TOYO ADVERTISING COMPANY LIMITED v. CHEUNG CHUNG FAT trading as KIN SHING COMPANY

IN THE COURT OF APPEAL OF THE HIGH COURT

1996, No.67

(Civil)

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J U D G M E N T

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Findlay J. :

The Background

1. In the District Court, the plaintiff claimed the sum of $60,000 from the defendant on the basis of the unpaid price of 300,000 pieces of cloth sold and delivered to the defendant on 5 October 1994, and, in the alternative, on the basis of the defendant being the drawer of cheque numbered 12370 dated 31 October 1994 payable to the plaintiff that was dishonoured.

2. In his defence, the defendant pleads that he received 150,000 pieces of cloth on a consignment sale at the plaintiff's request on the basis that payment would be due only after the defendant had sold the goods. The defendant admits he was the drawer of the cheque 12370, but is not liable on it because -

1. although the defendant agreed to take only 150,000 pieces of cloth, the plaintiff delivered 300,000 pieces;

2. the defendant told the plaintiff to collect the additional 150,000 pieces, and gave the plaintiff an undated cheque numbered 12370 for $60,000 on condition that the cheque "would only be payable after the sale of the consignment";

3. after the consignment sale of 150,000 pieces, the plaintiff told the defendant "falsely and fraudulently ... that they could not find the cheque and asked the [defendant] to pay by another cheque";

4. the defendant then gave the plaintiff another cheque 12369 for $60,000 against the plaintiff's assurance to return the earlier cheque if it were found.

3. So, the defendant says, the plaintiff obtained the cheque numbered 12370 by fraud.

4. The defendant also makes other allegations about a failure to give notice of dishonour.

5. By a summons dated 13 April 1995, the plaintiff claimed judgment under Rule 27 "on the ground that the Defence filed herein does not disclose any reasonable ground of defence".

6. In an affirmation in support of the summary judgment application, Mr Albert Lo, on behalf of the plaintiff, says that, on 5 October 1994, the defendant gave the plaintiff two cheques, numbered 12369 dated 6 October 1994 and 12370 dated 31 October 1994. Cheque 12369 was met on presentation. Cheque 12370, when presented for payment on 1 November 1994, was dishonoured.

7. In his affirmation in opposition to a claim for summary judgment, Mr Cheung says "I repeat that the cheque No.012370 was only given to the Plaintiff upon its representation that the cheque No.012369 had been lost and upon its undertaking to return the lost cheque if they found it" and "I repeat that I only gave the cheque no.012369 to the plaintiff as a conditional payment of the goods upon successful sale thereof by way of consignment."

8. On 3 July 1995, Judge Chan ordered that - "Unless the Defendant pays HK$60,000 into the Court within 14 days the Plaintiff may enter final judgment against him ... And it is ordered that if that sum is so paid into Court, the Defendant may defend the action".

9. On 30 November 1995, the defendant having failed to comply with the terms of the order, Judge Chan granted final judgment against the defendant.

10. On 28 March 1996, the defendant obtained leave from Godfrey, JA to appeal to this court against the order of 3 July 1995.

11. On 11 April 1996, the defendant filed a notice of appeal, and, as appears from the court file, the matter was set down on the list on the same day.

Motion to Set Aside the Appeal

12. The plaintiff has applied to have the notice of appeal set aside. This application is based, ultimately, on the allegation that the defendant did not, in terms of Order 59, rule 5, give notice to the plaintiff that the appeal had been set down. The plaintiff knew that an appeal had been lodged. Its advisers should have assumed that the Registrar would have done his duty by causing the appeal to be set down, as indeed he did. So, the application is based on the merest technicality. Mr Thomson concedes that he would not expect us refuse to deal with the appeal on this basis. He says that the only prejudice suffered by the plaintiff is that its Respondent's Notice is out of time, and that it has incurred costs of attempted execution. As to the Respondent's Notice, this should have been served within the time prescribed after the service of the notice of appeal; this has nothing at all to do with any notification that the appeal has been set down. In any event, the defendant is happy that the plaintiff should have leave to file its Respondent's Notice out of time, and I would grant this. As to the aborted costs of execution, it was the plaintiff's own decision to proceed in this way, knowing that an appeal was pending. I find it was surprising that it should have done so, and I would make no order in respect of these costs.

