FINE GOOD LTD AND ANOTHER v. STATEMART INVESTMENTS LTD AND ANOTHER

HCA1190/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1190 OF 2012

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J U D G M E N T

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Introduction

1.  This is an application by the Plaintiffs for summary judgment and a declaratory order, under Order 14 Rule 1 of the Rules of the High Court (“O 14 Summons”).

2.  The Plaintiffs issued their writ in July 2012 and served a statement of claim in September 2012, and the Defendants’ defence was filed on 10 October 2012 (“Defence”).  The Plaintiffs filed a reply in November 2012, followed by the O 14 Summons, which was supported by an affirmation from Mr Ho, a director of the Plaintiffs (“Mr Ho’s 1^st Affirmation”)

3.  Notwithstanding that there being an order that unless the Defendants filed and served their affirmation in opposition to the O 14 Summons by 4 pm on 17 January 2013, the Defendants be debarred from filing and serving any affirmation (“Unless Order”), no affirmation had been filed on behalf of the Defendants within time.

4.  Almost 3 months after the Unless Order and about 3 working days (excluding the weekend) before the hearing fixed for the argument of the O 14 Summons, the Defendants suddenly issued a summons seeking, firstly to be relieved from the sanction imposed by the Unless Order and for leave to file an affirmation of  a Mr Lau on behalf of the Defendants to oppose the O 14 Summons (“D’s 1^st Application”), and secondly to be granted leave to amend the Defence and to include a counterclaim (“D’s 2^nd Application”).  Mr Lau’s affirmation contained exhibits of 8 box files (“Mr Lau’s Affirmation”).

5.  The Plaintiffs opposed D’s 1^st Application and asked that D’s 2^nd Application be adjourned to be dealt with after the determination of the Order 14 Summons.  In response to Mr Lau’s Affirmation, Mr Ho filed a 2^nd affirmation on behalf of the Plaintiffs (“Mr Ho’s 2^nd Affirmation”).  At the commencement of the hearing, Mr Chan, Leading Counsel for the Plaintiffs, informed the court that irrespective of whether this court would allow the Defendants’ applications or not, he would proceed with the O 14 Summons any way.

6.  As a result, all submissions/arguments for the Defendants’ two applications and for the O 14 Summons were heard at the hearing.

Brief Background

7.  The 1^st plaintiff (“Fine Good”) and the 2^nd Plaintiff (“Billport”) are BVI companies set up by the Plaintiffs’ side (“P’s Side”). The 1^st Defendant (“Statesmart”) is a BVI company set up by the Defendants’ side (“D’s Side”).  There are in fact a number of companies set up in British Virgin Islands and Hong Kong by P’s Side, as well as D’s Side, for various purposes.

8.  There are two actions which P’s Side issued in the High Court on the same day, 10 July 2012, against D’s Side.  The present action involved a property development in Beijing (“Beijing Development”) by D’s Side.  The other action HC 1189 of 2012 involved two golf resorts in Hainan, one at Hong Tong Bay, and one at Ya Long Bay (“Hainan Resorts”).

9.  There was also a third action instituted by D’s Side against P’s Side HCA 179 of 2013, just one day prior to the hearing of P’s Side’s application for summary judgment in HCA 1189 of 2012, seeking to restrain P’s Side to proceed with the sale of its interest in the company holding the majority interest in one of the Hainan Resorts.

Beijing Development

10.  In 2005, D’s Side arranged for financing of Phase 2 and 3 of the Beijing Development consisting of 55 villas (“Villas”) through Statesmart.  Financing was to be provided by way of loans from the P’s Side through one of their companies Onmile Limited (“Onmile”) Two agreements were entered into on 4 August 2005, one for Phase 2 and one for Phase 3, which were subsequently supplemented by two further agreements (“Onmile Agreements”) .

11.  The Onmile Agreements set out detailed arrangements regarding the financing and the security.  Briefly, D’s Side granted a BVI company on P’s Side Fullvision Profits Limited (“Fullvision”) an exclusive option to purchase the 55 Villas. Fullvision acquired 55 Hong Kong companies for this purpose (“HK Subsidiaries”).  55 pre-sale agreements were then signed, one by each of the HK Subsidiaries for the purchase of each of those 55 Villas (“Pre-Sale Agreements”).  Financing was then provided by Onmile to Statesmart by way of payments through Fullvision under the Pre-Sale Agreements.  Such payments made by Onmile would then be used for completing the Beijing Development.  D’s Side was responsible for the marketing to the public/third parties of the Beijing Development, and when a third party indicated interest to purchase a Villa, Fullvision either exercised its first option to purchase that Villa or, failing which the Villa would be sold to the third party, by way of a sub-sale agreement by the relevant HK Subsidiary.

12.  In addition, under the Onmile Agreements, Statesmart agreed to pay bonuses to Billport, a company on P’s Side.

13.  Upon the sale of a Villa to a third party, the sale proceeds would be firstly applied to pay the bonuses to Billport, and then the outstanding loans to Onmile.

14.  On full repayment of the bonuses and the loans by D’s Side to P’s Side, the shares of Fullvision were to be transferred back to D’s Side by P’s Side.

15.  As of 7 September 2007, under the Onmile Agreements, the amounts due from Statesmart to Onmile totalled HK$338,038,041.43 and the amount of bonuses due from Statesmart to Billport was HK$5,505,152.70.  P’s Side and D’s Side then decided to enter into a new loan arrangement.  The new loan agreement was entered into on 8 September 2007 (“Loan Agreement”), this time on P’s Side, by Fine Good and Billport, and on D’s Side, by Statesmart and the 2^nd Defendant (“Mr Liu”).

16.  Under the Loan Agreement, P’s Side was to make available to Statesmart a fixed term loan facility up to a total principal amount of HK$457,000,000 for the purpose of satisfying the above amounts due from Onmile and the amounts due from Billport.  Further, the outstanding balance of the new loan due to Billport, and interest, including any default interest, under the Loan Agreement (“Secured Indebtedness”) was to be fully repaid by a final maturity date (“Final Maturity Date”), which was at that time fixed on 13 September 2009.

