SOURTHWEST SECURITIES (HK) BROKERAGE LTD v. LIU SU HENG AND ANOTHER

HCA 787/2017

[2021] HKCFI 863

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 787 OF 2017

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D E C I S I O N

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Introduction

1.  This is the 1^st Defendant’s appeal against the decision of Master Martin Wong dated 26 November 2020 dismissing her summons seeking to set aside the default judgment entered against her on 17 August 2017. 

2.  The 1^st Defendant joined the 2^nd Defendant in April 2015, holding the title as its General Manager (Administration).  In or around June 2015, she signed an agreement (the “Client Agreement”) and opened a securities account in her name with the Plaintiff.  She ceased working for the 2^nd Defendant in February 2016 when it fell into financial difficulties.

3.  On 31 March 2017, the Plaintiff commenced this action against the 1^st and 2^nd Defendants for failing to make payment of the principal and interest owed to the Plaintiff in breach of the Client Agreement.  The Writ and the Amended Writ of Summons were served on the 1^st Defendant under two covering letters respectively dated 18 April 2017 and 2 May 2017 from the Plaintiff’s solicitors, Messrs Loong & Yeung (“L&Y”).

4.  Other than discussing with the Plaintiff on 19 May 2017, the 1^st Defendant paid no heed to the Amended Writ and took no action to defend the action.  On 17 August 2017, the Plaintiff obtained default judgment against both the 1^st and 2^nd Defendants. 

5.  On 11 October 2019, the 1^st Defendant received a letter from L&Y suggesting that the Plaintiff may take enforcement action against her such as bankruptcy petition.  Still, she did nothing about the default judgment. 

6.  It was only until 9 March 2020 that she took out a summons seeking to set aside the default judgment.  There is no dispute that she had received the Writ and Amended Writ and that the default judgment obtained is regular.  Her application was dismissed by Master Martin Wong on 26 November 2020. 

7.  Against that decision she now appeals.  Originally, she advanced four grounds for setting aside the default judgment.  In this appeal, she proceeds on just one ground, the estoppel ground.

The legal principles applicable to setting aside default judgment

8.  The legal principles applicable to setting aside default judgment have been usefully summarised by Deputy High Court Judge Marlene Ng (as she then was) in Shun Pong Limited and Chan Koo Kai Felix and Others[1].  These are as follows. 

9.  Under Order 19 rule 9 of the Rules of the High Court, the court may, on such terms as it thinks just, set aside or vary any judgment entered in pursuance of this Order.  This rule gives the court discretion to set aside a default judgment.  The purpose of the discretion is to avoid any injustice that may be caused by the entering of a judgment in default.  Two underlying principles that come into play in the exercise of this discretion are, on the one hand, that a party should observe procedural rules with judgment entered against him in default and, on the other, that a party should not be deprived of an adjudication of the case on its merits: see Hong Kong Civil Procedure 2021[2].

10.  If a default judgment is regular, the defendant must show a meritorious defence with a real prospect of success or which carries some degree of conviction: see Premier Fashion Wears Ltd v Li Hing Chung[3].  Bare assertions are not sufficient for this purpose: see Dawn Jade Ltd & Anor v Himanshu Girdhar Dua[4].  Unless a defendant can produce potentially credible affidavit evidence  demonstrating a real likelihood that he will succeed on fact, he cannot be said to have shown he has a real prospect of success: see Tong Yi Sang & Anor v Fung Law & Ng & Ors[5], O Mark Polyethylene Products Factory Ltd v Reap Star Ltd[6], and Cheung Chi Po v Ke Jun Xiang[7].  This requires the court to form some provisional view of the probable outcome of the action.  This does not mean that the court should undertake a mini-trial on the affirmations as to the likely outcome if the matter goes to trial: see Maryo Development Limited v Tsang Yau Ma[8].  Where the outcome depends on whose evidence is likely to be accepted, the appropriate test for determining whether the defendant has a real prospect of success is to ask whether the defence “could well be established” at trial or whether the defence witnesses could well be believed at trial: see Guangdong International Trust and Investment Corp Hong Kong (Holdings) Ltd v Yuet Wah (Hong Kong) Wah Fat Ltd & Anor[9], Morigood Development Ltd v Sunny Trading Co (a firm)[10], L & M Specialist Construction Ltd v Wo Hing Construction Co Ltd[11] and El Vince Ltd v Wu Wen Sheng[12].

