BEST JOINT INVESTMENTS LTD v. KAGANI LTD

CACV 417/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 417 OF 2007

(ON APPEAL FROM HCA NO. 2608 OF 2006)

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BETWEEN

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JUDGMENT

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Hon Kwan JA:

1.  This is an appeal of the defendant, Kagani Limited, against the orders made by Chung J on 13 December 2007. By his orders, the judge

(1) dismissed the defendant’s appeal from the decision of Master Lung given on 22 August 2007 in which the Master dismissed the defendant’s application to set aside the default judgment entered against it on 15 January 2007;

(2) dismissed the defendant’s summons dated 27 October 2007 to dismiss or stay the action on the ground that the plaintiff, Best Joint Investments Limited, had no authority to bring this action;

(3) dismissed the defendant’s summons dated 4 December 2007 seeking leave to cross-examine the deponents of affirmations filed on behalf of the plaintiff in this action; and

(4) dismissed the defendant’s summons dated 25 October 2007 for an interim stay of execution of the default judgment pending the outcome of its appeal to the judge and its summons dated 27 October 2007.

2.  Notwithstanding that the Notice of Appeal was filed on 28 December 2007, the defendant did not apply to fix a hearing date of its appeal until late March 2011.  About two weeks before the hearing, it filed an amended Notice of Appeal to introduce new grounds of appeal and issued a summons for leave to adduce further evidence on appeal.

3.  Mr C. Y. Li, counsel for the plaintiff, pointed out that no leave was given for the filing of the amended Notice of Appeal.  A notice of appeal may only be filed without leave not less than 3 weeks before the hearing of the appeal pursuant to Order 59 rule 7(1)(b), this was not the case of the amended Notice filed on 28 June.  The plaintiff opposed leave for the filing of the amended Notice of Appeal and the application to adduce further evidence on appeal.  We heard arguments on the new grounds and the further evidence de bene esse.

The background

4.  The relevant background matters may first be stated as follows.

5.  In the 1980s, Lau Kwok Leung Ron (“Ron Lau”) carried on business as a trader and exporter of general merchandise under the names of a group of companies including Calgo Development Ltd. and Calgo Asia Ltd. and as a travel agent under the name of the defendant.  All these companies were managed or controlled by him and of which he was the principal shareholder and/or director.  In some of these companies, his brother Lau Kwok Ching Wayne (“Wayne Lau”) was appointed as a nominal director and was issued a small allotment of shares but did not take any active role.

6.  Ron Lau has cohabited with Chan Siu Ling Betty (“Betty Chan”) since about 1982.  They have been living in the subject property at Hanking Court in Cloudview Road, Hong Kong (“the Property”) since about 1987.  Betty Chan entered into a sale and purchase agreement of the Property for $1.85 million and the Property was assigned to her in October 1987.  She was and is a director of the defendant, and a shareholder and director of Calgo Asia Ltd. and Calgo Development Ltd.

7.  In May 1999, Betty Chan entered into a sale and purchase agreement with the plaintiff, by which the Property was sold to the plaintiff for $9.2 million.  The Property was assigned to the plaintiff on completion on 15 July 1999.  The charges created over the Property in favour of Chiyu Banking Corporation Ltd. were released and the Property was mortgaged to Generale Belgian Bank on 15 July 1999.

8.  The plaintiff was incorporated in November 1998.  At all material times, only two shares of $1 each were issued.  It was acquired as a shelf company in 1999 by Wayne Lau and a nominee company by the name of Beauson Enterprises Ltd. (“Beauson”), each holding one share.  Ron Lau and Wayne Lau were appointed as the directors and Wayne Lau was appointed its secretary.  Beauson signed a declaration of trust dated 15 March 1999 declaring that it held its share on trust for Calgo Development Ltd. with a blank instrument of transfer pre-signed by Beauson.  Wayne Lau also signed a declaration of trust dated 5 May 1999 declaring that he held his share on trust for Calgo Development Ltd. with a blank instrument of transfer pre-signed by him.  There was no change in the shareholdings and directorship up to the annual return made up to 18 November 2005.

9.  By a facility letter dated 31 October 2003 from Citic Ka Wah Bank to Calgo Asia Ltd., general banking facilities were granted to the latter against a number of securities including a first legal charge of the Property and a joint and several personal guarantee from Ron Lau and Betty Chan.  On 17 November 2003, the mortgage of the Property in favour of Generale Belgian Bank was released and the plaintiff executed a mortgage in favour of Citic Ka Wah Bank.

