CHINA DRAGON INTERNATIONAL LTD v. PANG HONG

HCA 1864/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1864 OF 2005

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D E C I S I O N

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1.  This is an appeal by the Plaintiff in these proceedings, China Dragon International Limited (“the Plaintiff”), against that part of the order of Mr Registrar Chan dated 28 December 2005 whereby he ordered, among other things, that there should be a stay of execution of a judgment that had been entered by the Plaintiff against the Defendant, Mr Pang Hong (“the Defendant”), on 23 December 2005.

2.  In order to understand how the matter came before Mr Registrar Chan, it is necessary to set out briefly the background to these proceedings and the events leading up to his order.  These proceedings were commenced by a writ issued by the Plaintiff against the Defendant on 22 September 2005.  The writ had endorsed on it a statement of claim in simple terms.  In essence, the Plaintiff’s claim was that the Defendant was the Plaintiff’s representative in relation to its affairs on the mainland and operated a representative office of the Plaintiff in Beijing.  The Plaintiff asserted that it had placed certain funds in a bank account of the representative office with a bank in Beijing, amounting to slightly in excess of RMB 2.5 million.  The control of that account was vested in the Defendant, who was the Plaintiff’s authorised agent in Beijing and who held the relevant chops belonging to the Plaintiff with which to operate the bank account.  The Plaintiff alleged that it had, on a number of occasions, asked the Defendant to return to it the funds that had been placed in that account, but that, despite such repeated demands, the Defendant had failed to return such funds to the Plaintiff.  Against that background, the Plaintiff commenced the present proceedings seeking the repayment to it by the Defendant of the funds standing to the credit of such bank account. 

3.  The Defendant applied for and obtained a number of extensions of time within which to file his defence.  Initially, the Defendant indicated that he intended to dispute the jurisdiction of the Hong Kong courts, or to suggest that Hong Kong was not the appropriate forum for the resolution of the dispute between the Plaintiff and himself.  That matter was ventilated on the first occasion that an extension of time was sought, and the question of whether or not Hong Kong was a suitable forum was apparently determined against the Defendant.  The Defendant was, however, given an extension of time within which to file a defence.  He failed to do so and a further extension was sought.  Towards the expiry of that extended period of time, a further application for an extension of time was taken out.  On this occasion, an unless order was made requiring the Defendant to file his defence by no later than 5 pm on 21 December 2005.

4.  That order stated that the consequence of failure to file a defence would be that the Plaintiff would be free to enter judgment against the Defendant.  However, shortly before that time allowed under the unless order expired, on 17 December 2005, the Defendant took out an application under Order 17 of the Rules of the High Court seeking to interplead in respect of the sums claimed from it by the Plaintiff.  That application was supported by an affirmation by the Defendant in which he deposed to the fact that there had been a claim against him by another party, Pacific Electric Wire & Cable Company Limited (“the Claimant”).  He indicated that in those proceedings, in which there was a very substantial statement of claim filed, allegations were made, which if true, would mean that the Plaintiff was in fact beneficially owned by the Claimant.

5.  The Defendant said that if that were correct, it would follow that the ultimate entity entitled to the assets of the Plaintiff would in fact be the Claimant, and said that he was therefore concerned that if he should pay the funds to the Plaintiff, he would find himself faced with legal action by the Claimant in respect of the same funds.  He went on to say that he did not seek to put forward any claim to beneficial entitlement or interest in the funds and that he therefore wished to interplead and leave it to the Plaintiff and the Claimant to fight out as between themselves the question of who should be entitled to the funds in question.

6.  On taking out this summons and filing the supporting affirmation, the solicitors acting for the Defendant wrote to the Plaintiff’s solicitors requesting that they should not enter any judgment against the Defendant, notwithstanding the unless order, having regard to the interpleader proceedings which had been taken out.  Unfortunately, the plaintiff’s solicitors saw fit to disregard that request and on 23 December 2005 they went ahead and entered judgment against the Defendant on the basis that the Defendant had failed to comply with the unless order.  This was just five days before the interpleader summons was fixed for its first hearing, which was to take place on 28 December 2005 before Mr Registrar Chan.

