GOLDEN TECH (ASIA) LTD. v. PO YUEN (TO'S) MACHINE FACTORY LTD.

HCA4517/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4517 OF 2001

--------------------

--------------------

----------------------

J U D G M E N T

----------------------

Background

1. The plaintiff was previously put under receivership pursuant to orders dated 1 and 6 August 2002 in HCCW692/2001. By a further order dated 28 September 2001, the receivers were given specific power to commence and defend legal proceedings. On 16 October 2001, the plaintiff commenced the present proceedings against the defendant for delivery up of goods and five liquidated sums totalling nearly HK$8.5 million.

2. On 7 December 2001, the defendant obtained a 14 days' extension to file its defence. However, instead of filing a defence, the defendant applied for further and better particulars on the Statement of Claim on 19 December 2001 ("the F & B Summons"). The application was then adjourned for argument. On 28 December 2001, the defendant applied for further time to file its defence. The application came before the master on 3 January 2002. She made an order that unless the defendant filed and served its defence by 4 p.m. on 17 January 2002, the plaintiff shall be at liberty to enter judgment with costs ("the Unless Order").

3. The defendant failed to comply with the Unless Order. It only purported to file a defence without leave on 24 January 2002. On 5 February 2002, the defendant took out a time summons for leave to file the defence out of time ("the Time Summons"). On 6 February 2002, upon the plaintiff's application, the master entered default judgment for the five liquidated sums with interest and costs ("the Default Judgment").

Applications

4. The defendant now applies to set aside the default judgment. There are altogether four summonses before me :

(1) The Time Summons.

(2) The defendant's summons dated 7 February 2002 to set aside the Default Judgment on the ground that the defence had been filed and served on 24 January 2002 ("the Setting Aside Summons").

(3) A summons by Ms Chan Siu King dated 15 February 2002 to add as an intervening party in the defendant's application to set aside ("the Intervening Party's Summons"). Ms Chan is the majority shareholder and managing director of the plaintiff.

(4) The defendant's summons dated 21 May 2002 to amend the Setting Aside Summons by (1) adding two alternative grounds, namely, that the defendant has a good arguable defence to the plaintiff's claim; and that the Default Judgment was irregular in that for four quantified sums awarded, the plaintiff is on pleadings only entitled to interlocutory judgment for damages to be assessed; and (2) adding a new paragraph that in the event that the Default Judgment is set aside, the present action be consolidated with HCA4270/2001 and appropriate directions be given for the consolidated action ("the Amendment Summons").

5. At the hearing before me, Mr Chain for the defendant sought leave to rely on an affirmation of Tsui Kam Cheung which was filed on 13 May 2002 ("Mr Tsui's affirmation") without leave. Mr Yu, SC for the plaintiff objected. After hearing counsel, I allowed the application. I was of the view that although Mr Tsui's affirmation did raise certain matters outside the ambit of a reply affirmation, those matters were pertinent to the determination of the Setting Aside Summons and any prejudice to the plaintiff could be properly compensated by an adjournment, if so required, and costs. I then invited Mr Yu to consider if any adjournment was required. After taking instructions, Mr Yu indicated that he could proceed without any adjournment.

6. Counsel agreed that as the plaintiff had already obtained the Default Judgment, the Time Summons was no longer relevant. Mr Chain conceded that the Setting Aside Summons was misconceived as it purported to rely on the defence lodged with the court on 24 January 2002 without leave. Hence the need for the Amendment Summons. Mr Yu did not object to the Amendment Summons. Accordingly, I made an order in terms thereof. Counsel also agreed that the Intervening Party's Summons was peripheral. In any event, Mr Chain did not seriously challenge this summons. Thus, the substantive debate that took place before me concerned the Setting Aside Summons only.

