HONG ZI YUN v. WONG CHUNG KWOK AND ANOTHER

HCA2398/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2398 OF 2008

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J U D G M E N T

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1. This is an appeal against the order of Master Kwang made on 18 December 2009 whereby the Master dismissed the application of the defendants to set aside the default judgment entered against the defendants on 31^st December 2008.  At the same time the Master also made absolute the Garnishee Order nisi pursuant to the Notice to Show Cause dated 21 July 2009 for enforcement of the default judgment.

Background

2. The plaintiff entered into a written Chinese agreement dated 9 October 2008 with the 1^st defendant whereby the plaintiff loaned RMB5 million to the 1^st defendant for one month with interest stated in the agreement to be at 3% per month (“the Agreement”).

3. The 2^nd defendant together with two of its subsidiary companies in Mainland China, being also parties to the Agreement, acted as guarantors for the loan.

4. The 1^st defendant failed to repay the loan under the Agreement.

5. The plaintiff issued the Writ herein together with Statement of Claim endorsed on 24 November 2008 and served same on the 1^st and 2^nd defendants.  By the Writ the plaintiff claimed for the repayment of the loan, interests and costs against the 1^st defendant as borrower and against the 2^nd defendant as guarantor.

6. At the time of the issue of the Writ, the plaintiff and the 1^st defendant were residents of Hong Kong and the 2^nd defendant a limited company incorporated in Hong Kong with its registered office here.

7. In the absence of any notice of intention to defend, default judgment was entered against both defendants on 31 December 2008.

8. After the default judgment was entered against the defendants, and in order to enforce such default judgment, the plaintiff applied for and obtained a Garnishee Order Notice to Show Cause against the 2^nd defendant on 21 July 2009 in an attempt to garnishee moneys held in a bank account of the 2^nd defendant with the Bank of China (Hong Kong) Limited.  That application was due to be heard on 22 August 2009.

9. One day before that hearing, on 21 August 2009, the defendants issued a summons in an application to set aside the default judgment and/or for the plaintiff’s claim to be struck out.

10. As a result, the garnishee proceedings were adjourned to be heard together with the application for setting aside the default judgment.

11. Those matters were heard by Master Kwang on 18 December 2009.  Master Kwang dismissed the application to set aside the default judgment and at the same time made absolute the Garnishee Order nisi.

12. The defendants now appeal against the order of Master Kwang.

The appeal by the defendants

13. In bringing this appeal, firstly it is to be noted that the defendants conceded before the Master at the hearing below that the default judgment was entered regularly.  This concession was made although it was stated in the defendant’s summons to set aside the default judgment that the default judgment was entered irregularly.

14. The second matter to note is that for the purpose of this appeal, the defendants sought to rely on further evidence as was contained in the 3^rd affirmation of Wong Chung Kwok which was not before the Master at the hearing below.

15. That application by the defendant for the admission of the further evidence was not opposed by the plaintiff and leave was granted to the defendants in respect of the further evidence.

16. Essentially, three points were taken by the defendants in this appeal as follows :

(a)  that the present action brought by the plaintiff in the courts in Hong Kong was in breach of an exclusive jurisdiction clause in the Agreement in which it was agreed between the parties that any disputes arising from the Agreement may be litigated in the People’s Court in Xiamen;

(b) that the loan which the plaintiff sought to recover from the 1^st defendant was one which was unenforceable under Hong Kong law due to the fact that the interest rate charged thereunder was in excess of the 60% permitted under the Moneylenders Ordinance; and

(c) the liability of the 2^nd defendant, as a guarantor, was discharged by the plaintiff’s participation in the reorganization of the co-guarantors of the 2^nd defendant in Mainland China.

17. Each of the above three points taken by the defendants will be dealt with individually in this judgment.

Exclusive jurisdiction clause

18. Clause 6 of the Agreement (in the certified translation) states as follows :

“6. Dispute resolution method :

Both parties shall negotiate for resolution.  If resolution does not succeed, (parties) agree to bring the matter to litigation at the People’s Court where the agreement is executed.”

19. It was expressly stated in the Agreement, and not in dispute, that the place of execution of the Agreement to be Xiamen, China.

20. The defendants submitted that what was contained in clause 6 was effectively an exclusive jurisdiction clause by which the parties to the Agreement had agreed that the People’s Court in Xiamen would have exclusive jurisdiction to adjudicate any dispute arising from the Agreement.

21. On the other hand, it was submitted by the plaintiff that clause 6 did not use the word “exclusive” nor did any other words in clause 6 oblige the parties to resort to the People’s Court in Xiamen to resolve dispute arising from the Agreement.  In that sense it was submitted that at best clause 6 merely conferred jurisdiction upon the People’s Court in Xiamen but such jurisdiction was not exclusive.