10.  Between April 2005 and July 2006, Ron Lau caused the plaintiff to borrow money from Bestlite Industrial Ltd. (“Bestlite”) on six occasions, as evidenced by the loan agreements between them.  A second legal charge over the Property was executed by the plaintiff in favour of Bestlite to secure the credit facilities granted.  Bestlite is a licensed moneylender and Lau Cheuk Nam (“CN Lau”) is one of its two shareholders and directors.

11.  On 5 July 2005, CN Lau was appointed as a director of both Calgo Development Ltd. and Calgo Asia Ltd.  The appointment was to facilitate CN Lau in arranging for further letter of credit facilities from banks for Ron Lau’s companies as requested by Ron Lau.  In the end no such facilities were arranged.

12.  In early 2006, Calgo Asia Ltd. was not able to repay the general banking facilities granted by Citic Ka Wah Bank.  As at 28 February 2006, the plaintiff owed the bank $7,294,117.52.

13.  To repay the bank, Ron Lau had two alternatives – to sell the Property or to arrange for re-financing with other banks.  He sought the help of CN Lau.

14.  On 3 March 2006, a provisional sale and purchase agreement was entered into by which the plaintiff agreed to sell the Property to the purchaser Biotech International Ltd. (“Biotech”) for $14 million and a cheque for $400,000 was paid as provisional deposit upon signing the agreement.  Biotech is a company of CN Lau.

15.  It is common ground that the provisional sale and purchase agreement was cancelled shortly thereafter. It is Ron Lau’s case that instead of purchasing the Property, CN Lau agreed to arrange re-financing for the plaintiff with the Nanyang Commercial Bank Ltd. using the Property as security.  CN Lau’s version was different.  He alleged that although the provisional sale and purchase agreement with Biotech was cancelled, it was agreed that the sale of the Property would be effected by the sale and purchase of the plaintiff to him at a nominal sum, in return he would procure banking facilities from the Nanyang Commercial Bank to be granted for the repayment of the plaintiff’s indebtedness to Citic Ka Wah Bank.  Thereafter the plaintiff would become CN Lau’s company and the loans and interest owed by the plaintiff to Bestlite of over $3.6 million would no longer be repayable by Ron Lau.  The divergence in the two versions is the crux of the dispute.

16.  On 4 July 2006, the Nanyang Commercial Bank issued a facilities letter to Biotech which was the borrower, not the plaintiff.  CN Lau provided a copy of it to Ron Lau on 6 July.  By this letter, the bank advised Biotech that the facilities available to it had been revised on the terms and conditions set out.  One of the conditions was the execution of an all-money first legal charge on the Property.

17.  On 16 August 2006, pursuant to a board resolution of the plaintiff signed by Ron Lau and Wayne Lau, CN Lau was appointed a director of the plaintiff and authorised to negotiate with the Nanyang Commercial Bank in using the Property to apply for a mortgage loan to pay off the existing loan with Citic Ka Wah Bank.

18.  CN Lau gave instructions to a solicitor Cheng Chi Hung (“Mr Cheng”) of Messrs. Cheng Chan & Co. to prepare documents for the sale and purchase of the shares in the plaintiff to CN Lau.  These documents included a sale and purchase agreement of the shares with Calgo Development Ltd. as the vendor and a deed of assignment of the director’s loan of Ron Lau to CN Lau of $2,272,176.44. The total consideration for the transfer of the shares and the assignment of the director’s loan was $100,000. According to the affirmations of CN Lau and Mr Cheng, the documents to give effect to the aforesaid transactions were executed by Ron Lau and CN Lau on 29 September 2006 and witnessed by Mr Cheng.  Ron Lau claimed he did not sign any of the documents allegedly executed by him that day.  Wayne Lau alleged that he did not sign on the minutes of the plaintiff’s board meeting on 29 September 2006 approving the said transactions and accepting the resignation of him and Ron Lau as directors with immediate effect and that his purported signature was a forgery.

19.  Mr Cheng also prepared a tenancy agreement dated 28 September 2006 (“the Tenancy Agreement”) between the plaintiff and the defendant by which the Property was let to the defendant for two years from 1 August 2006 at a monthly rent of $60,000, the minutes of a board meeting of the plaintiff held on 28 September 2006 by which it was resolved that the plaintiff should enter into the Tenancy Agreement, and the minutes of a board meeting of the defendant held on the same date to like effect.  The defendant was by then a dormant company.  Mr Cheng deposed that Ron Lau had signed these documents in his presence, took them away for other relevant parties to sign and that the documents were returned with the signatures of Wayne Lau and Betty Chan.  Ron Lau admitted that he had signed and placed the seals of the plaintiff and the defendant on the last page of the Tenancy Agreement when the agreement itself had not been prepared and that his signatures on the minutes of the plaintiff and the defendant were forgeries.  Wayne Lau and Betty Chan claimed that their signatures on all the aforesaid documents were falsified.

