EL VINCE LTD. v. WU WEN SHENG

HCA 14607/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.14607 OF 1999

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J U D G M E N T

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1. This is an appeal by the defendant against the order of Master De Souza made on 12 April 2001 whereby he dismissed two applications of the defendant. One was an application to set aside the default judgment obtained by the plaintiff on 15 July 2000 for irregularity and the other was an application to strike out the plaintiff's action on the ground that it was frivolous or vexatious and/or an abuse of the process of the court. The ground relied on by the defendant for the two applications heard by the Master was identical and was based on the fact that the plaintiff had been struck off from the register of companies for failure to forward annual returns under section 290A of the Companies Ordinance, Cap.32. It was contended that as the plaintiff had been dissolved at the time the writ was issued, the proceedings were a nullity and the default judgment should be set aside or that the plaintiff's action should be struck out or dismissed.

2. The Master held against the defendant on the ground of irregularity. In the appeal from the Master's decision, the defendant had sought to rely on merits of its defence as an additional basis for his application to set aside the default judgment and notice was given to the plaintiff of his intention to rely on a meritorious defence in the Notice of Appeal filed by the defendant on 26 April 2001. This had met with stiff opposition from the plaintiff's counsel, Mr Kenny Lin, who appeared for the plaintiff on appeal and before the Master. Mr. Lin submitted that as the plaintiff had made a clear election not to rely on merits of his defence as a basis for setting aside the default judgment before the Master, the defendant was estopped from taking the point on appeal. In support of this, he referred me to the decision of the Court of Appeal in Lam Fung Ying v Ho Tung Sing & Anr [1993] 2 HKLR 187.

Should the Defendant be Allowed to Raise a New Point on Appeal

3. It is necessary to set out the procedural steps that had been taken before the matter got to the hearing before the Master on 12 April 2001.

4. The writ was issued on 9 September 1999. On 30 September 1999, the defendant wrote to the Registrar of the High Court stating that as the plaintiff had been struck off the register of companies, it had no right to bring the action and instead of taking out a summons to set aside the action, the defendant stated he would not do so as this would incur extra costs which would be borne by the plaintiff's solicitors. Hence, he wrote the letter to the Registrar which was copied to the plaintiff's solicitors. The plaintiff's solicitors then took steps to have the plaintiff restored to the register of companies. Pursuant to section 290A(6) of Cap 32, on 2 June 2000, the Registrar of Companies published a notice in the Gazette stating that the name of the plaintiff had been restored to the register on the same date. On 15 July 2000, the plaintiff entered judgment in default of defence. Four days later, the defendant issued a summons ("the defendant's first summons") to set aside the default judgment and on 22 July 2000, the defendant filed a supporting affirmation in which it set out the merits of his defence. The defendant's first summons was dealt with by Acting Registrar Chan on 25 July 2000 and he gave directions to both parties to file evidence in opposition and evidence in reply and adjourned the summons for argument.

5. On 9 October 2000, the defendant issued a summons to strike out the plaintiff's action on the ground of its being frivolous or vexatious and/or an abuse of the process of the court ("the defendant's second summons"). On the same day, the defendant filed his second affirmation which served a dual purpose. Firstly, it was to reply to the plaintiff's evidence in opposition on the defendant's first summons. Secondly, it was in support of the defendant's second summons which was for striking out of the plaintiff's action and in it he stated that the ground for that application was that the plaintiff was struck off the register of companies when the writ was issued. The defendant's second summons was dealt with by Master C B Chan on 12 October 2000 and it was ordered that the defendant's second summons was to be adjourned sine die with liberty to restore pending the determination of the defendant's first summons.

6. As the defendant was anxious to have its second summons heard before the first summons, to get around the order of Master C B Chan, the defendant issued a third summons on 2 January 2001 ("the defendant's third summons") in which the defendant sought an order that "without prejudice to the defendant's right to make a fresh application to set aside the default judgment dated 15 July 2000", the defendant's first summons was to be withdrawn and the defendant's second summons adjourned by Master C B Chan was to be restored for hearing on an early date. The defendant's third summons was dealt with by Master Jones on 8 January 2001. He granted the order as sought save that he did not provide in his order that the withdrawal of the defendant's first summons was without prejudice to the defendant's right to make a fresh application to set aside the default judgment.

