JUN FUNG v. TONG WAN SZE (also known as WILSON TONG) AND OTHERS

HCA 1568/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1568 OF 2016

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JUDGMENT

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INTRODUCTION

1.  This is the appeal of the 2^nd defendant (D2) against the Final Judgment entered against him on 30 September 2016, ordering him to pay the plaintiff (P) the sum of RMB8 million (or its Hong Kong dollar equivalent) together interest thereon and also to pay P fixed costs of HK$11,045.

2.  D2’s appeal, which is purportedly made pursuant to O58, Rules of the High Court (RHC), is misconceived, as the Final Judgment was entered against him by the Registrar in default of defence pursuant to O19, RHC.  As such, the proper procedure that D2 should have followed is not one of appeal but one of setting aside a default judgment.  Moreover, there are reliefs sought by D2 in the Notice of Appeal which are plainly inapt for an application pursuant to O58.[1]

3.  However, in view of the fact that D2 has acted in person and that Ms Wong (counsel for P) has already prepared for the contingency, I consider it just to ignore the procedural irregularities and to deal with D2’s application as if it were an application to set aside the default judgment: see O2 r1, RHC.

D2’S REASONS FOR NOT FILING A DEFENCE

4.  D2 has filed two affirmations[2] in support of his application, I have considered their contents and the annexures carefully.

5.  D2 gives the following reasons for not having filed a defence:

(i) his frequent business trips;

(ii) his lack of legal knowledge; and

(iii) his lack of resource to engage lawyers.

6.  With respect, none of the above, whether taken individually or as a whole, can be an excuse for not filing a defence at all, not to say not filing it in time. 

7.  In particular, I note also that:

(i) D2 filed a notice of intention to defence[3] shortly after the Writ of Summons[4] (together with the Statement of Claim) had been validly served on him.  Therefore, it was not the case that he was not aware that P was suing him.

(ii) In Form 14, at §2, it was provided clearly that D2 had to file and served his defence within 28 days.  There was also a notice warning him that “This is a legal document.  The consequences of ignoring it may be serious.”  Furthermore, D2 is well-educated and a mature man with business experience.  Therefore, it would lie ill in D2’s mouth that he did not know the serious consequence of not responding to P’s claim in time.

(iii) P filed the Notice of Intention to Enter Judgment on 14 July 2016.  The application for default judgment was submitted to court on 24 August 2016.  The order for the Final Judgment was not made until 30 September 2016.  Therefore, P had already given more than adequate notice to D2 and allowed him plenty of time to respond.  Nevertheless, D2 still failed to file any defence. 

8.  Therefore, the default judgment has been regularly obtained.  In order for it to be set aside, it is not sufficient for D2 to show a merely “arguable” defence that would justify leave to defend under O14, RHC.  D2 must show that he has “a real prospect of success”.  To do so, he must satisfy the court that his case and the evidence that he adduces in support of it is potentially credible and carries some degree of conviction: see Hong Kong Civil Procedure 2017 (“HKCP”), at §19/9/1 & §13/9/14.

P’S CASE AGAINST D2

9.  Before going on to consider D2’s grounds for setting aside the default judgment, it would be convenient for me to set out P’s case against him as stated in the Statement of Claim.

10.  The dispute between the parties is about an Investment Agreement, dated 26 January 2013, signed by P on the other hand and D2, D3, D4 and D5 on the other.[5]  It was a term of the Investment Agreement that upon payment by P of RMB8 million, she would be issued with 4% of the shares in D4, D5 and China Wang Mao (HK) International Holdings Co Ltd (“Wang Mao HK”) within two weeks.  The Investment Agreement was signed by D2, both in his personal capacity as well as for D4.[6]  There was also a joint warranty by D2 and D3 that D4 would use its best endeavour to become a subject of acquisition or to apply for listing, including but not limited to he London stock Exchange, Hong Kong Stock Exchange, New York Stock Exchange, NASDAQ Stock Market, or a stock exchange by agreement between the parties.

11.  P’s case against D2 is that she had been induced into entering the Investment Agreement by the misrepresentations of D1, D2 and D3, which she said were made fraudulently and/or reckless and/or negligently.  For present purposes, I only need consider the misrepresentations allegedly made by D2.  The misrepresentations allegedly made by other defendants in the absence of D2 are not relevant.[7]

12.  Further or alternatively, P also alleges that there was a breach of the Investment Agreement in that D4 had failed to issue the shares (including the shares in D4) to her as agreed.  There is also an allegation of anticipatory breach in that D4 had been struck off of the companies register for non‑payment of its administration fee, so that it has been placed beyond reach of its objective of being a subjection of acquisition or being listed.

