MARYO DEVELOPMENT LTD v. TSANG YAU MAY AND OTHERS

CACV 101/2015

CIVIL APPEAL NO 101 OF 2015

(ON APPEAL FROM HCA NOS. 2297/2012 AND 271/2013)

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HCA 2297/2012

ACTION NO. 2297 OF 2012

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HCA 271/2013

ACTION NO. 271 OF 2013

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(Consolidated by Order of Master J Wong dated 30^th August 2013)

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J U D G M E N T
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Hon Yuen JA:

1.  I agree with the judgment of Harris J.

Hon Barma JA:

2.  I also agree with the judgment of Harris J.

Hon Harris J:

The Appeal

3.  On 11 July 2013 Deputy High Court Judge B Chu (as she then was) entered judgment in default of defence against the 3^rd Defendant in HCA 2297 of 2012 for HK$9,130,000, with interest and costs.  The Judge also ordered the variation of an existing Mareva injunction to allow the judgment to be satisfied out of the balance of a frozen bank account.  On  20 January 2014 the 3^rd Defendant issued a summons pursuant to RHC O.13 r.9 to set aside the judgment.  The application was dismissed on 13 April 2015 by Deputy High Court Judge Marlene Ng.  The 3^rd Defendant has appealed that decision.

Background

4.  The Plaintiff company was incorporated in 1988.  The majority shareholder was Dr Tsang, who owned 99.8% of the issued share capital, the balance being owned by the 1^st Defendant, who was Dr Tsang’s half-sister.  Both were directors of the Plaintiff until Dr Tsang’s death in December 2001 following which the 2^nd Defendant, the 1^st Defendant’s brother (Dr Tsang’s half-brother) was appointed.  Dr Tsang had died intestate and a protracted dispute over his estate arose, which it is not necessary to describe, but accounts for the fact that it was not until 21 July 2010 that letters of administration were granted to Ms. Chan Yui Ling (Dr Tsang’s half-sister by his natural mother).  Ms.  Chan as administratrix of Dr Tsang’s estate caused herself and 2 others to be appointed as directors of the Plaintiff on 28 August 2012 and the removal of the 1^st and 2^nd Defendants on 18 January 2013.

5.  Initially the Plaintiff was used to invest in property.  By 2005 it had ceased to do so and became dormant.  This changed in October 2010.  On 5 October 2010 the Plaintiff and Bright Jade International Limited (“Bright Jade”) signed an agreement to establish a joint venture to trade jade, medicines, coffins and provide catering services (“October agreement”).  The 3^rd Defendant was the sole shareholder and director of Bright Jade, which was de-registered on or about 24 February 2012.  The October agreement provided that the Plaintiff was to provide financing of HK$10,000,000 at an interest rate of 5%.  Bright Jade was to provide equipment, facilities, market information and skill.  The October agreement reads as if the Plaintiff was largely a passive investor.  If the joint venture proved profitable the net profit was to be shared 70% to the Plaintiff and 30% to Bright Jade.  On or about 5 October 2010 the 1^st  and 2^nd Defendants drew a cheque on the Plaintiff’s bank account for HK$10,000,000 in favour of Bright Jade.  However, the 3^rd Defendant had a stroke in November 2010 (this does not appear to be in dispute), which impacted sufficiently on his health that he decided that it was best to terminate the joint venture and on 3 May 2011 he returned the amount that Bright Jade had received to the Plaintiff.

6.  On 22 July 2011 the Plaintiff and the 3^rd Defendant signed a written agreement for the sale by the 3^rd Defendant to the Plaintiff of 200 pieces of jade for HK$12,000,000 (“July agreement”).  A total of HK$10,000,000 was paid as evidenced by a cash memo of the same date.  HK$9,000,000 was paid by the Plaintiff and HK$1,000,000 was paid personally by the 1^st Defendant.  The 3^rd Defendant transferred the 200 pieces of jade (“Jade”) to the Plaintiff.  On 13 February 2012 the Plaintiff paid a further HK$130,000 towards the balance due under the agreement.

7.  It appears that Ms. Chan became aware of these transactions and payments as a result of the production of documents during legal proceedings arising out of the disputes concerning Dr Tsang’s estate.  In June 2012 she reported the matter to the Commercial Crimes Bureau.  At about the same time Ms. Chan took steps to obtain control of the Plaintiff.  It appears, although the chronology is not clear, that having taken control of the Plaintiff in August and checking its books and records, she could not find any board resolutions approving or documents explaining the payments in October 2010, July 2011 and February 2012.  In December 2012 the Plaintiff commenced the High Court Action 2297 of 2012 claiming damages for breach of duty against the 1^st and 2^nd Defendants and relief based on knowing receipt by the 3^rd Defendant of HK$9,130,000 from the Plaintiff.  I shall address the claim against the 3^rd Defendant in more detail later in this judgment.

