CHOI CHUNG BUN VINCENT v. AUSTRALIA CHINA HOLDINGS LTD

HCA 539/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 539 OF 2009

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J U D G M E N T

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Introduction

1.  This is an appeal from two decisions of a Master made under Order 13, rule 9 of the Rules of the High Court.  Under this provision the Master ordered that the defendant’s application to set aside final judgment be dismissed and that the plaintiff’s application to vary the amount of the final judgment be allowed.  This variation was allowed on the basis of a finding that the defendant had not established that it had a defence to certain heads of claim but that it had established a possible defence in respect of the remaining heads of claim, which was in fact conceded by the plaintiff.  Consequently the Master further ordered that, in respect of those heads of claim to which the defendant had established a defence, leave be granted to the defendant to file and serve a defence.

A history of the proceedings

2.  The plaintiff was an executive director of the defendant and in a writ of summons filed on 24 February 2009, and amended on 23 July 2009, he claimed for remuneration, bonus and compensation due and owing for services provided to the defendant in this capacity.  The amount claimed is HK$17,142,897.42.

3.  The defendant is a company which was incorporated in Bermuda, has its registered office there but carries on no business there.  It is listed on the Australian stock exchange but is a holding company which invests in various projects through subsidiaries.  For a while it maintained an office in Hong Kong from which the plaintiff worked.  It also maintained, and still maintains, an office address in Sydney.

4.  The attempt to serve the defendant at the offices it had occupied in Hong Kong was unsuccessful and so an application was made to a Master for leave to issue a concurrent amended writ and serve it out of the jurisdiction, namely on the defendant at its Bermuda registered office.  This application was supported by an affirmation of Yau Leong Sau, a partner in the firm of solicitors representing the plaintiff.  The factual basis of the plaintiff’s claim as set out in the affirmation was, in all essential respects, the same as set out in the statement of claim.

5.  Applications for service out of the jurisdiction are governed by Order 11 of the Rules of the High Court.  Order 11, rule 1(1) provides a number of different gateways by which a link to the jurisdiction may be established as one of the conditions precedent to the granting of leave.  A plaintiff must be able to bring himself within one of these gateways and in this case the solicitor deponent of the plaintiff relied upon Order 11, rule 1(1)(d) which is a claim in contract.  The provisions of the sub-rule are as follows :

“O.11 r.1 (1)... service of a writ out of the jurisdiction is permissible with the leave of the court if in the action begun by the writ -

....

(d) the claim is brought to enforce, rescind, dissolve, annul or otherwise affect a contract, or to recover damages or obtain other relief in respect of the breach of a contract, being (in either case) a contract which -

(i) was made within the jurisdiction, or

(ii) was made by or through an agent trading or residing within the jurisdiction on the behalf of a principal trading or residing out of the jurisdiction, or

(iii) is by its terms, or by implication, governed by Hong Kong law, or

(iv) contains a term to the effect that the Court of First Instance shall have jurisdiction to hear and determine any action in respect of a contract.”

The plaintiff relied on paragraphs (i) to (iii) above of Order 11, rule 1(1)(d).

6.  Leave was granted on 14 August 2009 and the defendant was served at its registered office in Bermuda.  No notice of intention to defend was filed and on 7 December 2009 final judgment was entered for the plaintiff for the full amount of his claim.  On 3 March 2010 the defendant applied by summons to set aside the default judgment.  On 24 September 2010 the plaintiff applied by summons for an order varying the amount for which the final judgment had been entered.

7.  Both of these summonses came before a Master on 13 October 2010. The Master refused the defendant’s application to set aside the default judgment and granted the plaintiff’s application to vary the amount of the final judgment.  The effect of this variation was to award the plaintiff a final judgment in respect of his claims for director’s fees and what I shall call director’s remuneration in order to distinguish it from director’s fees.  The director’s fee is an annual amount payable to all directors whilst the director’s remuneration is a monthly amount payable to the executive directors. The other heads of claim were effectively carved out and the defendant was given leave to defend in respect of them.

8.  The defendant then appealed both of the Master’s orders.

The grounds of the appeal

9.  There are two separate orders being appealed, namely the refusal of the defendant’s application to set aside and the grant of the plaintiff’s application to vary.  In respect of the former appeal the defendant also attacks the order granting leave to serve outside of the jurisdiction and says that should the default judgment be set aside, which it asserts is a necessary first step, it will file an application to set aside the grant of leave to serve out.  It argues that this is a ground separate from showing a defence on the merits and can be a matter properly taken into account by the court when exercising the Order 13, rule 9 discretion to set aside.

10.  In relation to the grant of leave to serve out the defendant has a number of grounds by which it seeks to attack the grant.  One of them goes to the jurisdiction of the court.  It says that what is described in the statement of claim and affirmation is a claim by a company director for emoluments of office and such a claim is not a claim in contract and so is not within Order 11, rule 1(1)(d).  Thus the original grant of leave was wrong as the facts relied on by the plaintiff to found his claim in contract did not meet the threshold of a good arguable case.

11.  Secondly, the defendant also argues that there was material non-disclosure in the affirmation filed in support of the application for leave to serve out in that paragraph 15 of that affirmation fails to identify the source of the defendant’s knowledge and belief for the statements contained in that paragraph.

12.  Thirdly, the defendant says that in so far as the statement of claim and the affirmation reveal an action based upon a resolution passed at an informal director’s meeting of the defendant at which only the plaintiff and the managing director were present, then such a claim would have no chance of success as the plaintiff could not vote on such a resolution as he would have a conflict of interest.  In such a situation, the defendant argues, the resolution, absent any other director being present, could not have been validly passed as there would not have been a quorum for a board meeting. Consequently, the defendant argues, the statement of claim and affirmation do not raise a serious issue to be tried.

13.  Finally the defendant says that in his subsequent affirmations the plaintiff seeks to advance a different version of events which involves the only other director of the defendant being present by phone, at this informal board meeting.  This version would overcome the non-quorate meeting difficulty but, the defendant says, such a case is so markedly different from the case originally presented that it infringes the principle laid down in Parker v Schuller (1901) 17 TLR 299 and the plaintiff should not be allowed to rely on it.

14.  These last two arguments are equally applicable to the application to set aside the default judgment as they would be to an application to set aside the grant of leave to serve out.  They are part of the defendant’s defence on the merits which, factually, is effectively a complete denial of the plaintiff’s case. 

15.  In respect of the appeal against the Master’s order varying the amount of the final judgment the defendant argues that the variation power under Order 13, rule 9 does not encompass what was done here, namely allowing a part of the same claim, involving the same issues of liability, to remain alive.

The appeal hearing

16.  An appeal from a Master is in the nature of a rehearing of the application and so I have the evidence that was before the Master as supplemented by further evidence in the form of additional affirmations for which leave to file has been given.  The evidence is :

(i) the statement of claim which is supported by a statement of truth signed by the plaintiff;

(ii) the affirmation of Yau Leong Sau filed in support of the application for leave to serve out of the jurisdiction;

(iii) affirmations of the plaintiff affirmed on 3 March 2010, 21 September 2010 and 14 December 2010;

(iv) affirmations of Nelson Chiu, the managing director and a founder of the defendant, affirmed on 3 March 2010, 14 June 2010, 8 October 2010 and 24 November 2010; and

(v) an affidavit of Anthony Francis Hill, a consultant in the legal firm representing the defendant.

