XCHRX YONGHENG NEVADA INTERNATIONAL CO. LTD. v. CHAN MAU TAK

HCA14528/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.14528 OF 1998

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J U D G M E N T

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SETTING ASIDE DEFAULT JUDGMENT

1. The plaintiff obtained judgment in default of notice of intention to defend against the defendant. The judgment was for RMB1 million. The defendant applied to set aside the judgment. The master ordered that the judgment was to be set aside conditional upon the defendant paying into court RMB800,000. The defendant now appeals against the decision.

IRREGULAR JUDGMENT

Defendant not in Hong Kong

2. The first ground relied upon by the defendant is that the judgment was obtained irregularly because the writ of summons was not duly served on him. The writ was served by inserting into the post box of Flat 5, 3/F, Block F, Honour Building, 80R To Kwa Wan Road, Kowloon, Hong Kong ("the To Kwa Wan address").

3. A writ is required to be served personally on a defendant : Order 10, r.1(1) of the Rules of the High Court ("the Rules"). The exception that is relevant for this case is service by way of inserting the writ at the post box of the last known address of the defendant : Order 10, r.1(2) of the Rules. As explained by the Court of Appeal in Chu Kam Lun v. Yap Lisa Susanto [1999] 3 HKC 378 at 382, for service under this rule to be effective, "the defendant has to be physically within the jurisdiction at the time of service (see Barclays Bank of Swaziland Ltd v. Hahn [1989] 1 WLR 508 applied in Desirable International Fashions Ltd (In Liq) v. Chiang Shi Chau [1997] 3 HKC 170). Other authorities have held that service is effective when the proceedings are brought to the notice of defendant and not on merely delivery of the writ to the last known address of the defendant (see Forward v. West Sussex County Council [1995] 1 WLR 1469; and Fok Chun Hung v. Lo Yuk Shi [1995] 2 HKC 648)."

4. It is the defendant's case that he is a Hong Kong resident, but since 1981, he and his family have been living in China and he only came to Hong Kong about twice a year for a short period of time.

5. The writ was served on 8 September 1998 at 4 p.m. In this case, the defendant had produced his Re-Entry Permit which confirmed that he had spent very little time indeed in Hong Kong in the years 1993 to 1998. What is more important is that it shows that he was in the Mainland from 2 July 1997 to 15 September 1998. He left the Mainland on 15 September 1998 and returned on the same day. Then he left the Mainland again on 16 September 1998 and returned on 17 September 1998. He then stayed until 18 November 1998. Thus at the time when the writ was served on 8 September 1998, the defendant was not in Hong Kong.

Deeming provision

6. Mr Hung, counsel for the plaintiff, relied on the deeming provision of Order 10, r.1(3)(a) that the writ was deemed to be served seven days after the writ was inserted into the post box. As the writ was inserted into the post box on 8 September 1998, the seven-day period would end on 15 September 1998. On that day, the defendant was in Hong Kong, and thus he was deemed to be served on 15 September 1998.

7. The deeming provision is preceded with these words : "Where a writ is served in accordance with paragraph (2)". The service in accordance with paragraph (2) requires the defendant to be within the jurisdiction at the time of service. If this requirement was not even satisfied in the first place, the deeming provision just cannot come into operation.

8. The court in Wing Lung Bank Ltd v. Ho Man Lam [1999] 3 HKC 368 did examine the issue whether the defendant was in Hong Kong at the time of the deemed service. But this step, in my view, is not necessary if the writ was not properly served in the first place. Nothing in the decision of the House of Lords in Barclays Bank suggested that despite the fact that the writ was not properly served in the first place, the deeming provision can still come into operation. The defendant in that case was physically in England on the same day when the writ was inserted into the post box.

Defendant not aware of service

9. Further, there is no evidence that the defendant was aware of the service of the writ until he was served with a copy of the default judgment by the High Court of Yunnan in the Mainland on 16 November 1998. It was then that the defendant became aware of the judgment that had been entered against him. The defendant was engaged in litigation with the plaintiff in the Intermediate Court in Kunming, Yunnan.

10. In my view, what the defendant said has a ring of truth in it. Since September 1997, he had been engaged in litigation with the plaintiff in Kunming, resulting in him obtaining a judgment in January 1998. If he was aware of the present action, there really was no reason why he should let it go by default and allow the plaintiff to obtain a judgment and gaining an advantage over him.

11. As one of the conditions under Order 10, r.2(b) had not been satisfied, the writ was not properly served and the judgment that was obtained was an irregular one.

