LUXWORLD LTD v. ETS WOLF SA & CIE (ASIA) LTD

DCCJ 2478/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2478 OF 2007 

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BETWEEN

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 DECISION

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The Application

1. On 24 July 2007, judgment was entered against the Defendant in the sum of HK$694,182.08 (“the default judgment”) due to its failure to give notice of intention to defend.

2. This is the Defendant’s application to set aside the default judgment.

The Plaintiff’s pleaded case

3. The Plaintiff’s claim arises from its business dealings with the Defendant, whereby the Plaintiff supplied materials for the Defendant to manufacture ladies’ wear for which invoices were issued by the Defendant to the Plaintiff for settlement.

4. In the Statement of Claim, the Plaintiff first alleges that pursuant to an agreement dated 23 March 2005, it agreed to transfer a sum of HK$1,852,000.00 in three instalments to the Defendant.   Nevertheless, the Plaintiff’s pleading does not provide the nature and contents of that agreement including, in particular, the reason why the transfer of HK$1,852,000 was required.  The Statement of Claim does not even address if and when the transfer of HK$1,852,000 was actually made.

5. The Plaintiff then pleads that during the period between 1April 2005 and 31 August 2006, the Plaintiff had issued invoices in a total sum of HK$24,683,062.65 and that the Plaintiff had settled a sum of HK$23,552,244.73 during that period.  Pausing here, I wish to point out that the Statement of Claim is silent on what has happened to the outstanding balance of HK$1,130,817.92 (i.e. HK$24,683,062.65 – HK$23,552,244.73) which, apparently, was owed by the Plaintiff to the Defendant on the basis of the figures pleaded.

6. The business dealings, according to the Statement of Claim, were terminated in September 2006.  The Plaintiff claims that according to its own account ledger, an outstanding balance of HK$694,182.08 has been kept by the Defendant and the Defendant has failed to return the same to the Plaintiff.  There is no mention in the Statement of Claim as to how the sum of HK$694,182.08 has been arrived at.  Neither is there any explanation on whether and how such a claimed sum is in any way associated with the alleged transfer of HK$1,852,000 and the amounts of the invoices referred to above.

The Defence

7. Mr Simon Ho, for the Defendant, has made it clear that in this application, his primary case was that the default judgment should be set aside on merits.  As a subsidiary argument, the Defendant has also sought to challenge the regularity of the default judgment.

8. In fact, the Plaintiff and Mr Tan Hai Jain (“Mr Tan”) are the only two directors of the Defendant.  Each of them holds 50% shareholding of the Defendant.  Mr Tan has made two affirmations in support of the present application.  The Defendant also relies on the contents of another affirmation of Mr Tan filed in HCMP No. 380 of 2008 (“the HCMP”).  In the HCMP, Mr Tan sought leave to intervene in the present claim on the basis that the Plaintiff, due to its vested interest in this claim, has not diligently defended this action for and on behalf of the Defendant. On 18 March 2008, an order allowing Mr Tan to intervene was made by Barma J.

9. The Defendant alleges that the Plaintiff cannot rely on the alleged transfer of HK$1,852,000 to the Defendant under the agreement dated 23 March 2005 in order to justify its claim.  The Defendant has adduced evidence that the agreement dated 23 March 2005 was in fact a settlement agreement made between the Plaintiff and the Defendant (“the Settlement Agreement”).

10. According to the Settlement Agreement, trade debt in a total sum of HK$2,800,000 was owed by the Plaintiff to the Defendant.  The Settlement Agreement further provided that the Plaintiff would settle HK$1,800,000 (as opposed to the sum of HK$1,852,000 pleaded in the Statement of Claim) by 3 instalments (i.e. the 1^st instalment in the sum of HK$300,000 on 23 March 2005, the 2^nd instalment in the sum of HK$500,000 on 31 March 2005, and the 3^rd instalment in the sum of HK$1,000,000 on 6 April 2005) and that the remaining balance of HK$1,000,000 would be settled by the Plaintiff through other means.

11. In view of the above, it has been submitted by the Defendant that insofar as the Plaintiff relies on the alleged transfer of HK$1,800,000 in support of its present claim, this part of the Plaintiff’s case is directly contradicted by the contents of the Settlement Agreement.   Further, it transpires from the Settlement Agreement that the sum of HK$2,800,000 was the trade debt owed by the Plaintiff to the Defendant as at 23 March 2005 and hence should have nothing to do with the invoices issued during the period from 1 April 2005 to 31 August 2006 as pleaded by the Plaintiff.

