RATONAL INDUSTRIAL LTD. v. GRAND BOND (ASIA) LTD.

HCA 2455/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2455 OF 2002

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J U D G M E N T

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1. This is an action taken out by the plaintiff against the defendant for the price of goods sold and delivered.

2. On 17 June 2002, the plaintiff through their solicitors sent a letter of demand to the defendant demanding payment of the amount claimed. The defendant did not reply. On 23 June 2002, the writ of this present action was issued and was duly served on the defendant. There was no acknowledgement of service and as a result, the plaintiff obtained default judgment on 26 July 2002 against the defendant.

3. On 3 August 2002, the defendant through its solicitors wrote to the plaintiff's solicitors asking if the plaintiff would consent to the setting aside of the default judgment. In their letter, the defendant's solicitors did not give any details as to what defence the defendant might have against the plaintiff's claim. All that was mentioned in the letter was that:

"We are also of the view that our client has a defence to your client's claim, which has a real prospect of success".

4. Not surprisingly, the plaintiff's solicitors paid no heed to this letter, and on 19 August 2002, a summons was taken out by the defendant to set aside the default judgment. That summons was supported by an affirmation by Mr Roger Lau. In his affirmation, Mr Lau exhibited a draft defence and counterclaim to the plaintiff's claim. In brief terms, he also verified the contents of the draft defence and counterclaim. On top of that, he also exhibited to his affirmation, the documents relied upon by the defendant in support of the defence and counterclaim.

5. It is important for me now to go into the defence raised in this draft pleading. In para. 4 of the draft pleading, the defendant said, in effect, that 5 of the invoices in the total sum of HK$607,986.63 had been paid. In relation to this assertion of payment, the plaintiff in its reply in fact admitted that these invoices were in fact paid, hence, the net result must be that the judgment had been entered for too much. Having taken into account the payment, in fact, the judgment that ought to be entered, should, at the most, be HK$9,418,896.52. Hence, in any event, it would not be appropriate not to set aside the judgment. The question is whether I ought to order that judgment be entered for the amount of HK$9,418,896.52 or I ought to set aside the judgment unconditionally or to set aside the judgment subject to certain conditions to be complied with by the defendant.

6. Apart from the plea of part payment, the defendant also raised the defence of set off. The defendant's case was that, in fact, the plaintiff owed the defendant a large sum of money amounting to some HK$32 million to which the defendant is entitled to counterclaim, and this amount, or at least a very substantial part of it, was made up of liquidated claims and are thus available to set off the amount owed by the defendant to the plaintiff. It is in relation to this counterclaim that most of the arguments were presented before me today.

7. The counterclaim could be divided into 5 categories, the particulars of which are set out in 5 schedules. Schedule A of the draft defence was in fact claims made by the defendant against the plaintiff for payments made to the plaintiff or to 3rd parties in satisfaction of the liability of the plaintiff. The total amount of this category of claim is HK$19,034,690.10. The defendant, as I mentioned earlier, has exhibited documentations to support this category of claim. It is not disputed by Mr Lo, counsel for the plaintiff, that on the face of the documents exhibited, the defendant would appear to have such a claim against the plaintiff.

8. The next category of counterclaim relates to letters of credit opened in favour of the plaintiff's vendors and suppliers at the request of the plaintiff. The particulars of this category of claim are set out in schedule B of the defendant's draft defence and counterclaim. The total amount of this category of claim is HK$10,791,778.47. Again, subject to the point that in some of the documentations exhibited in support of this category of claims, the address of the plaintiff was stated to be Room 2211, block B, New Trade Plaza, 6 On Ping Street, Siu Lek Yuen, Shatin, Hong Kong, the plaintiff made no specific complaint about this category.

9. Mr Lo, counsel for the plaintiff, also agreed that on the face of the documents in schedule B of Mr Roger Lau's affidavit, the documentations would appear to support this category of counterclaim. The point about the address is that this would appear to be an address of the defendant and is not the plaintiff's trading address. The point is relevant to the question of whether the facts referable to the letters of credit were actually acquired for the benefit of the plaintiff.

