WONG KING FUN v. KEYWAH INTERNATIONAL LTD

HCA 2823/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2823 OF 2006

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REASONS FOR JUDGMENT

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1.  The Defendant is appealing against the order of Master Kwang in refusing to set aside the judgement in default of intention to defend entered on 12 January 2007.

2.  I dismissed the appeal at the hearing, and here are my reasons.

Background

3.  The Plaintiff is suing the Defendant for repayment of a loan (with interest) of RMB¥8,555,188.14. 

4.  The Defendant is a Hong Kong company.  Its shareholders and directors included Madam Yuk-Yin Garcia aka Lam Yuk-Yin, Messrs Hui For-Sing, Wong Ming-Hon and Choi Muk-Tik, the husband of the Plaintiff. The Plaintiff was the Defendant’s company secretary until 5 March 2004.

5.  There shareholdings of the Defendant are as follows:

	Before March 1994	Now
Lam	28%	33%;
Choi	22%	32%
Wong	10%	15%
Hui	10%	10%
Others	30%	10%

6.  In March 1992, the Defendant entered into a joint venture land development project in Harbin whereby it needed to make 30% capital investment in the JV company.

7.  It is common ground that in early 1992, HK$17.5 million were raised.  But since there was no immediate use of the funds, 80% were returned to the shareholders.  By August 1992, the Defendant’s bank account had less than half a million HK$ left.

8.  On 15 April 1993, the Harbin Municipal Planning Commission issued a directive that the Defendant do contribute US$2.26 million.  Under Phase I, the Defendant was to contribute US$1.2 million.  The Defendant also had to make a loan of US$365,000 to a local government enterprise in Harbin.  At that stage, the defendant’s bank balance was just over HK$20,000.

9.  The Plaintiff alleged that she made a loan of HK$7.45 million to the Defendant acting through Choi in August 1993 in order to make capital contribution in the JV company.  HK$7.45 million were remitted to and duly verified by the JV company.

10.  On 22 June 1994, the Plaintiff entered into a Loan Agreement with the Defendant acting through Choi for HK$7.45 million, with interest at 9.5% p.a. 

11.  On 4 May 2003, Hui and Choi signed a Letter of Acknowledgment stating that the insufficient capital contribution by the shareholders had been advanced by Choi, and Hui’s 10% share amounted to HK$1.37 million.

12.  On 5 May 2003, Hui and Choi signed another Letter of Acknowledgment repeating the same as on 4 May 2003, adding that Hui’s shares would be “held” by Choi, and before the final accounting for the project, Hui did not need to make repayment.  If the accounting resulted in surplus, Hui could share in pro rata.  The parties have agreed that the Letter of Acknowledgment on 5 May 2003 (validity disputed) literally meant a security on the shares.

13.  On 5 August 2003, Hui and Choi signed another Letter of Acknowledgment stating that Choi had advanced the Phase II capital investment in the JV company and various expenses.  Hui had a 10% share but was not able to pay any part of his capital investment.

14.  On 5 January 2004, Wong and Choi signed a Letter of Acknowledgment stating that Wong transferred his shares in the Defendant to Choi and the profit or loss had nothing to do with Wong.  However, no transfer of shares was ever effected.

15.  The Defendant did not dispute the remittance of HK$7.45 million to the JV company.  However, the defence is that the capital contribution was raised by the shareholders of the Defendant, and the Plaintiff did not lend any money to the Defendant.

16.  Choi has received on behalf of the Defendant distributions of RMB¥6.25 million cash from the JV company, and repayment of the US$360,000 loan from the local government enterprise.

17.  The Writ was served on the registered office of the Defendant.  Choi had notice of it and he also sent the Writ by registered post to 4 other directors as per the addresses in the Annual Return to the Companies Registry, and only 1 of the postings was returned undelivered.

18.  Hui said Wong had only received the Writ on the day of the default judgment, and the other directors had not received the Writ.  They have not file any evidence to that effect.