17.  Just prior to the hearing of this appeal a summons was filed by the defendant seeking leave to file a further affidavit, with exhibits, as evidence on the appeal.  I shall rule on this application later in this judgment.

18.  For Order 13, rule 9 applications there is a considerable body of case law which I discuss below.  The appeal against the Master’s decision to vary the default judgment involves a separate consideration of the scope of the variation power.

The legal principles underlying Order 13, rule 9 applications

19.  The starting point for a consideration of the Order 13, rule 9 discretion is that it is a broad discretion which exists in order to prevent injustice being done.  Lord Atkin in Evans v Bartlam [1937] AC 473 described it as unfettered and unconditional.  The underlying rationale for the existence of the discretion was explained by Lord Atkin at page 480 as follows :

“The principle obviously is that unless and until the Court has pronounced a judgment upon the merits or by consent, it is to have the power to revoke the expression of its coercive power where that has only been obtained by a failure to follow any of the rules of procedure.”

20.  This was more succinctly expressed by Sir Roger Ormrod in his seminal judgment on Order 13, rule 9 in Alpine Bulk Transport Co. Inc. v Saudi Eagle Shipping Co. Inc. (“The ‘Saudi Eagle’”) [1986] 2 Lloyds Rep. 221 where he said at page 223 that the purpose of the rule was “to avoid the injustice which might be caused if judgment followed automatically on default.”

21.  In exercising the discretion to set aside Hong Kong law makes a distinction between what are known as regular judgments and irregular judgments.  Whether a judgment is characterized as one or the other has important consequences on the issue of whether it should be set aside.

22.  In respect of an irregular judgment a defendant is entitled as of right to have it set aside and does not have to show that he has a defence to the claim.  But the law in England has now moved away from characterizing judgments as regular and irregular and courts are more inclined to examine the merits of the defence in every case, however the judgment might have come to be entered.  Hong Kong has not yet travelled down this path and it remains unclear whether our law will develop in the same way (see Cosec Nominees Ltd & anor v Lau Hon Ming [2001] 2 HKLRD 581).

23.  In respect of a regular judgment the defendant has to show that his defence has “merits to which the court should pay heed”.  These are the words of Lord Wright in Evans v Bartlam at page 489.  Sir Roger Ormrod in The “Saudi Eagle” case said at page 223 that this meant that a defendant has to show he has a defence “which has a real prospect of success”.  He continued on the same page :

“… In our opinion, therefore, to arrive at a reasoned assessment of the justice of the case the Court must form a provisional view of the probable outcome if the judgment were to be set aside and the defence developed. The ‘arguable’ defence must carry some degree of conviction.”

24.  These comments must be understood in context.  They were prompted by an analysis of Evans v Bartlam and a Court of Appeal decision of Vann v Awford and in both of the cases it was quite clear that there was a defence on the merits.  Importantly, there is no suggestion that the court’s assessment of the merits of the defence required it to become involved in assessing the credibility of witnesses or the inherent credibility of competing factual assertions.

25.  The relevance of the regular/irregular distinction in the present case is that in respect of the argument that leave to serve out should not have been granted as the writ does not reveal a claim in contract, Mr Alder for the defendant says that this is both a freestanding argument in its own right (which though not within the scope of the concept of a defence on the merits is a matter which can and should be taken into account by the court when exercising the discretion to set aside) and it is an argument which, if correct, would have the effect of rendering the judgment irregular and therefore dispense with the need for him to show he has a defence with a real prospect of success.

26.  Apart from this attack upon the judgment he accepts that in other respects it was regularly entered but maintains that he has a defence on the merits.  Consequently the issue whether the plaintiff has shown that he has a defence with a real prospect of success remains a live issue.

27.  Mr Alder contends that showing a defence with a real prospect of success is a very low test.  Describing it in this way is not, to my mind, particularly helpful and I would, in any event, take issue with the use of the adjective “very”.  After all, Sir Roger Ormrod in The “Saudi Eagle” did add that “The arguable defence must carry some conviction.”

28.  I prefer to approach this question by going back to the purpose for which the power is to be exercised, namely avoiding injustice, and bearing in mind the context in which it is to be exercised.  This context is of an interlocutory application where the evidence is only in the form of affirmations from the parties.  In the present case there is the added element that these affirmations contradict one another on all major areas but when each is considered in isolation, neither can be said to be inherently unbelievable.

29.  In such a situation, where assessing the merits of a defence requires judges to embark upon an assessment of the credibility of competing evidence, courts have cautioned against conducting a trial on affirmations whose deponents’ claims have been untested by cross-examination.  In Allen v Taylor [1992] PIQR 255 Lord Dillon said at page 259 :

“It is quite impossible to be dogmatic about the extent to which the court must be satisfied of the validity of the suggested defence. There must be numerous cases where the issue will turn entirely on the assessment of the facts at trial; each party’s case would carry conviction if it stood alone and without conducting a trial the court is not able to say which will succeed.”

30.  In Day v R.A.C. Services Ltd [1999] 1 WLR 2150 Ward LJ said at 2157C-D :

“I agree, however, that the arguable case must carry some degree of conviction but judges should be very wary of trying issues of fact on evidence where the facts are apparently credible and are to be set aside against the facts being advanced by the other side. Choosing between them is the function of the trial judge, not the judge on the interlocutory application, unless there is some inherent improbability in what is being asserted or some extraneous evidence which would contradict it.”

31.  How does one accommodate these concerns in applying the real prospect of success test?  Lord Justice Ward said that in respect of these situations it was wrong to use the real prospects of success test in a positive way and the judge should not be asking himself whether or what the defendant says establishes a defence with a real prospect of success.  Rather, he should be approaching the question negatively and asking himself whether what the defendant says has no real prospect of being a successful defence to the plaintiff’s claim.  In so saying he was critical of a view expressed in the Supreme Court Practice 1999 that suggested the defendant bore a burden of demonstrating, by potentially credible evidence, a real likelihood of success. Such a view had in fact been expressed by Godfrey JA in obiter comments in Premier Fashion Wears Ltd v Li Hing Chung [1994] 1 HKC 213 at 219I-220A but it is a view from which he appears to have later resiled in O Mark Polyethylene Products Fty Ltd v Reap Star Ltd [2000] 2 HKC 300.

32.  Lord Justice Ward’s approach to the issue was followed by Deputy Judge Alan Boyle QC in Manolakaki v Constantinides [2003] EWHC 401.  In this case Deputy Judge Boyle QC reviewed the authorities and distilled the principles from them into the following summary in paragraph 46 of his judgment :

“I take it from these passages that whether in any particular case there is ‘a real prospect of successfully defending the claim’ must ultimately turn on a judgment to be made on the particular facts of the particular case, applying common sense, and taking account of the requirement that the defence should carry some degree of conviction. The court should not attempt to judge questions of fact on conflicting statements which have not been tested by cross-examination and should avoid attempting to try issues of fact where apparently credible facts are advanced by each side. There may be cases where the court can reach the view that there is no real prospect of successfully defending the claim, in which case the judgment must be allowed to stand. But if the court is unable to reach that conclusion on the materials before it, it may be, depending on the circumstances of the particular case, that the court has to conclude that there is a real prospect of successfully defending the claim. At all events, it appears to be wrong to require the defendant to show ‘a real likelihood that he would succeed’, as suggested in the note to the Supreme Court Practice 1999.”

