KO SIN YUN v. CHAN CHUEN

CACV 147/2006 and CACV 198/2006

(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 147 OF 2006 (CACV 147/2006)

(ON APPEAL FROM DCCJ 6693/2004)

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BETWEEN

CIVIL APPEAL NO. 198 OF 2006 (CACV 198/2006)

(ON APPEAL FROM HCB 4824/2005)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA :

1. I agree with the reasons for judgment of Cheung JA.

Hon Cheung JA :

2. We dismissed the 1^st defendant’s appeals at the conclusion of the hearing.  I now give my reasons.

Facts

3. On 21 December 2004 the plaintiff issued a writ against the 1^st and 2^nd defendants claiming the sum of $600,000 with interest.  As this appeal only concerns the 1^st defendant I will confine the discussion to the case against him.

4. The claim against the 1^st defendant was based on a loan as evidenced by a memorandum of loan dated 25 September 1998 whereby the plaintiff agreed to lend the 1^st defendant $600,000 which he agreed to repay by 25 January 1999. 

5. The plaintiff duly lent $600,000 to the 1^st defendant but despite demands the 1^st defendant did not repay the money to him. 

6. Apart from $600,000 the plaintiff also claimed interest on this sum pursuant to sections 49 and 50 of the District Court Ordinance, Cap. 336 at such rate and for such period as the Court may decide. 

7. On 15 February 2005 the plaintiff entered judgment against the 1^st defendant by reason of his failure to file any notice of intention to defend.  The judgment was for the sum of $600,000 together with interest at the rate of 8% per annum from 21 December 2004 to the date of the judgment and thereafter at judgment rate until payment. 

8. Based on the default judgment the plaintiff issued a statutory demand on the 1^st defendant on 6 April 2005.  The 1^st defendant failed to comply with the demand and on 29 June 2005 the plaintiff presented a bankruptcy petition against him. 

9. The 1^st defendant applied to set aside the judgment by summons dated 16 November 2005. 

10. On 23 February 2006 H H Judge H C Wong set aside the judgment but ordered costs of the application to be borne by the 1^st defendant. 

11. After the 1^st defendant successfully set aside the default judgment the plaintiff applied to withdraw the bankruptcy petition.  Barma J allowed the plaintiff to withdraw the bankruptcy petition but ordered costs of and occasioned by the bankruptcy proceedings to be borne by the 1^st defendant.

12. The 1^st defendant obtained leave to appeal against both sets of costs orders. 

Service of the writ

13. The 1^st defendant claimed that the service of the writ of summons was irregular and defective.  However this was rejected by Judge Wong who found that the writ was properly served on him.  She, however, set aside the default judgment on the basis that the 1^st defendant has a meritorious defence. 

The 1^st defendant’s caseon the loan

14. The 1^st defendant claimed that the loan was given on 26 January 1998 and he signed an IOU for the loan.  The IOU was renewed on 25 May 1998 and 25 September 1998 respectively.  The 1^st defendant’s case is that he had repaid the loan by way of partial payments made from time to time.  He claimed that by January 2002 he had repaid $622,000 to the plaintiff. 

The plaintiff’s case on the loan

15. The plaintiff accepted that the loan was first made on 26 January 1998.  It was repayable on 25 May 1998.  The 1^st defendant was required to pay interest at 3% per month on the loan.  In January 1998 the 1^st defendant gave the plaintiff four cheques : the first was for $600,000 payable on 25 May 1998 and the other three were for the sums of $18,000 each payable on 25 February, 25 March and 24 April 1998 respectively.  These three cheques represented the interest on $600,000.

16. Then on 25 May 1998 the 1^st defendant asked for an extension of four months to repay the loan.  He further gave the plaintiff five cheques.  The first was for $600,000 payable on 25 September 1998.  The other four were for the sums of $18,000 each payable on 25 May, 25 June, 25 July and 25 August 1998 respectively. 

17. On 25 September 1998 the loan was extended for four further months at the request of the 1^st defendant.  Again the 1^st defendant gave a cheque of $600,000 which was post-dated to 25 January 1999 and four $18,000 cheques. 

18. The 1^st defendant had signed a total of three IOUs dated 26 January, 25 May and 25 September 1998 respectively.  After the last IOU expired the 1^st defendant was unable to settle the loan.  However he refused to sign another IOU.  He also failed to keep his promise to pay interest to the plaintiff on a regular basis.  According to the plaintiff, after repeated requests by him the 1^st defendant deposited some money as interest into either the plaintiff’s personal bank account or the plaintiff’s company account.

19. The plaintiff stated that the payments made by the 1^st defendant were agreed to be interest payments of the loan of $600,000. 

20. The plaintiff claimed that he was advised by his legal adviser at the time when instructions were given to commence these proceedings that he might have difficulty in claiming payment of interest at the rate as agreed between the parties.  In order not to complicate the matter he therefore did not claim in the statement of claim the agreed interest at the rate of 3% per month.  But this was made without prejudice to his right to claim against the defendants. 

