THE INCORPORATED OWNERS OF HIU KWONG COURT AND HIU MING COURT v. YIP HUNG LILY

DCMP 735/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 735 OF 2013

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DECISION

1.  This is the defendant’s application to set aside an order for sale (“Order for Sale”) in respect of the abovementioned property (“Property”) on grounds of irregular service of process.

2.  The defendant is formerly a registered owner of the Property while the plaintiff is the incorporated owners of the Building of which the Property forms part.  The defendant having defaulted in payment of management fees and contribution to renovation costs, the plaintiff commenced action in the Lands Tribunal in LDBM 241/2012 and obtained default judgment for the sum of HK$59,676 (“Judgment Sum”) plus costs and interest on 27 November 2012.  On 20 February 2013, the Lands Tribunal granted a charging order absolute (“Charging Order Absolute”) against the Property. 

3.  No payment of the outstanding sums secured by the Charging Order Absolute having been made by the defendant, the plaintiff commenced these proceedings to enforce the Charging Order Absolute.  Service of process was reportedly effected on 22 March 2013 by insertion of the originating summons herein through the letterbox for the Property being the usual and/or last known address of the defendant.  In his affirmation of service, the service processor stated the plaintiff’s opinion that the originating summons so inserted into the letterbox for the defendant’s address would have come to the latter’s knowledge within 7 days after the date of insertion.

4.  On 9 May 2013, a master granted the Order for Sale ordering, inter alia, the sale of the Property by private treaty or public auction at a reserve price in default of payment of the outstanding sums within 28 days.  The order was reportedly served on the defendant by ordinary post to the same address.

5.  By an Assignment dated 25 September 2013 (“Assignment”), the Property was sold (“Sale”) in the defendant’s name to Madam Cheung Yin Kam (“Madam Cheung”) at the reserve price.  In the preamble to the Assignment, reference is made to the Order for Sale and the appointment of a partner of the plaintiff’s solicitors to effect the Sale.

6.  It is the defendant’s case that service of the originating summons herein was irregular and ineffective.  Of note is the fact that by this application the defendant is not seeking to set aside the Sale.

Legal principles for setting aside a default judgment for irregular service

7.  It is trite law that an irregular default judgment would be set aside as of right without regard to the merits of the proposed defence although the court does retain residual discretion to impose terms by having regard to the parties’ conduct.  A judgment is irregular where service of the writ is bad or ineffective.  See: Hong Kong Civil Procedure 2016, Vol 1, §§13/9/4-5 and Po Kwong Marble Factory v Wah Yee Decoration Co Ltd [1996] 4 HKC 157 (CA). 

8.  When it comes to service of writ, the test is whether the writ “had been brought to the defendant’s notice and not whether it had been delivered to the defendant’s last known address”. Thus, where a defendant was not living at the address where it was inserted into a letterbox at that address, it was not brought to the defendant’s notice and the service was irregular.  See Sinokawa Investment (Holdings) Ltd & Anor v Li Chun [2006] 3 HKLRD 441 at §15 and Hong Kong Civil Procedure 2016, §10/1/13. 

9.  Where a defendant deposes that he has not received the writ through the post, the court has little option but to believe this save when there is sufficient material to cast doubt upon the defendant’s credibility to enable the court to disbelieve him (which is a matter of evidence dependent on the circumstances of the case).  This does not mean the court must accept a defendant’s assertion no matter how improbable.  A defendant must therefore provide convincing evidence.  How much evidence is required must depend on the circumstances of the particular case.  See Bank of China (Hong Kong) Ltd v Cheung Keung Fung [2007] 1 HKLRD 462 at §§32-34 and Hong Kong Civil Procedure 2016, §10/1/13.  

10.  Where a defendant alleges that he was unaware of the proceedings begun by originating summons, the principles regarding the setting aside of a default judgment entered under Order 28, rule 4 are the same as if the proceedings had been begun by writ and judgment entered under Order 13.  See Hong Kong Civil Procedure 2016, §28/4/1.

Whether service of the originating summons herein irregular or ineffective

11.  The sole basis of the defendant’s present application is that she never received any notice of these proceedings and therefore never had the opportunity to respond, there being no challenge to the mode of service adopted by the plaintiff.

12.  As revealed by the defendant’s affirmation in support of the present application, the Property was transferred to the defendant’s sole name in 1997 as part of the divorce settlement with her ex-husband.  She continued to live in the Property with her daughter until about 2002 when she moved to a different property though leaving behind personal belongings in the Property. She had since occasionally returned to the Building to collect letters from the letterbox until July/August 2008 when she stopped visiting the Building because she had no particular need for retrieving personal belongings from the Property. 