33.  This, I believe, is a helpful guide to the exercise of the discretion where the court is placed in the situation of having before it competing assertions as to fact, neither of which, on its own, is inherently incredible and without the benefit of other independent evidence, such as documentary evidence, to help it in its search for the truth.  I should emphasise that the Day v R.A.C. Services Ltd approach is not a different test : rather it is an application of the same test in a different way in order to deal with particular difficulties arising from specific circumstances.

34.  Approaching the exercise of the discretion in this way advances the purpose for which it exists of ensuring that the coercive powers of the court are not inappropriately employed where the court has not pronounced a judgment upon the merits or by consent.  In fulfilling this purpose it is less concerned with achieving final justice which is the responsibility ultimately of the trial court but more with avoiding injustice at the interlocutory stage.  It helps the court achieve its objective which the Court of Appeal in Allen v Taylor described at page 258 as being “an assessment of the justice of the case as between the parties”. 

35.  In situations other than this the test should be applied as suggested by Godfrey JA in O Mark Polyethylene Products Fty Ltd, at 337.  A straightforward application of the test is particularly suited to defences which involve the application of legal principles to uncontested facts or to issues of pure law.  In The “Saudi Eagle” one of the defences involved the construction of words in a document.  In applying the discretion to this defence Sir Roger Ormrod said as page 224 :

“… Like most questions of construction it is ‘arguable’. The real question is whether it is a ‘prima facie’ defence (per Lord Atkin in Evans v. Bartlam at p. 480), a ‘serious’ defence, (per Lord Russell of Killowen, ibid, at p. 482) or has merits to which ‘the Court should pay heed’ (per Lord Wright at p. 489). …”

36.  Whatever qualifying word is employed, whether it be “prima facie”, “serious”or “real”, it is clear that its purpose is the same, namely to convey the idea that the defence must be more than merely arguable.  In making this assessment the court is obliged to give consideration to the merits of the defence in order to reach a conclusion on whether it is possessed of the necessary degree of conviction so that it becomes a defence to which the court should pay heed.   

Legal challenges to the jurisdiction of the court

37.  As mentioned, the defendant asserts that the plaintiff’s claim is not a claim in contract and therefore Order 11, rule 1(1)(d) does not apply to it and therefore leave to serve out should never have been granted.  This would mean that the court should not have asserted jurisdiction over the defendant under Order 11, rule 1(1)(d).

38.  I agree with the defendant that this is a freestanding ground and is not encompassed within the concept of a defence on the merits.  The question is whether this is a matter that I can properly take into account when exercising the Order 13, rule 9 discretion.  As previously mentioned the courts have been at pains to emphasise that the discretion is an unconditional and unfettered one.  In Evans v Bartlam Lord Atkin said at page 480 when discussing guidelines laid down by courts for the exercise of the discretion :

“ The discretion is in terms unconditional. The Courts, however, have laid down for themselves rules to guide them in the normal exercise of their discretion. One is that where the judgment was obtained regularly there must be an affidavit of merits, meaning that the applicant must produce to the Court evidence that he has a prima facie defence. It was suggested in argument that there is another rule that the applicant must satisfy the Court that there is a reasonable explanation why judgment was allowed to go by default, such as mistake, accident, fraud or the like. I do not think that any such rule exists …

But in any case in my opinion the Court does not, and I doubt whether it can, lay down rigid rules which deprive it of jurisdiction.  Even the first rule as the affidavit of merits could, in no doubt rare but appropriate cases, be departed from.  The supposed second rule does not in my opinion exist.”

39.  It seems clear from the passages just quoted that the discretion, by reason of its breadth and unconditional and unfettered nature, would be capable of accommodating considerations other than those laid down as rules of guidance by courts. 

40.  The question then becomes whether a challenge to the jurisdiction is an appropriate matter that can be taken into account in the exercise of the Order 13, rule 9 discretion.  Answering this question requires a consideration of Order 11.

41.  Order 11 represents a statutory extension to the territorial jurisdiction of the court.  This was explained by Lord Diplock in Siskina (Cargo Owners) v Distos S.A. [1979] AC 210 (“The Siskina”).  At page 254F–255A he said :

“The general rule is that the jurisdiction of the English Court over persons is territorial. It is restricted to those upon whom its process can be served within the territorial limits of England and Wales. To this general rule there are some exceptions. These are now to be found in Order 11 of the Rules of the Supreme Court which have statutory force by nature of section 99 of the Supreme Court of Judicature (Consolidation) Act 1925. Order 11 permits the High Court to grant leave to a plaintiff to serve its process upon a person outside the territorial limits of England and Wales in those cases, but only in those cases, that are specified in sub-rules (a) to (o) of rule 1(1) or in rule 2 …

In several of the cases specified in sub-rules (a) to (o) the jurisdiction exercisable over foreigners by the High Court is wider than that which is recognized in English law as being possessed by courts of foreign countries.  These are ‘exorbitant’ jurisdictions which run counter to the normal rules of comity among civilized nations.  For this reason it has long been held that where there is any room for doubt as to their meaning the provisions of the sub-rules are to be strictly construed in favour of the foreigners : The Hagen [1908] P.189, 201 per Farwell L.J. and it is in my view equally well settled now that it is not permissible in any action commenced by service of process on a person out of the jurisdiction to litigate any claim that does not fall within one or other of sub-rules (a) to (o).”

42.  Decisions on applications for leave to serve out involve a two stage process.  The first stage involves a decision that the plaintiff has established to the threshold of a good arguable case that he has a cause of action within Order 11, rule 1(1).  This gives the Hong Kong High Court jurisdiction and leads to the second stage which is a consideration of whether the Hong Kong High Court should exercise that jurisdiction.  This second stage requires a consideration of whether there is a serious issue to be tried between the parties and whether Hong Kong is the appropriate venue to try that issue.  This second stage decision is said to be discretionary in nature (see GDN Ltd v Creditor Co. Ltd [2008] 5 HKLRD 895, at 906-908 for a description of the Order 11 and Order 12 processes).

43.  The gravity of these decisions can best be appreciated by quoting the comments of Farwell LJ in The Hagen [1908] P 189 that were referred to by Diplock LJ in The Siskina and which remain apposite to this day.  At page 201 Farwell LJ said :

“ During these present sittings Vaughan Williams LJ and myself have on more than one occasion had to consider Order XI, and we have had many authorities discussed and fully considered by the court, and the conclusion to which the authorities led us I may put under three heads. First we adopted the statement of Pearson J, in Société Générale de Paris v Dreyfus Brothers (1885) 29 Ch D 239, 242, that ‘it becomes a very serious question , whether or not, even in a case like that, it is necessary for the jurisdiction of the court to be invoked, and whether this court ought to put a foreigner, who owes no allegiance here, to the inconvenience and annoyance of being brought to contest his rights in this country, and I for one say, most distinctly, that I think this court ought to be exceedingly careful before it allows a writ to be served out of the jurisdiction.’ The second point which we considered established by the cases was this, that, if on the construction of any of the sub-heads of Order XI there was any doubt, it ought to be resolved in favour of the foreigner; and the third is that, inasmuch as the application is made ex parte, full and fair disclosure is necessary, as in all ex parte applications, and a failure to make such a full and fair disclosure would justify the court in discharging the order, even although the party might afterwards be in a position to make an another application.”

