KWAI WAH ENGINEERING CO LTD t/a WAI WAH CO v. TONVIT INVESTMENTS LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. On 21st November 1995, judgment in default of acknowledgement of service and notice of intention to defend was entered against the Defendant in favour of the Plaintiff in the sum of US$710,207.82. On 27th September 1996, Master Jones dismissed the Defendant's application to set aside that default judgment, and by Notice of Appeal dated 30th September 1996, the Defendant appeals against that decision.

2. Mr. Osmund Lam, who appears for the Defendant on this appeal, accepts that the judgment he seeks to set aside was a regular judgment, and further recognises the burden upon him in an application of this type: see in particular the judgments of the Court of Appeal in Premier Fashion Wears Ltd. v. Chow Cheuk Man & Anr., [1994] 1 HKLR 377, probably the leading Hong Kong case on the point. Whilst Mr. Lam argues that he is able to bring his client's case foursquare within Premier Fashion Wears, he also placed reliance upon the English Court of Appeal decision in Allen v. Taylor, [1992] PIQR 255, which does not appear to have been placed before the Court in Premier Fashion Wears, and which I note was cited by Mr. Justice Keith in Winston Camera & Radio Co, Ltd. v. Veart Design Ltd. [1995] No. A11595 dated 3rd May 1996. In particular Mr. Lam suggested that the following extract from the judgment of Dillon L. J. is more than usually apposite in the circumstances of this case:-

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

3. But I am getting ahead of the story. Put shortly, and it is perhaps one of the few elements of this case that is susceptible to accurate compression, the Plaintiff's claim against the Defendant was for payment of the sum of US$710,207.82, a sum which was said to be due and owing under a Promissory Note executed by the Defendant in favour of the Plaintiff on 16th July 1990. The sum in question was expressed on the face of the Note to be a loan from the Plaintiff to the Defendant to be used for the payment of interest on a loan of US$7,500,000.00 to the Defendant from the China State Bank Ltd. in Hong Kong.

4. It is a further common ground that the aforesaid principal sum had been borrowed by the Defendant from the Bank for the purpose of a joint venture development in Vancouver named "Meridian Cove" on a site owned by one Cherrybrook Holdings Ltd; indeed, the Defendant was the joint venture vehicle set up to develop this project, and was owned, in form at least, as to 50% by a company known as Team Victory Co. Ltd. and as to 50% by a company known as Henan Hongkong Enterprises Ltd. That, however, is about as far as the common ground in this case allows, save possibly for the further fact that "Meridian Cove" was unsuccessful, with a fall-out between the parties involved being reflected in several pieces of litigation, in both Canada and Hong Kong, of which this case is but one instance. In this connection, Mr. Lam submitted that there were currently three ongoing cases in Hong Kong, and one ongoing case in Canada, all of which are in some way related to this project.

5. The affidavit evidence which has been filed represents a somewhat murky picture, and I am in agreement with Mr. Lam's opening remarks to the effect that there are complex and substantial factual disputes in this case, and that the existing documentary evidence is not only voluminous but also less than straightforward. Notwithstanding the formal corporate structure, the commercial reality of this case, says Mr. Lam, is that the present dispute is but one of a number of disputes between two competing interest groups or "camps", on the one hand represented by one Ng Chun Wah and Chiang Yung Chieh (through Team Victory), and on the other that of one Cai Ligui, Su Fu Gon and Lu Hong Xun (through Henan Hongkong Enterprises Ltd.) Indeed, the Defendant's case is that the land development project in Canada, which forms the factual background to the present proceedings, was in fact a joint venture between Henan Hongkong Enterprises on the one hand and Messrs. Ng and Chiang on the other, and that because Messrs. Ng and Chiang were respectively an architect and a civil engineer with experience in similar development projects, the day-to-day management of this Defendant, the joint venture vehicle, and in particular its financial management and the project management, was at all material times entirely entrusted to Ng and Chiang through the Plaintiff company, which the Defendant maintains is owned and controlled by Mr. Ng. These matters are disputed by the Plaintiff, but they form an integral element of the Defendant's case; whilst I cannot at this stage make any judgment upon these issues, they are nevertheless matters which I must take into account in evaluating the merits of the defence that is put forward, and in deciding whether to exercise my discretion to set aside the judgment and to permit this Defendant to contest the Plaintiff's claim, which as matters currently stand has now merged into the judgment which has been entered.

6. With that brief overview of the factual background, I turn out to consider the merits of the Defendant's case as it is put forward before me; as Bokhary J. A. succinctly put it in Premier Fashion Wears, op. cit. , at p.380:

"No defence is any good if it will not work law even if based on fact. Likewise, no defence, whatever its effect in law if believed, is any good if it does not enjoy any real prospect of being believed."

