XCHRX COSEC NOMINEES LTD. AND ANOTHER v. LAU HON MING ALAN

HCA 9775/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9775 OF 2000

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J U D G M E N T

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Introduction

1. This is an appeal against the order of the master dismissing the defendant's application to set aside the default judgment.

2. On 1 November 2000, the plaintiffs issued the writ endorsed with a statement of claim, claiming against the defendant on a loan and several dishonoured cheques, totalling more than $1.1 million with interest. The writ was served on the defendant by insertion through the letter box at Room 1904, Block 29, Hang Fa Chuen, Hong Kong ("the Hang Fa Chuen address") on the following day.

3. The 2nd plaintiff, the defendant and one Sileigh Holding Limited, a company of which the defendant is a director, are all involved in another High Court Action, HCA 4793 of 2000 ("the earlier action"). By a letter dated 2 November 2000, the plaintiff's solicitors sent a copy of the writ in the present action to the solicitors representing the defendant in the earlier action for information. On 14 November, the defendant's solicitors wrote back stating that they did not have instructions to accept service of the present proceedings.

4. The defendant did not file any acknowledgment of service. In the event, the plaintiff obtained the default judgment on 1 December 2000. The setting aside application was taken out on 11 December, but was dismissed by the learned master on 2 March 2001. At that hearing, the defendant appeared in person.

Principal ground

5. The principal ground relied on by the defendant to set aside the judgment is that it was irregular, the writ having not been duly served on him according to the rules. His evidence as disclosed in his affirmations in support may be summarized thus.

6. According to the 1999 annual return of Sileigh filed with the Company Registry on 1 June 1999 ("the 1999 annual return"), the defendant's residential address was the Hang Fa Chuen address whereas Sileigh's registered address was at Room 1806, 18/F., Westlands Centre, 20 Westlands Road, Quarry Bay, Hong Kong ("the Westlands Road address"). The defendant used to live at the Hang Fa Chuen address. By a tenancy agreement dated 6 July 1999, Sileigh rented Flat G, 28/F, Ngan Sing Mansion, Tai Koo Shing, Hong Kong ("the Tai Koo Shing address"). The defendant then moved out from the Hang Fa Chuen address and lived there.

7. In March 2000, the defendant caused a notification of changes of registered address for Sileigh and a notification of changes of secretary and directors to be filed with the Company Registry on 10 and 17 March separately. Sileigh's registered address was changed to Workshop A7, 11/F, Block A, Kailey Industrial Centre, 12 Fung Yip Street, Chai Wan, Hong Kong ("the Fung Yip Street address"). The defendant's residential address was stated to be Block F, 9/F, Guo Sheng House, Guo Zhan Estate, Bu Ji, Shenzhen City, P.R. China ("the Shenzhen address"). His address was so stated because the defendant had to spend most of his time in the Mainland developing business. Sileigh's annual return dated 20 April 2000 and filed with the Company Registry on 22 August 2000 ('the 2000 annual return") had incorporated the above changes.

8. On 15 May 2000, the earlier action was commenced. The writ was served on Sileigh at the Fung Yip Street address and on the defendant at the Hang Fa Chuen address. By then, the defendant was no longer living there. But he received the writ served on the company at the Fung Yip Street address. He therefore did not take any issue on the purported service of the writ on him at the Hang Fa Chuen address. Solicitors were then instructed to handle the matter.

9. On 20 May 2000, the plaintiff's solicitors issued a letter before action for the present proceedings to the defendant. It was sent to Room 1301-2, 13/F, Trend Centre, 29-31 Cheung Lee Street, Chai Wan, Hong Kong. This was the address of another company, for which the defendant was then working.

10. The defendant contended that by November 2000, the public records with the Company Registry already showed that his residential address was the Shenzhen address. Thus, the Hang Fa Chuen address could not have been his last known address to the plaintiffs.

11. The defendant further complained that he had never received the writ. Although solicitors acting for him in the earlier action did receive the writ, they had not informed him so. On 3 November 2000, there was a hearing of an order 14 application by the plaintiff in the earlier action. At about noon, the defendant called the handling solicitor, inquiring about the result of the application. He also told the solicitor that he was on his way to the Mainland and would not come back until sometime in December. The solicitor did not advise him that they had received the writ.