44.  In the present case the defendant attacks the decisions made in both stages but his main attack is upon the first stage decision.

45.  Thus the decision of a court under Order 11 as to whether to bring a putative defendant within its juridical embrace is comprised of two determinations.  The first is whether the defendant’s claim can be brought within one of the Order 11 gateways.  The second is a discretionary determination of whether notwithstanding that as a matter of law the claim is within one of the Order 11 gateways, it is appropriate for the court to impose itself on the defendant and subject the defendant to its authority.

46.  In different contexts the concept of jurisdiction can have different meanings.  This was recognized by the Court of Final Appeal in Re Chime Corp. Ltd [2004] 7 HKCFAR 546 at 566E-567C.  In the context of Order 11 the determination of whether a plaintiff has brought his claim within one of the rule (1) gateways is, it seems to me, a use of the concept of jurisdiction in the strict sense of the word.  It may be that in respect of the discretion exercised in the second stage of determining whether to grant an application for leave to serve out, jurisdiction is being used in its wider sense.

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

48.  Having decided that the fact that a defendant wishes to challenge the jurisdiction of the court is a matter that I can properly take into account when exercising the Order 13, rule 9 discretion, the next issue I must decide is what threshold the defendant must meet in order to succeed with such a basis for setting aside.  Clearly it must involve more than just indicating a wish to make the challenge.  The nature of the challenge must be clearly set out in respect of both the factual and legal aspects of the challenge.  Nor will it be enough that such a challenge is merely arguable or even reasonably arguable. 

49.  I do not think that one can do better than the test already employed for assessing the defence on the merits, namely the reasonable prospect of success test.  But this is not the reasonable prospects of success as applied in the way suggested in Day v R.A.C. Services Ltd and Manolakaki v Constantinides [2003] EWHC 401.  This is not an evidential/credibility issue.  This is a mixed fact and law issue where the court assesses the merits of the legal argument on basis of the facts of the plaintiff as presented to the Master who granted leave to serve out.  If that legal argument can be said to be more than reasonably arguable and to carry some degree of conviction such that it becomes a matter to which the court must pay heed then it will be an argument that has a reasonable prospect of success and can be properly taken into account by the court in exercising its Order 13, rule 9 discretion.

50.  Without determining that it will succeed, the court should at least be able to say of it that it is not a challenge that has no reasonable prospect of success.

51.  If the challenge to jurisdiction is adjudicated upon in this way then it becomes irrelevant whether it has the effect of causing the default judgment to be regarded as one that was irregularly entered.  Once the challenge passes this test then the judgment should be set aside with a direction to the defendant to apply to set aside the leave out within a timeframe specified by the court.

The basis of the defendant’s jurisdictional challenge

52.  The factual basis underlying the defendant’s challenge is as set out in the Statement of Claim, paragraphs 4 to 8 of which assert as follows :

“4. From 3^rd January 1995 to 6^th February 2008 the Plaintiff was engaged by the Defendant as the Executive Director whereupon most of the service as provided by the Plaintiff was done in Hong Kong throughout the period.

5. As the Founder Director and Executive Director the Plaintiff’s service extended to technical review and advice; business review and development; business negotiation and contract signing; listing of the Defendant and its subsidiaries; fund raising and bank loan; overseas market development; review operations in China; promotion of the Defendant; staff salary payment for the Defendant and its subsidiaries in return for which the Plaintiff would be given director fee and remuneration, bonus and compensation as recorded and evidenced in a Board Minutes on 25^th June 2002 and an Annual General Meeting Minutes on 20^th August 2002. Without prejudice to the generality of the aforesaid, on or about 25^th June 2002, the Plaintiff and the Defendant through its top management through the aforesaid Mr. Hon Sang Chiu Nelson also reached an agreement in Hong Kong in terms of the aforesaid. The said agreement was reached orally in Hong Kong between the Plaintiff and the aforesaid Hon Sang Chiu Nelson on behalf of the Defendant which reaffirmed the usual practice in the past and was reflected in writing by the aforesaid Board Minutes and Annual General Meeting Minutes.

6. In purported performance of the said agreement and the resolution passed at its Annual General Meeting in 2002 aforesaid the Defendant paid partially to the Plaintiff his rightful director fee and remuneration, and bonus amounting to HK$1,771,774.36.

7. On 6^th February 2008, the Defendant unilaterally and wrongfully terminated the said agreement.

8. In breach of the said agreement, the Defendant has failed to pay fully to the Plaintiff his rightful director fee and remuneration, bonus and compensation, the total outstanding amount of which is liquidated at HK$17,142,897.42 but there may be additional amount the Plaintiff can only provide after discovery as the information and figures are privy to the Defendant.”

53.  The affirmation that was filed in support of the application for leave to serve out contained the following paragraphs :

“15. For the reasons set out below, Order 11 rule 1(1)(d)(i) and/or (ii) and/or (iii) shall apply in this Application. The remuneration agreement was reached in Hong Kong by the Plaintiff and the Defendant in its own right through its top management through its Executive Director Mr. Hon Sang Chiu Nelson on its behalf in Hong Kong which reaffirmed the usual practice in the past and was reflected in writing by a Board Minutes on 25 June 2002 and an Annual General Meeting Minutes on 20 August 2002. I am instructed that whilst these 2 meetings were held in Hong Kong, the top management of the Defendant including the Plaintiff and the said Mr. Hon Sang Chiu Nelson were all residing in Hong Kong throughout the period. The said Mr. Hon Sang Chiu Nelson is a businessman residing in Hong Kong. The subject matter of remuneration agreement was the arrangements primarily undertaken in Hong Kong and/or rights under the Hong Kong law. As such, the intention of the parties for the remuneration agreement to be governed by Hong Kong law and dispute therefrom be determined by Hong Kong Court has manifested in the most clear and unequivocal way. Hence, the proper law of the remuneration agreement and the arrangements thereby undertaken shall be the Hong Kong law. There are now produced and marked ‘YLS-10’ copies of the said Board Minutes and Annual General Meeting Minutes (‘the said Board Minutes and Annual General Meeting Minutes’)

…

20. The Plaintiff’s action against the Defendant in these proceedings is to seek a judgment against the Defendant for the sum of HK$17,142,897.42 and/or damages to be assessed together with interest and cost.

21. As revealed in the Statement of Claim, the Plaintiff was engaged by the Defendant as the Executive Director from 3^rd January 1995 to 6^th February 2008 whereby most of the service as provided by the Plaintiff was done in Hong Kong throughout the period. By virtue of the remuneration agreement, the Defendant is liable in return to pay the Plaintiff director fee and remuneration, bonus and compensation as recorded and evidenced in the said Board Minutes and Annual General Meeting Minutes.