20.  On 22 November 2006, CN Lau caused the writ in this action to be issued in the plaintiff’s name against the defendant.  The solicitors for the plaintiff at the time were Cheng Chan & Co.  The plaintiff sued on the Tenancy Agreement claiming that the defendant had defaulted in the payment of rent since the commencement of the tenancy on 1 August 2006.  The plaintiff claimed vacant possession, arrears of rent for four months at $240,000, and mesne profits thereafter.

21.  There was a deed of surrender dated 6 January 2007 by which the defendant agreed to surrender the tenancy of the Property to the plaintiff voluntarily and deliver up vacant possession and the minutes of a board meeting of the defendant authorising the execution by a director of the deed of surrender.  These documents were prepared by Mr Cheng.  Ron Lau and Betty Chan denied that the signatures on these documents were signed by them.

22.  Vacant possession of the Property was not delivered up to the plaintiff pursuant to the deed.  On 15 January 2007, the plaintiff entered judgment in default against the defendant as no notice of intention to defend was given.

23.  On 17 January 2007, the plaintiff executed a mortgage of the Property in favour of the Nanyang Commercial Bank and on the same date the second legal charge in favour of Bestlite was released.  It is not in dispute that the plaintiff’s indebtedness to Citic Ka Wah Bank of about $7.3 million has been discharged with the facilities granted by the Nanyang Commercial Bank to Biotech.

24.  The defendant applied by summons on 5 February 2007 to set aside the default judgment.  After its application was dismissed by the Master in August 2007 and before its appeal was heard by a judge, on 27 October 2007, the defendant issued a summons to dismiss or stay this action on the ground that the plaintiff had no authority to bring the action (“the Authority Summons”), claiming that the documents regarding the sale and purchase of the plaintiff’s shares were forgeries and that the plaintiff is still Ron Lau’s company.  On 4 December 2007, the defendant issued another summons seeking to cross-examine CN Lau and Mr Cheng on their affirmations at the hearing of its appeal before Chung J on 13 December 2007.  In support of its various applications, the defendant filed a total of 12 affirmations, of which five were made by Ron Lau. The plaintiff filed five affirmations in answer.

25.  On 31 October 2007, Betty Chan issued a summons to be joined as the 2^nd defendant with leave to defend the action.  She was ordered to be added as a defendant on 15 August 2008 and pleadings have since been filed.

The judgment of Chung J

26.  It was argued before Chung J that the Authority Summons should be determined first and that the court must first resolve the dispute over the plaintiff’s authority to sue in this action involving conflicting evidence through cross-examination.  The defendant relied on the decision of A. Cheung J (as he then was) in Kammy Town Ltd. v. Super Glory Corporation Ltd., HCA 3524 of 2003, 14 January 2005.

27.  The plaintiff did not agree with that approach and submitted that the defendant’s allegation of forgery, which is the basis for the alleged lack of authority of the plaintiff to sue, should be looked at as part of the defendant’s application to set aside the default judgment, and, analysed that way, it was the defendant’s burden to establish a defence with a real prospect of success.

28.  The judge agreed with the plaintiff as regards the approach to be adopted when deciding the appeal from the decision of the Master to set aside the default judgment and the Authority Summons.  He took the view that in the factual context of this case, the alleged lack of authority owing to the allegation of forgery and the merits of the defence to the plaintiff’s claim are so closely related that they should be treated as different facets of the same subject matter.

29.  Having considered the evidence filed on both sides, the judge accepted the plaintiff’s contention that if the allegations of forgery were true, it would effectively mean that CN Lau had obtained no benefit for shouldering the loan advanced by Nanyang Commercial Bank in Ron Lau’s favour as well as other financial obligations, which totalled about $12 million.  Ron Lau was not able to put forth any satisfactory answer to this.  The judge regarded Ron Lau’s story inherently impossible and not believable.  He held that the defence did not have merits which showed a real prospect of success.  Hence, the appeal, the Authority Summons and the other summonses taken out by the defendant were dismissed.

