CHINA HUAXIN PETROLEUM LTD (IN LIQUIDATION) AND ANOTHER v. YE JIANMING

HCA 1080/2023

[2024] HKCFI 2838

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1080 OF 2023

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JUDGMENT

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Application

1.  This is an application by summons filed by the 1^st plaintiff (“P1”) and the 2^nd plaintiff (“P2”) on 8 July 2024 (the “Summons”) for default judgment to be entered against the defendant (“D”) for:

(1)  An order for payment by D to P1 and P2 in the sum of HK$117,718,774 and HK$57,952,647 (together, the “Sums”) respectively.

(2)  Interest on the Sums at HSBC prime rate plus 1% from 21 December 2018 to the date of judgment, and thereafter at judgment rate until full payment.

(3)  A declaration that P1 and P2 are each entitled to be subrogated to the rights of the Belcher’s Mortgage (as defined in the Summons) over Flat D on the 57^th Floor of Tower 2, The Belcher’s, No. 89 Pok Fu Lam Road, Hong Kong (the “Belcher’s Property”).

(4)  A declaration that P1 and P2 are each entitled to be subrogated to the rights of the Lantau Island Mortgage (as defined in the Summons) over House No. 2 and Car Park Space No. 2, Lot No.238 in DD331, Lantau Island, New Territories (the “Lantau Island Property”).

2.  P1 and P2 also seek leave to enforce the Belcher’s Mortgage and the Lantau Island Mortgage, delivery by D to P1 and P2 for vacant possession of and an order for sale of the Belcher’s Property and the Lantau Island Property.

3.  It was accepted by Mr Ho, counsel for P1 and P2 that the default judgment application should first be dealt with before P1 and P2 could proceed to apply separately by way of a mortgagee’s action for the enforcement of the Belcher’s Mortgage and the Lantau Island Mortgage. I therefore will adjourn paragraph 2 of the Summons sine die with liberty to restore.

P1 and P2’s Claim Against D

4.  The following is a summary of the pleaded facts:

(1)  P1 and P2 are wholly-owned subsidiaries of Shanghai Huaxin Group (Hongkong) Limited (“SHX”). The Bank of East Asia (“BEA”) granted a loan facility (the “Loan”) to SHX, as borrower.

(2)  The Loan was conditional upon legal charges or mortgages over various properties respectively owned by P1, P2 and D in favour of BEA.

(3)  Each of P1, P2, and D provided mortgages over their respective properties as security for the Loan.

(4)  The mortgages D granted were over:

(a)  the Lantau Island Property; and

(b)  the Belcher’s Property.

(5)  Upon an event of default, including a winding up petition being presented against SHX, BEA is entitled to take possession of the Lantau Island Property and the Belcher’s Property.

(6)  A winding up petition was presented by another creditor against SHX on 17 May 2018. Provisional liquidators of SHX were appointed on 17 July 2018 and on 3 September 2018 SHX was wound up.

(7)  SHX was indebted to BEA in the sum of HK$263,537,819.17 and US$32,145,214.93 as at 8 August 2018.

(8)  With the sanction of the court, P1, P2 and SHX sold various of the mortgaged properties between October 2018 to January 2019 to settle the Loan and the rest of the proceeds were paid into a trust account.

(9)  As at 21 December 2018, after the Loan was settled in full, the total loan amount plus interest amount to HK$530,562,673.16.

(10)  P1 contributed to the repayment of the Loan with the sale proceeds of HK$295,365,604 whilst P2 contributed with the sale proceeds of HK$235,197,069.16.

(11)  D did not make any contribution in discharge of the Loan.

(12)  D was unjustly enriched at the expense of P1 and P2 as a result of the sale proceeds of P1 and P2’s properties being applied to the Loan without contribution from D as a co-surety.

(13)  Equity avails the remedy of subrogation to P1 and P2 over the Belcher’s Mortgage and the Lantau Island Mortgage against D.

(14)  In April 2022, pursuant to Harris J’s decision in Re Shanghai Huaxin Group (Hongkong) Ltd [2022] HKCFI 1060; [2022] HKCLC 499, P1 and P2 recovered by way of indemnity from SHX the sums of HK$1,975,409 and HK$1,573,001, respectively.

(15)  Consequently, P1 and P2 have effectively discharged D’s portion of the liability as a co-surety under the Loan.

5.  Therefore, P1 and P2 are seeking a claim against D based on unjust enrichment and subrogation.

Service of Documents

6.  Pursuant to the Order of Master Ho dated 3 January 2024 (the “Sub-Service Order”), service of the Writ of Summons and the Summons were effected on behalf of P1 and P2 on D by leaving at 5 addresses and by advertising in the Standard and the Hong Kong Commercial Daily.

7.  I have considered the Affirmations of Service filed for P1 and P2. I am satisfied that:

(1)  service of the Writ to this action was effected on D on 2 February 2024 with no acknowledgment of service filed by D;

(2)  service of the Sub-Service Order was effected on D on 2 February 2024; and

(3)  service of the Summons was effected on D on 8 July 2024.

8.  I am also satisfied that the service is regular and D has defaulted in filing a Defence in opposition to the Statement of Claim. Accordingly, P is entitled to seek default judgment pursuant to Order 19 rule 7 of the Rules of the High Court against D.

