CENTRAL SOUTHWOOD LTD v. YEUNG MEI CHUN AND ANOTHER

DCCJ 398/2014 &
DCMP 1474/2015
(Heard Together)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 398 OF 2014

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 1474 OF 2015

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DECISION

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Introduction

1.  In DCCJ 398 of 2014, the plaintiff entered into two deeds of indemnity with the 1^st and 2^nd defendants guaranteeing a loan advanced by Lau Shek Sun（劉石新）(“the Lender”) to the 1^st defendant. The 2^nd defendant and the plaintiff were the guarantors of the same loan in the principal loan agreement. The Lender demanded the plaintiff to repay the loan in default of 1^st repayment by the 1^st defendant. The plaintiff repaid the outstanding loan and then sued the 1^st and 2^nd defendants for damages pursuant to both deeds of indemnity.

2.  The 1^st and 2^nd defendants are mother and son. The 1^st defendant is the owner of Flat 1, 34^th floor, Shin Lun House (Block 2), Fu Shin Estate, No 12, On Po Road, Tai Po, New Territories, Hong Kong (“the Property”).  The plaintiff obtained default judgment against the 1^st and 2^nd defendants on 27 March 2014. Charging order nisi against the Property to show cause was granted on 8 April 2014 and charging order absolute was made on 16 May 2014 against the Property.

3.  In DCMP 1474 of 2015, the defendant is the 1^st defendant in DCCJ 398 of 2014 (hereinafter referred to as “the 1^st defendant” in this decision). The plaintiff applied for an order for sale of the Property pursuant to the charging order absolute. The plaintiff obtained the order of possession against the Property on 18 August 2015 and subsequently a writ of possession against the Property on 5 October 2015.

4.  There are three applications.

(i) The 1^st and 2^nd defendants in DCCJ 398 of 2014 seek an order to set aside the default judgment entered against them on 27 March 2014.

(ii) The 1^st and 2^nd defendants in DCCJ 398 of 2014 seek an order to discharge the charging order nisi to show cause dated 8 April 2014; the amended charging order absolute dated 16 May 2014; and vacate the registration of both the charging orders in the Land Registry.

(iii) The defendant in DCMP 1474 of 2015 (the 1^st defendant) seeks an order to set aside the order for possession of the Property dated 18 August 2015 and writ of possession of the Property on 5 October 2015.

The plaintiff’s claim

5.  On 5 December 2013, the 1^st defendant entered into a principal loan agreement as borrower, 2^nd defendant as the guarantor, with the Lender for a loan in sum of RMB432,300.00 (“the Loan”).  The 1^st repayment of the Loan in sum of RMB7,137.66 was due on 10 January 2014.  At the same time, the 1^st defendant entered into a 2^nd loan agreement with the Lender and China Everbright Bank. The 1^st defendant opened a bank account with the said bank and the Loan was deposited in her account therein.  Both the loan agreements were executed in Shenzhen.

6.  On the same day, the plaintiff entered into two deeds of indemnity with the 1^st and 2^nd defendants respectively in Hong Kong.  The 1^st and 2^nd defendants agreed to indemnify the plaintiff against the sums, losses, expenses and costs that the plaintiff may suffer or pay to the Lender or China Everbright Bank in event of default of repayment of the Loan.

7.  The plaintiff alleged the 1^st and 2^nd defendants were in default of the 1^st repayment of the Loan to the Lender.  Upon demand of the Lender on 16 January 2014, Ms Yeung Suet Ying, a director of the plaintiff transferred RMB544,876.04 to the Lender in satisfaction of the Loan and other charges on 17 January 2014.

8.  On 29 January 2014, the plaintiff commenced DCCJ 398 of 2014 against the 1^st and 2^nd defendants.  Default judgment was entered against both the 1^st and 2^nd defendants on 27 March 2014. On 16 May 2014, a charging order nisi to show cause against the Property was made absolute in absence of the 1^st defendant.  

9.  On 3 June 2015, the plaintiff commenced DCMP 1474 of 2015 against the 1^st defendant.  The order of possession and the writ of possession against the Property were granted on 18 August 2015 and 5 October 2015 respectively.