11.  The court takes a holistic approach in deciding whether to set aside a default judgment.  It conducts a balancing exercise of all relevant factors, including why the default judgment was allowed to occur in the first place and any consequent prejudice caused to the plaintiff, but the critical factor and starting point are the merits of the defence: see Maryo Development Limited[13], Morigood Development Ltd and Chekiang First Bank Limited v Ng Chun Hing Benjamin[14], Young Bing Ching (deceased) v Chow Yung Fong & Anor[15] and Wan How Wan v Wan Hoi Wei[16].  If the defence has no real prospects of success, there is no point in setting aside the same.

The 1^st Defendant’s factual case

12.  Mr Tommy Cheung, counsel for the 1^st Defendant, stressed heavily on the backdrop in this case which he submits is critically important in explaining why the 1^st Defendant reposed substantial trust and confidence in her supervisor, Tseng Chen-Yun (“Tseng”) who was the shareholder in charge of the 2^nd Defendant.

13.  The 1^st Defendant was a full-time housewife.  She was introduced to Tseng in August 2014 by her aunt who is her closest relative. She was happy to meet her aunt’s good friends including Tseng and decided to maintain regular contact with him.  Tseng was generous and friendly to her and helped her aunt overcome her financial difficulties.

14.  In March 2015, Tseng invited the 1^st Defendant to join the 2^nd Defendant which was set up as an investment company.  The 1^st Defendant agreed to join as an employee to earn some income for her family. 

15.  The 1^st Defendant started working for the 2^nd Defendant in April 2015.  She did not enter into a written contract of employment because of the close relationship between her and her aunt on the one hand and between her aunt and Tseng on the other.  Her remuneration was $15,000 per month. 

16.  In the same month, Tseng told the 1^st Defendant his plan of boosting the business of the 2^nd Defendant which involved the 1^st Defendant, as one of his trusted staff members and friends to open a security account under her own name to facilitate the 2^nd Defendant’s investment strategies to be introduced by Tseng.  Tseng told her that he or the 2^nd Defendant would (a) provide funds for investment in the security account and that there would be no obligation on the 1^st Defendant’s part to raise funds for the 2^nd Defendant (the “No Financial Commitment Representation”); and (b) shoulder any financial loss that may arise out the above arrangement (the “Loss Protection Representation”).  Tseng told her one of the shareholders and his trusted friend, Lui, would do the same and there was nothing for her to worry about.  The two representations are collectively referred to as “Tseng’s Representations”.

17.  In around June 2015, the 1^st Defendant and Lui accompanied by Tseng attended the Plaintiff’s office to open a security account under the 1^st Defendant’s name for and on behalf of Tseng and/or the 2^nd Defendant.  They were introduced to Luo and Pao who were respectively the Plaintiff’s Vice President and Executive Director.  Pao attended to the 1^st Defendant while she was filling in the account opening form.  Neither Luo nor Pao nor indeed anyone from the Plaintiff explained the terms or mention specifically the nature of the account and the credit limit to her.  When asked by the Plaintiff’s staff about how to deal with the situation if there was a drastic drop in share price, Tseng repeated the Loss Protection Representation to them in front of the 1^st Defendant.

18.  The security account was approved on or around 12 June 2015.  The funds to be used for trading in the security account were provided by Tseng.  Relying on Tseng’s Representations, the 1^st Defendant gave Tseng the particulars and password of the security account for Tseng to trade.  She had no idea about the actual operation or the nature of the security account.  She only received her salary and made no profit out of the transactions made through the security account.

19.  In February 2016, Tseng told the 1^st Defendant that the share prices of the shares in the security account dropped drastically and repeated Tseng’s Representations.  Relying on Tseng’s Representations, the 1^st Defendant did not take any further actions and continued to work as an employee of the 2^nd Defendant until mid or late February 2016.