Main questions

7. Mr Chain readily conceded that the Default Judgment is a regular judgment, subject to the contention that the plaintiff is not entitled to a judgment on four of the liquidated sums but only damages to be assessed. In determining this application, I will have to consider two main questions. First, what are the circumstances as to how the non-compliance of the Unless Order arose, leading to the entry of the Default Judgment? I will call this the circumstances question. In this connection, the reasons why the defendant defaulted are plainly relevant. So are the events the plaintiff and Ms Chan rely on in resisting the Setting Aside Summons. Second, does the defendant has a credible defence? In this connection, Mr Chain submitted that the defendant needed to show a defence with a real prospect of success. As I understand Mr Yu, he did not hold a different view.

8. However, it has been suggested that the rule that on an application to set aside a default judgment it was necessary for the defendant to demonstrate by credible defence that he had a real prospect of success does not apply to judgments entered for failure to comply with an unless order : see Hong Kong Civil Procedure 2002, para.42/2/7 at p.621, citing Chow Kai Sang v. Toi Samuel & Others [1996] 4 HKC 330. In that case, the plaintiff's claim against the defendants was struck out after it had failed to provide further and better particulars within the time prescribed by an unless order. The plaintiff then sought and was granted leave to file the further and better particulars out of time. The master also set aside the judgment. On appeal by the defendants, Keith J (as he then was) accepted that the explanation given by the plaintiff's solicitors completely exonerated the plaintiff from any responsibility for the failure. He queried the application of the general rule that on an application to set aside a default judgment, it is necessary for the party in default to demonstrate by credible evidence that he has a real prospect of success to the case. (Emphasis supplied.) For he took the view that the plaintiff's application before the master was in essence an application for time. He was not convinced that the merits of the case were relevant to applications for an extension of time even if the consequences of the refusal of that application was that the action was prematurely brought to an end. Further, he was not convinced that the rationale of the rule applied with equal force to defaults by plaintiffs. See pp.336I to 338C of his judgment.

9. When this part of Keith's judgment in Chow Kai Sang v. Toi Samuel & Others is properly understood, it is obvious that the learned judge was considering whether the general rule applied to the facts of the case before him. I doubt if it really supports the very general proposition stated in the Hong Kong Civil Procedure 2002 above (which appears to be a repetition of the head note in part). In any event, the facts in Chow Kai Sang v. Toi Samuel & Others are clearly distinguishable from those in the present case. The Setting Aside Summons is not and should not be regarded as a time summons. The default is by the defendant and not by the plaintiff. The consequences of default are also different. The Default Judgment here being a regular judgment (subject to the point about damages to be assessed), the general rule that the defendant needs to demonstrate a defence with a real prospect of success, in my view, applies. This is the test that I will adopt when examining the merits of the defence. I will call this the merit question.

10. I will look at the circumstances question first. As will be seen in a moment, this is the primary question and it raises an issue that apparently has not been decided by the court until now. I will first summarize the relevant evidence.

The circumstance question

11. The defendant was at material times represented by Messrs Norman M.K. Yeung & Co. ("NMKY"). The handling solicitors was Mr Raymond Chak ("Mr Chak"). The plaintiff's solicitors were Messrs K.C. Ho & Fong ("KCHF").

(1) Mr Chak's slip

12. In his affirmation filed on 18 February 2002, Mr Chak said that the defendant's failure to comply with the Unless Order was unintentional. He first explained that the defence was already finalized and engrossed on 16 January 2002, i.e., one day before the deadline imposed by the Unless Order. It was ready for filing by the clerk the next day. At the same time, Mr Chak was busily engaged in research and preparation of a summary judgment application in DCCJ13902/2001 involving the defendant as plaintiff and Ms Chan as defendant in a related dispute. On 17 January 2002, the hearing in the District Court finished at about 5 p.m. Mr Chak had forgotten about the deadline imposed by the Unless Order. He therefore did not check with his clerk to see if the defence had been filed and served.

13. On 21 January 2002, the plaintiff applied to the master for entry of default judgment upon the defendant's non-compliance of the Unless Order.

14. The last date for the plaintiff to file its affirmation to the F & B Summons fell on 23 January 2002. As Mr Chak did not receive any affirmation from the plaintiff, he checked with his clerk and found out that the defence had yet to be filed and served. He immediately caused the defence to be lodged with the court on 24 January 2002. The defence was also served on the plaintiff's solicitors.