12. In reply, the plaintiffs through the 2nd plaintiff's affirmations made a couple of points on service.

13. First, the Hang Fa Chuen address was the defendant's address last known to the 2nd plaintiff and his solicitors. The 2nd plaintiff had known the defendant for years. The defendant had all along resided at the Hang Fa Chuen address. He was not aware of the defendant having moved to the Tai Koo Shing address in July 1999 or that he had established the Shenzhen address later. According to his solicitors, before the commencement of the earlier action, they had available to them, as latest public records on Sileigh, the 1999 annual return and the notification of change in its registered address filed on 10 March 2000. They did not have the notification concerning the change of the defendant's residential address filed on 17 March 2000. Thus, the writ in the earlier action was served on Sileigh at the Westlands Road address and on the defendant at the Hang Fa Chuen address. The defendant had not made any complaint on the service at the Hang Fa Chuen address. Before the commencement of the present proceedings, the plaintiff's solicitors had not carried out an up-dated company search on Sileigh because it was thought unnecessary. After all, Sileigh was not sued here. Thus, the last known address of the defendant according to the latest public records then available to the plaintiff was all along the Hang Fa Chuen address. The writ in the present action was therefore served at that address.

14. Secondly, the plaintiffs contended that the defendant must have been aware of the existence of the writ. The writ together with the letter dated 2 November 2000 was faxed to the defendant's solicitors in the earlier action at about 12.30 p.m. on that day. Thus, they must have received the writ before the defendant spoke to the handling solicitor on the phone on the following day. It would be very surprising if the solicitor did not advise him of the writ over the conversation. Further, according to the letter of 14 November, it was apparent that the defendant was aware of the existence of the writ and decided not to appoint the solicitors to represent him.

Regular or irregular service?

15. A writ for service on a defendant within the jurisdiction may be served on him by insertion through the letter box at his usual or last known address: Order 10 rule 1(2). The date of service shall, unless the contrary is shown, be deemed to be the seventh day after the date of insertion: rule 1(3).

16. The applicable principles are well established. They may be summarized as follows:

(1) The phrase "last known address" in rule 1(2) means the defendant's address last known to the plaintiff. It matters not perhaps with further inquiry, a different address might have been discovered: Law Kwok Hung v Tse Ping Man & Others [1999] 4 HKC 397. A defendant's last known address must have been intended to be an alternative to a defendant's usual address in case the plaintiff was unaware of a recent change in defendant's usual address: Guangdong International Trust and Investment Corporation Hong Kong (Holdings) Ltd v Yuet Wah (Hong Kong) Wah Fat Ltd & Others [1997] 2 HKC 696.

(2) The phrase "within the jurisdiction" in rule 1(2) applies to the defendant, and not the service of the writ. Unless the defendant was within jurisdiction at the time of service, the service was invalid: Barclays Bank of Switzerland Ltd v Hahn [1989] 1 WLR 506, followed in Wing Lung Bank Ltd v Ho Man Iam [1999] 3 HKC 368.

(3) However, a plaintiff or a defendant could displace the deemed date of service by proving that the defendant had acquired knowledge of the writ at some other date. That is apparent from the phrase "unless the contrary is shown" in rule 1(3): Barclays Bank of Switzerland Ltd v Hahn, supra, followed in Wing Lung Bank Ltd v Ho Man Iam, supra.

(4) On a true construction of rule 1(2), service was duly effective when the proceedings were brought to the notice of a defendant and not on merely delivery of the writ to his last known address: Forward v West Sussex Country Council & Others [1995] 1 WLR 1496, followed in Desirable International Fashions Ltd v Chiang Shi Chau [1997] 3 HKC 170; Chu Kam Lun v Yap Lisa Susanto [1999] 3 HKC 378, CA; Redland Concrete Ltd v Hing Lee Construction Co Ltd & Another, HCA 8140 of 1997, unreported, (25 June 1999); Kwan Kam Wah v Chan Wai Ming [2000] 2 HKC 378. This proposition is different from the view expressed by the Court of Appeal in Honour Finance Co Ltd v Chui Mei Mei [1989] 2 HKLR 146. There, the emphasis of the Court was apparently place on the delivery of the original process rather than notice of that: see pp 149-150. But after Chu Kam Lun, which is the latest judgment of the Court of Appeal reported on this subject matter, it would appear that this view is no longer preferred.

