SOPEX INTERNATIONAL SA AND ANOTHER v. ARNOLD DEPARIS AND ANOTHER

HCCL21/2003

IN THE HIGH COURT OF THE

HONG KONG ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 21 OF 2003

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JUDGMENT

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1.  These proceedings began with the issue of a writ on 17 April 2003, in which a simple claim is made by the plaintiffs against the defendants in relation to two bills of exchange, described as promissory notes, signed by the defendants on 12 December 1997, and due for payment on 31 August 1998.  The amount claimed is the principal sums on the two promissory notes, US$12,529,370, together with interest which as at 17 April 2003, amounted to US$8,701,905, a grand total of US$21,231,275.  The issues now before me concern only the second defendant, (Mr Du).

2.  There was difficulty in serving the defendants with the writ, and on 26 September 2003, Deputy High Court Judge Muttrie made an order for substituted service on Mr Du, which order permitted service to be effected by leaving the writ and other documents at Room 1703, Top Glory Tower, 262 Gloucester Rd, Causeway Bay, Hong Kong.  Service was so effected.  On 26 November 2003, there having been no response to the writ, default judgment was entered against Mr Du.  On 26 July 2004, an order was made requiring Mr Du to attend for oral examination as a judgment debtor.  On 26 August 2004, a Prohibition Order was made.  That order lapsed, and on 13 May 2005, a second Prohibition Order was made.

3.  On 18 May 2005, Mr Du was stopped by the Immigration Department at Hunghom Railway Station pursuant to the Prohibition Order.  Acting promptly, on 1 June 2005, solicitors for Mr Du filed a summons, now before me, to set aside or discharge the Order for Substituted Service, made on 26 September 2003, the Default Judgment, the Oral Examination Order, and the Prohibition Order.  The plaintiffs’ oppose that summons, and have themselves filed a summons for Summary Judgment pursuant to O.14.

4.  Mr Du asserts that until he was prevented from leaving Hong Kong on 18 May 2005, he was unaware of the proceedings that had been issued against him.  The plaintiffs dispute this and Mr Stock has pointed to a number of matters upon which he says an inference may be drawn that Mr Du knew of the proceedings.  While those matters give rise to a suspicion in my mind that the proceedings may have come to Mr Du’s attention, I am satisfied, on the balance of probabilities, that Mr Du was not aware of the proceedings until 18 May 2005.

5.  That being the case I am satisfied that it is not necessary for me to conduct any inquiry as to whether or not the order for substituted service ought to have been made or not.  If it ought not to have been made, then Mr Du is entitled to have the judgment set aside.  If it was a proper order, but was ineffectual in bringing the proceedings to his notice, he is entitled to have the judgment set aside.  A fine point then arises, in both circumstances, as to whether or not, before the judgment is set aside Mr Du must establish that he has a good prospect of succeeding in a defence to the action.

6.  There appears to be a conflict in the Hong Kong authorities as to the basis upon which a default judgement may be set aside.  In Chan Yeuk Mui v Ng Shu Chi [1999] 2 HKC 702, a strong court comprising Mortimer VP, Godfrey and Rogers JJA, appeared to take the position, in a judgement of Rogers JA, (as he then was), that where the proceedings have not come to the notice of the defendant, judgment would not be set aside where the defendant failed to show any defence.  That decision appears to be in conflict with the decision in Fok Chun Hung v Lo Yuk Shi [1995] 2 HKC 648, where an equally strong court comprising Power VP, Mortimer and Godfrey JJA, held that where a notice of the proceedings had not come to the attention of the defendant, the defendant was entitled to have the judgment set aside unconditionally.  That decision was followed by a court comprising Rogers VP and Yuen JA in Liu Chong Hing Bank Ltd v Union World (HK) Ltd [2005] 1 HKC 20.