7. On 10 April 2001, two days before the hearing of the defendant's second summons before Master De Souza, the defendant issued a fourth summons ("the defendant's fourth summons") seeking an order to set aside the judgment for irregularity on the same ground as the defendant's second summons. On 11 April 2001, the plaintiff's solicitors wrote to the defendant's solicitors recording that there was an agreement between counsel that the defendant would not object to the late filing of the defendant's fourth summons on the basis that the defendant's application would only be confined to the grounds set out in the fourth summons, i.e. they would relate solely to the striking off of the plaintiff from the companies register, and no issue concerning the merits of the defence would be taken. The defendant's solicitors did not appear to have replied to this letter at the time. The defendant's solicitor had filed an affidavit for this appeal stating that he was told by the counsel who was then representing the defendant that the defendant had "never abandoned the right to set aside default judgment". The defendant's solicitor also disputed the assertion of Mr Lin and the plaintiff's solicitor that at the hearing before Master De Souza, the Master was informed of an agreement reached between the parties as stated in the letter of the plaintiff's solicitor dated 11 April 2001. Master De Souza heard the defendant's second summons and the defendant's fourth summons and dismissed both applications. As stated earlier, the only ground argued and relied upon by the defendant for both applications was the ground of irregularity.

8. Was there an election by the plaintiff and consequently an estoppel by election in these circumstances? The Court of Appeal in Lam Fung Ying, supra. at 191 referred to the principle set out in Spencer Bower &Turner, Estoppel by Representation, 3rd ed. (1977), at p.333 as follows:

".......it very frequently happens that a party litigant is concerned with the necessity of immediately making a definite choice between two possible courses of action which are mutually exclusive. Whenever this occurs, the general rule of estoppel by election comes into play: that is to say, if by words, or (as is almost invariably the case) by conduct or inaction, he represents to the other party litigant his intention to adopt one of two alternative and inconsistent proceedings or positions, with the result that the latter is thereby encouraged to adopt or persevere in a line of conduct which he otherwise would have abandoned or modified, or (as the case may be) change tactics from which he otherwise would never have deviated, the first party is estopped, as against his antagonist, from resorting afterwards to the course or attitude which, of his free choice, he has waived or discarded."

9. Regardless of whether there was an agreement between counsel as alleged, it is clear that the defendant had not sought to rely on the ground of merits of his defence as a basis for setting aside the default judgment until this appeal was brought. It is also clear that whatever might have been agreed between counsel prior to the hearing before the Master, the defendant's counsel had not agreed that the point relating to merits of the defence would not be raised on appeal. It is open to a defendant in applying to set aside a default judgment to rely on irregularity or a meritorious defence or both. I do not think these courses of action are mutually exclusive or inconsistent with each other. All that the representation had amounted to was that the defendant would not rely on merits of his defence in the applications before the Master. There was no representation that the point on merits of the defence would not be taken at a subsequent hearing.

10. I am mindful of the fact that this is an appeal from the decision of a Master and such appeals are by way of rehearing and it is very common for new points to be taken in an appeal of this kind. A party to an interlocutory hearing before a Master is not entitled to rely on the other party's conduct of the case as an implied representation that the case will be conducted in the same way on an appeal to the judge in chambers and that no new point will be taken (See Magec Aviation Limited v Fayair (Jersey) Company Limited, Lexis transcript, 25 March 1997).

11. In the present case, it seems to me that the defendant's legal advisers had, rightly or wrongly, taken a tactical decision not to rely on merits of the defence even though that was the original and only ground advanced when the defendant's first summons was issued. This ground on merits of the defence was not a point that had never been raised before and only raised for the first time on appeal. There being no estoppel by election, I think it would be right to exercise my discretion to allow the defendant to rely on this ground as an additional basis to set aside the default judgment in the interest of justice. The defendant would be penalised on costs for the wrong tactical decision but I do not think he should be penalised by disallowing him from raising the point altogether. In exercising my discretion in this manner, I have also considered the question of prejudice to the plaintiff. Mr Lin had submitted that the plaintiff would be prejudiced if the defendant was allowed to rely on merits of the defence as the plaintiff had not filed any affirmation to deal with the evidence filed by the defendant on 9 October 2000, which was evidence in the nature of a reply to the plaintiff's evidence in opposition. When Registrar Chan gave directions in July 2000 for the filing of evidence on the defendant's first summons, he had ordered that no further affirmation be filed without leave of the court after the defendant had filed evidence in reply. I have sought to ascertain from Mr Lin what further evidence the plaintiff proposed to file to answer the defendant's affirmations in reply. I was given to understand that the only evidence the plaintiff would wish to file would be to rebut an allegation made by an estate agent that she had taken instructions from one Mr Wong Jen Tai for the sale of the property in question. I am unable to see how that would have assisted the plaintiff's case in the appeal in any significant way. Mr Lin did not seek an adjournment for the purpose of putting in further evidence.

