楊佩玲 v. SUPER BEST INVESTMENT LTD

HCA 1465/2022

[2023] HKCFI 2494

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1465 OF 2022

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DECISION

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A.  Introduction

1.  This is the hearing of the summons first taken out on 30 December 2022[1] (the “Summons”) by the defendant (“D”) for (a) leave to file its acknowledgement of service out of time (§1), (b) the default judgment of 28 December 2022 entered against it (the “Default Judgment”) be set aside (§2); (c) the proceedings be stayed in favour of arbitration (§3); and (d) alternative to (c), these proceedings be stayed in favour of PRC Court on the grounds of forum non conveniens (§4).

2.  Mr Dixon Co appeared for D.  Mr Kenneth Chan together with Ms Becky Wong appeared by the plaintiff (“P”).

B.  The affirmations

3.  In support and reply, D has filed 2 affirmations by Au Siu Fung (“Au”, “Au/Aff1” and “Au/Aff2”).  Au is a director of D.

4.  In opposition, P herself has filed an affirmation (“P/Aff”).

C.  Parties’ cases and stances

5.  The Writ is dated 2 November 2022.  It is indorsed with a Statement of Claim (“SOC”).

6.  P’s pleaded case is a straightforward one.  She sues to enforce a loan agreement of 4 May 2015 (the “2015 Loan”, and the “2015 Loan Agreement”).  She was the lender.  D was the borrower.  There were other parties, who joined to give effect to the securities set out therein.  The principal was RMB15,000,000.  That was in effect the unpaid principal of RMB10,000,000 and accrued interest (RMB5,000,000) rolled over from an earlier loan made in May 2013 for 2 years (the “2013 Loan”, together with the 2015 Loan, the “Loans”, and the “2013 Loan Agreement”, and together with the 2015 Loan Agreement, the “Loan Agreements”).  Interest was 25% per annum.  The term was 2 years.

7.  On 5 May 2017, D failed to repay the 2015 Loan.

8.  Despite the issue of the Writ and its service upon D at its registered office, it being a Hong Kong limited company, D failed to file any acknowledgment of service.  The Default Judgment was then on 28 December 2022 entered.

9.  D’s case, as summarized by Mr Co, is that the 2015 Loan Agreement was part of a series of transactions between the camp of Au and Ou Daoyi (“Ou”) (Ou being also a director of D) of the one part and the camp of one Chen JX of the other.  D says further that either P is merely the agent and nominee of Chen JX, or Chen JX is the agent of P and having authority to represent P.

10.  Au says that communication had been delayed by the pandemic.  D had notice of the Writ late.  When it sought to file its acknowledgment of service on 28 December 2022, filing was refused on the basis that the Default Judgment had been entered.  2 days later, it filed the Summons.

11.  D relies principally on a written agreement said to be supplemental to the 2015 Loan Agreement (the “Supplemental Agreement”), and the arbitration clause contained therein (the “Arbitration Clause”). Alternatively, D relies on the doctrine of forum non conveniens.

12.  P in P/Aff says that whilst the Supplemental Agreement had been suggested to her, she did not agree to it.  She also denies being an agent or nominee of Chen JX, but that the Loans concerned were made by her on commercial considerations.

D.  Whether to stay in favour of arbitration

13.  I consider first of all whether the proceedings should be stayed in favour of arbitration. 

14.  An analogy may be drawn with Choi Chung Bun Vincent v Australia China Holdings Limited [2011] 3 HKLRD 622.  In that case, default judgment was entered against the defendant.  The service of the writ was effected outside jurisdiction with leave.  Subsequently, the defendant sought to set aside that leave, on the basis that the claim was not one on contract, and hence not within the gateway under O. 11, r.1(1)(d).  In respect of that ground, McWalters J (as he then was) observed at §§38 and 47 that:

“38. I agree with the defendant that this is a freestanding ground and is not encompassed within the concept of a defence on the merits. The question is whether this is a matter that I can properly take into account when exercising the O.13 r.9 discretion. As previously mentioned the courts have been at pains to emphasise that the discretion is an unconditional and unfettered one …

…

47. Because in the first stage [of the decision of the court under O.11 as to whether to bring a putative defendant within in juridical embrace] the determination of the issue of whether the court has jurisdiction is fundamental to the proceedings, I am of the view that it is an issue to which the court should have regard in an O.13 r.9 application irrespective of the existence of a defence on the merits.  That the court may be acting unlawfully and as a consequence wrongly bringing a defendant into its extended jurisdictional grasp and compelling him to be subject to its authority is something that cannot be ignored.”