(2) Correspondence between the solicitors

15. The solicitors then engaged in a series of correspondence. Some of the letters were marked "without prejudice save as to costs". At the hearing, they were read de bene esse. I am satisfied that on the authority of Family Housing Association (Manchester) Ltd v. Michael Hyde and Partners & others [1993] 1 WLR 354, CA, such correspondence are admissible as they are relevant to the question of default and conduct of the parties and the underlying policy of excluding the use of without prejudice correspondence at trial or during post trial proceedings would not be inhibited by their disclosure. The effect of the correspondence is summarized below :

Date	Correspondence
24/1/02	KCHF told NMKY that they did not accept the defence as valid as the defendant had no right to file and serve the defence beyond the deadline imposed by the Unless Order. They also pointed out that they had already applied to the court to enter judgment against the defendant and would serve on NMKY a sealed copy judgment as soon as it was available. (As noted above, KCHF applied for entry of judgment on 21 January 2002.)
25/1/02	NMKY explained to KCHF why the defence was not filed on 17 January 2002. They also indicated that they would take out a time summons. They invited KCHF to reply by noon the following day.
26/1/02	KCHF advised NMKY that they were unable to respond by noon and would revert back to them by 5 p.m. on 28 January 2002. At the end of the letter, KCHF reserved all the rights of the plaintiff. (On the same date, KCHF submitted a draft judgment to the master for approval. Nothing before me suggested that NMKY were or made aware of this.)
28/1/02	KCHF indicated that, apart from taking instructions from the receivers, they needed to consult Ms Chan through her solicitors, Wilkinson & Grist ("WG") as well. They would contact the defendant's solicitors on the following day.
1/2/02	NMKY advised KCHF that they had been approached by WG and that they would take out a time summons. NMKY asked KCHF to indicate by noon the following day if they acceded to the time application. (On the same date, the master approved the application for entry of judgment against the defendant.)
2/2/02	KCHF complained that they had been given insufficient time to take instruction and suggested NMKY withholding further any action until they obtained proper instructions for a detailed reply to reach KCHF by 5 p.m. on 4 February 2002.
4/2/02	WG wrote to NMKY exploring the possibility of settlement and warned NMKY that if they proceeded with the time application, WG might produce the letter to recover costs against the defendant.
5/2/02	NMKY replied to WG to the effect that unless WG came up with some specific proposal, nothing shall prevent the matter to proceed in the usual manner.
	WG replied that they would revert back to NMKY within 2 days.

16. Feeling uncomfortable about the situation, Mr Chak caused the Time Summons to be issued on 5 February 2002. But it was to his surprise that he received a seal copy of the Default Judgment on the following day.

(3) Change of position

17. Ms Chan applies to intervene in the Setting Aside Summons on the principal ground that she had suffered a change of position upon reliance of the defendant's non-compliance of the Unless Order. In her affirmation filed on 8 April 2002, she described the events thus.

18. On 10 July 2001, a shareholder and director of the plaintiff, Ms Lau Shui Ying ("Ms Lau") filed a winding-up petition against the plaintiff and her in HCCW692/2001 on the just and equitable ground. Ms Chan was represented by WG in the winding-up proceedings. In order to enable the plaintiff to carry on its business as a going concern, interim receivers and managers were appointed on 2 August 2001 upon Ms Chan's application. On 5 January 2002, Ms Chan was advised by Mr Harrison Ho of KCHF ("Mr H. Ho") that the court had made the Unless Order and the defendant had to file its defence by 17 January 2002.

19. On 19 January 2002, Ms Chan made enquiry with Mr H. Ho if the defendant had complied with the Unless Order and filed the defence. Mr H. Ho advised that the defendant had not. Ms Chan then asked Mr H. Ho what was the effect of non-compliance. Mr H. Ho advised her that there would be a breach of the Unless Order and judgment could be entered on that basis. Ms Chan later confirmed this view with Mr Keith Ho of WG ("Mr K. Ho"). Ms Chan believed that Mr H. Ho would take step to enter judgment against the defendant.