12. For the above reasons, I have allowed the defendant to rely on merits of the defence as an additional ground to set aside the default judgment and I have given leave to the defendant to amend the defendant's fourth summons by adding this as an additional ground. I turn to consider firstly the ground of irregularity and then the merits of the defence.

The Ground of Irregularity

13. The plaintiff's name was struck off the register of companies on 11 September 1998 pursuing to section 290A of Cap. 32 and it was restored to the register on 2 June 2000. The writ was issued on 9 September 1999. The plaintiff's contention before the Master was that by virtue of section 290A(6), upon the notice of the Registrar of Companies in the Gazette restoring the plaintiff's name to the register, this would have the effect of validating restropectively all the acts done in the name of the plaintiff during the period between its dissolution and the restoration of its name to the register. This submission was accepted by the Master who was taken to the same decisions as counsel have taken me through.

14. Section 290A was added in 1993. It was in force at the time the plaintiff was struck off the register of companies in 1998. Section 290A was repealed in 1999 but because of a savings provision, the section is to continue to have effect in relation to a company that has been struck off under the section as if it had not been repealed. The relevant provision in section 290A is sub-section 6 which is as follows:

"If a company or any member or creditor thereof feels aggrieved by the company having been struck off the register, the Registrar on an application made by the company or member or creditor before the expiration of 20 years from the publication in the Gazette of the notice under subsection (3) may, if satisfied that it is just that the company be restored to the register and a fee of not more than $20,000 as may be decided by the Registrar having regard to the circumstances of the case has been paid, publish a notice to that effect in the Gazette and upon the notice being published the company shall be deemed to have continued in existence as if its name had not been struck off; and the Registrar may in the notice give such directions and make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off." (emphasis supplied)

15. As mentioned earlier, section 290A is concerned with the situation where a company is struck off for failure to forward annual returns. There is a similar provision in section 291 concerning the dissolution of a company where the Registrar of Companies has reasonable cause to believe that the company is defunct. The provision for restoration of a defunct company in section 291(7) contains similar wording to section 290A(6) as to the effect of an order for restoration and it reads as follows:

"If a company or any member or creditor thereof feels aggrieved by the company having been struck off the register, the court on an application made by the company or member or creditor before the expiration of 20 years from the publication in the Gazette of the notice aforesaid may, if satisfied that the company was at the time of the striking off carrying on business or in operation, or otherwise that it is just that the company be restored to the register, order the name of the company to be restored to the register, and upon an office copy of the order being delivered to the Registrar for registration the company shall be deemed to have continued in existence as if its name had not been struck off; and the court may by the order give such directions and make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off." (emphasis supplied)

16. Section 291(7) is derived from a similar provision in the English Companies Act, being section 242 of the 1908 Act and replaced subsequently by section 295 of the 1929 Act, section 353 of the 1948 Act and section 653 of the 1985 Act. This provision had been considered in a number of decisions in the House of Lords and the English Court of Appeal: Morris v Harris [1927] AC 252; Tyman's Ltd v Craven [1952] 2 QB 100; and Top Creative Ltd. & Anr v St. Albans District Council [2000] 2 BCLC 379. The effect of an order for restoration of a defunct company is clear under the English authorities. Such an order is effective to validate restropectively all acts done in the name or on behalf of the company during the period between its dissolution and restoration of its name to the register, on the true construction of the provision in the Companies Act similar to our section 291(7).

17. It was submitted by Mr Alan Ng, who appeared for the defendant in this appeal, that as there is no provision in the English Companies Act equivalent to section 290A, the English decisions should not be followed. As I have pointed out, there is no material difference between section 290A(6) and section 291(7) insofar as the effect of the order for restoration to the register is concerned. I see no reason to differ from the English authorities on the construction of the effect of a restoration order under section 290A(6). The Master was clearly right to reject the defendant's submission that the writ, which was issued between the time of dissolution and the restoration of the plaintiff to the companies register, was not validly issued.

