EARTH GROUP LTD v. GLOBALMAX GROUP LTD AND ANOTHER

CACV 16/2023, [2024] HKCA 1186

On Appeal From [2022] HKDC 241

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 16 OF 2023

(ON APPEAL FROM DCCJ NO 2155 OF 2019)

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REASONS FOR JUDGMENT

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Hon Anthony Chan J (giving the Judgment of the Court)  :

1.  This was an appeal by the Defendants (separately “Globalmax” and “Lee”)  against the order of HH Judge H Leong (“Judge”)  dated 27 April 2022 (“Order”). The Order was made in an appeal by the Plaintiff (“EGL”)  against the order of Master M Lam (“Master”)  dated 13 September 2021 by which: (1)  the default judgment against Globalmax dated 31 July 2019 was set aside on condition that it paid into court the sum of HK$710,000; (2)  the default judgment against Lee dated 13 August 2019 was set aside unconditionally; (3)  Globalmax’s costs of the set aside application (apportioned as 50% of the Defendants’ costs)  be in the cause if the condition was met, otherwise it should pay 50% of the EGL’s costs with a certificate for counsel; (4)  Lee’s costs (50% of the Defendants’ costs)  be paid by EGL with certificate for counsel; and (5)  the charging orders[1] against Lee’s ½ interest in a landed property (“Charging Orders” and “Property”)  were discharged with no order as to costs.

2.  Pursuant to the Order: (1)  the default judgements against the Defendants were set aside on condition that they jointly and severally paid into court the sum of HK$1,139,462 within 28 days (“Condition”); (2)  on compliance with the Condition, the Charging Orders be discharged; and (3)  the costs of the hearing before the Master and the costs of the appeal be paid by the Defendants to EGL, with certificate for counsel for both hearings.

3.  This appeal was about the imposition of the Condition by the Judge for setting aside the default judgments against the Defendants.  At the end of the hearing, the appeal was allowed.  These are the reasons for allowing the appeal. 

Background

4.  The background of this case can be succinctly stated.  EGL was trading in beauty products.  Beauty machines and beauty goods (“Machines” and “Goods”)  were sold by EGL to Globalmax, which operated a beauty centre (“Centre”)  in Fanling.  Lee was the sole shareholder and director of Globalmax.

5.  According to EGL’s Amended Statement of Claim (“ASOC”), the price for Machines of HK$710,000 had not been paid.  Pursuant to 5 Quotations, Goods[2] were supplied to Globalmax with an unpaid balance of HK$469,462[3].

6.  When the Defendants failed to give notice of intention to defend, default judgments were obtained by EGL against them on respectively 31 July and 13 August 2019.  On 19 June 2020, EGL obtained a charging order absolute against the Property, which was subsequently amended on 12 October 2020. 

7.  By summons filed on 4 February 2021, the Defendants applied to set aside the default judgments, as well as the Charging Orders.  On 13 September 2021, the Master made the order set out in para 1 above.

8.  On appeal by EGL to the Judge, the order of the Master was set aside pursuant to the Order.  The reasons of the Judge were set out in a Decision dated 27 April 2022 ([2022] HKDC 241)  (“Decision”).

Decision

9.  The Judge rejected the Defendants’ challenge to the service of the proceedings on them, and held that the default judgments were regular and the Defendants had evaded service.  This finding was not an issue in this appeal.

10.  The Judge referred to the defence briefly.  It was noted that Globalmax’s defence was “on the whole” one on quantum, and Lee’s complaint about the absence of an adequate plea on lifting the corporate veil of Globalmax was a matter of legal argument which the court should not be involved in at that stage of the proceedings.

11.  The Judge went on to hold in the Decision, [40]-[42] :

“40. Overall, the courts [sic] finds that although the defendants may have, arguably, some merit in their defence to show “a real prospect of success”, given the circumstances of the case (including the 1^st defendant’s seemingly lack of defence on liability, the relationship between the 1^st and 2^nd defendant, the removal of the Goods by the 2^nd defendant and the court’s finding that the defendants have been, in reality, evading service), the court should impose terms in order to afford reasonable protection of the interest of the plaintiff.