17. With the above principles in mind, I now turn to consider if the service of the writ in the circumstances described above was valid.

18. The first question is whether the Hang Fa Chuen address was the last known address within the meaning of Order 10 rule 1(2). The plaintiffs had already explained why the Hang Fa Chuen address was considered to be the last known address. As I understand it, the defendant placed much reliance on the fact that when the present writ was issued, the public records with the Company Registry clearly showed that his address was the Shenzhen address. Accordingly, Hang Fa Chuen address could not have been the last known address to the plaintiffs when the writ was issued.

19. Implicit in this contention are two alternative assertions. First, before issuing the writ, the plaintiffs had conducted an updated company search which revealed the Shenzhen address as the defendant's latest address but, for some reasons, they chose to effect service on the Hang Fa Chuen address. In short, there was a lack of good faith on the plaintiffs' part. There is, of course, no evidence before me which can possibly substantiate this. On the contrary, the plaintiffs had deposed on oath that his solicitors had not made an updated search because it was considered unnecessary.

20. The alternative assertion is that the plaintiff should have discovered the Shenzhen address had it conducted the updated company search before issuing the writ. In my view, in the present circumstances, an updated search was unnecessary. Rightly or wrongly, the defendant did not take issue on the service of the writ in the earlier action at the Hang Fa Chuen address in May 2000, although he was no longer residing there. In a way, the defendant had himself led the plaintiffs to believe that the Hang Fa Chuen address was still good for service. On the evidence before me, nothing would have suggested to the plaintiffs that 6 months later in November 2000 that was no longer the case. I also accept the explanation that as Sileigh was not sued here, the plaintiffs had not made an updated company search before issuing the present writ, although it would be prudent and advisable to do so.

21. For the above reasons, I find that the Hang Fa Chuen address was the last known address within the meaning of Order 10 rule 1(2), being the defendant's address last known to the plaintiff at the time of service in November 2000. And it mattered not that the plaintiffs could have found out the Shenzhen address had they conducted a company search immediately before issuing the writ.

22. That is, however, not the end of the matter. For the defendant complained that he had never received the writ. He could not possibly have notice of it as he had already moved out of the Hang Fa Chuen address in July 1999. That can be hardly disputed. But the plaintiffs argued that the defendant must have knowledge through his solicitors in the earlier action. To this, the defendant replied that his solicitors had not advised him of the existence of the writ until in early December 2000, when he came back to Hong Kong, his solicitors told him that default judgment had already been entered. Counsel for the plaintiffs submitted that the defendant's allegation should be viewed with suspicion. The defendant's solicitors would have been guilty of professional negligence if they had really failed to advise the defendant of the existence of the writ on 3 November 2000.

23. I note that the defendant had engaged the same firm of solicitors to represent him in both actions. No doubt the defendant's affirmations in support of the present application to set aside were prepared with their assistance. If the solicitors had in fact advised the defendant of the existence of the writ but the defendant chose to state the contrary in his affirmations, clearly a conflict of interest arose. I would expect the defendant's solicitors to have ceased to act in those circumstances. Otherwise, they would be guilty of professional misconduct and possibly of aiding and abetting the defendant's perjury. On the evidence before me, I cannot see any reason why the defendant's solicitors would continue to act for him if what the defendant said was untrue. Counsel for the plaintiffs placed reliance on the letter of 14 November 2000 from the defendant's solicitors and argued that the defendant must have given them instruction not to accept service. But in my view, the letter is not inconsistent with the defendant's position. The solicitors had not advised the defendant of the writ before he left for the Mainland. They were thus unable to obtain instruction thereon. Naturally, they wrote to state that they did not have instruction to accept service.