10. The 3rd category of counterclaim relates to handling charges and interest incidental to the opening of the letters of credit for the plaintiff. This item is relatively small, the total amount is only HK$194,303.42. Again, there is no question that on the face of the documents, the amount claimed under this category would be justified.

11. The 4th category of counterclaim relates to goods sold and delivered by the defendant to the plaintiff. The total amount under this category is HK$648,577.74.

12. The 5th category relates to commission and other miscellaneous charges due by the plaintiff to the defendant and the documentation shows that this category of claim would amount to HK$1,509,537.18.

13. In relation to the 4th and 5th category, Mr Lo, for the plaintiff, made the point that the documents appear to show that they were invoices or delivery orders, directed to the plaintiff at the address of the defendant. However, it is important to point out that in the affirmation filed on behalf of the plaintiff, there was no specific allegation that these goods and services were not delivered or not rendered to the plaintiff. In relation to the goods supplied, the deponent for the plaintiff merely made a general point that it would be very unlikely that the plaintiff could have consumed that amount of the goods, but he frankly admitted that he was not really in a position to dispute these invoices. He gave the reasons that his inability to do so was due to the fact that the relevant documents and accounts were in the possession or control of the defendant.

14. As I mentioned earlier, the total amount of the counterclaim worked out to be over HK$32 million. Hence, if the defendant's counterclaim has a good prospect of success, there would be no question that the whole of the plaintiff's claim would be extinguished if the defendant is successful.

15. The question before me is therefore whether on the evidence before me, the defendant's counterclaim would have any good prospect of success or whether it is at the most shadowy or in fact, it is completely not viable.

16. Mr Lo, for the plaintiff, pointed out to me that the evidence tendered by the defendant to support its counterclaim was wholly unsatisfactory. First, he relied on the well-known dicta of Kaplan J in the case of Tong Yee Sang v. Fung, Law and Ng reported in [1993] 2 HKC 665 at 672 A-E:

"In the present case, it is clear that no affidavit on the merit has ever been put in the draft defence was merely exhibited and was not even verified on oath or affirmation.

However, even if it had been verified on oath or on affirmation, in the usual perfunctory way, I am not prepared to go so far as to say that this would have been sufficient. I believe that there is a substantial onus on the applicant or seek to set aside the regular judgment. This is clear from the Saudi Eagle 1986 2 Lloyds Report 221. In a case such as this, I would expect the defendant to condescend the particulars of his defence on the merits in his own words. To verify a defence drafted, no doubt on the basis of instruction given by the defendant and expressed in the usual obscured wordings of a pleading, may not be sufficient to discharge the onus placed on a defendant in a situation such as this. What is far more preferable (and I leave over the question of whether it is strictly necessary) is an affidavit in narrative form, explaining precisely what the proposed defence will be so that the court can be assisted informing a value judgment as to whether it can be satisfied that there is some degree of conviction and a real prospect of success in the proposed defence."

17. It was pointed out to me that in essence, the evidence tendered by the defendant to show that the defendant had a good prospect of success in its defence would merely amount to a perfunctory verification of a draft pleading and therefore, it was not satisfactory and was insufficient for the purpose of discharging the defendant's onus.

18. Of course, this was not the only point relied upon by Mr Lo. Mr Lo also relied upon the fact that it appeared that at least some part of the counterclaim made by the defendant could not be genuine. To support his contention, he drew my attention to the fact that in the audited account published by the defendant for the year ending 31 March 2001, the amount due from other company was stated to be HK$1,973,826.00 and the amount due from the related companies was HK$7,235,605.00. Mr Lo then drew my attention to the defendant's counterclaim. On the basis of the breakdown figures given by the defendant, the amount of the defendant's counterclaim if one applied a cut off point on the date of 31 March 2001, the plaintiff alone would, according to the defendant, be owing the sum of HK$15,700,854.41 to the defendant. If one then worked out the total amount of the plaintiff's invoices to the defendant with the cut off date of 31 March 2001, the amount owed by the defendant to the plaintiff under those invoices would amount to HK$1,637,201.76. Hence, even if one were to set off the amount due by the defendant to the plaintiff, on the defendant's own version of the counterclaim there should still be some HK$14 million due by the plaintiff to the defendant. If one then looked at the audited account of the defendant, the amount said to be due and owing by related companies to the defendant was only HK$7,235,605.00 and hence, Mr Lo submitted that the figures of the counterclaim made by the defendant ending with this period of 31 March 2001 must be grossly inflated. There is substance in the point.

