TADASHI FURUSAWA v. LEUNG KWOK CHAI

[A judgment in default of defence will be set aside only in favour of a defendant who can show that he has a defence on the merits which carries some degree of conviction and has a real prospect of success : The "Saudi Eagle" [1986]2 L1.L.R. 221 followed and applied]

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. This is an application by a defendant, made under O.13, r.9 of the Rules of the Supreme Court, to set aside a judgment obtained against him on 28th October 1989 in default of defence. The Master dismissed the application on 25th January 1990 and the defendant now appeals.

2. The principles upon which the Court exercises its discretion to set aside a judgment obtained in default of defence have been the subject of some debate before me, and I think it desirable, before I narrate the facts, to express a view as to what those principles are.

3. The most recent of the authorities cited to me is a decision of the (English) Court of Appeal, Alpine Bulk Transport Co. Inc. v. Saudi Eagle Shipping Co. Inc. [1986] 2 L1.K.R. 221. That was an interlocutory appeal heard by a two-judge court : O'Connor, L.J. and Sir Roger Ormrod. The judgment of the Court was delivered by Sir Roger Ormrod. In its judgment, the Court of Appeal took its guide from the leading case of Evans v. Bartlam [1937] A.C. 473. The Court of Appeal remarked that the primary consideration is whether the defendant "has merits to which the Court should pay heed" (citing from Lord Wright's speech in Evans v. Bartlam at page 489). The Court of Appeal went on to say this :-

"In applying these 'general indications' it is important in our judgment to be clear what the 'primary consideration' really means. In the course of his argument Mr. Clarke, Q.C., used the phrase 'an arguable case and it, or an equivalent, occurs in some of the reported cases (e.g. Burns v. Kendel, [1977] 1 Lloyd's Rep. 554 and Vann v. Awford). This phrase is commonly used in relation to R.S.C., O.14, to indicate the standard to be met by a defendant who is seeking leave to defend. If it is used in the same sense in relation to setting aside a default judgment, it does not accord, in our judgment, with the standard indicated by each of their Lordships in Evans v. Bartlam. All of them clearly contemplated that a defendant who is asking the Court to exercise its discretion in his favour should show that he has a defence which has a real prospect of success. (In Evans v. Bartlam there was an obvious defence under the Gaming Act and in Vann v. Awford a reasonable prospect of reducing the quantum of the claim.) Indeed it would be surprising if the standard required for obtaining leave to defend (which has only to displace the plaintiff's assertion that there is no defence) were the same as that required to displace a regular judgment of the Court and with it the rights acquired by the plaintiff. In our opinion, therefore, to arrive at a reasoned assessment of the justice of the case the Court must form a provisional view of the probable outcome if the judgment were to be set aside and the defence developed. The 'arguable' defence must carry some degree of conviction."

4. That was the view of the Court of Appeal in "The Saudi Eagle". I think it unnecessary and, indeed, undesirable for this Court to examine the question whether the test which the Court applies in deciding whether to give leave to defend under O.14 is a different test from that which it applies in deciding whether to set aside a default judgment obtained under O.13, r.9, but I should, I think, accept the test suggested by the Court of Appeal in the latter connection, even though, since this is not the High Court in England or Wales, but the High Court of Hong Kong, I am not technically bound by the decision. I hold that the Court's discretion under 0.13, r.9 should be exercised only in favour of a defendant who can show that he has a defence which carries some degree of conviction and which has a real prospect of success.

5. In the present case the dispute between the plaintiff and the defendant is one of fact. Lord Wright said in Evans v. Bartlam at page 489:-

"The appellant here has an explanation, the truth of which is indeed denied by the respondent, but at this stage I see no reason why he should be disbelieved on what appears to me to be a mere conflict on affidavits."

6. I accept that it is not the function of a judge considering an application under O.13, r.9 to attempt to resolve questions of fact on a mere conflict of affidavits; that is the function of the trial judge (if the matter gets that far). Nevertheless, if the material before the judge is such as to leave him in no doubt that the defence has no real prospect of success, or that it carries no degree of conviction, then, it seems to me, it is his duty to refuse the application. The discretion conferred on the Court to set aside the plaintiff's judgment should be exercised only where it is necessary or desirable in order to avoid injustice to the defendant. If there are no merits in his case there is no point in allowing him to re-open the matter in the face of a regular judgment obtained by a plaintiff in accordance with the rules. It is on this basis that I turn to the background which has given rise to the dispute between the plaintiff and the defendant in this action.

7. The facts are not uncomplicated but in brief the story is as follows.

8. The plaintiff is a Japanese businessman. The defendant is a Hong Kong dentist. The parties were interested in purchasing a ship to be sold to a Taiwanese company called Yang Hong Steamship Company Limited ("Yang Hong"). (The plaintiff says this company was the creature of the defendant; the defendant says it was the creature of the plaintiff.) Things went wrong; Yang Hong was unable to pay for the ship. The plaintiff through a company of his own took the ship over and endeavoured thereafter to sort the matter out. The plaintiff says that when the ship earned some money, that money was paid not to the vendor of the ship, a Japanese company called Nagai Marine Transportation Limited ("Nagai") but lent to the defendant. The defendant failed to repay the money so lent to him; the plaintiff took over the debt; hence this action.