22.    On the basis of the instructions given by the Plaintiff and the documents made available to me in the course of these proceedings, it is my belief that the Plaintiff has a good cause of action against the Defendant in respect of the matters as set out in the Statement of Claim.”

54.  A plain reading of these two documents reveals the following assertions by the plaintiff :

(1) he was engaged by the defendant to be an executive director of it;

(2) he discussed with one Nelson Chiu Hon Sang who was part of the senior management of the defendant as to his remuneration as an executive director of the defendant;

(3) he reached an oral agreement with Nelson Chiu as to what that remuneration should be; and

(4) this agreement was reflected in the minutes of a meeting of the board of directors and subsequently of the company.

However it is unclear whether it is being asserted that the remuneration agreement was formed when the plaintiff reached an agreement with Nelson Chiu or when the resolutions were passed at the general meeting of the company and the meeting of the board of directors.  The significance of the two meetings only became apparent when further information was placed before me by way of affirmations which included the company’s bye-laws. Bye-law 18.5 is entitled “Directors’ remuneration” and requires that directors’ remuneration shall be determined by the company in general meeting. But this bye-law concludes with the following sentence :

“The foregoing provisions shall not apply to a director who holds any salaried employment or office in the Company except in the case of sums paid in respect of Directors’ fees.”

Bye-law 18.8(a) supplements bye-law 18.5 as follows :

“18.8 Forms of remuneration

(a) Notwithstanding Bye-Laws 18.5, 18.6 and 18.7, the remuneration of a Managing Director, Joint Managing Director, Deputy Managing Director or an Executive Director or a Director appointed to any other office in the management of the Company may from time to time be fixed by the Board and may be by way of salary, commission, or participation in profits or otherwise or by all or any of those modes and with such other benefits (including pension and/or gratuity and/or other benefits on retirement) and allowances as the Board may from time to time decide but may not be by commission on, or a percentage of, operating revenue.  Such remuneration shall be in addition to his ordinary remuneration as a Director.”

55.  These bye-laws make it clear that there are in fact two types of directors’ remuneration.  There is directors’ fees which is an amount payable to all directors and which has to be approved by the company in general meeting and director’s remuneration in the form of salary, bonuses etc. which is only payable to a class of directors which I shall call executive directors and this form of remuneration can be approved by the board of directors.

56.  In assessing the merits of the jurisdiction point I must examine the facts against the backdrop of the legal principles relevant to directors. Directors are categorized as trustees or fiduciaries.  The consequences of this were described by L.S. Cheung and William M.F. Wong in their work Company Law, Powers and Accountability, at page 126 :

“ In a summary, the principles are that a director in his capacity as fiduciary is:

· not allowed to put himself in a position where his duty to his beneficiary, the company, conflicts with his personal interests,

· prohibited from deriving a benefit from his office; and if in breach of the principles aforesaid he acquires some benefit for himself, the company is entitled to recover the benefit from him.

These principles may be varied or totally released by the beneficiary either pursuant to the terms of engagement or with the informed consent of the beneficiary.  So far as the remuneration of directors is concerned, modern articles of association usually vary the strict application of the equitable principles by allowing remuneration to be paid to directors for their work and services if authorized by the general meeting or by the board of directors.  It is through this provision in the articles that directors often get paid.  However, there must be strict compliance with the terms of the articles pursuant to which the equitable principles are relaxed. …”

57.  In support of its argument, the defendant relies on a judgment of Knox LJ in the Chancery Division of the English High Court.  The judgment is in the case of Newtherapeutics Ltd v Katz & anor [1991] Ch. 226. In this case it was clear from the statement of claim that what was being alleged were breaches of duty by the defendants as directors of the company.  There was no plea of any other contractual relationship between the plaintiff and the defendants.  The arguments in this case required a discussion by Knox LJ of the nature of a director’s appointment and the distinction between appointment to an office and an employment contract.  They also required the court to construe Order 11, rule 1(1)(d) as it was contended that this provision in the order was capable of covering an appointment to an office. Knox LJ concluded that in the absence of a specific contract of employment the appointment of a person to the office of director did not result, by that reason alone, in the creation of a contract between the director and the company and so the plaintiff’s claim did not fall within the English equivalent of Order 11, rule 1(1)(d).

58.  However in determining the relevance of this judgment to the case before me it must be borne in mind that the issue with which Knox LJ was grappling was whether the appointment of a person to the office of director created a contractual relationship between that person, in his capacity as director, and the company.  Knox LJ concluded that it did not and that what was being pleaded was neither contract nor quasi-contract but rather an appointment to an office and further concluded that such an appointment was not within Order 11, rule 1(1)(d).  But that is quite a different issue from that with which I am concerned.  The issue before me is whether a company enters into a contractual relationship with its directors when it agrees to pay them remuneration in accordance with provisions in its articles.

59.  In Palmer’s Company Law at 8.919 the following tantalizingly brief statement is found :

“A director can sue for remuneration agreed to be paid him by the company^FN…”

The footnote cites two 19^th century cases, Orton v Cleveland, etc., Co. (1865) 3 H&C 868 and Nell v Atlanta, etc., Mines (1895) 11 T.L.R. 407.  In the former case Channell, B said at 871 :

“The articles of association show that the Company made this contract with the plaintiff. The Company are a corporation, and have power by law to make contracts which will bind their funds … I am satisfied that it was competent to the Company to contract to pay each of their directors 50L. per annum, and, there being a valid agreement to do so, this action is maintainable.”

60.  In the Nell v Atlanta Mines case, Lord Esher MR, in giving the judgment of the Court of Appeal, said at page 408 that the directors, having performed the services required of them, “had an absolute right to receive the sum so specified as payable to him, and was entitled to sue if the money was not paid.”  Another old authority that is discussed by Knox LJ in the Newtherapeutics case is In re New British Iron Co., Ex parte Beckwith [1898] 1 Ch. 324, and in that case Wright J adopted a similar approach.  The articles of the company provided that the remuneration of the board “shall be an annual sum of £1,000 to be paid out of the funds of the company”. At page 326 Wright J said :

“But where on the footing of that article the directors are employed by the company and accept office the terms of article 62 are embodied in and form part of the contract between the company and the directors. Under the article as thus embodied the directors obtain a contractual right to an annual sum of £1,000 as remuneration.”

61.  The principle that I take from these cases is that the articles do not themselves create a contract between the director and the company.  Rather it is conduct pursuant to the articles that results in the creation of a contract.  What that means in the present case is that the conduct of the company in general meeting (for directors’ fees) and of the board (for executive directors’ salaries) in exercising powers granted to them by the articles, led to a contractual relationship between the directors and the company in respect of their remuneration.  In my view there is nothing inconsistent in this approach with the decision of Knox LJ in Newtherapeutics v Katz that, in the absence of a contract of service, the appointment of a person to be a director of a company is an appointment to an office which does not, per se, create a contract between the director and the company.  I conclude therefore that the Statement of Claim correctly pleaded a claim in contract and that contract was the appropriate gateway under Order 11, rule 1(1) for leave to serve out to be granted.  I reject the argument based on a challenge to the jurisdiction of the court.