17.  There were 2 other documents signed on the same day as the Loan Agreement:

(i)      A deed of guarantee executed by Mr Liu in favour of Fine Good under which Mr Liu personally guarantees and indemnifies unconditionally and irrevocably as principal debtor/obligor the due and prompt payment by Statesmart of the Secured Indebtedness under the Loan Agreement (“Guarantee”);

(ii)     A supplemental deed executed by Statesmart, Mr Liu, Onmile, Fullvision and Billport (“Onmile Supplemental Deed”), under which Statesmart confirms, among other things, that the then bonuses  outstanding  and payable to Billport (“Billport Outstanding Amount”) shall become immediately due if the Secured Indebtedness under the Loan Agreement shall become payable.  Further, Mr Liu indemnifies and guarantees, unconditionally and irrevocably as principal debtor/obligor, and not merely as a surety, the due and prompt payment by Statesmart of the Billport Outstanding Amount.

18.  The Loan Agreement was subsequently further supplemented by:

(i)      A supplemental agreement by deed dated 20 October 2008 (“1^st Supplemental Agreement”);

(ii)     A 2^nd supplemental agreement by deed dated 25 October 2010 (“2^nd Supplemental Agreement”).

19.  It appears that in 2009, Statesmart and Mr Liu already started to default in making payments under the Loan Agreement, and Fine Good and Billport respectively issued 2 actions in the High Court at that time[1].  Thereafter, the 2^nd Supplemental Loan Agreement was executed, which superseded the 1^st Supplemental Loan Agreement and sets out out, among other things:

(i)      The outstanding Secured Indebtedness due to Fine Good as of 25 February 2010 was HK$558,470,186.97;

(ii)     The Billport Outstanding Amount due to Billport as of 25 February 2010 was HK$7,705,393.41;

(iii)    The Final Maturity Date was postponed to 24 February 2011;

(iv)    A default interest at 30% per annum compounded monthly would be charged.

20.  A further agreement in Chinese entitled “同意書” was entered into concurrently on the same day as the 2^nd Supplemental Agreement, by Fine Good and Billport, on P’s Side, and Statesmart and Mr Liu, on D’s Side, under which Statesmart irrevocably agreed and authorized Fine Good to, among other things, dispose of the unsold Villas and the HK Subsidiaries and the sale proceeds were to be applied to settle the Secured Indebtedness (“Consent Letter”)

21.  Statesmart failed to repay in full on the Final Maturity Date the outstanding Secured Indebtedness to Fine Good and the Billport Outstanding Amount to Billport.

22.  Then, by a deed of acknowledgment dated 19 September 2011 (“Deed of Acknowledgment”) entered into by, among others, Statesmart and Mr Liu respectively acknowledged to Fine Good and Billport that the Loan Agreement, together with the two supplemental agreements, and the Onmile Supplemental Deed had been breached by Statesmart and Mr Liu. Statesmart and Mr Liu each agreed and acknowledged in the Deed of Acknowledgment that the sale proceeds of the remaining Villas (“Sale Proceeds”) could be applied at the absolute discretion of Fine Good and Billport for settlement of the damages suffered by them as a result of the breach.

23.  There were other parties to the Deed of Acknowledgment, as follows:

P’s Side

Success Forever Enterprises Limited (“Success Forever”)

Rich Shine Investments Limited (“Rich Shine”)

Fullvision

D’s Side

Jumbo Up Group Limited (“Jumbo Up”)

Jungle Eagle (“Jungle Eagle”)

24.  The other parties, save for Fullvision, were involved in other transactions concerning the Hainan Resorts between P’s Side and D’s Side, as set out hereafter.

Hainan Resorts

25.  The Hong Tong Bay Resort was entirely owned by a company called Du Shi International Holding and Enterprises Company Ltd (“Du Shi”), and about 81% of Du Shi was held by a company called Boost Time Investments Ltd (“Boost”).

26.  Success Forever, on P’s Side, was the owner of 70% of the issued shares of Boost, whilst two companies on D’s Side, Jumbo Up and Jungle Eagle respectively owned 20% and 10%.

27.  Under an agreement for sale and purchase dated 26 January 2010, as revised and varied by two supplemental agreements (“Boost Agreements”), Success Forever agreed to sell to Jumbo Up its 70% of the issued shares of Boost Time (“Boost Transaction”).

28.  At the same time, there was another transaction concerning the Ya Long Bay Resort (“Newrich Transaction”) under which a company on P’s Side, Rich Shine, agreed to purchase from a company on D’s Side Union Rich 20% shares of a company Newrich Holdings Ltd.

29.  The Boost Agreements provided in the event of default of Jumbo Up to complete the Boost Transaction, the consideration in the Newrich Transaction would be reduced.

30.  For the purpose of securing, among other things, the due performance by Jumbo Up of its obligations under the Boost Transaction and the obligations of Union Rich under the Newrich Transaction, Jumbo Up and Jungle Eagle executed a deed of share charge, among other things, in favour of Success Forever.  Further, Mr Liu executed a deed of guarantee in favour of Success Forever and Rich Shine under which he guaranteed the performance of Jumbo Up and Union Rich under the Boost Agreements.

31.  After payment of the initial and further deposits, Jumbo Up failed to pay the balance of the consideration under the Boost Agreements and failed to complete the Boost Transaction.

32.  Under the Deed of Acknowledgment, Jumbo Up, Union Rich, Jungle Eagle and Mr Liu acknowleged that they were in breach of the Boost Agreements, and further agreed that the Sale Proceeds could be applied by Success Forever, Rich Shine, as well as Fine Good and Billport, to settle the damages for the breach of the Boost Agreements.