The grounds of appeal

30.  The defendant raised three broad grounds of appeal.

31.  Firstly, it was contended that the default judgment was an irregular judgment in that service of the writ was bad as CN Lau and Mr Cheng were aware that the premises being the defendant’s registered office had long been surrendered to the landlord so the writ served on the registered office would not be properly brought to the defendant’s attention.

32.  Secondly, the judge had erred in treating the issue of lack of authority to sue and the merits of the defence as different facets of the same subject matter and had erred in denying the defendant’s right to cross-examine the deponents of the plaintiff’s affirmations on the issue of authority.  He should have dealt with the Authority Summons as a preliminary issue before he heard the appeal dismissing the defendant’s application to set aside the default judgment.

33.  Thirdly, it was contended that the judge had erred in finding that the defendant had failed to show a real prospect of success in its defence.

34.  Before dealing with the grounds in the above order, I will first rule on the admission of new evidence on appeal and whether leave should be granted to file the amended Notice of Appeal. 

The admission of new evidence

35.  The defendant sought leave to adduce the 6^th affirmation of Ron Lau with five exhibits consisting of 76 pages.  As the new evidence does not relate to matters which have occurred after the hearing in December 2007, special grounds are required to be made out before such evidence could be admitted on appeal, see Order 59 rule 10(2).  This means that the three requirements in Ladd v. Marshall [1954] 1 WLR 1489 must be satisfied: (1) it must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial; (2) the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; and (3) the evidence must be such as is presumably to be believed, or in other words, it must be apparently credible although it need not be incontrovertible.  It was asserted by the defendant in its summons for leave that these three requirements are satisfied.

36.  The approach I adopt is to look at the documentary exhibits primarily, rather than the body of the 6^th affirmation of Ron Lau, to ascertain whether the requirements are fulfilled.  A strict approach is necessary, bearing in mind that the defendant had already put in twelve affirmations.  

37.  For exhibit 1, being documents to show that CN Lau and Mr Cheng were well aware that the defendant had moved its place of business at the time the writ was served on its registered office, I agree with Mr Li that requirement (2) is not satisfied.  In Ron Lau’s 1^st affirmation, he had deposed that Messrs. Cheng Chan & Co. were instructed to prepare a deed of surrender by the defendant of its office to the landlord so they knew the defendant had moved away from that address.  There is already existing material before the court for the consideration of the defendant’s argument regarding the propriety of the service of the writ at the registered office.  The additional documents in exhibit 1 would not have made any difference to the resolution of this argument.  I refuse leave to adduce the documents in exhibit 1.

38.  Exhibit 2 is the audited accounts of the defendant for the year ended 31 March 2005.  Quite clearly, the requirement in (1) is not satisfied.  Even if the audited accounts were among the documents seized by the Commercial Crime Bureau when Ron Lau was arrested in April 2006, there is no reason why the accounts could not have been obtained from the auditors.  Further, requirement (2) is not satisfied in that it was not demonstrated in what way these accounts would have an important influence on the result of the case.  Leave to adduce this exhibit is refused.

39.  Exhibit 3 consisted of five documents and they showed that an intended allotment of 4 million shares in Calgo Development Ltd. to CN Lau was cancelled.  Some of these documents were presented to the Companies Registry for registration, so clearly the requirement in (1) is not fulfilled.  The next item of documents consisted of demand notices to CN Lau to pay the price of the 4 million shares allotted to him and the rate of interest for overdue payment of 8% was alleged to be agreed by CN Lau.  I consider these documents do not satisfy the requirement in (3) in that they are not apparently credible, as the rate of interest alleged in the demand notices is in conflict with the rate of interest alleged in notes 1 of the statement of account between the plaintiff and Bestlite exhibited to Ron Lau’s 5^th affirmation.  The remaining document is the minutes of an extraordinary general meeting of Calgo Development Ltd. in March 2007.  This document cannot be said to have an important influence on the result of the case, so does not meet the requirement in (2).  For the above reasons, I refuse leave to adduce the documents in exhibit 3.

40.  Exhibit 4 consists of email exchanges between Ron Lau and Citic Ka Wah Bank in September 2006 and the land search records of the Property and a commercial property in Causeway Bay. It is said that the email exchanges showed that when these two properties were redeemed in January 2007, $5.4 million of the indebtedness was apportioned to the Property and $2.2 million was apportioned to the commercial property.  I agree with Mr Li this apportionment is totally irrelevant.  The fact remains there was a liability owed by the plaintiff to Citic Ka Wah Bank of about $7.3 million, as evidenced by the demand letter of the bank’s solicitors to the plaintiff dated 30 March 2006.  The requirement in (2) is not satisfied.  Leave to adduce the documents in exhibit 4 is refused.

