RICHIE INTERIORS LTD. v. SANKO AIR-CONDITIONING ENGINEERING LTD. AND ANOTHER

HCA 4365/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4365 OF 2001

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(Heard Together)

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J U D G M E N T

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1. This is an appeal from a decision of Master B Kwan refusing to set aside one default judgment in one action and setting aside another default judgment with conditional leave in the second action.

2. On 5 October 2001, the Plaintiff issued two writs claiming for payment of certain sums under two sets of almost identical agreements and guarantees.

3. In each action, the 1st Defendant is a limited company. The 2nd Defendant in both actions is an individual, a director of the two corporate defendants.

4. On 8 October 2001, each of the corporate defendants purportedly filed an acknowledgment of service indicating it did not wish to contest the proceedings. Each acknowledgment of service was signed by the 2nd Defendant with a chop of the 1st Defendant concerned with the words "authorised signature".

5. Judgments in default in the two actions were entered on 18 and 19 October 2001 respectively, less than 14 days from the date when the two acknowledgments of service were lodged with the Registry.

6. Today, the 1st Defendant in each action sought to apply to set aside the default judgment and at the same time and for that purpose, sought to adduce further evidence on the merits of its defence. The Plaintiff, on the other hand, sought an adjournment to deal with the rather voluminous evidence which was sought to be put in by each of the corporate defendants.

7. I did not see, however, why there should be a mini-trial on the merits of the claims if either or both of the default judgments entered were premature or irregular. I therefore ordered a preliminary point to be argued as to whether the judgments entered were premature or irregular.

8. In the course of argument, it transpired that in relation to Action 4365 involving Sanko Technology Ltd., the legal representative appearing on behalf of Sanko Technology Ltd in the court below had conceded that the judgment was regular. Mr Paul Shieh, appearing on behalf of the 1st Defendant, did not wish to expressly challenge the allegation that a concession was made, but he asked for the tape of the hearing to ascertain whether or not the concession had indeed been made. He also made the point that if a judgment was not regular, then it was not something that a concession could cure.

9. In view of Mr Shieh's desire to hear from the tape as to exactly what happened in the court below, I stood that action down so that the matter could be looked at in light of my ruling today on Action 4366 of 2001.

10. The Rules are very clear as to the basis on which a default judgment can be entered against a defendant. Order 13 Rule 7(1) says:

"Judgment shall not be entered against a defendant under this Order unless --

a) the defendant has acknowledged service on him of the writ; or

b) an affidavit is filed by or on behalf of the plaintiff proving due service of the writ on the defendant.

........"

11. Order 10 Rule 1(5) provides:

" Subject to Order 12, Rule 7, where a writ is not duly served on a defendant but he acknowledges service of it, the writ shall be deemed, unless the contrary is shown, to have been duly served on him and to have been so served on the date on which he acknowledges service."

12. It therefore follows that if an acknowledgment of service is a valid acknowledgment of service then prima facie there was proper service and on that basis, a plaintiff can then apply under Order 13 Rule 7(1) for a default judgment against a defendant.

13. In this respect, Order 12 Rule 1(2) deals with how a corporate defendant can acknowledge service. Rule 1(2) says:

" The defendant to such an action who is a body corporate may acknowledge service of the writ and give notice of intention to defend the action either by a solicitor or by a person duly authorised to act on the defendant's behalf but, except as expressly provided by or under any enactment or where leave is given under paragraph (2A) for such defendant to be represented by one of its directors, such a defendant may not take any further step in the action otherwise than by a solicitor."

14. Mr Shieh quite properly pointed out that Order 12 Rule 1(2), on the face of it, only deals with a corporate defendant acknowledging service and giving notice of intention to defend. What if the corporate company does not wish to defend? Mr Shieh argued that in that case no acknowledgment of service could be returned. I do not think that is right. The Rule must be read in such a way as to enable a defendant to indicate whether he wishes to defend proceedings or to contest proceedings. I think the proper way to read Order 12 Rule 1(2) is to read the words "give notice of intention to defend" as if it says "to give notice as to its intention to defend or otherwise."