20.  On or around 2 February 2017, the 1^st Defendant received a letter from L&Y demanding repayments of certain loans.  Later, she received the Writ and Amended Writ under the respective covering letters.  Upon receipt of each of the letters, she telephoned Tseng and asked if she had anything to worry about.  Tseng reassured her that he was handling the situation and reiterated the Loss Protection Representation.  Relying on Tseng’s Representations, the 1^st Defendant took no action about the Writs.

21.  On or around 17 May 2017, Lui suggested to the 1^st Defendant that they might as well contact the Plaintiff to find out more about the matter and the latest development.  They went to the Plaintiff’s office in Lee Garden One on or around 19 May 2017 and met with Tong Shing (“Tong”) and some risk-management staff.  The 1^st Defendant challenged the letter of demand and the two covering letters enclosing the Writ and Amended Writ by referring to Tseng’s Representations.  Tong and his colleagues did not deny the representations.  Instead, they told her that such letters were part of the “internal procedural steps” （「走程序」） on the part of the Plaintiff and the Plaintiff had no genuine intention to and would not proceed with the legal proceedings against her.  They further requested her not to take any action to defend or challenge the Plaintiff’s claims in any way.  The 1^st Defendant emphasized Tseng’s Representations made by Tseng for and on behalf of himself and the 2^nd Defendant and demanded the Plaintiff to take steps to ensure that Tseng and/or the 2^nd Defendant would honour them.  The Plaintiff’s staff agreed.  These conversations are collectively referred to as the “Lee Garden Promises”. 

22.  Relying on the Lee Garden Promises, the 1^st Defendant did not take any action to defend or challenge the Plaintiff’s claims to protect her interest.  Since around early 2018, the 1^st Defendant lost contact with Tseng.

23.  In gist, the 1^st Defendant’s case is that by reason of her familial relationship with her aunt on the one hand and Tseng’s relationship with her aunt on the other, she reposed substantial trust and confidence in Tseng and became a victim of Tseng’s Representations which led her to open a security account with the Plaintiff.  Tseng was close to the Plaintiff’s senior management, allegedly travelling to Singapore in around June or July 2015 and paid money to Luo.  The Plaintiff therefore has notice of Tseng’s Representations.  After the Plaintiff commenced action against the 1^st Defendant, the Plaintiff’s staff gave her the Lee Garden Promises.  Relying on those promises, she did not take any action to defend or challenge the Plaintiff’s claims, resulting in the default judgment being made against her.

Tseng’s Representations

24.  Much has been said by the 1^st Defendant about the trust and confidence she reposed on Tseng; Tseng’s Representations and the Plaintiff’s failure to explain the account opening form to her.  All these matters are irrelevant except as part of the factual background leading to the opening of the security account.

25.  At the highest, the 1^st Defendant may argue that she opened the security account as a result of misrepresentation by Tseng but not by the Plaintiff.  Much emphasis has been made by the 1^st Defendant about the repetition of Tseng’s Representations before the Plaintiff’s staff while processing the opening of the security account.  Those representations are matters between Tseng and the 1^st Defendant.  They govern the mutual rights and obligations between them only.  It is also not the 1^st Defendant’s case that Tseng was an agent of the Plaintiff and made those representations on behalf of the Plaintiff.  Even if the Plaintiff has knowledge of their mutual rights and obligations, it has no bearing on her liability towards the Plaintiff under the security account. 

26.  Again, much has been said by the 1^st Defendant about the Plaintiff not explaining the Client Agreement and the account opening form to her and she did not know the effect of these documents and the nature of the security account.  It is not her case that she is illiterate.  It is trite law that mere ignorance of the substance of the document which one freely signed, short of fraud, mistake, misrepresentation, non est factum, duress, undue influence and lack of mental capacity is not sufficient to vitiate the instrument on which one affixed his signature: Ming Shiu Chung & Others v Ming Shiu Sum & Others[17], Bank of China (Hong Kong) Ltd v Fung Chin Kan & Anor[18]and Nanyang Commercial Bank Ltd v Lin Zhuo Yan[19].   The 1^st Defendant portraits herself as a simple and naïve housewife who reposed trust and confidence on Tseng.  Even accepting that by reason of the trust and confidence reposed on Tseng, the 1^st Defendant did not read the Client Agreement and have no knowledge of its contents, it is not open to her to argue that she is not bound by her signature on the Client Agreement.  She may have remedy for misrepresentation against Tseng, but as between she and the Plaintiff, the Client Agreement is binding.

