MARYO DEVELOPMENT LTD v. TSANG YAU MAY AND OTHERS

HCA 2297/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2297 OF 2012

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HCA 271/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 271 OF 2013

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BETWEEN

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D E C I S I O N

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I. INTRODUCTION

1. Tsang Yau May (“D1”) and Tsang Kwong Kan (“D2”) are whole-blood siblings, and their natural mother is Ho Sin Yung (“Ho”).  Dr Tsang Kwong Lik (“Dr Tsang”) was their elder half-blood brother.  The natural mother of Dr Tsang and Chan Yui Ling (“Chan”) was Leung Lai Fong (“Leung”).  Hence, Ho is Dr Tsang’s stepmother.

2. The plaintiff company (“P”) was incorporated in 1988.  P claimed (but D1/D2 did not admit) its principal activity between 2001 and 2003 was property investment, and it became dormant during the financial year July 2003 / June 2004 and did not carry on business from July 2005 to June 2011.  P’s directors were Dr Tsang (until he passed away on 12 December 2001) and D1. D2 was appointed as P’s director in December 2001, and from about 12 December 2001 to 27 August 2012 D1/D2 were P’s only directors.  Dr Tsang and D1 were the registered shareholders of 998 and 2 shares respectively in P.  On 21 July 2010, letters of administration in respect of the estate of Dr Tsang (“Estate”) were granted to Chan (“Tsang LA”).  On 5 March 2012, Chan as administratrix became P’s registered shareholder.  On 28 August 2012, Chan and two others were appointed as P’s additional directors (“New Directors”).  On 18 January 2013, D1/D2 ceased to be P’s directors.

3. Wong Yat Man Sunny (“D3”) was the sole director/shareholder of Bright Jade International Limited (“Bright Jade”) until its dissolution by deregistration on/about 24 February 2012.

4. The present consolidated action concerned payments which appeared on the face of relevant documents to be as follows:

(a)  on/about 5 October 2010, D1/D2 drew a cheque in the sum of $10,000,000 on P’s bank account with Wing Lung Bank Limited (“Wing Lung”) (“P’s WL A/C”) for P in favour of Bright Jade, and such cheque was deposited in Bright Jade’s bank account with Hang Seng Bank Limited (“Hang Seng”) (“Bright Jade’s HS A/C”), which payment reduced P’s bank balance from $10,842,475.45 to $842,475.45 as at 5 October 2010 (“$10 Million Payment”);

(b)  nearly seven months later, ie on/about 3 May 2011, Bright Jade repaid $10,000,000 to P by a cheque of the same date drawn by D3 on Bright Jade’s HS A/C (“$10 Million Repayment”);

(c)  on/about 18 July 2011, D1/D2 drew a cheque in the sum of $9,000,000 on P’s WL A/C for P in favour of D3, and such cheque was deposited in D3’s account with Wing Lung (“D3’s WL A/C”) on/about 22 July 2011, which payment reduced P’s bank balance from $9,480,760.05 to $480,760.05 as at 22 July 2011 (“$9 Million Payment”);

(d)  on/about 13 February 2012, D1/D2 drew a cheque in the sum of $130,000 on P’s WL A/C for P in favour D3, and such cheque was deposited in D3’s WL A/C, which payment reduced P’s bank balance from $165,007.05 to $35,007.05 as at 13 February 2012 (“$130,000 Payment”).

II.  P’s CLAIM

5. P claimed (a) D1/D2 misappropriated/misapplied P’s funds from about 2002 to 2012 by causing P to pay them grossly excessive directors’ remuneration/fees that were not authorised or determined/ approved by P in general meeting, and (b) D1/D2 made the $10 Million, $9 Million and $130,000 Payments in breach of their fiduciary duties owed to P.  P further claimed D3 knew or ought to have known there had been some breach of trust and/or fiduciary duty on the part of D1/D2 in causing P to pay the $9 Million and $130,000 Payments to him because:

(a)  D3 as director of Bright Jade or otherwise must have known P had no or no commercial reason to pay the $10 Million Payment to Bright Jade, and Bright Jade subsequently made the $10 Million Repayment back to P;

(b)  P had no or no commercial reason to pay D3 the $9 Million and $130,000 Payments (collectively, “$9,130,000 Payments”);

(c)  D3 knew or ought to have known such payments were procured by D1/D2 as authorised signatories of P’s WL A/C, and they stood as fiduciaries and/or directors of P;

(d)  D3 wilfully/recklessly failed to make any or any reasonable inquiries with D1/D2 as to why P made such payments to him at the time of payment.

6. P claimed it was unconscionable for D3 to receive/apply for his own use the $9,130,000 Payments, and denied the existence or validity of the 22/7/11 Agreement[1] and/or any payment pursuant thereto, but if such agreement did exist, D1/D2 entered into it in breach of fiduciary duties owed to P in that they knew or ought to have known the purported sale of the Goods by D3 to P[2] was grossly overpriced and they had no basis to believe the alleged purchase was in P’s best interest.   P claimed it suffered loss and damages being unauthorised or excessive remuneration/fees paid to D1/D2, and the total sum of $9,130,000 paid to D3. 

III.  D1/D2’s DEFENCE

7. D1/D2 denied P’s claims against them.  In respect of the $10 Million, $9 Million and $130,000 Payments, D1/D2 claimed that:

(a)  D1/D2’s parents had traded precious stones for a long time, and D1 learnt “skills in trading precious stones” from them.[3] After Dr Tsang passed away, P was idle for several years and D1 tried to look for investment opportunities for P.

(b)  By a written agreement dated 5 October 2010 (“5/10/10 Agreement”), P and Bright Jade made the following joint investment and P made the $10 Million Payment to Bright Jade:

“[P]和[D]現就共同合作發展玉石、藥村、棺木、飲食或其他具潛力投資發展的項目(“上述項目”)的貿易和推廣業務達成以下協議，其條款如下:-

1.  [P]和[D]願意共同合作發展香港、中國大陸、東南亞以及世界各地有關上述項目的貿易和推廣業務。

2.  [D]願意提供所有相關的器材、設備、市場資訊和其他專業技術共同合作發展上述項目的貿易和推績業務。[P]同意依賴[D]所提供的設備和專業意見去共同經營上述項目的貿易和推廣業務。

3.  [P]願意借出港幣壹仟萬元給[D]作為共同合作發展上述項目的貿易和推廣業務所需的資金。如[D]在開業後需要額外營運資金，所有額外資金均由[P/D]雙方共同負責。

4.  除了下述5.條款外，在上述項目的賬目每年經註冊會計師核實後有純利的情況下，[D]承諾會於簽定本合作協議書內十年分120 期劃一以年息百份之5分期償還於以上第3段內所述的借款給[P]。……” (my emphasis)

(c)  Such joint investment did not go ahead because D3 was injured in an accident, and Bright Jade made the $10 Million Repayment back to P.