22. When ruling on this point, the Master took the view that the application before him was not an application for stay based on an exclusive jurisdiction clause, but an application to set aside the default judgment entered against the defendants, therefore before any application for a stay can be made, the defendants will have to succeed in setting aside the default judgment which was regularly entered before they can even make an application for a stay based on clause 6.

23. For that reason the Master did not see fit to decide upon whether clause 6, on its wording, was or was not an exclusive jurisdiction clause.  Instead the Master took the view that this point of exclusive jurisdiction would depend on whether the defendants could show a meritorious defence so as to succeed in setting aside the default judgment.  As matters turned out, the defendant did not succeed in setting aside the default judgment and so the point as to exclusive jurisdiction fell away.

24. At the hearing of this appeal not only did counsel for the defendants not dispute that approach adopted by the Master below, but in fact agreed with the approach of the Master.

25. Given that concession by the defendants, it is not necessary to decide at this present stage whether on a proper construction of clause 6 of the Agreement, exclusive jurisdiction was conferred by the parties on the People’s Court at Xiamen, since if the defendants are not successful in setting aside the default judgment on merits, that jurisdictional point would be entirely academic and of no practical assistance to the defendants at all.

Claim unenforceable by reason of Moneylenders’ Ordinance

26. I turn now to deal with what is effectively the substantive defence on merits put forward by the defendants in their application to set aside the default judgment.

27. There is no dispute that the plaintiff had lent RMB5 million to the 1^st defendant under the Agreement and that the loan was stipulated to be for one month.

28. There is also no dispute that no part of that loan had been repaid by the 1^st defendant to the plaintiff.

29. What is in dispute here is the rate of the interest charged for that loan.

30. The Agreement expressly stated in clause 2 that the interest to be charged on the loan was 3% per month.

31. However, it is alleged by the 1^st defendant that despite what was expressly stated in the Agreement, the interest charged by the plaintiff upon the loan was in fact at 6% per month.

32. That allegation comes about in this way.  It is the 1^st defendant’s case that pursuant to the Agreement, only RMB4.7 million was transferred over to him by the plaintiff but that the remaining RMB300,000 was deducted as being the first month’s interest.  On that basis the 1^st defendant says that the amount of RMB300,000 deducted works out to be interests charged at 6% per month.

33. In the circumstances, it was the 1^st defendant’s case that the annual interests charged under the Agreement came to, even when calculated on simple interest (as opposed to compound interest), 72% which is well in excess of the 60% permissible under the Moneylender’s Ordinance, and therefore unenforceable under Hong Kong law.

34. On the other hand, it was the plaintiff’s case that the rate of interest charged on the loan under the Agreement was at 3% per month as expressly stated in the Agreement.

35. While it is not disputed by the plaintiff that RMB4.7 million was transferred into the 1^st defendant’s bank account by the plaintiff as being part of the loan under the Agreement, it was also the plaintiff’s case that the balance of the RMB300,000 was paid over in cash to the 1^st defendant and for which the 1^st defendant had acknowledged by signing a receipt for the RMB300,000 cash.  Thus the RMB300,000 had nothing to do with interest as alleged by the 1^st defendant.

36. In this respect, the plaintiff has produced the receipt signed by the 1^st defendant in respect to the RMB300,000 cash and dated 10 October 2008.

37. On this point, the Master took the view that faced with the express wording of the Agreement which provided for interests to be at 3% per month and the receipt signed by the 1^st defendant acknowledging his receipt of the RMB300,000 cash, the 1^st defendant has not discharged his burden of showing that he has a real prospect of success at trial.

38. The Master also took into consideration the conduct of the defendants, namely, that when they were served with the Writ herein in November 2008 and were aware of these proceedings against them, they took no steps whatsoever to contest the proceedings thereby allowing the default judgment to be entered.  It was only one day before the hearing of the garnishee order nisi that the defendants saw fit to issue their summons seeking to set aside what is now conceded by them to be a regular judgment.

39. In the circumstances, the Master took the view that if the defendants genuinely believed that they had a meritorious defence to the plaintiff’s claim, such belief was certainly not consistent with their conduct in doing nothing until they were aware of the garnishee proceedings.

40. Given all the circumstances referred to above, I cannot see how that decision of the Master can be faulted.  The views taken by the Master are views which I will have no hesitation in adopting.  Likewise the decision of the Master.

41. At the hearing of this appeal, the defendants also sought to rely on an earlier loan transaction between Lu Anmin and the 1^st defendant in respect of a loan of RMB10 million split into two trunks of RMB5 million each.  It was alleged by the 1^st defendant that for that earlier loan, the 1^st defendant had also to pay identical amount of interest for each advance and thereafter monthly interest in same amounts.

