NIFSMBC-V2006S1 INVESTMENT LTD PARTNERSHIP AND ANOTHER v. GAINDAY INVESTMENTS LTD

HCA 2738/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2738 OF 2008

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BETWEEN

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J U D G M E N T

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I. INTRODUCTION

1.  Gainday (a BVI company) appeals against the Master’s refusal to set aside a default judgment. By that judgment a principal sum of about $26 million was held (together with interest thereon) to be payable to the plaintiffs.

II. BACKGROUND

2.  The principal sum represented the price of convertible bonds which the plaintiffs purchased from Gainday in November 2007. The bonds were issued by Ecolean. It was a term of the bonds that Ecolean would pay interest of 2.5% semi-annually in arrears on 29 April and 29 October from June 2005. The face value of the bonds sold to the Plaintiffs was about US$1.5 million.

3.  In the Sale Agreement and the Assignment Deed whereby the bonds were transferred, Gainday expressly warranted to the plaintiffs that (to the best of Gainday’s knowledge) Ecolean had not defaulted on its obligations under the bonds (including the obligation to pay interest). By the Sale Agreement, Gainday further expressly acknowledged that the plaintiffs were buying the bonds in reliance on Gainday’s warranties.

4.  The plaintiffs claim never to have received interest under the bonds. They have adduced evidence that, in breach of its obligations under the bonds, Ecolean has not paid interest since April 2007. If so, Gainday would not have received any interest from Ecolean in October 2007. Gainday could not then have warranted in November 2007 (when the Plaintiffs acquired the bonds) that, to the best of Gainday’s knowledge, Ecolean had not been in default of its obligations under the bonds.

5.  Consequently, it is the plaintiffs’ case that they were misled by Gainday’s misrepresentation as to Ecolean’s compliance with its obligations. The plaintiffs say that they are entitled as a result to treat the sale as rescinded and to claim back the price paid for the bonds including interest thereon.

6.  The plaintiffs obtained leave to serve the writ on Gainday in the BVI. Gainday not having acknowledged service within the stipulated time, the plaintiffs obtained default judgment.

III. DISCUSSION

7.  Mr. Ivan Cheung (appearing for Gainday) advances 2 arguments for setting aside the default judgment.

A. 1^st Argument: Irregularity in naming the plaintiffs

8.  Mr. Cheung observes that, where a judgment has been irregularly obtained, it should be set aside as a matter of course.

9.  Mr. Cheung says that these proceedings were wrongly brought in the name of the plaintiff limited partnerships. By RHC Order 81 Rule 1, partners may bring an action in the name of their partnership. But Order 81 Rule 1 only allows this where the partnership is “carrying on business within the jurisdiction”.

10.  Here the partnerships give a Tokyo address in the writ. There is no evidence that the partnerships directly carry on business in Hong Kong. In those premises, Mr. Cheung concludes that there is an irregularity. The plaintiffs (Mr. Cheung says) cannot sue merely as named partnerships. These proceedings ought to have been brought in the names of the individuals comprising the partnerships. Mr. Cheung submits that, on the basis of this irregularity alone, the default judgment should be set aside.

11.  I disagree.

12.  In Dinardo, Lenoci Sr, Lenoci Jr and Schinella t/a One Sylvan Road North Associates v. Lark International Ltd. HCA 14565 of 1998, 2 June 1999, the plaintiff firm did not carry on business in Hong Kong. But it instituted proceedings in the name of the firm (One Sylvan Road North Associates). Objection was taken by the defendant when the firm applied for summary judgment. As here, the defendant argued that Order 81 Rule 1 did not authorise the use of the partnership name as plaintiff.

13.  Yuen J held that the institution of proceedings in the firm name was an irregularity. But she added that the irregularity “does not nullify the proceedings”. There being no prejudice to the defendant occasioned by the use of the firm name, Yuen J gave immediate leave to correct the writ to reflect the names of the individual partners in the firm. She then confirmed the summary judgment granted by the Master.

14.  Here it is difficult to see how the “irregularity” in the identification of the plaintiffs constitutes a material unfairness to Gainday which necessitates the setting aside of the default judgment. It is not every irregularity, however minor, which automatically calls for the setting aside of a default judgment.

15.  Normally, the Court sets aside a default judgment where, as a result of an irregularity, a defendant is deprived of a fair opportunity to acknowledge service of a claim and to state one’s defence. Typical irregularities which lead to the setting aside of a default judgment are: the bad service of a Writ; the giving of judgment before the time for acknowledging service has elapsed; the award of more than a plaintiff is entitled to receive; and the procuring of a judgment by fraud. In the situations just listed, there would be obvious unfairness to the defendant if the irregularities involved were not treated as nullifying the default judgment.

16.  Here the misnaming of the plaintiffs could not have caused Gainday any prejudice. Nor is there any allegation of the judgment having been obtained by fraud or having been given for an excessive amount. Mr. Cheung does not suggest that Gainday did not know what the plaintiff partnerships were and why they were suing Gainday. Mr. Cheung can hardly do so since the Agreement and the Assignment for the convertible bonds only identified the plaintiffs by their limited partnership name and that seemed good enough for Gainday at the time.

17.  In my view, the irregularity identified by Mr. Cheung does not constitute any unfairness which needs to be countered by treating the default judgment as a nullity. If need be, the irregularity can be readily cured by applying Dinardo and giving leave now to amend the plaintiffs’ names on the Writ.