24. For the above reasons, I accept that the defendant had not been made aware of the existence of the writ by his solicitors on 3 November 2000; and that he became aware of it in only after the default judgment had been obtained. Accordingly, I find the default judgment irregular.

Whether an irregular judgment should be set aside as of right?

25. The next question is whether I should set aside the irregular judgment without considering the merits of the defence.

26. Counsel for the defendant submitted that as the law now stands, the judgment should be set aside unconditionally without considering the merits of the defendant's case. In any event, there is merit in the defence for in the earlier action, the court had already dismissed an application for summary judgment by the plaintiff against Sileigh and the defendant on a claim arising out of the same set of facts. Counsel for the plaintiff, however, submitted that the law in this area is unsettled and urged me to consider the merits of the defence. He contended that there was no merit in it and I either should not set aside the judgment or should only set it aside with condition.

27. Hereinbelow, I will endeavour to summarize the development of the law in this area.

28. One begins with the well-recognized proposition that where a judgment had been obtained irregularly, a defendant was entitled to have it set aside as of right.

29. In England, the position seemed to have changed after the Court of Appeal's decision in Faircharm Investments Ltd v Citibank International plc, The Times, 20 February 1998. There, judgment was entered in default of defence when an Order 14 application was pending and the time for service of defence had not expired by reason of the operation of Order 18 rule 2(2). The Court held that since summary judgment would have had to be entered against the defendant, it would be pointless to set the judgment aside. Sir Christopher Staughton went on to say:

"I would not go so far as to say that no irregularity could be so fundamental that the judgment in such a case would have to be set aside, whatever the other circumstances. But if indeed Citibank would be bound to lose I do not, in the circumstances of this case, consider that there is such a degree of fundamental error to require that the judgment be set aside. After all the tortured misunderstanding on both sides in this case and the regrettable imprecision in the pleading and court documents, it is time that justice is done once and for all in relation to this sum of ￡7,788.99."

Faircharm had since been heavily criticized: see The Supreme Court Practice 1999 Vol 1, para. 13/9/8. But it had found favour in a more recent decision of Park J in Bank of Credit and Commerce International (Overseas) Ltd (in liq) v Habib Bank Ltd [1999] 1 WLR 42.

30. In Hong Kong, as early as in 1989, the Court of Appeal in Honour Finance Co Ltd v Chui Mei Mei [1989] 2 HKLR 146 had already held that the victim of an irregular judgment enjoyed a confident expectation but not a right that it would be set aside. Hunter JA said at 150:

"The mere fact that the defendant was able to show lack of notice was not sufficient to entitled him to be let in to defend. He was required in addition to show a good ground of defence."

31. In 1995, Godfrey JA in Fok Chun Hung v Lo Yuk Shi [1995] 2 HKC 648, held that a judgment which was irregular in substance, like an irregular judgment, should be set aside unconditionally. He observed that the dicta of Hunter JA was made without the benefit of adversary argument.

32. In Po Kwong Marble Factory Ltd v Wah Yee Decoration Co Ltd [1996] 4 HKC 157, the Court of Appeal held that a defendant not having been served was entitled to have the judgment set aside without considering the merits. The court, however, retained a residual discretion to impose condition in setting aside the judgment.

33. In Desirable International Fashions Ltd (in liq) v Chiang Shi Chau [1997] 3 HKC 170, after carefully analyzing the authorities, Wuang J was of the view that Po Kwong was binding on him. He then said at p178 B-E:

"(1) the court should not go into the merits of the defence in considering the setting aside of irregular judgment, as otherwise the distinction between irregular and regular judgment disappears and the defendant of an irregular judgment will be in invidious position of having to go fully into the merits of the defence and such a defendant would be worse off as result of no proper service having been effected on him;

(2) if there was such a fundamental defect in the service such as that mentioned by Godfrey JA in the Fok case, then the court can take such matter into account and normally would arrive at a result of setting aside without imposing any terms;

(3) the conduct of both parties in relation to the proceedings could be taken into account in deciding whether the default judgment should be set aside and of so on what terms."