41. I agree with Mr. Poon that the Charging Order should not be discharged unconditionally because this will likely leave the plaintiff at risk of an empty judgment given that the 1^st defendant is unlikely to hold any assets of value and the whereabouts of the Goods is unconfirmed.

42. I am also of the view that the amount of security must be just and proportionate to the apparent strength of the parties’ case at this stage. I note the fact that the defendants have tried to evade service despite their lawyers having previously raised some apparent defence on quantum (e.g. quality of the Goods and dispute on the existence of some agreements etc.).”

Grounds of appeal

12.  There were 5 grounds of appeal.  They may be summarised as follows :

(1)  The Judge erred in imposing the Condition against Lee in setting aside the default judgment in that he failed to consider the adequacy of EGL’s pleading against Lee and her defence.  Further, the Judge erred in taking into consideration (a)  the relationship between Globalmax and Lee; (b)  reasonable protection of EGL’s interest; and (c)  risk of empty judgment to EGL.

(2)  The Judge erred in imposing the Condition against Globalmax in setting aside the default judgment in that (a)  he failed to consider that Globalmax has a good defence against the Goods claim; and (b)  he erroneously took into account the reasonable protection of EGL’s interest. Having regard to Globalmax’s defence on the Goods claim, the Condition should have been limited to the sum of HK$710,000.

(3)  The Judge erred in ordering the Defendants to meet the Condition “jointly and severally”.

(4)  The discharge of the Charging Orders should not have been made conditional upon the satisfaction of the Condition.  Those orders did not concern Globalmax, and the Judge failed to consider the evidence that Lee did not have notice of the charging order proceedings.

(5)  In respect of the costs order, the Judge failed to take into account that the Defendants were successful in setting aside the default judgments.  Even if the default judgments were rightly set aside on condition, costs of the hearing before the Master and the Judge should be in the cause.

Applicable principles

13.  The principles on setting aside a regular judgment are trite and may be shortly stated as follows :

(1)  The power to set aside a regular default judgment is discretionary and unconditional.

(2)  The major consideration on a set aside application is whether the defendant has demonstrated a defence with a reasonable prospect of success.

(3)  The court would take into account all the relevant circumstances of the case in exercising its discretion, including the reason for default; the defendant’s conduct after he had notice of the proceedings; any delay in making the set aside application and the explanation for the delay; and any prejudice to the plaintiff or third parties if the default judgment were set aside.

(4)  The court has the power to impose terms in setting aside a regular default judgment, including payment into court. 

(5)  Where the defendant has a reasonably arguable defence which should be tried, there must be something specific in the defendant’s conduct or in the case which justifies the imposition of a condition, eg, serious infraction of procedural rule by the defendant so that a payment into court is necessary to ensure the proper future conduct of the litigation.

See Hong Kong Civil Procedure 2025, vol 1 (“HKCP”), [13/9/12], [13/9/13] and [13/19/15].

14.  It is trite that a discretionary decision of the court below would only be set aside if it is wrong in principle or was made under a misapprehension as to the facts; or the court took into account irrelevant matters or failed to take into account relevant matters; or the discretionary decision was outside the generous ambit within which a reasonable disagreement is possible: HKCP, [59/0/54].

Analysis

15.  In a case where the default judgment is regular, the primary consideration is the merits of the defence.  On the face of the Decision, the defence of neither Defendant was considered in any depth. Further, it appears from the first sentence of paras 40 and 42 of the Decision that the Judge was lukewarm about the merits of the Defendants’ case. 

Globalmax’s defence/ evidence

16.  It can be seen from Globalmax’s evidence in support of the setting aside application that its defence on the Machines claim is three-fold.  First, on the price claimed for the Machines, Globalmax’s evidence is that a deposit of HK$260,000 had been paid, leaving an outstanding balance of only HK$450,000. 

17.  Second, under the Sale Contract for the Machines, they were described as “European Brand(s)  made in China” (“歐洲品牌中國制做”).  In fact, they are not of European brand.

