深圳市量子景順投資管理有限公司 v. HUANG BINGHUANG AND ANOTHER

HCA 1093/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1093 OF 2009

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D E C I S I O N

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I. Introduction

1.  The Plaintiff was/is a PRC company.  The 1^st Defendant (“Huang”) was/is the sole director/shareholder of a Hong Kong company, ie the 2^nd Defendant (“HK Zhongxing”), and was at all material times the legal representative, director and 80% shareholder in 深圳市中興房地產開發限公司 (“SZ Zhongxing”).

2.  On 29 April 2009, the Plaintiff commenced the present proceedings against Huang and HK Zhongxing.  Their respective address and registered office given in the Writ of Summons was 15^th Floor, CRE Building, 303 Hennessy Road, Wanchai, Hong Kong (“1^st Address”).  The affirmation of service filed by the Plaintiff’s solicitors Messrs Simon Ho & Co (“SHC”) verified that the Writ of Summons was served to the 1^st Address on 29 April 2009.

3.  On 29 May 2009, SHC confirmed to the court that “the Plaintiff have abandoned the claims sought in the prayers (1) and (3) of the Statement of Claim [ie “all necessary accounts, directions and inquiry” and “further or in the alternative, damages”] so far as [HK Zhongxing] is concerned” (“SHC Election Letter”).  On the same day, the Plaintiff entered final judgment against HK Zhongxing (“HK Judgment”) in the following terms:

“No notice of intention to defend having been given by [HK Zhongxing] herein, it is this day adjudged that [HK Zhongxing] do pay the Plaintiff the sum of RMB5,000,000.00 or its Hong Kong dollar equivalent at the time of payment together with interest thereon from the 29^th day of April, 2009 at judgment rate until payment and HK$11,045.00 fixed costs.”

4.  On 3 June 2009, the Plaintiff petitioned to wind up HK Zhongxing under HCCW 326/2009 (“WU Action”) pursuant to section 177 of the Companies Ordinance Cap.32 based on a statutory demand dated 16 October 2008 for the Sum (“Petition”).  The Petition also referred to the HK Judgment which was said to be unpaid and unsatisfied.

5.  On 10 June and 14 July 2009, Messrs Kelvin Cheung & Co (“KCC”) on behalf of Huang respectively gave notice of intention to defend and filed a Defence and Counterclaim.

6.  On 14 July 2009, KCC on behalf of HK Zhongxing applied by summons to (a) set aside the HK Judgment on the ground of there being a good defence to the Plaintiff’s claim, (b) seek leave to give notice of intention to defend, and (c) apply for stay execution of the HK Judgment pending final determination of (a) above (“Summons”).

7.  On 6 August and 22 September 2009, the Plaintiff respectively filed their Reply and Defence to Counterclaim to Huang’s Defence and Counterclaim and gave further and better particulars of such pleading.

8.  On 23 July 2009, KCC on behalf of HK Zhongxing applied by summons in the WU Action (“Petition Summons”) to strike out the Petition under Order 18 rule 19 of the Rules of the High Court (“RHC”).  On 12 August 2009, Master J Wong adjourned the Petition and the Petition Summons to be heard before the Companies Judge.  On 17 August 2009, Kwan J granted further adjournment with directions for filing affidavits and obtaining translations.  On 21 September 2009, Kwan J set the matters down for substantive argument.

9.  At the substantive hearing of the Summons on 12 October 2009, Master Levy granted leave for the Plaintiff to add a further ground for their application to set aside the HK Judgment, ie that such judgment was irregular in failing to comply with Order 13 rule 6 of the RHC.  The amended Summons filed on 15 October 2009 (“Amended Summons”) was adjourned for substantive hearing on 30 December 2009, but such hearing was vacated and further adjourned by consent on 28 December 2009.

10.  On 8 September 2010, the Plaintiff was ordered to provide security for Huang’s costs in the sum of HK$441,000.00, but failed to do so notwithstanding an “unless” order by Master de Souza dated 11 November 2010.  On 19 November 2010, the Plaintiff’s claim against Huang was struck out and their action against Huang was dismissed with costs.

11.  On 27 October 2010, SHC applied to restore the substantive hearing of the Petition and the Petition Summons, which was fixed to be heard on 25 November 2010.  But pursuant to KCC’s application dated 18 November 2010, Barma J on 25 November 2009 granted leave for the parties to file further affidavit evidence and adjourned the aforesaid substantive hearing to a date not before 21 February 2011 after the hearing of the Amended Summons.

12.  The Amended Summons was restored in November 2010 for substantive hearing on 26 January 2011 (“Hearing”).  HK Zhongxing filed 3 supporting affirmations of Chen Yu (“Chen”, officer-in-charge of HK Zhongxing’s administration office) on 14 July, 11 September and 11 September 2009 respectively and a supporting affirmation of Cheung Ka Wai (partner of KCC) on 15 October 2009. The Plaintiff filed 2 affirmations of Chow Chiu Chung Alexander (“Chow”, manager of the Plaintiff) respectively on 14 August and 27 October 2009 in opposition.

13.  At the Hearing, I granted leave (a) for the Plaintiff to rely on the affirmation of Wong Vai Nang (solicitor of SHC) dated 21 January 2011 which exhibited Chow’s 2^nd affirmation dated 22 December 2010 and Chen’s 3^rd affirmation dated 19 January 2011 both filed in the WU Action, and (b) for HK Zhongxing to rely on the 2^nd affirmation of Cheung Ka Wai dated 21 January 2011 which exhibited HK Zhongxing’s amended draft Defence and Counterclaim (“Amended Draft”).  The original draft Defence and Counterclaim was exhibited to Chen’s 1^st affirmation of 14 July 2009.

14.  I have set out the procedural history of this action and the WU Action in some detail because I intend to say a few words about case management of the present litigation at the end of this Decision.

II.  Parties’ respective case

15.  I set out below the parties’ respective case taken from the Plaintiff’s pleadings, HK Zhongxing’s Amended Draft, and certain undisputed facts elicited from the affidavit evidence.

(a)  Agreement

16.  There is no dispute that on/about 19 February 2008, Huang on behalf of SZ Zhongxing and Tsang Pong Keung (“Tsang”) on behalf of the Plaintiff entered into an agreement (“Agreement”).

17.  The Plaintiff claims the Agreement was made partly orally and partly in writing whilst HK Zhongxing alleges it was made in writing.  There is no dispute that the relevant writing that formed either part (according to the Plaintiff) or whole (according to HK Zhongxing) of the Agreement was as follows:

“ 借據

玆借到[the Plaintiff]人民幣（出借人）人民幣伍佰萬元[illegible]，用予[SZ Zhongxing]所享有和[PRC parties]土地開發合作項目24.5%的權益認購首期付款。若[the Plaintiff]經過調查了解放棄以上項目權益認購，借款人必須於2008年4月30日前償還以上借款，逾期每天罰滯納金千萬之一。

	借款人：[SZ Zhongxing] [蓋章]
擔保人：[Huang’s signature]	借款日期：2008年2月19日”

18.  Accordingly, the Plaintiff claims it was expressly provided or impliedly agreed in order to give business efficacy inter alia that:

(a) the Plaintiff would lend RMB¥5,000,000.00 (“Sum”) to SZ Zhongxing;

(b) the Plaintiff had the option to treat the Sum lent as the first instalment payable for the acquisition of 24.5% equity interest in a land development project (“Land Project”) invested and taken up by SZ Zhongxing and 3 other PRC parties (“Land Investment”);

(c)  after investigation and understanding, the Plaintiff could by 30 April 2008 choose not to exercise the option whereupon HK Zhongxing (but Chow later admitted it should be SZ Zhongxing) would have to repay the Sum to the Plaintiff by 30 April 2008 with interest of 1/1000^th per day;

(d) Huang as guarantor shall guarantee the repayment of the Sum.

19.  On the other hand, HK Zhongxing claims that the Plaintiff by the Agreement (a) would acquire a 24.5% interest in the Land Investment by paying the Sum as the first instalment and (b) had an option to back out from the Land Investment and to ask SZ Zhongxing to repay the Sum before 30 April 2008, so upon a true construction of the Agreement, the Plaintiff was obliged to serve written notification on SZ Zhongxing of its intention to give up its right to the Land Investment before 30 April 2008, and on proper and/or valid service of such written notification, SZ Zhongxing would be obliged to repay the Sum to the Plaintiff before 30 April 2008, failing which there would be an added penalty at the rate of 0.1% per day.  Huang would guarantee the repayment of the Sum and the relevant penalty.

20.  For convenience, I shall refer to the option described in paragraphs 18(b) and 19(b) above as the “Option” and the Plaintiff’s written notification to SZ Zhongxing in the above paragraph as the “Notice” in this Decision.

21.  HK Zhongxing therefore claims that the following were terms of the Agreement by necessary implication and/or to give business efficacy:

(a) the Notice must be given at a reasonable time before 30 April 2998 so that SZ Zhongxing would have reasonable time to arrange for the repayment of the Sum to the Plaintiff before 30 April 2008;

(b) if the Plaintiff did not exercise the Option within a reasonable time before 30 April 2008, they would no longer be entitled to ask for the repayment of the Sum.

22.  There is no dispute that Huang requested the Plaintiff to pay the Sum to SZ Zhongxing by deposit into HK Zhongxing’s designated bank account with Hang Seng Bank Limited (“Account”).

23.  The Plaintiff claims that 鈞濠房地產開發（深圳）有限公司 (“SZ Grand Field”) owed them in excess of RMB¥6,700,000.00, which debt was due in mid-February 2008, so on/about 21 February 2008 they directed SZ Grand Field to repay part of such debt by depositing the Hong Kong dollar equivalent of RMB¥5,000,000.00 into the Account.  On 22 February 2008, SZ Grand Field through its Hong Kong parent company Grand Field Group Limited (“HK Grand Field”) deposited a cheque in the sum of HK$5,484,000.00 into the Account.

24.  Although Huang and HK Zhongxing had no knowledge of the Plaintiff’s financial or internal affairs and/or its operation, and do not admit the aforesaid alleged arrangements, they do not dispute that the sum of  HK$5,484,000.00 was deposited into the Account on/about 22 February 2008.

25.  The Plaintiff claims that after investigation and understanding it decided not to exercise the Option, and by a notice dated 30 April 2008 they informed Huang of SZ Zhongxing that “[the Plaintiff]作出決定，不參與[SZ Zhongxing’s]有關項目投資，希望[SZ Zhongxing]在2008年5月7日前將以上所欠款項500萬元人民幣償還[the Plaintiff]，否則，[the Plaintiff]將通過法律手段索取，兼要求擔保人[Huang]承擔連帶責任” (“Withdrawal Notice”).  The Plaintiff further claims that despite the Withdrawal Notice demanding repayment of the Sum by 7 May 2008, in breach of the Agreement neither Huang nor SZ Zhongxing repaid the Sum.

26.  Huang and HK Shenzhen deny (a) they had ever received the Withdrawal Notice and/or (b) the Plaintiff had ever served any notice of intention to exercise the Option on them on 30 April 2008 or to demand repayment of the Sum by 7 May 2008 or otherwise, and further note that the Plaintiff had failed to provide any particulars as to whom and how the Withdrawal Notice was served.  Further, HK Zhongxing avers that even if the Plaintiff had served the Withdrawal Notice (which is denied), such notice not having been served within a reasonable time before 30 April 2008 was not a proper and/or valid Notice under the Agreement.  HK Zhongxing admits that neither Huang nor SZ Zhongxing had repaid the Sum or any part thereof to the Plaintiff, but denies any breach of the Agreement as alleged or at all.

(b)  Undertaking agreement

27.  The Plaintiff claims that in consideration of and in an attempt to lure them to lend the Sum to SZ Zhongxing by making deposit into the Account, Huang personally and on behalf of HK Zhongxing orally agreed and undertook with the Plaintiff to transfer, pay or give the Sum or cause the Sum to be transferred, paid or given to SZ Zhongxing immediately or no later than 1-2 days upon receipt of the Sum (“Undertaking Agreement”).  Further, even if the Undertaking Agreement did not exist (which is denied), a reasonable time for HK Zhongxing to transfer the Sum to SZ Zhongxing would be within 1-2 days upon receipt of the Sum.