7.  It is right that none of those decisions involved issues of substituted service, but in my view that makes no difference.  If the whole point of service, whether it be by registered post at a last known address, or through a letterbox, or by substituted service, is to bring the attention of the defendant to the proceedings, and if that result is not achieved, then the same principles ought to apply which ever means of service was adopted.  It would be remarkable if one rule would apply when service by registered post or delivery through a letterbox has failed to bring the proceedings to the attention of the defendant, but another rule, significantly more onerous, should apply in circumstances of substituted service.  Mr Stock contended that the rules were different in relation to substituted service.  He acknowledged that where service is effected by the insertion of a writ in a letterbox, pursuant to O. 10 R. 2(b) and the defendant establishes that the writ did not come to his attention, any judgement entered by default may be set aside.  But he said that where service is effected the pursuant to an order for substituted service under O. 65 R 4, it is does not matter that the writ does not come to the notice of the defendant for the effect of the Rules is that effective service has taken place by compliance with the order for substituted service, and the judgement may not be set aside.  That cannot be right.  It would be remarkable for the court to say to a man who did not receive notice of a writ inserted through a letterbox: “as you did not receive actual notice of the writ, the default judgement may be set aside”; but to a man who does not see a single advertisement published once in a newspaper: “the default judgement may not be set aside because service on you was effected by publication of the notice and it does not matter that you did not see the notice and so did not know of the proceedings”.  The proposition only needs to be stated to show its fallacy.

8.  The point in which the authorities are in conflict is as to whether or not there is a requirement upon the subject of a default judgement to show a defence in having that judgement set aside.  Interesting though the point is, I do not find it necessary to decide it to reach a conclusion on this matter, because I am satisfied that on the merits Mr Du has a reasonable prospect of success in a defence of the action.  It should be noted that, if a defence must be shown, the test that is applied when considering whether a default judgment ought to be set aside is the higher test of a “reasonable prospect of success” in defence: see Evans v Bartlam [1937] AC 473 as explained in Alpine Bulk Shipping Co Inc v Saudi Eagle Shipping Co Ltd. [1986] 2 Lloyd’s Rep 221 CA, and Yeu Shing Construction Co Ltd. v Pioneer Concrete (HK) Ltd [1987] 2 HKC 187; as against the lesser test applicable in O. 14 proceedings, that of a triable issue that is not shadowy or mere moonshine.  Consequently, in this case, if that higher test can be met, inevitably there will be no summary judgment.

9.  The plaintiff has brought its proceedings in simple form relying upon two bills of exchange, the promissory notes.  In the course of argument Mr Stock was obliged to acknowledge, (although he was not at that stage able to concede), that the documents upon which he relies may not constitute bills of exchange.  A promissory note is a form of a bill of exchange.  A bill of exchange is defined in s 3 Bills of Exchange ordinance Cap 19, in the following terms:

“3	(1)	A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person or to bearer.
	(2)	An instrument which does not comply with these conditions, all which orders any act to be done in addition to the payment of money, is not a bill of exchange.”

It is clear that clause 1 of the documents upon which the plaintiffs rely would, if it stood by itself, constitute a bill of exchange.  However clause 2 of the document makes provision for the sum due to be paid on an earlier date, in the event of certain circumstances, such as the presentation of a petition in bankruptcy against the makers, thus potentially creating a condition on the instrument, varying the date of payment.  While it is right that if the instruments do not constitute the bills of exchange the right of the plaintiffs to sue upon them is not affected, the opportunities for defence open to the defendants are greatly widened.

10.  The substantive defence however arises from an issue of interpretation of the documents which gave rise to the promissory notes.  In mid-1997 there were disputes between the parties who at that time were, in various ways, shareholders in a company called Advertasia Street Furniture Limited, (Advertasia).  On 12 December 1997, by a Deed of Reorganisation Agreement, (of the Deed), made between the plaintiffs and defendants and other companies in which they were involved, two companies, owned, one each separately, by the two defendants, agreed to buy all shares held by the plaintiffs in Advertasia.  The two defendants signed the promissory notes, totalling US$12,529,370, as consideration for the purchase, payable on the completion date, 31 August 1998.  The promissory notes, together with appropriate share transfers, were held in escrow by solicitors pursuant to the terms of an escrow letter.  If completed on due date the defendants would be the sole owners of Advertasia.