7.  Faced with the judgment entered against him, the Defendant acted promptly to take out a further summons seeking to set aside such judgment.  That summons was also made returnable before Mr Registrar Chan on 28 December 2005.  When the matter came before Mr Registrar Chan, all the parties – the Plaintiff, the Defendant and also the Claimant - attended and made submissions.

8.  The only evidence filed before Mr Registrar Chan consisted of the Defendant’s affirmation in support of his interpleader summons and an affidavit of the Defendant’s solicitor setting out the background to the entering of the judgment against his client.  However, it appears that the submissions before Mr Registrar Chan were somewhat more wide ranging, in that a number of other matters, not adverted to in the affirmations, were raised.

9.  The first was the question whether or not, if the judgment were to be set aside, or execution on it stayed, a condition should be imposed requiring the Defendant to bring the monies that were the subject matter of the dispute into court in Hong Kong.  As to this it was said on behalf of the Defendant that there might well be exchange control difficulties in doing so.

10.  Another matter that was raised was as to the then current status of the funds, it being revealed that the funds were at that stage in fact no longer held under the control of the Defendant himself, but were under the control of a stakeholder, an attorney in the People’s Republic of China with a Beijing law firm.

11.  There was also, it seems, a suggestion that the Defendant was a person of some substance who owned property in Hong Kong.

12.  At the end of the day, the Registrar adjourned the hearing of both summonses which were before him.  He thus did not rule one way or another on either the application to set aside the default judgment, or the application for interpleader relief.  Pending the substantive hearing of those summonses the Registrar granted a stay of execution of the default judgment.  He did so having expressly noted the defendant’s contention that the funds were currently held by the stakeholder in Beijing and recording the defendant’s undertaking not to instruct the stakeholder to dispose of those funds otherwise than in accordance with an order of the Hong Kong court.

13.  Mr Registrar Chan also gave directions for the filing of evidence in relation to the summonses.  It is clear from the terms of those directions that such evidence was intended to be filed in connection with the interpleader summons, as directions were given requiring the Plaintiff and the Claimant to file (at that stage within 21 days) their evidence setting out their respective claims to the funds that had formerly been held by the Defendant.  Perhaps somewhat unusually, an opportunity was also provided to the Defendant to reply to that evidence 14 days after it had been filed.

14.  The Plaintiff was not satisfied with the outcome of that hearing.  It therefore appealed to this court seeking an order setting aside the stay of execution that been granted.  That appeal eventually came before me on 15 February 2006, about a month ago.  On that occasion the matter was adjourned in order to enable the parties to explore further the possibility of finding a stakeholder who was acceptable to all the parties and for the funds in question to be transferred to that other stakeholder instead. 

15.  I should point out at this stage that, in relation to that suggestion, concerns were expressed on behalf of the Claimant as to possible tax implications that might arise as a result of some other stakeholder being appointed, in particular if a representative office of a Hong Kong law firm were appointed as stakeholder, as it was considered by the Claimant’s legal advisers that there was a risk that, in the hands of such a stakeholder, the funds might be subject to PRC tax of a not insignificant amount.  In the result, it was not possible to reach any agreement as to the identity of an alternative stakeholder and the matter has therefore come back for hearing today.