28.  The Plaintiff further claims that in mid-2008 Tsang learnt from persons who knew Huang but whose identities could not be recalled that without the Plaintiff’s approval, consent, authority and knowledge, Huang and/or HK Zhongxing wrongfully and unlawfully misappropriated, spent and/or used the Sum without giving the same to SZ Zhongxing. Consequently, Huang and/or HK Zhongxing were in breach of the Undertaking Agreement.  Despite repeated requests and demands, they refused and/or failed to account for and/or return the Sum or any part thereof to the Plaintiff.

29.  Huang and HK Zhongxing deny (a) the existence of any Undertaking Agreement or (b) if such agreement existed (which is denied), any breach thereof as alleged. HK Zhongxing further avers that even if the Undertaking Agreement existed (which is denied), how and when the Sum would be transferred to SZ Zhongxing or any other party would rest solely in their discretion.

30.  In the Amended Draft, HK Zhongxing avers inter alia that:

(a) on/about 27 February 2008, the Sum was transferred from the Account to 深圳市泰利置業有限公司 (“Tai Lee”, a PRC company through which the Land Project was acquired) for the purpose of the Land Investment;

(b) by reason of the Plaintiff’s failure to serve proper and/or valid Notice on Huang and/or SZ Zhongxing by 30 April 2008, the Plaintiff irreversibly committed themselves to the Land Investment and were irreversibly precluded from asking for repayment of the Sum;

(c)  alternatively, even if the Plaintiff were entitled to the repayment of the Sum (which is denied), HK Zhongxing being a mere agent for the transfer of the Sum was not liable for such repayment under the Agreement or otherwise.

However, HK Zhongxing has not adduced any affidavit evidence to verify the factual assertions in (a) above.

(c)  Conversion

31.  Further or alternatively, the Plaintiff claims that Huang and/or HK Zhongxing all along had actual, imputed and/or constructive knowledge that the Sum was lent to SZ Zhongxing and repayable to the Plaintiff by 7 May 2008.  But Huang and/or HK Zhongxing wrongfully detained, deprived and/or interfered with and continued to detain, deprive and/or interfere with the Sum, denied the Plaintiff’s use of the Sum, and converted the Sum to his/their own use.  Huang and HK Zhongxing deny such claim.

(d)  Money had and received

32.  Further or alternatively, the Plaintiff claims the Sum as money had and received by Huang and/or HK Zhongxing. Huang and/or HK Zhongxing deny such claim, and further deny that HK Zhongxing received the Sum or any part thereof for the use of the Plaintiff or in circumstances that would create any liability to pay the same to the Plaintiff.

(e)  Conspiracy

33.  Further or alternatively, the Plaintiff claims that Huang and HK Zhongxing by luring them to pay the Sum into the Account and by wrongfully and unlawfully misappropriating, spending and/or using the Sum without their consent, approval, knowledge and/or authority conspired together with the predominant intention to injure them and/or to use unlawful means against them. The Plaintiff further claims that the only conclusion that could be reached would be HK Zhongxing was instructed and/or procured by Huang or vice versa to spend or use the Sum knowing that “these are monies the Plaintiff lent to [SZ Zhongxing] and would cause damage to the Plaintiff”.  The Plaintiff therefore claims for loss and damages being the Sum. Huang and/or HK Zhongxing deny such claim.

(f)  Constructive trust

34.  The Plaintiff avers that having knowingly participated in the aforesaid dishonest design, Huang and HK Zhongxing and each of them became constructive trustees of “all moneys and properties received by them purporting to relate to the aforesaid transactions” and were liable to account to the Plaintiff for all such monies and/or properties, and/or the Plaintiff was entitled to trace all such monies into the hands of Huang and HK Zhongxing or elsewhere.  Huang and/or HK Zhongxing deny such claim.

(g)  Set-off and counterclaim

35.  There is no dispute that judgment was granted after trial by the People’s Court of Shenzhen City, Lung Gang District, Guangdong Province (廣東省深圳市龍崗區人民法院, “PRC 1^st Court”) under (2008) 深龍法民初字第8970號 in favour of 深圳市佳潔口腔醫院管理有限公司 (“Jia Jie”) against the Plaintiff (“PRC Judgment”) for the sum of RMB¥16,780,000.00 (“PRC Judgment Debt”) together with interest accruing from 27 September 2008 until payment at the prevailing lending rate of the People’s Bank of China.

36.  On/about 11 June 2009, the Plaintiff appealed against the PRC Judgment to the Intermediate People’s Court of Shenzhen City (深圳市中級人民法院, “PRC 2^nd Court”) under (2009) 深中法民二終字第1694號.  On 29 September 2009, the PRC 2^nd Court dismissed the appeal (“PRC Appeal Judgment”).  The PRC Appeal Judgment states inter alia that:

“…… 同時，雖然[HK Zhongxing]在[the present proceedings]陳述，其已受讓[Jia Jie]在本案中的部份債權，但是，[Jia Jie]向案外人轉讓債權是否合法、有效、是獨立於本案之外的另一法律關係，當事人應另循法律途徑解決，本院在此不予審理。況且[Jia Jie]是否向案外人轉讓債權，并不會影響[the Plaintiff]的債務負擔。因此，[the Plaintiff]要求追加[HK Zhongxing]參加訴訟的請求，本院亦不予支持。至於[the Plaintiff]在一審提出的反訴請求，因其在二審調查時明確表示未對反訴部份提出上訴，故本院對此不予涉及。依照《中華人民共和國民事訴訟法》第一百五十三條第一款第(一)之規定，判決如下 : 駁回上訴，維持原判。”

37.  On 26 October 2009, the Plaintiff petitioned to the Superior People’s Court of Guangdong Province (廣東省高級人民法院, “PRC 3^rd Court”) for re-trial of the appeal.  On 13 August 2010, the PRC 3^rd Court under (2009)粵高法民二申字第671號 (“PRC Re-trial Decision”) held that although the PRC Appeal Judgment had become legally effective, the Plaintiff petitioned for re-trial and was found to have satisfied Article 179(1) of the PRC Civil Procedure Code (“Code”) (ie “有新的證據，足以推翻原判決、裁定的”), so pursuant to Articles 179(1), 181 and 185 of the Code, “本案指令[the PRC 2^nd Court]再審” and “再審期間，中止原判決的執行”.

38.  Huang and HK Zhongxing aver that:

(a) by 3 separate assignments of debt all dated 25 May 2009, Jia Jie assigned the PRC Judgment Debt divided into RMB¥5,780,000.00 (“Huang Debt”), RMB¥6,000,000.00 (“HK Zhongxing Debt”) and RMB¥5,000,000.00 to Huang, HK Zhongxing and one Mr Chu King Fai respectively;

(b) the Plaintiff failed to pay the HK Zhongxing Debt to HK Zhongxing;

(c)  HK Zhongxing therefore intends to counterclaim against the Plaintiff for the amount of the HK Zhongxing Debt which remained due and owing or alternatively for loss and damages as a result of the Plaintiff’s failure to pay the HK Zhongxing Debt, and seeks to set off such amount as may be awarded upon their intended counterclaim in extinction or diminution of the Plaintiff’s claim;

(d) Huang also counterclaims against the Plaintiff for the amount of the Huang Debt which remained due and owing or alternatively for loss and damages as a result of the Plaintiff’s failure to pay the Huang Debt to him.

39.  The Plaintiff claims that the PRC Judgment was not final and conclusive and therefore not enforceable in Hong Kong.  But even if there were any legally effective PRC Judgment Debt in favour of Jia Jie against the Plaintiff (which is denied), it could not be assigned in whole or in part by way of the assignments of debt dated 25 May 2009 as alleged, so HK Zhongxing was not entitled to any defence of set-off.

III.  Issues

40.  The following issues arise from the Amended Summons:

(a) whether the HK Judgment is regular or irregular;

(b) if the HK Judgment is irregular, whether the court should exercise its residual discretion not to set aside the same or to impose conditions for setting aside the same;

(c)  if the HK Judgment is regular, whether HK Zhongxing has shown real prospect of success on the merits of the defence.

41.  Mr Lam leading Mr Lau, counsel for HK Zhongxing, informs me that for the purpose of the Amended Summons, HK Zhongxing will not contend that Mainland China and not Hong Kong is the appropriate forum for the present litigation.

IV.  Regularity of the HK Judgment

42.  There is no dispute that:

(a) the annual return of HK Zhongxing dated 11 July 2008 (“Annual Return”) shows their corporate secretary to be B&W International Secretary Limited (“B&W”) and their registered office at the 1^st Address being also B&W’s address;

(b) the Notification of Change of Address of Registered Office dated 15 April 2009 (“Form R1”) gives notice that HK Zhongxing’s registered office was changed to Unit 102, 1^st Floor, Hong Kong Trade Centre, 161-167 Des Voeux Road Central, Hong Kong with effect from 15 April 2009;

(c)  Form R1 states that such document was received by the Companies Registry on 27 May 2009.

43.  Chen suggests the HK Judgment is irregular because the Plaintiff purportedly served the Writ of Summons to the 1^st Address on 29 April 2009, when it had ceased to be HK Zhongxing’s registered office.  But Chow points out that when SHC conducted company search of HK Zhongxing on/about 21 April 2009 and served the Writ of Summons to the 1^st Address on 29 April 2009, the up-to-date record of HK Zhongxing’s registered office as shown in the Annual Return was still the 1^st Address, and the Plaintiff could not be blamed if HK Zhongxing only lodged Form R1 with the Companies Registry on 27 May 2009, ie outside the prescribed 14 days from the date of change of address of registered office.

44.  For the purpose of the Amended Summons, Mr Lam concedes that service of the Writ of Summons on HK Zhongxing was regular. [1]  Instead, he submits that the HK Judgment is irregular because it fails to comply with Order 13 rule 6(1) of the RHC. Order 13 rules 5 and 6(1) of the RHC provide as follows:

“ 5. Where a writ issued against any defendant is indorsed with two or more of the claims mentioned in the foregoing rules, and no other claim, then, if that defendant fails to give notice of intention to defend, the plaintiff may, after the prescribed time, enter against that defendant such judgment in respect of any such claim as he would be entitled to enter under those rules if that were the only claim indorsed on the writ and proceed with the action against the other defendants, if any.

  6.(1)    Where a writ is indorsed with a claim of a description not mentioned in rules 1 to 4, then, if any defendant fails to give notice of intention to defend, the plaintiff may, after the prescribed time and, if that defendant has not acknowledged service, upon filing an affidavit proving due service of the writ on him and, where the statement of claim was not indorsed on or served with the writ, upon serving a statement of claim on him, proceed with the action as if that defendant had given notice of intention to defend.”

45.  The Statement of Claim indorsed on the Writ of Summons claims inter alia for “(1) All necessary accounts, directions and inquiry; (2) the Sum; (3) Further or in the alternative, damages; …….” (ie mixed claims with (1) being outside the scope of Order 13 rules 1-4 of the RHC), so the Plaintiff could not, after the prescribed time for giving notice of intention to defend, enter default judgment against HK Zhongxing for the Sum in the manner “as it would be entitled to enter under [Order 13 rule 1 of the RHC] if that were the only claim indorsed on the writ”, and would have to proceed with the action under Order 13 rule 6(1) of the RHC as if HK Zhongxing had given notice of intention to defend.

46.  However, a plaintiff may abandon inappropriate claim(s) and bring himself within Order 13 rules 1-4 of the RHC in order to enter judgment in default of notice of intention to defend under those rules. [2]  The commentary on Order 13 rule 6 of the RHC in Hong Kong Civil Procedure 2011 Vol.1 para.13/6/1 at p.204 states as follows:

“The effect of para.(1) is to preclude a plaintiff from entering judgment in default of notice of intention to defend in every case in which the indorsement on the writ contains or includes a claim which is not squarely within rr.1 to 4 of this Order, and to require him to proceed with the action as if that defendant had given notice of intention to defend. If, therefore, there is indorsed on the writ a claim for an account, …… or other remedy or relief which falls outside the descriptions specified in rr.1 to 4, the plaintiff cannot enter judgment in default of notice of intention to defend, unless he expressly and finally abandons every such remedy or relief. On the other hand, the plaintiff is free to elect which relief he wants to pursue and he is under no duty to give prior notice of his election to abandon any form of relief which he originally claims, and on the effective abandonment of every remedy or relief outside the descriptions specified in rr.1 to 4 he is entitled to enter a default judgment under these rules (Morley London Developments Ltd v. Rightside Properties Ltd (1973) 231 E.G. 235, CA).”