27.  In fact, the 1^st Defendant’s is not seeking to set aside the Client Agreement for misrepresentation.  Thus, all these evidence serves no purpose other than setting the background leading to the making of the Lee Garden Promises.  Her application boils down to the merit and credibility of her defence based on The Lee Garden Promises.

The Lee Garden Promises

28.  The 1^st Defendant came to know Tseng in August 2014.  In April 2015, she joined the 2^nd Defendant.  In the same month, Tseng told her about his business plan which required her to open a security account in her own name for and on behalf of the 2^nd Defendant. It was in that connection, Tseng made the Tseng’s Representations.  The security account was opened in June 2015.  In February 2016, Tseng told her that the security account suffered heavy loss but assured her by repeating Tseng’s Representations.  In the same month, she ceased working in the 2^nd Defendant.

29.  A year later, on or around 2 February 2017, she received a demand letter from L&Y and then two other letters enclosing the Writ and the Amended Writ.  On each occasion, she telephoned Tseng and asked if she had anything to worry about.  Tseng assured her that he would handle the situation and repeated Tseng’s Representations.  Relying on the representations, she took no action in relation to the legal action which has commenced.

30.  Then, on 17 May 2017, at Lui’s suggestion, the 1^st Defendant contacted the Plaintiff and had a meeting with Tong and his colleagues on 19 May 2017 when the Lee Gardens Promises were allegedly made.  In gist, Tong was alleged to have told her that the issue of the Writ and Amended Writ were just “internal procedural steps”; that the Plaintiff had no intention to proceed with the legal action; and that she should not take any action to defend the Plaintiff’s claim.  But despite the promise, the Plaintiff sought and obtained a default judgment against her.

31.  The Plaintiff admits having had a meeting with the 1^st Defendant’s and Lui on 19 May 2017 but denies having made the Lee Gardens Promises.  Indeed, it is Tong’s evidence that prior to that meeting, there were numerous internal meetings within the Plaintiff and external meetings with the 1^st Defendant about the arrangement for repayment of the amount she owed.  However, the 1^st Defendant did not honour her repayment proposal.  It was then that the Plaintiff commenced legal proceedings.  As Tong knew that litigation would be commenced against the 1^st Defendant, he told her and Lui that as an account executive he could not assist them unless they had some sort of concrete repayment proposal.  He suggested them to contact the Plaintiff’s legal and compliance department directly.

32.  To set aside the default judgment, the 1^st Defendant has to adduce potentially credible affidavit evidence demonstrating a real likelihood that she will succeed on the facts at trial.  In view of the factual dispute, the outcome depends on whose evidence is likely to be accepted, the 1^st Defendant’s or Tong’s.  The test is whether the 1^st Defendant’s evidence could well be believed when tested against Tong’s.

33.  The essence of the 1^st Defendant’s case is that Tseng was very close to the senior management of the Plaintiff. He went to trip together with Luo and gave Luo money.  They knew about Tseng’s Representations when the 1^st Defendant opened the security account with the Plaintiff.  Luo and Pao are no longer working with the Plaintiff.  The 1^st Defendant seemingly suggests that because of this knowledge of Tseng’s Representations and Tseng’s relationship with the Plaintiff’s senior management, the Plaintiff would not enforce the debt against her.  Hence, Tong made the Lee Gardens Promises, saying that the legal procedures were just “internal procedural steps” for the purpose of writing off the debt.  How credible is that?

34.  Even assuming there was some special relationship (even one involving corruption) between Tseng and Luo, Luo has left the Plaintiff by the time the 1^st Defendant approached Tong. The Plaintiff is a reputable securities brokerage firm.  The debt is an enormous one of the tune of $20 million.  To start with, there was no reason why the Plaintiff would have forgone such a debt.