15. To read it in the strict way as Mr Shieh suggested would make no sense. It would mean either that a corporate defendant could not indicate its consent to judgment in any way whatsoever and the Plaintiff must therefore wait for 14 days after service to sign judgment or that where the corporate defendant did not wish to defend the action, it could give notice of its intention not to contest proceedings by anyone who was not so authorised because it was not bound by Order 12 Rule 1(2). That cannot be the intent of the Rules.

16. I draw some comfort from paragraph 6 of the notes of guidance to the form of acknowledgment of service (Form No. 14 of Appendix A to the Rule of the High Court) which says:

" Where the defendant is a LIMITED COMPANY, the form must be completed by a Solicitor or by someone authorised to act on behalf of the Company, but the Company can take no further step in proceedings without a Solicitor acting on its behalf."

17. In other words, the notes suggest that if a corporate defendant wishes to acknowledge service either to contest the proceedings or to consent to judgment, it should do so in the same way as envisaged under Order 12 Rule 1(2).

18. The point of course does not assist the Plaintiff in the present case. Here, the acknowledgment of service was not signed by a solicitor. The 1st Defendant denied on affidavit that the 2nd Defendant, Mr Philip Liu, had the necessary authority to act on behalf of the company. No other director of the company had signed on the acknowledgment of service.

19. It is of course trite law that a company could only act through its board of directors and normally, a single director would only be authorised to act on behalf of the company if he was expressly authorised by a proper resolution of the board. There is no evidence before me suggesting that had taken place.

20. In this respect, it may be useful to look at Order 12 Rule 1(2A)(b), where it refers to the necessity of having a resolution of the board of the body corporate authorising a single director to appear on its behalf. The onus of course is on the Plaintiff to show that it could rely on the acknowledgment of service and therefore was in a position to sign judgment against the 1st Defendant. There was no evidence from the Plaintiff as to the authority of the single director, the 2nd Defendant.

21. Unfortunately, there is no affidavit proving due service of the writ either. Now, I do not intend to criticize those acting on behalf of the Plaintiff for not preparing such an affidavit because I understand the practice is that if a defendant acknowledges service and indicates that he does not wish to contest proceedings, such an affidavit normally is not prepared. But if a plaintiff wishes to enter judgment against a defendant under Order 13 Rule 7 where there may be a doubt as to the validity of the acknowledgment of service, then I think it must be a matter of good practice for practitioners to prepare an affidavit proving due service of the writ and also to wait at least 14 days before signing judgment against the defendant.

22. This is because under Order 13 Rule 6A, a plaintiff can only sign judgment against a defendant immediately without waiting for the expiration of the 14-day period if there is a valid acknowledgment of service and the defendant has indicated that he did not intend to contest the proceedings. And since everything hinges on the validity of the acknowledgment of service, it is of paramount importance for practitioners to be sure that the corporate defendant would not at some later date dispute the validity of the acknowledgment of service.

23. Since there is no affidavit proving due service of the writ, I am not in a position to decide whether there was due service of the writ or exactly when, if at all, the Plaintiff was in a position to sign judgment in default. For example, I do not know by what mode of service the writ was served on the corporate defendant: whether the service was effected under Order 10 Rule 1(2) as amended by Order 65 Rule 2(2) or Section 536 of the Company Ordinance (see the cases referred to in Hong Kong Civil Procedure 2002 Vol. 1 para. 10/1/18).

24. Be that as it may, assuming that service was effected by the time an acknowledgment of service was lodged i.e. on 8 October 2001, the judgment signed against the 1st Defendant was obviously premature. In any event, given the view that I have taken on the validity of the acknowledgment of service, it will not be necessary for me to decide whether or not service had been properly effected since even assuming service had been properly effected, a judgment must still be open to challenge as there is no affidavit proving due service.

25. The judgment therefore was prematurely entered and must be irregular. What then should be the position? In the case of Anlaby & ors v. Praetorius [1888] 20 QB 764, Fry LJ said this at page 768:

" In such a case, the right of the defendant to have the judgment set aside is plain and clear. The court acts upon an obligation; the order to set aside the judgment is made ex debito justitiae, and there are good grounds why that should be so, because the entry of judgment is a serious matter, leading to, the issue of execution, and possibly to an action of trespass.

...............