9. The defendant altogether denies the alleged loans. He admits signing a number of documents acknowledging the loans but he says these do not reflect the true position in any way but really reflect the plaitiff's need to persuade Nagai, as the vendor of the ship, to refrain from making demands for immediate payment of the sums owed by the plaintiff or his creature Yan Hong to Nagai in relation to the sale. The documents are part of a massive fraud by the plaintiff on the defendant.

10. There is no way this dispute can be resolved on what Lord Wright calls "a mere conflict of affidavits"; but, as I have already mentioned there is other material besides the affidavits before the Court which falls to be considered, namely, the documents which have in fact been signed by the defendant.

11. Before examining these, I should say something about the course which the proceedings took.

12. The writ in the action was issued on 20th June 1989. On 6th July 1989 the defendant acknolwedged service of the writ. On 17th July 1989 some of the documents mentioned in the statment of claim, which was endorsed on the writ, were supplied to the defendant; but these documents were in Japanese and required translation.

13. On 14th August 1989, the defendant asked for an extension of time for defence. The plaintiff's solicitors agreed to an extension of time to 14th September 1989. The defendant's solicitors asked for another month but they were granted only an extension to 28th September 1989. No defence was forthcoming and on 30th September 1989, the plaintiff applied for judgment in default of defence.

14. On 2nd October 1989, the defendant's solicitors applied to the Court for a further extension of time for delivery of the defence. But that was frustrated by the fact that, on 5th October 1989, the plaintiff obtained judgment; and on 6th October 1989, the defendant's time summons was dismissed.

15. On 28th October 1989, the defendant took out his summons to set aside the default judgment. Eventually the matter came on for hearing before me on 11th May 1990 with a plethora of affirmations and affidavits in which each side accuses the other of putting forward an untrue story.

16. I would be disinclined on this material to refuse the defendant an opportunity, if I were satisfied that he had a defence which carried a degree of conviction, of putting forward his defence. The overriding principle on which the Court proceeds is the necessity to do justice between one litigant and another. There is not anything in the procedural history which I have mentioned which would satisfy me that justice had been done to this defendant if I refused to set aside the judgment obtained against him in default of defence. That, however, is subject to the condition I have mentioned, that is to say, that the defendant can show that he has a defence which carries some degree of conviction and which has a real prospect of success. I would have felt compelled to give the defendant the opportunity of presenting his case on the merits to the Court, had I concluded that he had disclosed such merits. In fact, I find myself quite unable, with great respect to the careful argument put before me by Mr Mills-Owens Q.C. on behalf of the defendant, to come to that conclusion. The reason is that the documents signed by the defendant are, in my opinion, much too much to be got over. The documents signed by the defendant, to which I shall refer in detail in a moment, are, as will be seen, documents which repeatedly admit the indebtedness. They cannot, in my judgment, by any stretch of the imagination be held referable to a gigantic fraud on the part of the plaintiff, bringing these documents into existence simply for the purpose of gaining himself extra time from Nagai for payment of the ship which I have mentioned, which is the defendant's case.

17. The first document is dated 20th October 1980 and is headed "Counter Guarantee". It is addressed to Nagai, the original lender. It is signed by the defendant and it says this : -

"Concerning the 15 million Japanese yen which I borrowed in November 1989, I will start paying back in January, 1981, as stipulated in the original indenture."

It is curious that neither side can produce either "the original indenture" or any copy of it.

18. The next document is an I.O.U. dated 30th October 1980 headed "Certificate of indebtedness". It reads :-

"I owe you 4.2 million Japanese yen.

 

The term of repayment is October 30, 1984.

 

Monthly rate of interest is 1.5%."

19. Next, there is a letter of 2nd February 1982, addressed to Nagai and signed by the defendant, which reads as follows:-

"I am sorry for causing you trouble for such a long time. I have read the letter from Mr. Nagai to Mr. Furusawa. I must apologise to you that I am not able to repay any of the principal and interest even though I have been working hard and concentrating on my business (dental practice) as I have been pressed for the repayment of old debts."

And then the defendant sets out the detail. It is to be observed that this letter was written in manuscript on the paper of a hotel in Hong Kong, the Hotel Singapore, where the plaintiff was in the habit of staying when he was in Hong Kong. The defendant says that I should infer that this document brought into existence in this way is not what it purports to be, but is a document brought into existence simply for the purpose of being shown by the plaintiff to Nagai. I find this, I am sorry to say, utterly beyond belief. (I say that, conscious that it is not my function at this stage to attempt to resolve a genuine dispute of fact upon affidavits only.)