18.  Third, no instruction manuals or warranty information was provided for the Machines.  It is therefore unclear whether the Machines comply with the stipulations on the Contract and/or are capable of performing the functions stated therein.

19.  In respect of the Goods, Globalmax’s case is that it did order beauty goods from EGL in July, September and November 2018 but they had all been paid.  Documentary support in terms of quotation, delivery note and payment records were produced.  Further, despite the letter of Globalmax’s solicitors dated 18 March 2019 (“Letter”)  by which EGL was requested to provide the details of the Goods claim, eg, quotations and receipts for the Goods, no response was received. 

20.  In addition, Globalmax’s evidence was that although the Centre ceased operation in January 2019, it continued to pay rent for its premises until January 2020 when its financial resources ran dry.  Bank deposit slips were exhibited as evidence of the rental payments.  Globalmax said that it had honoured its payment obligations to the best of its ability.

EGL’s evidence

21.  Evidence was filed by EGL to answer Globalmax’s defences.  First, the payment of HK$260,000 was a part payment of decoration expenses for the Centre.  A Quotation for decoration work at the Centre, priced at HK$966,360 in total, was exhibited. 

22.  Second, it was said that EGL, Globalmax and Lee understood that the Machines “would be an European Brand when it complied with European standard”.  A Certificate of Compliance dated 26 November 2018 was produced. 

23.  Third, in respect of the Goods, there was a blanket allegation that they were delivered and accepted by Globalmax’s employee.  No documentary support was provided.  As regards a payment of HK$200,000[4] which Globalmax said was for beauty goods ordered in July 2018 (see para 17 above), EGL said that it was a payment for decoration expenses.

Globalmax’s reply evidence

24.  Globalmax denied that the payment of HK$260,000 was for decoration expenses.  A signed Consultancy Contract was produced.  It was made between Globalmax and Globe Group Ltd (“GGL”), which appears to be associated with EGL[5].  According to clause 3D thereof, a total sum of HK$460,000 would be paid for the renovation of the Centre.  Further, available payments records were produced by Globalmax showing that a total sum of HK$649,000 was paid by it to Hong Kong SME Commerce Centre (“SME”), another business associated with EGL[6].  Such payments were said to have been made under various provisions of the Consultancy Contract, including clause 3D.  Furthermore, the Consultancy Contract was the subject matter of another action in the District Court which was on foot. 

25.  EGL’s allegation on the understanding on “European Brand” was denied.  Globalmax was not given a copy of the Certificate of Compliance.  It appears that Globalmax’s case is that the document was first produced in EGL’s evidence filed in opposition to the Defendants’ set aside application.

Lee’s defence

26.  In addition to relying upon the defences advanced by Globalmax, Lee’s evidence was that at the time of filing of the Statement of Claim or the ASOC in May or June 2019, the Machines and Globalmax’s stock of beauty products were kept at the Centre.  They were only moved to storage[7] in March 2020 when the Centre’s premises were vacated.  Photographs showing the Machines and some beauty products were produced.  The photographs were taken at the storage.  Further, Lee said that the Machines and beauty products were moved from the Centre by her acting as the director of Globalmax.

27.  No evidence was adduced by EGL to contradict that of Lee’s concerning the case against her. 

Merits of the defence

Globalmax

28.  In respect of the Machines claim, firstly, the issue of the deposit of HK$260,000 will have to be resolved at trial. Globalmax’s dispute over EGL’s allegation that it was a payment for decoration expenses was supported by the Consultancy Contract, as well as the available records of payment of HK$649,000.  On the other hand, EGL was only able to provide an unsigned and undated quotation.

29.  Further, there is a reasonably arguable case that EGL was in breach of the express term that the Machines would be of European Brand.  EGL’s case on the alleged understanding is against the plain wording of the Contract.  Taken at the highest, it will have to be tried.  On the other hand, the Machines had been accepted and there is no evidence on the difference in value between Machines of European Brand(s)  and those supplied by EGL.  At most, Globalmax may have a set off against the Machines claim based on EGL’s breach. 