There is a strong distinction between setting aside a judgment for irregularity, in which case the court has no discretion to refuse to set it aside, and setting it aside, where the judgment, though regular, has been obtained through some slip or error on the part of the defendant, in which case the court has a discretion to impose terms as condition of granting the defendant relief.

...............

I entirely agree that Order LXX, rule 1 does not apply here. It was meant to apply where a party had made some blunder in his proceedings, as by delivering a pleading too late; but the present case seems to me altogether outside the operation of rule 1 because the judgment was entered prematurely, without any right whatsoever. To obtain that judgment was a wrongful act, not an act done within any of the rules. The defendant is therefore entitled ex debito justitiae to have it set aside."

It is to be noted that Order LXX, Rule 1 is the predecessor of Order 2 Rule 1 of our Rules.

26. In White v. Weston [1968] 2 QB 647, Russell LJ said at page 658:

" The defect is in my judgment so fundamental as to entitle the defendant as of right ex debito justitiae to have the judgment avoided and set aside. If as technical matter it is a matter of discretion to set aside the judgment, in accordance with settled practice, the court can only exercise its discretion in one way, namely by granting the order sought."

27. These two cases were considered by the English Court of Appeal in a case called Charlesworth & Ors. v. Focusmulti Limited decided on 17 February 1993.

28. Russell LJ, after citing the passages set out above, said this:

" There is no amendment of the judgment in the instant case which either the plaintiffs can seek or the court can sanction that could have the effect of curing the defect. In my view the flaw in the judgment obtained in this case is and was fatal and irretrievable. It cannot be cured by any process .............

I take the view that the defendants remain entitled to set aside ex debito justitiae on the ground that the judgment obtained was a nullity or at least had a defect of a fundamental nature incapable of being cured."

29. The other member of the Court, Hollis J agreed with what was said and added:

" There appear to me therefore to be certain breaches of the rules which are so fundamental that orders obtained in consequence do indeed fall outside the ambit of Order 2 and should be set aside without considering the merits ex debito justitiae. I consider that the error made in this case by the plaintiffs' solicitors was so fundamental that the irregular judgment so obtained must be set aside."

30. Mr Wong appearing on behalf of Plaintiff sought to rely on the case of Desirable International Fashions Ltd (in liq) v. Chiang Shi Chau [1999] 3 HKC 870. In that case, Waung J referred to the recent trend of judicial authority that a defendant has only a limited right to set aside a default judgment where it was shown to be irregular. Based on that view, Mr Wong asked me to take into account two matters. First of all, he said that there was inexcusable delay in that judgment was entered in October 2001 and yet the 1st Defendant did not seek to apply to set aside the judgment until 17 March 2002. He very rightly, however, accepted that no enforcement proceedings had taken place as a result of the default judgment. There is, however, evidence from the 1st Defendant that the board was not aware of what the 2nd Defendant had done until late November 2001. Because of the internal dispute, Mr Liu eventually resigned and an EGM had to be called in March so as to put the 1st Defendant's house in order. In my view, if the 1st Defendant's evidence is to be accepted, and I do not see any reason why it should not be accepted, the delay of some 4 months or perhaps less than 4 months is by no means excessive.

31. The second matter that the Plaintiff wishes to rely on is the allegation that the 1st Defendant was in serious financial difficulties. In that regard, Mr Wong prayed in aid the fact that the Plaintiff has a very strong claim against the 1st Defendant.

32. If I am not supposed to go into the merits of the claim, I cannot really see how it can be said that I must take into account the alleged strength of the Plaintiff's claim and I do not really see in such circumstances, how the financial position of the 1st Defendant can be relevant. If the Plaintiff has a good claim, the 1st Defendant's financial position may be a relevant factor. But if the Plaintiff has not a good claim, it is totally irrelevant. I note with some comfort that those two same arguments did not convince Waung J in the case of Desirable International Fashions Ltd. not to set aside the default judgment there.

33. In my view, the default judgment in the case of Sanko Air-Conditioning Engineering Ltd. was entered prematurely and in breach of Order 13 Rule 7(1).

34. In these circumstances, I see no need to go into the merits of the claim and I think the judgment must be set aside and the appeal allowed.