34. It should be noted the above authorities were all decided before the English Court of Appeal's decision in Faircharm.

35. In 1999, the courts in Hong Kong began to consider the effect of Faircharm.

36. In March, Cheung J in Pollard Construction Co Ltd v Yung Yat Fan (t/a Golden Year & Co) [1999] 3 HKC 109 followed and applied Faircharm. After considering the merits of the defence, he upheld the master's decision of refusing to set aside the judgment but instead amending the judgment, which had been entered for too large a sum. Po Kwong was not cited in argument.

37. In April, Keith J (as he then was) in Wing Lung Bank Ltd v Ho Man Iam, supra, was of the view that Po Kwong was binding on him. He therefore refused to follow Faircharm. The service of the writ was bad and the irregular judgment was set aside without considering the merits of the defence.

38. In May, the Court of Appeal held in Chu Kam Lun v Yap Lisa Susanto [1999] 3 HKC 378 that where the service of a writ was defective, the irregular judgment should be set aside without considering the merits. Leong JA (as he then was) arrived at this conclusion by referring to the relevant Hong Kong authorities, namely, Honour Finance, Fok Chun Hung and Po Kwong. He then went on to consider the question whether Faircharm should be adopted at p 384H - 385D:

"Thus, the weight of the Hong Kong authorities is where the judgment is irregular, it should be set aside without going into the merits of the defence. This would have disposed of the appeal. But there is still the question raised as to whether this court should adopt Faircharm and refuse to set the aside the irregular judgment for lack of a meritorious defence.

Faircharm is a decision by the English Court of Appeal in February 1998 which is not binding on us. It purports to change a principle which has been established by a long line of authorities...The courts in Hong Kong so far have not taken any view on it. It is doubtful how much weight it has in Hong Kong. Faircharm seems to have decided that if the defendant to an irregular judgment is bound to lose for lack of a meritorious defence, setting aside the irregular judgment only prolongs the life of the action until the plaintiff applies to enter summary judgment which the plaintiff is bound to succeed. In these circumstances, to refuse to set aside is to do what is just and expedient and to achieve justice. Practical as this approach may appear to be, given the assertion of the defendant in the present case...I am unable to say that the defendant is bound to lose if give the opportunity to defend. That being the case it dose not arise for a decision on whether it is appropriate to adopt Faircharm for the purpose of this appeal."

39. Nazareth VP was also of the view that the facts of the case did not provide an appropriate occasion to consider if Faircharm should be adopted. He said while he was attracted by the dictum in Faircharm, it would be a major departure from the long established position that it is unnecessary to be concerned with the merits of the defence which is not without practical advantage.

40. In June, Chung J in Redland Concrete Ltd v Hing Lee Construction Co Ltd & Another, HCA 8410 of 1998, unreported, while holding the judgment was regularly obtained, followed Fok Chun Hung and set aside it unconditionally. He then went on to consider the question whether the merits of the defence need to be considered when an irregular judgment is to be set aside. In the end, he concluded that litigants could usually expect the courts to set aside irregular judgments without going into the merits of the defence but that did not mean the courts could not in exceptional cases consider other matters including merits.

41. In July, Yuen J in Law Kwok Hung v Tse Ping Man & Another [1999] 4 HKC 397 referred to Chu Kam Lun and was of the view that Po Kwong is still good law and binding on her. She therefore said, obiter, that where a judgment had been obtained irregularly, a defendant would not need to show merits, although the court may consider all the other circumstances of the case in deciding whether to impose conditions in the exercise of its discretion.

42. In Kwan Kam Wah v Chan Wai Ming [2000] 2 HKC 378, Chu J, after ruling that the service of the writ was defective and hence the default judgment was irregular, held that there was no requirement for a defendant to show that he had a defence on the merits to set aside the judgment. Like, Yuen J, she was of the view that Po Kwong is still the law and is binding on her.