11.  It is clear that the plaintiffs at least contemplated the likelihood that the defendants would not meet the promissory notes and would not complete the purchase.  The Deed went on to provide that in the event that the plaintiffs did not receive the full amount of the consideration for the share purchase on the completion date, the plaintiffs had an option themselves to purchase the defendants’ shares in Advertasia for the sum of HK$2.00.  Thus, if the sale of the shares by the plaintiffs to the defendants failed, instead of merely having an action against the defendants for specific performance or damages for breach of contract, for a simple payment of HK$2.00, the plaintiffs could become sole owners of Advertasia.

12.  The failure of the defendants to make full payment of the consideration for this share purchase constituted one of a number of defined “Default Events” under the Deed.  In the event of such a default, and the exercise by the plaintiffs of their option to acquire all of the shares in Advertasia, the Deed further provided that the plaintiffs must use reasonable efforts to identify a purchaser, and negotiate the purchase of all the shares of Advertasia by a third-party, by 31 August 1999.  From the net proceeds of sale, after deducting costs and any deficiency on the promissory notes, the balance was to be distributed on a pro rata basis between the plaintiffs and the defendants’ two companies.

13.  The promissory notes were not met on due date.  The plaintiffs exercised their option and acquired the defendant's shares in Advertasia.  At the same time as the promissory notes and share transfers of shares in Advertasia in favour of the defendants had been placed in escrow so had share transfers of the defendants’ shares in Advertasia, in favour of the plaintiffs been placed.  Thus on the exercise of their option it was not necessary for the plaintiffs to have contact with the defendants to achieve full ownership of Advertasia.

14.  Apparently pursuant to their obligations to sell the shares of Advertasia onto a third-party, the plaintiffs identified a purchaser.  Instead of selling the shares in Advertasia however they sold four subsidiary companies of Advertasia to the purchaser for a sum of HK$68 million.  It does not appear to be in dispute that the sale of the subsidiary companies had the same effect as the sale of the shares of Advertasia in that the whole of the business of Advertasia passed to the buyers.  Advertasia remains in formal existence.  The contract for the sale of the four subsidiary companies has itself been the subject of litigation, for the purchaser did not complete.  In a judgment delivered on 8 October 2004, Stone J. ordered specific performance of that contract, (see HCA 145/1999.  That judgement is currently under appeal.

15.  The defendants say that the reality of the transaction between the parties was that their agreement to purchase the plaintiff's shares in Advertasia was not an absolute obligation but an option.  They say it was an option because otherwise there would have been no purpose in the Deed going on to make provision for the acquisition by the plaintiffs of their shares in Advertasia, in the event that they did not complete, together with the consequent obligation to find a buyer, and the distribution of any surplus on the sale of the business on a pro rata basis between the three shareholder companies in Advertasia.  Such a scenario they argue is quite at variance with an absolute obligation on their part to make a share purchase.

16.  They say further that the reality of the transaction was that it was an option, because they argue that it would have been unthinkable that they should be obliged to pay the whole of the purchase price under the promissory notes but receive nothing at all, in the event that the plaintiffs exercised their option to acquire the defendants shares in Advertasia for only two dollars.  Mr Wong pointed to the general rule that where under an executory contract for the sale of property, the price for which is payable in advance, and the price is not paid, the seller may recover overdue instalments, but he may not at the same time treat himself as relieved from the obligation of transferring the property to the buyer: see E.G. Rover International Limited v Cannon Film Limited [1989] 1 WLR 912, at 930, citing Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129 at 1141.  The usual rule is that if the seller elects to keep the property he is restricted to an action for damages.  If he wishes to recover the purchase price he must instead sue for specific performance and perform the contract himself, (in this case), by transferring the shares to the defendants pursuant to the Deed.  Mr Wong put it in simple terms.  It was, he said, a total failure of consideration.  If the defendants did not get the shares, they should not have to pay the price.