The Actions

33.  At 31 July 2012, there were 36 of the Villas sold and 19 unsold in the Beijing Development.

34.  At 31 August 2012, the total outstanding Secured Indebtedness was HK$468,655,22.14, and the total Billport Outstanding Amount was HK$8,665,454.86.  The grand total as of that date was HK$477,320,674.90. 

35.  As mentioned earlier, P’s Side commenced two actions at the same time, namely HCA 1189 of 2013 and the present one.

36.  HCA 1189 of 2003 was instituted by Success Forever and Rich Shine against Jumbo Up, Union Rich, Mr Liu, Jungle Eagle and Statesmart arising out of Jumbo Up’s failure to comply with the Boost Agreements. Summary judgment was given to the Success Forever and Rich Shine against all 5 defendants on 11 April 2013[2] (“Summary Judgment”), 5 days before the hearing before this court.

37.  In the present action, Fine Good and Billport claimed against Statesmart and Mr Liu the outstanding amount of the Secured Indebtedness and the Billport Outstanding Amount (“Updated Remaining Sums”), interest at 30% per annum, and a declaration that Fine Good and Billport are entitled to apply the Sale Proceeds to settle the Updated Remaining Sums or otherwise to settle the damages suffered by Success Forever and Rich Shine under the Boost Agreements.

38.  In the O 14 Summons, Fine Good and Billport only sought final judgment against Statesmart and Mr Liu for (i) the Updated Remaining Sums together with interest at 30% per annum compounded monthly on the Updated Remaining Sums from 1 September 2012 to date of repayment, and (ii) a declaration that Fine Good and Billport were and are entitled to apply the Sale Proceeds of such of the remaining 19 Villas being held by Fine Good to settle the Update Remaining Sums.

39.  The O 14 Summons does not include the declaration sought by Fine Good and Billport in relation to their entitlement to apply the Sale Proceeds to settle damages suffered by Success Forever and Rich Shine under the Boost Agreements, and this part will need to proceed to trial.

D’s 1^st Application

Legal Principles on Relief from Sanction

40.  The legal principles prior to our Civil Justice Reform (“CJR”) had been summarized by the then Ma J in Ping Kai Engineering Company Limited and Hong Kong Teakwood Works Limited[3], namely where there had been a failure to comply with an ‘unless’ order, the court would proceed on the footing that the sanction stated in the ‘unless’ order would be imposed, and it would not do so where the party in default (and it was important to stress that the burden was on him) were to demonstrate with cogent and compelling evidence that the failure was not intentional or contumelious and was caused by circumstances beyond his control.

41.  Further, in Lessy SARL v Pacific Star Development Ltd & Another[4], our Court of Appeal considered the guidance given by the Court of Appeal in England and Wales in Hytec Information Systems Ltd v Coventry City Council[5] should be followed, modified, if necessary, in such way as appropriate to suit local conditions.  The guidance given in the case of Hytec was as follows[6]:

“(1) An unless order is an order of last resort. It is not made unless there is a history of failure to comply with other orders. It is the party’s last chance to put his case in order. (2) Because that was his last chance, a failure to comply will ordinarily result in the sanction being imposed. (3) This sanction is a necessary forensic weapon which the broader interests of the administration of justice require to be deployed unless the most compelling reason is advanced to exempt his failure. (4) It seems axiomatic that if a party intentionally or deliberately (if the synonym is preferred) flouts the order then he can expect no mercy. (5) A sufficient exoneration will almost inevitably require that he satisfies the court that something beyond his control has caused his failure to comply with the order. (6) The judge exercises his judicial discretion in deciding whether or not to excuse. A discretion judicially exercised on the facts and circumstances of each case on its own merits depends on the circumstances of that case; at the core is service to justice. (7) The interests of justice require that justice be shown to the injured party for the procedural inefficiencies caused by the twin scourges of delay and wasted costs. The public interest in the administration of justice to contain those two blights upon it also weighs very heavily. Any injustice to the defaulting party, though never to be ignored, comes a long way behind the other two.”

42.  Post CJR, O 2 r 4 of our Rules of the High Court (“RHC”) now provides that:

“Where a party has failed to comply with a rule or court order, any sanction for failure to comply imposed by the rule or court order has effect unless the party in default applies to the court for and obtains relief from the sanction within 14 days of the failure”

43.  Further, O 2 r 5 of RHC sets out the circumstances to be considered, which include:

“(1) On an application for relief from any sanction imposed for a failure to comply with any rule or court order, the Court shall consider all the circumstances including-

(a) the interests of the administration of justice;

(b) whether the application for relief has been made promptly;

(c) whether the failure to comply was intentional;

(d) whether there is a good explanation for the failure to comply;

(e) the extent to which the party in default has complied with other rules and court orders;

(f) whether the failure to comply was caused by the party in default or his legal representative;

(g) in the case where the party in default is not legally represented, whether he was unaware of the rule or court order, or if he was aware of it, whether he was able to comply with it without legal assistance;

(h) whether the trial date or the likely trial date can still be met if relief is granted;

(i) the effect which the failure to comply had on each party; and

(j) the effect which the granting of relief would have on each party.”

44.  The approach post CJR has been also summarized by Fok J (as he then was) in the case of Top One International (China) Property Group Co Ltd and Top One Property Group Ltd[7].  He has held hat in light of the CJR in Hong Kong, the English approach in Hytec nowreflected the approach to be applied in this jurisdiction as to the circumstances in which the court would extend time to permit compliance with an ‘unless’ order.  So, although intentional and contumelious disregard of a court’s peremptory order might be the most usual circumstance leading to the refusal of an extension, the exercise of the discretion to refuse an extension or to relieve a party from sanctions was no longer limited to such cases.  Fok J went on to hold that the court should consider all the individual circumstances including those listed in O 2 r 5(1)(a)-(1)(j), and depending on the circumstances, failure to comply with one or a number of orders through negligence, incompetence or sheer indolence might be such as to warrant a court refusing an extension of time, and any other conclusion would be to ignore the positive duty placed on parties to assist the court to further the underlying objectives of CJR (1A r 3) and on the court to do so by actively managing cases (O1A r4(1)).