(d)  In 2011, D1 found “a very good investment opportunity to purchase a group of 200 pieces of precious stones owned by [D3] at a very attractive price”.[4]

(e)  By a written agreement of sale and a cash memo dated 22 July 2011 between D3 and P (collectively, “22/7/11 Agreement”), P agreed to purchase from D3 200 pieces of jadeite articles/items (“Goods”) for $12,000,000 (“Price”) for investment purpose:

“買賣雙方同意以港幣一仟二佰萬元成交，買方[P]已付港幣一仟萬元與貨主[D3];買方[P]倘欠賣方[D3]貨銀港幣二佰萬元正。買賣雙方同意由2011年7月22日起，買方[P](包括本金及利息)分期每月供還港幣十七萬元，供12個月，至2012年7月22日，即供12 期(本金連利息合共港幣二佰零四萬元)。完成清還欠款及利息(給與賣方[D3])。若到期未能還清還債項全部的欠款及利息。(所餘欠款連利息仍繼續計算)。由於欠款沒有任何抵押下，貨主賣方[D3]保留可以提早隨時追討買方[P]清還全部欠款及利息的權利。”

(f)  D3 delivered the Goods to P, and P paid $10,000,000 in part payment of the Price made up by D1’s payment of $1,000,000 for P (“$1 Million Payment”) and the $9 Million Payment with the remaining balance of the Price ($2,000,000) to be paid by instalments.

(g)  The Goods was a sound/profitable investment “at a very attractive price” with current value exceeding the Price, so P stood to earn huge profits by such investment.  D1/D2 acted in P’s best interest and in accordance with P’s constitution and clause 38 of P’s Memorandum of Association.[5]

(h)  The $130,000 Payment was part payment of the remaining balance of the Price.

IV.  BACKGROUND AND PROCEEDINGS

8. This Decision concerned an application by D3 to set aside the default judgment entered against him for (a) $9,130,000 together with interest at judgment rate from 12 December 2012 to the date of full payment, and (b) costs of the action against D3 including costs of such application and all costs reserved (if any) vis-à-vis D3 (“D3 Judgment”).  There was no dispute this was a regular judgment. 

9. After Dr Tsang died, Leung and Ho were engaged in protracted probate litigation which ended up at the Court of Final Appeal in 2009.  Leung was held to be entitled to the Estate, but by then she had passed away, so Chan was granted the Tsang LA in July 2010 and was later registered as P’s shareholder.  Apart from the 988 shares in P, the Estate also included a debt of $6,725,700 due from P (“Tsang Debt”)[6] and two commercial properties.  In August 2010, Chan requested P’s board of directors to provide information about P’s financial condition and demanded P to repay the Tsang Debt, but to no avail.

10. Meanwhile, Ho sued Chan as administratrix of the Estate in HCA90/2010 (claiming beneficial interests in properties held by Dr Tsang and P) and in HCA1501/2010 (claiming a share of the Estate as dependent maintained by Dr Tsang at the time of his death[7]). In HCA1501/2010, Ho sought declarations inter alia that P’s shares registered in Dr Tsang’s name were held on trust for her, or alternatively Ho and the Estate were beneficial owners thereof in equal shares or in such shares as the court shall determine.  Ho discontinued HCA1501/2010 shortly before trial in June 2012. 

11. At the trial of HCA90/2010 on 5 June 2012, Ho’s counsel in opening submissions said (a) D1 would give evidence, and (b) about $10,000,000 had been withdrawn from P’s WL A/C to buy the Goods (and the value of of the Goods had increased by about 20%).  But in the end Ho did not call D1 as witness even though D1 had made three witness statements, the last of which was filed less than a week before trial in response to Chan’s 2^nd supplemental witness statement filed on 21 May 2012.

12. Chan’s 2^nd supplemental witness statement asserted D1/D2 appeared to have depleted P’s assets “to practically nothing for reasons best known to them, and unknown to [her]”.  D1’s last witness statement denied such accusation and alleged P “has always been in operation for business” and “[monies] were withdrawn from time to time for business transactions and for defraying costs and expenses connected with the operation of the company”.  D1 claimed “some of the cheque payments in July 2011 were for purchase of jade products for business”, but it was not relevant/appropriate to explain P’s business operation in that action.  After trial, DHCJ Saunders ruled against Ho, who has appealed against such judgment.

13. By specific discovery a few weeks before trial in HCA90/2010, Chan obtained P’s audited financial statements and recent bank statements, and discovered D1/D2 had caused P to dispose of its remaining property holdings during the financial year ended 30 June 2003, so P (a) had $13,781,457 in cash/deposits as at 30 June 2003, (b) P became dormant in 2004 and remained so in 2005[8] and for the following five years up to 30 June 2011, and (c) P’s bank balance was reduced to $15,358.05 as at 26 April 2012 due to various transactions including the $10 Million Payment,  $10 Million Repayment, $9 Million Payment and $130,000 Payment. 

14. By letters dated 10 and 11 May 2012 (ie shortly before the trial in HCA90/2010), Chan’s solicitors demanded D1/D2 for explanation in respect of inter alia the $10 Million and $9 Million Payments and the $1 Million Loan,[9] but there was no substantive reply.  Chan also wrote to ask P and D1/D2 for inter alia the identitites of the payees/recipients of such payments/loan.

15. In June 2012 Chan made a report to the Commercial Crimes Bureau (“CCB”), and in/around July 2012 D3 was arrested by the police.  In August 2012, the CCB told Chan they had “frozen” about $7,000,000 of funds that represented P’s various payments to D3.  D3 knew about this in August 2012 since his bankers (eg Wing Hang Bank Limited (“Wing Hang”) and Wing Lung) told him his bank accounts were temporarily “frozen” pending the outcome of police investigation of suspected fraud. 

16. On 28 August 2012, Chan was appointed as P’s director.  On 8 November 2012, P’s solicitors wrote to demand D1 to repay the $1 Million Loan,[10] and wrote to D1/D2 to ask for written explanation of the $9,130,000 Payments to D3.  No explanation was received until five months later in April 2013 when D1/D2 filed their respective defence pleadings.  On 5 December 2012, P’s solicitors wrote to demand D3 to repay the $9,130,000 Payments, saying that at the time of the payments (a) he knew there had been some breach of trust or fiduciary duty by D1/D2, and (b) he knew or ought to have known P had no legitimate/commercial reason to so pay him.  Again, no reply was received until D3 took out the Summons referred to in paragraph 24 below.

17. On 12 December 2012, P commenced HCA2297/2012 against D1/D2 for damages for breach of duty of care, fiduciary duties and P’s articles of association, and against D3 for (a) repayment of the sum of $9,130,000,[11] (b) a declaration that D3 received/held such sum as constructive trustee for P, and (c) an account be taken of profits made by D3 and an order that D3 do pay P such profits found due upon taking of such account together with interest thereon.  On 28 December 2012, D3 filed acknowledgment of service to give notice of intention to defend.  The Director of Legal Aid (“DLA”) filed two Memoranda of Notification of Application for Legal Aid dated 23 and 29 January 2013 giving notice that D2 and D3 had applied for legal aid.