Last known address

12. The defendant further stated that the To Kwa Wan address was not his last known address. The address was used by him when he operated a company by the name of De Xiang Tuo Yi Industrial Company ("De Xiang"). The address was also used as his residence when he came to Hong Kong. In 1995, he sold his interest in De Xiang to the plaintiff and he resigned as a partner in De Xiang in March 1996. He informed the plaintiff that he would no longer use the To Kwa Wan address and asked the plaintiff to change the address of De Xiang. De Xiang changed its business address in October 1996. The tenancy for the To Kwa Wan address was terminated in November 1996.

Business registration

13. The plaintiff relied on the business registration particulars of De Xiang which showed that the address of the defendant was that of the To Kwa Wan address. This document clearly would not assist the plaintiff because the particulars stated that the defendant ceased to be the owner of De Xiang in March 1996.

Court documents

14. The plaintiff further relied on the fact that when the defendant commenced litigation against the plaintiff in Kunming, the To Kwa Wan address was stated to be his address in the court documents.

15. Mr Hung referred to Guangdong International Trust and Investment Corp Hong Kong (Holdings) Ltd v. Yuet Wah (Hong Kong) Wah Fat Ltd & Anor. [1977] 2 HKC 696 which showed that the last known address meant the address known to the plaintiff. Similar construction was adopted by the English Court in Robertson v. Banham & Co. (A Firm), Times Law Report 26 November 1996.

16. The defendant's explanation is that the address was wrongly used because the attorney who prepared the agreements for the sale of his interest to the plaintiff was the same attorney who conducted the litigation on his behalf. The attorney had used the same address which appeared in the agreements. The defendant said that when he appeared in the court in Kunming, he had informed the court that he was no longer residing at the address. A representative of the plaintiff, namely, Mr Deng Sung Zhen, was present at the hearing. The only contrary evidence was one that came from the solicitor of the plaintiff who filed an affidavit relating what one Mr Deng Shan had told him, but not specifically on the defendant's contention that he had informed the Kunming court that he was no longer living at the To Kwa Wan address, and he had given his correspondence address in Sichuan.

17. In my view, the defendant had clearly proved that the To Kwa Wan address was not his last known address. The judgment was an irregular one and there is nothing in the conduct of the defendant which would preclude the judgment from being set aside as of right. There should not be any conditions imposed.

MERITORIOUS DEFENCE

18. In any event, the defendant had shown that he has a meritorious defence to the plaintiff's claim in the sense that there is a real prospect of success in his defence : The Saudi Eagle [1986] 2 Lloyds 221. By setting aside the judgment, the master obviously had considered that the defendant had a meritorious defence. The issue then is whether the conditions should be imposed on the defendant. In my view, they should not.

The agreements

19. The defendant, after setting up De Xiang, had entered into a joint venture agreement with China Kunming City Fuel Company ("China Fuel"), a company in the Mainland. The joint venture that was set up was called Kunming Xinmao Petrochemical Industrial Company Limited ("Kungming Xinmao"). In 1995, the defendant transferred his interest in De Xiang and Kunming Xinmao to the plaintiff.

20. A number of agreements were signed between the plaintiff, the defendant and China Fuel for the transfer of the interest. They were the Transfer of Enterprise Property Agreement ("The Transfer Agreement") and the Agreement of Payment ("The Payment Agreement"). These were later supplemented by a Memorandum and a Supplemental Agreement.

Penalty clause

21. Clause 6 of the Transfer Agreement provided that : "If (the defendant) was in breach of the warranties stated in Clause 2 thereof or (the plaintiff) was in breach of the warranties stated in Clause 4 thereof, the defaulting party should pay to the innocent party RMB1 million for breaching the agreement and compensate the innocent party for all the financial losses".

22. The defence that this provision is a penalty is clearly available to the defendant because, apart from paying the RMB1 million, the defaulting party has to compensate the financial loss suffered by the innocent party. This, on the face of the clause, cannot be a genuine pre-estimate of the loss.

Set off

23. The plaintiff alleged that the defendant had been in breach of the Transfer Agreement and failed to assist the plaintiff by opening the accounts, and that the defendant had failed to disclose some liabilities of Kunming Xinmao. The defendant disputed that he was in breach of the agreement. He had produced evidence showing that he assisted in the obtaining of business for the plaintiff and also there was in fact no hidden liability. Furthermore, he alleged that the plaintiff had not complied with the terms of the Payment Agreement by paying him the balance of the purchase price of RMB2 million. This sum was due because the property rights had been duly transferred to the plaintiff. There appears to be no dispute that the RMB2 million was due to the defendant. This sum clearly can be used to set off and extinguish the claim of the plaintiff.

APPEAL ALLOWED

24. In my view, the conditions should not be imposed against him, and the appeal is accordingly allowed.