Reasons for Relief

45.  Mr Wong, Counsel for the Defendants, submitted that the reasons why the Defendants should be granted relief from sanction were:

(i)      During the period between end of October 2012 and mid January 2013, P’s Side and D’s Side were negotiating for settlement both in relation to this action and HCA 1189 of 2012, and that all the parties almost reached a settlement on 15 January 2013.  To save costs, D’s Side had been focusing on the settlement negotiation, and after negotiation failed, Mr Lau picked up the matter again in late March 2013, as the hearing was approaching, and it was only then he realized that no affirmation had been filed in opposition to the O 14 Summons.

(ii)     Mr Lau only sought to achieve two main purposes in his affirmation, to exhibit the Onmile Agreements and the Pre-Sale Agreements signed by the HK Subsidiaries, and to give evidence on the circumstances where Fine Good delayed in giving approval of the intended sale of the Villas.  These matters would not prejudice P’s Side.

(iii)    It was in the interest of the administration of justice that the court should be apprised of all matters relevant to the Plaintiffs’ claims.

(iv)    The present case was still at its early stage and had not yet come to the stage of discovery, and there would be no adverse impact on the trial date if relief were to be given. As to the O 14 Summons, there should be no prejudice to the Plaintiffs in their preparation, and in any event, any prejudice caused could be compensated by an appropriate costs order.

(v)     There was no history of failure on the part of the Defendants to comply with court orders, and there was no allegation that there was a history of non-compliance which led to the Unless Order, and it could have been well arguable that the Unless Order should not have been granted in the first place.

O 2 r 5(e)

46.  I would first of all deal with the last point, namely as to whether there had been a history of failure to comply with other orders and whether the Unless Order should have been granted in the first place. Under O 2 r 5 (e), one of the circumstances I have to consider is the extent to which the Defendants had complied with other rules and court orders.

47.  Mr Wong submitted that  where an ‘unless’ order should not have been made in the first place because there had been no history of failure to comply with orders, the court would be more ready to grant relief from sanction.  It is his submission that the present case is such a case.

48.  He referred the court to   the case of KM Cheung & Co v Kung Ching[8].  In that case, the ‘unless’ order was an order for the plaintiff to comply with the defendant’s request for particulars.  The plaintiff did file and serve the particulars within the stipulated time, but the defendant was dissatisfied with the answers and applied to strike out the plaintiff’s claim.  This was not allowed by the master, and on appeal, Le Pichon HCDJ (as she then was) said she found troubling the fact that an ‘unless’ order was made at all, as there was no history of the plaintiff failing to comply with court orders.  She referred to the following passage from Ward LJ in the case of Hytec[9], and commented that the ‘unless’ order in that case should not have been made and was entirely inappropriate:

“(1) An unless order is an order of last resort. It is not made unless there is a history of failure to comply with other Orders. It is the party’s last chance to put his case in order.” (emphasis added)

49.  It appears that in the case of KM Cheung & Co, the ‘unless’ order was the first order obtained by the defendant immediately after an extension of time requested by the plaintiff expired.

50.  In the present case, the O 14 Summons was first scheduled for a call over hearing on 26 November 2012, and the Defendants were originally obliged to file and serve their affirmation in opposition 3 clear days before the call over hearing.  The Defendants sought more time, which was agreed by the Plaintiffs.  This was reflected in a consent order (“Consent Order”).  The Defendants were given 28 days under the Consent Order, and the time expired on 21 December 2012.  No affirmations were filed by the Defendants.  The Plaintiffs then  took out a summons for the Unless Order on 27 December 2012, and it was clear from a letter from the Defendants’ solicitors dated 2 January 2013 that they had no instructions to file any affirmation in reply, and that the Defendants did not require any extension of time to do so (emphasis added).  The Defendants’ position at that time was the summons for the Unless Order was a waste of costs. The Plaintiffs’ solicitors then explained that they sought the Unless Order as they did not want a possibility to remain that the Defendants would try to seek leave to file an affirmation out of time later in order to drag out the proceedings. Thereafter, there was no evidence that the Defendants opposed the Unless Order, and there was no appeal against the Unless Order. 

51.  It is clear from the above that when the Plaintiffs applied for the Unless Order, the Defendants had already failed to comply with the Consent Order.  Although it appears that this was the only court order that the Defendants had failed to comply, the unusual feature here was that the Defendants did not instruct their solicitors to file any affirmation at all and went further to indicate that they did not require any further extension of time for filing any affirmation.  The Unless Order was subsequently obtained almost 3 weeks after the Consent Order, and in the circumstances, I am satisfied that it was properly applied for and duly granted.

 Other circumstances in O 2 r 5

52.  The present application for relief was taken out only on 10 April 2013, three months after the Unless Order, and shortly before the hearing for the O 14 Summons. It was certainly not made promptly after the expiration of the deadline imposed in the Unless Order.

53.  D’s Side was represented by the same firm of solicitors throughout in the present action, and HCA 1189 of 2012, and also in HCA 179 of 2012.  P’s Side made applications for summary judgment in both the present action and in HCA 1189 of 2012.  There was no allegation made by Mr Lau that the failure to comply with the Unless Order was caused by the Defendants’ solicitors.  

54.  According to Mr Lau, there were two meetings for negotiations for an overall settlement, on 14 December 2012 and on 15 January 2013.  The O 14 Summons was issued over a month before the parties’ first meeting, and the first directions hearing and the Consent Order took place about three weeks before the first meeting.  About two weeks after the first meeting, the Plaintiffs applied for the Unless Order which was made before the parties’ second meeting.  There was no evidence that the Defendants were not aware of all the steps taken by the Plaintiffs in the action.

55.  It is further clear that from Mr Lau’s affirmation that by 15 January 2013 the Defendants knew that there was no settlement.  There were still 2 days before the expiry of the time limit in the Unless Order.  Yet, the Defendants chose not to file any affirmation, nor was there any request or application made to seek relief or extension of time within 14 days under O 2 r 4.