30.  As for the lack of operation manuals and warranty documents for the Machines, there is no evidence on why it had resulted in any damage to Globalmax.  We note that the Sale Contract stated that (a)  under clause D4, a one year warranty was provided by EGL for the Machines; and (b)  under clause D5, free training could be provided by EGL for the operation of the Machines subject to the payment of transportation cost of its staff.

31.  In respect of the Goods, there is no adequate answer by EGL to Globalmax’s case that it had paid for all the beauty goods ordered from it.  In particular, despite the Letter, not a single document was produced by EGL in support of its claim on the Goods.  Again, the claim will have to be tried.

32.  In the premises, with respect to the Judge, it is not correct to characterise Globalmax’s defence to the Goods claim as one on quantum.  As for the Machines claim, there is a reasonable argument that the price should be deducted by the deposit.  There is also a possible set off based on the fact that the Machines are not of European brand as described in the Sale Contract.

Lee

33.  The totality of the case pleaded against Lee in the ASOC is as follows :

(1)  Lee was the sole shareholder and director of Globalmax, and the operator of the Centre (para 3);

(2)  The Centre was opened for business on 28 October 2018 but was closed down on 14 January 2019 (in less than 3 months), and Lee removed all the goods and equipment to an unknown place with intention to evade liability (para 9);

(3)  On 14 January 2019, Lee informed a Whatsapp group without prior warning that “[Globalmax] now officially announces dissolution” (particulars (1)  under para 9);

(4)  The Machines and Goods were removed to an unknown place by Lee without informing EGL of their location (particulars (2));

(5)  Lee intentionally closed down the Centre and removed the Machines and Goods with intention to evade liability to pay EGL (para 10);

(6)  By her conduct, Lee is personally liable to pay for the Machines and Goods (para 11).

34.  Mr Poon, who appeared for EGL, submitted that EGL’s case against Lee is based on “long-firm fraud”.  In short, the term is used to describe the use of a company as a vehicle of fraud.  After a few genuine purchases by the company to gain the trust of the victim, further purchases would be made without any intention of payment.  The company would then be closed down with the new purchases taken away: see HKSAR v Cheng Man Cheung, CACC 334/1998, unrep, 15 January 1999.

35.  We are unable to see that such a case has been pleaded in the ASOC.  It is trite that an allegation of fraud must be pleaded distinctly with the utmost particularity, and it is not permissible to leave fraud to be inferred from facts: see HKCP, [18/12/18].  The ASOC contains no allegation of fraud against Lee.  It appears that the fraud allegation was not raised before the Judge. 

36.  On the other hand, there were arguments before the Judge on whether the corporate veil of Globalmax should be lifted so that Lee might be held liable for the claims against Globalmax.  In [36]-[37] of the Decision, the Judge held :

“36. In the Amended Statement of Claim, I note that the plaintiff did plead that the 2^nd defendant had removed all the Goods herself to “a known (unknown?)  place, and without informing the plaintiff of the location of storage of the same”, thus suggesting that she now has the possession of them, and that she “by such conduct, is personally liable for the debt…” (Hearing Bundle page 14)

37. Whether this was adequate pleading for “lifting of the corporate veil” or not would be a matter of legal argument. The court should not be involved in a mini-trial on such matters at this stage.”

37.  We believe that the Judge’s view that Lee can be held liable to EGL’s claims on the basis of lifting the corporate veil is flawed.  Doubts were expressed by the UK Supreme Court in Prest v Petrodel Resources Ltd & Ors [2013] 2 AC 415 on the existence and necessity of the doctrine, as well as formulating a more restrictive scope of the doctrine (at 488, [35]).  See also the commentaries at Gore-Brown on Companies, 7[14B] to 7[15A].

38.  For the purpose of disposing of this appeal it is not necessary to reach a firm view on these issues, because we are unable to see that there is a sustainable case to justify the lifting of corporate veil. First, there is no plea in the ASOC that the corporate veil should be lifted in respect of the contracts for the Machines or the Goods. 

