GM COMMERCIAL CONSULTANTS CORP. v. EURO ASIA ZHONG JI (HK) LTD AND ANOTHER

HCA 651/2019

[2021] HKCFI 1378

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 651 OF 2019

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DECISION

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Introduction

1.  Euro-Asia Zhong Ji (HK) Ltd (“D1”) seeks determination of the following applications:

(1) D1’s notice of appeal dated 4 November 2020 (“the appeal”) from the Decision of Master Rebecca Lee dated 21 October 2020 dismissing D1’s default judgment summons (“the default judgment summons”) and D1’s extension of time summons (“the 2^nd time summons”) dated 18 June 2020 and 19 October 2020 respectively;

(2) D1’s summons dated 13 November 2020 (“the relief summons”) seeking relief from sanctions consequent upon non-compliance with an unless order as well as leave to file a defence and a notice of intention; and

(3) D1’s summons dated 20 January 2021 (“the new evidence summons”) seeking leave under Ladd v Marshall principles to adduce affirmations filed in support of that summons.

2.  These applications arise from proceedings commenced on 15 April 2019 by GM Commercial Consultants Corp (“P”) when it issued a writ against D1 and Jilin Trading Co Ltd (“D2”) (collectively, “the defendants”) claiming the sum of HK$7,523,955 (“the said sum”) being money payable by the defendants to P “as money had and received”. D2 is not a party to these applications.

3.  In outline, the proceedings stem from P’s claim that it had a 21.5% share or interest in Jiyuan Shopping Town (“JST”) and “on a date unknown” to P, the defendants “sold and received … the said sum being the proceeds of sale of P’s 21.5% interest in JST”.  

4.  P obtained a default judgment against D1 on 10 June 2019 for $7,523,955 and based on that judgment, it obtained a charging order absolute on 7 August 2019 (“the charging order absolute”). D1 maintains that the writ was never served on it.

5.  The procedural history thereafter may be summarised as follows:

(a) D1’s then solicitors Messrs B Mak & Co (“B Mak”) issued the default judgment summons to set aside the default judgment and for the discharge of the charging order absolute, supported by an affirmation of Li Wenxia (“Madam Li”) dated 11 June 2020 (“Li 1^st”). However, that affirmation was ineffectively executed as it did not contain a valid declaration from the sworn interpreter proving that its contents were truly, faithfully and/or audibly interpreted to the deponent before it was affirmed;

(b) by an order dated 14 August 2020 (“the August order”), Master Winnie Tsui granted

(i) an unless order requiring D1 to rectify the execution of Li 1^st by 25 September 2020, failing which D1 would be debarred from relying on that affirmation at the substantive hearing; and

(ii) leave to D1 to file and serve an affirmation in reply to the 2^nd affirmation of George Yuen Chee Mok (“Mok 2^nd”);

(c) D1 failed to comply with the August order (which, according to D1, was due to the erroneous advice/mistakes of its solicitors (“B Mak”) and its former counsel Zhan Binhua (“Mr Zhan”));

(d) on 9 October 2020, Master Tsui dismissed the time summons dated 25 September 2020 (“1^st time summons”);

(e) at the substantive hearing on 21 October 2020, in the absence of admissible evidence from D1 on its substantive case, Master Rebecca Lee dismissed the default judgment summons and a summons dated 19 October 2020 for extension of time (“the 2^nd time summons”);

(f) on 2 November 2020 D1 changed its solicitors to Messrs Anthony Siu & Co (“ASC”).

Relevant background

6.  JST was a partnership entity holding a real estate development project known as the Jiyuan Shopping Town Development Project (“the JST project”).

7.  On 16 January 2001, Jilin Province Zhong Ji Limited Company (a company established in the PRC which until 4 August 2011 was known as Zhong Ji Holdings Limited) (hereinafter referred to as “Zhongji Holdings”) and Bonaseal Holdings Limited (“BHL”) were 2 of 3 partners in the JST project.

8.  As at 16 January 2001, BHL’s partnership share was 30%.

9.  By a share transfer agreement dated 16 January 2001 BHL sought to transfer a 21.5% interest in JST to P (“the 2001 STA”) but Zhongji Holdings did not and would not consent to BHL transferring away any of its interest in JST before BHL cleared its share of JST’s debts and expenditure.