19. It is also important to point out that when such point was made by the plaintiff, director Mr Tung, in his affidavit of 28 October 2002, the defendant's director Roger Lau merely sought to explain the discrepancy by saying that:

"The sum stated in the audited account was a figure after setting off the amount we owed to the plaintiff at the relevant time, therefore, the amount was lower."

He certainly did not say anything or make any suggestion that apart from the amount claimed by the plaintiff in the present action, there was any other amount due and owing by the defendant to the plaintiff which had been utilised in the set off so as to arrive at the sum of HK$7,235,605.00 as stated in the audited account.

20. Before me, Mr Chan, counsel for the defendant, sought to explain the discrepancies in the figures by saying that apart from the amount claimed by the plaintiff in the present action, there could be other sums due by the defendant to the plaintiff which has not been referred to or mentioned in the affirmation of Roger Lau. I am afraid that on the face of the affirmation and on the totality of the evidence before me, this submission is not supported by any evidence.

21. Further I note that in the relevant entry in the audited account, the amount of HK$7,235,605.00 was stated to be "the amount due from the related companies". This is to be contrasted with the other item of HK$1,973,826.00 which was stated to be "the amount due from other company". Hence, on the face of the audited account, it would appear that the net figure of just over HK$7 million may not just be a figure of the net amount due from the plaintiff because of the use of the plural "companies". On the face of the audited account, there may not be anything due from the plaintiff at all. In any event, even assuming that the figure in the audited account was intended to show the indebtedness due only from the plaintiff, it would show that the figure of some HK$7 million was still due and owing.

22. Mr Lo also made the point that the evidence of the defendant was not satisfactory because the defendant failed to answer the letter of demand from the plaintiff's solicitor. I would place very little weight to this argument because the writ was issued very shortly after that.

23. As I indicated earlier, Mr Lo also criticised the evidence of the defendant in relation to the use of the defendant's address in some of the documents in support of the defendant's claim under the 2nd, 4th and the 5th categories. In assessing the weight of this argument I note that it is never the plaintiff's suggestion that the invoices or documents using the defendant's address are not genuine transactions. All that Mr Tung of the plaintiff can say is that he would cast doubt as to whether the goods or the underlying transaction covered by these documents were in fact, goods consumed by the plaintiff or transactions to which the plaintiff was the real beneficiary.

24. Taking the evidence in the round, I would consider that in many aspects of the defendant's evidence, there were gaps which would show that the whole of the defendant's counterclaim of HK$32 million is unlikely to succeed. I would not be able to say that the defendant's counterclaim is just shadowy. This is because the defendant's evidence is certainly something more than simply a perfunctory verification of a draft pleading. The defendant went further and actually sought to support its counterclaim by documentations which, on the face of them, subject to the qualification that I have mentioned earlier, would support the defendant's counterclaim.

25. The greatest difficulty that arises from the defendant's evidence was the apparent discrepancies between the quantum of the defendant's counterclaim and what was stated in the audited accounts. I do not consider that the explanation given by Mr Roger Lau was satisfactory. The test, in the present case, is whether defendant has a good prospect of success in their counterclaim.

