KUNG SHIU CHEONG v. WONG SUET MAN AND OTHERS

DCCJ5423/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5423 OF 2006

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D E C I S I O N

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1.    This is an application by the 3rd Defendant to set aside the judgment obtained against him on 27 December 2006.

2.    The Plaintiff’s claim is for the sum of $240,000 against all 3 Defendants for misrepresentation.  According to the Statement of Claim, the 1st Defendant was the sole proprietor of a noodle shop known as “Noodle House”.  In or about December 2005, to induce the Plaintiff to acquire one-third of the interest of the business of the Noodle House (“the Business”), the 2nd and the 3rd Defendants, under the authority of the 1st Defendant, represented to the Plaintiff that the Business was being operated by a company with issued share capital jointly held by the Defendants.  It is claimed that the said representation was false in that such company did not exist.  Relying on the said representation, the Plaintiff agreed to purchase and the 2nd and the 3rd Defendants agreed to sell one-third of the share capital of the said company at a total consideration of $240,000.  After the Plaintiff discovered the said untrue representation, the Plaintiff repudiated the agreement.  Further, the Plaintiff claims that the consideration for the payment of $240,000 had wholly failed and the Defendants are liable to the Plaintiff for the said sum of $240,000 on the ground of misrepresentation or mistake.  

3.    In support of his claim, the Plaintiff relies on the Share Transfer Agreement and the Memorandum of Receipt of the Purchase Money for the Share signed by the 2nd and 3rd Defendants dated 23 and 24 January 2006 respectively. 

4.   There is no issue that the judgment obtained against the 3rd Defendant is a regular one.  The 3rd Defendant explains that he had all along relied on the 2nd Defendant to conduct the proceedings, and he himself had not filed a defence in the present case.  The 3rd Defendant knew about the default judgment in mid-January 2007.  As the 2nd Defendant applied for legal aid by that time, he believed that he could benefit from the conduct of the defence by the 2nd Defendant.  After the 2nd Defendant’s legal aid application was refused in April 2007, the 2nd Defendant instructed solicitors to defend his case.  After the 2nd Defendant’s solicitors ceased to act for the 2nd Defendant in late June 2007, the 3rd Defendant sought legal advice from the same firm of solicitors formerly acting for the 2nd Defendant, and the 3rd Defendant finally took up an application to set aside the judgment on 3 July 2007. 

5.    In my judgment, the 3rd Defendant has all along been adopting a carefree attitude towards the present litigation.  There is no justification for the 3rd Defendant not to take up the defence of his own case.  He has allowed the Plaintiff to proceed with the action and his delay has resulted in the present application before the court.  I will certainly take the 3rd Defendant’s conduct into consideration in respect of any issue of costs in due course. 

6.    Though the judgment is a regular one, the 3rd Defendant is still entitled to have the judgment be set aside if he can establish a meritorious defence with real prospect of success.  Hence, I need to analyse the defence put forward by the 3rd Defendant in the affirmations.

7.    According to the 3rd Defendant, the 2nd and the 3rd Defendants had all along been acting as agents of the 1st Defendant in assigning one-third of the interest in the Business to the Plaintiff, and the Plaintiff at all material times knew about the same.  In addition, the Plaintiff knew that the Business was solely owned by the 1st Defendant, and that the sale and purchase of the shares of the Business was a matter between the Plaintiff and the 1st Defendant.  The 2nd and 3rd Defendants had not received any money arising from the transaction, and the cheque of $200,000 paid by the Plaintiff for the purchase of the shares was actually deposited in the bank account of the 1st Defendant.  Further, the 3rd Defendant claims that the Plaintiff took part in the management of the Business after acquiring the shares and by such conduct, the 3rd Defendant claims that the Plaintiff has lost the right to repudiate the agreement. 

8.    In my judgment, there are quite a number of questions which affect the credibility of the 3rd Defendant’s case.  Firstly, the fact that the 3rd Defendant was acting as agent was contrary to the terms stated in the Share Transfer Agreement dated 23 January 2006, in which the 3rd Defendant described himself as the seller of the shares.  Secondly, there was no reason why the 1st Defendant, as the principal, could not have handled the transaction herself.  Even if she needed an agent to handle the transaction, there was no reason for her to engage two agents instead of one.  Thirdly, if the 2nd and the 3rd Defendants were making the deal as agents, in order to protect his own interests, the Plaintiff should have handed the cheque directly to the 1st Defendant and not the agents.  Fourthly, the 3rd Defendant claims that the Plaintiff all along knew that the 2nd and the 3rd Defendants were acting as agents and that the 1st Defendant was the sole proprietor of the Business.  However, no particulars have been supplied to substantiate such allegations. 