47.  In Morley London Developments Ltd, dispute arose between the respondents (who agreed to buy various properties from the appellants) over the sale and purchase of one of the properties, which resulted in proceedings by the respondents against the appellants for specific performance, alternatively damages, and all necessary accounts and inquiries.  Upon the appellants entering an appearance, the respondents applied by summons for judgment pursuant to Order 86 for damages to be assessed and an account of all sums received by the appellants.  Subsequently, the respondents withdrew the Order 86 summons and, having made plain to the appellants they were going to do so, signed judgment in default under Order 19 rule 3.  The default judgment expressly stated that with no defence served and “the [respondents] abandoning their claim to the other relief sought in the statement of claim, it is this day adjudged that the [appellants] do pay to the [respondents] damages to be assessed”.  Upon the appellants applying to set aside the default judgment, Edmund Davies LJ said at p.237 as follows:

“At any time, a plaintiff was free to elect to abandon a particular form of relief. …… The fact was that a plaintiff was free to choose the relief he wished to pursue, the only requirement being that at the time when the matter came before the court he must make it plain what remedy he asked for. He was under no duty to give prior notice to the other side of his election, though in the present case there seemed to be no doubt that the respondents had made clear to the appellants their decision to abandon their claim for specific performance and to seek only unliquidated damages. On November 22, then, the respondents having informed the court and (indeed) the appellants’ advisers of their decision to seek only the remedy of damages, nothing more was required of them and they were free to sign judgment.” (my emphasis)

48.  Morley London Developments Ltd was referred to in Craig Osborne v Patricia Leighton [1999] EWCA Civ 1314 (unreported, 30 April 1999).  In that case, the appellant issued a writ followed by a statement of claim seeking damages for libel, slander and unlawful interference with his contractual relationship with his employer, and an injunction restraining the respondent from repeating the various libels and slanders.  The appellant sighted the defence which was served a few hours after the extended time limit, but still proceeded to enter default judgment under Order 19 rule 3.  He eventually conceded that the default judgment ought to be set aside, and it was set aside by consent.  The remaining issue before the court was the matter of costs. Mantell LJ (with whom Simon Brown LJ agreed) said as follows:

“…… It is clear, however, from Morley London Developments Ltd v Rightside Properties Ltd (1973) 117 SJ 876 that it is open to a claimant to withdraw part of his claim without notice to the other side in order to take advantage of the administrative procedures provided by Order 19 rule 2 or, for that matter, Order 19 rule 3. But, as was made plain in that case, the judgment taken in such circumstances must make it clear on its face that the inappropriate claims have been abandoned, and that was what had happened in Morley London Developments Ltd. ……”

49.  Here, the first question is whether the Plaintiff had effectively abandoned the remedies or reliefs that were outside Order 13 rules 1-4 of the RHC so as to be able to enter default judgment under Order 13 rule 5 of the RHC?

50.  The Plaintiff did not inform HK Zhongxing about the SHC Election Letter, but when I gave a copy to Mr Lam at the Hearing, he readily conceded that the Plaintiff had expressly informed the court their abandonment of claims outside the scope of Order 13 rules 1-4 of the RHC. But relying on Mantell LJ’s above observations, Mr Lam argues that the HK Judgment is irregular in failing to make clear on its face that the claim for “all necessary accounts, directions and inquiry” (ie an inappropriate claim outside the scope of Order 13 rules 1-4 of the RHC) has been abandoned.

51.  Mr Lam accepts there is no express statutory provision or form in the RHC which requires any default judgment under Order 13 rule 5 of the RHC to expressly state on its face that the plaintiff has abandoned all inappropriate claims.  Further, as evident from Craig and as conceded by Mr Lam, Mantell LJ’s above observations were obiter. In such circumstances, it is therefore necessary to revisit Morley London Developments Ltd to see whether Mantell LJ’s above observations can be supported.  In that case, although it was expressly endorsed on the face of the default judgment that the plaintiff had abandoned “their claim to the other relief sought in the statement of claim”, such express indorsement was not specified by Edmund Davies LJ to be a necessary requirement for the default judgment to be valid and effective.  Indeed, he made clear there was no need to give prior notice of any abandonment of inappropriate claim(s) to the defendant, and once the plaintiff informed the court of such decision, “nothing more was required of them and they were free to sign judgment”.  In my view, the ratio in Morley London Developments Ltd does not support Mantell LJ’s interpretation of there being an additional requirement to spell out the abandonment of inappropriate claim(s) on the face of the default judgment.

52.  Mr Lam submits that such additional requirement will help the defendant appreciate that inappropriate claim(s) have been abandoned and that the default judgment is therefore regular in this respect.  Even if this amounts to convenient or even good practice, I am not persuaded that failure to do so will render any default judgment irregular in the sense of being an irremediable nullity.  Even assuming there is such additional requirement (which I disagree), if a plaintiff has informed the court (without any need to notify the defendant) of his abandonment of inappropriate claim(s), the absence of express indorsement of such abandonment on the face of the relevant default judgment at most can only be a remediable procedural irregularity and not an irremediable fundamental irregularity that nullifies the default judgment.

53.  I therefore conclude that the HK Judgment is a regular default judgment. For the avoidance of doubt, at the Hearing Ms Lau, counsel for the Plaintiff, abandoned the arguments set out in paragraphs 12-15 of her written submissions. There is no need for me to consider her arguments in paragraph 17 of her written submissions, which are only relevant if the HK Judgment is irregular.

V.  Merits of the defence

(a)  Legal principles

54.  Since the HK Judgment is a regular judgment, HK Zhongxing must show a meritorious defence with real prospect of success or which carries some degree of conviction. [3]  It has been said that “unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success”. [4]  In Tong Yi Sang & anor v Fung Law & Ng & ors [1993] 2 HKC 665, 672, Kaplan J said as follows:

“…… I believe that there is a substantial onus on an applicant who seeks to set aside a regular judgment. This is clear from the Saudi Eagle [1986] 2 Lloyds Ref. 221. In a case such as this, I would expect a defendant to condescend to particulars of his Defence on the merits in his own words. …… What is far more preferable (and I leave over the question whether it is strictly necessary) is an affidavit in narrative form explaining precisely what the proposed defence will be so that the court can be assisted in forming a value judgment as to whether it can be satisfied that there is some degree of conviction and a real prospect of success in the proposed defence.”

55.  This requires the court to form some provisional view of the probable outcome of the action.  Where the outcome depends on whose evidence is likely to be accepted, the appropriate test for determining whether the defendant has real prospect of success is to ask whether the defence “could well be established” at trial or whether the defence witnesses could well be believed at trial. [5]

56.  There are other considerations which a court must consider in deciding whether or not to set aside a default judgment, such as the reason why default judgment was allowed to occur in the first place, any delay in making the application to set aside the default judgment, and any consequent prejudice caused to the plaintiff.  The court’s approach is to conduct a balancing exercise of all relevant factors. [6]  But the critical factor and starting point are the merits of the defence. [7]  If the defence has no real prospect of success, there is no point in setting aside the same. [8]

(b)  Breach of the Agreement?

57.  Mr Lam argues that on a true construction of the written Agreement, should the Plaintiff exercise the Option to give up the Land Investment, SZ Zhongxing must (“必須”) repay the Sum before 30 April 2008 (“於2008年4月30日前”). He contends that it is implicit from such provision and from the fact that the Sum was a sizable sum that the Notice “must” be given at a reasonable time “before” 30 April 2008 so that SZ Zhongxing could arrange for repayment of the Sum to the Plaintiff “before” 30 April 2008, failing which the Plaintiff would be deemed to have irreversibly committed to the Land Investment and deemed to be irreversibly precluded from seeking repayment of the Sum.

58.  Further, Chen in his 2^nd affirmation has denied receipt of the Withdrawal Notice.  Although Chen has complained that the Plaintiff failed to give particulars of their alleged service of the Withdrawal Notice, the Plaintiff has failed to provide any such particulars whether by way of Chow’s affirmations or otherwise.  Mr Lam submits that the Withdrawal Notice is not unlikely to be an afterthought and/or fabrication to support the Plaintiff’s claim, but even if the Plaintiff did issue the Withdrawal Notice (which is denied), he argues that it cannot amount to a valid exercise of the Option.  After all, the Withdrawal Notice only came into existence on 30 April 2008 and could not have been served within a reasonable time for SZ Zhongxing to repay the Sum to the Plaintiff “before” 30 April 2008.  By 30 April 2008, the deadline for repayment of the Sum and hence exercise of the Option had expired, so the Plaintiff had irreversibly lost their right to any repayment of the Sum and had irreversibly committed to the Land Investment.

59.  Ms Lau reminds that certain allegations in the Amended Draft (eg the averment that HK Zhongxing transferred the Sum to Tai Lee) are unsupported by credible affidavit evidence, so the court should view HK Zhongxing’s above arguments, which are newly pleaded in the Amended Draft, with caution and conclude that HK Zhongxing’s defence is without merit.

60.  It is true that HK Zhongxing’s above arguments are freshly pleaded in the Amended Draft, but they are premised on the written agreement exhibited to Chen’s 1^st affirmation (see paragraph 17 above).  The parties have no dispute over such document, and plain reading of such written agreement suggests it can be respectably argued that the Plaintiff agreed to pay the Sum to SZ Zhongxing as their first instalment for acquiring 24.5% interest in the Land Project with an option for them to back out whereupon SZ Zhongxing must repay the Sum to them before 30 April 2008.  Since the written Agreement provides for repayment of the Sum “before” 30 April 2008, it is also seriously arguable that the deadline for exercising the Option so as to trigger the repayment obligation must likewise be “before” 30 April 2008, and hence the Withdrawal Notice dated 30 April 2008 is too late.  The Withdrawal Notice also raises a question as to whether the Plaintiff’s unilateral extension of time for repayment of the Sum to “on or before 7 May 2008” in the absence of any contractual provision permitting the same (and none has been pleaded in the Statement of Claim) is sufficient to validate the late Withdrawal Notice.

61.  Ms Lau submits that such contentions are incredible because if the Withdrawal Notice were invalid and the Plaintiff had irreversibly committed to the Land Investment, then Chen’s affirmations are conspicuously silent on any subsequent communications with the Plaintiff about their share in the Land Investment. But it must be remembered that SZ Zhongxing and not HK Zhongxing is party to the Land Project.  In my view, it is unsurprising that Chen on behalf of HK Zhongxing (which is not privy to the Land Project) does not depose to (a) the progress of the Land Project and/or (b) further communications (if any) amongst the investors concerning such project/investment.

62.  But more importantly, I am of the view that it is not possible to form any provisional view as to whether the Withdrawal Notice had been served on Huang and/or SZ Zhongxing in face of the contradictory factual assertions by the Plaintiff and Chen on behalf of HK Zhongxing.  Indeed, given the Plaintiff’s reluctance to divulge particulars as to whom, how and when such notice was served despite HK Zhongxing’s complaint of lack of such particulars, I am convinced that HK Zhongxing’s denial of receipt of the Withdrawal Notice could well be established at trial.  In my view, HK Zhongxing has raised a defence with real prospect of success.

(c)  HK Zhongxing’s liability under the Agreement

63.  Pursuant to the trite principle in Salomon v Salomon & Co [1897] AC 22, Mr Lam argues that since Huang and HK Zhongxing are separate legal entities, HK Zhongxing is not liable for Huang’s liabilities (if any) under the Agreement simply because Huang is its sole shareholder/director. [9]  Ms Lau does not challenge such proposition, and Chow accepts that the party liable to repay the Sum under the Agreement was SZ Zhongxing and not HK Zhongxing.