26. Notwithstanding the discrepancies in their audited account and a counterclaim, I come to the view that I cannot say that the counterclaim has got no good prospect of success. This is because even on the face of the audited account, having regard to the figures for the amount due from related companies and also the amount due to the related company, it also appears from the defendant's own audited account that related companies of the defendant still owed money to the defendant. Of course, we do not know what these related companies are, whether they include the plaintiff or others. It is obviously necessary for all these discrepancies to be resolved in the trial. The discrepancy would cast doubt on the quantum of the defendant's counterclaim, but it did not show that the defendant did not have a counterclaim larger in amount than the plaintiff's claim.

27. Hence, I am of the view that in the light of all the circumstances, the defendant ought to be given the opportunity to defend this action. Mr Lo, however, also pressed upon me that in the circumstances of the present case, I ought to impose conditions. There is no doubt that the judgement against the defendant is a regular one and it is also clear that the defendant has not presented its case on the counterclaim clearly by explaining also the discrepancies. On top of that, I should also mention that some part of the defendant's counterclaim particularly in relation to the items of payment made to the plaintiff would appear to have been repaid by the plaintiff through funds channelled through Grand Sky Holding Ltd. The amount involved here was about HK$6.71 million.

28. Mr Chan, for the defendant, submitted that even if this amount of $6.71 million was taken into account, the defendant still had a big enough counterclaim to absorb the whole of the plaintiff's claim. Mr Lo, of course, contended that it was not the actual figures that mattered, because it did show that in general the defendant's case was not really that reliable and also that the way that the defendant presented its evidence was not the proper conduct that one should expect from a defendant who sought to set aside default judgment. Mr Lo referred me to the case of City Construction Contract (London) Ltd v. Adam where the report from a Times Newspaper said:

"The court has power to impose a condition even where there was a good arguable defence not to punish the defendant but to encourage the proper future conduct of the litigation and to provide a measure of security for the plaintiff."

29. Mr Lo contended that even if I was satisfied that there was a good arguable defence, in view of the conduct of the defendant and the way they presented the case, I ought to apply the principle in the City Construction Contract's case and ordered the defendant to pay money into court. I have a discretion in this matter. In looking at the defendant's evidence, I have to bear in mind that the background to the litigation would appear to be a complicated one, and there were many cross-claims between two camps of individuals controlling companies seeking to disentangle a business relationship caused by a merger of the two groups of companies. I was told and in fact there was evidence to show that apart from the current action, there were winding up proceedings and other High Court actions amongst the personalities involved.

30. In the circumstances, I think that there is merit in what Mr Chan submitted that it was not easy to present a clear picture of the amount due by one particular company to another in this group. It is said that the counterclaim presented was or represented the most optimistic way of putting the defendant's counterclaim and it is recognised that the full amount of a counterclaim may not be justifiable. Be that as it may, even given the shortness of time, I agreed with Mr Lo that the defendant way of presenting the counterclaim was not to be encouraged. I considered that at least the court ought to be told that there could be other claims which had not been taken into account.

31. Notwithstanding all this criticism, and the fact that the evidence presented by the defendant was not wholly satisfactory, I am not prepared to order that the defendant should be asked to pay money into court as a condition for setting aside the judgment.

32. In coming to this conclusion, I bear the following factors specifically in mind:

(a) Although the defendant's counterclaim would appear to be for and excessive amount, the plaintiff's evidence is never clear as to what part of the defendant's counterclaim was not maintainable (save and except for the amount of HK$6.71 million being the amount which had been said to be repaid to the defendant);

(b) It is as much to the plaintiff's interest to give its account or defence to the defendant's counterclaim and the plaintiff would appear to be also guilty of not condescending to the court all the information and particulars which would be relevant for the court to make an assessment on the prospect of success of the defendant's counterclaim;

(c) There was a pending petition against the defendant which would have the effect of stopping the defendant to utilise its fund for effecting any payment unless there is a validation order given by the court to do so.

33. Of course, I realise that the plaintiff is prepared to offer an undertaking not to oppose such validation order, but in the case of a winding up, even assuming that the plaintiff as the petitioner is not opposing to the validation order, there may be opposition by other interested parties.

34. So to conclude, my decision is that the appeal is dismissed with costs to the defendant.