10.  The 1^st and 2^nd defendants were absent in all hearings.

The 1^st and 2^nd defendant’s application

11.  The 1^st and 2^nd defendants gave a very different account of events. They submitted, the plaintiff obtained the default judgment by fraud, it was an irregular judgment and should be set aside without considering merits.  Alternatively, in event the count finds it was a regular judgment, the 1^st and 2^nd defendants have a meritorious defence and a real prospect of success against the plaintiff’s claim.  The default judgment should be set aside.

12.  The plaintiff agrees, should the default judgment be set aside (be it on the basis of regular judgment or irregular judgment), the order made against the Property, namely, the charging order nisi to show cause; charging order absolute; the order for possession and the writ of possession should be set aside accordingly.

The defence

13.  The 1^st and 2^nd defendants conceded they were served with the writ of summons and all relevant documents.  The default judgment was irregular because it was obtained by fraud.  The 1^st defendant did not borrow the Loan from the Lender. The principal loan agreement, the 2^nd loan agreement and the deeds of indemnity were fraudulent and shall have no effect. 

14.  In or about November 2013, the 2^nd defendant enquired from a business entity known as “Intell Finance and Mortgage Company” which had represented itself to be a money lender (“Intell”), for a personal loan.  One Ms Lau of Intell in Mongkok office procured the Loan to the 2^nd defendant. She suggested the 1^st defendant shall be the borrower because she has assets. The 2^nd defendant shall be the guarantor of the loan.  Ms Lau instructed the 1^st and 2^nd defendants to sign relevant loan agreements in Shenzhen. It turned out the principal loan agreement and the 2^nd loan agreement were executed. Two deeds of indemnity were signed by both the 1^st and 2^nd defendants with the plaintiff afterwards.

15.  At all times, the 1^st and 2^nd defendants acted in accordance to the instructions of Intell.  Intell represented to the 1^st defendant that the real lender of the loan was the plaintiff.  Intell will issue a cashier order to the 1^st defendant after the execution of the principal loan agreement, the 2^nd loan agreement and other relevant documents.   

16.  Intell issued a cashier order in sum of HK$300,000 to the 1^st defendant. The 1^st defendant deposited the same into her bank account in Hong Kong on 6 December 2013. Intell further issued to the 1^st defendant a cash cheque in sum of HK$50,000 being Intell’s administrative fee and legal fee for the procurement of the loan.  The 1^st defendant was instructed to return HK$50,000 cash to Intell after withdrawing the amount from her bank.

17.  Intell further issued a repayment schedule to the 1^st and 2^nd defendants.  The repayment schedule did not bear the identity of the lender but had expressly stated the 1^st defendant as borrower and the 2^nd defendant as guarantor.  The principal loan amount was HK$550,000.00 with an annual interest rate at 9.825%. The monthly repayment was fixed at $9,085 for 84 installments.  Intell represented to both the 1^st and 2^nd defendants that the first two repayments will be waived.  The 1^st defendant then effected the 1^st repayment promptly on 5 February 2014 (which was due on 6 June 2014).

18.  Intell instructed the 1^st defendant to open an account with the Bank of East Asia.  The 1^st defendant was instructed to issue an undated cheque in sum of HK$165,000.00 to Intell.  The payee of the cheque was “英利按揭財務公司”, the Chinese name of Intell. Intell explained the purpose of such being penalty in event the 1^st defendant opted for early repayment of the entire Loan.

19.  The writ of summons was served on the 1^st and 2^nd defendants in February 2014.  The 1^st and 2^nd defendants were bewildered. The same Ms Lau of Intell reassured both the 1^st and 2^nd defendants of the waiver of 1^st and 2^nd repayments of the Loan until March 2014. She explained to the 2^nd defendant that it was a normal practice for Intell to commence of legal proceedings against them.

20.  The 1^st defendant effected repayments in accordance to the instructions of Intell from February 2014 until November 2014.  Intell instructed the 2^nd defendant to deposit the monies to the bank account of “The Brightness Management Co” with Shanghai Commercial Bank, not Intell.

21.  Whilst the 1^st and 2^nd defendants were served with the notice to occupier to quit on 19 October 2015, a staff from Intell represented to the 2^nd defendant that such notice could be ignored if he continued to make repayments to Intell.  The 2^nd defendant then deposited HK$20,000.00 and HK$100,000.00 to the bank account of “The Brightness Management Co” on 13 and 16 November 2015 respectively.  After making such deposits, the 1^st and 2^nd defendants were further served with the 2^nd and 3^rd notices to occupier to quit on 13 and 27 January 2016 respectively.