The Merits of the Defence

18. The plaintiff's claim is for HK$2 million being money advanced by the plaintiff to the defendant by a cheque dated 21 August 1997. There was no written agreement for a loan. The cheque issued by the plaintiff in favour of the defendant was a week after an assignment was executed by the plaintiff in favour of a shelf company acquired by the defendant for this purpose, Golden Summit Ltd. of a non-residential property at Room 705, Chevalier House, 45-51 Chatham Road South, Kowloon ("the Property") for the price of HK$4 million. It is the plaintiff's case that the loan, which was requested by the defendant through Mr Wong Jen Tai, was a short-term loan payable on demand without interest and that it had nothing to do with the assignment of the Property a week earlier. It is the defendant's case that there was devised an elaborate scheme in which he was to advance a net sum of HK$2 million to Mr Wong, who was an undischarged bankrupt in 1997, to be repaid within a year with interest at the best lending rate and reimbursement of expenses and charges arising from the elaborate scheme. It was an essential part of the scheme that the plaintiff company (which was wholly owned by Mr Wong's wife, Madam Ng Ling Ling, and Mr Wong's sister, Madam Wong Juin Rong) was to transfer the Property to the defendant as security for the defendant's loan to Mr Wong. The transfer was by way of an assignment for the consideration of HK$4 million when there was in fact no genuine transaction for the sale and purchase of the Property between the plaintiff and the defendant as it was agreed between the defendant and Mr Wong that after the receipt of the purchase price of HK$4 million upon the execution of the assignment, the plaintiff was to return HK$2 million to the defendant, which the plaintiff did by its cheque dated 21 August 1997 (i.e. the same cheque alleged by the plaintiff to be its loan to the defendant). It was further agreed between the defendant and Mr Wong that within a year of the assignment of the Property, Mr Wong was to purchase from the defendant all the shares of Golden Summit Ltd. (which was holding the Property) at HK$2 million plus interest and charges arising from the whole arrangement, thus in effect repaying the loan of HK$2 million and obtaining a release of the security for the loan. The defendant's alleged agreement with Mr Wong was not contained or evidenced in writing.

19. It was submitted by Mr Lin for the plaintiff that if it was the defendant's intention to lend money to Mr Wong to stave off legal action from the mortgagee of the Property which had issued a writ against Mr Wong, Mrs Wong, Madam Wong and a company called Lucky Term Development Ltd. for about HK$1.5 million), the defendant could simply have lent Mr Wong the money without going through an elaborate scheme of purchasing the Property from the plaintiff at HK$4 million and then receiving HK$2 million back from the plaintiff, acquiring the shelf company Golden Summit Ltd. to hold the Property, and incurring substantial expenses in stamp duty and legal fees. It was submitted that the defendant's story was wholly incredible.

20. The defendant did not deal with this specifically in his affirmations as this was not raised by the plaintiff on affidavit and his counsel was unable to offer an explanation why such an elaborate scheme was adopted. All that could be gleaned from the evidence filed by the defendant was that Mr Wong had been made bankrupt in 1985 and was an undischarged bankrupt in 1997, that notwithstanding his bankruptcy Mr Wong had been carrying on a fashion business in the Property for over ten years, that he had difficulty in meeting mortgage payments for the Property in 1997 and the mortgagee was threatening to sell the Property, and that Mr Wong was looking for a way to resolve his financial difficulty so that he could carry on his business at the Property. It was not in dispute that after the assignment of the Property to the defendant's shelf company, the defendant did allow Mr Wong to have the use of the Property free of charge for at least a year if not longer. Further, Mr Wong had executed the memorandum for sale and purchase of the Property in June 1997 and the assignment in August 1997 on behalf of the plaintiff as an authorised signatory even though he was not a director and had no position or interest in the plaintiff according to the affirmation of Madam Wong. It would appear from Madam Wong's affirmation that the plaintiff's only business since its incorporation in 1986, which was a year after Mr Wong was made bankrupt, was the holding of the Property.

21. The defendant had alleged that Mr Wong was the mastermind of all these. The plaintiff had sought to rebut the defendant's allegations with the affirmations of Madam Wong who had deposed to matters on the information provided by Mr Wong. Mr. Wong himself did not make any affirmation.

