnesses whom he said he had lost contact, he again did not say what effort he had made and the means by which he had tried to locate them.  These bare assertions are therefore not helpful at all to establish any prejudice caused to him.

21.  At the hearing this morning, he further alleged that he was told that the 1st named 1st defendant had died at sometime in the past in some place that he could not tell.  This, again, is a bare assertion without even the source of information.

22.  He further said that the 1st named 1st defendant had in early June 2001 promised to reserve three units (later increased to four units) of accommodation in Shenzhen owned by the 1st named 1st defendant and the 3rd defendant to cover his loss in case he should be found liable to the plaintiff’s claim.  Since he could not locate the 1st named 1st defendant and that the 3rd defendant had been struck out by the Companies Registry, he said he had lost the indemnity as promised by the 1st named 1st defendant.

23.  He also said that the plaintiff’s delay in conducting these proceedings has prejudiced him on the amount of interest that may be payable as the plaintiff is charging 14.5% per annum pre-judgment interest on the outstanding sums.

24.  In his fifth affirmation filed on 10 March 2008, he produced some title documents purportedly showing the ownership of the 1st named 1st defendant and the 3rd defendant of four units of accommodation in Shenzhen.  He further said that the units were under long-term lease until 2009 and the rental had been applied to set-off a debt of the 1st defendant’s business in Shenzhen and the premium for the extension of the government lease for the units.

The Law

25.  The plaintiff relies on the principles in Birkett v James [1978] AC 297, which was followed in HongKong and Shanghai Banking Corporation Ltd v Kuan Tao Sheng and Others [1998] 2 HKLRD 585.  These principles were summarised and applied by Deputy High Court Judge To (as he then was) in Au Yeung On v Che Shing Cheong Wilfred and Others, HCMP4745/1999.  Deputy Judge To said,

“18.  The House of Lords held that the power of the court to dismiss an action for want of prosecution should be exercised only (1) where the plaintiff’s default had been intentional and contumelious or (2) where there had been inordinate and inexcusable delay on his or his lawyers’ part giving rise to a substantial risk that a fair trial would not be possible or to serious prejudice to the defendant.  It also held that other than in a case of contumelious conduct on the plaintiff’s part, the jurisdiction should not normally be exercised within the currency of the limitation period, save in an exceptional case.  The following speech of Lord Diplock at 321 B-D is illuminating:

‘The court may and ought to exercise such powers as it possesses under the rules to make the plaintiff pursue his action with all proper diligence, particularly where at the trial the case will turn upon the recollection of witnesses to past events.  For this purpose the court may make peremptory orders providing for the dismissal of the action for non-compliance with its order as to time by which a particular step in the proceedings is to be taken.  Disobedience to such an order would qualify as “intentional and contumelious” within the meaning of the first principle laid down in Allen v. McAlpine.  But where no question of non-compliance with a peremptory order is involved the court is not in my view entitled to treat as “inordinate delay” justifying dismissal of the action in accordance with the second principle in Allen v. McAlpine a total time elapsed since the accrual of the cause of action which is no greater than the limitation period within which the statute allows plaintiffs to start that action.  To dismiss the action in such circumstances would, in my view, involve an error in principle in the exercise of judicial “discretion” which it is the function of the appellate court to correct.’”

Analysis and Decision

26.  Though the plaintiff had not filed any affirmation in reply pursuant to the Master’s order dated 7 September 2001, that order was not a peremptory order, hence I do not think these proceedings should be dismissed for the plaintiff’s intentional and contumelious default as there was no such default.

27.  Regarding the second ground, the plaintiff submitted that the delay had not given rise to any substantial risk that a fair trial would not be possible or to serious prejudice to the plaintiff. 

28.  It further submitted that the limitation period of 12 years from the date of accrual of its cause of action has not expired and the proceedings should not be dismissed on the ground of inordinate and inexcusable delay as it is not an exceptional case.

29.  Lord Salmon has said in Birkett v James at page 328 that an exceptional case can happen only in rare and exceptional circumstances.  Lord Edmund-Davies also said in the same case at page 334 that such case must be quite exceptional and difficult to imagine.

30.  The default under the mortgages which gave rise to these proceedings occurred on 27 October 2000.  The plaintiff submitted that this claim, brought pursuant to mortgages, is an action upon a specialty.  The limitation period should be 12 years as prescribed by section 4(3) of the Limitation Ordinance, Cap. 347.

31.  The 2nd defendant disagreed.  He submitted that since the mortgaged properties have been sold and the mortgages have been given to the purchasers, there is no more debt secured by any mortgage.  But this argument merely makes section 19 of the Ordinance applicable.