20. In the winding-up proceedings, a hearing was scheduled to take place before me as the Companies Judge on 22 January 2002 to deal with an application by Ms Lau for the discharge of the receivers and managers and their appointment as provisional liquidators, an application by Ms Chan to continue the appointment of the receivers and managers and to acquire Ms Lau's shares at a value to be assessed.

21. Ms Chan's summons was taken out on 17 January 2002. Before then, Ms Lau's solicitors had already indicated that Ms Lau required at least HK$2 million for her shares. Ms Chan was advised that acquiring Ms Lau's shares was the quickest way to resolve the dispute with her. In view of the serious damage already caused to the plaintiff and herself, Ms Chan took the view that it would only be fair to buy off Ms Lau's share at a price based on the net asset value or a price acceptable to Ms Chan herself. She then prepared her own computations on the net asset value of the plaintiff. On the following days, Ms Chan was in close liaison with Mr K. Ho to prepare for the hearing on 22 January 2002. Ms Chan asked Mr K. Ho if she were to inject funds to the plaintiff so that it could carry on the business as a going concern, what would be the chance of success of discharging the winding-up petition. Mr K. Ho said the chance of success would be high. He also said the receivers were of the view that if she were to inject funds, the plaintiff could continue as a going concern.

22. Ms Chan explained that injection of funds into the plaintiff was always in her mind as she firmly believed that the plaintiff should continue its operations notwithstanding the winding-up proceedings. In fact, she had injected over HK$2 million into the plaintiff to keep it going since the commencement of the winding-up proceedings. She knew that she had to inject another HK$1 million to HK1.5 million to enable the plaintiff to continue with its normal operations.

23. On 21 January 2002, Mr K. Ho informed Ms Chan that the receivers were to file its second report with court. In the report, the receivers took the view that unless there was substantial injection of funds, the plaintiff would not be able to continue as a going concern. This would cast doubt on Ms Chan's application to continue the appointment of the receivers to run the plaintiff as a going concern. Mr K. Ho invited Ms Chan to attend the office of the receivers that evening, which she did. After reading the report, Ms Chan sought clarification from Mr K. Ho on the non-compliance of the Unless Order. He told her that judgment on the amounts claimed would be entered against the defendant. Mr K. Ho further advised her that she could take into account of the fact that judgment would be likely to be entered against the defendant when making an offer to buy Ms Lau's shares and settle the winding-up petition. Thus, Ms Chan had two options :

(1) To inject fund of about HK$1.5 million into the plaintiff so as to enable the receivers to run it as a going concern and continue to oppose the winding-up petition.

(2) To use the money to negotiate an immediate settlement with Ms Lau by acquiring her shares.

24. Ms Chan went on to say that she knew at that stage that the defendant had not filed its defence and that judgment of more than HK$8 million would be entered against it for breach of the Unless Order. The judgment to be entered against the defendant would benefit the plaintiff as she expected that it would at least be able to obtain the release of the inventories from the defendant (one of the subject matters of the present dispute) which would greatly assist the business operation of the plaintiff. It was also in Ms Chan's interest to settle the matter with Ms Lau by acquiring her shares. Thus, Ms Chan said that she would have the benefit of the judgment as well. She added that if the defendant had complied with the Unless Order by filing a defence prior to 17 January 2002, she would not have sought to acquire Ms Lau's shares but instead, she would have used the funds available to fund the continued operation of the plaintiff and to continue to oppose the winding-up petition. Under such circumstances, she eventually settled the matter with Ms Lau by buying her share at HK$1.2 million. A consent order was made on 22 January 2002. The winding-up petition was subsequently dismissed.