10.  It is Zhongji Holdings’ case that the transfer could not take effect under PRC law because the consent of all the other stakeholders in JST had not been obtained. P’s expert expressed a different view.

11.  On 31 January 2008, BHL sold/transferred its 30% share or interest in JST to Zhongji Holdings (“the 2008 transaction”)[1].

12.  P’s 21.5% share formed part of the 30% interest sold under the 2008 transaction.

The parties

13.  P is the trade name used by Dawnwell Limited, a company incorporated in Hong Kong. Mok Yuen Chee George (“Mok”) who holds 99.99% of its shares is one of its 2 directors and the company secretary. He is also the senior partner of Messrs George YC Mok & Co (“GYCM”), P’s solicitors.

14.  D1 is a Hong Kong company incorporated on 11 August 2011. Its current directors are Zhou Wei and Madam Li. Its shares are held as to 8,178,070 by Jilin Province Zhingji Building Co Ltd and 80,000 shares by Madam Li.

15.  Madam Li is permanently resident in the Mainland and a non-permanent Hong Kong resident.

16.  The “Zhongji Group” is a group of associated companies principally based in the PRC engaged in inter alia real estate development. Its members have included

(i) Zhongji Holdings;

(ii) Zhong Ji Ltd (“HK Zhongji”) a company incorporated in Hong Kong on 14 February 1989; 

(iii) Jilin Xinda International Real Estate Developing Co Ltd and Ji Yuan Real Estate Development Company both being companies established in the PRC and wholly owned subsidiaries of Zhongji Holdings.

17.  Hong Kong Bonaseal Company Limited (“Bonaseal HK”) and BHL were Hong Kong companies. They were dissolved on 31 October 2007 and December 2012 respectively.  

D1’s case

18.  It is D1’s case that its failure to comply with the August order was wholly attributable to the failure of its former legal advisers (B Mak and Mr Zhan) to render proper and timely advice to D1.  

19.  Li 1^st was defective for lack of a valid declaration from the sworn interpreter but D1’s legal advisers only belatedly admitted (6 days before the substantive hearing on 21 October 2020) that they did not know how to resolve the problem and requested D1 to engage a PRC lawyer to assist. B Mak and Mr Zhan also never advised D1 to apply for relief from sanctions.

20.  As a result, D1 was simply not in any position to file affidavit evidence on its substantive case in admissible form by the time of the October hearing.

21.  For those reasons, it was submitted that this Court should grant (a) an extension of time for D1 to make its application for relief from sanctions with respect to its obligation to rectify the execution of Li 1^st under the unless order; (b) relief from sanctions and leave to rely on Li 1^st; and (c) an extension of time for D1 to rectify the execution of Li 1^st and to file an affirmation in reply to the 2^nd affirmation of Mok.

D1’s appeal

22.  Mr William Wong SC, leading counsel for D1, submitted that the default judgment must be set aside for the following reasons:

(1) no judgment, default or otherwise, should be entered in favour of P on the ground that P’s claim is so defectively pleaded that it is liable to be struck out; and/or

(2) the default judgment is liable to be set aside ex debito justitiae.

23.  At the hearing, D1 made those submissions based solely on the plaintiff’s case as disclosed in P’s pleadings and the evidence P has filed.

I. Whether P’s cause of action is defective

(A) The statement of claim

24.  In pertinent part, the statement of claim reads as follows:

“1. The Plaintiff’s claim is for HK $7,523,955 … (“the said sum”), being money payable by the Defendants to the Plaintiff as money had and received by the Defendants to the use of the plaintiff.

PARTICULARS

On a date unknown to the Plaintiff, the Defendants sold and received from their Head-office or Principal, Zhong Ji (Holdings) Limited (now known as Zhong Ji Limited) [State-owned enterprise belonging to a PRC Government] the said sum being the proceeds of sale of the Plaintiff’s 21.5% share in [JST] which has a building floor area of about 89,754 m² and the current estimated value of over RMB 160,000,000.00, of which the Plaintiff was/is the true beneficial owner thereof.