35.  Critically examined, the 1^st Defendant’s evidence is full of question marks.  Upon receiving L&Y’s letter of demand, she consulted Tseng what to do, but she never contacted the Plaintiff. It was only until 17 May 2017 that she contacted Tong and found out that Pao no longer worked with the Plaintiff.  According to Tong, Luo had also left the Plaintiff.  The 1^st Defendant was a total stranger to Tong.  Tong had no special relationship with her or the 2^nd Defendant.  Yet, according to the 1^st Defendant, when she challenged the Plaintiff with Tseng’s Representations, Tong immediately responded by making the Lee Gardens Promises.  The 1^st Defendant gave no credible reason why Tong would have given her such a favour, a waiver of $20 million.  What she alleged Tong to have promised does not make business sense or common sense.  What she said is just too good to be true.

36.  On the contrary, Tong’s evidence is inherently credible.  The 1^st Defendant’s security account is in debt.  It was a sizeable debt.  The matter was discussed internally by the Plaintiff on numerous occasions.  He chased after the 1^st Defendant and discussed repayment arrangements with her.  The 1^st Defendant gave a proposal, but was unable to honour it.  Hence, the Plaintiff commenced proceedings. There was no reason why the Plaintiff should commence proceedings and incur legal costs only for the purpose of waiving its claim.  What Tong said is just what an executive would do in the normal course.  It is credible.

37.  Mr Yim, counsel for the Plaintiff, further submits that the 1^st Defendant is in substance seeking to set aside a default judgment obtained by fraud dressed up as a defence of promissory estoppel.  The alleged fraud must be both properly particularised and proved: see Daniel Terry v BCS Corporate Acceptances Limited, BCS Offshore Funding Limited, John Taylor[20].   For the purpose of the setting aside application, I think fraud has been adequately pleaded.  It is the fraudulent representation that the Plaintiff has no genuine intention to proceed with the legal proceedings against the 1^st Defendant.  To pursue such a defence, the 1^st Defendant has to adduce credible evidence in addition to the existence of the Lee Gardens Promises the alleged fraud to the standard of real prospect of success.  I do not find it necessary to deal with this argument as the 1^st Defendant cannot even overcome the burden of showing credible evidence in support of her factual case of the Lee Gardens Promises.  Besides, the parties have not adequately argued about proving fraud.

Reason for allowing the default judgment to be entered

38.  The reason given by the 1^st Defendant for allowing the default judgment to be entered was her reliance on Tseng’s Representations and then the Lee Gardens Promises.  Having failed to demonstrate credible evidence about the Lee Garden Promises, it must necessarily mean that she has not adduced any potentially credible evidence of her reason for allowing the default judgment to be entered.  This is a factor which weighs against exercising discretion to set aside a default judgment.

Delay and prejudice

39.  There was a delay of more than two and half years between entering of the default judgment on 17 August 2017 and the summons to set aside the default judgment.  The 1^st Defendant does not dispute she was aware of the judgment having been entered against her and that the judgment was regularly obtained.  Her explanation for the delay is her reliance on the Lee Gardens Promises.  This is a lame excuse for she is unable to adduce credible evidence of the Lee Gardens Promises.  She has no excuse for the delay.

40.  Prejudice could be readily inferred by such delay.  Setting aside the judgment would require the Plaintiff to start proceedings all over again after four years; or to say the least, judgment delayed is prejudice.

Conclusion

41.  In my view, the probable outcome of the action is that the 1^st Defendant would be disbelieved at trial.  She has failed to produce potentially credible affidavit evidence demonstrating a real likelihood that she will succeed on the fact.  I share Master Wong’s observation that the 1^st Defendant’s case is against inherent probabilities.  It is just a bare assertion.  She has no real prospect of success.  On this ground alone, it is sufficient to dismiss her appeal.  In addition, there was inexcusable delay of two and half years before seeking to set aside the judgment.  As a result, the Plaintiff would suffer prejudice, if the default judgment is set aside.  She has no credible reason for allowing the default judgment to be entered in the first place.  On balance, all factors weigh against setting aside the default judgment.

42.  Accordingly, I uphold the decision of Master Martin Wong and dismiss the 1^st Defendant’s appeal with costs to the Plaintiff.  The costs are to be taxed, if not agree.