18. On 28 January and 4 February 2013, the CCB informed Chan they had seized some gemstones during their investigations (“Gemstones”)[12] and had “frozen” about $7,000,000 in D3’s bank accounts, and suggested she should apply for an injunction as soon as possible. 

19. On 8 February 2013, P commenced HCA271/2013 against D1.  P claimed that (a) during the financial year ended 30 June 2011 P advanced an unsecured loan of $1,000,000 to D1 (“$1 Million Loan”)[13] that was repayable on demand,[14] and (b) on/about 8 November 2012 P’s solicitors made written demand to D1 for repayment of such loan but D1 failed/fails to repay.  P did not admit such loan was used to settle any alleged payment due or payable to D3, and claimed for repayment of such loan or damages with interest and costs.  But D1 denied such loan, and claimed that the sum of $1,000,000 represented a standby fund she kept for purchase of inventories after the year end date,[15] or it was a fund P used as part payment of the Price for entering into the 22/7/11 Agreement.  D1 repeated the matters in paragraph 7 above, and also made a counterclaim that was not relevant for the present purpose.

20. On 5 March 2013, the DLA refused D3 legal aid.  On 12 March 2013, the CCB wrote to Chan to say they were investigating a case of fraud in which P’s ex-directors were suspected of having siphoned off assets of P, and to enquire whether Chan would commence civil proceedings to take recovery action.  On 13 March 2013, the CCB told Chan that D1, D2 and D3 had been arrested as part of the police investigation.

21. On 13 March 2013, upon P’s application in HCA2297/2012, Anthony Chan J granted an ex parte Mareva injunction order restraining D3 from removing his assets in D3’s WL A/C or disposing of or dealing with or diminishing the value of any of his assets up to the value of $9,130,000 (“Ex Parte Order”), and an order requiring D3 to make disclosure in relation to his assets (“Disclosure Order”).  On 5 February, 14 March and 15 March 2013, P filed Chan’s 1^st affirmation and the 1^st and 2^nd affirmations of its solicitor Ng Wai Chun for the application for the Ex Parte and Disclosure Orders.  On 22 March 2013, Chung J inter alia continued the Ex Parte Order until judgment or further order with slight variation to the Disclosure Order (“Continuation Order”).

22. D3 failed to file any Defence in HCA2297/2012 within the prescribed time. On 11 July 2013, DHCJ B Chu granted the D3 Judgment, and ordered (a) the Ex Parte Order as continued to be varied to the effect that “[P] be paid from [D3’s WL A/C] the amount of HK$9,130,000 or so much thereof as may be sufficient to satisfy the said judgment sum”, (b) the injunction order be continued until further order, and (c) the injunction order “be discharged upon full payment of the judgment sum of HK$9,130,000; or the amount of HK$9,130,000 stated in the Mareva Injunction be reduced by any amount paid” (“1^st Payment Order”).

23. Pursuant to the 1^st Payment Order, Wing Lung paid the sum of $2,765,293.86 to P.  Since the CCB had advised about $7,000,000 had been “frozen”, on 18 September 2013 P filed Chan’s 2^nd affirmation to apply for the release of monies in D3’s other bank accounts to satisfy the outstanding balance of the D3 Judgment in the sum of $6,899,130.79.[16] On 2 October 2013, DHCJ B Chu ordered the 1^st Payment Order set out in the above paragraph to be varied/replaced by the provision: “[P] be paid from [D3’s bank account(s)] with [Wing Lung] or other banks in Hong Kong the amount of HK$9,130,000 or so much thereof as may be sufficient to satisfy the said judgment sum” (“2^nd Payment Order”).

24. On 30 August 2013, Master J Wong ordered inter alia that HCA2297/2012 and HCA271/2013 be consolidated “and thereafter be carried on as one action …… and that the leading action be HCA2297/2012”.  On 21 December 2013, D3’s solicitors filed their Notice to Act.  By a summons filed on 20 January 2014 (“Summons”), D3 applied for the following reliefs:

(a)  an order that the D3 Judgment be set aside and that D3 be at liberty to defend P’s claim;

(b)  leave to D3 to file/serve his Defence as per the draft exhibited to D3’s affirmation filed on 20 January 2014 within 14 days;

(c)  an order that the 2^nd Payment Order be set aside and P do return the amount(s) paid thereunder to D3 within 14 days;

(d)  execution/enforcement of the D3 Judgment and the 2^nd Payment Order be stayed pending the outcome of the Summons;

(e)  discharge of Ex Parte Order as continued by the Continuation Order;

(f)  costs of and occasioned by (i) the entering of the D3 Judgment and (ii) the Summons be paid by D3 to P.

25. On 27 January and 12 March 2014, P’s solicitors asked and the CCB agreed to let P’s expert gemologist Chan Pik Kwan (“PK Chan”) to examine the Gemstones.  Purusant to the directions granted by L Chan J on 30 January 2014, P filed Chan’s 3^rd affirmation in opposition on 13 March 2014.  On 17 June 2014, pursuant to a summons filed on 4 June 2014 (“1^st Aff Summons”), DHCJ Leung (a) granted leave for P to file/serve Chan’s 4^th affirmation and for D3 to file an affirmation in reply on the question of valuation of the Gemstones, (b) further adjourned the Summons for argument, and (c) reserved the costs of the 1^st Aff Summons and adjournment (“Leung Order”).  P filed Chan’s 4^th affirmation on 18 June 2014.

26. On 18 November 2014, Chan found out from the CCB that charges had been laid against D2 for conspiracy to defraud, and against D1 and D3 for conspiracy to defraud and dealing with property known or believed to represent proceeds of indictable offence.  The mention hearing for ESCC3272/2014 against D2 and for ESCC3303/2014 against D1/D3 was scheduled to be heard on 2 February 2015.

27. Pursuant to the Leung Order, D3 filed his 2^nd affirmation on 17 December 2014.  On 8^th January 2015, pursuant to P’s summons filed on 30 December 2014 (“2^nd Aff Summons”), Master H Au-Yeung granted leave for P to file/serve Chan’s 6^th affirmation, and for D3 to file/serve affirmation in reply by 4:00pm on 20 January 2015 with costs reserved (“Au-Yeung Order”).  Since the original copy of Chan’s 6^th affirmation was annexed to the filed 2^nd Aff Summons, on 9 January 2015 Master Au-Yeung granted leave for P to file/serve Chan’s 7^th affirmation with contents identical to his 6^th affirmation.  P filed Chan’s 7^th affirmation on 12 January 2015, and D3 filed his 3^rd affirmation in reply on 20 January 2015.