…”

25.  D1 highlighted the following problems with P’s pleading:

(i)      money had and received 

26.  P’s claim is a common law action for money had and received. Such an allegation necessarily involves the payment of money from one party to another and the receipt of those monies by the other.

27.  However, it transpires from the opinion of P’s expert CH Hong dated 17 July 2020 (“Hong 1^st”)[2] (exhibited to Mok 2^nd) that in July 1999 the controllers of BHL were indebted to P in excess of $6.15 million and “the said sum” represented the value assigned by BHL, its controllers and P to the pleaded “21.5% share” in JST. The 2001 STA[3] was intended as a means of repaying and/or setting off the controllers’ indebtedness to P. 

28.  It follows that there never was a payment of $7,523,955 from one party to another and thus never any receipt of the same by the other. Payment and receipt of monies are essential elements to found P’s cause of action.

(ii)     The subject matter of what D1 is alleged to have sold[4]

29.  Read literally, D1 is alleged to have sold “the said sum” which makes no sense.

30.  Nor could it be read as D1 having sold the 21.5% share in JST since P claims to be its owner and D1 has never been registered as owner of the 21.5% share.

(iii)     P’s case as disclosed in §3(b) of its reply to D2’s defence

31.  In so far as P’s claim is made to consideration passing in the 2008 transaction, the recipient of consideration for the transfer would have been the transferor, i.e. BHL and not D1.

32.  In any event, it could not have been D1 as it was not incorporated until 11 August 2011.

33.  D2’s defence specifically raised the limitation issue by pleading that P’s claim is statute barred.

34.  P’s reply[5] is problematic: the basis for P’s belief (that the proceeds from the sale of the shares were received/collected by the defendants on behalf of P within 6 years of the writ) is not pleaded, nor was the reason why the defendants would have received those proceeds on P’s behalf.

35.  Since P’s own case is that the 2008 transaction was for no consideration[6], the basis for P’s claim for alleged proceeds of the 2008 transaction in the specific amount claimed is incomprehensible.     

(iv)     P’s locus standi to sue

36.  Unless P is currently the beneficial owner of the 21.5% share in JST, it has no locus standi to sue for the proceeds of that share.

37.  P’s pleading that it “was/is the true beneficial owner” is ambivalent which is inexplicable given that it must be a matter known to it.

38.  Exhibited to Mok’s 4^th affirmation dated 15 January 2021 (“Mok 4^th”) is a 2^nd opinion from P’s expert CH Hong dated 14 January 2021 (“Hong 2^nd”). The annexures to Hong 2^nd include 2 agreements between Zhongji Holdings and BHL that together constitute the 2008 transaction mentioned in §11 above, namely:

(a) a Supplemental Agreement dated 30 January 2008 whereby Zhongji Holdings agreed to pay BHL RMB200,000 by 1 May 2008 as “compensation for the withdrawal and transfer of the shares of Li Tianyuan (chairman of the Board of Directors of [BHL]” (“the Supplemental Agreement”); and

(b) the Agreement on the Withdrawal and Transfer of the Shares in the Co-operative Project in Jilin City, Jilin Province dated 31 January 2008 (“the Transfer Agreement”). 

39.  Under the Transfer Agreement, BHL transferred its 30% interest in JST to Zhongji Holdings for nil consideration. While the Supplemental Agreement predates the Transfer Agreement by one day, it is clear from the recital and contents of the Transfer Agreement that the parties had reached an agreement on 27 January 2008, effective upon signing by both parties: upon the transfer of BHL’s 30% interest JST to Zhongji Holdings, the latter would thereafter be responsible for all the consequences (i.e. BHL’s share of debts and social responsibility issues) arising from the development project.

40.  Logically, in so far as P has a cause of action in respect of the 21.5% interest making up the 30% interest transferred, it should be against BHL.

41.  Apparently based on the fact that the Supplemental Agreement pre-dated the Transfer Agreement, P has expressed the view that the Supplemental Agreement and the Transfer Agreement are sham documents.

42.  Having regard to the recitals in the Transfer Agreement, while it may be debatable whether the transfer of the 30% share by BHL was at nil consideration or for RMB 200,000, their respective dates of execution could not have rendered the 2008 transaction a sham given the agreement reached on 27 January 2008.