42. The connection between that earlier loan of RMB10 million (Lu Anmin being the lender) and the present loan pursuant to the Agreement (plaintiff being the lender) is that the plaintiff in the present transaction merely acted as the nominee of Lu Anmin in making the present loan.

43. The defendants criticize the plaintiff for saying in response to this point raised by them relying on the earlier loan that the earlier loan has no relevance to this action.

44. The short answer to this further point raised by the defendants relying on the earlier loan must be that there is not a single iota of evidence which could show that the Agreement is in any way linked to or connected with the earlier loan.  As such it is inconceivable that the proper construction in respect of the Agreement can in any way be affected by the earlier loan, or the contract in respect of the earlier loan.

Discharge of the 2^nd defendant’s liability by plaintiff’s participation in the re-organization of Xiamen Star Arts and Crafts Co. Ltd

45. As already stated above, the loan was guaranteed by the 2^nd defendant together with two of its Mainland subsidiaries under the Agreement.

46. One of these two Mainland subsidiaries of the 2^nd defendant was Xiamen Star Arts & Crafts Co. Ltd (“Xiamen Star”), being a Mainland company.

47. In 2009 an application was made in the Mainland by Xiamen Star to the courts in the Mainland for bankruptcy protection and on 30 October 2009 the draft re-organization plan of Xiamen Star was approved by the second meeting of its creditors.

48. The point now taken by the defendant is that by taking part in the scheme of arrangements in registering herself as a creditor, the plaintiff has effectively released Xiamen Star from its liability as a guarantor and such release effectively discharged all other co-guarantors including the 2^nd defendant from being liable.

49. This point was not taken before the Master at the hearing below by the defendants but was submitted in this appeal hearing on behalf of the 2^nd defendant.

50. I am not persuaded by that submission of the defendants.

51. In the explanatory notes issued by the Scheme Manager, which was produced by the defendants as Exhibit “WCK-8” in the 3^rd affirmation of Wong Chung Kwok, it is stated :

“…Xiamen Haicang District Court, who accepted the reorganization application of Xiamen Star Art and Craft Co. Ltd. (hereinafter referred to as ‘Xiamen Star’) on Jan. 22^nd, 2009, approved such reorganization by the ‘2009 hai min chu zhi No. 2’ Paper of Civil Verdict.  On Nov 6^th, 2009 Xiamen Haicang District Court rendered ‘2009 hai min po zhi No.2-(6)’ Paper of Civil Verdict to approve the reorganization plan of Xiamen Star officially and Xiamen Star has entered the implementation stage of such reorganization plan.”

52. It is also stated in the Information Note issued by the Reorganization Manager that although the plaintiff did not attend the second meeting of Xiamen Star’s creditors, that would not disentitle her to her creditor’s right for compensation and that the reorganization plan would still be binding on her.

53. In this respect, it is also stated by the Reorganization Manager that in accordance with the reorganization plan of Xiamen Star that the plaintiff’s entitlement from Xiamen Star is the amount of RMB914,701.70 to be paid by four installments between January 2010 and November 2015 in the event that the plaintiff decides to accept that amount of compensation.  By Article 94 of Law of the People’s Republic of China on Enterprise Bankruptcy, it is specified that the relevant debtor shall not, as of the day when the reorganization plan is accomplished, be obligated to bear the liability anymore.  In other words, Xiamen Star’s liability as a guarantor shall be exempted and Xiamen Star shall no longer be obligated to assume any liability of compensation.  Therefore in the event that the plaintiff decides to give up her creditor’s right for compensation by Xiamen Star, Xiamen Star’s liability as a guarantor shall still be exempted and Xiamen Star shall no longer be obligated to assume any liability of compensation.

54. It is therefore clear from what has been stated by the Reorganization Manager that Xiamen Star was released from its liability as a guarantor under the Agreement not because of the plaintiff’s participation in the scheme of arrangements by registering herself as a creditor, but rather by the operation of law resulting from the application by Xiamen Star for bankruptcy protection.

55. It must follow therefore that in registering herself as a creditor in the bankruptcy, the plaintiff was doing no more than protecting her own interest in the bankruptcy of Xiamen Star, which the plaintiff was entitled to do.

56. The plaintiff has simply not done anything to release Xiamen Star from its liability as a guarantor under the Agreement to the disadvantage or prejudice of the other co-guarantors under the Agreement.

57. Accordingly, there is no merit in this further point taken by the defendants.

Decision

58. For the reasons given above, this appeal by the defendants from the decision of Master Kwang is dismissed.

59. The order of the Master is to stand in its entirety including making absolute the garnishee order as well as the costs order.

60. There will be a costs order nisi that the defendants do pay the costs of this appeal to be taxed if not agreed.