56.  With the failure of settlement discussions, D’s Side must have known that P’s Side would be proceeding with full steam in their two actions.  Indeed, the hearing for summary judgment in HCA 1189 of 2012 did go ahead on 30 January 2013.

57.  Mr Lau said after settlement discussions failed, then came Chinese New Year, and the Mr Lau claimed that he was occupied by “other business matters in March 2013”, and that the Defendants and he only picked up this matter in late March 2013.

58.  Firstly, the first day of Chinese New Year was not until 10 February 2013.  There was a period of almost 4 weeks after the failure of settlement discussions before the commencement of Chinese New Year.  There was no evidence as to what was done during this period of time about filing an affidavit.  In any event, there were only 3 days of public holidays for Chinese New Year in Hong Kong.  Even assuming a longer period in Mainland China, by the last week of February, the holiday should be over.  Mr Lau then said he was occupied with other business matters in March 2013.  No details were given.

59.  The Plaintiffs made an application for leave to re-amend their writ, which was granted on 19 March 2013.  During that hearing, the Defendants’ solicitor was present, and there appeared to be an oral application by the Defendants to put in an affirmation in opposition to the O 14 Summons.  This application was refused by Master Hui[10].  All this must have been known to the Defendants.  It is thus not clear why Mr Lau would say that the Defendants and Mr Lau himself only picked up the matter “in late March 2013”.

60.  In light of the above, I do not find there was any sufficient evidence that there were circumstances beyond the control of the Defendants which caused their failure to comply with the Unless Order, and in my view, the failure to comply was caused by the Defendants themselves and the burden is on them to give a good explanation.  The Defendants failed to do so.

61.  The Defendants’ failure to comply with the Consent Order was intentional in the sense that they did not instruct their solicitors to file any affirmation in reply/opposition to the O 14 Summons.  There was no evidence of any change of such instructions at the time when the Unless Order was granted on 10 January 2013, nor was there any sufficient evidence that by 17 January 2013, the deadline in the Unless Order, the Defendants had changed their mind and wanted to file an affirmation.  It is thus plain that at that time, the Defendants made a conscious and deliberate decision not to file any evidence in opposition to the O 14 Summons.

62.  Due to the Defendants’ failure to comply with the Unless Order, the Plaintiffs would no doubt be under the belief that no evidence would be filed by the Defendants, and Mr Chan, SC, had indeed prepared his written skeleton submissions and arguments on this basis.

63.  As mentioned earlier, the reason why the Plaintiffs applied for the Unless Order was they did not wish the Defendants to try and seek leave to file an affirmation out of time to drag out the proceedings.  What the Plaintiffs feared at that time unfortunately came true.

64.  Mr Lau’s affirmation contained 8 box files of exhibits, since he chose to exhibit all 55 copies of the Pre-Sale Agreements. There was absolutely no reason for Mr Lau to exhibit in his affirmation copies of the 55 Pre-Sale Agreements which totalled about 3,000 pages.  They all contained standard/similar terms, and even if they were relevant, exhibiting one as an illustration would be quite sufficient.  Mr Lau did not explain why the terms of these agreements would be relevant.  Mr Wong did not refer to the terms of these Pre-Sale Agreements at all during his skeleton or oral submissions.

65.  Although the action is still at its early stage and there is no trial date yet, the O 14 Summons was filed in November 2012, and the Plaintiffs had waited 5 months for the present hearing.  To file an affirmation with 8 box files of exhibits 3 working days before the hearing could “derail” the hearing, if there were to be an adjournment of the hearing, thus causing further delay to the proceedings.

66.  Mr Wong, however, submitted that Mr Lau’s affirmation would do little prejudice to the Plaintiffs because the Plaintiffs had themselves referred to the Onmile Agreements and the Villas being held by Hong Kong Subsidiaries, and further Mr Lau was only exhibiting the documents and explaining the relevant terms in his affirmation. Further, if there were to be any delay caused by an adjournment, such delay could be compensated by costs.

67.  During the hearing, Mr Wong conceded that the explanations given by Mr Lau for the delay might not be sufficient, but he referred this court to a decision of Au-Yeung DHCJ (as she then was) in the case of Tang Kim Kwan Patrick also known as Patrick Tang and Lee Chi Ting Karen also known as Karen Lee[11] to say that even so, this court should grant relief.  In that case, the defendant failed to comply with an ‘unless’ order to file her witness statement, and she sought relief from sanction.  Au-Yeung J held that the defendant had failed under those factors listed in O 2 r 5(1)(b), (d) and (f), and notwithstanding there was prejudice to the plaintiff, to preclude the defendant from relying on her witness statement would effectively deprive her of a proper defence.  Au-Yueng J has said in her judgment that the primary aim of the court in exercising its powers is to secure the just resolution of disputes in accordance with the substantive rights of the parties and not technical, and it would not be conducive to the administration of justice to bar the defendant entirely from adducting witness statements.  The relief sought was subsequently granted.

68.  Mr Wong submitted that the Defendants had 3 defences, as follows:

(i)      The loan obtained from the Fine Good was used to repay the advances by Onmile and Fullvision under the Onmile Agreements and upon such repayment, Fullvision should have transferred all it shares/interest in the HK Subsidiairies to Statesmart under the terms of the Onmile Agreements.  Thus the Plaintiffs should not be entitled to the 2^nd declaration they sought in the O 14 Summons, and further the Defendants should be entitled to set off damages for the failure of Fullvision to do so (“Defence 1”);

(ii)     The Plaintiffs had delayed their approval to the sale of 5 Villas to third parties, and thus the Defendants should be entitled to set off damages for such delay (“Defence 2”)

(iii)    Any declaration sought by Fine Good in relation to use the Sale Proceeds to pay and settle the damages suffered by Success Forever and Rich Shine respectively under the Boost Agreements was premature, in that whether those two companies were entitled to claim damages had not yet been determined (“Defence 3”).