25. Ms Chan further caused the plaintiff to settle a District Court Action commenced by a sole proprietorship called Choy Kam Kong Eric trading as JC Machinery (Hong Kong) ("JC Machinery") against the plaintiff. There JC Machinery obtained a default judgment on 14 November 2001. It further joined in the winding-up proceedings to support the petition. KCHF took out a summons to stay the execution of the judgment returnable on 24 January 2002. In order to remove any possible obstacle for dismissing the winding-up petition, Ms Chan instructed Mr K Ho to settle the matter with JC Machinery. On 23 January 2002, a settlement agreement was reached, pursuant to which, Ms Chan paid JC Machinery a sum of HK$200,000 and JC Machinery would undertake not to execute the judgment and consent to the dismissal of the winding-up petition. Ms Chan said that if she did not believe that the defendant would not defend the action and that judgment would be entered against the defendant, she would have insisted that the receivers to continue to defend the claim by JC Machinery. As a result of the settlement, the plaintiff had incurred a debt to Ms Chan for HK$200,000.

26. The plaintiff also relies on the above events to support its own case of change of position.

27. Both the plaintiff and Ms Chan contend that if the Default Judgment were to be set aside, they would suffer injustice.

28. This completes the evidence on the circumstances question. I will at this juncture deal set out the law in this area before coming to deal with counsel's submissions.

The Law

29. The basic legal principles in this area are well settled. In Hytec Information Systems Ltd v. Coventry City Council [1997] 1 WLR 1666, after reviewing the modern authorities, Ward LJ identified the relevant principles, at pp.1674H-1675B, as follows :

"(1) An unless order is an order of last resort. It is not made unless there is a history of failure to comply with other orders. It is the party's last chance to put his case in order. (2) Because that was his last chance, a failure to comply will ordinarily result in the sanction being imposed. (3) This sanction is a necessary forensic weapon which the broader interests of the administration of justice require to be deployed unless the most compelling reason is advanced to exempt his failure. (4) It seems axiomatic that if a party intentionally or deliberately (if the synonym is preferred) flouts the order then he can expect no mercy. (5) A sufficient exoneration will almost inevitably require that he satisfies the court that something beyond his control has caused his failure to comply with the order. (6) The judge exercises his judicial discretion in deciding whether or not to excuse. A discretion judicially exercised on the facts and circumstances of each case on its own merits depends on the circumstances of that case; at that core is service to justice. (7) The interests of justice require that justice be shown to the injured party for the procedural inefficiencies caused by the twin scourges of delay and wasted costs. The public interest in the administration of justice to contain those two blights upon it also weighs very heavily. Any justice to the defaulting party, though never to be ignored, comes a long way behind the other two."

30. The English authorities normally do not draw a distinction between the litigant himself and his legal adviser when considering whether the non-compliance of the unless order amount to intentional and contumelious conduct : Hytec Information Systems Ltd v. Coventry City Council, at p.1675G-1676A. The courts in Hong Kong however adopt a different approach. The general position is that failure of a solicitor to comply with an unless order should not adversely affect his client's interests if that can be avoided without injustice to the other party : Tan Eddy Tansil v. PTBank Pembangunan (Indonesia) Persero [1996] 1 HKC 231, per Bokhary JA (as he then was), followed by Keith J (as he then was) in Ming Pao Enterprise Corporation Ltd v. CIM Co Ltd [1999] 1 HKC 497.

Submissions

31. It is clear from the evidence summarized above that the failure to comply with the Unless Order lied completely with NMKY and that the failure is unintentional, outside the defendant's control and dose not amount to any contumelious conduct on his part.

32. Relying on the dicta of Bokhary JA in Tan Eddy Tansil v. PTBank Pembangunan (Indonesia) Persero, Mr Yu submitted that nevertheless the Unless Order should not be set aside as it would cause injustice to the plaintiff and Ms Chan. When Ms Chan decided to settle the winding-up petition and the District Court action, she relied on the fact that the defendant had failed to comply with the Unless Order and that default judgment on a total sum of more than HK$8 million would be entered against it. Both the plaintiff and Ms Chan had thus changed their position as a result of the Default Judgment, which cannot be reversed any more. Service to justice, which is at the core of setting aside applications, dictated that the Default Judgment should not be set aside.