41.  Exhibit 5 is a non-starter.  It consisted of a consolidated statement of account between the plaintiff and Bestlite relating to loans as at 8 January 2007 and another consolidated statement of account between Ron Lau and CN Lau relating to property investments as at 15 May 2006 with supporting documents for these accounts, mainly cheques.  According to Ron Lau’s 6^th affirmation, he prepared these “fuller detailed statement of accounts” based on the materials he was able to recover after his computers and papers were returned by the police.  As mentioned earlier, he had already exhibited a similar statement of account as exhibit 20 to his 5^th affirmation.  The requirements in (1) and (2) are not satisfied.  There is no reason why he could not have obtained the supporting cheques from the banks, as the numbers of all these cheques were given in the statement of account to his 5^th affirmation.  Leave to adduce these documents is refused.

42.  The application to adduce new evidence on appeal is a waste of time and effort.  It should never have been made.

The amended Notice of Appeal

43.  The amended Notice of Appeal filed without leave introduced two new grounds in paragraphs (5A) and (7). The contention in paragraph (5A), raising the matter that the Property as well as a commercial property were charged to Citic Ka Wah Bank to secure the indebtedness, is of no consequence. Paragraph (7) sought to argue that service of the writ was not properly effected and the default judgment was irregular.  Evidence in support of that contention was found in Ron Lau’s 1^st affirmation.  Chung J had noted that Ron Lau contended service of the writ was irregular and Mr Jonathan Chang, who appeared for the defendant here and below, accepted that as the judge was bound by the decision of the Court of Appeal in Ho Kwok Wah v. Group Jewellery Arts Ltd. & Ors. [2000] 3 HKC 595, did not dispute that service of the writ was regular and the judgment a regular judgment for the purpose of the hearing before the judge.

44.  As there was evidence from the defendant in support of its contention that service of the writ was not properly effected, and the concession before Chung J was made on the basis that the judge was bound by the decision of the Court of Appeal, I think it appropriate to permit the defendant to argue this point on appeal and for that purpose, I will grant leave to file the amended Notice of Appeal.

If the judgment was irregular

45.  Mr Chang accepted before us that the contention about bad service was not his strong point but argued it nonetheless.

46.  According to the affirmation of the process server of Messrs. Cheng Chan & Co., a sealed copy of the writ was served on the defendant on 15 December 2006 by leaving it at an address in Hoi Tai Street, Quarry Bay, Hong Kong, being the registered office of the defendant.  Further, on 18 December 2006, the process server posted up a sealed copy of the writ in a conspicuous place at the main entrance of the Property.

47.  Ron Lau deposed in his 1^st affirmation that on 10 July 2006, the defendant moved out of its office address in Hoi Tai Street and surrendered the premises to the landlord.  He exhibited a deed of surrender of the premises dated 10 July 2006 prepared by Messrs. Cheng Chan & Co. on his instructions, so the solicitors ought to be aware that the defendant could not be reached at its registered office on 15 December 2006.  Ron Lau stated that from 22 November to 27 December 2006, he had regular contact with Messrs. Cheng Chan & Co. in connection with another court case, but the solicitors had never informed him of the service of the writ on the defendant.  Ron Lau also mentioned that from 4 December 2006 to 16 January 2007, he was working in the New Territories and residing in Yuen Long and he did not return to the Property during this time.  It was only on his return to the Property on 17 January 2007 that his maid handed him a sealed copy of the writ and by then judgment in default was entered against the defendant.

48.  Mr Chang emphasised it is fundamental that no one should be made liable by an order of the court unless he has been given fair notice of the proceedings to enable him to appear and defend the proceedings.  As the plaintiff must have known it was very likely that the writ left at the address in Hoi Tai Street would not reach the defendant at all or at least until some time later, service of the writ was bad and the default judgment should be set aside.  In support of this, he cited Chu Kam Lun v. Yap Lisa Susanto [1999] 3 HKC 378 at 382F to G.  As for the proposition that service of the writ on the registered office could be regarded as proper even though the plaintiff knew at the time that the defendant had vacated the premises, Mr Chang submitted that this proposition went too far and would effectively condone the plaintiff’s abuse of court process and that the decision of Ho Kwok Wah v. Group Jewellery Arts Ltd. relied on by the plaintiff should be regarded as per incuriam.