69.  I will deal with the 3 defences later in this Judgment. Suffice to say, at this stage, that by the time of the hearing, the Summary Judgment had just been granted to Success Forever and Rich Shine, with damages to be assessed, and in any event, in the O 14 Summons, the Plaintiffs were not seeking a declaration in relation to the entitlement of these two companies.  Defence 1 appeared to be the only “new” defence raised by the Defendants, since Defence 2 was already pleaded to in their Defence, although the Defendants did not make any counterclaim at that time.

70.  What would the effect be on the Defendants if this court were not to grant relief ?  Without Mr Lau exhibiting the Onmile Agreements, the Defendants would not have any evidence to support Defence 1, and further there would be also no evidence to support their Defence 2.

71.  Mr Lau’s affirmation was served on the Plaintiffs before filing, but notwithstanding the such late service, the Plaintiffs reacted immediately, and the day before the hearing, Mr Ho’s 2^nd Affirmation was filed in opposition to the Defendants’ summons, and also to deal with Defence 1.  It is the Plaintiff’s case that whatever new arguments and new evidence set out by Mr Lau in his affirmation had no value, and the voluminous amount of documents served no purpose, and they asked that the Pre- Sale Agreements be expunged from the court’s record.

72.  As mentioned earlier, at the hearing, Mr Chan, SC, decided that whether the court were to allow Mr Lau’s affirmation to be filed, and whether to allow the Defendants to amend the Defence or not, he wanted to proceed with the O 14 Summons at that hearing.

73.  Notwithstanding the Defendants had failed to provide good explanation for the failure to comply with the Unless Order, and indeed the failure to comply was intentional in that there was no sufficient evidence that the Defendants had at the time of the expiry of the deadline in the Unless Order any intention to file any affirmation in reply, I am of the view that there is little or no prejudice to the Plaintiffs’ case in the event of this court granting the relief sought, whereas the Defendants would be deprived of a last chance to put their case before this court if relief were not to be granted.  Having considered all the circumstances, in the administration of justice, I exercise my discretion to grant the D’s 1^st Application, save that I order that exhibit “LTS-2” which consists of the Pre-Sale Agreements should be excluded and expunged from the court’s record.

D’s 2^nd Application

74.  At the commencement of the hearing, Mr Chan submitted that D’s 2^nd Application should be adjourned until after the determination of the O 14 Summons, since if the Plaintiffs were to succeed with the O 14 Summons, there would be no need to deal with D’s 2^nd Application.

75.  Mr Wong, however, wanted to rely on the amended defence and counterclaim to oppose the O 14 Summons.  I am of the view that the way to deal with this at this stage is for this court to grant leave to the Defendants to rely on the draft amended defence and counterclaim (“Draft Amended Defence”) as part of their evidence to oppose the O 14 Summons, even though the draft was not exhibited in Mr Lau’s affirmation, but was simply attached to the Defendant’s Summons.

76.  I accept Mr Chan’s submission that D’s 2^nd Application should be adjourned to be dealt with after this judgment as the Defendants may wish to review their application in light of this judgment.

The O 14 Summons

77.  Fine Good’s claim is simply based on the Loan Agreement, as varied and supplemented by the 1^st and 2^nd Supplemental Agreement, and the Guarantee, and Billport’s claim is based on the Onmile Supplemental Deed.  There was no dispute as to the terms of these documents. 

78.  It is the Plaintiffs’ case that the Defendants have no defence to their claims in the O 14 Summons.

79.  As set out in the Hong Kong Civil Procedure, the underlying policy of the summary procedure is to prevent a defendant from delaying the plaintiff from obtaining judgment in a case in which the defendant clearly has no defence to the plaintiff’s claim.  Further, when applied for, it is for the defendant to show that there is a triable issue or an arguable defence if he is to be allowed his day in court.  To deny him his day in court, if he shows a triable issue or an arguable defence, is indeed a fearful injustice.  On the other hand, if he has no defence and he obtains leave to defend, equally, there is injustice to the plaintiff[12].

80.  There was no dispute that the Plaintiffs’ case came within Order 14, and that the ‘preliminary requirements’ had been satisfied.

81.  As mentioned earlier, the Defendants relied on 3 defences.

Defence 1

82.  It was not disputed that the payments from Fine Good under the Loan Agreements were applied to repay the outstanding amounts under the Onmile Agreements.

83.  The Defendants’ case under Defence 1, according to this court’s understanding, was:

(i)      On 11 September 2007, under the terms of the Loan Agreements, Fine Good was authorized by Statesmart to pay to Onmile and Billport a sum of HK$195,692,309.34.

(ii)     By the above payment, the then outstanding amounts from Statesmart under the Onmile Agreements had been repaid;

(iii)    Under Clause 12.7 of the Onmile Agreements (“Clause 12.7”), upon repayment of the outstanding amounts, Fullvision was to transfer forthwith its shares in the HK Subsidiaries to Statesmart or its nominees;

(iv)    Upon repayment, the equitable interests in the HK Subsidiaries became vested in Statesmart, and Fine Good no longer had any equitable interests in the HK Subsidiaries, and thus it should not be entitled to the declaration sought in relation to the Sale Proceeds;

(v)     Further, due to the failure of Fullvision to transfer to Statesmart its shareholding in the HK Subsidiaries, Statesmart suffered loss and damages, and thus it was entitled to counterclaim for an order that Find Good to procure Fullvision to transfer its shareholding in the Hong Kong Subsidiaries, and for damages to be assessed.

84.  There was no dispute as to the interpretation or effect of Clause 12.7.  What the Defendants failed to disclose in their Draft Amended Defence, or in Mr Lau’s affirmation, was that on 7 September 2007, prior to Fine Good and Statesmart entering into the Loan Agreement, there was a letter of instructions of the same date signed by Statesmart and addressed to Onmile (“Letter of Instructions”)[13], irrevocably agreeing and authorizing Statesmart to transfer , among other things, the entire share capital of Fullvision to Fine Good to hold as security under and in accordance with the terms and conditions of the Loan Agreement, and further indemnifying Onmile against all claims etc arising out of and/in connection with the transfer.