V.  LEGAL PRINCIPLES

28. 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.[17]  Unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success.[18]  This requires the court to form some provisional view of the probable outcome of the action.  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.[19]

29. It is not correct to adopt the approach that if the defendant can show he has an arguable defence, a default judgment against him ought to be set aside unless there is incontrovertable evidence before the court to negate it.[20] The court is also entitled on assessment of the affirmation evidence to come to a view that the defence put forward by reason of its inherent inconsistencies (eg between the defendant’s own evidence and documents) is inherently unbelievable and the defendant therefore has failed to discharge the burden of putting forward a defence with a real prospect of success.[21]

30. There are other considerations which a court must consider in deciding whether or not to set aside a default judgment, such as the reason why default judgment was allowed to occur in the first place, and any delay in setting aside and any consequent prejudice caused to the plaintiff.  The court’s approach is to conduct a balancing exercise of all relevant factors.[22] But the critical factor and starting point are the merits of the defence.  If the defence has no real prospects of success, there is no point in setting aside the same.[23]

VI.  DISCHARGE OF THE INJUNCTION AND PAYMENT ORDERS

31. By the 1^st and 2^nd Payment Orders, Wing Lung and Wing Hang paid the following sums to P in partial satisfaction of the D3 Judgment:

Date	Amount (HK$)	Bank
9/8/13	2,765,293.86	Wing Lung
24/10/13	5,047,746.31	Wing Lung
31/12/13	6,970.53	Wing Hang
Total:	7,820,010.70

32. On 19 August and 28 October 2013, P repaid $2,700,000 and $4,025,700 to settle the Tsang Debt of $6,725,700.  Out of such sums, the Estate paid out a total sum $5,727,693.21,[24] and settled P’s legal fees for HCA2297/2012, HCA271/2013, CACV221/2013 and other just and proper expenses of P[25] totalling $715,227 between 9 August 2013 and 31 October 2014.  P claimed its total bank balance was reduced to less than $380,000, and it did not have any other assets besides its claims against D1, D2 and D3.

33. In the circumstances, Mr Leung, counsel for P, accepted it was no longer appropriate for the Ex Parte Order as continued by the Continuation Order and varied by the 1^st and Payment Orders (“Injunction Order”) to “freeze” D3’s assets up to $9,130,000, and Mr Wu (and Mr Fong with him), counsel for D3, accepted that even if the D3 Judgment were set aside question would arise as to whether the Injunction Order and/or the execution of the D3 Judgment ought to be discharged or set aside for the sum of $7,820,010.70 to be returned to D3 when P had already disbursed the bulk of such sum recovered pursuant to the regular D3 Judgment and the 1^st and 2^nd Payment Orders and when third party interests might be affected.  None of the third parties who might be affected, eg the DLA, Ho, the Estate and/or Leung’s estate, were notified of the Summons.

34. In the end, both Mr Leung and Mr Wu agreed to confine their arguments before me to the issue of whether the D3 Judgment should be set aside, and to adjourn for further argument the questions of (a) whether the Injunction Order should be discharged and (b) whether the execution of (and recovery of the sum of $7,820,010.70) under the D3 Judgment and 1^st and 2^nd Payment Orders should be set aside. However, this is a separate matter from the discretion to be exercised by this court under D3’s application to set aside the D3 Judgment by balancing the change of circumstances after the D3 Judgment amongst other factors/considerations.

35. On such basis, at the hearing on 27 January 2015, I ordered that the Injunction Order be varied to the extent that paragraph 1 of the Ex Parte Order be continued save and except that the value of D3’s assets subject to restriction on disposal shall be reduced from $9,130,000 to $1,309,989.30, and adjourned paragraphs 3-5 of the Summons sine die with liberty to restore.

VII.  DISCUSSION

(a) P’s case

36. P claimed that to the best of Chan’s knowledge and based on P’s audited financial statements, P had been a property holding company, and after sale of its properties in 2002 it became dormant and only held cash/deposits.  Since becoming P’s director Chan searched through P’s company documents/records at its registered office and could not find any documents/records[26] in relation to the 5/10/10 and 22/7/11 Agreements[27] and/or the $10 Million, $9 Million and $130,000 Payments, which Chan considered strange since the value of the transactions (ie $10,000,000 or $12,000,000) comprised nearly the entirety of P’s assets.  Also, Chan had never seen the Goods nor come across any photograph or inventory record of the Goods in P’s possession even though she was aware that the CCB had seized the Gemstones during their investigations.  As explained below, there was huge disparity between the Price of $12,000,000 and the valuation of the Gemstones (which Ho[28] and D3[29] claimed to be the Goods) by PK Chan.  Takng into account the above matters, P claimed (a) the 22/7/11 Agreement was a sham transaction, (b) D3 was aware of D1/D2’s wrongdoing in making the $9,130,000 Payments to him, and (c) the police’s decision to file charges against D1, D2 and D3 following Chan’s report to the CCB was made on good grounds and evidence.

(b)  D3’s case

37. On the other hand, D3 claimed (a) he developed an interest in gemstones/jade since childhood and learned the skill of appraising jade from his grandmother, (c) D1 knew he collected jadeite articles/items and raw stones for over 35 years and he would make purchases for his own collection or trade (if the price was attractive), (d) he set up Bright Jade to carry on business of trading in jade and precious stones, and (e) the Goods were part of his personal collection for more than 10 years and/or valuable items inherited from his grandmother. 

38. D3 claimed D1/Ho had traded in jadeite articles/items for many years, and after discussions with D1 during which D1/Ho viewed the Goods for inspection/valuation and for taking photographs, he agreed to go into business with them.  On/about 5 October 2010 D3 for Bright Jade and D1 for P signed the 5/10/10 Agreement, and pursuant thereto P made the $10 Million Payment to Bright Jade. 

39. In November 2010, D3 suffered a stroke and had to undergo surgery.  Since then he had difficulty in mobility/self-care and problem with his vision, so (a) he was unable to carry on the intended business, (b) D1 for P and D3 for Bright Jade agreed to terminate the 5/10/10 Agreement, and (c) Bright Jade made the $10 Million Repayment to P in May 2011.

40. D3 claimed that in/about mid-2011 D1 told him she was still interested in his jadeite collection and she would purchase it if he would sell.  D3 was then in financial need for medical treatment and helper assistance, and his impaired eyesight hindered his enjoyment/ability in appraising jadeite articles/items, so he agreed to sell the Goods (which he had previously shown to D1/Ho and they had carefully viewed) if D1 would offer an attractive price.  After arms-length negotiations, D1/Ho eventually offered the Price.  D3 asked D1 about the Price out of curiosity, and D1 explained the Goods “could be sold at a retail market with a substantial profit upon polishing and packaging”. 

