EARTH GROUP LTD v. GLOBALMAX GROUP LTD AND ANOTHER

CAMP 380/2022

[2023] HKCA 64

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 380 OF 2022

(ON AN INTENDED APPEAL FROM DCCJ NO. 2155 OF 2019)

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JUDGMENT

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Hon Poon CJHC (giving the judgment of the Court):

Introduction

1.  The plaintiff is a limited company trading in beauty products, accessories, equipment and other merchandise.  The 1^st defendant is another limited company running a beauty centre in Fanling, New Territories.  The 2^nd defendant is the sole shareholder and director of the 1^st defendant and the operator of the beauty centre.

2.  By a writ of summons dated and filed on 2 May 2019 and amended on 24 June 2019, the plaintiff commenced the proceedings below, claiming against the 1^st defendant for HK$1,319,462 (“the Sum”) being the price for (1) beauty machines sold and delivered on 20 August 2018 pursuant to an agreement for sale and purchase dated 17 July 2018 in the sum of HK$710,000 (“Machines”); and (2) beauty goods sold and delivered on 16 September, 3 October, 6 and 22 November 2018 (“Goods”), in the total sum of HK$429,462.  The plaintiff further claimed against the 2^nd defendant personally for the Sum, averring that the 2^nd defendant intentionally closed the beauty centre on about 14 January 2019 after less than 3 months of operation and removed the Machines and Goods to another place without informing the plaintiff the location, with intention to evade liability to repay the debt owing to the plaintiff. 

3.  When the defendants failed to give a notice of intention to defend, the plaintiff obtained default judgment against the 1^st defendant on 31 July 2019 and against the 2^nd defendant on 13 August 2019 respectively for the Sum with interest and fixed costs.  The plaintiff further obtained a charging order absolute against the 2^nd defendant’s property on Waterloo Road, Kowloon dated 19 June 2020 and amended on 12 October 2020.

4.  By a summons dated 4 February 2021, the defendants applied to set aside the default judgments on the grounds that the judgments were irregular because of defective service and that they had a meritorious defence.  The 2^nd defendant further denied that she had any knowledge of the charging order proceedings.  By an order dated 13 September 2021, the master set aside the default judgment against the 1^st defendant, giving it leave to defend on the condition of paying HK$710,000 into court; and set aside the default judgment against the 2^nd defendant, giving her unconditional leave to defend, and discharged the charging order as well.

5.  On appeal by the plaintiff, HH Judge Harold Leong (“the Judge”) by a decision dated 27 April 2022 set aside the master’s order, and ordered that the default judgments be set aside and the charging order be discharged on the condition that the defendants jointly and severally pay the Sum into court (“the Condition”), with costs to the plaintiff.[1] In so doing, the Judge rejected the defendants’ contentions that the service of the process was defective and that they had no knowledge of the same.  On the contrary, he found that they had evaded service.  After briefly referring to the defence, he noted that the 1^st defendant’s defence seemed to be on quantum only; and that the 2^nd defendant’s complaint that the plea of lifting the 1^st defendant’s corporate veil was insufficient should be determined at trial.  He then said:

“40. Overall, the courts [sic] finds that although the defendants may have, arguably, some merit in their defence to show ‘a real prospect of success’, given the circumstances of the case (including the 1^st defendant’s seemingly lack of defence on liability, the relationship between the 1^st and 2^nd defendant, the removal of the Goods by the 2^nd defendant and the court’s finding that the defendants have been, in reality, evading service), the court should impose terms in order to afford reasonable protection of the interest of the plaintiff.

41. I agree with Mr Poon [counsel for the plaintiff] that the Charging Order should not be discharged unconditionally because this will likely leave the plaintiff at risk of an empty judgment given that the 1^st defendant is unlikely to hold any assets of value and the whereabouts of the Goods is unconfirmed.

42. I am also of the view that the amount of security must be just and proportionate to the apparent strength of the parties’ case at this stage.  I note the fact that the defendants have tried to evade service despite their lawyers having previously raised some apparent defence on quantum (e.g. quality of the Goods and dispute on the existence of some agreements etc.).”

6.  The defendants’ subsequent application for leave to appeal was dismissed by the Judge on 13 September 2022.[2]

7.  The defendants now renew the application for leave to appeal before us on the same grounds of appeal raised below.  They are:

(1)  The Judge erred in imposing the Condition in giving the 2^nd defendant leave to appeal.

(2)  By imposing the Condition against the 1^st defendant, the Judge erred in ordering it to pay the Sum in full into court.

(3)  The Judge erred in imposing the Condition jointly and severally against the defendants.

(4)  Since the charging order concerns only the 2^nd defendant, the Judge erred in ordering the 1^st defendant to pay the Sum as a condition of discharge.  The Judge also completely failed to deal with the 2^nd defendant’s case that she had no knowledge of the charging order proceedings.

(5)  The Judge erred in ordering costs in favour of the plaintiff when its primary stance was to oppose the applications to set aside the default judgments, which failed.

8.  Having considered the written materials, we take the view that the application can be properly dealt with on paper without an oral hearing.  We now hand down our judgment.  For the reasons set out below, we will grant the defendants leave to appeal.

Service of the writ

9.  We first deal with the defendants’ case that the default judgments were defective as they had no knowledge of the proceedings.  In this regard, the 2^nd defendant deposed, on behalf of the 1^st defendant and herself, that she had collected registered posts which, on the plaintiff’ case, were service of the writ but she found that they were only blank sheets of paper.  She also received notification of registered posts which were said to be service of the amended writ but she did not collect them as she thought they were also pranks.  The Judge rejected her evidence as incredible and found that the service was regular.  In our view, it was open to the Judge to make such a finding of fact on the evidence and there is no basis for us to disturb it on appeal.