64.  Mr Lam goes on to argue that since HK Zhongxing was merely an agent/nominee for receipt of the Sum on behalf of SZ Zhongxing just as HK Grand Field acted as agent for effecting payment of the Sum on behalf of the Plaintiff, so the Plaintiff (and not HK Grand Field) is the plaintiff in the present proceedings and likewise HK Zhongxing cannot be a proper defendant.

65.  Halsbury’s Laws of England 4^th ed reissue Vol.2(1) para.189 at p.133 provides as follows:

“ The receipt of money from a third person by an agent on his principal’s behalf does not in itself render the agent personally liable to repay it when the third person becomes entitled as against the principal to repayment, whether the money remains in the agent’s hands or not. If, however, a third person pays money to an agent under a mistake of fact, or in consequence of some wrongful act, the agent is personally liable to repay it, unless, before the claim for repayment was made upon him, he has paid it to the principal or done something equivalent to payment to his principal …… Where, however, the agent has been a party to the wrongful act, …… in consequence of which the money has been paid to him, he is not discharged from his liability to make repayment by any payment over to his principal.”

It therefore appears to be two different lines of reasoning which can be taken in recovery of money from an agent.

66.  The first uses the notion that money paid to an agent for his principal and received within the agent’s actual or apparent authority, or the receipt of which is ratified, is regarded as having been paid to and is recoverable from the principal because the agent recipient is regarded as a mere conduit for the money so that “in contemplation of law the payment is made to the principal and not to his agent”. [10]  The principal “may be permanently entitled to it; but by virtue of subsequent events it becomes repayable, as where a deposit correctly paid is justifiably reclaimed, or there is a total failure of consideration on a contract” [11] (ie where the money becomes reclaimable at a later stage than payment), it is then arguable that the principal should alone be liable, for the agent does not receive the money on a conditional basis, and may not be in a position to know whether the money has become returnable, and the matter should therefore be disputed between the principal and the third party. [12]

67.  The second uses the notion that where the agent holds money to which neither he nor the principal is entitled, it can be intercepted and recovered at this stage unless without knowledge of the claim the agent has paid it over to the principal. “…… If the agent retains the money, the plaintiff may elect to sue either the principal or the agent, and the agent remains liable if he pays over the money to his principal after notice of the claim.  If he wishes to protect himself, he should interplead. But once the agent has paid over the money to his principal or to his order without notice of the claim, the plaintiff must sue the principal.” [13]  This covers those situations where the liability to repay arises immediately on payment, as where money is paid by mistake, where the right to intercept subject to a payment over defence is more easily acceptable. [14]

68.  In my view, the defence argument described in paragraph 64 above has real prospect of success.  There is no dispute that under the Agreement the Plaintiff was contractually obliged to pay the Sum to SZ Zhongxing, and that Huang requested the Plaintiff to deposit the monies into the Account.  In my view, it is strongly arguable that (a) HK Zhongxing received the Sum as agent or conduit for SZ Zhongxing, (b) the Sum was correctly paid, and (c) HK Zhongxing did not receive the Sum on a conditional basis.  Further, even on the Plaintiff’s case, the requirement to repay the Sum arose from a subsequent event being service of the Withdrawal Notice.  In such circumstances, the defence contention premised on the first line of reasoning as discussed in paragraph 66 above (ie SZ Zhongxing as principal should alone be liable irrespective of whether there was any payment over of the Sum received by HK Zhongxing to SZ Zhongxing) has real prospect of success.

69.  But Ms Lau submits that the first line of reasoning is inapplicable since HK Zhongxing through its sole director/shareholder (ie Huang) was well aware that the Sum had become returnable, and HK Zhongxing was therefore liable to repay the Sum to the Plaintiff by virtue of the various causes of action discussed below.

(d)  Alleged breach of the Undertaking Agreement

70.  The Plaintiff claims that pursuant to the Undertaking Agreement HK Zhongxing took up a personal liability to ensure that the Sum was transferred to SZ Zhongxing immediately or no later than 1-2 days upon receipt of the Sum, but even if the Undertaking Agreement did not exist (which is denied), a reasonable time for such transfer would still be within 1-2 days of HK Zhongxing’s receipt of the Sum.  The Plaintiff further contends that in breach of the Undertaking Agreement, HK Zhongxing failed to transfer the Sum to SZ Zhongxing, and wrongfully and unlawfully misappropriated, spent and/or used the Sum without accounting for and/or returning the same to the Plaintiff.

71.  But the Undertaking Agreement is disputed. Not only does HK Zhongxing denies the existence of such agreement, they positively aver that when and how such transfer were to be done was left to their discretion.  It is true that it is newly pleaded in the Amended Draft that on/about 27 February 2008 the Sum was transferred from the Account to Tai Lee and that such fact has not been verified by affidavit, but I am not persuaded that such lacuna in the affidavit evidence renders HK Zhongxing’s defence incredible.  After all, on the primary issue of whether there was any Undertaking Agreement, the Plaintiff has not condescended upon any particulars of when, how, with whom, where and why such oral agreement was made notwithstanding HK Zhongxing’s denial of such agreement.  There is also no explanation why the Sum must be transferred to SZ Zhongxing within 1-2 days of receipt by HK Zhongxing.

72.  Ms Lau submits that commercial reality makes it unlikely that the Plaintiff, having lent the Sum to SZ Zhongxing, would agree to deposit such Sum into the Account without any corresponding undertaking by Huang and HK Zhongxing to remit the Sum to Shenzhen Zhongxing within a reasonable time (ie within 1-2 days) after receipt of the Sum.  Ms Lau submits that although HK Zhongxing is not entitled to rely on the averment in the Amended Draft that HK Zhongxing transferred the Sum to Tai Lee on/about 27 February 2008 (ie 8 days after the Agreement) without affidavit evidence, the Plaintiff can rely on such assertion in support of the existence of the Undertaking Agreement.

73.  I am not persuaded by Ms Lau’s submissions. Commercial reality can only be considered in context, ie against the whole transaction and possibly also its background, which can only be canvassed at trial.  I am unable to draw any irresistible conclusion from the nomination of HK Zhongxing to receive monies on SZ Zhongxing’s behalf that HK Zhongxing as agent will necessarily assume a personal liability by separate undertaking to the Plaintiff as third party to remit the monies to SZ Zhongxing, which argument essentially renders the first line of reasoning discussed in paragraph 66 above redundant.  The first line of reasoning clearly suggests that HK Zhongxing’s contrary contention is seriously arguable with real prospect of success.

74.  For the purpose of the Amended Summons, there is no need for me to consider Mr Lam’s submissions that the Undertaking Agreement is likely to be a recent fabrication by the Plaintiff in their attempt to drag HK Zhongxing into present litigation.  But I agree with Mr Lam that it is not possible for the court to form any provisional view as to the existence of the Undertaking Agreement at this stage, and there is real possibility that HK Zhongxing may succeed in its denial at trial.

75.  Further, even if the Plaintiff were able to establish the existence of the Undertaking Agreement, HK Zhongxing denies any breach thereof.  Interestingly, apart from alluding to some hearsay information in mid-2008 from persons who knew Huang but whose identities the Plaintiff could not recall, the Plaintiff is unable to provide any further particulars of breach of the Undertaking Agreement.  The evidential further basis for the Plaintiff’s serious allegation of wrongful and unlawful misappropriation, spending and/or use of the Sum by Huang and/or HK Zhongxing without the Plaintiff’s approval, consent, authority and knowledge cannot be said to be strong, and upon considering all the circumstances, I am of the view HK Zhongxing’s denial of any breach of the Undertaking Agreement (if any) is seriously arguable.

76.  For the present purpose, I shall not rely on HK Zhongxing’s plea in the Amended Draft that they transferred the Sum to Tai Lee on/about 27 February 2008.  But if I am entitled to do so, such plea must be placed in the relevant context, ie HK Zhongxing’s case that such Sum was the Plaintiff’s first instalment for their share of the Land Investment.  In such circumstances, it is arguable that such transfer of the Sum to Tai Lee (being the PRC company which acquired the Land Project) was for the purpose of the Land Investment as specified in the Agreement, and hence such transfer arguably does not amount to any breach of contract.

77.  Mr Lam goes on to submit that even if HK Zhongxing were in breach of the Undertaking Agreement, the Plaintiff would only be entitled to claim for damages for such breach, ie loss and damages arising from the difference between transferring the Sum to SZ Zhongxing within 1-2 days of receipt of the Sum and failing to transfer such Sum at all.  There is no affidavit evidence and no material facts pleaded in the Statement of Claim showing how such loss and damages are quantified at the amount of the Sum and/or how SZ Zhongxing’s refusal to refund the Sum was caused by HK Zhongxing’s failure to transfer the Sum to them.

78.  I agree. In any event, even if the Plaintiff were able to establish the existence and breach of the Undertaking Agreement and to quantify their loss and damages at RMB¥5,000,000.00, the Plaintiff is not entitled to recover the Sum by entering final judgment by default (which is only suitable for a liquidated claim) in contra-distinction to an interlocutory judgment for damages for breach of contract to be assessed. [15]  In such circumstances, the HK Judgment is liable to be set aside.

(e)  Money had and received

79.  Mr Lam submits that the essential elements of a claim for money had and received are as follows [16]:

“1. the defendant must have received a definite and ascertained sum of money; ……

2. the money received by the defendant must be either the plaintiff’s own money or money in which the plaintiff is directly interested;

3. the money or its equivalent must be clearly proved to have come into the defendant’s hands;

4. there must be privity of contract between the plaintiff and the defendant, even if the defendant is wrongfully in possession of money held for the benefit of the plaintiff or is in possession of the plaintiff’s own money: the relationship on which the quasi-contractual obligation is based must be between the plaintiff and the defendant. …… privity of contract for this purpose [is not established] between a creditor and the debtor’s servant or agent ……”

80.  Mr Lam further cites Stephens v Badcock (1832) 3 B&Ad 354, which headnote reads as follows:

“J., an attorney who was accustomed to receive certain dues for the plaintiff, his client, went from home, leaving B., his clerk at the office. B., in the absence of his master, received money on account of the above dues for the client (which he was authorized to do), and gave a receipt signed “B., for Mr. J.” J. was in bad circumstances when he left home, and he never returned, but it did not appear that his intention so to act was known at the time of the payment to B. B. afterward refused to pay the money over to the client, and on assumpsit brought against him for money had and received, it was held, that the action did not lie; for that the defendant received the money as the agent as his master, and was accountable to him for it, the master on the other hand being answerable to the client for the sum received by his clerk; and there was no privity of contract between the present plaintiff and defendant.”

81.  Mr Lam argues that since HK Zhongxing’s principal was SZ Zhongxing and/or Huang (who directed HK Zhongxing to receive the Sum), there was no privity of contract between the Plaintiff and HK Zhongxing, so any claim by the Plaintiff for money had and received should lie against SZ Zhongxing and/or Huang and not against HK Zhongxing.

82.  Ms Lau in her written submissions argues that since (a) the Sum was deposited into the Account and (b) Huang was/is HK Zhongxing’s only director/shareholder, HK Zhongxing must have been fully aware of the Plaintiff’s claim for repayment of the Sum, and having knowingly and wrongfully kept, misappropriated, spent and/or used the Sum should repay such Sum to the Plaintiff.

83.  There is no dispute that the first 3 conditions set out in paragraph 79 above have been satisfied.  In saying that HK Zhongxing is immune from the Plaintiff’s claim for money had and received and that the Plaintiff is restricted to his rights (if any) against SZ Zhongxing and/or Huang, Mr Lam is essentially relying on the first line of reasoning in paragraph 66 above.

84.  Ms Lau concedes that for the Plaintiff to make good their cause of action on money had and received, it is essential for the Plaintiff to establish that they are entitled to repayment of the Sum under the Agreement and that HK Zhongxing still retains the Sum and/or has wrongfully and unlawfully misappropriated, spent and/or used the same, which brings in the second line of reasoning in paragraph 67 above. [17]  However, as I have already concluded above, HK Zhongxing has raised defence that has real prospect of success against such contentions.  Therefore, there is likewise a viable basis for setting aside the HK Judgment based on the cause of action for money had and received.