41. D3 was satisfied with the Price, and on 22 July 2011 (a) P and D3 signed the 22/7/11 Agreement, (b) P made the $9 Million Payment and D1 made the $1 Million Payment to D3 in part payment of the Price, and (c) D3 delivered the Goods to P.  The remaining balance of the Price (ie $2,000,000) was to be paid by instalments, and the $130,000 Payment was part payment of the same.  D3 claimed the 22/7/11 Agreement and the $9,130,000 Payments were bona fide and legitimate business dealings between P and D3 by relying on the apparent authority of D1 as P’s director and without knowledge of (or reason to believe) any breach of fiduciary duty by D1/D2.

42. D3 denied he committed any criminal offence(s).  He all along believed his bank accounts were frozen by the police, and it was only by the time of the Summons that he realised there was the Injunction Order against him.  When he learned P alleged the value of the Goods was much lower than the Price, he confronted D1 who revealed to him she offered the Price to get the best price from him on the basis of a valuation of the Goods at $16,068,000 by Ho (an experienced trader in jadeite articles/items) (“Ho’s Valuation”).

(c)  Real prospect of success?

43. Mr Wu submitted D3’s defence had real prospect of success that carried some degree of conviction.  He argued P’s case was built on thin circumstantial evidence drawn from a background of probate disputes between feuding family camps that had nothing to do with D3 except for his receipt of the $9,130,000 Payments as part payment of the Price for his sale of the Goods to P, and such circumstantial evidence could not be strengthened by the pending criminal trial faced by D1, D2 and D3 in the absence of a final verdict.  Mr Wu submitted it was all too easy for P to try to pick holes in D3’s case and to urge the court to draw inference of knowing receipt by D3, but in fact there were no internal inconsistencies within D3’s own case and between the case of D1/D2 and that of D3.

44. On the other hand, Mr Leung submitted D3’s case defied commercial/common sense and his evidence was internally inconsistent in a material way, which demonstrated that the 22/7/11 Agreement was a sham transaction to disguise D1/D2’s efforts to siphon off P’s assets by purported purchase of the overpriced Goods (that in truth were worth much less than the Price) by P (dormant company with no trading activity) from D3. 

45. In my view, one starts by looking at the contextual background of the alleged 5/10/10 Agreement and the $10 Million Payment.  Mr Wu submitted there was nothing sinister about such transaction and payment.  He said P was unable to refute the $10 Million Payment was repaid in May 2011 following termination of the 5/10/10 Agreement as a result of D3’s ill-health, which fact, he argued, supported D3’s case (and also D1/D2’s case) because D3 would hardly have returned the money if D1/D2 intended to siphon away P’s assets to D3.

46. However, although D3 claimed the 5/10/10 Agreement was an agreement between P and Bright Jade to “jointly invest in precious stones in the sum of HK$10,000,000”[30] and/or to “jointly invest in trading precious stones among others whereby [P] and Bright Jade provided the capital and expertise respectively”,[31] the terms of the 5/10/10 Agreement itself showed that the so-called joint investment was in fact a business to be run by Bright Jade[32] and the $10 Million Payment was in fact a loan by P to Bright Jade to be repaid with interest.[33] If the intended business was profitable, the repayment of such loan with interest at 5%pa was to commence immediately upon signing of the 5/10/10 Agreement by monthly instalments over ten years.[34] On an amortised basis the monthly repayment sum would be over $100,000, but clause 5 of the 5/10/10 Agreement provided that only 50% of D3’s 30% share of the profits would be used for such repayment.  On such basis, the monthly profits of the intended business would have to be above $650,000 in order to meet the loan repayment requirement. 

47. D3 did not adduce any affirmation evidence to explain how he would be able to establish the envisaged business under the 5/10/10 Agreement by using his “器材、設備、市場資訊和其他專業技術” and start to earn profits for the business at a level of at least $650,000 a month in order to make monthly repayment of over $100,000 to P, or alternatively how he could afford to make such monthly repayment and bear half of any loss of such business.[35] In face of P’s accusation that the 5/10/10 Agreement was a sham transaction with a view to effectively wipe out or significantly reduce P’s bank balance, one would have expected D3 to have condescended upon particulars of concrete plans for the business with projected income and/or his own financial capability to meet the repayment requirements.  There was also no explanation from D3 as to (a) why he only made the $10 Million Repayment seven months later in May 2011, (b) whether P had chased him for monthly repayment of the loan or on progress as to establishment of the intended business in the meantime, and/or (c) whether P asked for refund of the $10 Million Payment.  Indeed, there was no mention of these matters even in D1/D2’s witness statements, which merely stated that the “investment plan was not executed as planned”.  The silence is loud since the absence of these matters did not make much commercial sense in an arms-length commercial deal.

48. As Mr Leung pointed out, the $10 Million Payment was made on the eve of Ho’s commencement of HCA1501/2010 against the Estate following her failed attempt to obtain grant of letters of administration (and any beneficial interest) in respect of the Estate.  Even though the $10 Million Payment was repaid, it is interesting to note D3 again received the same amount of $10,000,000 as part payment of the Price for the Goods under the 22/7/11 Agreement two months later.

49. This nicely brings me to the 22/7/11 Agreement and the $9,130,000 Payments.  Mr Leung submitted the 22/7/11 Agreement was not a genuine transaction, and the practical effect of such payments was to effectively wipe out P’s bank balance by reducing it to $35,007.05 in February 2012.  On the other hand, Mr Wu submitted that D3’s line of defence based on the underlying sale and purchase transaction under the 22/7/11 Agreement in support of the $9,130,000 Payments was not a recent fabrication because this was alluded to in May 2012 by D1 in her 2^nd supplemental witness statement in HCA90/2010.  However, I note D1 eventually was not called to give evidence, and her assertions were untested at trial.

50. In my view, D3’s case based on the underlying sale and purchase transaction in respect of the Goods raised more questions than answers.  Even on the basis of the 22/7/11 Agreement, there was no explanation or commercial/other justification put forward by D3 as to why he would extend credit of $2,000,000 to P for a year upon outright sale and immediate delivery of the Goods to P without any collateral or even personal guarantee by D1/Ho.  This was especially curious when the Goods were part of his prized collection, and he was reluctant to part with them but for his urgent financial need as a result of his ill-health.  There was no explanation why the upfront cash payment was set at $10,000,000, which in the absence of other explanation lent weight to the suggestion that it conveniently matched the $10 Million Repayment in order to remove such sum out of P’s coffers yet again.

51. More importantly, even though the 22/7/11 Agreement provided for monthly instalment payment of $170,000 by P over 12 months, P did not comply with such requirement and did not pay the remaining balance of the Price ($2,000,000) at all save for the $130,000 Payment more than half a year later in February 2012.  Yet D3 accepted the $130,000 Payment without complaint, and there was no evidence he ever demanded for payment of any monthly instalment or the remaining balance of the Price.  There was no explanation why $130,000 (and not the instalment amount of $170,000 or any other amount) was paid by P after half a year, or why D3 accepted it without question.  Further, there was no evidence D3 took any action to demand/recover the outstanding balance of the Price and/or interest despite expiry of the last due date for such instalment payments in July 2012 despite his entitlement to demand for immediate payment,[36] and there was also no explanation for such non-commerical inaction.  This was particularly significant given his professed financial needs in relation to his ill-health, which must have been aggravated by the “freezing” of his bank accounts by the police since August 2012 and later by the Injunction Order.  Despite all this, there was still no counterclaim in D3’s draft Defence or any protest/demand in D3’s affirmation evidence for the outstanding balance of the Price.

