LET-WIN PLASTIC PRODUCTS FACTORY LTD v. LAM KEI KIT

HCA 1769 / 2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1769 OF 2008

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D E C I S I O N

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A.  Introduction

1.  This is the Defendant’s appeal against the Order made by Master R Yu on 31 December 2008, granting summary judgment against him in the sum of HK$2,520,280.49.

2.  The background relevant to this application can be conveniently summarized as follows.

3.  There is no dispute that the Defendant was employed by the Plaintiff from 1995 to December 2006. 

4.  It is the Plaintiff’s case that in 1998, it advanced a loan in the sum of HK$4,698,784.14 to the Defendant to assist him to purchase a residential property (“the Shatin Property”) in Shatin.  The Defendant and his family had since lived in the Shatin Property.   Subsequent to 1998, there had been further advances of loans made to the Defendant by the Plaintiff, and at the same time there had been partial repayments made by the Defendant.

5.  The sum of HK$2,520,280.49 (“the Debt”) now claimed by the Plaintiff against the Defendant is said to represent the remaining outstanding balance of the debt owed by the Defendant to the Plaintiff.

6.  After the termination of the Defendant’s employment, the Plaintiff demanded for repayment of the Debt by way of a letter dated 7 July 2008.  The Defendant has failed to repay it, and the Plaintiff therefore brought the present action against him.

7.  On the other hand, it is common ground that the Defendant has provided the Shatin Property as security under a second mortgage (“the 2^nd Mortgage”) to secure banking facilities granted by Wing Lung Bank Ltd (“the Bank”) to the Plaintiff.

8.  On 10 January 2009, the Bank wrote to the Defendant as the 2^nd mortgagor saying that the Plaintiff owed the Bank some HK$5.56 million under the general banking facilities and threatened to take out legal proceedings to enforce the 2^nd Mortgage if the outstanding loan was not paid.

B.  Legal principles

9.  The principles applicable for an O.14 application are trite and not disputed.  It is for the Defendant to show that he has a triable defence which is worthy of belief.  The Defendant must also condescend upon particulars on  his defences.  See:  Hong Kong Civil Procedure 2009, paras 14/4/2 – 14/4/4.

C.  The defences raised below and the defences raised in this appeal

10.  At the hearing before the learned Master, the Defendant through his Defence and the 2 affirmations filed raised effectively the following  defences:

(1)  There is no outstanding debt, as the sum of HK$4,698,784.14 was provided to him as a financial incentive to lure him to work for the Plaintiff.  There was thus an agreement or promise made by the Plaintiff that this sum was not repayable.

(2)  The Defendant disputes the quantum of the Debt in any event, as he did not know how the Plaintiff arrived at the calculations. In particular, the Defendant does not accept the accuracy of the two audit confirmations he had signed confirming the then outstanding debt said to be owed by him to the Plaintiff.

(3)  Time-bar.

11.  As I mentioned above, the learned Master rejected all these defences and granted summary judgment.

12.  For this appeal, the Defendant abandons all these earlier defences.  He has instead filed a 3^rd Affirmation relying on some entirely new defences.  As further elaborated by his counsel at the hearing on 12 February 2009, these defences could be summarized as follows:

(1)  The defence of implied trust:  The Plaintiff’s advancement of HK$4,698,784.14 was to purchase the Shatin Property together with the Defendant as a joint-venture.  As a result, by reason of the principle of implied trust (resulting or constructive) the Plaintiff has acquired a beneficial interest in the Shatin Property, and its right to recover this lies in a claim for a declaration of proprietary interest in the Shatin Property (which the Defendant is willing to recognise), but not for recovery of a debt. 

(2)  The defence of equitable set-off:    Given the 2^nd Mortgage, and given that the Plaintiff owed to the Bank some HK$5.56 million under the general banking facilities, the Defendant is entitled to a defence of set-off since he is liable to discharge the Plaintiff’s indebtedness to the Bank under the 2^nd Mortgage. As such, he as the surety is entitled to claim an indemnity against the Plaintiff for this amount which exceeds the Debt. 

D.  Development at the hearing of the appeal on 12 February 2009 and thereafter

13.  At the hearing before me on 12 February 2009, the Defendant through his counsel provided to the Court a specially endorsed Writ issued by the Bank against, inter alia, the Defendant and his wife for the enforcement of, inter alia, the 2^nd Mortgage under High Court Action HCA 339/2009 in relation to all the outstanding loans owed by the Plaintiff to the Bank.  The Bank seeks, inter alia, vacant possession of the Shatin Property as part of its claim to enforce the 2^nd Mortgage.   The Bank’s claim was issued on 11 February 2009, one day before the hearing of this appeal.

14.  Upon the Court’s inquiry, the Defendant’s counsel confirmed that the Defendant and his wife would not defend the Bank’s claim under the 2^nd Mortgage and would be consenting to delivering vacant possession of the Shatin Property to the Bank within the next 3 weeks.