17.  It is right that the words of clause 4.2 of the Deed provides, ( I have substituted appropriate references for clarity):

“….the (plaintiffs) shall sell all but not some only of the (Advertasia) Shares as beneficial owners and (the defendants) shall purchase all but not only some of the (Advertasia) Shares on the Completion Date,”

but that phrase is preceded by the words:

“On and subject to the provisions of this agreement…”

While at first view there appears to be a fixed obligation on the defendants to purchase the shares, through the use of the word “shall”, that is an obligation which must be read in the light of the whole of the agreement including the option in the plaintiffs to acquire the defendants’ shares in Advertasia for only HK$2.00.  In my view it is plainly arguable that if the defendants are not to acquire the shares of the plaintiff in Advertasia they should not have to pay the purchase price.

18. It is right to that the escrow letter makes provision for the promissory notes to be handed to the plaintiffs in the event of the defendants’ failure to complete.  It is certainly arguable that that would not be the case unless it was intended that the plaintiffs were entitled to then sue on the promissory notes.  But that fact is clearly not decisive of the matter.  If on the other hand the defendants argument succeeds and they had merely an option to purchase the defendants shares in Advertasia, which they did not exercise, then that would be a complete answer to an action based upon either promissory notes or acknowledgements of debt.

19.  In my view the argument available to the defendants is one which goes well beyond merely raising a triable issue, the threshold required to meet an O.14 summons.  If the plaintiff's argument is correct, and they succeeded in selling the business of Advertasia for a sum in excess of the amount due under the promissory notes, and to succeed against the defendants on the promissory notes, they would be entitled to a windfall of some US$12 million, the whole purchase price payable by the defendants.  That would be an extraordinary situation, but I accept one which may have been bargained for by the defendants.  The case is not one where the argument for the defendants as such as to be sufficient to strike out the claim on the basis that no cause of action is revealed.  I am satisfied that the contention is no mere shadow, but an argument with a reasonable prospect of success.

20.  I am satisfied that the proceedings did not come to the notice of Mr Du by way of the substituted service or otherwise.  I am satisfied that he has a reasonable prospect of success in a defence to the action on the merits and that accordingly the Default Judgement ought to be set aside.  It follows that the Order for Oral Examination and the Prohibition Order must also be set aside.  It follows also that the O. 14 Summons for Summary Judgement fails.  Mr Du will have unconditional leave to defend the proceedings.

21.  In the course of the argument a great deal of emphasis was placed by Mr Stock on what the plaintiffs described as fraudulent conduct on the part of the defendants.  It has not been necessary for me to refer to that alleged conduct in the course of reaching this decision.  It is sufficient if I say this about the allegations of fraud.  The factual circumstances and the evidence presently before the court certainly raise clear issues of fraud on the part of the defendants.  But if the plaintiffs are to rely upon fraud they must bear in mind the provisions of O. 18 R 8, and the requirement to plead fraud specifically.  As the claim is presently pleaded, by way of a simple bill writ, it may well not be open to the plaintiffs to rely in any way upon the matters of fraud which they say are disclosed by the evidence.  That may well even be so if they confine their claim to a claim on a simple acknowledgement of debt, which the promissory notes certainly appear to constitute.  It will be up to the plaintiff's advisors to determine how the matter should be appropriately pleaded.

22.  The defendant has succeeded in setting aside the orders made against him and in resisting the O. 14 summons.  Having regard to the whole of the circumstances there will be an order nisi that the costs on both summons’ will be 2^nd defendants costs in the cause.