13.  On 1 June 2015, the defendant happened to pass by the Building and saw clothing hanging out from one of the windows of the Property, hence coming to know about the Sale.  Copy court documents in LDBM 241/2012 and the present proceedings were obtained and legal advice was sought before the present application was taken out on the defendant’s behalf.  I pause here to note the plaintiff is not taking any issue on delay in taking out this application.

14.  It is also the defendant’s case that the plaintiff knew full well that she was not living in the Property.  In his affirmation in support of the originating summons herein, the plaintiff’s solicitor stated that he was informed by the plaintiff that the Property was vacant.  That being so, the plaintiff could not truthfully believe that documents sent to the Property would have come to her knowledge within 7 days of insertion/posting thereof.  She further refers to the bailiff’s report of 30 July 2013 recording a caretaker to have stated that he had not seen the occupiers of the Property (presumably referring to the defendant and her family) for several years.

15.  By her 2^nd affirmation, the defendant deposed to the fact that the plaintiff’s evidence adduced in LDBM 241/2012 suggested that by the time the Lands Tribunal and the present proceedings were commenced, the Building had been installed with a new entrance gate with a security code of which the defendant had no knowledge and a new letterbox for the Property the key to which the defendant did not possess.  She therefore concluded that at the time of the purported service of process in both LDBM 241/2012 and the present proceedings, the plaintiff knew that she would not be able to gain entry to the Building to access the new letterbox for the Property and that she did not have the key to retrieve mail inserted into that letterbox.

16.  The defendant avows that had the court documents come to her attention, she would have settled the outstanding amounts to retain the ownership over the Property.  Also of note is her indication that she intends to “take further legal action against appropriate parties to claim for the Property, the proceeds of sale and/or damages for the wrongful sale of the Property”.  Apart from the present application, however, the defendant has as yet taken no other court action.  I shall come back to this.

17.  To these assertions of the defendant, all the plaintiff manages to do is to refer to the plaintiff’s practice up to mid 2008 to insert all management fee demand notes and receipts into the letterbox for the Property so that the plaintiff had no reason to believe correspondence with the defendant through insertion into the letterbox for the Property would not reach the defendant. 

18.  For one thing, this negative averment ill compares with what the service processor stated as the plaintiff’s opinion that documents inserted into the letterbox for the Property would have come to the defendant’s knowledge within 7 days.  For another, the plaintiff has simply not addressed the defendant’s assertion in her 2^nd affirmation which would give the plaintiff every reason to believe correspondence with the defendant through insertion into theletterbox for the Property would not reach the defendant.

19.  Indeed, the plaintiff has via its solicitors’ open letter of 29 January 2016conceded for the purpose of the present application that the defendant “has made out an arguable case of ineffective/irregular service, and therefore she has a right to claim (against the plaintiff) for …irregular and/or unlawful sale of the Property” (“Plaintiff’s Concession”).

20.  Before me, Mr Chain for the plaintiff offered no argument against the defendant’s case on irregular service other than fairly conceding that the defendant probably did not come to know about these proceedings within 7 days of the insertion of the originating summons herein into the letterbox for the Property.

21.  In the circumstances, I have no hesitation to conclude that service of process herein was irregular/ineffective, there being nothing to cast doubt on the defendant’s case on how she came to know about these proceedings.

Discretion not to set aside the Order for Sale for irregularity

22.  Mr Chain for the plaintiff and Mr Smith, SC, with whom Mr Lam appeared, for the defendant disagreed as to whether the court retains any discretion not to set aside the Order for Sale when service of process is found to be irregular.  Both counsel relied on Po Kwong, supra. 

23.  Mr Smith’s stance is that the court’s discretion in case of irregular service of process is limited to imposing conditions when setting aside a default judgment and there is no discretion to refuse to set aside the judgment or it would be in violation of the defendant’s fundamental right enshrined in the Basic Law not to be proceeded against in court without due notice of commencement of proceedings. 

24.  Mr Chain demurred and submitted that the court did retain discretion not to set aside a default judgment despite irregular service, reference being made to what Sears J said in Po Kwong, supra  at 161C-E:

“ The provisions of O.13, r.9, as I have said, are wide in their context. In my judgment, whilst it can be rightly said that a judgment which has been obtained irregularly ought to be set aside as of right, in other words that the merits of the particular defence to the claim do not have to be entered into by the court, nevertheless, there is always a residual discretion in the court to have regard to the conduct of the parties. For example, if a judgment has been obtained irregularly and the writ comes to the notice of the defendant, he may delay for a certain period of time before taking any action on the writ. In my judgment, the court still has a discretion - having regard to what the defendant himself has done - to deprive him, if necessary, of that judgment or alternatively, to impose terms upon the setting aside of the judgment which accord with justice having regard to the facts of the particular case.”