52. In my view, D3’s conduct defied commercial/common sense if the 22/7/11 Agreement were genuine and enforceable, and D3 failed to come up with solid/convincing explanations that carried a degree of conviction despite these obviously non-commerical and questionable features.  There was little to refute Mr Leung’s argument that the tenor of the affirmation evidence suggested the partial payment of the Price by the $9 Million and $1 Million Payments was to match the $10 Million Payment previously paid and returned with the result of effectively wiping out or substantially depleting P’s bank balance. 

53. Mr Wu submitted the absence of a counterclaim by D3 was a red herring because this court should focus on the affirmation evidence as it was not necessary to put forward a draft Defence.  However, unlike Ko Lai Kuen, D3 in the present case did put forward a draft Defence as part of his admissible affirmation evidence, and there was no cogent reason why I should not take this into account when D3 asked for such Defence to be filed if the D3 Judgment were set aside.  But even if one focused on D3’s affirmation evidence (as Mr Wu would have me do), there was no intimation of any intention to demand/recover the remaining balance of the Price.

54. Mr Leung submitted that careful scrutiny of D3’s 2^nd affirmation and his draft Defence raised an even more fundamental concern.  The tenor of D3’s case was that (a) he knew D1 and Ho were jade traders for many years, (b) in June 2011 D1 asked D3 to sell the Goods to her, (c) D1 and Ho had viewed the Goods carefully, (d) D1/Ho came up with the offered Price for the Goods, (e) D3 was satisfied with the offered Price and thus agreed to sell the Goods for the Price, (f) in July 2011 D1 made payment to D3 in a total sum of $10,000,000, ie $9,000,000 by “[D1] through her company” and $1,000,000 by D1’s own personal cheque, and (g) in February 2012 “[D1] through the company” paid D3 a further sum of $130,000.  It appeared from such affirmation evidence and/or draft Defence that the alleged sale and purchase transaction in respect of the Goods was between D1/Ho and D3 which, Mr Leung argued, had nothing to do with P.  After all, even according to D3, it was D1 who made payment to him albeit “though her company”, and this fed P’s argument that the 22/7/11 Agreement and the $9,130,000 Payments were for siphoning P’s assets to D3 by D1/D2. 

55. The $1 Million Loan was the subject matter of HCA271/2013, but D1 in her Defence thereto claimed she was not liable to repay P since it was a standby fund she kept for the purchase of inventories  or alternatively it was a fund P used as part payment of the Price for entering into the 22/7/11 Agreement.  But D3 never explained why he accepted the $1 Million Payment (which was by D1’s personal cheque and not from P as purchaser named under the 22/7/11 Agreement) without question.  This added weight to D3’s own affirmation evidence that he struck the deal with D1/Ho, and that part payment of the consideration was actually by D1 either personally or “through her company”, which also did not sit well with Mr Wu’s reliance on D1/D2’s apparent authority as directors of P.  No attempt was made by D3 to clarify these matters in his 3^rd affirmation or to seek leave to file further affirmation to explain such discrepancy.  Given that P in its pleadings had raised the issue of knowing receipt on the part of D3, it behoved D3 to provide cogent explanation which he failed to do. 

56. Mr Wu reminded that the CCB seized 200 Gemstones in 2012 during their investigations and D1/D2 did produce faxed copies of the 5/10/10 and 22/7/12 Agreements, so whether or not Chan (who only became P’s director in August 2012) had seen the Goods, found photographs or inventory records of the Goods and/or discovered relevant records/ documents in P’s possession had no bearing on the question whether there was a genuine underlying sale and purchase transaction. Mr Wu argued that such matters concerned P’s internal administration, and should be answered by D1/D2 at trial and not by D3.  He added that the fact P was allegedly dormant after 2002 was irrelevant vis-à-vis D3 since D1/D2 as P’s directors had power to carry on the business of P as a going concern.[37] In any event, in my view, these matters added weight to the contextual background as well as D3’s own affirmation evidence discussed above that the sale and purchase of the Goods was struck between D3 and D1/Ho (as traders in jadeite articles/items) rather than P, except that part payment of the Price was made through P.

57. The Ho Valuation also raised questions.  Mr Wu would not rely on the valuation of the Goods in the Ho Valuation for the present purpose, but submitted that at the material time D1/Ho must have offered the Price for the Goods (and D3 merely accepted it) on the basis of the Ho Valuation with photograph taken and valuation made for each item of the Goods.  According to D3, the Ho Valuation came to light when D3 made enquiries with D1 for the purpose of the Summons after he learnt of P’s allegation that the Gemstones were worth much less than the Price.  On D3’s case, he must have learnt of such allegation latest by the time of the Leung Order in June 2014 and confronted D1 then, and yet the Ho Valuation never featured in the respective Defence and witness statement of D1/D2, and it was not discovered/disclosed by them in their List of Documents and Supplemental List of Documents respectively filed on 10 October 2014 and 15 January 2015 even though their line of defence was that the purchase of the Goods was a good investment at an attractive price, the current value of the Goods exceeded the Price, and P stood to earn huge profits by such investment. 

58. I also note D3’s 3^rd affirmation claimed that during negoatiations for the 22/7/11 Agreement, D3 already knew D1/Ho had inspected the Goods, and when he enquired out of curiosity as to the Price, D1 told him Ho had made a valuation of the Goods.  This did not sit well with his further assertion in the same affirmation that it was only several years later in 2014 when he confronted D1 with P’s allegation as to the low valuation of the Gemstones and “[upon] his strong request” that D1 revealed to him the offered Price “was actually based upon the valuation made by [Ho]”.  There was also no evidence he ever asked Ho to make an affirmation to verify the Ho Valuation to support his case or ever queried D1 why she never referred to the Ho Valuation in the present action. 

59. There was no dispute that the Gemstones were jadeite articles/ items.  Mr Leung submitted the expert evidence showed the Goods were significantly overpriced, which went a long way to show D3’s defence was not credible.  He argued the huge disparity between the Price and the assessed value by PK Chan (and by D3’s expert gemologist Chung Yam Ming (Daly) (“Chung”)) undermined D3’s claim that the 22/7/11 Agreement was an arms-length and genuine transaction.

60. Both PK Chan and Chung adopted the 13 HOKLAS testing criteria with Chung testing 13 and PK Chan testing 12 (except specific gravity) of such criteria.  Their appraisal was based on colour, cut, polish/cracks, clarity, transparency, volume and market supply/demand.