33. Mr Chain on the other hand argued that Mr Yu's submission seemingly premised on a presumption that the defendant owed a duty to the plaintiff. But the defendant, like any other defendant in a hostile litigation, owes no duty to the opponent. In any event, the non-compliance of the Unless Order in the circumstances did not amount to any misrepresentation that the defendant would not defend the matter. Mr Chain argued that Ms Chan could not possibly rely on the defendant's failure to comply with the Unless Order as any default judgment is liable to be set aside; and that Ms Chan was clearly making a commercial decision when settling the winding-up petition and the District Court action.

34. Before addressing the central question of injustice, I will first allow the Intervening Summons. I am satisfied that Ms Chan has demonstrated a sufficient interest to take part in the Setting Aside Summons, although Mr Yu stressed that he was relying primarily on the change of position on the part of the plaintiff. The central question is : have the plaintiff and Ms Chan suffered injustice so that the Default Judgment should not be set aside on that ground alone?

Injustice?

35. "Injustice" is not defined by Bokhary JA in Tan Eddy Tansil v. PTBank Pembangunan (Indonesia) Persero or indeed in any subsequent cases. I wonder if it is capable of any precise definition at all. Obviously, injustice takes different forms. Whether the party asserting it suffers any real injustice is a question of fact dependent on all the circumstances of a particular case. Here, the plaintiff and Ms Chan rely on the concept of change of position. This concept is still developing in other areas of the law, especially in restitution. It is akin to the concept of estoppel but, it would appear, is more generous. In the absence of full submissions on its jurisprudential basis, I do not propose to say more than what is necessary to dispose of the matter before me.

36. In my view, a change of position normally arises when it is reasonable and equitable for the injured party to rely on the act of the other party and changed his position accordingly. The act in question may take the form of representation or conduct. In this connection, I agree with Mr Chain that in a hostile litigation, a party does not normally owe any duty to his opponent and his act normally does not constitute any representation to his opponent either. I do not accept that when there is a failure to comply with an unless order, the defendant must have by conduct represented that he had decided not to defend the claim. More importantly, on the evidence before me, it was not the defendant's non-compliance of the Unless Order that prompted Ms Chan to settle. It was the advice of her solicitors on the implications of non-compliance. Based on such advice, she made an informed decision to settle the winding-up petition and the District Court action. (While I should refrain from criticizing those who gave the advice, it is apparent that the advice is at least inaccurate in one aspect. For Mr Yu now conceded, and rightly so in my opinion, that the plaintiff is not entitled to four out of the five liquidated sums under the Default Judgment. For those items, the plaintiff is only entitled to damages to be assessed. Thus contrary to the advice, the plaintiff should only be entitled to a liquidated sum of HK$343,860.11 and damages to be assessed if default judgment was to be entered.) In my view, Ms Chan was clearly making a commercial decision with the benefit of the legal advice in the circumstances. Accordingly, I do not agree with Mr Yu's submission that the plaintiff or Ms Chan had suffered a change of position capable of giving rise to injustice that on its own is sufficient to prevent the setting aside of the Default Judgment.

37. This disposes of the plaintiff's primary contention and the circumstances question. I next consider the merit question, which Mr Yu submitted, is secondary.

The merit question

38. The Statement of Claim pleaded two kinds of agreements. First, the Injection Moulding Agreements whereby the plaintiff acted as a distributor/agent of the defendant of the plastic injection moulding machinery of the defendant under the latter's brand name. Second, the Die-Casting Agreements whereby the plaintiff designed and developed, assembled and sourced, sold and marketed die-casting machines under its own brand name. The production of major spare parts of the die-casting machines was sourced out to the defendant. The plaintiff's claims can be conveniently grouped under the following heads :

(1) The plaintiff claimed to be owners of and entitled to the possession of various finished/semi-finished die-casting machinery, spare parts and components which were manufactured and stored at the defendant's factory. On or about 14 August 2001, the defendant had wrongfully refused the plaintiff to remove such goods, the value of which stood at HK$4,167,176.67. This is a claim of conversion. The plaintiff claimed for delivery up of the goods or alternatively the sum of HK$4,167,176.67. This is the first liquidated sum.

(2) On or about 10 September 2001, the defendant refused to fit out one die-casting machine. The plaintiff was thus unable to deliver the machine to its buyer, thereby suffering loss and damage in the sum of HK$375,000. This is the second liquidated sum.