9.    If the matter rests here, the 3rd Defendant’s application must fail.  However, in order to determine whether the 3rd Defendant has managed to establish a meritorious defence with real prospect of success, the court needs to consider the Plaintiff’s case as well.  In this regard, I must say that the Plaintiff’s case is not free from difficulties. 

10.   Firstly, it is the Plaintiff’s case that the 2nd and the 3rd Defendants, with the authority of the 1st Defendant, made a misrepresentation to the Plaintiff that the Business was operated by a company with issued share capital.  As this was untrue, the representation must have been a fraudulent one with a view to deceive the Plaintiff in investing in the Business.  However, such fraudulent scheme simply could not have worked , as the Plaintiff, in the normal course of events, would have asked for the business registration and the company documents of the Business before buying the shares with a substantial amount of money.  Further, the business registration certificate displayed inside the noodle shop would have shown that the 1st Defendant was the sole proprietor of the Business, and so there was no way for such fraudulent scheme to work.  The Plaintiff claims that he simply trusted the words of the 2nd and 3rd Defendants, but I find it incredible that a businessman like the Plaintiff would not have demanded such documents before he acquired the interest in the Business with $240,000.

11.   Further, it is the 3rd Defendant’s case that the Plaintiff took part in the management of the Business after acquiring the shares, which is an allegation not disputed by the Plaintiff at this stage.  In such circumstances, I also find it incredible that after acquiring the interest in the Business in January 2006, the Plaintiff did not know that the 1st Defendant was the sole proprietor of the Business until October 2006.  If the Plaintiff knew about the alleged misrepresentation at an earlier time and he continued to take part in the management of the Business, there is also a triable issue as to whether the Plaintiff has lost the right of repudiation and whether he is entitled to claim back the whole sum of $240,000 by reason of total failure of consideration. 

12.   Last but not the least, the fact that the purchase money for the interest in the Business was deposited in the bank account of the 1st Defendant also supports the 2nd and the 3rd Defendants’ case. 

13.   Hence, I have great reservation about the credibility of either parties’ case, and I doubt whether they have revealed the whole truth to the court.  One possible scenario which would fit the facts of the present case was that contrary to the 3rd Defendant’s allegation, the 2nd and the 3rd Defendants did have an interest in the Business which was registered solely under the name of the 1st Defendant.  The Plaintiff knew about this, and so he executed the agreement with the 2nd and 3rd Defendants and purchased the shares in the Business.  After that, the Plaintiff took part in the management of the Business and for some unknown reasons, there was a dispute between the parties which resulted in the present litigation.  This possible scenario would explain why the 2nd and the 3rd Defendants executed the agreement for the sale of the shares as sellers and the plaintiff did not demand the production of the business registration and company documents before acquiring the shares. 

14.   Mr Li, counsel for the Plaintiff, argues that the court should not consider such a scenario as this is not the pleaded case of the 3rd Defendant.  However, if the court ultimately finds that the above scenario is the truth, the Plaintiff will not be able to prove his case on the existing pleading and his case would also fail at the trial. 

15.   In conclusion, I have great reservation about the credibility of both the Plaintiff and the 3rd Defendant’s case.  I know that it is established law that a defendant, attempting to set aside a regular judgment, has the burden of establishing a meritorious defence with a real prospect of success, but with all the unanswered questions at this stage, I am of the view that the 3rd Defendant has discharged the burden.  There should be a trial, and the 3rd Defendant should be given leave to defend the case.

16.   Based on the aforesaid, I set aside the judgment.  I have also considered the option of imposing condition in setting aside the judgment.  However, as I find that the 3rd Defendant has discharged the burden of establishing a meritorious defence, it is not appropriate for the court to impose condition at this stage.  I therefore set aside the judgment unconditionally.  I will now hear the parties’ submissions on the issue of costs.