20. Next, there is a letter of 30th August 1984. This is written by Nagai to the plaintiff, and it says this :-

And a number of matters are set out, including the making of a receivables and debt confirmation note between the plaintiff and Mr Leung to be dated 30th October 1984.

21. It seems to me that this letter of 30th August 1984 is utterly inconsistent with the suggestion that the true debtor to Nagai was, in fact, the plaintiff himself. Certainly that was not what Nagai appears to have thought and it is necessary, for the defendant's case to have any credibility, that he must accuse not only the plaintiff of a massive fraud, but Nagai too. There is not a shred of evidence which justifies any such suggestion.

22. On 30th October 1984, the defendant signed the receivables and debt confirmation note; but it was preceded on 19th October 1984 by a letter addressed to Nagai by the defendant. This reads as follows :-

"Sorry for causing you the trouble concerning the repayment of my loan. As I confirmed with Mr. Furusawa today, as I do not have so much confidence in making the monthly repayment, I should like to request for an amendment for me to assume the responsibility of making the repayment of HK$12,000 as from April 1985 and HK$24,000 as from January of 1986 onwards without fail. I am grateful to you for making it possible to enhance the prospect of reestablishing myself. Please give me some more time."

23. I find it, again, utterly beyond belief that a dentist in some way of practice in Hong Kong should be so naive as to sign a document like this for the purpose of enabling the plaintiff to get more time in dealing with Nagai. Even if he was willing to make the various statements as to his financial position contained in the letter, why should he have gone on to add "I am grateful to you for making it possible to enhance the prospect of reestablishing myself"? His explanation is simply incredible.

24. The note of 30th October 1980 confirmed the amount of the loans made; on 30th November 1979, 15 million yen, and on 30th October 1980 4.2 million yen. (It was suggested to me that this note was suspect because the loans were in fact made in Taiwanese dollars; but there seems to me to be no real objection to taking these figures across the exchanges and casting them in terms of Japanese yen.)  The note recited that the defendant had not paid back any capital or interest; it treated the plaintiff, not Nagai, as the creditor, but by then it seems the loans had been the subject of a novation under which the plaintiff stood in the shoes of Nagai. Detailed provisions were made for the repayments mentioned in the letter of 19th October 1984 to which I have referred. The note contains manuscript alterations to give effect to precisely those arrangements. I see nothing curious about that.

25. On 1st June 1985, the parties entered into a further confirmation note which stated what, as at 31st May 1985, was the unpaid interest on the 15 million yen and the 4.2 million yen. It was confirmed as unpaid interest of JPY10,175,000.

26. In an undated note, made probably in July 1985, the defendant wrote to the plaintiff saying this : -

"I am sorry for the delay in making the repayment of principal and interest as I promised. I have tried my best up to now, but I won't be able to repay. I think I should be able to make repayment in September. Until then, I would like to ask your cooperation in this respect.

 

Now I would like to set out my financial liabilities."

And the defendant proceeded to set out in some detail the various people to whom he owed money, including various sums to his friends and relatives. How this could have been brought into existence for the purpose of persuading Nagai to give extra time to the plaintiff for the purchase of the ship completely passes my comprehension. It seems to me to be indicative only of the fact which it contains, namely, that the defendant was, by now, considerably indebted to the plaintiff.

27. On 27th October 1985, the defendant wrote to the plaintiff and said this : -

"I would like to report on the present loan condition as at 27th October 1985 ..."

Again the defendant sets out the sums he owes to his cousin, to a bank, to a finance company for tax and to friends, and he adds:-

He sets out the detail; and he asks for the plaintiff's support.

28. It is curious that there seems to have been little excitment thereafter for some considerable time. Eventually the ship was paid for and no doubt the beneficial interest passed to Yang Hong. whichever one of the parties it was whose creature Yang Hong had become.

29. The plaintiff does not seem initially to have pressed for repayment of the debt; but not long before these proceedings were commenced, the plaintiff did instruct solicitors, who prepared documents for signature by the defendant on the footing that the defendant was indeed indebted to the plaintiff. In the end, the defendant refused to sign the documents and so precipitated this litigation. I have evidence from the solicitor, whose integrity is not challenged by the defendant, which is clearly explicable only on the footing that the defendant proceeded with the solicitor on the footing that the defendant was indeed indebted to the plaintiff. There is no conceivable explanation for this, other than that the defendant's story is quite beyond belief, and is a desperate attempt to put off the day when the judgment obtained by the plaintiff against him falls to be enforced.

30. I do not pretend that I have not found some aspects of the plaintiff's case strange; some aspects of the plaintiff's case are almost as strange as the defendant's case. But, nevertheless, the plantiff obtained a regular judgment, and is entitled to the fruits of it, It is for the defendant to satisfy me that he has a defence which carries some degree of conviction and has a real prospect of success. I am quite unpersuaded that the defendant has done this. For these reasons, I feel bound to dismiss this appeal and accordingly the judgment must stand. I will hear counsel on any consequential matters and on any question there may be as to costs