16.  At the hearing today, Mr Yau, who appeared for the Plaintiff, but who had not previously appeared for the Plaintiff in these proceedings, made a number of submissions.  He submitted that the interpleader proceedings were misconceived and that this was a case in which the Defendant’s application for interpleader relief should be dismissed on the grounds that the Defendant was in effect colluding with the Claimant in relation to this matter.  That, however, is not a matter that is before me for consideration today.  It may be that, notwithstanding the fact that the parties will, by the time the interpleader summons comes on for hearing, have filed what one imagines will be full evidence in support of their respective claims to the matter (the Claimant for its part certainly has done so, whereas the Plaintiff has to date filed a relatively short affirmation asserting its entitlement to the funds in question), it will still be open to the Plaintiff to take the point that this is not a suitable situation for interpleader relief to be ordered at all.  However, that matter is not now before me and I do not propose to say anything more about it today. 

17.  However, Mr Yau did also draw my attention to what he submitted was deliberate delay on the part of the Defendant in progressing this action while it was still in the hands of the Defendant alone to respond to it, and on the part of the Defendant and the Claimant in progressing the interpleader proceedings once directions had been given for evidence to be filed in relation to them.  With respect to Mr Yau, I am unable to agree that there is evidence of any deliberate delay or obstruction on the part of either the Defendant or the Claimant up to this point.  It is fair to say that there has been delay and that such delay has not been short.  That said, however, an explanation for the delay up to the point when the interpleader summons was issued has been provided by the Defendant’s solicitor in his affidavit filed in support of the Defendant’s application to set aside the judgment which had been entered against him.  Equally, from the point of view of the Claimant, it is clear from the nature of its claim in the proceedings to which the Defendant referred in support of his application to interplead that the Claimant’s claim is a complex one, and it has now filed its evidence in support of its claim in the interpleader summons.  That evidence consists of a substantial affidavit supported by four box files of supporting exhibits.  Having regard to those matters, it does not seem to me that I can fairly say that there has been deliberate delay or obstructiveness on the part of either the defendant or the claimant, although there has undoubtedly been considerable delay in the progress of these proceedings.

18.  It seems to me, however, that the real question for determination today is simply whether or not a stay should have been granted in relation to execution of the default judgment that had been entered against the Defendant when he failed to serve his defence as required under the unless order, and if so whether it should have been made subject to some condition involving payment into court, or appointment of a different stakeholder.

19.  In my view, there can be no question that the right course was to grant a stay of execution on that judgment.  At the time when the judgment was entered, the Plaintiff well knew that the Defendant had already applied for directions to be given for an interpleader to be determined as between the Plaintiff and the Claimant.  In those circumstances it seems to me that it was not appropriate for the Plaintiff to have entered judgment against the Defendant, knowing full well that this matter had to be determined.  Even if the Plaintiff was strictly entitled or within its rights to enter that judgment, it seems to me that the Defendant, having applied for it to be set aside, would be entitled to a stay of execution until such time as its entitlement to seek interpleader relief, at least, had been determined.

20.  That being so, I do not think that Mr Registrar Chan can be faulted for granting a stay of execution of the judgment pending the resolution of the application to set aside the default judgment, or pending the resolution of the question of whether or not interpleader relief should be granted and an interpleader directed to be tried.

21.  The question, therefore reduces itself to the relatively narrow one of whether or not conditions should have been imposed on the granting of such a stay.  The only condition that had been proposed at the time when the matter was before the Registrar was a condition requiring payment into court.  At that point, although there was no solid evidence before the Registrar, concerns were expressed as to the possible foreign exchange control implications of that course and in particular as to whether or not it would actually be possible for the funds to be transferred to Hong Kong.  Since then evidence has been filed by both the Plaintiff and the Defendant.  This evidence suggests that there may well be some question as to whether or not it is possible for the funds to be transferred to Hong Kong, and the possibility of a transfer of the funds to Hong Kong and payment into court has not been seriously pursued before me today. 

22.  In those circumstances I do not think it would be appropriate for me to order that the funds be brought into court, since to do so may not be possible.  That leaves the question of whether or not some other terms should be imposed in relation to the stay.