13. Accordingly, I would order that the motion to set aside the notice of appeal be dismissed. I would make an order nisi that the plaintiff pay the costs of this.

The Appeal

14. In Sit Yiu Wah v Kin Hung Hong Company Limited [1996] 3 HKC 140, the District Judge made an order similar to the one with which we are concerned. In that case, Mortimer, JA said that, if a judge came to the conclusion that there was no reasonable ground of defence, he should give judgment, but, if he concludes that a reasonable ground of defence was disclosed, he should not make an order such as he did. He believed that the provision regarding payment into court in Rule 27 was not appropriate to this situation.

15. Mr Thomson accepts, on the basis of Sit Yiu Wah's case, that the judge's order was wrong, and should be set aside. I agree. I would allow the appeal, set aside the order of 3 July 1995, and the judgment of 30 November 1995 on which it was based. Mr Thomson says that the plaintiff has always conceded this, but it does not appear that the plaintiff co-operated in assisting the defendant to have it set aside in the District Court. Accordingly, I would make an order nisi that the plaintiff pay the defendant's cost of appeal.

The Respondent's Notice

16. The Respondent's Notice says, in essence, that the order of the judge should have been judgment in favour of the plaintiff because the defendant failed to disclose any reasonable ground of defence.

17. On the main claim, for goods sold and delivered, the defendant says that the price was not due until he had sold the goods. There is nothing inherently incredible in that defence, so there is a reasonable ground of defence here.

18. On the alternative claim, that based on the cheque numbered 12370, there is some confusion in the defendant's pleading. Clearly, it was not cheque numbered 12370 that the defendant gave in the first place, and then cheque numbered 12369. This emerges from the evidence filed by the parties that I have quoted above. Reading that evidence with the pleading, what the defendant means to allege is that cheque 12369 was given first, and cheque 12370 was given later when the plaintiff said that it could not find cheque 12369. The wording of Rule 27(1)(b) indicates that, when consideration is being given to whether or not the defendant has disclosed a defence, attention is not limited to the written defence. It is common ground that it is the second cheque upon which the plaintiff sues. That this is the common understanding of the parties appears from the fact that Mr Thomson does not take this point. His argument proceeds on the basis that the defendant is alleging that cheque 12370 was given to the plaintiff by reason of the plaintiff's fraud.

19. Mr Thomson's argument is that the allegation of fraud is not made with sufficient particularity. The case of fraud is, of course, sufficiently alleged. The defence says that the plaintiff falsely and fraudulently represented to the defendant that cheque 12369 could not be found and asked for a replacement cheque. What is not alleged is when the representation was made, who made it on behalf of the plaintiff and by what means it was communicated. But these are details that the plaintiff could have ascertained if it wished to do so, either by asking for further particulars or during the process of framing the issues. Rule 38A provides a procedure for a plaintiff to complain that a defence is "inadequate", and to obtain further and better particulars. The lack of these particulars does not, in my view, amount to a failure to disclose a reasonable ground of defence.

20. I find that the allegation of fraud discloses a reasonable ground of defence. There are other allegations in the written defence, including the giving of the cheque conditionally and the failure to give notice of dishonour, that may arguably disclose no reasonable ground of defence, but there is no need for me to deal with these allegations here. If the plaintiff thinks that those allegations do not disclose an adequate defence, it has its remedy under Rule 38A.

21. Accordingly, I would dismiss the cross appeal. I would make an order nisi that the plaintiff pay the defendant's costs.