39.  Second, the matters pleaded in the ASOC are insufficient to invoke the doctrine on any view of the matter.  Save for the averment that Lee had intentionally closed down the Centre and removed the Machines and Goods with intention to evade liability, the other averments are quite neutral.  For instance, there is no averment that Lee had the obligation to inform EGL of the whereabouts of the Machines and Goods.  Therefore, the lack of notice to EGL of the location of the same cannot give rise to anything sinister.

40.  Third, the fact that subsequent to Globalmax’s alleged failure to pay for the Machines and Goods, Lee removed them to an unknown place with intention to evade Globalmax’s liability does not of itself make Lee liable for the unpaid price.  There is no valid basis to suggest that property in the Machines and Goods did not pass under the sale contracts between EGL and Globalmax.  Therefore, the Machines and Goods are the properties of Globalmax.

41.  Fourth, the evidence before the court below did not sit with a sinister view of Lee’s conduct : 

(1)  Globalmax was incorporated on 4 September 2017. It signed a Tenancy Agreement for Centre’s premises (for the period from 18 May 2018 to 17 May 2024 with a break clause exercisable after 36 months)  and the Consultancy Contract on respectively 16 and 20 May 2018.

(2)  Between 23 May 2018 and 13 June 2018, HK$649,000 was paid by Globalmax under the Consultancy Contract[8].

(3)  Another payment of HK$200,000 was made by Globalmax to SME on 3 July 2018 (disputed as to whether it was for beauty goods or renovation).

(4)  The Sale Contract for the Machines was signed on 17 July 2018. 

(5)  Payment of HK$260,000 was made by Globalmax to SME (disputed as to whether it was for the Machines or renovation).

(6)  Between 16 September and 30 November 2018, beauty goods were ordered from EGL and paid for by Globalmax.

(7)  The Centre ceased operation in January 2019.

(8)  Globalmax continued to pay rent until January 2020 when, according to the evidence, it ran out of funds.

(9)  Centre vacated its premises in March 2020 with the Machines and Globalmax’s stock of beauty products moved to storage.

42.  On the basis of the above evidence, it is quite plausible that Globalmax had a genuine but unsuccessful business.  The evidence will of course have to be tested at trial.

Exercise of discretion

43.  It appears to this court that the Judge had failed to pay sufficient regard to the evidence, and consequently did not have a reliable appreciation of the merits of the Defendants’ case when he exercised his discretion and imposed the Condition for the set aside.

44.  The lack of adequate regard to the merits of the defence of the Defendants is, in our view, sufficient to falsify the exercise of discretion by the Judge.  In the circumstances, it is the duty of this court to re-consider the issue whether condition should be imposed, and if so, what it should be.

45.  In the case of Globalmax, it had accepted that the default judgment against it should be set aside on condition of payment into court of the sum of HK$710,000, ie, restoring the order of the Master.  We see no reason to disagree. 

46.  In respect of Lee, she clearly has a defence with a reasonable prospect of success.  We see no adequate reason to impose any condition for setting aside the default judgment against her. 

Disposition

47.  For the above reasons, we made an order that :

(1)  The appeal is allowed and the Order be set aside;

(2)  The default judgment against Lee be set aside unconditionally;

(3)  The Charging Orders be set aside without any condition;

(4)  The default judgement against Globalmax be set aside on condition that it pays into court the sum of HK$710,000;

(5)  The costs of this appeal be paid by EGL to the Defendants;

(6)  The costs order of the Judge in respect of the Defendants’ application for leave to appeal be set aside and substituted with an order that the costs be in the cause of this appeal, with a certificate for counsel;

(7)  In respect of EGL’s appeal before the Judge against the Master’s order, the Defendants should have 2/3 of their costs paid by EGL, with a certificate for counsel;

(8)  For the costs of the set aside application before the Master, the order made by the Master is restored, namely, (a)  Globalmax’s costs of the application (apportioned at 50% of the Defendants’ costs)  be in the cause if the above condition is met, otherwise it should pay 50% of the EGL’s costs with a certificate for counsel; and (b)  Lee’s costs (50% of the Defendants’ costs)  be paid by EGL with a certificate for counsel.