(3) By reason of various matters complained of, including failure to carry out and complete orders pursuant to the agreements, the defendant had repudiated the agreements, which repudiation was accepted by the plaintiff by virtue of issuing the writ herein. The plaintiff had lost the benefit of the agreements and the revenue, business and clients they otherwise would have received thereunder. The loss and damage was respectively calculated at HK$642,000 and HK$2,892,000 under the two agreements. These are the third and fourth liquidated sums.

(4) As at 16 October 2001, the plaintiff's current account with the plaintiff stood at HK$343,860.11 being monies over paid to the defendant. This is the fifth liquidated sum.

39. As noted above, Mr Yu now conceded that the plaintiff is not entitled to the first four liquidated sums. It is only entitled to damages to be assessed. He applied to vary the Default Judgment accordingly.

40. The defence lodged with the court on 24 January 2002 was no more than a holding defence, Mr Chain accepted. However, a fuller defence and counterclaim in draft form had been prepared and exhibited to Mr Tsui's affirmation, the contents of which had been verified by Mr Tsui. In his affirmation, Mr Tsui also expanded on some aspects of the defence and exhibited certain documents in support.

41. In essence, the defendant now seeks to raise the following matters on the parties' relationship and course of dealings. The parties had co-operated at the defendant's factory in producing various die-casting machines, but not necessarily under the Die-Casting Agreements. The production of die-casting machines took place at the defendant's factory by using spare parts and components supplied by the defendant as well as some of the defendant's employees. Only a small portion of materials and some workers were supplied by the plaintiff. There is no express agreement between the parties on the ownership of the die-casting machines during their assembling stage. After the machines were completed, they would be sold by the plaintiff but prior to their being removed from the defendant's premises, the defendant would invoice the plaintiff for the completed machines. By reason of the above matters and in the absence of any agreement between the parties that the defendant would supply materials and workers to the plaintiff on credit, the completed machines are the defendant's properties until they were sold to and/or paid for by the plaintiff. The plaintiff did occupy an area of approximately 300 square feet at the defendant's factory. Various spare parts and components ordered by and paid for by the plaintiff from third party suppliers were stored there. That licensed area was locked up and was different from the place where the die-casting machines were produced. The plaintiff had failed to pay license fee and the license was terminated on 8 September 2001.

42. On the conversion claim, the defendant denies that that any of the finished/semi-finished die-casting machines is the plaintiff's properties. On the spare parts and components, the defendant admits that only some are the plaintiff's, totalling HK$605,509.26. The others are not. In any event, the defendant had not refused the plaintiff to take delivery of its goods. There were correspondence between the defendant and the receivers showing attempts to allow the plaintiff to take stock and discussion on accounts. But the receivers and the plaintiff refused to address the questions relating to accounts, i.e., the amount the plaintiff owed the defendant. On 12 September 2001, the plaintiff's representative did not turn up at the defendant's factory despite earlier arrangement made. The plaintiff had not clearly identified what where their goods and demanded to take possession of the same. Further, from the correspondence, the plaintiff only claimed they had about HK$3 million worth of goods at the defendant's factory, which is significantly lower than what is now claimed in the Statement of Claim.

43. On the claim for failure to fit out a machine (giving rise to the second liquidated sum of HK$375,000), the defendant avers that the parties had not agreed on the price and thus the property remained with the defendant, who had no duty to deliver the same to the plaintiff. Further, in order to earn the alleged profit, the defendant must have bought the machine from the defendant first. But it had not paid for or tendered payment for the machine.

44. On the claim arising from repudiation of the agreements (giving rise to the third and fourth liquidated sums), the defendant says it was entitled to terminate the Injection Moulding Agreement by reason of the matters set out in paragraph 17 of the draft Defence and Counterclaim. In essence, the defendant complains that the plaintiff had denied that it had received a sum of HK$54,000 from a customer and had failed to account to the defendant that sum.