15.  As we will see, Article 8 of the UNCITRAL Model Law, given effect by section 20 of the Arbitration Ordinance, Cap 609 obliges the court to refer the parties to arbitration in an action which it applies, and to stay the related legal proceedings. 

16.  Given the regime, whether an action should be stayed in favor of arbitration goes to the fundamental issue as to whether the Court should respect the agreement between the parties and to decline jurisdiction.  That, similar to the challenge of a gateway under O.11, should be a freestanding matter not encompassed within the concept of a defence on the merits. 

17.  It does not appear that Mr Chan seeks to argue otherwise.

18.  Further, the delay in D’s attempted filing of the acknowledgment of service was a short one.  It also took out the Summons expeditiously. 

19.  The question of stay is hence in my view an issue decisive of whether the Default Judgment should be set aside and whether D should be granted leave to file acknowledgment out of time.

D.1.   The applicable law

20.  The starting point is section 20 of the Arbitration Ordinance, and in particular sections 20(1) and 20(5) thereof.  They are in the following terms:

“…

(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

…

(5) If the court refers the parties in an action to arbitration, it must make an order staying the legal proceedings in that action.”

21.  The term “arbitration agreement” is defined in section 19 of the Arbitration Ordinance, inter alia, that:

“(1) Option I of Article 7 of the UNCITRAL Model Law, the text of which is set out below, has effect—

‘Option I

Article 7. Definition and form of arbitration agreement

(1) "Arbitration agreement" is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(2) The arbitration agreement shall be in writing.

(3) An arbitration agreement is in writing if its content is recorded in any form, whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means. …’

…

(2) Without affecting subsection (1), an arbitration agreement is in writing if—

(a) the agreement is in a document, whether or not the document is signed by the parties to the agreement; or

(b) the agreement, although made otherwise than in writing, is recorded by one of the parties to the agreement, or by a third party, with the authority of each of the parties to the agreement.”

22.  In considering whether a stay pursuant to section 20(1) of the Arbitration Ordinance should be granted, the court asks 4 questions (“Question #1” to “Question #4”): (1) is there an arbitration agreement between the parties?  (2) Is the arbitration agreement capable of being performed, in the sense that it is not null and void, inoperative or incapable of being performed?  (3) Is there in reality a dispute or difference between the parties?  (4) Is the dispute or difference between the parties within the ambit of the arbitration agreement? – see Tommy CP Sze & Co v Li & Fung (Trading) Ltd & Ors [2003] 1 HKC 418 at §§18-23, and A v C [2023] HKCFI 804 at §5.

23.  The onus is on the applicant for stay to demonstrate that there is a prima facie case that the parties were bound by an arbitration clause, and unless the point is clear, the Court should not attempt to resolve the issue and the matter should be stayed in favour of arbitration, as it is for the tribunal to decide first on its jurisdiction PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309 at §§49-51. 

24.  The application of the “prima facie” threshold in cases not complicated by any further application to set aside a default judgment is in my view clear.  PCCW Global is indeed binding on this Court.  I reject Mr Chan’s submissions in so far as he is seeking to submit a higher threshold (at §§46 and 47 of his written submissions[2]).

25.  In his written supplemental submissions, Mr Chan relies on Talent Mark Development Ltd. v Kwan-On-U Tech Joint Venture and Others [2022] HKCFI 3277 for the proposition that evidence which is cumulatively far from “cogent and arguable” and falls into the “dubious and fanciful” category does not pass the threshold of establishing a plainly arguable or prima facie case that an arbitration agreement existed.  He relies further on Bond Tak (Holdings) Limited v King Fame Trading Limited [2020] HKCFI 1509 for the proposition that if it is clear that no arbitration agreement exists, it is inappropriate to leave the matter to the arbitral court.  Those are however different points.  They relate to whether the evidence on proper assessment establishes an arguable (or plainly arguable) or prima facie case that an arbitration agreement existed.  They are in fact premised upon the application of the “prima facie” threshold, and do not assist Mr Chan’s original submissions.

26.  The position however becomes less clear when an application to set aside a default judgment regularly obtained is added to the consideration.   

27.  In O Mark Polyethylene Products Fty Ltd v Reap Star Ltd [2000] 3 HKLRD 144 at 150, Godfrey V-P laid down the straightforward test, applicable in all cases of applications to set aside a default judgment, whether made under O.13 r.9 or O.14 r.11, of “whether or not the applicant has shown that he has a real prospect of success in the action”. 