85.  But I need to go further because at the Hearing Ms Lau submitted that the common law cause of action for money had and received should be regarded as a species of restitutionary claim based upon the principles of unjust enrichment. She relies on Brennan v Brighton Borough Council [1997] EWCA Civ 1628 (7 May 1997) to submit there can be a restitutionary remedy even if some elements of the common law cause of action are absent, and a plaintiff can recover simply by establishing that recovery will be just.

86.  The short answer to such submissions is the absence of any express cause of action in the Statement of Claim for any stand-alone wrong based on unjust enrichment.  The pleaded claim is one of money had and received.  But even if a free-standing claim of unjust enrichment can be elicited from the Plaintiff’s pleadings, I am still convinced that HK Zhongxing has an arguable defence with real prospect of success.

87.  First of all, judicial statements in various authorities suggest that unjust enrichment is not of itself a cause of action, but is merely an underlying principle for the formulation of claims and defences. [18]  So how does Brennan feature in such context?

88.  In that case, the plaintiff on the advice of the defendants formed a company which was merely his corporate personification and through which he controlled the development of a site as a tennis centre.  He advanced substantial sums and did a lot of work in the expectation that the defendants would grant a 31-year lease on completion of the tennis centre.  The defendants refused to grant such lease to the company, which went into liquidation, and they subsequently acquired the tennis centre for a total outlay that was much less than its value.  An application to strike out the plaintiff’s claim was mounted on the assumed facts that the defendants wrongfully and in breach of contract refused to grant the lease and thereby forced the plaintiff’s company into liquidation and that they were enriched by being able to take over the tennis centre.

89.  The defendants opposed the application on the basis that such enrichment was at the expense not of the plaintiff but of the company being a separate legal entity, so the plaintiff’s restitutionary claim was objectionable for subverting the doctrine of privity of contract.  On the other hand, the plaintiff argued that the defendants encouraged him to work through the medium of his company and required him to control the venture personally through such medium, so his company was only a “conduit” through which his funds enriched the defendants.  The Plaintiff’s counsel seized on some remarks by Lord Goff of Chieveley in his dissenting judgment in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961, 980-981, and argued on the basis of a general rule of restitution to correct injustice that courts should act on the reality of the situation and hold the loser to be the plaintiff and not his company.

90.  Despite the principle of separate corporate personality, the English Court of Appeal in Brennan refused to strike out the claim of unjust enrichment, but acknowledged that such argument was at the very outer limits of arguability.  Pill LJ  said inter alia that:

“…… I see considerable force in the submissions of [the defendants’ counsel], particularly that based on the principle in Salomon. The proposed claim would have been a most difficult one and I would not rate the prospects of success at all highly. However, given the relationship between the three parties, that is the plaintiff, the [plaintiff’s company] and the defendants, the conduct of the defendants towards the plaintiff and the enrichment of the defendants which resulted from the transactions, I would not have been prepared to hold that it was a plain and obvious case in which the jurisdiction to strike out should have been exercised. However, for reasons given earlier, I would dismiss this appeal.”(my emphasis)

Slade LJ said that:

“…… The major hurdle facing the plaintiff would be that of satisfying the court that, for the purposes of the law of restitution, the enrichment could properly be regarded as having been at the expense of the plaintiff and not exclusively at the expense of the company.

I think that the plaintiff’s prospects of surmounting this hurdle would have been somewhat slender, since it would have involved persuading the court in effect to lift the corporate veil. ……

On the assumed facts, it can well be said that in the events which have happened the defendants’ enrichment has in broad terms been at the plaintiff’s expense. Notwithstanding the Salomon principle, I would not for my part have ruled out the possibility that at the trial, the court, after full investigation of the special circumstances of this case, and the special relationship between the plaintiff, defendants and company, might have considered it essential to allow the plaintiff a restitutionary remedy in order to do full justice as between him and the defendants. Accordingly, by a narrow margin, I would not have considered this such a plain and obvious case as to justify the court exercising the draconian remedy of striking out the statement of claim.” (my emphasis)

91.  It is plain from the above that both Pill and Slade LJJ did not rate the plaintiff’s arguments on his restitutionary claim highly.  Indeed, Slade LJ regarded the prospects of such claim “somewhat slender” so that such claim merely survived the striking out “by a narrow margin”.  As observed by Mann J in Charles Uren v First National Home Finance Limited [2005] EWHC 2529 [Ch] para.17, “the Court of Appeal in [Brennan] expressed the view that it was only just on the “survival” (my word, not theirs) side of the survival/striking out line”.  Further, the proceedings in Brennan were in fact struck out on different grounds for breach of the limitation rules.  Again as noted by Mann LJ in Charles Uren, the above observations by Pill and Slade LJJ, which were made without deep analysis, were plainly obiter.  In my view, surviving a strike out application on the basis that the claim as framed is at the outer limits of an evolving area of the law that has yet to be authoritatively decided provides little basis for undermining the real prospect of success posed by defence arguments premised on the more orthodox first line of reasoning in paragraph 66 above and on the essential elements for a claim for money had and received in paragraph 79 above.

92.  Neither counsel referred to Charles Uren, but this is understandable since Ms Lau only referred to Brennan at the Hearing.  In fact, there is a sequel to the Brennan saga. After the plaintiff’s High Court claim was struck out, he resurrected an earlier claim which he commenced in the County Court and applied to amend such claim by inserting the High Court claim that was struck out and then to have such amended claim transferred to the High Court.  The English Court of Appeal in Brennan v Brighton Borough Council [1998] EWCA Civ 689 (23 April 1998) refused him leave on the grounds of want of prosecution and abuse of process.  It is interesting to note that Buxton LJ (with whom Auld LJ agreed) stated that Slade LJ’s observations in Brennan “about the arguability of the unjust enrichment were obiter, and we are not bound by them.  For the purposes of this application I am prepared not to go behind those observations, but I wish it to be specifically understood that I am not thereby to be taken to be agreeing with them.”  This lends weight to Mr Lam’s suggestion that the counter-arguments to the above observations by Pill and Slade LJ have real prospect of success.

93.  Again, neither counsel has referred to the local authorities on unjust enrichment [19], but the Court of Final Appeal and Court of Appeal did emphasise that under the law of restitution, in determining whether the enrichment was unjust, it was essential to consider how such claim fitted with the contracts of the parties because serious difficulties would arise if the law of restitution was expanded to redistribute risks for which provision had been made under an applicable contract.  The law of restitution should not without compelling reasons interfere with the contractual allocation of risks: attempting to do justice by a revision of risks as between, say, A and B might lead to injustice as between, say, B and C or others in the contractual network.

94.  I accept that unjust enrichment is a developing area of law. [20]  But an application for setting aside default judgment is plainly not the proper forum for continuing that development.  Although I should not avoid deciding questions of law simply on the basis that this is a difficult and developing area, it is still appropriate to consider the present context and to further consider whether, despite the scope for evolution of the law, HK Zhongxing has nonetheless shown a defence that has real prospects of success so that the HK Judgment ought to be set aside.  Taking all of the above matters into account, I am persuaded that HK Zhongxing has raised defences to the cause of action on money had and received that have real prospect of success.

(f)  Conversion

95.  Mr Lam submits that in order to succeed on its claim on conversion, the Plaintiff must establish that HK Zhongxing’s dealing with the Sum was without their authority.  Since the Plaintiff entered into the Agreement for the purpose of the Land Investment and was aware that the Land Project involved SZ Zhongxing and other PRC parties through which the Land Project was acquired, the Sum ought to be transferred to the relevant parties for investment purpose.  Mr Lam says this accords with the fact that HK Zhongxing transferred the Sum to Tai Lee within 8 days of receipt into the Account for the purpose of the Land Investment, and in the absence of contrary instructions by the Plaintiff to Huang and/or SZ Zhongxing, such transfer could not have been unauthorised.

96.  However, the averment in the Amended Draft in respect of the transfer of the Sum by HK Zhongxing to Tai Lee has not been verified by affidavit evidence, so I do not propose to rely on the above argument.

97.  Mr Lam next submits that for the conversion claim the Plaintiff has to establish their entitlement to possession as well as wrongful dealing of the Sum, but as shown above HK Zhongxing has raised good arguable defence with real prospect of success against the Plaintiff’s allegations of (a) breach of the Agreement and (b) existence and breach of the Undertaking Agreement.  Although Ms Lau submits that the conversion claim is a stand-alone cause of action free from the Undertaking Agreement, her argument that HK Zhongxing committed conversion by refusing to return the Sum when through Huang it must have had constructive knowledge of the Plaintiff’s demand for repayment is necessarily premised upon proper service of a valid and effective Notice being the Withdrawal Notice on SZ Shenzhen (ie immediate right to possession) and misappropriation, spending and use of the Sum by HK Zhongxing (ie act of conversion).  Again, as seen above, HK Zhongxing has raised defence with real prospect of success against such arguments.

98.  Ms Lau cites China Everbright – IHD Pacific Ltd v Ch’ong Poh CACV 513/2001 (unreported, 19 February 2002) in support of the conversion claim.  In that case, a fraudulent scheme of sale and purchase of shares in a company was made possible because all involved parties were ultimately controlled by the culprit and his associates.  Under the scheme’s circular transaction, monies went from a bank to the company as cashier orders procured by a related company and intended as a discharge of the liabilities owed to the company, and then moved from the company to its subsidiary as purported investment, from such subsidiary to a related company as payment towards the purchase price, and from such related company back to the bank.  The process took a few moments with credit entries followed by corresponding debit entries, but the cash position of the participants was not affected.  The company commenced proceedings against the defendant being the purchaser of the company’s shares alleging inter alia conversion.

99.  The Court of Appeal held that the conversion took place when the defendant put in train the active part of the conspiracy by passing the cashier orders to the company in circumstances where the immediate withdrawal of the proceeds of the cashier orders had already been secured by the deposit of cheques in favour of its subsidiary.  In short, once the cashier orders were delivered as part and parcel of the fraudulent scheme, the plaintiff’s right to possession of those cashier orders was complete

100.  At the Hearing, Ms Lau was unsure whether the defendant in China Everbright – IHD Pacific Ltd lodged any appeal. In fact, he did. [21]  Although the Court of Final Appeal upheld the finding that the defendant was guilty of conversion of the cashier orders, the judgment of Lord Millett NPJ at pp.661-662 provided useful insight for the present purpose.

101.  First, Lord Millett NPJ accepted “as trite law that conversion must be conversion of corporeal personal property; choses in action cannot be converted: see Clerk & Lindsell on Torts (18^th ed.) p.744 para.14-41. ……”  Here, the Statement of Claim pleads that the property converted was the Sum and not the cheque deposited into the Account on 22 February 2008.  Even on the Plaintiff’s case, their right to demand for repayment of the Sum only arose upon service of the Withdrawal Notice dated 30 April 2008 and not at the time of deposit of the cheque into the Account on 22 February 2008.  But once the cheque was deposited into the Account, the monies passed into currency.  By 30 April 2008, all that remained was a chose in action and no longer a cheque.  Quite simply, conversion does not lie for money which has passed into currency in the sense that if the alleged wrongdoer were sued he could not be required to repay in specie. [22]

102.  Secondly, Lord Millett NPJ went on to say explain that the cashier orders in that case were converted because of the unusual factual circumstances whereby the proceeds were paid into the company’s account with the specific purpose that they be immediately withdrawn and misapplied, so that the company’s affirmation of the transaction did not preclude there being a conversion.  Lord Millett NPJ placed weight on the fact that the money was paid with the intention not only that the existing indebtedness owing to the company be discharged but also to fund the purchase of the shares.  This was not authorised by the company, and was the cause of the loss.  But in the present proceedings, the Plaintiff does not allege that HK Zhongxing converted the cheque that was deposited into the Account.  Unlike China Everbright – IHD Pacific Ltd, there was no matching between the payment of the proceeds of the cheque into the Account and any misapplication of such proceeds.  Even on the Plaintiff’s own case, there was a lapse of time between 22 February and 30 April 2008 before the Plaintiff has any right to demand repayment of the Sum.  Hence, the present case is wholly unlike the unusual circumstances found in China Everbright – IHD Pacific Ltd and arguably the established principle of conversion of only corporeal personal property is applicable.

103.  In all the circumstances, I am persuaded that there is substantial arguability with real prospect of success against the Plaintiff’s conversion claim.