49.  There is no basis for the contention that Ho Kwok Wah v. Group Jewellery Arts Ltd. was decided per incuriam.  As stated by Rogers JA (as he then was) at 598I, it is quite clear that when one reads together section 356 of the Companies Ordinance, Cap. 32, Order 10 rule 1(7) and Order 65 rule 3(1), a writ may be served on a company by simply leaving it at the registered office of the company.  At 599B to C, reference was made to the dicta of Fuad V-P in United Venture Navigation Co. Ltd. v. Shum Yuen Nim [1991] 2 HKC 73 at 86, that service of the writ in accordance with section 356 contains no requirement of the kind to be found in Order 10 rule 1(3)(b)(i), namely, that the affidavit of service must contain a statement to the effect that in the opinion of the deponent, the copy of the writ served in the manner deposed to will have come to the attention of the defendant within seven days thereafter.

50.  Chu Kam Lun v. Yap Lisa Susanto was not concerned with service of the writ in accordance with section 356.

51.  It is not necessary to consider whether the writ served on the Property should have come to the notice of Betty Chan, who was and is a director of the defendant and had resided in the Property at the time service was effected.

52.  I hold that there was proper service of the writ on the defendant and the default judgment was a regular judgment.

The Authority Summons

53.  Mr Chang submitted that a challenge on the authority to sue is not a defence and should not be raised as such but should be taken at the earliest opportunity and resolved as a preliminary issue, citing Kammy Town Ltd. v. Super Glory Corporation Ltd., para. 11.  The judge had erred in conflating the authority to sue issue with the merits of the defence and in declining to deal with the Authority Summons as a preliminary issue before he heard the appeal dismissing the defendant’s application to set aside the default judgment.  Significant consequences unfavourable to the defendant followed from this erroneous approach.  Firstly, had the authority to sue issue been determined as a preliminary issue, the burden of proving that there was proper authority to sue would have rested with the plaintiff, see Kammy Town Ltd. para. 13.  If the plaintiff had failed to establish it had proper authority to sue, this action would have been dismissed without the need of the defendant showing that it had a meritorious defence to set aside the default judgment.  Secondly, the defendant was denied the right to cross-examine the deponents of the plaintiff’s affirmations.  It was submitted that this was not a case where the challenge to authority was plainly bad on the evidence and given the conflicting evidence on affidavit, the judge should not “attempt the impossible by making a finding of fact on affidavit evidence without cross-examination”, see Kammy Town Ltd. paras. 14, 15 and 18.

54.  Mr Li submitted the judge was right to regard that the allegation of lack of authority based on forged documents and fabrications was closely intertwined with the merit of the defence.  The forgery allegation is part and parcel of the factual content of the defence.  He pointed out Kammy Town Ltd. was not a situation where there was an application to set aside a default judgment.  There is no decided authority in support of the proposition that whenever the defendant takes issue with the plaintiff’s authority to sue in an application to set aside a default judgment, the court must first resolve that issue by a trial of preliminary issue.

55.  In my view, the matter should be approached from first principles.  On the particular facts of this case, the judge is right in taking the view that the issue of lack of authority to sue based on the allegation of forgery and the merits of the defence to the plaintiff’s claim are so closely intertwined that they should be treated as different facets of the same subject matter.  This being the defendant’s application to set aside a regular default judgment, the onus is on the defendant to show a defence on the merits with a real prospect of success. The fact that its defence, or a substantial part of its defence, is premised on an allegation which formed the basis of its challenge to the plaintiff’s authority to sue should make no difference to the primary position.  The defendant has no right to demand a trial of the issue of lack of authority unless it has first satisfied the court that this issue (based on the same allegation of forgery as the defence and is merely a different facet of the same subject matter) has a real prospect of success.

56.  If this hurdle is not overcome by the defendant, the default judgment will not be set aside and the lack of authority issue will not proceed to trial with cross-examination on the affirmations.  In effect, the court is taking the view that the defendant’s challenge of the plaintiff’s authority to sue is so incredible that it should be rejected without the need of a trial where oral evidence would be heard and tested.  If the defendant succeeds in showing merits of a defence with a real prospect of success, it will be given leave to defend and the action will proceed to trial.  The lack of authority to sue could then be directed to be tried as a preliminary issue with cross-examination on the affidavits.

57.  I do not think the judge was in error in his approach.  There is no conflict with Kammy Town Ltd. and other authorities regarding the determination of an objection to the plaintiff’s authority to sue.