28.  That test is not difficult to understand (though application is another matter, as Godfrey V-P acknowledged at 151A) when applied to the merits of an applicant’s proposed defence.  That applicant will have to establish a real prospect of success of the same.  However, when applying to an application of the present nature, should it become a “real prospect of success in establishing a prima facie case that the parties were bound by an arbitration agreement”?  If such a test exists and means anything, it would be a test even lower than the “prima facie” test, as it involves only the proof of a “real prospect of success” in establishing a “prima facie case”.  I do not find it logical that the added consideration of a default judgment would in fact lower the threshold.

29.  I have considered the reasoning by McWalters J in Vincent Choi. At least in an application involving an application to set aside a default judgment in the context of an application for a stay in favour of arbitration, I do not find it easy to appreciate the reasons for formulating a test with reference to the nature of the evidence before the court or whether credibility of the affirmants is in issue[3], so that the “real prospect of success” test may not be applied in a positive way[4], so that the test becomes whether the judge is able to say “that it is not a challenge that has no reasonable prospect of success.”[5]

30.  For my part, and in a case of the present nature, and in the absence of any direct authority on the point, which counsel informed me that there is indeed none, I will adopt and stick to the threshold of prima facie case established by cogent as opposed to dubious or fanciful evidence[6]. I do not accept that the threshold should be any higher.  To hold so would ignore the UNCITRAL regime discussed above, and gives the plaintiff undue juridical advantage on the basis of the existence of a default judgment, the entry of which can be the result of different reasons.

31.  However, as I will explain below, in the end, and on the evidence before this Court, the exact threshold to be applied as discussed above may not make any decisive difference, because I am satisfied that D is on the evidence able in any event to pass the real or good prospect of success test, and a fortiori, the negative good prospect test. 

D.2.   Question #1

32.  This is the main question in dispute.

33.  Question #1 may be considered against the following factual background put forward by Au:

(a)  Au and Ou are 2 directors and shareholders of a company called Heyday (Asia) Group Development Limited (“Heyday”).  Heyday operates a joint venture company in Guangzhou called 廣州長盾電氣機械有限公司 (the “Guangzhou JV” or “長盾”) with a Mainland company called Huizhou Kaixuan Cultural Company Limited (惠州市開軒文化有限公司) (“Kaixuan”);

(b)  In 2009, the 4 then shareholders of Heyday sold in total 65.5% of the shares in Heyday to Chen JX.  Chen JX held them through a corporate vehicle called Hong Kong Union Group Investment Development Limited (香港聯合集團投資發展有限公司) (“Union Group”).  After that sale, one shareholder ceased to hold any shares in Heyday.  The rest (Au, Ou and Yao Zhidong (姚志東, “Yao”) transferred all their shareholding to D, who became a 34.5% shareholder in Heyday;

(c)  In 2011, Union Group and D agreed that D would inject further capital into the Guangzhou JV.  D did not have sufficient funds to do so.  A loan from a third party with shares in Heyday was intended.  Chen JX became aware of that.  He expressed concern, because if D ultimately failed to repay the loan, shares in Heyday would fall into that third party’s hands.  He proposed to be the lender.  Au agreed.  The 2013 Loan Agreement was subsequently signed;

(d)  At the time of execution, the name and other details of the lender were left blank.  Nor was P there.  Chen JX said that he would use another person’s name to lend D the money.  It was only later when D received the copy signed by P.  Chen JX told Au that P was her girlfriend.  Au and Ou had in fact never met P;

(e)  That P’s particulars were only added subsequently is, as submitted by Mr Co which I agree, supported by the fact that P’s name and particulars therein are handwritten, when the vast majority of the balance of the contents are printed;

(f)  A receipt for the 2013 Loan has been produced.  The 2013 Loan was said to be paid out from an account in P’s name, but paid into an account in Chen JX’s name.  The receipt was signed by Chen JX, and the 2013 Loan described to be “用于投入广州长盾电气机械有限公司基建项目工程，属于股东投资款。”;

(g)  In May 2015, D could not repay the 2013 Loan.  In 2016, the Guangzhou JV was arranging for a bank loan in the Mainland (the “Bank Loan”).  Au and Chen JX agreed that if the Bank Loan exceeded RMB80 million, part of it would be applied for the discharge of the 2013 Loan.  Chen JX would not enforce the 2013 Loan Agreement, and would extend the 2013 Loan;

(h)  The 2015 Loan Agreement, and another agreement (the “2016 Agreement”) were then prepared.  Clause 3 of the 2016 Agreement is material.  It records and reflects the agreement between Au and Chen JX on the application of the Bank Loan, that:

“甲乙双方同意，广州长盾电气机械有限公司正在办理银行贷款，如贷款(不低于8000万元)到账，按以下顺序支付有关费用：

1. 收购[Kaixuan] 长盾股份约2000万元；

2. 借款给佳迏公司归还借杨佩玲本金1500万元及利息，佳达公司承担长盾公司该贷款本金及利息；”

(i)  P was not involved in the negotiation or execution of the relevant documents;

(j)  Shortly after the execution of the 2015 Loan Agreement and the 2016 Agreement, Chen JX prepared and produced the Supplemental Agreement for Au, Ou and Yao to sign.  P was again not involved;

(k)  The Supplemental Agreement contains the following terms:

“1. 原合同适用的法律解释：适用中国法律解释。

2. 解决纠纷的方式：各方发生纠纷，应协商解决，协商不成，提请中国广州仲裁委员会仲裁解决。[7]

3. 除上述內容外，其他条款仍按原合同执行。本协议作为原合同的补充协议，与原合同具有同等的法律效力。如本协议与原合同有抵触的，以本协议为准。”

(l)  P was again not involved in the negotiation and execution of the Supplemental Agreement.  Her signature does not appear thereon.  D has never received or seen one with her signature on;

(m)  Subsequently, the Guangzhou JV obtained the Bank Loan.  The total amount was not less than RMB80 million; 

(n)  At §§58 and 59 of Au/Aff1, Au says:

“58. … According to clause 3 of the 2016 Agreement, after acquiring the shares in Heyday from Kaixuan, the amount shall be lent to [D] to repay the loan owed to [P]. Whether Chen JX caused the Guangzhou JV to pay [P] is beyond my knowledge.

59. As of now, [P] brought this action against [D].  Either she was seeking to have double recovery, or that Chen JX and Union Group have breached the 2016 Agreement.”

34.  P’s evidence may be summarized as follows:

(a)  She accepts that she does not know Au, Ou or Yao;

(b)  She was not involved in any of the business negotiations or discussions. The granting of the 2013 Loan was upon Chen JX’s introduction and request.  She consented to the extension of the 2013 Loan by granting the 2015 Loan also upon Chen JX’s request, though she requested more securities;

(c)  Both the 2013 and 2015 Loans were the result of her commercial decisions having considered the terms and securities;

(d)  She denies that she is Chen JX’s girlfriend.  She otherwise gives no explanation as to their relationship, and why she was prepared to grant the Loans merely upon his requests without any due diligence herself on the financial viability of the borrower and guarantors;

(e)  She denies having agreed to the Supplemental Agreement.  She says she refused the same when it was suggested to her.  She has given 3 reasons: the involvement of Hong Kong individuals and entities, the security shares being those of a Hong Kong company, and the unreasonableness in using “协商解决” to deal with the dispute (as included in the Arbitration Clause).

35.  Whilst P denies all knowledge of all the negotiations and discussions, further documents produced by Au via Au/Aff2 shows that she, together with Chen JX and her mother were the shareholders of the company which provided guarantee to a facilities letter which resulted in the Bank Loan.

36.  On the evidence before me, I am of the view that the version of events put forward by Au is supported by contemporaneous documents, inherent probable, and makes commercial sense.

37.  The 2013 and 2015 Loans were clearly part of the dealings related to the Guangzhou JV, and Chen JX was closely involved in those dealings.  Amongst other documents, the receipt for the 2013 Loan clearly shows both.  P was not involved at all.

38.  On the other hand, the version of events put forward by P is not consistent with contemporaneous documents, inherently improbable, and makes little commercial sense.  In particular, it is inherently most improbable that she would have agreed to lend RMB10,000,000 and then extended the repayment of RMB15,000,000 without pursuing the additional default interest merely upon the requests of and information provided by Chen JX, without knowing the financial ability on the part of D to repay, and without knowing the worth and viability of the securities provided.

39.  Mr Chan relies heavily on the wording of the 2016 Agreement, which document Au accepts was prepared by him.  Mr Chan submitted that therein, P is described as the lender, that there is no reference to D being a dummy, nominee or agent, and that it further provides that Chen JX should be responsible for certain interest.  In those regard, Mr Co submitted that there was nothing surprising that the 2016 Agreement only shows the documentary state of affairs.  I accept that submission.  The contents of the 2016 Agreement in any event do not in my view assist P to any meaningful extent given the inherent improbability of P’s version.

40.  Mr Chan criticized §58 of Au/Aff1 as being not credible.  But as Mr Co submitted, whether Chen JX had repaid P direct, or whether he had caused the Guangzhou JV to do so, could be beyond Au’s knowledge.  These are not matter that can be decided upon on affirmation.