62.  Another argument challenging the jurisdiction of the court is that there was a material non‑disclosure by the plaintiff in paragraph 15 of the affirmation of the plaintiff’s solicitor that was filed in support of the application for leave to serve out.  I have carefully considered the contents of not only paragraph 15, but of the affirmation as a whole, together with the Statement of Claim and set in the context of litigation by a plaintiff whose claim is clearly based on an account of facts known only to him.  I note that at one point in paragraph 15 the deponent solicitor says “I am instructed…”.  In my view no-one reading the affirmation could be in any doubt that the source of the solicitor’s knowledge and belief for the statements contained in that paragraph was the plaintiff himself.  I reject this argument as a basis for setting aside the default judgment.

63.  The other arguments which were advanced in relation to the jurisdiction of the court overlap with the defence on the merits and because a proper assessment of them requires a consideration of the affirmation evidence and exhibits, they are more appropriately dealt with under that heading.

The defences on the merits

64.  The defence is essentially a denial of the plaintiff’s claim that any contract existed between he and the company in respect of directors’ remuneration and I shall discuss this defence in greater detail shortly.  Allied with this defence is an argument that in his affirmations the plaintiff is putting forward a different basis of his claim.  The defendant argues that although the claim is quite uncertain as to its basis, it can only be either a claim in contract based upon an agreement with Nelson Chiu personally or a claim in contract based upon an informal board resolution passed only by he and Nelson Chiu. If it was the former then the contract could have no legal basis as Mr Chiu was not able to bind the company and if it was the latter then the resolution passed by this informal board meeting was invalid as, in the absence of the non-executive director Lin, there would not have been a quorum for the plaintiff would not have been able to vote on a resolution whose purpose was to confer a benefit on him.  When, in a later affirmation, the plaintiff asserted that the non-executive director, Lin, was present by telephone, he was changing his case in order to overcome the non-quorate problem that would otherwise have illegitimized the 2002 resolution.  Such a change of tack, the defendant argues, infringes the principle in Parker v Schuller (1901) 17 TLR 299, namely that a plaintiff is prohibited from asserting at the inter-partes stage or on appeal a case different from that on which ex parte leave to serve out was granted.

65.  Before I set out the factual assertions of the defendant I shall briefly describe what is said by the plaintiff in further explanation of his claim.  In his affirmation the plaintiff claims that before 2002 he and Nelson Chiu received directors’ remuneration with Mr Chiu always receiving a greater payment in a ratio of 100:70.  This remuneration was paid only to them as they were the only executive directors.  In 2002 the non-executive director proposed the payment of a director’s fee and the plaintiff and Nelson Chiu discussed this and their remuneration package generally and agreed an annual fee payable to all directors and a monthly remuneration payable only to the executive directors of AUD40,000 for Nelson Chiu and AUD$28,000 for the plaintiff, again reflecting the 100:70 ratio.  This resulted in resolutions by the board and subsequently by the shareholders in 2002.

66.  In his 3^rd affirmation the plaintiff accepted that he was not engaged by the defendant under a contract of service and that his claim for remuneration was founded upon the resolution of the board.  He said :

“It is sufficient to say that, all along since I became one of the only two executive directors of the Defendant in 1995, my remuneration as an executive director was fixed by way of assent among members of the board of directors of the Defendant. Hence, although I was not engaged by the Defendant in the form of a service contract, there was a binding agreement between me and the Defendant (through assent of its board) over the directors’ remuneration payable to me.”

67.  The plaintiff explains that after 2002 he and Nelson Chiu only occasionally took payments in respect of their remuneration entitlements as they wished to conserve the cash of the defendant.  However he maintains that in respect of the monthly salary of AUD$28,000 “it had been accepted by Chiu and Lin (the non-executive director) in 2002 and consequently the Defendant that I was entitled to this amount effective from 1^st April 2002”.  (1^st affirmation of the plaintiff.).

68.  He says the breakdown of his relationship with Chiu can be dated from early 2007 and culminated in his ejection from the board at the special general meeting on 31 December 2007.  This special general meeting was preceded by a board meeting which was concealed from him.  When he found out about the special general meeting, he engaged solicitors to communicate his disagreement with what was being proposed.  He also attended the meeting and voiced his complaints but they were ignored.  He claims he never agreed to any part of the 2007 resolution, disputes the amount owing to him and refuses to accept what is owing in the form of shares. 

69.  The defendant’s defences are set out in a draft defence and supported by evidence contained in the affirmations of Nelson Chiu.  By way of background Mr Chiu explains that the defendant is a holding company which operates through various subsidiaries whose business currently focuses on property development in Australia, plantation business in Inner Mongolia and other trading businesses.  He maintains that the defendant never had any business operation or registration in Hong Kong but did maintain an office here for a subsidiary company because it needed to have an Asian office and Hong Kong was a convenient location.  Whilst conceding that the defendant stated in its official documents that it had a Hong Kong office, now said to be in fact only the office of its subsidiary, Mr Chiu affirmed :

“The Hong Kong address was intended to be stated as the address of the group (not the Defendant) in Hong Kong for promotional purposes.”

70.  Mr Chiu accepts that the plaintiff was an executive director of the defendant from 30 January 1995 until 6 February 2008.  However he plays down substantially the involvement of the plaintiff in the operation of the defendant and says his role “was in marketing aspects for the Hong Kong subsidiary companies” (paragraph 12 of the 1^st Affirmation). He also denigrates the value of that involvement.

71.  At paragraph 14 of his 1^st Affirmation Mr Chiu describes how the plaintiff’s involvement with the defendant came to an end :

“At the Special General Meeting on 6 February 2008, the resolution to have the Plaintiff re-elected as a director after his retirement by rotation was not carried and therefore his engagement as the director of the Defendant was terminated with effect from 6 February 2008.”

Mr Chiu denies that the defendant ever entered into an employment or service agreement with the plaintiff.

72.  In terms of the remuneration provided to executive directors of the defendant between 1995 and 2008, there is a clear dividing line that is represented by the 2002 annual general meeting of the defendant at which a number of resolutions were passed.  This annual general meeting took place in Hong Kong on 20 August 2002 but was preceded by a board meeting that took place also in Hong Kong on 25 June 2002 and which the non-executive director, Mr Michael Lin, attended by telephone conferencing.  This board meeting resolved that shareholder approval be sought to pay the directors’ fees and remuneration. These board resolutions were subsequently passed at the annual general meeting.  One of the resolutions was that from 1 April 2001 the directors be paid an annual fee of AUD$22,200 which would be in the form of shares in the defendant.  In an Explanatory Memorandum to this resolution it was said :

“It is not reasonable to expect Directors to provide their services and accept the risks associated with acting as Directors without some compensation.”

73.  Other resolutions were to pay a monthly remuneration to Mr Chiu as managing director and the plaintiff as executive director.  These resolutions were expressed in terms of a monthly remuneration of AUD$40,000 and AUD$28,000 respectively but, rather curiously, were limited to the period 1 April 2002 to 31 August 2002.  The satisfaction of this liability was also to be by way of share allocation and it was only because of this that the issue of directors’ salary had to go before the annual general meeting.  If the salary was intended to be taken as cash then the question of whether to pay the executive directors and how much to pay them could be decided by the board.

