LINPAI CHING v. LABOURBUILDINGS LTD

HCA363/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 363 OF 2009

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BETWEEN

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D e c i s i o n

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1.  This is the plaintiff’s appeal out of time against the master’s decision of 9 March 2010 setting aside the default judgment dated 12 March 2009 against the defendant.

The plaintiff’s claims

2.  In the statement of claim (“SOC”), the plaintiff alleged to be the attorney and representative of China States Limited (“China States”). She then pleaded that on 6 June 2008, the defendant entered into a sale and purchase agreement with Year Harvest Investments Ltd (“Year Harvest”) for the purchase of Tatami Hotel (“referred to as the Hotel Building in the SOC”) together with the defendant’s guesthouse licence for that hotel and the plaintiff’s guesthouse licence in respect of Hampton Hotel for HK$160 million. She then went on to plead :

“3.  On 14^th June 2008, the Plaintiff as the Attorney and the Representative signed personally on the agreement between China States Limited and the Defendant for the transfer of the Tatami Hotel license to the Year Harvest Investments Limited or any nominee (‘License Agreement’) whereby it was stipulated in the License Agreement that the license fee was agreed at $28 million.

4.  The license transfer fee of $28 million was agreed to be paid on or before 30th September 2008 and time is of the essence in the said payment. It is agreed between the Plaintiff and the Defendant that the Plaintiff is agreed as the agent for receipt of such money in her dual capacities of the Attorney and the Representative.

5.  The Defendant failed to pay the Plaintiff $28 million. The Defendant continues in its failure to make payment of the said sum of $28 million notwithstanding repeated demands from the Plaintiff to the Defendant during the period from October 2008 to January 2009.

6.  The Plaintiff suffered losses of hotel businesses and profits therefrom during the period from October 2008 to January 2009 in that the Defendant’s indebtedness to the Bank of East Asia had led to the possession of the Hotel Building by the bailiff on 18th June 2008, that being 5 days after the execution of Agreement, and the subsequent delay until 10^th September 2008 in gaining repossession of the Hotel Building for the exclusive use and hotel operations of the Plaintiff as the Attorney and the Representative.

7.  Further and alternatively, the Defendant failed to give the Plaintiff peace and enjoyment of the hotel premises in the Hotel Building under the Tatami Hotel license whereby the Plaintiff suffered from loss of goodwill in its hotel operations from 18th June 2008 and such loss is continuing to the date hereof.”

3.  The plaintiff claimed for HK$28 million and damages to be assessed.

Default judgment and winding up petition

4.  Default judgment for HK$28 million and damages to be assessed was entered on 12 March 2009.

5.  Relying on the default judgment, the plaintiff then presented a winding up petition against the defendant (HCCW721/2009), which is due to be heard on 10 May 2010.

Receivers appointed

6.  Separately, the defendant obtained a credit facility from Winland Mortgage Limited (“Winland”) of HK$104 million by a debenture dated 8 April 2008 on the security of a mortgage over the Hotel Building and a first floating charge over its undertaking, property and assets.  Upon the defendant’s subsequent default on the debenture, Winland appointed receivers over the defendant.

7.  The receivers then carried out investigation.  On 22 January 2010, the receivers obtained an order from Yam J in HCMP2544/2009 empowering them, inter alia, to defend these proceedings and to apply to set aside the default judgment.

The hearing before the master

8.  The matter came before the master on 9 March 2010. The plaintiff was absent. The defendant was represented by counsel instructed by Messrs Hon & Co. Messrs David W.T. Chan & Co. also appeared and took a preliminary point that Messrs Hon & Co. did not have authority to represent the defendant. The master ruled against Messrs David W.T. Chan & Co. on the ground that Yam J’s order clearly supplied Messrs Hon & Co. with the requisite authority to act for the defendant.

9.  The master then set aside the default judgment and gave consequential directions.

Discussion

10.  Ms Lok, counsel for the defendant, first submitted that the default judgment was irregular. She relied on the receivers’ investigation, which showed that at the material time the plaintiff, her husband and his brother, Mr David Chan of Messrs David W.T. Chan & Co., had management and control of the defendant. And the plaintiff had caused or procured the defendant not to defend her claim. The default judgment is tainted with the apparent conflict of interest. She relied on the proposition that a default judgment obtained by fraud is liable to be set aside : Hong Kong Civil Procedure 2010, Vol. 1, para. 13/9/8 at p. 204. However, I do not think the evidence is sufficient to enable the defendant to raise fraud on the part of the plaintiff. In the end, Ms Lok did not persist. She accepted that for present purposes, the default judgment is a regular in the sense that the defendant had been duly served with the writ but had failed to acknowledge service.