D2’S GROUNDS FOR SETTING ASIDE

13.  According to D2’s affirmations, his grounds for “reversing” or “repealing” the judgment entered against him include the following:

(i) P has made a “fraudulent claim” that D4 wholly owned D5.  There is, however, evidence that D5 was in fact wholly owned by D3;

(ii) although she had not been issued with any shares of D4, she had enjoyed all the rights and benefits of a shareholder including attending the shareholders’ meetings, voting at the meetings, attending events at the companies’ expenses and receiving shareholders’ emails;

(iii) P is a professional investor; 

(iv) out of the RMB8 million price, D4 had only received RMB1.6 million, the rest of the money had gone to D3 and D5;

(v) there were disputes between D2 and D3 and D2 had also suffered losses;

(vi) there are other defendants liable and he should not be made responsible for the whole amount of RMB8 million;

(vii) before D4 could be in a position to issue its shares to P, it was necessary to form a Wholly Foreign Owned Enterprise (“WFOE”) between D4 and D5, so that D4 would hold 100% of the WFOE and the WFOE would in turn hold 100% of D5.  However, the formation of the WFOE had failed which rendered it impossible for D4 to issue any of its shares to P;

(viii) Hong Kong is not the most convenient forum to hear and rule on P’s claim, as D3 is a mainland citizen, D4 a BVI company and D5 a mainland company.  Besides, it is impossible for D2 to have a fair hearing and a fair judgment in Hong Kong, as D2 would not be able to require mainland witnesses to come to give evidence; and

(ix) as regards D3 and D5, no order has been made for the service of the writ of summons out of the jurisdiction.

14.  Apart from the above, D2 has also raised other matters which concerns P’s case against the other defendants.  However, since those matters do not bear on P’s case against D2, I would not deal with them in this judgment.  It suffices for me to say that I have considered all those and do not find that any of them can assist D2.

CONSIDERATION

As to (i): D3’s ownership of D5

15.  With respect, I am unable to see how it can be said that P has made a “fraudulent claim” against the defendants, just because there is an incorrect assertion in her Statement of Claim that D5 was wholly owned by D4.[8]  Nor can I see how this point advances D2’s defence in any way.  In particular, as submitted by Ms Wong, counsel acting for P, the point of ownership between D4 and D5 has nothing to do with the defendants’ obligations to P under the Investment Agreement or the misrepresentations allegedly made to her by D2 which, she says, had induced her into entering the Investment Agreement.

As to (ii): P’s enjoyment of shareholder benefits

16.  The enjoyment of shareholder rights and benefits cannot be equated with the allotment of issues.  D2 has not denied that no shares of D4 had ever been issued to P.  This ground is simply no answer to D2’s obligation under the Investment Agreement.  It is also no answer to P’s case of misrepresentation.  It is also not a defence to any breaches of contractual obligation.

As to (iii): P an experience investor

17.  P has denied that she is a professional investor.  In any event, it cannot be an excuse for the misrepresentations which, she alleges, had been made to her, many of them go to the value of the business she was persuaded to invest, its profitability, the costs and the risks involved.

As to (iv): Only part of the purchase price received by D4

As to (v): Disputes with D3 and losses suffered by D2

As to (vi): Other people also liable

18.  These grounds are related and can be dealt with together. Basically, D2 is saying that he should not be held liable for the whole amount of RMB8 million which P says she had lost.  This is on the bases that his company (D4, not he personally) had only received part of the contract price, that there are other defendants who had made promises and warranties to her upon which she had relied, that the failure of the business was the responsibility of D3 and that he (D2) had also suffered losses.

19.  As regards P’s case for misrepresentations, the allegation is that D2’s misrepresentations were among the causes which had contributed to her loss.  There is no dispute that P had paid a total of RMB 8 million.  As such, D2’s liability to P (if any) is “joint and several” with D1 and D3.  As a matter of law, the fact that D4, not D2, had received part of the purchase price from P would not prevent her from suing him for the whole amount which she says she had lost.  Furthermore, even though it is P’s case that she had also been induced by the misrepresentations of other defendants, that would not prevent her from suing D2 for the entire amount. 

20.  As regards P’s case based on contract, the contracting parties to the Investment Agreement were D2 and D3 (as Party A) on one side and P (as Party B) on the other.  D2 and D3 would be jointly liable for the warranties which they had jointly made (as Party A) to P under the Investment Agreement.  As such, P is entitled to sue either one or both of them for all the damages as a result of the breach of those warranties.

21.  As regards D2’s alleged disputes with D3, whether or not P knew about them, they are matters between D2 and D3 which can have no bearing on P’s claim against either of them. 

22.  Regarding D2’s contention that D4 (his company) had received only part of the purchase price from P, it is also pertinent to note the following:

(a) Under the Investment Agreement, the RMB8 million could be paid to any of D3, D4 and D5 and this was what P did.