(g)  Conspiracy

104.  The Plaintiff’s pleaded claim for conspiracy alleges that Huang and HK Zhongxing were co-conspirators.  This raises an interesting question as to whether Huang as sole director/shareholder can conspire with HK Zhongxing as a separate legal entity but at the same time Huang’s “alter ego”.

105.  Neither counsel addressed this issue in their written submissions.  It has been held that a criminal conspiracy between a “one-man” company and its sole director is an impossibility because it is not possible to find an agreement between two minds [23], but it has been suggested that “[this] might not be the case in a civil action where the controller had used the corporate machinery in what was alleged to be a conspiracy to damage the claimant”. [24]  In Taylor v Smyth [1991] IR 142, 165, McCarthy J noted that no authority was cited in support of extending the principle in R v Donnell to an action for civil conspiracy.  “In principle, it would seem invidious, for example, that the assets of a limited company should not be liable to answer for conspiracy where its assets had been augmented as a result of the action alleged to constitute the conspiracy.  Essentially, it would be permitting the company to lift its corporate veil as and when it suits.”

106.  In light of the above discussion and in the absence of detailed submissions by counsel, for the purpose of the Amended Summons, I will not find any defence with real prospect of success based on the above arguments.

107.  There is no dispute that the essential ingredients for conspiracy are as follows [25]:

“In order to make out a case of conspiracy the claimant must establish: (1) an agreement between two or more persons; (2) either, where the means are lawful, an agreement the real and dominant purpose of which is to injure the claimant or, where the means are unlawful, an agreement a purpose of which is to injure the claimant; and (3) that acts done in execution of that agreement resulted in damage to the claimant.”

108.  For lawful means conspiracy, Mr Lam submits that HK Zhongxing’s involvement in accepting the Sum and transferring it to Tai Lee was for the purpose of the Plaintiff’s participation in the Land Investment, so it cannot be said the combination between Huang and HK Zhongxing (if any) was for the predominant purpose of injuring the Plaintiff.  He argues that to the contrary the combination by Huang, HK Zhongxing and SZ Zhongxing might potentially benefit the Plaintiff if the Land Investment proved to be successful.

109.  Although there is no affidavit evidence that verifies HK Zhongxing’s transfer of the Sum to Tai Lee, Ms Lau concedes it is an essential element of lawful means conspiracy that the conspirators (ie Huang and HK Zhongxing) retained, misappropriated, spent and/or used the Sum and that such acts were done with the predominant purpose of injuring the Plaintiff.  Since I have found that in this respect HK Zhongxing has raised defence with real prospect of success or which could well be believed at trial, there is likewise strongly arguable defence to the Plaintiff’s claim based on lawful means conspiracy.

110.  For unlawful means conspiracy, Mr Lam complains that the Plaintiff has not pleaded the alleged unlawful means.  Ms Lau did not clarify this in her submissions, but I assume the Plaintiff relies on the plea of wrongful and/or unlawful retention, misappropriation, spending and use of the Sum by Huang and/or HK Zhongxing in breach of the Agreement and/or the Undertaking Agreement.  Again, since I have already found that in this respect HK Zhongxing has raised defence with real prospect of success or which could well be established at trial, there is likewise similar defence to the Plaintiff’s claim based on unlawful means conspiracy.

111.  More importantly, the plaintiff has to prove he has suffered loss or damage as a result of such conspiracy.  Even if the plaintiff can enter judgment by default, a conspiracy claim can only lead to interlocutory judgment for damages to be assessed and does not offer any basis for entering final judgment (such as the HK Judgment) for payment of a liquidated sum (such as the Sum in the present case).

(h)  Constructive trust

112.  According to Halsbury’s Laws of England 4^th ed 2007 reissue Vol.48 para.687 at pp.468-469,

“[a] constructive trust attaches by law to specific property which is neither expressly subject to any trusts nor subject to a resulting trust but which is held by a person in circumstances where it would be inequitable to allow him to assert full beneficial ownership of the property. Such person will often hold other property in a fiduciary capacity and it will be by virtue of his ownership of or dealings with that fiduciary property that he acquired the specific property subject to the constructive trust. A third party who receives property in circumstances where he has actual or constructive notice that it is trust property being transferred to him in breach of trust will, however, also be a constructive trustee of that property. As a general principle it may be said that property subject to a constructive trust must have come into the hands of the alleged trustee as a result of unconscionable dealing or in breach of a fiduciary obligation.”

113.  Mr Lam submits that there is no breach of contract, no unconscionable dealing and/or no breach of any fiduciary obligation whatsoever.  In the absence of the Plaintiff’s instructions to the contrary, the actions of Huang, HK Zhongxing and/or SZ Zhongxing were merely to carry out the purpose of the Plaintiff’s investment in the Land Investment.  Mr Lam further submits there was no fiduciary relationship between the Plaintiff and HK Zhongxing that might give rise to any constructive trust, and fiduciary relationship (if any) only existed between HK Zhongxing (as agent) and SZ Zhongxing (as principal), which means only the latter can complain against the former for any withholding of the Sum (which is denied).

114.  Ms Lau concedes that to maintain this cause of action the Plaintiff has to establish the existence as well as breach of the Undertaking Agreement to show that HK Zhongxing had actual and constructive notice that their retention, misappropriation, spending and use of the Sum was in breach of trust.  Since I have found there is real prospect of success in respect of HK Zhongxing’s defence against these contentions, there is likewise similar defence to this cause of action.

(i)  Set-off and counterclaim

115.  If the Plaintiff is able to establish its claim for the Sum (which HK Zhongxing denies), HK Zhongxong relies on the assignment of debt dated 25 May 2009 in respect of the HK Zhongxing Debt (which exceeded the Sum) to raise a defence of legal set-off between mutual liquidated debts [26] and to claim for any shortfall by way of counterclaim.  For the purpose of the Amended Summons, there is no dispute that there would be an arguable defence of legal set-off if there was a valid assignment of the HK Zhongxing Debt as alleged.  But was there a valid and effective assignment of debt?

116.  According to the written PRC legal opinion of廖治超律師 of 廣東舜華律師事務所 dated 15 December 2010 exhibited to Chow’s 2^nd affirmation dated 22 December 2010 in the WU Action,《中華人民共和國合同法》provides inter alia as follows:

“……

(2) 第七十九條: 債權人可以將合同的權利全部或者部份轉讓給第三人，但有下列情形之一的除外：

(一) 根據合同性質不得轉讓；

(二) 按照當事人約定不得轉讓；

(三) 依照法律規定不得轉讓。

(3) 第八十條: 債權人轉讓權利的，應當通知債務人，未經通知，該轉讓對債務人不發生效力。

(4)   第八十二條債務人接到債權轉讓通知後，債務人對讓與人的抗辯，可以向受讓人主張。”

117.  The assignment of debt dated 25 May 2009 from Jia Jie to HK Zhongxing is evidenced in writing as follows:

“鑑於：

A) [The Plaintiff]欠下[Jia Jie]債務，欠款本金為人民幣1678萬元(下稱“債務本金”) ……。該債項本金 …… 是經[the PRC Judgment]確認的債項。

B) …… [HK Zhongxing]同意根據於此所載條款及條件，將上述債項本金中的部份轉讓予[HK Zhongxing]。

現本協議認証如下：

1. [Jia Jie]以實益擁有人身份，特此將債務本金人民幣1678萬元中之部份，即人民幣600萬元之全部權益及利益絕對轉讓予[HK Zhongxing] ……。

2. [Jia Jie]及[HK Zhongxing]特此共同向[the Plaintiff]發出轉讓通知。

3. [Jia Jie]特此解除及永遠開釋[the Plaintiff]與債項有關的一切索償及要求，而[the Plaintiff]須將該債項妥為償還及清還予[HK Zhongxing]，代替償還及清還予[Jia Jie]。

4. [Jia Jie]特此向[HK Zhongxing]不撤銷地及無條件陳述及保證如下：

a) 該債項仍屬有效及存續，不含與該債項有關的任何產權負擔、留置權、押記、妥協、解除、棄權及交易或任何協議；及

b) [Jia Jie]有權根據此項轉讓列載的方式轉讓該債項的利益。

5. 本協議受中國法律管限，並按照中國法律詮釋。

6. 本協議一式兩份，簽約方各執一份，簽字蓋章後生效。”

118.  Chow claims that Jia Jie and HK Zhongxing gave written notice of assignment dated 25 May 2009 to the Plaintiff as follows:

“我等（下列簽署人）特此向[the Plaintiff]發出通知，[Jia Jie]根據於本通知日期訂立的一項轉讓，將[the Plaintiff]應付及所欠[Jia Jie]並須應要求償還的債項本金人民幣1678萬元中的部份即人民幣600萬元，絕對轉讓予[HK Zhongxing]，而我等特此要求[the Plaintiff]據此將上述債項人民幣600萬元給[HK Zhongxing]。”

Although the written PRC legal opinion of吳上杰律師 of Guangdong Huishang Law Firm dated 30 July 2009 exhibited to Chow’s 1^st affirmation states that “[Jia Jie]將其所認為的債權轉讓後，如果沒有通知債務人，該轉讓行為也不能對債務人產生效力”, the Plaintiff has not adduced any countervailing affidavit evidence to dispute service of the aforesaid written notice of assignment on them.

119.  The Code provides inter alia that:

(a) “第二審人民法院的判決、裁定，是終審的判決、裁定” (Article 158);

(b) “按照審判監督程序決定再審的案件，裁定中止原判的執行。裁定由院長署名，加蓋人民法院印章” (Article 185);

(c)  “發生法律效力的民事判決、裁定，當事人必須履行。一方拒絕履行的，對方當事人可以向人民法院申請執行，也可以由審判員移送執行員執行” (Article 212);

(d) “有下列情形之一的，人民法院應當裁定中止執行 : …… (五) 人民法院認為應當中止執行的其他情形。中止的情形消失後，恢復執行” (Article 232);

(e)  “有下列情形之一的，人民法院裁定終結執行 : …… (二) 據以執行的法律文書被撤銷的; …… (六) 人民法院認為應當終結執行的其他情形” (Article 233).

120.  Chow claims that HK Zhongxing is not entitled to any set-off because the Judgment Debt could not be assigned to other parties by way of assignment of debt.  According to the aforesaid PRC legal opinion of吳上杰律師 dated 30 July 2009, the PRC Judgment whilst pending appeal to the PRC 2^nd Court was not legally effective to support any recovery of the Judgment Debt, so Jia Jie could not assign the PRC Judgment Debt to third parties and the purported assignment of the HK Zhongxing Debt was not legally effective against the Plaintiff. Further, according to the written PRC legal opinion of 廖治超律師 of 廣東舜華律師事務所 dated 26 October 2009, the PRC Judgment and PRC Appeal Judgment were not legally effective or final and conclusive pending the PRC 3^rd Court’s decision on whether to accept the petition for re-trial.  According to the aforesaid PRC legal opinion of廖治超律師 dated 15 December 2010, ie after the PRC Re-trial Decision and pending the re-trial by the PRC 2^nd Court, the PRC Judgment was not legally effective (ie “[the PRC Judgment]將處於上訴階段而不發生法律效力，任何根據該判決書作出的司法行為和法律行為都不符合法律規定而無法律強制力” and “在[the PRC 3rd Court]指令再審階段，[the PRC Judgment]無法律效力”), and although “合法有效成立的債權可以轉讓，合法成立的債權債務依法受到法律强制力保護”, “[the PRC Judgment]所確定的債權轉讓給予第三人，而該等債權根據[the PRC Re-trial Decision]將不予生效和成立。因此，在再審階段，該等債權無法履行，亦無法獲得法律強制力的保護。[The Plaintiff]可以對[HK Zhongxing]提出不予履行的抗辯”.

121.  The aforesaid PRC legal opinion adduced by the Plaintiff does not say that the PRC Judgment was null and void, but merely suggests that its legal effect was suspended so that any legal action based on such judgment would also be suspended pending the re-trial at the PRC 2^nd Court.  In such circumstances, Ms Lau acknowledges that the assertion in paragraph 23 of her written submission that “[the] PRC Judgment has been set aside” is incorrect.  But she submits that stay of execution and suspension of the legal effect of the PRC Judgment means corresponding suspension of the legal effect of Jia Jie’s assignment of the HK Zhongxing Debt to HK Zhongzing.