11.  To set aside the default judgment as a regular one, the defendant needs to show that it has a meritorious defence with a real prospect of success. In my view, it has well discharged the burden.

12.  First, the plaintiff’s claim for the licence fees of HK$28 million is defective. Para. 3 of the SOC did not expressly plead who was to pay the licence fees for the licence for Tatami Hotel. Presumably it should be the transferee, that is, Year Harvest or its nominee. In the absence of any plea that the defendant is Year Harvest’s nominee, the assertion that the defendant is liable to pay the licence fees is simply not maintainable.

13.  Second, payment of the licence fees should be premised on the transfer of the licence for Tatami Hotel to Year Harvest.

14.  It is not clear from para. 3 of the SOC as to who should effect the transfer of the licence. Presumably, it should be the plaintiff, who effectively pleaded in para. 2 of the SOC that she owned the licence. In HCA1899/2008, Year Harvest sued the defendant for, inter alia, its failure to transfer the two guesthouse licences. In the judgment handed down on 11 February 2010, the Deputy Judge found that the defendant had failed to do so. The allegation in that action that the defendant was to transfer the licences to Year Harvest does not sit well with the plaintiff’s plea in para. 2 of SOC.

15.  Leaving aside the uncertainty as to who should transfer the licence, the more important point is that there is no plea in the SOC that the licence had been transferred to Year Harvest, whether by the plaintiff or by the defendant. In fact, what transpired in HCA1899/2008 showed that the licence for Tatami Hotel had not been transferred to Year Harvest.

16.  In the circumstances, it is highly questionable if the liability to pay the licence fees of HK$28 million had arisen at all.

17.  Third, the basis for the plaintiff’s claim in paras. 6 and 7 of the SOC is misconceived. It is not pleaded that in any of the two agreements relied on the plaintiff was to be granted possession of the Hotel Building for her exclusive use and hotel operations as the attorney and representative of China States (para. 6) or that she (whether in her personally capacity or as China States’s attorney and representative) was to be given quiet peace and enjoyment of the Hotel Building under the licence for Tatami Hotel.

18.  In short, the plaintiff’s claims, as now pleaded in the SOC, are bound to fail. It follows that the default judgment must be set aside.

19.  The plaintiff raised essentially two points in resisting this appeal.

20.  First, the order of Yam J did not allow the receivers, through Messrs Hon & Co., to take out the setting aside application. This is wrong. Yam J’s order did authorise the receivers to do so.

21.  Second, the plaintiff complained that she had not been served with the notice of the hearing before the master. According to the affirmation of service dated 1 March 2010, the notice was sent by registered post to her last known address, which was the address that the plaintiff stated in her affirmation filed on 27 February 2009 in support of the application for the default judgment. However, in HCMP2544/2009, Messrs Hon & Co. sent a letter dated 29 January 2010 to the plaintiff at a different address, which is her current address. In the circumstances, I do not think it could be said that the old address stated in her affirmation was her last known address for the purpose of giving her notice of the hearing before the master.

22.  In the absence of proper service of the notice of hearing, the master’s order made at the hearing, insofar as the plaintiff is concerned, is liable to be set aside technically. But it does not distract from my decision that the default judgment must be set aside.

Orders

23.  For the above reasons, I will make the following orders :

(1)	leave is granted to the plaintiff to appeal out of time;
(2)	the appeal is allowed and the order of the master setting aside the default judgment with consequential directions for filing of defence and reply is set aside;
(3)	the default judgment is set aside;
(4)	the defendant is given leave to file its defence forthwith and the defence filed on 7 April 2010 is to be treated and do stand as the defence filed pursuant to this order;
(5)	the plaintiff is to file her reply, if any, within 28 days from today.

24.  As between the plaintiff and the defendant, the master ordered that costs before him be in the cause. In my view, the costs before the master had become wasted as a result of the non-service. The proper order should be no order as to costs. I will vary that part of the master’s costs order accordingly. For the costs before me, the plaintiff succeeded on a technical point but it remains the case that the default judgment is set aside. I think in such special circumstances, there should be no order as to costs. And I so order.