43.  On P’s case, immediately prior to the 2008 transaction, only BHL could be holding the 21.5% share for P. There is no evidence of any subsequent sale by Zhongji Holdings or of any transfer to D1 and/or D2

44.  Mr Tony Ko, counsel for P, referred to a letter dated 2 January 2014 from P to Liu Hao (who served as chairman of Zhongji Holdings from May 2005 to July 2007) seeking the latter’s assistance for introductions to potential purchasers of the 21.5% share P owned in JST, offering 20-30% of the profits as commission. There was no reply to P’s letter.

45.  P submitted that Liu Hao’s failure to reply to the letter and/or to deny in his affirmation dated 11 December 2020 that it had been received amounted to his agreement “to basically sell for the plaintiff and then receive the sum”. Mr Ko sought to explain that since there was a transfer (in 2008), consideration must have passed that belonged to P and should be given to P.

46.  It is impossible to make any sense of P’s submissions: to begin with, there is no evidence of Liu Hao’s agreement as alleged. The absence of a reply to the 2014 letter cannot be equated with an agreement on Liu Hao’s part.  

(v)     the plea alleging that defendants received a total sum of $7,523,955 without pleading how much each received

47.  As the cause of action is in common law for money had and received rather than a tortious claim, there is no joint and several liability. If D1 did receive “the said sum,” as a matter of logic, there could be no claim against D2.

48.  Nevertheless, having obtained the default judgment against D1, P continued to maintain its claim against D2 for the full amount by filing its reply to D2’s defence. The ineluctable inference is that P does not know how much each of the defendants received. That would necessarily render the amount D1 is alleged to have received uncertain and unliquidated which is fatal to P’s application for default judgment under Order 13 rule 1. 

49.  In so far as P seeks to cast the burden of apportionment on the defendants, where liability is not joint and several, that cannot be correct.

 (B) P’s action is time-barred

(i) The burden of proof

50.  The limitation period for a claim for money had and received is 6 years from the accrual of the cause of action: Limitation Ordinance Cap 347, s 4. The cause of action in money had and received arises when the relevant money is paid by the plaintiff to the defendant[7].

51.  It is D1’s case that when a defendant raises a defence based on limitation, the initial onus is on the plaintiff to prove that its cause of action accrued within the statutory period. If the plaintiff fails to raise a prima facie case that its cause of action accrued within the limitation period, the plaintiff’s case will fail even in the absence of any evidence from the defendant.

52.  D1 relied on Kensland Realty Ltd v Tai, Tang & Chong (2008) 11 HKCFAR 237 where McHugh NPJ held (at §153) that

“… once a limitation defence is raised, the onus is on the plaintiff to prove that the cause of action relied upon accrued within the limitation period … [C]ourts in the United Kingdom and this Court have … insisted that, although the defendant must raise and plead the limitation defence, once the defence is pleaded, the onus is on the plaintiff to prove that the cause of action accrued within the limitation period: … Accordingly, Kensland carries the burden of proving that its claim fell within the limitation period.”

53.  P maintained (at §35 (e) of its written submissions) that:

“It is trite that the burden is on a defendant to specifically plead the time bar issue. … If D1 has no evidence to suggest when the cause of action was said to have accrued, then there is simply no basis for the time bar defence to be raised in the first place.”

54.  In so far as it is an allegation that D1 has not raised the time bar issue, the cause of action against each of D1 and D2 is for money had and received. D2 filed its defence squarely raising the limitation issue well before the default judgment application.  

55.  In those circumstances, D1 submitted that the master or judge hearing the application against a co-defendant would have to be satisfied that the plaintiff’s cause of action falls within the limitation period since the cause of action against the defendants is identical. I would agree.

56.  Since the limitation defence which is common to both defendants has already been raised, the burden falls squarely on P to show that its claim falls within the limitation period.

57.  P referred to the decision in Lu Shaoping v Wu Lianmo and Ors[8] [2020] HKCFI 944 at §§15-16 where the issue concerned costs over the setting aside of a regular judgment. In that case, the precise date[9] certain monies were disbursed (which was within the defendant’s knowledge) was critical in determining whether or not the defendant had a good limitation defence. It was in that context that it was held that the defendant had the burden of making the limitation defence good.