Relevant principles

19.  A default judgment irregularly obtained is liable to be set aside without consideration of the merits.  But a defendant must show a real prospect of success as opposed to an arguable defence in setting aside a regular judgment.  The Court must be satisfied that the evidence produced by the defendant is potentially credible and carries some degree of conviction, and form a provisional view of the probable outcome of the action  (Hong Kong Civil Procedure 2009, Vol. 1 para. 13/9/14).  However, where the outcome would depend on whose evidence is believed and no provisional view of the probable outcome of the action can be formed, the appropriate test is to see whether the defence could well be established (see Hong Kong Civil Procedure 2009, Vol. 1 para. 13/9/15).

Service

20.  S. 356 of the Companies Ordinance (Cap. 32) provide that

“A document may be served on a company by leaving it at or sending it by post to the registered office of the company.”

21.  Mr. Dawes, for the plaintiff, referred to Hong Kong Civil Procedure 2009, Vol. 1para. 10/1/18 and submitted that service on the registered address of a company is good service and there is no need to establish the company had actual notice of the writ (see Ho Kwok Wah v Group Jewellery Arts Ltd & ors [2003] 3 HKC 595), and the writ could be served at the registered office even though the plaintiff was aware that the office had been vacated (see Lo Wing Kwong & anor v Grand Lord Seafood Restaurant [2006] HKEC 1026).

22.  Mr. Chiu, for the defendant, submitted that service was irregular in that the Writ was effectively served on Choi only as the registered office was chosen by him and the other directors had no knowledge of such address.  Alternative, the judgment was unfair or unjust as Choi was obviously colluding with the plaintiff.

23.  Mr. Chiu referred to Li Ngan Kwan v Gao Li Hui [2007] 4 HKLRD 592 where the plaintiff therein owned the 2^nd defendant and the writ was served on the 2^nd defendant’s place of business which was the registered place of business of another BVI subsidiary where there was an unrevoked standing instruction to forward all documents served on it for the 2^nd defendant to the plaintiff.  A Cheung J said (at paras. 24 to 26) that on the particular facts of the case, after “service” the writ went straight back to the plaintiff, and regardless of whether the default judgment was regular or irregular, it was unjust and unfair and it should be set aside unconditionally. 

24.  Mr. Chiu submitted that Choi was colluding with the Plaintiff by “playing the same game” (China Dragon International Ltd v Pang Hong [2007] 2 HKLRD 655 citing Murietta & ors v South America Etc Co Ltd & ors (1893) 62 LJQB per Wills J).

25.  Mr. Chui submitted that the following circumstances on collusion:

(1)  The Loan Agreement and Acknowledgment of Repayments were singed by Choi on behalf of the Defendant;

(2)  The plaintiff was the Defendant’s company secretary at the time of the alleged loan;

(3)  Choi took part in remitting the funds to the JV company;

(4)  Choi has received payments from the JV company on behalf of the Defendant and is liable to account to the Defendant should the Plaintiff’s claim fails;

(5)  Choi has taken side with the Plaintiff by filing affidavits in support.

26.  I find that the present facts are distinguishable from Li Ngan Kwan :

(1)  Service on the registered office of the Defendant is good service;

(2)  There is no arrangement for any service on the Defendant to be routed back to the Plaintiff.

27.  I find the default judgment was regularly obtained.  Even if there were any consideration of unfairness by reason of the relationship between of the Plaintiff and Choi, I would still consider the merits in deciding whether to set aside the judgment.

Merits

28.  Mr. Chiu submitted the defence as follow:

(1) &nbspThe Plaintiff did not lend to the Defendant;

(2) &nbspThe shareholders of the Defendant injected funds into the joint account of the Plaintiff and Choi and it was not necessary for the Defendant to borrow from the Plaintiff;

(3) &nbspThe funds for remittances by Choi through various entities with permission to deal in foreign exchange came from the shareholders;

(4) &nbspThere was no document apart from the Loan Agreement and acknowledgment of repayments signed by Choi on behalf of the defendant;

(5) &nbspThe contemporaneous documents (Letters of Acknowledgment, etc.) between the shareholders never mentioned any loan from the Plaintiff.

29.  Mr Chiu referred to a pay-in slip dated 30 July 1993 of HK$776,100 paid by Hui into the joint account of the Plaintiff and Choi.  Hui said the amount is equivalent to US$100,000, which is about 10% of the Phase I investment of US$1.2 million, and the timing also tallied.  And although the documentary evidence (banking or otherwise) for contribution by the other shareholders is no longer available, the fact that he had made his contributions could support an inference that the other shareholders had also made their contributions.