22. As to the loan by way of the plaintiff's cheque as alleged by the plaintiff, the defendant had made these points in his affirmations. Firstly, the cheque was issued shortly after the completion of a sale and purchase in which the defendant had paid cash of HK$4 million to the plaintiff without the need of obtaining finance from a bank by the mortgage of the Property and that the receipt of HK$4 million by the plaintiff was not in dispute. Secondly, the defendant adduced evidence showing that he had a fixed deposit receipt in a bank for about HK$2 million which was to mature on 20 August 1997, which was one day before the plaintiff had issued its cheque to the defendant. All these, the defendant argued, would prove that he had considerable disposable cash in August 1997 and there was no reason and no necessity for him to borrow HK$2 million from the plaintiff as alleged.

23. Mr Ng has also drawn my attention to the affirmations of two witnesses for the defendant, Mr Chan Chi Ming and an estate agent Ms Tai Mei Kiu. Their affirmations showed that contrary to the plaintiff's assertion, Mr Wong was clearly interested in the sale of the Property by the plaintiff to the defendant's company in 1997 and the subsequent sale of the Property by the defendant's company in 1999.

24. On the required strength of the defence for the court to exercise its discretion to set aside a regular judgment, I was referred to the decision of the Court of Appeal in Premier Fashion Wears Ltd & Anr v Chow Cheuk Man & Anr [1994] 1 HKLR 377 at 383 in which Godfrey JA had this to say:

"Of the modern cases, I would single out Alpine Bulk Transport Co. Inc. v Saudi Eagle Shipping Co. Inc. [1986] 2 Lloyd's Rep 221. This, I believe, shows that for the purposes of O.13, r 9 it is generally not sufficient for a defendant merely to show an arguable defence, although that alone would justify leave to defend being given under O.14. A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so he must satisfy the court that his case, and the evidence he has adduced in support of it, carries some degree of conviction. It seems to me 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.

In the present case, the defence of the Third Party is that there was no contract of any sort at all between himself and the defendant. That, if made out, would obviously afford the Third Party a good defence to the Third Party proceedings. But in my judgment that is not enough. The court still has to form a provisional view of the probable outcome of the action."

25. Where the outcome of the action very much depends on whose evidence is likely to be accepted, it may not be possible to form a provisional view of the probable outcome of the action, as the court is required to do in Premier Fashion, short of conducting a trial. This has been recognised by the Court of Appeal in the subsequent decisions of O Mark Polyethylene Products Fty Ltd v Reap Star Ltd [2000] 2 HKC 330 at 335 and 337 and L&M Specialist Construction Co. Ltd. v Wo Hing Construction Co. Ltd. [2000] 3 HKC 335 at 339. Where a provisional view of the probable outcome of the action cannot sensibly be formed, the appropriate test suggested by the Court of Appeal in O Mark Polyethylene Products is to ask whether the defence "could well be established" at trial and if the defendant's version could well be believed at trial, it follows that the defence has a "real prospect of success".

26. In the present case, I think there are some prospects of success and some degree of conviction in the case set up by the defendant which can only be shown to be right or wrong by a proper evaluation of the evidence at the trial. At this stage, I do not think a provisional view of the probable outcome could sensibly be formed. Applying the above test, I am of the view that the defence could well be established at trial and that the issues raised by the defendant are sufficiently substantial to merit going to trial. Thus, the defendant has shown a defence with a real prospect of success and it would be appropriate to set aside the default judgment on that basis.

The Orders

27. For the above reason, I allow the appeal from the decision of Master De Souza on 12 April 2001 and I order that the default judgment entered on 15 July 2000 be set aside. I do not think it would be appropriate to impose any condition on setting aside the default judgment. I further order that the defendant is to serve his defence within 14 days from the handing down of this judgment.

28. I make the following order nisi as to costs. The defendant has succeeded on a ground not relied upon before the Master. I do not propose to disturb the order of the Master awarding costs of the defendant's applications to the plaintiff. As for this appeal, the defendant has failed on the ground of irregularity and succeeded on the ground of merits of the defence. The ground as to merits was raised only for the first time on appeal. In the circumstances, I think it would be appropriate to order that the defendant's costs of the appeal be costs in the cause of the action and to depart from the usual rule that costs should follow the event.