58.  In its pleaded case, P expressly admitted that it did not know when the sale of the 21.5% share (which it claims to have owned) actually occurred. Nor has any evidence been adduced that specifies when and how D1 is supposed to have received “the said sum”. The facts of that case are thus very different.

59.  I do not consider Lu Shaoping offers any assistance. In any event, it is distinguishable on the facts and, in my view, cannot affect the law as stated in Kensland.

60.  In those circumstances, I agree that P has failed to discharge its initial burden of proof to show that its cause of action falls within the limitation period.  

(ii)     P’s inability to raise a prima facie case that D1 received “the said sum” within the six-year limitation period

61.  P[10] admitted that it does not know the date the defendants received “the said sum”. Nevertheless, P asserted[11] that it “believes that the proceeds of sale are fully received/collected by the Defendants on behalf of the Plaintiff and in any event, within 6 years of the issuance of the Writ herein” without stating the basis for such belief.

62.  P relied on the 2014 letter to show that it did not know then of the 2008 transaction. But the date when P learned of the 2008 transaction is irrelevant to the time bar issue. The key question is the date D1 is supposed to have received “the said sum” which P is unable to specify.

(C) P has no plausible claim to ownership of the 21.5% share in JST

63.  P’s claim is based on Hong’s opinions that the 2001 STA was effective as a matter of PRC law. She relied on clause 23 of the Law of the People’s Republic of China on Partnerships which confers on the remaining partners a right of pre-emption over the interest of the partner proposing to transfer his interest to a 3^rd party.

64.  The Hong Kong court does not simply accept any stated conclusions based on foreign law and will examine the basis of the legal reasoning and the terms of the foreign legislation considered in the opinion: see Full Wisdom Holdings Limited v Traffic Stream Infrastructure Co Limited [2004] 2 HKLRD 1016 at §23. Further, opinions as to foreign law are unlikely to carry any serious weight if they simply consist of assertions for which no basis is established on the face of the opinion or its attachments: see Johnston’s Conflict of Laws in Hong Kong (3^rd Ed.) at §2.067.

65.  It is to be noted that no PRC authority was cited in Hong’s opinions to support the proposition that under PRC law a failure to exercise a right of pre-emption would render the transfer by the outgoing partner effective. Accordingly, its correctness is highly questionable.

66.  In so far as P’s claim is to any “beneficial interest” in JST, not only is there no suggestion in Hong’s opinions that the concept of beneficial ownership exists under PRC law, it is well-established that the concept of trust assets as understood in common law jurisdictions does not exist under PRC law: see Jessop & Baird (Hong Kong) Limited v Neo Hwee Khim [2020] HKCFI 2264 at §65.

67.  For those reasons, any claim by P to a beneficial interest in 21.5% of JST would not be sustainable as a matter of PRC law.

II. Whether the default judgment is liable to be set aside ex debito justitiae

68.  This submission turns on whether service of the writ was regular.

69.  In exercising the power to set aside for judgments, Hong Kong courts still distinguish between a judgment that was obtained irregularly and one that was not so obtained: see HKCP 2021, §13/9/2.

70.  In Hong Kong an irregular judgment would be set aside ex debito justitiae i.e. without regard to the merits of the proposed defence: Po Kwong Marble Factory Limited v Wah Yee Decoration Co Limited [1996] 4 HKC 157.

71.  P relied on an affirmation of service of Lei Chin Ki dated 30 April 2019 (“Lei 1^st”) stating that on 15 April 2019 at about 4 pm he served a sealed copy of the writ on D1 by leaving the same at its registered address. P submitted that the writ was duly served in accordance with the rules and the default judgment was obtained regularly.

72.  Following D1’s criticisms that Lei 1^st consisted of bare assertions without documentary evidence, Mok 2^nd exhibited a written report completed by the process server and a photograph[12] showing service of the writ and a cover letter (“the additional evidence of service”) but they were met with further criticisms that Lei had not gone on oath confirming their authenticity and of the quality of the photograph (that it was extremely blurred), not to mention a host of other aspersions on Mok’s integrity.