122.  On the other hand, Mr Lam argues that since the PRC courts did not invalidate the PRC Judgment, it remains valid and effective notwithstanding the order for temporary stay of execution (中止執行) in contra-distinction to permanent stay of execution (終止執行).  He refers to the following PRC legal opinion of 胡珊律師 and 于錦朝律師 of 廣東都源律師事務所 dated 16 January 2011 which disagrees with the PRC legal opinion adduced by the Plaintiff:

(a)  Article 158 of the Code made clear that the PRC Appeal Judgment was “終審生效判決，終審生效判決在未被本院或上級人民法院撤銷之前是具有法律效力的，所以，[the PRC Appeal Judgment]仍有法律效力”.

(b)  “第三人依法受讓[Jia Jie]依據[the PRC Appeal Judgment]而取得的債權，第三人對債務人[the Plaintiff]享有上述債權，在[the PRC Appeal Judgment]未被撤銷之前上述受讓債權依法有效”.

(c)   Pursuant to Article 185 of the Code, the PRC Re-trial Decision “指令[the PRC 2^nd Court]對[the PRC Appeal Judgment]案件再審並中止原判決執行，[the PRC 3^rd Court]並未直接將[the PRC Appeal Judgment]撤銷，且無任何法律規定原審生效判決在再審期間無法律效力，所以[the PRC Appeal Judgment]在被依法撤銷之前的仍有法律效力，僅是中止執行而已，而非是終止執行”.

(d)  “由於再審案件正在審理過程中，所以，[the PRC Appeal Judgment]是否能繼續執行需要依據深圳市中級人民法院(2011)深中法民二再字第3號案件[ie the re-trial]判決結果而定”.

123.  Chen says that the legal viability of the PRC Judgment and the PRC Appeal Judgment was further supported by the PRC 1^st Court taking steps to enforce the PRC Judgment.  On 31 August 2010, ie after the PRC Re-trial Decision, HK Zhongxing received “協助凍結通知書” (2009)深龍法執字第11520號dated 30 August 2010 which states that the PRC Judgment had become legally effective, and that pursuant to Article 120 of the Code HK Zhongxing was requested to “協助凍結將被執行人[the Plaintiff]到期債權人民幣5000000元及港幣11045元” and “凍結期間不得向被執行人支付款項，否則[the PRC 1^st Court]將追究妨害執行的法律責任”.  Since this suggested that the PRC Judgment was still legally effective, HK Zhongxing wrote to Jia Jie on 12 November 2010 requesting it (a) to perform its obligation to assign the HK Zhongxing Debt under the assignment of debt, (b) to acknowledge the set-off of the HK Zhongxing Debt against the Sum, and (c) to guarantee that any application for enforcement of the PRC Judgment would be reduced by the sum of RMB¥6,000,000.00. On 15 November 2010, Jia Jie replied as follows:

“ 2. [HK Zhongxing]來函所述情況屬實，[Jia Jie]與[the Plaintiff]的合同糾紛案件經二審判決後，[Jia Jie]向[the PRC 1^st Court]申請強制執行有關民事判決，[the Plaintiff]未能清付判決款項RMB16,780,000.00元及利息，該案尚處於執行階段。

3. [HK Zhongxing]提及2009年5月25日與[Jia Jie]的「債權轉讓協議」，[Jia Jie]承認此協議的效力。

4. 就[HK Zhongxing]來函第6段提出的方案，[Jia Jie]全部同意。

5. 基於[Jia Jie]已將[the Plaintiff]所欠債項RMB16,780,000.00元中的RMB6,000,000.00元轉讓給[HK Zhongxing]，[Jia Jie]將此向有關方面包括[HK Zhongxing]、[the Plaintiff]、及[the PRC 1^st Court]和其他有依法有權執行的法院作出承諾和保證，從此信件日期之日起，[Jia Jie]從[the Plaintiff]所欠債項RMB16,780,000.00元中放棄和扣減RMB6,000,000.00元。

……”

124.  For the purpose of the Amended Summons, the parties have adduced conflicting PRC legal opinion on the legal effectiveness or otherwise of the PRC Judgment and of the assignment of the HK Zhongxing Debt pending the re-trial of the PRC Appeal Judgment, which is very much a matter of PRC (and hence foreign) law.

125.  There is no dispute that foreign law must be proved as a fact by skilled witnesses [27], but where evidence from such skilled witnesses on such question of fact is conflicting or obscure, the court may go a step further and examine and construe the passages cited in order to arrive at a satisfactory conclusion.  Further, where any foreign law has been determined in the High Court of Hong Kong, then in any civil proceedings any finding made or decision given on that question in the first-mentioned proceedings shall, if reported or recorded in citable form, be admissible in evidence for the purpose of proving such foreign law. [28]

126.  I have referred counsel to the following decisions of the High Court on the effect of the trial supervision or re-trial system under PRC law on the finality of PRC judgments: (a) 李祐榮訴李瑞群 [2007] 2 HKLRD 749, and (b) Wu Wei (伍威) v Liu Yi Ping (劉一萍) HCA 1452/2004, DHCJ Lisa Wong SC (unreported, 30 January 2009) and on appeal at CACV 32/2009 (unreported, 27 March 2009).

127.  In 李祐榮, the defendant failed at first instance and on appeal to the PRC People’s Courts, and the plaintiff sought summary judgment against the defendant in a Hong Kong court based on the PRC appeal judgment. The defendant argued that such judgment was not final and conclusive and therefore not enforceable in Hong Kong.  It was recognised that under PRC law, apart from a two-tier court system which allowed only one appeal to a higher level People’s Court from a lower level court, the Code allowed for “trial supervision” whereby a party to a case, the People’s Court or the Supreme People’s Procuratorate could, under circumstances specified in Article 179 of the Code, apply to the People’s Court where the original trial took place or to a higher level People’s Court for re-trial.  But in 李祐榮the defendant did not petition for re-trial, and the plaintiff obtained summary judgment against the defendant in Hong Kong.

128.  Cheung and Yuen JJA allowed the appeal on the basis that the issue of whether the “trial supervision” system per se rendered a PRC judgment inconclusive and not final involved complicated legal questions that could not be determined in the absence of trial. Cheung JA said at pp.760-761 as follows:

“ 27. 本案涉及的議題明顯是一項具有公眾重要性的議題。雖然王教授[ie the plaintiff’s PRC expert]對本席提供了珍貴的意見，但這也只是訴訟一方所提供的專家的書面意見。袁大律師作為法庭之友對案件持中立態度，他是以專業知識協助法庭，雖然他不是內地法律專家，但本席認為他對王教授的意見所作出的回應並不是泛泛之言，王教授是應該出庭作證、接受盤問及全面解釋他的意見。

……

   29.     在這情況下，本席認為適當的做法是案件需要進行正式的審訊。……”

Yuen JA also stated as follows at p.762:

“ 36. 況且，原告人的中國法律專家證人的證據也顯示，內地法院到現時為止就審判監督制度對法院判決的影響，看來還在發展階段中，理論上及實行上的限制，還未塵埃落定。因此，本席認為香港法庭決不能在簡易程序的申請中，斷定在審判監督制度下的內地法院判決是否‘最終及不可推翻的’判決。

   37.     無論如何，本席認為，香港法院是否應該(1)由於該審判監督制度存在，絕對地否定內地法院的判決是‘最終及不可推翻的判決’，或是(2)在甚麼情況下有關判決可被當作為‘最終及不可推翻的判決’，這重要及影響深遠的決定，應由法院經詳細考慮過雙方的法律專家意見(包括他們經受盤問過的證供後)才作出決定，法庭並不能在一簡易程序的申請中立下判斷。”

129.  Chung J in his dissenting judgment was of the view that the “trial supervision” system under PRC law per se did not render a PRC judgment inconclusive and not final.  He found such system similar to the circumstances under which an appeal could be brought against a judgment made by a Hong Kong court as provided in the RHC. Further, Hong Kong courts also had power to order re-trial.  He noted that these local provisions would not render a Hong Kong judgment inconclusive and not final. In any event, the PRC judgment in that case was not intended to be merely provisional.

130.  In Wu Wei, DHCJ Lisa Wong SC said at para.99 that:

“99.     …… In the context of a PRC judgment, what may potentially render the judgment not final and inconclusive is the “trial supervision” system under Chapter 16 of the [Code] under which in addition to a party to the case, the People’s Court or the Supreme People’s Procuratorate can, under specified circumstances, apply to the People’s Court before whom the original trial took place or to a higher level People’s Court for a re-trial. Essentially, those circumstances were where the judgment were erroneous or based on insufficient evidence, where the judgment was obtained in violation of the prescribed procedure and the judicial officers conducting the original trial were guilty of embezzlement, corruption or other malpractice (Lee Yau Wing v Lee Shui Kwan, supra). Hence, it appears to me that the dismissal of the Plaintiff’s application for a re-trial by [the PRC 3^rd Court] is not a complete answer.

   100.   …… In any event, in Lee Yau Wing v Lee Shui Kwan, supra, the Court of Appeal held by a majority (Cheung and Yuen JJA) that whether the existence of the “trial supervision” system per se rendered a PRC judgment inconclusive and not final involved complicated legal questions that could not be determined in the absence of trial.

   101.   In the circumstances, the PRC Judgment merely adds to the serious issues to be tried in this action.”

On appeal, Tang VP at para.7 referred to李祐榮and agreed that the question as to whether the PRC judgment in the case before him should be recognised as “final and conclusive” “必須在正審之後才可以作出裁定”.

131.  In my view, the legal effect of the PRC Judgment is not a simple matter and should not be dealt with in summary way. Given (a) PRC law is a matter of fact to be proved by PRC legal experts, (b) there is fundamental conflict between the PRC expert opinion adduced by the Plaintiff and that by HK Zhongxing as to the effect of re-trial on the PRC Judgment and on the assignment of the HK Zhongxing Debt, (c) the guidance in the above authorities that such issue should be resolved at trial, (d) the dissenting judgment of Chung J in李祐榮 to the effect that the trial supervision or re-trial system under PRC law did not undermine the final and conclusive nature of any PRC appeal judgment under the two-tier court system, I am convinced that HK Zhongxing’s assertion of there being a valid and effective assignment of the HK Zhongxing Debt in its favour to buttress the defence of set-off has real prospect of success and should be left to trial.

132.  To accede to Ms Lau’s submission that suspension of the legal effectiveness of the PRC Judgment pending the re-trial as directed by the PRC 3^rd Court leads to suspension of the legal effectiveness of the assignment of the HK Zhongxing Debt is tantamount to accepting the PRC legal opinion adduced by the Plaintiff and ignoring not just the PRC legal opinion by HK Zhongxing but also Chung J’s reasoning in 李祐榮 (which arguably is more broadly applicable than the limited factual context of that case where the defendant did not petition for re-trial).  There is no persuasive reason why all these matters should be ignored at this stage of the proceedings when all HK Zhongxing needs to establish is a defence with real prospect of success.  In any event, I am not persuaded by Ms Lau’s submissions that a fair reading of the PRC Pre-trial Decision and the provisions of the Code will necessarily lead to the construction she advocated. However, for the present purpose, I do not take into account the steps taken by the PRC 1^st Court for enforcement of the PRC Judgment after the PRC Re-trial Decision because such decision directed a temporary stay of execution.

(j)  Summary

133.  In all the circumstances and looking at the totality of the affidavit evidence, I am of the view that HK Zhongxing has discharged its burden in showing defence arguments which have real prospects of success or which could well be established at trial.

VI.  Discretion

134.  Ms Lau submits that even if I were minded to set aside the HK Judgment against HK Zhongxing, I should impose a condition requiring HK Zhongxing to pay a sum of HK$5,484,000.00 into court.