  (Emphasis added)

25.  Mr Chain submitted that the phrase “to deprive him…of that judgment” must in the present context be taken to mean to deprive the defendant of the right to have the judgment set aside.  Mr Smith made no commenton this reading of the text but otherwise submitted that the court’s discretion is confined to having regard to the defendant’s conduct.

26.  In my view, this is too narrow a reading of what the Court of Appeal said in Po Kwong.  As Bokhary JA (as he then was) said in the same judgment, the court’s statutory jurisdiction is unfettered:

“Another thing I might have done was to underline the nature of the statutory jurisdiction.  “Ex debito justitiae” or as of right means without going into the actual merits of the defence.  It does not mean shutting one’s eyes the circumstances surrounding the question of service and why things went wrong in that regard.  The court’s statutory jurisdiction is unfettered.”

27.  As I see it, the Court of Appeal’s specific reference to the defendant’s conduct was made in circumstances where the court, having ruled that the default judgment ought to be set aside, went on to consider whether conditions could and should be imposed in setting aside the default judgment.  This should not be seen as imposing a fetter on what the court has described in the same judgment as a wide and unfettered statutory jurisdiction.

28.  I further observe that Po Kwong and subsequent cases applying Po Kwong all involved defendants seeking to defend the claim against them, with or without merits.  Discussions were therefore confined to imposition or otherwise of conditions in setting aside the default judgment in the particular circumstances of the cases.  Here, there is nothing left for the defendant to defend and the defendant is in any event not seeking leave to defend or otherwise disputing the claim itself.  All she seeks is to set aside the order for sale in enforcement thereof to pave way for her intended legal action which may or may not materialize.

29.  That said, I do subscribe to the view that such a residual discretion should not be lightly exercised and there must be special or exceptional circumstances before the court would consider exercising the same against someone rightly protesting at having been given no chance to be heard.

Whether to exercise discretion not to set aside the Order for Sale

30.  What must be highlighted at the outset is again the fact that there is nothing left in these proceedings after the Sale was completed and the proceeds thereof applied to pay off the outstanding amounts due to the plaintiff with the balance having been paid into court, albeit with delay which is prima facie inordinate, and the defendant is understandably refusing to collect the same given the present state of affairs. 

31.  Indeed, the defendant is not challenging the default judgment in LDBM 241/2012 or the Charging Order Absolute despite the likelihood of the service of process there being irregular.  Her complaint is confined to the way the plaintiff achieved its purpose of enforcing an indisputably rightful claim. 

32.  Mr Chain’s primary argument against the application is simply that it serves no purpose to set aside the Order for Sale or that the Plaintiff’s Concession has rendered it unnecessary to set aside the same.

33.  Mr Smith’s submission in support of the application is that it is an essential step to enable the defendant to take further legal action in respect of the wrongful sale of the Property that the Order for Sale be set aside.  By way of illustration, he cited the following passage from Virgo, Principles of the Law of Restitution (3^rd ed) at p 147 under the heading “Res Judicata”:

“When money has been paid by the claimant to the defendant as the result of a court judgment it cannot be recovered unless the judgment is set aside, for the judgment constitutes a basis for the payment. The judgment operates as a legally effective basis for the defendant’s receipt, even if the judgment has been obtained by fraud. It is only where the judgment is subsequently set aside that restitution will be awarded…”

34.  In other words, Mr Smith submitted, without setting aside the Order for Sale, the defendant would be debarred from making further claims in respect of the wrongful sale of the Property, as the existence of the Order for Sale serves as a valid legal basis for the Sale.

35.  One will recall that the defendant has not taken any legal action other than the present application.  If she is to embark on further litigation, as Mr Chain rightly submitted, it can only be either to have the Sale set aside or to claim damages for wrongful/irregular sale.  Clearly the defendant has yet to make up her mind.  One important consideration, as Mr Smith has fairly admitted, is the possibility of Madam Cheung being protected by s.52 of the Conveyancing and Property Ordinance, Cap 219(“Section 52 CPO”) which provides that:

“Where a sale is made under a mortgage, the title of the purchaser shall not be affected by the fact that no case had arisen to authorize the sale or that due notice was not given or that the power was otherwise improperly or irregularly exercised; but any person who suffers loss through an unauthorized, improper or irregular exercise of the power of sale shall have a remedy in damages against the person exercising the power.”