61. In his valuation report dated 3 December 2014, Chung gave an estimated market value on retail basis (based on Hong Kong’s and global prevailing market price) with reference to street jade shops at Jordan and Sham Shui Po at about $1,168,400 to $1,394,900, but claimed that the price of jadeite articles/items, which depended on the purchaser, market trend, supply/demand[38] and cost of cutting/carving (which had increased), could fluctuate substantially and might fetch 10-20 times more than the assessed price.  Chung said well-established jewellery shops would have higher mark-ups, and the price could also be substantially marked up by fine polishing/carving.  As each piece was unique and its price subjective to the individual, a willing buyer might offer a much higher price.

62. Chung’s supplemental report dated 20 January 2015 went on to say it was hard to compare valuations by different gemologists (who had their own appraisal references and different market information) because each item was unique and its value quite subjective, and the price could vary greatly with different country, shop and buyer/seller.  For the Gemstones, their value could be set at different price range by different tiers of jewellery shops, such as Chow Tai Fook, Chinese Arts and Crafts, Chow Sang Sang at the high end, and street shops at Jordan and Sham Shui Po at the low end.  The difference in mark prices could be 10-20 times between the cheapest and the most expensive.  Although Ho’s Valuation was much higher than Chung’s, it was said that “it is still within two ends of the price range ……” as aforesaid.

63. According to PK Chan’s expert report dated 23 May 2014, she gave her estimated market value on retail basis based on Hong Kong’s prevailing market price (and wholesale price would be at 20%-30% discount).  She opined the price of the Gemstones (being mediocre jadeite) in June 2011 was 10%-20% less than the current market value mainly due to increased costs in craftsmanship since mid-2011, and the estimated current (May 2014) value on retail basis was $345,550 to $450,000 so the estimated value in June 2011 on retail basis was $276,440 to $405,045 and on wholesale basis was $193,508 - $324,036.  Since there was no standard grading criteria for jadedite craftsmanship/cutting, upon referring to criteria similar to diamond cut grading nomenclature, PK Chan’s overall impression of the Gemstones was mediocre grade of Fei Cui (jadeite jade), and about 80% of the Gemstones had fair to poor cutting, and 20% had good to fair cutting.

64. Mr Wu submitted that since (a) there were no universal or standard grading criteria for jadeite craftsmanship/cutting and (according to Chung) the price of jadeite articles/items was subjective and could fluctuate 10-20 times above the assessed value, (b) Chung’s valuation at less than 20% of the Price was made with reference to low-end and not high-end shops (the latter of which would have higher mark-ups), (c) each jadeite article/item was unique and its value subjective to the individual, and (d) the market price could be substantially marked up 10 times by good polishing and fine carving, whether or not the Goods were overpriced would not be determinative as to whether the underlying transaction was genuine or not.

65. In my view, the significant disparity in price valuation and the Price could not be brushed aside as irrelevant.  Whilst Chung discussed various factors that might affect the retail price for a particular jadeite article/item (ie its individual uniqueness/cutting/carving/polishing, its subjective value to the purchaser in question, and the tier of retail shops where it was sold), Chung did not consider the value of the Goods on wholesale basis (which was the nature of the transaction under the 22/7/11 Agreement), the quality of the whole lot (eg whether it is of high or mediocre quality) and/or the quality of the cutting of whole lot.  The issue at hand was not whether the ultimate retail price that the Goods/Gemstones after polishing/packaging[39] could be substantially marked up to $12,000,000, but whether the existing Goods/Gemstones before further polishing/packaging were significantly overpriced in/about mid-2011 at the wholesale stage, which issue was directly addressed by PK Chan but which Chung shied away despite his supplemental report.

66. Further, there was no evidence at all that D1/Ho or P had marketed the Goods or any part thereof to either low-end or high-end shops after the purchase in mid-2011.  The fact that the police were able to seize all 200 Gemstones a year later suggested they had not been sold at all to “earn huge profits”.  Interestingly, D3 never enquired with D1/Ho about the progress of retail sale of the Goods or perhaps asked for return of some of the Goods since he had not been paid the outstanding balance of the Price of $2,000,000.  After all, retail sale of the Goods would have generated revenue to pay the remaining balance of the Price to him.

67. Further, the tenor of D3’s affirmation evidence was to distance himself from the Price by suggesting the offer came from D1 and he only accepted it.  However, D3 himself claimed to be an experienced collector with expertise in examining and valuing jade items, and indeed clause 2 of the 5/10/10 Agreement provided that Bright Jade (of which he was the sole director/shareholder) would offer such expertise for the purpose of the joint investment.  In my view, it was not a simple matter of whether P made a bad bargain or D3 made a good deal if the Goods were overpriced. Given D2’s professed expert knowledge, this goes very much to the issue of knowing receipt and called for an explanation from him as to whether at the time he thought the Price was reasonable/appropriate or whether it was so overpriced that would have put him as a collector with experience and knowledge in these matters on notice that the transaction was questionable.  However, his affirmation evidence did not address this at all.

68. Mr Wu submitted that P failed to prove directly that (a) the sale and purchase of the Goods was fictitious, (b) D3 was not conducting genuine business with P and/or (c) D3 received the $9,130,000 Payments for the benefit of D1/D2 to the prejudice of the Estate.  But this was not the correct approach. It was not for P to adduce incontrovertible evidence to negate any defence (even an arguable one although P disagreed that D3’s defence reached such threshold) put up by D3.  Rather, the burden was on D3 to convince the court that his evidence was credible and his defence had a real prospect of success and could well be established at trial.  Further, it was not an ingredient of “knowing receipt” to benefit the fiduciaries. 

69. Mr Wu submitted that since the trial between P and D1/D2 was still pending (as there was no application for summary judgment against D1 and/or D2), it would not be appropriate for this court to conduct a mini-trial on affirmation evidence.  He also raised the spectre of inconsistent decision if the D3 Judgment were not set aside and the court eventually found in favour of D1/D2 at trial that the 22/7/11 Agreement was a genuine transaction and/or the $9,130,000 Payments were proper payments without any breach of duty on the part of D1/D2.  But in my view, the fact that his co-defendants raised a similar defence did not alter the obligation on the part of D3 to put forward a defence with real prospect of success that carried some degree of convinction.

70. I am unable to draw adverse inference (as Mr Wu suggested I should) against P’s contentions based on P’s failure to date to seek summary judgment against D1/D2.  I bear in mind P was aware even before the commencement of the present action that the bulk of the $9,130,000 Payments in D3’s bank accounts had been “frozen” by the police.  Upon commencement of HCA2297/2012, such monies were “frozen” by the Injunction Order.  In light of the D3 Judgment and the 1^st and 2^nd Payment Orders, P had received a significant portion of its claim against D1, D2 and D3 in respect of the $9,130,000 Payments.  In such circumstances, it is doubtful whether it would be incumbent on P to apply for summary judgment against D1/D2 to recover the remaining balance of $1,309,989.30 when it had to proceed to trial against D1/D2 in any event in respect of its claim against them for unauthorised or excessive remuneration/fees and the $1 Million Loan. 