135.  The relevant principles can be found in the judgment of Ribeiro JA (as he then was) in L & M Specialist Construction Ltd v Wo Hing Construction Co Ltd [2000] 3 HKLRD 262, 268-269.  Whilst he agreed that Order 13 rule 9 of the RHC made clear the court had jurisdiction to impose appropriate terms for setting aside default judgment, “[most] of these [examples] involve terms requiring payment of the other party’s costs”.  The learned judge referred to examples of conditions requiring money be brought into court in Richardson v Howlett (1892) 8 TLR 445 where the defendants appeared to play for time and the defence was shadowy (although in modern times a shadowy defence might not be sufficient for setting aside a default judgment) and City Construction Contracts (London) Ltd v Adan (unreported) The Times January 4, 1988 where it was said the imposition of such condition was “not to punish the defendant but to encourage the proper conduct of the litigation and to provide a measure of security for the plaintiff”.  The learned judge went on to say as follows:

“In my view, it must be rare that a payment into court is made a judgment of setting aside a judgment. It may in theory do so, …… However, there is a certain logical tension between a court deciding that the defendant has real prospects of succeeding in his defence and the court considering at the same time that the defence is in shadowy realms. While I do not consider such an outcome impossible, I would expect it to be exceedingly rare. I do not consider the present case to come within that category.

…… As I have pointed out, the procedural infraction in the present case is very minor and no basis has been made out for providing the present plaintiff with security, either for its claim or for its costs.

The abovementioned examples of course are not exhaustive. However, to my mind, what they show is that where the 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 such as that imposed here. There must, in other words, be some material upon which the court can exercise its discretion in that manner: Ratnam v Cumarasamy [1965] 1 WLR 8.” (my emphasis)

136.  The above principles were endorsed by Ma J (as he then was) in Dah Chong Hong (Engineering) Limited v Boldwin Construction Company Limited HCA 1291/2002 (unreported, 11^th October 2002) at paras.29-31.  He went even further as follows: “I would venture to add that in most cases, a suitable order for costs will often be the only appropriate term to impose on a defendant.”

137.  I respectfully agree with all of the above observations. Here, the “procedural infarction” was not substantial.  A failure to promptly notify the Companies Registry of change of address of registered office is not such as to attract the stringent condition suggested.  I am also not persuaded that in taking out the Summons on 14 July 2009 the application was intolerably late.  Further, notwithstanding Ms Lau’s criticisms of HK Zhongxing’s case which I have carefully considered and analysed above, I am not prepared to order that HK Zhongxing should be asked to pay money into court as a condition of setting aside the HK Judgment.

VII.  Conclusion

138.  In the circumstances, the HK Judgment is set aside unconditionally.  The relief sought in the Amended Summons set out in paragraph 6(c) above is therefore redundant, and I make no order accordingly.  I also grant the following case management directions:

(a) HK Zhongxing do within 7 days from today file Acknowledgment of Service;

(b) HK Zhongxing do within 14 days from today file and serve their Defence and Counterclaim  as per the Amended Draft, and such Defence and Counterclaim shall be accompanied by its statement of truth;

(c)  leave to the Plaintiff to file and serve Reply and Defence to Counterclaim within 28 days thereafter, and such Reply and Defence to Counterclaim shall be accompanied by its statement of truth;

(d) within 28 days after the close of pleadings, the Plaintiff and HK Zhongxing do respectively file and serve timetabling questionnaire on each other.

The Plaintiff and HK Zhongxing should comply with Order 25 of the RHC and, where appropriate, the Plaintiff should promptly take out a case management summons.

139.  I further direct that within 14 days from today the Plaintiff and HK Zhongxing do jointly report in writing to Barma J in the WU Action the results of the Amended Summons and seek all necessary and appropriate case management directions for the expeditious disposal of the Petition and the Petition Summons with a view to saving costs and achieving procedural economy.

140.  I also grant a costs order nisi that save and except for costs of and occasioned by the Hearing before me, HK Zhongxing should pay to the Plaintiff costs of the Summons and Amended Summons (including all costs reserved, if any) in any event to be taxed if not agreed with certificate for counsel.  The HK Judgment is a regular judgment, and HK Zhongxing in making the present application seeks an indulgence of the court, so they should bear the costs of the Summons and Amended Summons up to the time when the Plaintiff had sufficient information to reasonably and realistically consider whether they should oppose the application.  Since (a) HK Zhongxing only abandoned their challenge against the HK Judgment on the grounds of irregular service of the Writ of Summons and forum non conveniens by way of Mr Lam’s written submissions for the Hearing, (b) both the Plaintiff and HK Zhongxing filed and served further affirmations as late as in late December 2010 and mid-January 2011 in the WU Action, which were adopted for the purpose of the Amended Summons, and (c) HK Zhongxing only presented the Amended Draft at the eve of the Hearing, it is appropriate that HK Zhongxing should bear the costs of the Summons and Amended Summons save and except for costs of and occasioned by the Hearing before me.

141.  As regards costs of and occasioned by the Hearing, even though HK Zhongxing successfully set aside the HK Judgment, I do not lose sight of the fact that their application was made to enable them to raise a defence and counterclaim.  It is therefore inappropriate to order the Plaintiff to immediately bear any part of the costs of the application given the possibility that HK Zhongxing’s defence may eventually turn out to be unmeritorious.  In the circumstances, I grant a costs order nisi that costs of and occasioned by the Hearing before me be HK Zhongxing’s costs in the cause with certificate for counsel.  Having considered the nature of the application and the arguments raised by counsel, I am not persuaded this is a matter fit for two counsel.

142.  I have debated whether to require summary assessment of costs in respect of the costs order nisi in paragraph 140 above.  However, giving the overlap and duplication with the WU Action, including adoption of affidavits used in those proceedings, conventional taxation of costs with more detailed analysis will be fairer to the parties.

VIII.  Postscript

143.  As I informed counsel at the Hearing, it has given me concern, especially after implementation of the Civil Justice Reform, that an application to set aside default judgment is only disposed of 1½ years after issuance of the relevant summons.  Both parties have taken a leisurely approach to producing affidavits, and neither party is able to offer any good reason for the delay for almost a year in restoring the Amended Summons for substantive hearing (see paragraphs 9 and 12 above).  After all, it is not necessary for the PRC proceedings to run their full course before the substantive hearing since the PRC appeal and re-trial procedures are set out in PRC legislation and PRC legal opinion can be obtained on such basis.  In any event, this only goes to one line of defence amongst many put forward by HK Zhongxing.

144.  Not only is the aforesaid delay tantamount to flaunting the court’s case management directions for adjourning the Amended Summons for substantive hearing, such folly is compounded by the parallel WU Action and the corresponding deferral of the substantive hearing of the Petition and the Petition Summons.  It is of no benefit to either HK Zhongxing and/or their creditors to keep the Petition in limbo for over 1½ years.

145.  It is the duty of both the Plaintiff and HK Zhongxing and their legal representatives to assist the Court in furthering the underlying objectives of ensuring expeditious progress of litigation, saving costs and encouraging procedural economy.  Had the parties applied for the Summons or Amended Summons to be heard by a Judge of the Court of First Instance together with the Petition and the Petition Summons and promptly set those matters down for substantive hearing, there would have been no need to file parallel affidavits in both sets of proceedings and it is highly probable that all outstanding matters would have been resolved long before now. Both parties are directed to bring the above matters to the attention of (a) the Taxing Master for the purpose of taxation of the above costs orders and (b) the Companies Court when dealing with the question of costs.

_____________________

[1]     Lo Wing Kwong & Lau Heung Wa trading as Hsin Pao Frozen Foods (Bun Kee) v Grand Lord Seafood Restaurant operated by Hoover Eternity Limited DCCJ 148/2005, Deputy District Judge A Kot (unreported, 8 June 2006)

[2]     Hong Kong Civil Procedure 2011 Vol.1 para.13/5/1 at p.203

[3]     Premier Fashion Wears Ltd v Li Hing Chung [1994] 1 HKC 213

[4]     Premier Fashion Wears Ltd v Li Hing Chung [1994] 1 HKC 213, 219-220 per Godfrey JA and Tong Yi Sang & anor v Fung Law & Ng & ors [1993] 2 HKC 665

[5]     Guangdong International Trust and Investment Corp Hong Kong (Holdings) Ltd v Yuet Wah (Hong Kong) Wah Fat Ltd & anor [1997] 2 HKC 696, Morigood Development Ltd v Sunny Trading Co (a firm) [1999] 2 HKC 710 and L & M Specialist Construction Ltd v Wo Hing Construction Co Ltd [2000] 3 HKLRD 262

[6]     Morigood Development Ltd v Sunny Trading Co (a firm) [1999] 2 HKC 710 and Chekiang First Bank Limited v Ng Chun Hing Benjamin HCA 3473/2000, Ma J (as he then was) (unreported, 12^th December 2001) para.13

[7]     Chekiang First Bank Limited v Ng Chun Hing Benjamin HCA 3473/2000, Ma J (as he then was) (unreported, 12^th December 2001) para.14

[8]     Premier Fashion Wares Ltd v Li Hing Chung [1994] 1 HKC 213

[9]     EBM Co Ltd v Dominion Bank [1937] 3 All ER 555, 564-565 and Williams and Humbert Ltd v W&H Trade Marks (Jersey) Ltd & ors [1985] 2 All ER 619, 628 per Fox LJ and on appeal to the House of Lords at [1986] 1 AC 368, 429 per Lord Templeman

[10]   Bowstead and Reynolds on Agency 19^th ed para.9-103 at pp.613-614 and Portman Building Society v Hamlyn Taylor Neck (a firm) [1998] 4 All ER 202, 207

[11]   Bowstead and Reynolds on Agency 19^th ed para.9-102 at pp.612-613 and Ellis v Goulton & anor [1893] 1 QB 350

[12]   Bowstead and Reynolds on Agency 19^th ed para.9-102 at pp.612-613

[13]   Portman Building Society v Hamlyn Taylor Neck (a firm) [1998] 4 All ER 202, 207

[14]   Bowstead and Reynolds on Agency 19^th ed para.9-102 at pp.612-613

[15]   Alco International Limited v Akai Electronic Co Ltd [2000] 3 HKC 724, 730, which held that although a claim for loss of profits arising from breach of contract may be quantified, it is not a liquidated claim but is a claim for damages that must be assessed by the court; so in that case, the defendant was not entitled to legal set-off based on their counterclaim but only to an equitable set-off

[16]   Atkin’s Encyclopedia of Court Forms in Civil Proceedings 2^nd ed (1995 issue) Vol.27 para.7 at pp.254-255

[17]   Goff & Jones, The Law of Restitution 7^th ed (2007) para.4-026 at p.207

[18]   Orakpo v Manson Investments Ltd [1978] AC 95, 104 per Diplock LJ, Woolwich Building Society v IRC [1993] AC 70, 196-197 per Lord Brown-Wilkinson, Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, 578 per Lord Goff of Chieveley, and Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1994] 1 WLR 938, 946-947 per Dillon LJ

[19]   Shanghai Tongji Science & Technology Co Ltd v Casil Clearing Ltd [2004] 1 HKLRD 548, Yew Sang Hong Ltd v Housing Authority [2008] 3 HKLRD 307 and Takahashi v Cheng Zhen Shu [2010] 1 HKLRD 603

[20]   Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961, 1004 per Lord Woolf

[21]   China Everbright – IHD Pacific Ltd v Ch’ong Poh (see (2005) 5 HKCFAR 630)

[22]   Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, 559, Man Won Company Limited  anor v Tay Vi Bing (also known as Eddy Tay; also known as Cheng Wai Ming) & ors CACV32/1990 (unreported, 27 September 1991) paras.41-43 and Silver Stone Development Limited & anor v Lau Kwong Ching, James & ors CACV251/2006 (unreported, 8 May 2007) para.15(2)

[23]   R v McDonnell [1969] 1 QB 233

[24]   Clerk & Lindsell on Torts 20^th ed para.24-93 at p.1671

[25]   Halsbury’s Laws of England 4^th ed reissue Vol.45(2) para.697 at p.453

[26]   Karpex (HK) Ltd v Yasmine Printing (China) Ltd [2008] 1 HKLRD 199

[27]   Phipson on Evidence 17^th ed para.33-75 at p.1136

[28]   Section 59(2)(a) of the Evidence Ordinance Cap.8 and alsoLam Chit Man（林哲民）t/a Yat Cheong Electric Co (transliteration)（日昌電業公司）v Cheung Shun Lin（張順連）[2001-2003] HKCLRT 230 and 243