If there is real prospect of success in the defence

58.  It is the defendant’s case that the documents purporting to sell the plaintiff’s shares to CN Lau, the assignment of the director’s loan of Ron Lau to CN Lau, the Tenancy Agreement, and various minutes of board meetings of the companies concerned to approve or give effect to these transactions were forgeries in that the signatures of Ron Lau, Wayne Lau and Betty Chan were all forged.  Although Ron Lau’s signature on the Tenancy Agreement was admitted to be genuine as well as the seals of the plaintiff and the defendant placed on that agreement, it is alleged that Ron Lau was tricked by CN Lau into signing and placing the seals in that he was never shown the entire document but just the last page.

59.  Ron Lau claimed that before the Property was mortgaged to the Nanyang Commercial Bank, he had agreed with CN Lau that he would continue to reside there for the “next four years”, with rentals of $60,000 a month being set off from his loan to the plaintiff.  He produced a tenancy agreement dated 28 August 2006 signed by him on the defendant’s behalf and by Wayne Lau on the plaintiff’s behalf by which the Property was let to the defendant for two years at $60,000 a month from 1 August 2006 and that the total rentals for two years of $1,440,000 were to be paid by Ron Lau by debiting his account with the plaintiff.  A receipt of the plaintiff signed by Wayne Lau dated 1 September 2006 was produced, acknowledging receipt of $1,440,000 from Ron Lau for the defendant in payment of two years’ rentals.

60.  Crucial to the defendant’s case is Ron Lau’s loan to the plaintiff, from which the setting off of two years’ rentals was made.  The loan was said to arise in this way.

61.  In July 1999, the plaintiff purchased the Property at $9.2 million from Betty Chan and took an assignment of the Property.  The purchase price, with stamp duty and legal charges, amounted to $9,581,050.  Ron Lau deposed in his 1^st affirmation that the proceeds came from a mortgage bank loan of $6.3 million and his personal loan of $3,281,050 to the plaintiff, which was interest free.  Ron Lau had all along resided in the Property with Betty Chan since 1987.  In mid 2005, his personal loan to the plaintiff had remained unpaid.  At the advice of his accountant, he entered into a tenancy agreement with the plaintiff by which the Property was let to him for one year from 1 July 2005 at $50,000 a month and that the rentals for the whole term were to be deducted from Ron Lau’s loan account with the plaintiff which had a credit balance of some $3 million.  In July 2006, the plaintiff acting by Wayne Lau issued a receipt to Ron Lau dated 11 July 2006 to acknowledge receipt of $650,000, being payment of his rentals from 1 July 2005 to 31 July 2006.  The plaintiff and the defendant each passed a board resolution dated 19 July 2006 resolving to enter into a tenancy agreement for a two-year term from 1 August 2006 with the rentals for the entire period to be set off by debiting Ron Lau’s account with the plaintiff which was in credit of over $2 million.

62.  Betty Chan gave a very different version in her 3^rd affirmation.  In 1999, Ron Lau was in need of obtaining banking facilities for Calgo Development Ltd. from Generale Belgian Bank.  She agreed with Ron Lau to sell the Property to the plaintiff at $9.2 million on the understanding that no part of the purchase price would be paid to her and that Ron Lau and Calgo Development Ltd. would take full responsibility for repaying the existing and future banking facilities.  It was further agreed that until the plaintiff was in a position to pay her the purchase price, she would be entitled to occupy the Property free of payment except that she would pay utility charges and outgoing expenses.  She produced a memorandum dated 15 July 1999 to this effect signed by her and by Wayne Lau on the plaintiff’s behalf.  She deposed that at no time after the making of the agreement for sale and purchase and the assignment of the Property in 1999 has the plaintiff paid her any part of the purchase price of $9.2 million.

63.  Wayne Lau gave an account similar to Betty Chan in his 2^nd affirmation that no payment of the purchase price of $9.2 million would be made to Betty Chan but alleged that on execution of the assignment in July 1999, Ron Lau and he made separate loans to the plaintiff of $1 million odd and $700,000 odd which were used to pay off part of the debts on behalf of Calgo Development Ltd. owed to Chiyu Banking Corporation for the release of the charge over the Property.

64.  According to Betty Chan’s version, Ron Lau could not have made a loan of $3,281,050 (being the purchase price including stamp duty and legal charges, not covered by the bank loan of $6.3 million) to the plaintiff in July 1999, as she has never received any part of the purchase price.  There would be no credit balance in Ron Lau’s account with the plaintiff, from which any set off of rentals for the defendant could be made.

65.  Even on Wayne Lau’s version, Ron Lau did not make a loan of $3,281,050 to the plaintiff in July 1999 from which amounts of $650,000 and $1,440,000 could be set off for rentals.