12. According to the Plaintiff’s own pleaded case, a sum of HK$1,130,817.9 [i.e. HK$24,683,062.65 – HK$23,552,244.73] should be owed by the Plaintiff to the Defendant in respect of the invoices issued during the period between 1April 2005 and 31 August 2006.  I refer to paragraph 5 above.   This, again, as submitted by the Defendant, does not support the Plaintiff’s claim.  In any event, according to the evidence produced by the Defendant, in respect of the invoices issued by the Defendant during the same period, the total sum owed by the Plaintiff to the Defendant is about HK$1,482,782.53.

13. The Defendant also alleges that it has lent a sum of HK$700,000 to the Plaintiff and such a sum remains outstanding.

The Plaintiff’s reply to the defence

14. The Plaintiff, in reply to Mr Tan’s 1^st Affirmation, has acknowledged that there were typographical errors in the Statement of Claim to the effect that the relevant period (insofar as the invoices are concerned) should be from 1 April 2004 (as opposed to 1April 2005 originally pleaded) to 31 August 2006.  The Plaintiff has referred to a document known as “cash reconciliation” statement (“the Cash Reconciliation Statement”) for the purpose of confirming that the Defendant still owes the Plaintiff HK$694,180.08.

15. The Plaintiff alleges that there are errors in the figures provided by the Defendant in relation to the invoices issued during the period between 1April 2005 and 31 August 2006 in that the Defendant has ignored certain payments which have already been made by the Plaintiff.

16. The Plaintiff denies the loan of HK$700,000 and alleges that the Defendant paid the sum of HK$700,000 in partial settlement of its indebtedness owed to the Plaintiff.  It has also queried why such a loan was not referred to in Mr Tan’s affirmation in the HCMP.

Merits of the defence

17. It is well-established that if a defendant seeks to set aside a default judgment on merits, the onus is on him to show a meritorious defence with a real prospect of success which carries some degree of conviction (see The Saudi Eagle [1986] 2 Lloyd’s Rep 221; and Premier Fashion Wears Ltd & Another v Chow Cheuk Man & Li Hing Chung (third party) [1994] 1 HKLRD 377).

18. In the present case, as discussed above, one cannot discern from the Statement of Claim how the sum of HK$694,180.08 has been arrived at.  There is also no reference whatsoever in the pleading as to whether and how the alleged transfer of HK$1,852,000 and the amounts relating to the invoices allegedly issued between 1 April 2004 (as a result of the correction made in the Plaintiff’s affirmation) and 31 August 2006 are in any way relevant to the sum claimed.

19. Insofar as the invoices are concerned, even on the Plaintiff’s own case, there appears to be a sum of HK$1,130,817.92 (i.e. HK$24,683,062.65 – HK$23,552,244.73) which was owed by the Plaintiff to the Defendant and such a sum can hardly support the Plaintiff’s claim.   Further, if it was the Plaintiff’s intention to rely on the alleged transfer of HK$1,852,000 to establish the Defendant’s liability, the contents of the Settlement Agreement would suggest otherwise.

20. In fact, the Plaintiff’s claim, as it now stands, is primarily based on the figures set out in the Cash Reconciliation Statement.  However, I am of the view that this document prepared by the Plaintiff is far from conclusive for the following reasons.

21. The Cash Reconciliation Statement started with an opening balance of HK$1,825,000.  Mr Raymond Lau, for the Plaintiff, informed me at the hearing that it was an opening balance as at 1^st April 2004.  He has fairly accepted that the Plaintiff’s affirmation does not provide any explanation on how the amount of the opening balance was calculated.

22. The Defendant has adduced evidence (including its financial statements which have been signed by Mr Remy Christian Wolf on behalf of the Plaintiff) that as at 31 March 2004, the Plaintiff owed trade debts in the sums of HK$398,189 and HK$925,730.08 to the Defendant.  By way of Mr Tan’s 2^nd Affirmation, the Defendant has adduced evidence on how such trade debts were incurred.  I believe that the Defendant’s evidence in this respect, if accepted at trial, will cast doubt on the accuracy of the Cash Reconciliation Statement including, in particular, the question why there was an opening balance in the sum of HK$1,825,000 as at 1 April 2004.