7. In looking at the merits, part of the difficulty facing the Defendant, in my view, stems from the rather offhand way the issue was first addressed by the Defendant on affidavit, with the mutually exclusive contentions that no monies had been advanced pursuant to the Promissory Note, but that if they had so been advanced, they had been repaid. However, once the matter was considered in detail in subsequent affidavit evidence, it became clear that there was a serious case being put forward, which, as Mr. Lam chose to characterise it, could be put under two heads; first, and primarily, that the sum the subject of the Promissory Note had in fact been repaid, so that the Note had been satisfied; and second, that the Note itself, which was dated 16th July 1990, had been overtaken by events and had been cancelled and replaced some eight months after its execution by a document entitled "Acknowledgment of Indebtedness" dated 12th April 1991.

8. This Acknowledgment was signed by Chiang Yung Chieh on behalf of the Defendant and by Ng Chun Wah on behalf of the Plaintiff confirming the sum due as of 21st April 1991, namely US$735,654.83, and recording the mutual agreement that payment was not to be made until after the Defendant had received payment from Canada upon completion of the "Meridian Cove" project. Since the Defendant had not yet recouped its investment in the project, which in any event it claims turned out to be a "fiasco", with the Defendant being sued by the Bank in July 1993 for repayment of its loans, it is a little unclear why Mr. Lam did not seek to make more of this document than he did. Admittedly, the circumstances in which such Acknowledgment came to be signed do not really emerge from the evidence, but it seems to me to represent a possibly fertile line of defence to an action on the Note itself.

9. Be that as it may. The Defendant's main line of defence, which Mr. Lam developed at some length with reference to documents derived from the other litigation in which these two groups were involved, was that the sum the subject of the Promissory Note (the origin of which was said to be shareholders' loans) had in fact being fully repaid by the Defendant over a period between mid-1990 to late 1992 (by which date the two "camps" had not yet fallen out and remained on talking terms), so that the effect was that the sum the subject of the Promissory Note had been more than satisfied; indeed, Mr. Lam contended that the available documents indicated total repayments of HK$11,677,567.00 from the Defendant to the Plaintiff during this period. He further argued that this action on the Promissory Note, which on its face had been due for repayment "on or before September 1990", was simply part and parcel of the ongoing sequence of litigation between the two "camps", and was patently designed to exert tactical and financial pressure upon the Defendant.

10. On the prime issue of repayment, Mr. Lam makes two main points:-

11. First, the written record supplied by the Plaintiff, pursuant to the Order of Master Jennings dated 22nd February 1996, which purportedly evidenced the underlying indebtedness of the Defendant, was clearly deficient and incomplete, and important matter because the financial management of the Defendant was entirely entrusted to the Plaintiff at the material time; and

12. Second, that the receipt by the Plaintiff of substantial payments from or on behalf of the Defendant, such repayments including the underlying loans the subject of the Promissory Note, had in fact been acknowledged in a statement of account filed by Messrs. Ng and Chiang in HCA No. A5278 of 1995, a case in which Messrs. Ng and Chiang were in litigation with Henan Hongkong Enterprises and in which proceedings they sought an order that Henan should, inter alia, take over and discharge their liabilities incurred on behalf of the development project in the amount of CAN$2,247,213.71. And that when cross-referenced to other accounting records obtained from Cherrybrook Holdings and filed in litigation in the Canadian Court-in particular, the statement of account of loans advanced to the Defendant for the project and the statement of repayments received from the Defendant-the picture which clearly emerged was of a running account between the two companies, with the admitted receipt of monies by the Plaintiff which more than absorbed the sum allegedly due under the Promissory Note. Further, said Mr. Lam, Messrs. Ng and Chiang were trying to have it both ways when it suited their particular purpose in the differing pieces litigation; and that their characterisation of the loans the subject of the Promissory Note as distinct from such loans as were actnally repaid by the Defendant was contradicted by an accountant's report of 11th June 1996, which indicated that in the accountants' view this contention as to the existence of other such loans was at variance with the books of account and records and documents as provided to the accountants by the Plaintiff.

13. Looked at overall, the picture is undoubtedly confused, and at trial will no doubt take a good deal of sorting out. In my view, however, a trial there must be. Mr. Rodway Q. C., who appeared for the Plaintiff, powerfully and persuasively argued that the evidential drawbacks within the Defendant's present application were clearly sufficient to doom it to failure, and that the Defendant's burden upon this type of application was simply not discharged by the "jigsaw" type of approach that was adopted. His argument, propounded with his usual clarity and elegance, was sufficient to persuade me to adjourn the case in order to review the material before me, with reference not only to the defence that was put forward but also to the possibility of setting aside this judgment on terms.