Keith J. :

22. I agree with the orders proposed by Findlay J., but I wish to add a few words of my own out of deference to the judge from whom I take a different view.

23. Rule 27(1)(b) of the District Court Civil Procedure (General) Rules permits the District Court to determine whether the defendant has disclosed a reasonable ground of defence. However, the rule has to be seen in the context of the procedure which exists in the District Court for the framing of issues. If, in the context of framing the issues, it is apparent that the defendant does not have a reasonable ground of defence, rule 27(1)(b) gives the Court power to pronounce such judgment against the defendant as it thinks appropriate.

24. In fact, that was not the purpose for which rule 27(1)(b) was invoked by the Plaintiff in this case. The Plaintiff wished to argue that the Defendant's Defence did not disclose a reasonable ground of defence. That is plain from its summons. The rule which should have been invoked by the Plaintiff in order to mount that argument was rule 38A(1), which enables the District Court to strike out the particulars of a defence if they do not disclose an adequate defence. For my part, I propose to consider this appeal as if the appeal had been brought from an order made under rule 38A(1).

25. Two procedural questions arise : first, to what extent is evidence admissible on applications under rule 38A(1)? Secondly, to what extent is it appropriate to make orders conditional on the payment of sums into court? On the first question, there is no express rule prohibiting the use of affidavits or affirmations to determine the issue as to whether the particulars of the defence disclose an adequate defence (as there is in Ord.18, r.19(2) of the Rules of the High Court). However, it would not normally be appropriate for the Court to take evidence into account : an examination of the pleadings would be sufficient. In this case, though, it has been appropriate to take the Defendant's evidence into account in order to correct an error in the Defence and Counterclaim, and to explain the sequence of the cheques : although the Defence and Counterclaim pleaded that the cheque no.12370 was drawn before cheque no.12369, it is plain that that was an error, and that cheque no.12369 preceded cheque no.12370.

26. As for the payment of money into court, it is true that the Court has power to impose such terms as it thinks fit on such orders as it makes. But if the Court decides that the particulars of the defence disclose an adequate defence, it would be a wrong exercise of that discretion to require a defendant to pay money into court as a condition of being permitted to defend the action. Equally, if the Court decides that the particulars of the defence disclose an adequate defence, it would be a wrong exercise of the discretion to permit a defendant to continue to defend the action on condition that he pays money into court. The question of whether money should be paid into court would be appropriate if the court was concerned with how likely a defence was to succeed at trial. But that was not the issue in this case. The issue here was whether the pleaded defence disclosed a defence recognised by the law. Accordingly, in my view, the judge was wrong to order that judgment would be entered in favour of the Plaintiff unless the Defendant paid the sum of $60,000.00 into court.

27. The remaining question is whether the particulars of the defence disclosed an adequate defence. On that issue, for the reasons given by Findlay J., I entirely agree that the particulars of the defence disclosed an adequate defence, and that the Defendant should have been permitted to defend the action unconditionally.

Liu J.A. :

28. It has been decided in this court that under Rule 27(1)(b), a District Court "may pronounce such judgment against him and in such terms as it shall think fit" if a defendant fails to disclose "any reasonable ground of defence" but that the court may not order a payment-in when a reasonable defence is disclosed under that paragraph of Rule 27(1). See Sit Yiu Wah v. Kin Hing Hong Co. Ltd. [1996] 3 HKC 140 at p.143A-B. That is sufficient to sustain the defendant's argument against the order of payment-in made by Her Honour Judge Chan. Insofar as the proceedings before the District Judge may be viewed, in substance, as an application for striking out under Rule 38A(1), I agree with the observations of Keith, J. on what is normally appropriate. Insofar as it is necessary to consider matters beyond what was evidently accepted by the District Judge as a disclosure of a reasonable defence, I wholly agree with what is said by Findlay, J. for disposing of this appeal and the cross appeal.