Basis for Default Judgment

9.  The principles on applications for default judgment under Order 19 rule 7 of the Rules of the High Court are trite:

“30. In such an application, the Court cannot receive any evidence, but must consider whether to give judgment according to the pleadings alone. The statement of claim must show a proper case for the order the applicant seeks to obtain, and the Court shall give such judgment as the plaintiff appears entitled to on his statement of claim only, and only if the pleaded facts give rise to the relief sought.[1]”

10.  As for declaratory relief, although it is not the normal practice for the court to grant a declaration without going to a trial, it is only a rule of practice rather than a rule of law. A declaration could be granted by the court on the basis that there is a genuine need for such relief to proprietary claim and on the merits of the case[2]. The position is set out by Coleman J. in Cheung Sai Lon v Cheung Sai Ha (supra)[3]:

“31. However, the power to give such default judgment is discretionary. In the exercise of that discretion, it is to be recognized that it is not the normal practice of the Court to make a declaration without trial. This is not a legal or inflexible rule, but rather a rule of practice, which need not be followed when the plaintiff has a genuine need for declaratory relief and justice would not be done if such relief were denied.

32. Even on what might appear to be straightforward applications, the Court does not act as a ‘rubber-stamp’ merely because of the uncontested nature of the application. In each case, it is necessary to consider whether the declaratory relief is properly made out on the pleading, and whether it is appropriate in the overall exercise of discretion for such relief to be granted without a trial.

33. In the exercise of the discretion, the Court will consider all relevant factors, including whether the plaintiff has established a strong and obvious case for proprietary relief on the face of its pleading, and where the claim is proprietary, whether there would be any prejudice to the plaintiff’s property and rights. The importance of a claim to proprietary relief arises because of the distinction from a merely personal claim. An order for payment, without more, would only put a plaintiff in the position of an unsecured judgment creditor. But a declaration of a proprietary interest will secure that interest.

34. As to what constitutes a genuine need for relief in the context of an application for default judgment involving a claim upon CICT [i.e. common intention constructive trust] or resulting trust, Mr Deng has drawn my attention to two cases.

(1) In Kan Kiu Chor v Fung Shu Fun (unreported, HCA 1902/2015, 6 April 2016, Recorder Cooney SC) a declaration on a CICT was granted on the basis that: (a) there was an acknowledgement of service; (b) the defendant did not contest the summons; (c) all the evidence in support of the plaintiff’s claim was in fact already before the Court and filed in previous affirmations; (d) large numbers of documents evidencing the plaintiff’s financing of the purchase of the property had been provided; and (e) there was a genuine need for declaratory relief and justice would not be done if relief was denied.

(2) In Lung Ka Kuen v Chu Chun Yuk (unreported, HCA 2832/2015, 18 October 2016, DHCJ Marlene Ng) the Kan case was distinguished on the basis that: (a) there was no acknowledgement of service; (b) the claim concerned interest in land that would affect other parties’ rights, and where in the particular case the first defendant was bankrupt and the second defendant was the official receiver, representing the interests of third-party creditors, and who expressed reservations as to the claim; (c) while the court is to look only at the pleadings, there was evidence already before the Court in the Kan case which indicated the strength of the case; and (d) the declaration sought went beyond the scope in any event, including future events.”

11.  Based on the Statement of Claim, I am satisfied that P1 and P2 are entitled to a declaration:

(1)  On the pleadings, P1 and P2 and D are all liable to repay the Loan to BEA.

(2)  P1 and P2 have paid off the Loan with no contribution from D.

(3)  In effect, P1 and P2 have discharged D’s portion of the liability as a co-surety under the Loan.

(4)  As co-sureties for the Loan, P1 and P2 are entitled to a right of subrogation in place of BEA in the Belcher’s Mortgage and the Lantau Island Mortgage[4].

(5)  Having taken into account the pro-rata share of the proceeds of SHX’s property (HK$1,975,409 to P1, and HK$1,573,001 to P2), D should pay HK$117,718,774 to P1 and HK$57,952,647 to P2.

12.  As regards the question whether there is genuine need for relief, I am of the view that there is a genuine need for the declaration:

(1)  Despite valid and regular service of legal processes, D has never appeared or in any way responded to the legal processes and proceedings since February 2024. D has not indicated that he would contest the proceedings. It would be an unnecessary use of court time, and a waste of legal fees, to proceed with a trial.

(2)  Having been notified of the present application, BEA has indicated that it is happy to release the Belcher’s Mortgage and the Lantau Island Mortgage. There is no indication that any other third-party interests would be affected by the relief sought by P1 and P2 against D.

(3)  Without the declaratory relief, P1 and P2 are unable to recover the recover contribution from D and they therefore severely prejudiced.

Disposition

13.  Accordingly, I have granted an order substantially in terms of the reliefs sought by P1 and P2 in the Summons as follows:

(1)  The defendant do pay the 1^st plaintiff HK$117,718,774.

(2)  The defendant do pay the 2^nd plaintiff HK$57,952,647.

(3)  Interest on the aforesaid sums at prime rate +1% from 21 December 2018 to the date of judgment, and thereafter at judgment rate until full payment.

(4)  A declaration that the 1^st and 2^nd plaintiffs are each entitled to be subrogated to the rights of the Belcher’s Mortgage (as defined in the Schedule to the Summons) over Flat D on the 57^th Floor of Tower 2, The Belcher’s, No. 89 Pok Fu Lam Road, Hong Kong.

(5)  A declaration that the 1^st and 2^nd plaintiffs are each entitled to be subrogated to the rights of the Lantau Island Mortgage (as defined in the Schedule to the Summons) over House No. 2 and Car Park Space No. 2, Lot No.238 in DD331, Lantau Island, New Territories.

(6)  Costs, including all costs reserved, incurred by the 1^st and 2^nd plaintiffs in this claim be paid by the defendant, with certificate for counsel, to be taxed if not agreed.