23. According to the financial statements of the Plaintiff, the sum of HK$1,825,000 has been treated as doubtful debt for which provision has been made.  However, as pointed out by the Defendant, there is no evidence which shows that the Plaintff has ever demanded such debt.  Hence, in my view, whether there is any valid basis for the Plaintiff to treat the sum of HK$1,825,000 as doubtful debt is, by itself, somewhat doubtful.

24. The Defendant has also pointed out that various items set out in the Cash Reconciliation Statement fall outside the period between 1 April 2004 and 31 August 2005 (i.e. the enlarged period as corrected by the Plaintiff in its affirmation).   The Plaintiff has not provided any explanation as to why such items are relevant to its claim.  I accept that the reliability of the Cash Reconciliation Statement would be further undermined if those items were to be excluded. 

25. Given my observations of the Plaintiff’s pleaded case and the matters set out in paragraphs 20 to 24 above concerning the Cash Reconciliation Statement (on which the Plaintiff’s claim is currently based), I am satisfied that the Defendant has discharged the burden of showing a defence with a real prospect of success.

26. On the other issues such as the allegations regarding the loan of HK$700,000 and the trade debts owed by the Plaintiff to the Defendant during the period between 1 April 2005 and 31 August 2006, it is sufficient for me to say that there are material discrepancies in the evidence adduced by both parties.  It is impossible and also inappropriate to come to any conclusive view on those issues summarily at this stage.  I think that the disputes in those areas, which call for investigation, further demonstrate why the default judgment should be set aside on merits.

Irregular judgment?

27. The Defendant, in both the HCMP and also Mr Tan’s 1^st Affirmation in this action, complained that the writ was not properly served.  However, this ground was no longer relied on by the Defendant at the hearing.  In seeking to challenge the regularity of the default judgment, the Defendant has contended as follows:-

(1)   The Defendant relied on Kerry Freight (Hong Kong) Ltd v Del Prado Asia Ltd [2005] 3 HKLRD 804 in support of the proposition that there should not be any difference between an irregular judgment as a result of defective service and that caused by other types of irregularities.

(2)   A judgment for more than the amount actually due at the time when the judgment is entered is irregular and the defendant is entitled to have the whole judgment set aside (see Hong Kong Civil Procedure 2008, Vol. 1, 13/1/3).

(3)   By analogy, in the present case, as the Plaintiff has accepted that the relevant period of time originally pleaded in the Statement of Claim was erroneous, the default judgment should be set aside.

28. I do not agree with the Defendant’s reasoning in this respect.

29. There can be no dispute on the general proposition set out in paragraph 27(1).  I, however, wish to highlight that in Kerry Freight (above), the default judgment was considered irregular because the acknowledgement of service had already been filed before judgment was entered.  It was against such a background that Deputy High Court Judge L Chan in that decision referred to the principle that such an irregularity should not be treated differently from that caused by defective service.

30. The above passage of Hong Kong Civil Procedure 2008 cited by the Defendant obviously envisages the situation where it is clear that the default judgment has been entered for more than the amount actually due and the plaintiff in such circumstances is at liberty to apply to reduce the judgment sum to the proper amount.  This is not the case here.   The fact that the Plaintiff has pleaded an incorrect period of time concerning the subject matter of its claim will not render the default judgment irregular.  Obviously, this error and also the question on whether the Plaintiff’s claim in respect of the relevant period (as now corrected) is supported or contradicted by the evidence adduced are factors which go to the merits of the case as opposed to the issue of irregularity.  In the circumstances, I hold the view that the Defendant’s argument on irregularity cannot stand.

Costs

31. In the normal course of events, if a defendant successfully sets aside a regular default judgment on the merits of his defence, the court should order the defendant to pay costs of the application (up to a time when the plaintiff has a chance to study the materials filed by the defendant for the purpose of considering if the application should be resisted) on the basis that the defendant seeks the court’s indulgence.  However, in the present case, the Plaintiff should have been aware of the gist of the Defendant’s case shortly after Mr Tan’s affirmation was filed in the HCMP on 3 March 2008.   Hence, I think that it is more appropriate to order that costs of and occasioned by the application be costs in the cause.

Conclusion

32. By reason of the above matters, I order that the default judgment entered on 24 July 2007 be set aside.  I also make an order nisi that costs of and occasioned by this application (including costs reserved and costs of the hearing on 30 July 2008) be in the cause.