(b) P’s case is that she made part of the contract payments to D3 and D5 as requested by D1 who was D4’s CFO.  D2 had not expressly denied that D1 was D4’s CFO until the time of his oral submissions. Moreover, in D2’s two affirmations filed for the present application, D2 depones that:

“The 1^st Defendant as the CFO failed to inform the 2^nd and 4^th Defendants that the Plaintiff’s had deposited investment monies to the 3^rd and 5^th Defendants.”[9]

“The 1^st Defendant as CEO who failed to fully monitor and to confirm with the 2^nd and 4^th Defendants that the 3^rd Defendant had deposited the Plaintiff’s monies into the 5^th Defendant’s corporate bank account”.

A plain and natural reading of the above paragraphs is that D2 was admitting that D1 was the CFO of D4.  Although D2 in his affirmation disputes D1’s authority to direct P as to which bank accounts the contract price should be paid into, one would ask, rhetorically, if D1 was not the CEO of D4, why should he inform D2 or D4 that P had made payments to D3 and D5?

(c) P made the payments by end of January 2013. Prior to the present action, there had been no complaint from either D2 or D4 that they had not received any part of the contract price from P or that her payments to D3 and D5 were not valid payments for the purpose of the Investment Agreement.

23.  These grounds have no merits whatsoever.

As to (vii): abortion of the WFOE

24.  As aforesaid, it was stated in the Investment Agreement that it was the intention of the parties that P be issued with 4% of the shares respectively in (i) D5; (ii) D4; and (iii) Wang Mao HK.  The latter was a company registered in Hong Kong and a subsidiary of D4. 

25.  It has to be pointed out, however, that P’s entitlement under the Investment Agreement to the 4% shareholding in the three companies was not conditional upon Wang Mao HK becoming a WFOE under the mainland law.  Therefore, the failure of Wang Mao HK to become a WFOE cannot affect P’s case against D2 basing on the non‑issuance of D4’s share to her.[10]  D2 signed the Investment Agreement in his personal capacity as well as for D4 and therefore he was bound by its terms.  However, no valid reason has been provided by D2 as to why P had not been issued with the shares in D4. 

As to (viii): Most convenient forum

26.  This ground has completely ignored the provision in the Investment Agreement that any disputes arising from the Investment Agreement were to be decided according to the law of Hong Kong and by the courts of Hong Kong.  I can no reason not to give effect to that provision.

27.  Secondly, P’s case is that the alleged false misrepresentations were made to her by D1‑D3 in Hong Kong and that she transferred the contract price to the others from Hong Kong.  Therefore, Hong Kong is a natural forum for the disputes between P and the defendants.

28.  Thirdly, D2 has failed to challenge the court’s jurisdiction over the matter according to the provisions of O 12 r 8, RHC.

29.  To conclude, this ground is misconceived. 

As to (ix): no order for serving writ out of jurisdiction

30.  The Writ of Summons was taken out on 14 June 2016.  As such, there is still plenty of time for P to make the relevant applications for the service of the Writ of Summons on D3 and D5. 

31.  In any event, whether or not P would pursue her claim against the other defendants is a matter entirely for her.  It does not affect her case against D2.  On the other hand, it is a matter entirely for D2 whether and how he would seek contribution for P’s claim from any of the other defendants.

Conclusion regarding D2’s grounds

32.  As discussed above, none of D2’s grounds, whether taken individually or collectively, has any merits.  

P’s case against D2 not contradicted

33.  In addition, it is pertinent to note that D2 has failed to dispute any of the misrepresentations which P says he had made to her[11] which she had relied upon[12] and caused her to enter the Investment Agreement[13] and resulted in her losses.[14]

CONCLUSION

34.  As aforesaid, D2’s purported appeal pursuant to O58, RHC is misconceived as the judgment against him was entered in default of defence. 

35.  Even if one treats D2’s application as an application to set aside the default judgment which has been regularly obtained, no valid reasons have been given for D2’s failure to file a defence and none of the grounds relied upon by him has any merits.  Moreover, D2 has singularly failed to place any materials before the court to contradict P’s case against him, not to say raising any real prospect of success.

36.  Based on the above, D2’s application is dismissed.

COSTS

37.  I can see no reason not to follow the general rule that costs should follow the event by ordering D2 pay P’s costs for the present application.

38.  In compliance with the practice of the court, Ms Wong has provided the Court with a statement of P’s costs and submissions have been heard from both sides on costs.  I note that P is claiming a total of $139,392 out of which $66,880 is counsel’s fees and $47,800 is professional work by the handling solicitors.[15]

39.  In my view, there are two major items which are excessive and call for reduction:

(i) item B2.1 (Telephone conference with client: 3 hours[16]), I would only allow 1.5 hours;

(ii) item B3.8 (Attending with counsel at hearing: 6 hours[17]), the actual hearing only lasted for about 2 hours and I would allow only 2 hours.

That would take away $6,000 and $12,000 respectively from the sum claimed.  There are other relative minor items for reduction which I would not go into minute details.

40.  By way of summary assessment and taking a broad brush approach, I order that D is to pay P a fixed sum of $115,000 as costs of this application.