23.  I should point out that initially no point appears to have been taken as to the identity of the stakeholder, and it would appear to have been, perhaps, a source of some comfort to the Registrar that the funds were held by an apparently independent third party.  Today, the Plaintiff has sought to persuade me that it would not be appropriate for the funds to remain with the current stakeholder and that some alternative arrangement should be made.  However, it was not until this morning, by an affirmation that was only prepared last night, that the Plaintiff has put forward some basis for suggesting that the present stakeholder may not be the ideal person to hold the funds.  The Plaintiff’s evidence suggests that the stakeholder is a personal friend of the Defendant and that the stakeholder has previously acted for the Claimant in apparently unrelated proceedings in the People’s Republic of China. 

24.  The Defendant and the Claimant have had no real opportunity to respond to that material, but even accepting that the Defendant has previously described the stakeholder as a friend, or very good friend, of his, and even accepting that the stakeholder has previously acted in other matters for the Claimant, it seems to me that at this stage, with no alternative stakeholder readily available, there is no suitable alternative candidate before the court.  The Plaintiff has previously suggested that the representative office of its firm, or that of the Claimant, should act as stakeholder.  It has also suggested that solicitors who have acted for the Plaintiff in other proceedings in the past, should, through their representative office in Beijing, act as stakeholders.  None of these suggestions have come to anything.  It would appear that by last night, the plaintiff had managed to find one other Chinese law firm to act as a possible stakeholder in relation to this matter.  However, as has been pointed out by those acting for the Defendant and the Claimant, at this stage, the precise terms on which that stakeholder might act are not entirely clear and the question of possible tax consequences that might arise in relation to the stakeholding by that other stakeholder do not appear to have been addressed.

25.  It seems to me also relevant to note that, although the concern as to the existing stakeholder had been put on the basis of his connections with the Defendant and the Claimant, the neutrality or otherwise of any potential stakeholder would not seem to have been a particularly major concern in this case in the past, given that the Plaintiff has itself proposed that its representative office, or solicitors who have previously acted for the Plaintiff, should act as a stakeholder and that it has indeed proposed that either of the law firms acting for the Defendant or the Claimant could also act as stakeholders. 

26.  It does not seem to me that there is any solid evidence to suggest that the integrity of the present stakeholder is open to question, and that being the case, it does not seem to me that the fact that he may have previously acted for some or all of the parties now before me is necessarily a matter that disqualifies him from acting as a stakeholder, particularly in the absence of some other qualified candidate on which all the parties agree.

27.  Mr Yau drew my attention to authority to suggest that it was undesirable for a stakeholder to be appointed where he was chosen by one party, rather than by agreement by all the parties.  Both the Defendant and the Claimant had made it clear that provided a suitable stakeholder can be found and the questions of tax implications addressed, they would have no objection to the funds being stake held by some person other than the present stakeholder.  That has not been possible so far.  I do not rule out the possibility that it may be possible in the future for some suitable stakeholder to be found, and if such a stakeholder is found, it will always be open to the parties to agree that the funds should be transferred to that stakeholder. 

28.  However, dealing with the matter as it stands at the moment, it seems to me that there are no viable alternatives to the existing arrangement and I do not think in any event that the existing arrangement can be said to be one that is unfair or unsatisfactory from the point of view of any of the parties now before me.  I bear in mind the suggestion by Mr Yau, that it would be preferable for the funds to be held by a stakeholder who is a Hong Kong solicitor, but in the light of the fact that there are concerns about the tax implications of doing so, I do not think that it would be appropriate for me to direct that one of the firms representing the parties before me today should be directed to act as stakeholder in the matter.  It certainly would not be possible for me to do that without the consent and agreement of the firm concerned.

29.  In the circumstances, therefore, it seems to me that there can be no real question but that it was appropriate to grant a stay of execution pending the resolution of the summonses that are now outstanding.  Further, it seems to me that there is no reason why the funds should not continue to be stakeheld by the present stakeholder in the People’s Republic of China.  In those circumstances it seems to me that this appeal must fail, and I therefore dismiss the appeal.