18.  Mr. Cheung cites 2 cases in support of his 1^st argument. But I do not believe that the cases assist.

19.  In Von Hellfeld v. E. Rechnitzer and Mayer Freres & Co [1914] 1 Ch 748 the plaintiff sued French firm Mayer Freres as a partnership, rather than suing the individuals comprising Mayer Freres. The English Court of Appeal held that the proceedings against Mayer Freres should be set aside. It was not possible (under the then English equivalent of our Order 81) to sue foreign partners in the name of their firm. Moreover, there was no evidence that under French law a partnership had a personality distinct from its individual partners.

20.  In contrast to the present case where the partnerships are the plaintiffs, Von Hellfeld was a situation where the partnership was named as defendant. The individuals making up a partnership change from time to time. A given person who was once (but no longer is) a partner, may be in doubt when a partnership is sued in its firm name, whether he is also meant to be a defendant. There might then be prejudice to that person, because he does not know whether or not he should acknowledge service. On the other hand, if the partnership acknowledges service, it would be uncertain whether such service covers the former partner.

21.  I am prepared to assume then that, where individuals are simply sued as a defendant partnership, there may be a lack of clarity which could in many instances lead to a writ being set aside as irregular. But such consideration does not apply where (as here) the partnership is a plaintiff. The present case is distinguishable.

22.  In Oxnard Financing SA v. Rahn and others [1998] 1 WLR 1465 the plaintiff sued a Swiss partnership by naming the individual partners as defendants. The English Court of Appeal held that the question whether a partnership could or must be sued in its own name was to be decided by reference to English law as the law of the forum. That is because the law of the forum governs procedural questions. By English law (in particular the then equivalent of our Order 81), it was open to a plaintiff to sue the individuals comprising a partnership, even if under Swiss law the partnership had a separate legal personality.

23.  Although I agree with the conclusions in Oxnard, I do not believe that the case helps very much one way or the other. Oxnard concerns the situation where partners are being sued individually, not that where a partnership is suing. The case does not appear to be relevant in the present context.

24.  In summary, I do not think that the irregularity here calls for the setting aside of the default judgment.

B. 2^nd Argument: Reasonable prospect of success

25.  A default judgment may be set aside in the exercise of the Court’s discretion where a defendant has a reasonable prospect of success.

26.  By way of defence, Gainday alleges that Ecolean paid interest of $140,000 in October 2007. Gainday contends that, as it had represented to the plaintiffs when assigning the bonds, it was unaware of any default on Ecolean’s part prior to the sale of the bonds to the plaintiffs.

27.  Mr. Cheung says that, given Gainday has filed affirmation evidence deposing that $140,000 interest was paid in October 2007, the Court cannot say (in the absence of trial and cross-examination) whether the plaintiffs or Gainday is right. It must therefore be (Mr. Cheung concludes) that Gainday has a reasonable prospect of success.

28.  But what does Gainday’s evidence amount to?

29.  Mr. Mung (a director of Lucky Seven (the corporate director of Gainday)) deposes that he was informed by an unidentified person (said to have been a director of Gainday in October 2007) that Ecolean paid a $140,000 dividend in October2007. As Lucky Seven did not become Gainday’s director until 2008, Mr. Mung has no personal knowledge of whether interest was paid in October 2007. His evidence on the issue is at best hearsay. Even then, a bare statement of what Mr. Mung was told by some unknown director is too vague to constitute credible evidence.

30.  In support of Gainday’s case, Mr. Mung produces a note signed by a Mr. Liu Shun Chuen on 11 May 2009. The note states:-

“I am writing to confirm you that I had delivered about $140,000 in cash from Ecolean Fine Chemicals Group Limited to Gainday Investments Limited about October 2007.  To my best understanding, the said $140,000 cash payment represented the soon due coupon interest payment of some type of convertible notes.”

31.  Mr. Mung says that, the note apart, there is no document evidencing the payment of interest by Ecolean in October 2007. For instance, no receipt, bank record, or ledger entry has been produced to bolster the assertions in the note.

32.  I think that Mr. Jenkin Suen (appearing for the plaintiffs) correctly characterises Gainday’s evidence as “plainly incredible”. The note only casts doubts on the credibility of Gainday’s defence.

33.  For instance, the terms upon which the bonds were issued provide that interest is to be paid by “telegraphic transfer into such bank account in New York City as the Bondholder may notify”. Why then would interest on the US$ bonds be handed over in HK$ worth of cash by Ecolean to Gainday through the agency of Mr. Liu?

34.  In any event, who is Mr. Liu? Why should weight be placed on his note as evidence of what has transpired? If money was handed over by Mr. Liu in cash, why is Gainday unable to produce a copy receipt? Did Mr. Liu, contrary to normal practice, merely hand over cash without obtaining a receipt? Mr. Mung does not condescend to particulars on these troubling matters.

35.  At the end of the day, all the Court has is an unparticularised hearsay statement by Mr. Mung and a cryptic and unsworn assertion by Mr. Liu. The quality of Gainday’s evidence is poor. On what has been placed before the Court, I cannot say that Gainday’s defence has a prospect of success.

36.  In all likelihood, Ecolean paid no interest to Gainday in October 2007. That is very possibly why Gainday is having difficulty in adducing evidence of a payment. Gainday would have known that no payment was received. In representing otherwise, Gainday would have breached its warranty. There is no basis upon which I can set aside the default judgment in the exercise of my discretion.

IV. CONCLUSION

37.  Gainday’s appeal against the Master is dismissed.