45. On the claim arising from the account, the defendant claims that it is the plaintiff who owes them some HK$880,000.

46. In its draft Counterclaim, the defendant seeks to counterclaim HK$890,606.58, being the price of six die-casting machine sold and delivered to the plaintiff and further sums of HK$516,341.70, HK$156,080.26 and HK$37,300 being the price of parts/replacements parts sold and delivered to the plaintiff.

47. As noted, Mr Tsui had affirmed the truth of the matters contained in the draft Defence and Counterclaim and exhibited documents in support. There is no evidence from the plaintiff to contradict Mr Tsui. Having considered the evidence and submissions carefully, I am satisfied that the defendant has shown a defence with a real prospect of success. I will explain why below.

48. On the conversion claim, Mr Yu submitted the defendant having admitted possession of the plaintiff's components and parts, the only remaining question is assessment. But it is the defendant's case, as demonstrated by the correspondence, that it had not denied the plaintiff opportunity to take delivery as alleged. It is also the unchallenged evidence of Mr Tsui that the plaintiff had not identified the goods in question and demanded delivery. In such circumstances, I am not satisfied that the only question on the conversion claim is assessment. Mr Yu further submitted that on the machines, it is the defendant' own plea in paragraph 9 of the draft Defence that the defendant would invoice the plaintiff for the machines completed. It dose not deny that the machines belonged to the plaintiff upon completion of production. With respect, when the defence in this regard is read in context, it must mean that property in the machines assembled did not pass until sale to the plaintiff or payment by the plaintiff : see, in particular, paragraph 10 of the draft Defence.

49. On the claim for failure to fit out the machine, Mr Yu adopted the same argument on the question of ownership, which I have rejected.

50. On the repudiation claim, Mr Yu took the point that Mr Tsui was only a financial controller who should not have any personal knowledge of the events and that there is no evidence to support the defendant's plea. The purported defence does not stand up to scrutiny. Mr Tsui said his evidence came from his personal knowledge and what he learnt from the defendant's books and document. In such circumstances, I do not accept that he is not qualified to give evidence on the dealings of the parties. Further, he had exhibited the documents in support of the defendant's plea. Apparently, these documents are not challenged.

51. On the question of account, the defendant has produced sufficient documentary evidence to support its case. Again, these documents are not challenged.

Conclusion

52. For the above reasons, I will allow the application to set aside the Default Judgment. Mr Yu's application to amend the Default Judgment in the circumstances does not arise.

53. I will give the defendant leave to file and serve its Defence and Counterclaim within 7 days after handing down of this judgment. The plaintiff shall file its Reply and Defence to Counterclaim within 14 days thereafter. I will leave the directions for future conduct to the parties for the time being.

54. On the question of costs, I will make an order nisi that the plaintiff shall have the costs of the Setting Aside Summons in any event, to be taxed if not agreed : see Hong Kong Civil Procedure 2002, Vol.1, para.13/9/16 at p.142. The order nisi will become absolute 14 days after handing down.

A reminder

55. Finally, I wish to add this. The defendant had filed and served a Defence, after the plaintiff had applied for entry of default judgment but before the Default Judgment was actually entered. In such circumstances, the following passage in the Hong Kong Civil Procedure 2002, para.19/7/4 at p.391 is an useful reminder :

"A defence served after expiration of the prescribed time but before judgment has been given cannot be disregarded, and will generally prevent the plaintiff from entering judgment, even though it is not served until after the plaintiff has served his summons or notice of motion for judgment under this rule, but the defendant may be ordered to pay the costs occasioned by his delay (Gill v Woodfin (1882) 9 QBD 170). In such a case, the court will have regard to the contents of the defence served out of time, and deal with the case in such a manner that justice can be done (Gibbings v Strong; Montagu v Land Corporation, etc (1884) 56 LT 730)..."

56. I would venture to suggest that upon an application (usually on paper) for entry of default judgment when a defence has been filed after the expiration of the prescribed time, whether under the rules or a peremptory order, it is prudent for the master, in exercising his discretion, to adjourn the application for argument and then deal with the matter after hearing the parties, instead of entering default judgment right away.