43. Finally, in The New China Hong Kong Finance Ltd (in liq) v Shimada Ltd, HCA 11030 of 1999, unreported (23 May 2000), Cheung J, after reviewing the authorities, had this to say:

"It is ultimately for the Court of Appeal to decide whether an irregular judgment is to be set aside as of right. As the matter now stands, my view is that whether an irregular judgment is to be set aside as of right or not will really depend on the nature of the irregularity. If, for example, the defendant had not even been served with the writ, then the question of the merits of the defence should not be considered because the defendant was not even given the chance to exercise his legal right due to the failure to effect service on him. However, where a defendant was served with the writ but due to irregularities such as entering a judgment for too large a sum, the question of merits of the defence ought to be considered. Likewise in situations like Faircharm where the judgment was entered prematurely because of the pending Order 14 application, the court should recognize the merits of the defence in considering whether judgment should be set aside in the first place.

However, while the merits of the case need not be considered where the writ was not served, as pointed out by Po Kwong Marble Factory, the court can still impose conditions for setting aside if the circumstances merit such an order. In that case, terms were imposed because of the conducts of the parties. The problem of service was due primarily to the conduct of the defendant who virtually disguised the registered office of the company..."

44. The question before me is this: when a default judgment was obtained irregularly because of defective service, as I have found to be the case here, should the judgment be set aside as of right without considering the merits of the defence. I am not concerned with any other type of irregularity. In light of what the Court of Appeal had said in Chu Kam Lun (quoted above), I respectfully share the view expressed by Keith J (as he then was) in Wing Lung Bank Ltd, Yuen J in Law Kwok Hung and Chu J in Kwan Kam Wah that Po Kwong is still the law and is binding on this court. Thus a defendant in such circumstances is entitled to have the default judgment set aside without showing a defence on merits. He should not be deprived of the right to be heard, which right I consider to be fundamental in our legal system. In this regard, Godfrey JA's remark in Fok Chun Hung, supra, at 653B-C is a useful reminder:

"I have, for my part, no doubt that a judgment obtained in these circumstances, even regularly obtained, must be set aside unconditionally, just as it would be if it had been irregularly obtained. To take any other course would be perversion of justice...such a course would involve treating the defendant as one who is craving an indulgence, rather than one who is (rightly) protesting at having been given no chance to be heard."

45. Counsel for the plaintiffs had urged me to follow Pollard. I do not think that is appropriate. First, as acknowledged by Chueng J in The New China Hong Kong Finance Ltd (in liq) v Shimada Ltd, the Po Kwong case was not cited in argument. More importantly, the default judgment was irregular because it had been entered for too large a sum. It is different from the irregularity in the present case, namely, defective service. In this regard, as noted, Po Kwong is binding on me. And it would appear that Cheung J in The New China Hong Kong Finance Ltd (in liq) v Shimada Ltd, supra, also accepted that a default judgment rendered to be irregular by defective service should be set aside without considering the merits of the defence.

46. For present purposes, I do not think it is necessary or indeed appropriate for me to express my view whether in other circumstances, an irregular judgment should be set aside as of right; and in that connection, whether Faircharm should be adopted.

Should condition be imposed?

47. The final question that I have to consider is whether I should impose any condition in setting aside the judgment. I should have regard to the parties' conduct when exercising my residual discretion under Order 13 rule 9. I do not think the defendant should be blamed for the state of the affairs. He had already in March 2000 filed with the Company Registry a notification of change in his residential address. He had not taken any issue regarding the service of the writ in the earlier action at the Hang Fa Chuen address and had thereby led the plaintiff to believe that it was an effective address for service. But I accept his explanation and do not think he should be penalized merely because he had taken a practical stance over the matter in the earlier action.

Conclusion

48. For the foregoing reasons, I will allow the appeal and set aside the default judgment unconditionally.

Costs

49. The defendant filed two affirmations in support of the setting aside application. By the time when the second affirmation was filed, i.e. 7 February 2001, all the matters relied on had been disclosed. In my view, it was unreasonable for the plaintiffs to have opposed the application before the learned master and this appeal.

50. I will therefore set aside the costs order of the learned master and order that for the costs of the setting aside application and this appeal:

(1) those costs up to 7 February 2001 be costs in the cause; and

(2) thereafter, costs including the costs of the hearing before the learned master and the costs of this appeal be to the defendant in any event.