Costs on setting aside irregular judgment

21. Generally speaking if an irregular judgment is set aside then the plaintiff should be ordered to bear the costs of the setting aside of the default judgment because the judgment was not properly obtained in the first place.  However where a judgment was set aside not because of it being irregular but because of a meritorious defence the general rule is that the defendant should bear the costs of the application to set aside the default judgment.  As an alternative the costs of the application can be in the cause of the action. 

Judgment for an excessive amount

22. The point now taken by Mr. Hung, counsel for the 1^st defendant, is that the judgment was an irregular judgment in that it was a judgment entered for an excessive amount.  He relied on the cases of Hughes v. Justin [1894] 1 Q. B. 667 and Muir v. Jenks [1913] 2 K. B. 412.  In both cases the evidence showed that the plaintiffs had entered judgments for an amount which was excessive.  The defendants had made partial payments to the plaintiffs before the judgments were signed.  On the basis that the judgments were irregular the court ordered costs of the setting aside of the judgments to be borne by the plaintiffs. 

23. In this case the 1^st defendant showed that between 25 February 1998 and 10 January 2002 he had paid a total of $622,000 to the plaintiff.  Initially there were payments of $18,000 to the plaintiff, then on 29 April 1999 there was a payment of $100,000 and thereafter there were sums of varying amounts ranging from $23,500 to $5,000 being paid each month to the plaintiff. 

24. Mr. Hung submitted that the subsequent sums starting from the payment of $100,000 could not be payment of interest and they must be payment of the loan itself and hence the judgment was entered for a larger sum than was due to the plaintiff. 

Issue to be tried

25. I do not consider that at this stage one can conclude from the evidence that the $100,000 and the various sums paid by the 1^st defendant were in the nature of payment of the principal and not by way of interest such that the judgment was entered for an excessive amount.  In my view whether the sums paid were principal or interest is an issue that can only be properly determined after the evidence is heard. 

26. The state of evidence before Judge Wong was that the nature of these payments was in dispute.  There was no clear admission that the payments were not by way of interest and the evidence did not clearly suggest that the only conclusion to be drawn from the circumstances of the case is that the payments were principal repayments.  This being the case Judge Wong clearly was entitled to impose costs against the 1^st defendant. 

27. It should be borne in mind that after judgment was entered against the 1^st defendant and before he took out the application to set aside the judgment, his former solicitors had actually written to the plaintiff claiming that the 1^st defendant had lent the plaintiff interest-free loans in the total sum of $508,500.  The letter further alleged that the plaintiff had failed to repay $508,500 to the 1^st defendant and if the sum was not paid within seven days legal proceedings would be instituted against him without further notice.  This was a most extraordinary assertion and was one taken by the 1^st defendant shortly before he filed his affirmation in which he admitted the loan but claimed that he had made repayments to the plaintiff.  The two positions were totally contradictory. 

28. I would further add that if indeed the 1^st defendant had been repaying the loan I really cannot see why he should on 25 May and 25 September 1998 give another two cheques of $600,000 each to the plaintiff.  It would be odd for him to do so if indeed he had been repaying the principal sum.  Even if security for the loan was required, I cannot see why the security should remain at $600,000 when partial repayment of the principal had been made. 

29. Faced with this and other circumstances of this case I do not think Judge Wong could be faulted for ordering costs against the 1^st defendant.  

The amendment

30. On 28 April 2006 the plaintiff amended his statement of claim.  Paragraph 21 of the amended statement of claim pleaded that

‘ In or about September 2000, the 1^st and 2^nd Defendants requested the Plaintiff to give more time for the 1^st Defendant to make the repayment of the Loan and to adjust the interest rate thereon.  It was subsequently agreed between the Plaintiff, the 1^st Defendant and the 2^nd Defendant, that:-

(i) The payments of the 1^st Defendant under paragraph 19 including a lump sum of HK$100,000.00 were counted as partial payment of interest under the Loan, during the period between January 1999 and August 2000.

(ii) The Loan in the sum of HK$600,000.00 together with adjusted interest thereon at the agreed sum of HK$120,000.00 shall be repaid by the 1^st Defendant by 144 instalments in the sum of HK$5,000,00 per month commencing from September 2000.  Any money paid by the 1^st Defendant would be used for payment of interest first.

(iii)      The 2^nd Defendant would act as the guarantor in favour of the 1^st Plaintiff to guarantee the repayment by the 1^st Defendant.’

31. Mr. Hung submitted that the substratum of the plaintiff’s claim was completely changed by the amendment and faced with this new stand the costs order that was made against the 1^st defendant was incorrect.  Even if costs is not to be given to the 1^st defendant the court should at least order costs in the cause of the action. 

32. I am also unable to accept this submission of Mr. Hung.  I do not consider that the amendment to the statement of claim betrayed a fundamental difference in the plaintiff’s case to the extent that this Court should make a different type of costs order. 

33. In any event, all this happened after the costs order was made on 23 February 2006.

Costs order made by Barma J

34. The costs order made by Barma J was based on the fact that a regular judgment had been entered against the 1^st defendant who had failed to set aside the judgment promptly.  This being the case I cannot see how Barma J’s order of costs can be faulted.  

Conclusion

35. Accordingly the appeals were dismissed with costs to the plaintiff. 

Hon A Cheung J :

36. I agree.