71. Mr Leung fairly accepted it would take a criminal trial to establish guilt.  Mr Wu strongly reminded that D3 was innocent until proven guilty.  But Mr Leung complained D3 was coy about whether he had given any witness statement to the police and if so what he told the police, and suggested there was nothing to prevent D3 from disclosing these matters.  For the present purpose, I do not take this against D3 given that his criminal trial is pending.

72. But taking all of the above matters into account, I am not persuaded P merely cast suspicion on D3’s case by relying on circumstantial inferences.  Rather, there were material aspects of D3’s own case that did not make commercial/common sense and cried out for explanation, but D3 either did not put forward any or any cogent/convincing explanation.  In my view, D3 failed to satisfy the threshold requirement for setting aside the D3 Judgment.

(d)  Other considerations

73. D3 applied to set aside the D3 Judgment after a delay of six months, which was not a short one as there had been change of circumstances since the D3 Judgment as explained in paragraphs 31-33 above.  D3’s explanation was that he had no knowledge of the D3 Judgment until mid-December 2013 when D1 told him about it.  In my view, such assertion also beggars belief. 

74. D3 claimed (a) Flat D, 5/F, True Light Building, 100-106 Third Street, Sai Ying Pun, Hong Kong (“Address”) was Bright Jade’s registered office, but since Bright Jade was deregistered in February 2012 such address was no longer in use, and (b) at the material time he lived at an address in Sham Shui Po.[40]

75. In December 2012, Chan’s solicitors wrote to D3 at the Address to demand an explanation for the $9,130,000 Payments, and although D3 claimed he had not received such letter it was not returned as unclaimed.  More importantly, in/about December 2012, when D1 told D3 about HCA2297/2012 commenced against him, D3 instructed Messrs George Chan & Co to contest the claim.  D3 did not explain how in December 2012 (ie about 10 months after Bright Jade was deregistered) he was able to have retrieve the writ of summons sent to the Address to enable his then solicitors to arrange for him to sign the acknowledgment of service form to give notice “in person” of his intention to defend,[41] and why he was not alerted when he signed right above the Address (which he claimed was wrongly written by his former solicitors’ paralegal and no longer in use) on such form.  Significantly, D3 never explained in what circumstances the Address was no longer in use.  The fact that Bright Jade was deregistered did not necessarily mean any tenancy, licence or other occupation arrangement expired or terminated at the same time.  No explanation was forthcoming as to why the Address was no longer in use when he apparently had access to the acknowledgment of service form sent to the Address.

76. D3 claimed that between March and December 2013 he did not receive any court document or was not informed of any development of the present action, and it was only when D1 told him about the D3 Judgment in mid-December 2013 that he immediately instructed his present solicitors to make an application to set aside the same.  He claimed to have acted promptly in all the circumstances given his poor health.

77. But notwithstanding his assertion of ill-health, D3 had no difficulty in seeking out solicitors to file the acknowledgment of service.  Given the DLA’s refusal of his application for legal aid in March 2013, D3’s failure to make enquiries about the progress of HCA2297/2012 or to check with his former/new solicitors for advice, especially when his bank accounts were frozen by the police and later by the Injunction Order, and when Wing Lung and Wing Hang withdrew a total sum of $7,820,010.70 out of his accounts in August and October 2013, was rather suprising.  D3’s inaction for about a year when (a) he knew he was a defendant in HCA2297/2012, (b) he claimed he intended to defend P’s claim, and (c) P was obviously taking action with respect to the litigation, could not be brushed aside by putting forward the banner of ill-health.  There is no medical evidence to suggest he could not even instruct solicitors to look into the matter on his behalf.  Mr Leung reminded that service letters were all sent to the Address and none of them had been returned undelivered.

78. More importantly, P had changed its position since entering the D3 Judgment by obtaining $7,820,010.70 under the 1^st and 2^nd Payment Orders in partial satisfaction of such judgment, and by paying P’s debt to the Estate, and the Estate in turn settled sums due to inter alia the DLA and others under court orders.  P’s current bank balance was less than $380,000, and it had no other assets or financial resources besides its claims against D1, D2 and D3.  As Mr Leung submitted, to set aside the D3 Judgment would cause harm and prejudice to P since it would not be easy to unwind the payments to the DLA and others, and in such circumstances P could face potential insolvency and liquidation, and hence inability to pursue its remaining claims against D1/D2.

79. As explained above, the court could take into account other considerations, eg the length of and explanation for the delay in seeking to set aside the default judgment,[42] the defendant’s conduct after the proceedings were served on him,[43] the public policy of finality in litigation even in the case of a default judgment,[44] and whether the party relying on the default judgment has altered his/her position.  [45]

80. Mr Wu reminded that in Young Bing Ching (deceased), the learned judge set aside the default judgment when real prospect of success was shown even though there was delay of nearly five years in making the application to set aside the default judgment, the explanation for allowing the judgment or the delay was not satisfactory, and third party interests might be prejudiced if the judgment was set aside (as there would be proceeding to set aside the receiving order).  But each case turns on its own facts, and the starting point is always the merits of the defence.  In respect of the defence contentions put forward by D3, I have concluded that they did not meet the threshold of real prospect of success.  The other considerations added weight to the exercise of the discretion not to set aside the D3 Judgment.

VIII.  CONCLUSION

81. In the premises, I dismiss paragraphs 1-2 of the Summons.  There is no reason why costs should not follow event.  I therefore grant a costs order nisi that (a) D3 do pay P’s costs of and occasioned by paragraphs 1-2 of the Summons (including all costs reserved, if any) to be taxed if not agreed, and (b) costs of paragraphs 3-5 of the Summons be reserved.

82. As regards the costs of the 1^st Aff Summons and the adjournment reserved under the Leung Order, I grant a costs order nisi that there be no order as to costs in respect of such costs.  It is true that P sought the indulgence of the court to file/serve Chan’s 4^th affirmation which necessitated the adjournment, but the timing of the preparation of PK Chan’s expert valuation report was dictated by response/permission from the police for the expert to carry out inspection, which matter was outside P’s control.  Neither party can be faulted.

83. As regards the costs of 2^nd Aff Summons which was reserved under the Au-Yeung Order, Chan’s 6^th affirmation essentially provided an account of updated developments.  In such circumstances, I grant a costs order nisi that the costs of 2^nd Aff Summons be costs in the cause of paragraphs 1-2 of the Summons.

IX.  POSTSCRIPT

84. I refer to the order of Master J Wong dated 30 August 2013 for consolidation of HCA2297/2012 and HCA271/2013 to be carried on as one action.  However, no directions were granted for consolidated pleadings.  Attention is drawn to the guidance in Wong Yuen Shun & anor v Siu Siu Kam,[46] and P should take the initiative to regularise the position.