85.  The Letter of Instructions was clearly signed prior to the entering into the Loan Agreement, as it referred to the Loan Agreement “to be entered into”.  This was followed by the execution of the Loan Agreement by Statesmart, and the entitlement of Fine Good to hold the equity interests in Fullvision, as security, was clearly set out in Clause 16.02 of the Loan Agreement.  The Defendants were thus fully aware and consented to this arrangement. 

86.  Pursuant to the Letter of Instructions and following the execution of the Loan Agreement, on 13 September 2007, Onmile executed an instrument of transfer, transferring its shares in Fullvision to Fine Good[14]. 

87.  The Loan Agreement was later supplemented by the 1^st Supplemental Agreement signed by Statesmart, Fine Good and Mr Liu[15], in which there was an amendment to Clause 8.7 of the Loan Agreement providing for circumstances when Fine Good was to sign a cancellation agreement in respect of the pre-sale agreement signed by the HK Subsidiary, in the event that a third party purchaser chose to purchase a Villa instead of acquiring the shares of the relevant HK Subsidiary.  There was no indication from Statesmart that Fullvision was in breach of Clause 12.7, and in fact the terms therein further confirmed that in all respects, Fine Good was regarded by Statesmart as holding the interest of the HK Subsidiary through Fullvision.  Again, Statesmart should be fully aware of these terms.

88.  Then came the 2^nd Supplemental Agreement[16]entered into by all the Plaintiffs and the Defendants.  Under the new Clause 16.02, Statesmart irrevocably agreed and authorized that Fine Good was entitled to hold the equity interest in Fullvision and the Hong Kong Subsidiaries held by Fullvision at that time, and entitled to dispose of the Villas.

89.  On the same day as the parties entered into the 2^nd Supplemental Agreement, there was also the Consent Letter signed on D’s Side by Statesmart, Jumbo Up, Jungle Eagle, Union Rich, Mr Liu, and P’s Side by Fine Good, Billport, Rich Shine, Success Forever.  Under the Consent Letter, Statesmart again irrevocably agreed and authorized Fine Good to dispose of the Villas and the HK Subsidiaries and to apply the Sale Proceeds to settle the Secured Indebtedness.

90.  Finally, on 19 September 2011, the Deed of Acknowledgement was executed by Statesmart, together with other companies on D’s Side, and on P’s Side, Fine Good, Billport, and this time also Fullvision, with D’s Side acknowledging that they were in breach of the Boost Agreements, the Loan Agreement, the Onmile Supplemental Deed and the Guarantee, and that P’s Side were entitled from the date thereof to apply all Sale Proceeds towards the settlement of any damages suffered by the P’s Side in consideration of P’s Side not taking legal action for a period of 30 days.

91.  In the above circumstances, Clause 12.7 has clearly been superseded by the Letter of Instructions, the provisions in Loan Agreement, the 1^st and the 2^nd Supplemental Agreements, and the Consent Letter.  I am thus of the view that Defence 1 has no merits.

Defence 2

92.  The Defendants pleaded in the Defence that in breach of Clause 8.03 of the Loan Agreement[17], as amended and varied by the 2^nd Supplemental Agreement[18], Fine Good delayed in giving approval of the proposed sale of 4 Villas, which had adversely affected the marketing and/or sales schedule or plans of Statesmart, causing Statesmart loss and damage, and that the Defendants were entitled to a set off.

93.  Clause 8.3 provided, among other things, that within 7 business days after receipt of written notice, Fine Good had to inform Statesmart whether it would exercise its right of first refusal to purchase the relevant Villa or the HK Subsidiary holding the Villa, and if Fine Good decided not to exercise its right of first refusal or its right to purchase, then it should approve the intended sale (“Clause 8.3”).

94.  In their reply filed on 7 November 2012, the Plaintiffs had already pleaded that the Defendants were in breach of the Loan Agreement and according to the terms of the Loan Agreement and the 2^nd Supplemental Agreement, Fine Good was no longer under any obligation to give any approval under Clause 8.03.  Further, under Clause 8.03 the intended sale was deemed to have been approved by Statesmart if Statesmart failed to exercise its right of first refusal within 7 Business Days as aforesaid.  It was also the Plaintiffs’ case that the Defendants had waived their right, if any, to allege that Fine Good was in breach of Clause 8.03.

95.  The Defendants did not include any counterclaim in the Defence, notwithstanding claiming that the Plaintiffs’ claim should be subject to a set off of the Defendants’ loss and damages under Clause 8.03. Further, no particulars of any loss or damages were set out in the Defence.

96.  In Mr Lau’s Affirmation, he provided more details of the alleged delay in approving the proposed sale of the Villas, and the number has gone up to 5, as follows:

	Villa	Date of Noticeto Statesmart	Approval Date
(i)	125	26.04.11	31.05.11
(ii)	220	29.08.11	06.10.11
(iii)	120	13.10.11	10.11.11
(iv)	118	02.11.11	21.11.11
(v)	116*	18.07.12	none todate

*not pleaded in the Defence

97.  Notwithstanding exhibiting copies of emails between Fine Good and Satesmart in relation to seeking approval, no particulars of the alleged loss or damage were given, save that it was said that:

(a) Statesmart incurred additional administration costs in obtaining the approval and in dealing with the third party purchasers;

(b) The delay of Fine Good in approving the intended sale caused delay to Statesmart in making repayments under the Loan Agreement.