74.  Thus up to 31 August 2002 the remuneration entitlements of Mr Chiu and the plaintiff were satisfied and their future entitlements in respect of directors’ fees were settled.  However a question mark existed in respect of directors’ monthly remuneration and that question mark is one of the main areas of dispute.  The plaintiff maintains that the intention was that this salary entitlement would continue indefinitely whilst Mr Chiu claims it was only for the period specified by the resolution.

75.  Between 2002 and 2008 the relationship between Mr Chiu and the plaintiff deteriorated to the extent that Mr Chiu no longer wished the plaintiff to be further involved with the defendant.  This led to the plaintiff’s ejection from the board of the defendant at a special general meeting of shareholders which Mr Chiu called.

76.  Mr Chiu maintains that between 2002 and 2008 the plaintiff contributed less and less to the activities of the defendant and worked more and more on his own private interests.  However, he says, the plaintiff requested to be remunerated for his past services.  At paragraph 41 of his first affirmation Mr Chiu explains how the board responded to this request :

“As a gesture of goodwill and courtesy and in anticipation for his departure from the Defendant’s group, the Defendant’s board resolved to recommend to the shareholders of the Defendant to approve to pay the Plaintiff (as well as other directors) a bonus by way of a share allotment and to grant a share option for the Plaintiff’s fast services in the defendant’s subsidiary and associated companies.”

77.  This board meeting took place in Hong Kong on 14 December 2007 with only Nelson Chiu and the non-executive director present, the latter by telephone conferencing.  The plaintiff claims he was not notified of this meeting.  The board minutes record the reasons why the board responded in the way it did to the plaintiff’s request.  In relation to the salary component of the remuneration the minutes record as follows :

“(c) Mr. Chung Bun Vincent CHOI has been a director of the Company since the incorporation of the company in 1995, and up to 2001 he was responsible for the subsidiary companies involved in the building material business and for the transformer business for the several years from 1997 to 2003. As both businesses failed due to the failure of Mr. CHOI to spend time with the Group and to take up work at the two China transformer factories, with a result no dividend and return of investment capital were achieved causing the disposal of these businesses. Since 2003 Mr. Choi has no interest in the group’s business and has spent more time on his own work. Mr. CHOI has no employment contract with the Company or any of its group companies and he is only entitled to director fee. As he has been with the Group for a number of years, out of goodwill as the Group did not owe him any payment, it was proposed the subsidiary companies to consider paying a special amount to him based on 1% of the Group’s net profit for several years from 2003 to 2007. The Group made a net profit after tax and minority interest for the five years ended 31 March 2007 of A$16,287,000 and it was proposed that the company shall allot Mr. Choi shares of the Company to the value of A$163,500 on behalf of the subsidiary companies and such payments will only be made if he accepts payment in the form of shares in the Company. It is not proposed to make any payment to him for period up to 31 March 2008 as he has no dealing with the Group.”

By the time of this meeting Mr Chiu had resolved to embark upon a course of removing the plaintiff from all involvement with the company. I must view these board minutes in that light and cannot regard them as independent evidence.  Indeed the plaintiff alleges them to be a fabrication and has some basis for so asserting.

78.  The resolution of the board was passed at the special general meeting that took place on 31 December 2007.  This special general meeting took place at premises that are referred to in the notice of it as “the board room at the Company’s Hong Kong office”.  One of the resolutions at this meeting was in respect of outstanding directors’ fees which had not been paid since 1 April 2005 and which for the plaintiff amounted to AUD$55,500.  The company resolved to discharge these liabilities by an allotment of shares.  The plaintiff insists on payment in cash.

79.  There was also a resolution in respect of directors’ remuneration which also required that the liability he discharged by way of allotment of shares. However this resolution, which encompassed both Mr Chiu and the plaintiff was unlike the 2002 resolution in that it treated each of them quite differently.  In respect of Mr Chiu it referred to a liability of AUD$1,768,000 in respect of the period 1 September 2002 to 31 March 2007.  This amount was calculated at the rate of AUD$40,000/month, the rate which was employed in the 2002 resolution.  So, in respect of Mr Chiu at least, the board appears to have used the 2002 resolution as the basis for discharging a company obligation to pay him a director’s salary of AUD$40,000/month.

80.  The resolution in respect of the plaintiff stands in stark contrast to that of Mr Chiu.  It does not specify the start date from which the payment is calculated and it does not contain anything which can be seen as a reference to the 2002 resolution.  It commences which the words :

“In satisfaction of all outstanding remuneration up to 31 March 2007 for the total amount of A$163,500…”

81.  In respect of the two resolutions for each of the two executive directors (i.e. resolutions 6(a) and 6(b)), the Notice of Special General Meeting, Explanatory Statement And Proxy Form says :

“The Directors’ remuneration has previously been approved by shareholders of the Company on 20^th August 2002 and has remained unchanged since then. However, the directors have not actually received payment of all the remuneration due to them. The Directors have refrained from seeking payment in cash in respect of remuneration to conserve the Company’s cash flow for business expansion. The shares sought to be allotted to them satisfy all arrears of remuneration and entitlements for that period if Resolution 5, 6(a) and 6(b) are passed.”

The plaintiff takes comfort from this paragraph and argues that it clearly indicates that the 2002 resolution in respect of executive directors’ remuneration was intended to bind the defendant in the future.  When set in context I do not regard it as having the same unambiguous clarity.

82.  Mr Chiu claimed that as a holding company the defendant only paid directors’ fees and that directors’ remuneration and other bonuses that were payable to the plaintiff were paid by the defendant’s separate subsidiary companies for which the plaintiff carried out services.  He denied ever having had discussions with the plaintiff about future remuneration packages and denies that he and other directors ever agreed to pay the plaintiff a sum of AUD$28,000/month as directors’ salary.

83.  Mr Chiu claimed that between 2003 – 2006 the defendant did not undertake any new investment and there was no need for executive directors, only a board of directors.  There were no management duties required to be performed by the plaintiff in respect of the defendant, only of the defendant’s subsidiaries.

84.  Some of the defendant’s Financial Statements were exhibited and these show sums of money paid as Executive Directors fees, salaries and allowances and discretionary bonuses.  These are explained by Mr Chiu as having been paid by a subsidiary company.

85.  Mention should also be made of a note to the 2006 Financial Statements. Note 6 is headed Directors’ and Executives’ Remuneration and paragraph (c) states :

“(c) Remuneration Practices

According to company policy, executive members of the Board are remunerated in accordance with the following criteria:

i) Personal performance

ii) Results of the Group for the year

iii) Performance of the business entities being looked after by the directors concerned.

iv) The compensation package offered by other competitors in the similar business fields

v) Overall economic environment

The Personnel Department would gather information based on the abovementioned factors to the Remuneration Committee, which in turn will submit a proposal of the remuneration to be paid to each executive director for the ensuing year for consideration at the Board Meeting.  If approved, a resolution will be passed to authorise payment.”