36.  Section 2 of the same ordinance defines mortgage to mean a security over land for securing money or money's worth.

37.  The charge imposed by a charging order is enforceable as an equitable charge created by a debtor in writing and is a security whereby real or personal property is appropriated for the discharge of a debt or other obligation that comes with a right of realization by judicial process in case of non-payment of the debt.  See Timmar Co Ltd & Anor v Erwin Hardy Corporation Ltd (HCMP 2875/2000), unreported, 12 June 2001, Mr Recorder Kwok, SC at §21.

38.  Before me, Mr Smith is unable to say with any degree of certainty if Section 52 CPO does not apply to protect Madam Cheung’s title to the Property and is content to leave this to any future proceedings taken out by the defendant.  Indeed, both Mr Chain and Mr Smith submitted, and I agree, that I need not make a ruling on this issue.

39.  Mr Chain argued that the analogy drawn with the position of a party seeking restitution was inapt in that the setting aside of a default judgment in that scenario would be obliged by the merging of the debt with the judgment.  And as the heading of the text cited from Virgo, op cit indicates, this is in turn necessitated by the operation of res judicata.

40.  I am inclined to agree with Mr Chain.  In particular, I agree with Mr Chain that the Order for Sale does not stand alone.  The Order for Sale gave rise to the Sale.  If the Sale cannot be set aside, the mere setting aside of the Order for Sale would not affect the Sale itself.  On the other hand, if the Sale is liable to be set aside, the Order for Sale must fall with the Sale.

41.  Indeed, if the defendant seeks to set aside the Sale, she will in all probability rely on the Order for Sale being obtained irregularly, absent any challenge to the regularity of the Sale itself.  The Order for Sale and the Sale must therefore stand or fall together in the present case.

42.  Even if Mr Smith is right in saying that the setting aside of the Order for Sale is an essential preliminary step before the defendant can take further legal action such as to avoid any argument on estoppel per rem judicatam, such worry is more imaginary than real insofar as the intended action is one against the plaintiff for damages.  For one thing, as Mr Chain submitted, the very nature of such a claim does not require the Order for Sale to be set aside first, because the claim would be premised on the Order for Sale being wrongfully obtained by at least material concealment.  For another, the Plaintiff’s Concession, re-affirmed by Mr Chain before me, should operate as some kind of estoppel against the plaintiff running an argument on estoppel per rem judicatam.  Nor should the plaintiff’s solicitors be able to run such an argument should they be named as a defendant along with the plaintiff.

43.  To this, Mr Smith replied that the Plaintiff’s Concession would be of limited value to the defendant because other parties could still argue estoppel.  I am unable to agree insofar as the intended action is for setting aside the Sale when the defendant would surely be asking the court to set aside both the Sale and the Order for Sale at one go and no question of estoppel should arise. 

44.  Of course, Madam Cheung will have to be made a party.  In his written submission lodged before Mr Smith was brought in, Mr Lam submits that DCMP 735/2013 is not the proper venue for the defendant to challenge the validity of the Sale and that the defendant will have to commence a separate action if she wishes so to do.  As neither Mr Chain nor Mr Smith made any submission on this issue, I express no view on the same.

45.  Mr Smith’s position is that the Order for Sale can be set aside without regard to Madam Cheung who, Mr Smith said, was brought in because of the plaintiff’s irregular service of process in the first place.  Mr Smith must have tacitly accepted that the setting aside of the Order for Sale could impact on Madam Cheung’s title to the Property when his tentative view is that Section 52 CPO does not apply to protect Madam Cheung. 

46.  This hardline position, however, ignores the fact that it was the defendant’s blatant failure to honour her contractual obligations under the relevant deed of mutual covenants to pay management fees and contribute to renovation costs that had brought about the plaintiff’s enforcement action the propriety of which would not have been open to challenge if not for irregular service. 

47.  Having been presented with two ladies, one being a delinquent former owner of the Property rightly protesting at the Sale and the other being the current owner of the Property whom I have no reason to believe to be someone other than a bone fide purchaser, this court is nonetheless asked to have regard to the interest of the former and ignore that of the latter.

48.  If the defendant is rightly complaining about the Order for Sale being obtained without her being given a chance to be heard, why should she be heard to say she is entitled to have the Order for Sale set aside without Madam Cheung being given a chance to be heard when this is likely to impact on the latter’s title to the Property?  Problems might well triplicate if Madam Cheung was selling the Property as arguments here proceeded in her absence.

49.  In light of the special circumstances of this case, I am exercising my discretion not to set aside the Order for Sale despite the irregularity of service of process herein.

50.  The defendant’s summons is therefore dismissed with an order nisi that costs be to the plaintiff with a certificate for counsel.