15.  It is not challenged by the Plaintiff that the market value of the Shatin Property (which is about HK$15.8million), even after taking into account of the debt owed under a first mortgage charged to it, would be more than the Debt.  As a result, upon the enforcement of the 2^nd Mortgage using the value of the remaining equity under Shatin Property, the Defendant would have discharged the Plaintiff’s indebtedness owed to the Bank, which is equal to or more than the sum of the Debt. 

16.  As such, the Plaintiff’s counsel Mr Eugene Yim fairly accepted that if that was in fact done, the Defendant would at least have a triable defence of equitable set-off against the Plaintiff’s claim for the Debt.

17.  On this basis, and at the application of the Plaintiff, I adjourned the hearing part-heard to allow the Plaintiff to file further evidence within 3 weeks to update the Court as to the development of the Bank’s proceedings to enforce the 2^nd Mortgage.

18.  The Defendant filed his 4^th Affirmation on 6 March 2009 confirming that:

(1)  He and his wife would not defend the Bank’s claim against them to enforce the 2^nd Mortgage.  They have elected not to contest the mortgagee action in their Acknowledgement of Service filed on 24 February 2009

(2)  He and his family have moved out of the Shatin Property and surrendered the keys to it to the Bank through his solicitors on 4 March 2009.

19.  This evidence is not challenged by the Plaintiff.

20.  Further, by his solicitors’ letter dated 24 March 2009, the Defendant provided to this Court a sealed Consent Order dated 17 March 2009 whereby it was ordered, inter alia, that the Defendant do within 14 days from the date of the order deliver to the Bank vacant possession of the Shatin Property.   

21.  There is no suggestion that this has not been complied with.

E.  Discussion

22.  Given these latest developments in relation to the Bank’s enforcement of the 2^nd Mortgage against the Defendant set out in section D above, Mr Yim now fairly (and rightly so I believe) accepts in his supplemental skeleton that the Defendant has a defence of equitable set-off against the Plaintiff’s claim in the form of a cross-claim for indemnity.   In the premises, subject to the argument on costs, Mr Yim accepts that the appeal should be allowed and the summary judgment be set aside.

23.  I agree and so order that the Order of Master Yu be set aside and the Defendant be given unconditional leave to defend.

24.  However, I further agree with Mr Yim’s contention that if not because of the new evidence filed under the Defendant’s 4^th Affirmation on 6 March 2009, I would not have allowed the appeal.  My reasons are as follows:

(1)  I do not find the implied trust defence raised by the Defendant at this appeal triable.  I find this defence practically moonshine and not worthy of belief:

(a)  Suffice to say that, other than a bare allegation made by the Defendant in his 3^rd Affirmation for the first time for this appeal, there is no evidence whatsoever filed in this application which would even remotely suggest that the Plaintiff’s advancement of HK$4,698,784.14 was for a joint venture project to purchase a beneficial in the Shatin Property.

(b) This new allegation of a joint-venture project is contradictory to the Defendant’s own evidence filed before Master Yu, where it was said that this sum was advanced to him as an incentive to ask him to work for the Plaintiff, and that it was a term of an agreement that it was not repayable.  

(c)  In all the previous correspondence exchanged between the parties in relation to the Plaintiff’s demand for the repayment of the Debt, the Defendant had never mentioned about the alleged joint venture.  In my judgment, if this allegation bore any seed of truth, any reasonable person in the position of the Defendant would have pointed this out immediately to the Plaintiff’s solicitors when he was first demanded to make repayment.

(2)  Insofar as the defence of set-off is concerned, before the Defendant’s surrender of the Shatin Property to the Bank under the 2^nd Mortgage under HCA 339/2009, I accept Mr Yim’s submissions that the defence is unarguable as generally a surety’s right to indemnification arises only on actual payment by him to discharge the debts owed by the principal debtor: Andrews & Millet, Law of Guarantees  (5^th ed), para 10-012.

25.  For the above reasons, I would have dismissed the appeal if not because of the new evidence filed on 6 March 2009 and developments in the Bank’s action against the Defendant under the 2^nd Mortgage. 

26.   In these circumstances, I agree that in now allowing this appeal and setting aside the summary judgment, the Plaintiff should still be entitled to (a) all the costs below, and (b) the costs of this appeal up to 6 March 2009 (inclusive of the costs of the hearing on 12 February 2009). 

27.  I have already ordered on the last occasion that costs of and occasioned by the adjournment of the hearing on 12 February 2009 be to the Plaintiff, which should include the Plaintiff’s costs in preparing the supplemental written submissions.   In relation to this, I would therefore not make a separate order again in this decision.

F.  Conclusion

28.  For the reasons set out above, I order that:

(1)  The Defendant’s appeal be allowed and the Order dated 31 December 2008 granted by Master Yu be set aside.

(2)  There be unconditional leave to the Defendant to defend.

(3)  Costs of the O14 application below, including the costs of the hearing before Master Yu on 31 December 2008, be to the Plaintiff to be taxed if not agreed with certificate for counsel.

(4)  Costs of this appeal up to 6 March 2009, including the costs of the hearing on 12 February 2009, be to the Plaintiff to be taxed if not agreed.