14. Having reviewed the evidence at length, however, I am persuaded that the Defendant can and does bring itself within the rubric of "potentially credible affidavit evidence" carrying "some degreed of conviction" (per Godfrey J.A. in Premier Fashion Wears, op. cit., at p.383) so that there is a real prospect of it being believed and, ergo, "a real prospect of success". And certainly, to put it in Allen v. Taylor terms, on the material before me the exculpatory facts relied on by the Defendant "could well be established." Moreover, it seems to me quite wrong, in the very particular circumstances of this case, to penalise the Defendant for being unable to particularise the precise repayments referable to the sum allegedly due under the Promissory Note in a situation in which first, there was clearly a running account with the Plaintiff over a significant period of time, and second, in which the Plaintiff allegedly controlled the financial management of the Defendant. I recognise, of course, that this latter fact is disputed, but if such management in fact be established the Plaintiff must surely in any event be required to account to the Defendant qua such financial controller. This latter point, I think, was not a point specifically developed by counsel during argument, but it seems to me that it must also arise in terms of the case put forward by the Defendant.

15. Accordingly, I am satisfied upon all the material before me that the Defendant has merits in the required sense, and I now turn briefly to consider the second lime, so to speak, of an application to set aside default judgment under O.13 r.9, RSC, namely the circumstances in which judgment came to be entered against the Defendant.

16. This aspect of the matter has given me less pause for thought than the issue of merits. As I indicated to that the outset, Mr. Lam accepted the regularity of this judgment, and further the factual situation that the writ had in fact been served on the Defendant's registered office at Singga Commercial Centre, 37th Floor, 148 Connaught Road West. As a matter of history, this had been the registered office originally shared by the Plaintiff and the Defendant, a situation which no doubt related back to a time at the beginning of this joint venture development when relations between the individuals concerned were amicable. In any event, the evidence in this case is that no attempt was made to serve or otherwise contact the Defendant at any other address notwithstanding that, as was well known to the Plaintiff, the Defendant was effectively based at the Henan Building, 27th Floor, Jaffe Road, Wanchai; indeed in this context there was further evidence that the invariable past practice of the Plaintiff had been to contact the Defendant or its directors at the latter address.

17. However, that which apparently occurred was that, upon receipt of the writ, Madam Chan Shuk Wan, a director of the Plaintiff (whom, I am informed, had been the secretary of the Defendant prior to 1993) contacted Chiang Yung Chieh when this document was brought to her attention. The problem with this, from the Defendant's point of view, was that Mr. Chiang, although remaining on record as a director of the Defendant, was in fact a member of the rival interest group, and the letters containing photocopies of the writ that he allegedly posted to the other directors of the Defendant never, apparently, arrived, nor for that matter did anyone in the Henan Enterprises office received notification as to the existence of the present action. Accordingly, nothing was done about this case until a fax arrived from the Defendant's Canadian solicitors on 12th December 1995 referring to the existence of these proceedings, and in the particular circumstances the Defendant characterises Madam Chan's notification of Mr. Chiang, and the latter's purported attempt to notify the other Directors of the Defendant, as nothing but a "farcical exercise". Moreover, Madam Chan's evidence as to the posting of a letter containing a photocopy of the present writ to Messrs. Cai Ligui and Su Fu Gong at the Henan Building on 6th November 1995 is rebutted by evidence that this letter was returned, undelivered, to the Plaintiff by the Post Office, a fact which, I imagine, is unlikely to have escaped Madam Chan's attention, although this fact was not revealed until the Defendant put in evidence on the point in answer to that initially put forward by Madam Chan.

18. In summary, whatever the strict technicalities of the matter (and Mr. Lam does not seek to avoid the fact that service was affected on the registered office as required by the Companies Ordinance), I am satisfied that the circumstances in which judgment came to be entered are not such as to preclude the course I would otherwise wish to adopt; in my view this case is nowhere near the type of situation in which, for example, a Defendant chooses to ignore proceedings and, as sometimes happens, permits judgment to be entered in default, only to have a change of heart and thereafter seek to set aside such default judgment. As I recall the facts of the case, Allen v. Taylor represented probably the high watermark of such situations, wherein notwithstanding that the Defendant in that case deliberately allowed judgment to be entered against him, his subsequent application to set aside such judgment was ultimately entertained successfully in light of the disclosed merits.

19. In all the circumstances of the case, therefore, after having taken into account the submissions of counsel and all the material before me, I have decided to allow this appeal, and in the exercise of my discretion to set aside the default judgment entered against the Defendant on 25th November 1995. I set aside this judgment unconditionally; as counsel are aware, I did at one stage consider the issue of a setting aside on terms, but after reflecting upon the evidence I have come to the conclusion that such a course would not be appropriate.

20. I will hear counsel on costs, both here and below, and on consequential directions at a time to be appointed. In the meantime, however, I express my thanks to counsel for their most helpful submissions.