73.  Order 13, rule 7 provides as follows:

“7 (1) Judgment shall not be entered against the defendant under this Order unless…

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

74.  Where a writ is served upon the registered office of a company pursuant to the provisions of s 356 of the Companies Ordinance, Cap 32[13], it is sufficient for the writ to be physically left at the registered office and it is not necessary to give the writ to a person at the registered office: P & L Concepts Ltd v Planners & Designers and Associates Ltd, unrep., DCCJ No. 2310 of 2002, 17 October 2002, [2002] HKEC 1542; HKCP 2021 at §13/7/2.

75.  Nor is there any need to establish that the company had actual notice of the writ where service is effected under s 827 of the Companies Ordinance: see Ho Kwok Wah v Group Jewellery Arts Limited [2000] 3 HKC 595 (at §11) where the Court of Appeal held that there was no requirement in section 827 of the kind to be found in O.10, r.1(3)(b)(i): see HKCP 2021, §10/1/18.

76.  The criticisms levelled by D1 at Lei 1^st have nothing to do with any breach of the rules for service and none has been alleged. As service of the writ was in accordance with s 827 of the Companies Ordinance and the rules, the default judgment was regularly obtained.

77.  Where D1 contends that service is irregular, it bears the burden of establishing irregularity. Criticisms of the additional evidence of service are neither here nor there where the additional evidence is not required under the rules.

78.  It follows that in my view the judgment was regularly obtained.

Exercise of the court’s discretion pursuant to O.13, r.9

79.  Proceeding on the basis that the judgment was regularly obtained but that D1 has shown that P’s cause of action as pleaded is defective irrespective of the time bar issue, the question then arises as to how the court’s discretion should be exercised.

80.  For the reasons set out in section I (A) to (C) above, there is no question but that P’s cause of action as presently pleaded is not sustainable as a matter of law.  

81.  Mr Ko stressed that D1’s delay in making the setting aside application was substantial and it was made only after enforcement action had been taken and an order for sale made. He submitted that P would be prejudiced by the delay that would inevitably result were the court to set aside the default judgment.

82.  I accept that there has been some delay on D1’s part. Nevertheless, it would be a travesty of justice if the Court were to allow a default judgment to be entered on a palpably bad and defective pleading.

83.  In the circumstances, it is clear that the discretion should be exercised in favour of D1. Consequentially, the charging order absolute must go.

The relief summons and the new evidence summons

84.  This hearing for 3 hours was fixed on 11 November 2020 for the hearing of the appeal. The relief summons and the new evidence summons were issued on 13 November 2020 and on 20 January 2021 respectively, after the hearing date had been fixed. No application had been made to the Court for those summonses to be heard at the same time.

85.  After 11 November 2020, D1 (without leave) filed 8 further affirmations (with exhibits) requiring 4 reply affirmations from P. The additional material filed filled more than 4 box files.

86.  A week or so prior to the hearing, the parties’ respective solicitors were asked to confirm that 3 hours would be sufficient for the hearing of all 3 applications.  Both parties gave that confirmation.

87.  I have little doubt that the parties gave the confirmations because they were not prepared to lose the hearing date come what may.  In the present case, it should have been obvious to counsel (much less experienced counsel) that a 3-hour hearing would not be sufficient for all 3 applications to be heard properly. In the event, it took the parties 2 hours and 20 minutes just to deal with the appeal.

88.  The parties made no oral submissions on the other 2 summonses but ‘rested’ on their written submissions. However, the whole point of an oral hearing is for counsel to render assistance to the Court.  The relief summons and the new evidence summons which make up a significant part of the hearing bundles raise difficult issues that are not suitable for paper disposal.  The course counsel adopted is entirely unacceptable, a disservice to their client and must be deprecated.

89.  In the circumstances, no order will be made on the relief and new evidence summonses.

Order

90.  As the pleading (as it stands) is defective for the reasons stated, no judgment should be entered on it.

91.  Accordingly, it is ordered that the appeal be allowed, the default judgment be set aside, the charging order absolute be discharged, and there be no order on the relief summons and the new evidence summons.

92.  There is to be an order nisi of costs of this appeal in favour of D1 with certificate for 2 counsel, such costs to include the costs of the hearings of the default judgment summons on 14 August 2020 and 21 October 2020 with certificate for counsel, to be summarily assessed. Directions for assessment will be given separately.