98.  Firstly, Mr Chan, SC, pointed out Clause 8.03 contains a provision to the effect that a proposed sale would be deemed to have been approved if Statesmart failed to exercise its right of first refusal within 7 business days.  However, it seems that notwithstanding this provision, Statesmart’s practice was to seek approval from Fine Good in any proposed sale.  Mr Ho’s 1^st Affirmation had also exhibited letters from the Plaintiffs’ solicitors giving approvals subject to certain conditions.  It further appears there was another Villa No 110 for which sale Fine Good’s approval had been sought, in addition to the 5 now claimed by the Defendants.

99.  Secondly, after the default of Statesmart to repay the then outstanding amounts to Fine Good by the Final Maturity Date, Fine Good was no longer under any obligation to consider or give any approval for the sale, as under Clause 16.01 of the Loan Agreement and Clause 16.02 (as subsequently varied and amended), Fine Good was entitled to dispose or deal with the interest in the Villas or the HK Subsidiaries at its absolute discretion.  The proposed sale of the 5 or 6 Villas all took place after the Final Maturity Date, and in fact, after receipt of the demand letters from the Plaintiffs’ solicitors of 1 March 2011[19] (“Demand Letters”).

100.  Thirdly, Mr Chan referred this court to China & South Sea Bank v Tan[20], and submitted that Statesmart, as a creditor, was not under any duty to sell (or approve the sale) as it was free to decide in its own interest if and when it should do so.

101.  In the Deed of Acknowlegement, Statesmart acknowledged unconditionally and irrevocably the defaults set out in the Demand Letters.  There was no complaint or allegation of any delay by Fine Good in giving approval or any reference to a set off of any loss or damage suffered by Statesmart whether as pleaded in their Defence or the Draft Amended Defence. 

102.  Further, for Villa Nos 125, 110, 220, 120,118, the approval was in fact given through the Plaintiffs’ solicitors, and both Statesmart and Mr Liu signed confirmations and acknowledgments of the conditions laid down in the Plaintiffs’ solicitors in giving the approval. Again, there was no complaint or allegation of any delay on the part of Fine Good in giving approval or any reference to a set off of any loss or damage suffered by Statesmart as a result of the alleged delay. As for the last Villa No 116, the proposed sale was after the issuance of the writ by the Plaintiffs.

103.  As set out in the Hong Kong Civil Procedure, the defendant may show cause against a plaintiff’s application for summary judgment by a preliminary or technical objection and/or on the merits[21].  In showing a defence upon merits, the defendant may show cause by “affidavit or otherwise”.  The defendant’s affidavit must “condescend upon particulars” and should, as far as possible, deal specifically with the plaintiff’s claim and affidavit, and state clearly and concisely what the defence is, and what facts are relied on to support it.  This obligation is to ensure that where a plaintiff raises a plausible and prima facie sustainable case, a defendant can convince the court there exists a triable issue so that leave to defend is given or the application for summary judgment is dismissed.  It should also state whether defence goes to the whole or part of the claim, and in the latter case it should specify the part[22].  Further, if the defence of set-off is raised, save in the special situation of a claim on a bill of exchange or a cheque, the defendant is entitled to unconditional leave to defend up to the amount of the set-off claimed[23] .

104.  Neither Mr Lau’s affirmation nor the Draft Amended Defence provides any particulars on the alleged loss and damage and no amount was given for the set-off. There was no evidence that the proposed sale of the 5 or 6 Villas for which approval was given had fallen through.  Only some administrative costs were referred to, and as Mr Chan pointed out, even if there were such administrative costs, the amounts would only be minimal, compared to the Secured Indebtedness. Mr Lau said the delay of Fine Good in approving the sales had caused delay in Statesmart in making repayments under the Loan Agreement.  It is not quite clear what he was referring to, since those proposed sales were all after the Final Maturity Date, and indeed after the Demand Letters had been issued.  There was already default on the part of the Defendants.

105.  Mr Ho had said that after the default of the Defendants upon the Final Maturity Date, in mitigation of the loss and damage and without prejudice to any of its rights against the Defendants’ breaches, Fine Good had allowed Statesmart to sell the Villas from time to time such that the Sale Proceeds obtained could be applied for repayment.  It is clear from the Plaintiffs’ solicitors’ letters giving approval and the subsequent confirmations signed by the Statesmart and Mr Liu that Statesmart had unequivocally acknowledged and admitted its breach, and further admitted that such approval of sale if given was made on a non-obligatory and case by case basis.

106.  In the above circumstances, I am of the view that the intended counterclaim is not bona fide and Defence 2 has no merits either.

107.  Mr Chan submitted that even if Statesmart were entitled to counterclaim, this would not affect Mr Liu, who under the Guarantee guarantees as the principal debtor under Clause 1.01 thereof, and not merely as a surety, the due and prompt payment by Satesmart of the Secured Indebtedness under the Loan Agreement.  Further, under Clause 15.01 of the Guarantee, all payments by Mr Liu have been guaranteed to be made without set-off or counterclaim.

108.  In addition to what was said in the Guarantee, Mr Liu had further signed a confirmation, when seeking the approval of sale.  I accept the submission of Mr Chan, in that even if I were to find that Defence 2 has any merits, this should not affect Mr Liu’s liability under the Guarantee.

Defence 3

109.  As the Plaintiffs are not seeking summary judgment for a declaration in relation to damages suffered by Success Forever and Rich Shine, Defence 3 therefore is not relevant.

Conclusion

110.  Having considered all the circumstances, I am satisfied that the Defendants have failed to show cause on merits or that there are triable issues.  The Plaintiffs should be entitled to summary judgment as sought.

Orders 

111.  In relation to the Defendants’ summons for relief from sanction, I order in terms of paragraphs 1, 2 4, and 5 of the Defendants’ summons issued on 10 April 2013 save that exhibit “LTS-2” of Mr Lau’s Affirmation shall be expunged from the Court record.  Paragraph 3 of the Defendants’ summons is to be adjourned for a date to be fixed before a Master.

112.  In relation to the O 14 Summons, I grant an order in terms.

113.  There be certificate for two Counsel.

114.  Finally, I thank all Counsel for their assistance to this court.