86.  There has been no evidence placed before me on this note or on the work of the Remuneration Committee that is referred to in it.  But it appears that a policy was developed by the Committee and approved by the board for in its Annual Report for 2007 the Directors’ Report contains the following paragraph :

“Remuneration Policy

The board’s policy for determining the nature and amount of remuneration for board members and senior executives of the economic entity is as follows:

· The remuneration policy, setting the terms and conditions for the executive directors and other senior executives, was developed by the remuneration committee and approved by the board.

· All executives receive a base salary (which is based on factors such as length of service and experience), superannuation, fringe benefits, options and performance incentives.

· The remuneration of the executives will be reviewed annually by reference to the economic entity’s performance, executive performance and comparable information from industry sectors and other listed companies in similar industries

Conclusion

87.  In a nutshell the plaintiff claims that he had discussions with Nelson Chiu about directors’ remuneration and these resulted in board resolutions which subsequently became resolutions passed by shareholders at the 2002 Annual General Meeting.  One resolution related to directors’ fees and is worded in terms which make it clear that it governs the future as well as the past.  The other resolution related to executive directors’ remuneration and is worded in terms that appears to limit it to a specific period and not to bind the defendant in the future.  Notwithstanding the wording the plaintiff maintains that it was intended to bind the company in respect of the future.

88.  The defendant, through Nelson Chiu, denies that any discussions as to future remuneration ever took place, asserts that the plaintiff was never employed on a contract of service (which is accepted by the plaintiff) and that the resolution of 2002 in relation to directors’ remuneration is clear as to its terms and accurately reflects what was intended, namely the creation of a liability by the company for a particular period of time, which liability was satisfied at the time by the allocation of shares.  The defendant says that this resolution was not intended to bind it in respect of future remuneration.

89.  There are some documents which have been exhibited to affirmations which potentially could provide independent evidence as to what took place and as to what was intended by the parties by their actions.  The plaintiff urges me to have regard to the documents as independent evidence of his claim that the 2002 resolution was intended to bind the company into the future.  However I do not find the documents so unambiguous as to enable me to be confident that they unequivocally reveal what the parties intended.  Such of this documentary evidence as is reliable does not, in my view, provide a direct, clear pathway to the truth.

90.  Ultimately the truth will be ascertained only after hearing the protagonists give evidence and assessing their credibility.  But assessing the credibility of deponents is not something that will normally be appropriate at the interlocutory stage and is not something that I can do in the circumstances in which I find myself.  Indeed much time was spent in submissions by counsel as to why I should believe or not believe one or the other deponents.  I have deliberately avoided discussing the evidence, and the problems associated with it, in any greater detail for that would then be tantamount to conducting a trial, at the interlocutory stage, on the affirmations – the very thing that the courts have unanimously said I must not do.  This case is all about the credibility of the plaintiff and Mr Chiu and in respect of both of them there is available much material that can be used to attack and undermine their credibility.  More could be said about both of them but, at this stage of the proceedings it would not be appropriate for me to do so.

91.  In my view I am in the same position as the courts found themselves in Allen v Taylor, Day v R.A.C. Services Ltd and Manolakaki v Constantinides; namely I have to assess the merits of competing defences where neither, standing on their own, can be said to be inherently incredible and where there is no independent evidence to light the pathway for me.  I intend therefor to assess the merits of the factual defence by applying the real prospects of success test in the way adopted in Day v R.A.C Services Ltd and Manolakaki v Constantinides.

92.  After carefully considering all that has been placed before me I find that I am not able to say that the defendant’s defence has no real prospect of being a successful defence to the plaintiff’s claim.  I therefore allow the application, set aside the default judgment and grant leave to the defendant to defend.

93.  I make this decision without reference to the additional materials that the defendant has sought leave by summons to adduce on this application.  These materials have very little relevance to this application and would only be of marginal assistance on it.  Given the late stage at which they were sought to be adduced and the marginal assistance they would have provided I would not, in any event, have been inclined to grant the defendant’s application.

94.  In view of my assessment that the factual defence has a real prospect of success, it is unnecessary for me to consider the other arguments which the defendant advanced in support of this application.

Costs

95.  The normal rule in applications of this nature is that the defendant should bear the costs of setting aside.  The defendant asks me to depart from this rule and allow the defendant to have the costs of the application.  He does so on the basis that, he says, the plaintiff should have realized he was supporting an unmeritorious default judgment and consented to setting it aside.  I do not agree and decline to depart from the normal rule.  In this case the real victim is the truth.  I am not persuaded that either party has been open and truthful with the court.  I find the defendant’s explanation as to how it came about that it was not made aware of the proceedings to be less than convincing.  I order that the defendant should bear the costs of the application.  I also order that the costs of the defendant’s summons for leave to adduce additional evidence on the hearing of the application to set aside be borne by the defendant.

The variation of the final order

96.  As mentioned at the beginning of this judgment the defendant also appeals against the order of the Master in respect of the plaintiff’s summons seeking a variation of the final order.  In view of my decision to set aside the default judgment it is not necessary for me to adjudicate this issue. However in deference to the full arguments of counsel I make the following observations.

97.  The plaintiff’s claim was essentially composed of two parts ‑ one part claimed director’s fees and remuneration and the other part was composed of a serious series of financial claims which can be loosely described as Employment Ordinance benefits.  The effect of the Master’s order was to sever the latter from the former by reducing the amount of the final judgment to the claim for director’s remuneration.  Importantly, though the Employment Ordinance benefits were severed, they were not abandoned and so the plaintiff’s claim in respect of them remains outstanding.

98.  The defendant contends that such an order is not permitted by Order 13, rule 9 and that the variations allowed for by the rule are limited to the types of orders that can be made under rule 1 of Order 13. Rule 1, so his argument goes, would not permit an order of this kind to be entered, that is, an order for less than the amount claimed which leaves, in relation to the same claim, an amount outstanding.  When this is sought to be done the plaintiff must, according to the defendant, abandon the balance of his claim.  He need not do so where the amounts arise from different actions, but where they arise from the same action he must; otherwise, the defendant says, there is no practical benefit obtained from the default judgment as a trial will still have to take place in respect of the outstanding claims.

99.  There is nothing in Order 13, rule 9 which would provide support for the defendant’s argument and no authority directly on this point, one way or the other.  The cases on which the plaintiff relies can be distinguished in that none of them concern precisely the same circumstances as are present in this case.  Nevertheless it is clear from these cases that the power exists in order to enable the court to do justice between the parties unconstrained by technical procedural matters.

100.  Given what I regard as the purpose of the power I am unwilling to construe it in a way which would limit the scope of its operation.  However the issue of whether in a particular set of circumstances a power can be used is quite separate from whether it should be used.  The latter issue will require a consideration of a range of matters in order for the judge to reach a considered view on whether exercise of that power in the way the applicant seeks is in the interests of justice in the case before him.

101.  Here the plaintiff conceded that certain elements of his claim allowed of a defence that had a reasonable prospect of success but that was because the legal basis of those elements was quite different from the legal basis of the director’s remuneration claim.  Where this is clearly so I can see how use of the variation power could be used to achieve justice for the plaintiff without in any way being contrary to the interests of justice.  However the grave risk to which a court must be vigilant is of contradictory judgments existing at the conclusion of the litigation.  It would only be when there was no possibility of that occurring that use of the variation power in the way it was employed in this case could be said to be in the interests of justice.