66.  These glaring conflicts in the defendant’s own evidence are not the only difficulty about the defendant’s case.

67.  As the judge had remarked, if the allegation of forgery were true and there was no sale and purchase of the plaintiff’s shares to CN Lau, it would effectively mean that he had obtained no benefit for shouldering the loan advanced by Nanyang Commercial Bank for the discharge of the plaintiff’s debt as well as other financial obligations, which totalled about $12 million.

68.  Mr Chang submitted there was no apparently sound commercial reason for Ron Lau to sell the Property (by a sale of the plaintiff’s shares) to CN Lau as alleged.  He contended that the value of the Property was worth at least $13 million and with Ron Lau waiving his loans to the plaintiff of $2.2 million, CN Lau would receive assets in the total value of $15.2 million.  In return, CN Lau discharged the plaintiff’s indebtedness to Citic Ka Wah Bank of $7.3 million, waived Ron Lau’s debt to Bestlite of $3.6 million (which was disputed by Ron Lau, who claimed the debt had been repaid) and there was the consideration of $100,000 under the sale and purchase agreement (payment of which was also disputed by Ron Lau), making a total of $11 million.  There was no reason why Ron Lau would have agreed to this and allowed CN Lau to pocket a windfall of $4.2 million.

69.  A similar argument was made to the judge and was rejected.  On Ron Lau’s own evidence, he was in financial difficulties in early 2006 and had to sell the Property or to arrange for re-financing to repay the banking facilities.  He sought the help of CN Lau to arrange for re-financing.  CN Lau obtained facilities from the Nanyang Commercial Bank for his company Biotech and used part of the facilities to discharge the plaintiff’s indebtedness to Citic Ka Wah Bank.  Ron Lau was not able to put forth any satisfactory explanation why CN Lau was willing to assume liabilities of $7.3 million for no apparent consideration.  The fact that CN Lau had made a profit out of this commercial transaction, according to Ron Lau’s figures as mentioned above, is not to the point.

70.  In the facilities letter of the Nanyang Commercial Bank to Biotech dated 4 July 2006, one of the conditions provided that the banking facilities “shall be granted to [Biotech] after the shares transfer have been fully completed and a certificate confirming the transaction should have been produced by the solicitor to [the bank].” A copy of this letter was handed by CN Lau to Ron Lau on 6 July, according to Ron Lau’s 1^st affirmation.  The “shares transfer” referred to must clearly be the transfer of the plaintiff’s shares, as, according to Ron Lau’s 5^th affirmation, when CN Lau approached the bank for re-financing, Ron Lau had informed him Calgo Development Ltd. was the beneficial owner of the plaintiff’s shares and he had provided CN Lau photocopies of the two declarations of trust made by Beauson and Wayne Lau declaring that each held one share in the plaintiff on trust for Calgo Development Ltd., for production to the bank.

71.  Ron Lau has not disputed there was an agreement for a tenancy of the Property to be granted by the plaintiff to the defendant at $60,000 per month.  He made conflicting statements in his 1^st affirmation whether the tenancy was for two years or four.  The major dispute was whether there was an agreement that the rentals for two years were to be deducted from his loan to the plaintiff.  Apart from the conflicts in the defendant’s own evidence regarding Ron Lau’s alleged loan to the plaintiff, it would be contrary to the conditions in the facilities letter of the Nanyang Commercial Bank dated 4 July 2006 for the plaintiff to permit the defendant to set off the rentals for the entire term against Ron Lau’s loan to the plaintiff.  One of the documents Biotech was required to provide to the bank as a condition precedent prior to any drawing under the facilities was a rental assignment in respect of all rental properties duly executed by its owner in favour of the bank.  Another condition provided that all rental incomes of the charged properties should be deposited into Biotech’s account with the bank.

72.  For all the above reasons, the defendant’s allegations of forgery in respect of the transfer of shares in the plaintiff and the Tenancy Agreement are quite simply unbelievable. The defendant has failed to show a real prospect of success in its defence.  Its allegation of forgery which formed the basis of its contention that the plaintiff is still Ron Lau’s company and that this action was brought without the plaintiff’s authority is so incredible that it should be rejected without the need of a trial.

73.  I would dismiss the defendant’s appeal against the orders of Chung J on 13 December 2007 and make an order nisi that the defendant should pay the plaintiff’s costs of this appeal.

Hon Suffiad J:

74.  I would also dismiss the defendant's appeal for the reasons given by her Ladyship above.  I have nothing further to add to what has already been said by Kwan JA.