22.  The 1^st and 2^nd defendants then took out these applications.

Legal principles

23.  The applicable legal principles for setting aside a default judgment are well established.  In event of an irregular judgment, it should be set aside as of right (subject to the court’s discretion to impose conditions), the court is not bound to consider the strength of the intended defence.  (See Po Kwong Marble Factory Ltd v Wah Yee Decoration Co Ltd [1996] 4 HKC 157).  For regular judgment, the court still retains a wide discretionary power to set aside the default judgment, with or without conditions.  A defendant needed to demonstrate a meritorious defence and a real prospect of success.  The court is entitled to form some provisional view of the probable outcome of the action.  (See El Vince Ltd v Wu Wen Sheng [2001] 3 HKLRD 445).

24.  Intell is not a party to DCCJ 398 of 2014, it is premature to determine on affidavits whether fraud was practiced by the plaintiff. The 1^st and 2^nd defendants’ application should be premised on a setting aside a regular judgment.

Analysis

The Loan

25.  To start with, the formation of all documents in this loan advancement exercise was dubious. The 1^st and 2^nd defendants approached Intell who represented itself as a money lender, it is expected any loan advanced will be made by Intell.  By an unusual manner, the 1^st and 2^nd defendants were directed by Intell to approach the Lender, an unknown person in Shenzhen, outside the jurisdiction, for the Loan. The arrangement itself is skeptical.

26.  It is also precarious whether the Lender has performed the principal loan agreement by advancing the Loan to the 1^st defendant in her bank account with China Everbright Bank.  A transaction history of the 1^st defendant’s bank account, a sum of RMB432,300.00 was deposited on 10 December 2013.  On the next day, the same amount was remitted back to the Lender.  Unexpectedly on 13 December 2013, an amount in sum of RMB432,535.00 was deposited again in the same bank account.  On the same day, the same amount was withdrawn with reference of an “early repayment of loan”.  Simply put, these couple of transactions shown no money has been advanced to the 1^st defendant pursuant to the principal loan agreement and the 2^nd loan agreement.  If this were the case, the principal loan agreement came without consideration and there was no performance at all.

27.  Notwithstanding this, the Lender issued a demand letter to the plaintiff on 16 January 2014. In an ordinary course of business where the repayment of a loan was in default, a lender would have demanded the borrower for repayment first. This letter was only issued to the plaintiff, as the guarantor of the Loan. No letter was issued to the 1^st defendant (or the 2^nd defendant who was also a guarantor) demanding repayment. Without negotiation or clarification, on the next day, the plaintiff has acted in an extraordinary efficient manner to repay the Loan to the Lender together with interest and charges.  Ms Yeung Suet Ying, a director of the plaintiff deposited HK$544,876.04 to the Lender to his account with China Everbright Bank.  

28.  The computation of the sum HK$544,876.04 is unclear.  As pleaded by the plaintiff in its statement of claim, the Lender accepted a concession interest rate for penalty at 30%. There is no evidence by the plaintiff that how it has been agreed. The Lender has indeed profited from such repayment without actual advancement of the Loan to the 1^st defendant.  

The dealings with Intell was suspicious

29.  After executing the so called relevant documents in Shenzhen, it turned out two loan agreements were signed, whether or not the 1^st and 2^nd defendants were provided with all signed documents, Intell did not inform the 1^st and 2^nd defendants to make 1^st repayment of the Loan to the Lender in good time.  Rather, Intell instructed the 1^st and 2^nd defendants to make repayment by depositing monies to the bank account of “The Brightness Management Co.” with Shanghai Commercial Bank, an unknown party to the loan agreements.

30.  The repayment schedule bears no letterhead.  At that time, the identity of the real lender was not made known to the 1^st and 2^nd defendants.  The amount of Loan was marked to be HK$550,000.00 as recorded in the repayment schedule, with no reference to RMB432,300.00. What is more alarming was that Intell has only advanced HK$300,000.00 to the 1^st and 2^nd defendants. Intell reassured the 2^nd defendant and sugarcoated the arrangement by waiving the 1^st and 2^nd repayments.  The 2^nd defendant did so by repaying the 3^rd repayment ahead of the due date and other repayments till November 2014.