10.  The Judge went on further to find that the defendants had evaded service.  Mr Ngai, counsel for the defendants, submitted that at most, it could only be inferred that the defendants had received the registered posts and knew what they were but did nothing about.  It did not amount to evasion of service.  Again, such a finding of fact was open to the Judge and there is no basis for us to interfere on appeal.

Knowledge of the charging order proceedings

11.  The position regarding the 2^nd defendant’s knowledge of the charging order proceedings is less straightforward.  After referring to the affirmation of service filed on behalf of the plaintiff which stated that there were 3 methods of service, the 2^nd defendant deposed in her affirmation dated 2 February 2021:

“30. The first method was by insertion into the letter box of the Fanling Address on 20^th April 2020. At that time, the 1^st Defendant had vacated the Fanling Address premises. As a result, the 1^st Defendant and I did not have notice of the documents served by this method. I shall explain below in further details the circumstances leading to the 1^st Defendant vacating the Fanling Address premises in March 2020.

31. The second method was by insertion into the letter box of the Waterloo Road Address on 20^th April 2020. I did not find any of the 2 sealed envelopes alleged to be inserted in the letter box. As a matter of fact, it is the practice of the management office of Yee On Court that non-residents are not allowed to enter and put letters or leaflets or advertising materials in the letter boxes inside the building. It is doubtful that Mr Chui was telling the truth when he said he did successfully insert 2 letters in the letter box of the Waterloo Road Address.

32. The third method was by registered post on 27^th April 2020 to the Waterloo Road Address.  I did receive the registered mail to me from the post office. At that time, I was expecting documents to be sent to me in respect of a Small Claims Tribunal case.  The mail I received is very ‘thin’ and does not appear to contain many pages of documents.  I did not think it was about the Small Claims Tribunal case and so I just put it away and did not open it.”

12.  The Judge did not deal with the 2^nd defendant’s evidence at all.  When Mr Ngai pressed this point for the leave application before him, he simply said that this complaint was entirely misconceived as he had already addressed “the findings of the court regarding service of court documents”: see [36] of the leave decision. However, in the main decision, the Judge specifically addressed the defendant’s case on service of the writ only and had not said a single word about the service of the charging order proceedings.  In the circumstances, it is doubtful if, as argued by Mr Poon for the plaintiff, what the Judge said at [36] of the leave decision is sufficient to cover the 2^nd defendant’s case on her knowledge of the charging order proceedings.  She ought to be given leave to pursue this ground of appeal.

The Judge’s assessment of the strength of the defence

13.  We next come to the Judge’s view on the apparent lack of strength of the defence, which appears to be his main reason in imposing the Condition: see [40] – [42] of his decision, quoted at [5] above.  With respect, his view does not sit well with a more careful consideration of the evidence adduced by the parties overall. 

14.  In respect of the 1^st defendant, there is evidence, which the Judge did not address, to support its defence that the Machines did not comply with the contractual description that they were of a European brand; that they were delivered without any users’ manual; and that there was part payment of HK$260,000.  Had the Judge applied his mind to these points, his assessment on the strength of the 1^st defendant’s defence might well be different.

15.  In respect of the 2^nd defendant, it is questionable if the plaintiff’s pleading for lifting the corporate veil of the 1^st defendant in order to attach personal liability against her for the Sum is sufficient.  Pleading aside, the plaintiff’s case for lifting the 1^st defendant’s corporate veil is based on two assertions: (1) the 1^st defendant was a criminal fraud from the outset by “obtaining goods and then closing down the business”; and (2) the 2^nd defendant removed the Machines and Goods to another place without informing the plaintiff of the location.  However:

(1)  There is evidence, which is apparently not disputed by the plaintiff, that payments were made by the 1^st defendant to the plaintiff for renovation of the beauty centre.  The plaintiff further has not specifically denied that the 1^st defendant had purchased other goods from the plaintiff which had been paid.  The plaintiff’s directors had been involved in assisting the defendants to set up the business of the centre and that substantive payments had been paid to the plaintiff under various agreements.  The 1^st defendant continued to pay the rent for the premises at which the beauty centre operated until January 2020 after cessation of business in January 2019.  The state of evidence seems to suggest that the 1^st defendant was set up as a genuine business for running the beauty centre and not for evading liability as alleged.  Again, the Judge did not address these points at all.

(2)  The 2^nd defendant’s undisputed evidence is that she removed the Machines and some other goods to another location in March 2020, some 10 months after the commencement of the proceedings below in May 2019.  It casts doubt if at the time of the commencement of action, the plaintiff’s cause of action against the 2^nd defendant had accrued.  Moreover, there is seemingly no evidence to counter the 2^nd defendant’s case that she was acting in her capacity of the shareholder and director of the 1^st defendant when she removed the Machines and those goods to another location.

It follows that the Judge’s view on the lack of strength of the 2^nd defendant’s defence is highly questionable. 

16.  For the above reasons, we take the view that the defendants have discharged the burden of demonstrating that the appeals have a reasonable prospect of success in contending that the Judge had erred in imposing the Condition based on his assessment of the strength of the defence setting aside the default judgments and discharging the charging order. That is sufficient for us to give the defendants leave to appeal.  There are some other minor points raised in the grounds of appeal, which seem to stand or fall together with the above main point.  It follows that the defendants should also be given leave to pursue them.

Dispositions

17.  We refuse to give the defendants leave to appeal on those grounds of appeal which concern the irregularity of service of the writ or the Judge’s finding that they had evaded service of the same.  We give them leave to appeal on the remaining grounds of appeal.

18.  We further order that the costs of this application be in the cause of the appeal.