41.  Whilst the Supplemental Agreement was not signed by P, it does not need to be for the Arbitration Clause to qualify as an “arbitration agreement” under the Arbitration Ordinance – see section 19(2) of thereof.

42.  Chen JX’s signature is on the Supplemental Agreement.  He signed for and on behalf of Union Group, showing clear knowledge on his part.

43.  On the evidence before me, I am of the view that D has at least demonstrated on a prima facie basis that either P is merely the agent and nominee of a Chen JX, or Chen JX is the agent of P and having authority to represent P.  On that basis, D has demonstrated at least on a prima facie basis that the Supplemental Agreement binds P, so that there exists an arbitration agreement between P and D.

44.  Indeed, on the evidence before this Court as analysed above, I am prepared to find that D has demonstrated good prospect of success in demonstrating those matters, and in particular the fact that the Supplemental Agreement (and hence the Arbitration Clause therein) binds P.

D.3.   Question #2

45.  Mr Chan has not put forward any submissions which may lead to Question #2 being answered in the negative, and I see none.

D.4.   Questions #3 and #4

46.  Arising from the 2016 Agreement and the Bank Loan subsequently obtained, I am of the view that there are disputes and differences between the parties as to whether P might have been doubly paid, or whether Chen JX and Union Ground have breached the 2016 Agreement.

47.  Those disputes and differences relate to D’s liability to repay the 2015 Loan.  They are within the ambit of the Arbitration Clause.

D.5.   Conclusion

48.  For the above reasons, subject to the question of the Default Judgment which I will turn next, I am of the view that the proceedings herein ought to be stayed in favour of arbitration.

E.  The Default Judgment

49.  In the light of my conclusions in Sections D2 to D4 above, and given my analysis of the legal position in Section D1, I am of the view that the Default Judgment ought to be set aside.

F.  Leave to file acknowledgment of service out of time

50.  For the reasons set out above, I also grant §1 of the Summons.  I allow D 7 days to do so.

G.  Forum non conveniens

51.  §4 of the Summons is alternative to §3.  Given my conclusions reached above, §4 is not engaged.

52.  However, if necessary, I would have stayed the proceedings on the basis of forum non conveniens.  The Loans and the Loan Agreements cannot be considered in isolation.  P herself accepts that she does not know Au, Ou and Yao.  The Loans and Loan Agreements related to the dealings of the Guangzhou JV.  The receipt for the 2013 Loan clearly demonstrates that.  Other documents also do. The land Guangzhou JV owns is in the Mainland.  Whilst shares in Heyday was used as security for the Loans, the assets of Heyday are shares in the Guangzhou JV.  The Bank Loan, agreement to be used partly for repayment of the 2015 Loan, was obtained in the Mainland and related to the performance of the 2016 Agreement.  D’s complaints of possible double repayment or breach of the 2016 Agreement have their most real and substantial connection with the Mainland.  As deposed to by Au, the People’s Court of Yuexiu District of Guangzhou has jurisdiction over those matters.  It is an available forum with competent jurisdiction.  Hong Kong is not the natural or appropriate forum for adjudication of all the related matters and issues.  The People’s Court of Yuexiu District of Guangzhou is clearly and distinctly more appropriate that Hong Kong.

H.  Disposition

53.  For the reasons set out above:

(a)  I grant §1 of the Summons, and allow D 7 days from the date of this Decision to do so;

(b)  I grant §2 of the Summons;

(c)  I grant §3 of the Summons;

(d)  I make no order in respect of §4 of the Summons.

54.  On costs, towards the end of the hearing, I invited counsel to make submissions on what costs order nisi this Court may give.  Having heard parties, I at this stage am inclined towards accepting Mr Chan’s submissions that §3 of the Summons is in fact part and parcel of D’s application to have the Default Judgment set aside.  It is by nature the same as a defendant in a more usual case seeking to establish good prospect of success in respect of their proposed defence and who has succeeded in doing so. Principally on those reasons, and despite the order I made in favor of D, I make a costs order nisi that D nonetheless should bear the costs of and occasioned by the Summons, to be assessed summarily.  Without disrespect to Ms Wong, and given the nature of the issues involved, I on a nisi basis only grant certificate for one counsel.  Any application for variation may be made by letter to this court within 7 days from the date of this decision, upon receipt of which this Court will hand down further directions, with the aim of dealing with the same on the papers.  In the absence of any application for variation, P shall within 14 days from the date of this decision lodge her statement of costs, D to lodge its statement of objection 7 days afterwards, and P to lodge her reply within 7 days afterwards.  Should any application for variation be made, further directions on assessment will be given at the same time.