31.  Having made repayments as instructed by Intell, the plaintiff commenced legal proceedings against the 1^st and 2^nd defendants.  Intell then instructed the 2^nd defendant to make repayments in larger sums outside the ambit of the repayment schedule.  The 2^nd defendant has deposited HK$120,000.00 into the back account of “The Brightness Management Co”.

Relationship between the Lender and Intell

32.  The Lender and Intell are closely related. After both summons were taken out by the 1^st and 2^nd defendants, on 20 April 2016, the plaintiff’s solicitors issued a letter to the solicitors for the 1^st and 2^nd defendants, stating inter alia,

“Please be informed that the Lender is considering to transfer your alleged repayments of HK$174,510 (subject to confirmation) to our client, the Plaintiff herein. The Plaintiff will deduct the said sum from its claim hereof.”

The letter was sent after the 1^st and 2^nd defendants’ protest that they have repaid HK$174,510 to Intell by depositing the same amount on various dates with “The Brightness Management Co”.  The correlation between the Lender and Intell is obvious when the repayments made to Intell (a non party) are capable to be set off with the alleged outstanding claim by the Lender (or the plaintiff).

33.  The 1^st and 2^nd defendants’ evidence is overwhelmingly clear that they have a meritorious defence. I could have added no more that this loan advancement arrangement was calculated.  The above dealings exposed Intell as the mastermind of the arrangement. It would be difficult for the court to resolve the dispute in absence of Intell be made as a party in this action. 

34.  Should Intell be found as a moneylender, the request made to the 1^st defendant to pay two sums of HK$50,000 and (ii) HK$165,000, which had been labeled as “admistrative fee” and “penalty for early repayment of loan” might be in contravention of provisions of the Money Lenders Ordinance, Cap 163. Although both the 1^st and 2^nd defendants submitted the provisions of said Ordinance are not relevant in this application, I am of the view at least, the conduct of Intell (who represented itself as a money lender) justify some kind of criminal investigation.

Conclusion

35.  For reasons of the foregoing, I have no hesitation to conclude the 1^st and 2^nd defendants have a meritorious defence against the plaintiff’s claim. I am persuaded the 1^st and 2^nd defendants are capable to demonstrate their defence has a real prospect of success at trial. The default judgment entered against the 1^st and 2^nd defendants should be set aside.  As conceded by the plaintiff, the charging order nisi to show cause; the charging order absolute; the order of possession against the Property and the writ of possession against the Property should be set aside accordingly.  

36.  Be it the 1^st and 2^nd defendants succeeded in their applications, they should have responded promptly to the plaintiff’s claim when they were being served with the writ of summons in February 2014. I am of the view that the 1^st and 2^nd defendants are at fault when they defaulted all court hearings which have resulted in these late applications. Costs should be awarded to the plaintiff in any event. (See §13/9/16 of the Hong Kong Civil Procedure).

37.  I therefore make the following orders:-

(i) The default judgment entered against the 1^st and 2^nd defendants on 27 March 2014 in DCCJ 398 of 2014 be set aside.

(ii) The charging order nisi to show cause dated 8 April 2014; the amended charging order absolute dated 16 May 2014 against the Property in DCCJ 398 of 2014 be discharged and the registration of both the charging orders in the Land Registry be vacated.

(iii) The order for possession of the Property dated 18 August 2015; and writ of possession dated 5 October 2015 be set aside.

(iv) Leave be granted to the 1^st and 2^nd defendants to file and serve a Defence within 28 days from the date of this decision.

(v) Leave be granted to the plaintiff to file and serve a Reply, if so advised, within 28 days thereafter.

(vi) The parties shall apply for further case management directions by way of a case management summons within 28 days from close of pleadings.

(vii) Costs of the 1^st and 2^nd defendants’ summons filed on 30 January 2016 in DCCJ 398 of 2014 be to the plaintiff in any event, with certificate for counsel, to be taxed if not agreed.

(viii) Costs of the 1^st defendant’s summons filed on 30 January 2016 in DCMP 1474 of 2015 be to the plaintiff in any event, with certificate for counsel, to be taxed if not agreed.

(ix) The 2^nd defendant’s own costs in DCCJ 398 of 2014 be taxed in accordance with the Legal Aid Regulations.