32.  The 2nd defendant further argued that there is no provision in the Limitation Ordinance for a limitation period in respect of debts due from documents executed under seal.  That is incorrect.  A specialty, as referred to in section 4(3) of the ordinance, means, among other things, a contract made under seal (see Black’s Law Dictionary 7th Edition and Hong Kong English-Chinese Legal Dictionary).

33.  The 2nd defendant further submitted that the limitation period applicable should be 6 years as prescribed by section 19(5) of the Ordinance, for that section specifically refers to the limitation period for the recovery of arrears of interest payable in respect of any sum of money secured by a mortgage or other charge. 

34.  These proceedings are no longer for the recovery of interest on money secured by a mortgage as all mortgaged properties have been disposed of.  These proceedings are for recovery of a debt contracted by the defendants in a specialty contract, namely, the mortgages executed under seal.  I therefore hold that the limitation period applicable should be 12 years and has not expired up to the date hereof.

35.  I also do not find any exceptional circumstances which would warrant the dismissal of these proceedings despite the limitation period is still extant.

36.  The above conclusions are enough for me to allow the appeal.  Nevertheless, I would also consider the 2nd defendant’s allegations of prejudice.  Regarding his general allegation of faded memory on the facts which would prejudice him in the preparation of pleadings, he did not say specifically in what aspect or issue in his defence that he was prejudiced.

37.  Regarding the lack of preservation of evidence, he again did not say what area of evidence that is no longer available.  If he was referring to the 1st named 1st defendant who was the alleged go-between for him and the plaintiff, then he has not said in any of his three affirmations filed in 2001 what the 1st named 1st defendant had on his behalf agreed with the plaintiff.  He also had not procure any affirmation by the 1st named 1st defendant in 2001 when he could still contact the 1st named 1st defendant then.

38.  Assuming that he has alleged that the 1st defendant had on his behalf agreed with the plaintiff in terms of his first and second affirmations as quoted above, he is also not running any defence of non est factum.  He therefore cannot deny his liability under the mortgage.

39.  Even if I further assume that the evidence of the 1st named 1st defendant could be of use to him, his evidence as cited above on his loss of contact with this defendant is also a bare assertion and is of little use.

40.  For all these reasons, I find that he has not established any prejudice by his alleged loss of contact with the 1st named 1st defendant.

41.  On his alleged loss of contact with the other witnesses or witnesses refusing to testify for him, I have already referred to the problems of this allegation above and I do not think this allegation has established any prejudice to him as it is nothing but a bare assertion.

42.  Regarding the so-called oral promise or indemnity by the 1st named 1st defendant to use the Shenzhen properties to indemnify him, his evidence in March 2008 was that the four units were subject to long lease until 2009.  There is no further evidence of any change of the status of the properties.  There is therefore nothing to stop him from taking whatever step that he may think appropriate to protect his interests despite the alleged disappearance of the 1st named 1st defendant and the striking off of the 3rd defendant by the Companies Registry.

43.  I would further say that there is no evidence to suggest that this alleged indemnity was known to the plaintiff.

44.  The 2nd defendant in his written submission also alleged that he could not bring third party proceedings against the 1st defendants for an indemnity as they have disappeared, but there is really nothing to stop him from so doing and he could have issued such proceedings on the first day when he was served with the originating summons by the plaintiff.  The alleged disappearance of the 1st defendants may make it more difficult for him to serve the third party proceedings on them, but it does not make such proceedings impossible.

45.  Regarding the question of interest, Mr Wong of the plaintiff’s solicitors also admitted that it is a matter of discretion for the court.  If the 2nd defendant should indeed be held liable to the plaintiff, he could bring out this question of delay and seek the appropriate order on interest.

46.  I also do not think that the mere delay by the plaintiff had led the 2nd defendant to believe that the plaintiff might have already abandoned the case against him.  Any search of the court file would show that up to 2004 the plaintiff was still taking steps for the furtherance of the proceedings.

47.  Regarding the allegation that the plaintiff’s claim as against the defendants is a joined and several one and the plaintiff could have proceeded against the 2nd defendant without proceeding at the same time against the other defendants, I agree with the plaintiff’s submission that this course is not permissible to the plaintiff because the plaintiff cannot apply to convert the proceedings as if it had been begun by writ just against the 2nd defendant but not against the other defendants.  Service of a summons for the conversion had to be effected on all defendants.

48.  In the premises, I hold that there was indeed inordinate and inexcusable delay on the part of the plaintiff in prosecuting these proceedings, but I further hold that the delay has not given rise to any substantial risk that a fair trial would not be possible or to serious prejudice to the 2nd defendant.  I therefore allow the appeal.

49.  I further order the 2nd defendant to pay the plaintiff the cost of the appeal and below in any event.