30.  Hui said the Letters of Acknowledgement dated 4 and 5 May 2003 were condition upon the precedent of the production of accounting evidence by Choi.  Since there was no such evidence, the acknowledgment would not take effect, and he had taken the liberty of physically tearing up his copies.

31.  In any case, even if they were valid acknowledgment, it only meant that he borrowed from Choi and there was no mention of any loan from the Plaintiff. 

32.  Mr Chiu also referred to a Clarification to Income and Expenditure Account for March 1992 to May 1993 dated 10 March 1995 prepared by Hui when he handed over the affairs of the Defendant to Choi and the Confirmation mentioned that the raising of capitals in July 1993 and 2 further occasions were not handled by Hui.  It did not mention any loan by the Plaintiff to the Defendant.

33.  Hui also produced 3 documents which authenticity is disputed :

(1)  An unsigned and unauthored announcement to the shareholders dated November 2000 on the raising of capital US$1.2 million which mentioned the difficulty of making foreign exchange remittance;

(2)  An undated, unsigned and unauthored letter to the shareholders of the Defendant stating the author contributed RMB￥5.55 million under Phase II;

(3)  An undated and unsigned letter to the shareholders of the Defendant with the typed name Choi as the author stating he had advanced all the sums in the JV project and the expenses for the sales activities in Hong Kong.

34.  Mr. Chiu submitted that none of the above mentioned the loan by the Plaintiff.

35.  Choi stated that the HK$776,100 deposit related to other dealings between the Hui and himself and had nothing to do with the Defendant nor the JV company.

36.  Be that as it may, I shall assume that HK$776,100 was contribution by Hui to the Defendant.

37.  Mr. Dawes submitted that:

(1)  In May 1993, the Defendant was called upon to make capital contribution of US$2.26 million (or at least US$1.2 million under Phase I) to the JV company;

(2)  At that stage the Defendant only had a cash of about HK$20,000;

(3)  Even assuming Hui had contributed his share of HK$776,100, there is a complete lack of evidence of the contribution and fund flow from the shareholders to support the claim that the Defendant had no need to borrow any funds;

(4)  Choi is authorized to borrow on behalf of the Defendant;

(5)  The Plaintiff is neither a shareholder nor director of the Defendant and is entitled to rely on the internal management rule in Turquand’s case (1856) 6 E&B 327.

38.  I do not think this case turns on the Turquand’s rule as there was no allegation of lack of authority on the part of Choi.  Were there to be any, it would be appropriate to assume, for the present purpose at least, that knowledge could be inferred on the Plaintiff by reason of her relationship with Choi.

39.  I think the case turns on the fact of borrowing, and from whom.

40.  I am of the view that it is non sequitur to conclude that if Hui had made his contribution of HK$776,100, the other shareholders must have likewise made their contribution, thereby absolving the need of the Defendant raise capital, debt or equity.

41.  Further, even if Hui had contributed HK$776,100, the fact remained he was still in arrears of capital contribution of HK$1.37 million as at 2003.  This supported the Plaintiff’s case that the Defendant was cash strapped.  Hui’s claim that his signed acknowledgment was somehow conditional upon the production of accounting evidence is contrary to the terms of the letters as well as common sense, and is simply unbelievable.

42.  As to whether it was Hui owing Choi money as opposed to the Defendant owing the Plaintiff money, granted that the documents seem to suggest it was Choi who advanced the funds and there was no mention of the loan by the Plaintiff, it was however never the defence case that Hui borrowed from Choi, but rather Hui and the other shareholders had made their contributions and the acknowledgment Hui signed never took effect.  The two stances are factually inconsistent.  Taken in such context, the point is nether here not there.

43.  I note that Choi has admitted receiving money on behalf of the Defendant.  As such, he is liable to account to the Defendant in any event.

44.  I am not satisfied that the Defendant has any real prospect of success of the defence of contributions by the shareholder and it had no need to borrow and did not borrow from the Plaintiff.

Conclusion

45.  In the premises, the appeal was dismissed.

Costs

46.  I ordered that the Defendant pay the costs of the appeal to the Plaintiff, to be taxed if not agreed.