8.  On 28 December 2012 the 3^rd Defendant filed an acknowledgment of service giving notice of his intention to defend.  On 13 March 2013 the CCB told Ms. Chan that the Defendants had been arrested.  They were subsequently prosecuted.  On 13 March 2013 the Plaintiff applied successfully for a Mareva injunction restraining the 3^rd Defendant from disposing of assets up to the value of HK$9,130,000.  In fact, and as Ms. Chan had been told by the CCB, they had already frozen approximately HK$7,000,000 in the 3^rd Defendant’s bank accounts representing what was believed to be the proceeds of the transfers of HK$9,000,000 and HK$130,000.

9.  The 3^rd Defendant failed to file a defence in the High Court Actions and, as I have mentioned, on 11 July 2013 judgment in default was entered against him and the existing injunction continued.  Subsequently the Plaintiff obtained payment orders from B Chu, DHCJ that resulted in payment of HK$7,820,010.70 being made to the Plaintiff out of the 3^rd Defendant’s bank accounts subject to the injunction.  On 20 January 2014 the 3^rd Defendant’s new solicitors applied for orders setting aside the default judgment, giving leave to file a Defence, ordering that the payment orders be set aside and further execution stayed.  That application was dismissed on 13 April 2015.

10.  In November 2014 Ms. Chan was told by the CCB that the Defendants had been charged with conspiracy to defraud and, in particular, that the 3^rd Defendant was charged with conspiracy to defraud and dealing with property known or believed to represent the proceeds of an indictable offence. 

Legal Principles

11.  There was no dispute before the Judge about the principles that governed the determination of the application to set aside what the 3^rd Defendant conceded was a regular default judgment.  RHC O.13 r.9 provides:

“Without prejudice to rule 7(3) and (4), the Court may, on such terms as it thinks just, set aside or vary any judgment entered in pursuance of this Order.”

12.  The Rule gives the court a discretion to set aside a default judgment.  The discretion is not restricted in anyway by the language of the rule, however, the authorities offer guidance as to how the discretion is to be exercised.  Of those authorities Godfrey JA says this in Premier Fashion Wears Ltd v Li Hing-chung [1]

“Of the modern cases, I would single out Alpine Bulk Transport Co. Inc. v. Saudi Eagle Shipping Co. Inc. [1986] 2 Lloyd’s Rep 221. This, I believe, shows that for the purposes of O.13 r.9 it is generally not sufficient for a defendant merely to show an arguable defence, although that alone would justify leave to defend being given under O.14. A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so he must satisfy the court that his case, and the evidence he has adduced in support of it, carries some degree of conviction. It seems to me that unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success.”

At line 15 he continues:

“The court still has to form a provisional view of the probable outcome of the action.”

13.  Godfrey JA speaks in terms of the defendant being required to show “a real prospect of success” and the court forming a provisional view of “the probable outcome of the action”.  These formulations have their origin in the judgment of the English Court of Appeal in the “Saudi Eagle” [2]. There is a danger that they can be read as requiring the court to undertake a mini-trial on the affirmations as to the likely outcome if the matter goes to trial.  This is not what is required and perhaps the correct approach can be more helpfully summarised as requiring the court to form a provisional view as to whether or not the defendant has a realistic prospect of successfully defending the action.  Determining this will involve assessing whether or not the defendant’s evidence on disputed factual matters has a realistic prospect of being accepted and, if it has, that the defendant has a realistic prospect of establishing a defence in law.  The assessment has to be carried out mindful of the interlocutory nature of the application and with a sense of proportionality.

14.  Whether or not the defendant has a realistic prospect of successfully defending the claim is the primary consideration, but as Bokhary JA (as he then was) explains in his judgment[3] in Premier Fashion other factors such as the reason judgment was allowed to be entered, and any delay in making the application to set aside, are to be taken into account.  In a case in which the assessment of the prospects of the defence lies in the balance these other factors may tip a case one way or the other. 

15.  An appeal against a judge’s decision pursuant to RHC O.13 r.9 asks this court to interfere with the exercise of a discretion.  It is well established that this court will not do so unless the judge has erred in principle or that the judge is sufficiently plainly wrong that he must be taken to have exercised his discretion wrongly [4].

The Plaintiff’s claim

16.  Before looking at the 3^rd Defendant’s defence it is necessary to consider the claim that he has to answer.  In paragraphs 30 and 31 of the Statement of Claim it is pleaded that in causing the payment of HK$9,000,000 by the Plaintiff to the 3^rd Defendant, the 1^st and 2^nd  Defendants breached their fiduciary duties to the Plaintiff.  The following are given by way of particulars of the alleged breach of duty:

“(1) It was not in the best interest of the Plaintiff to pay Bright Jade and/or the 3^rd Defendant such amounts or any amount as there was no or no commercial reason for the Plaintiff to make payment to Bright Jade or the 3^rd Defendant;

(2) The 1^st and/or the 2^nd Defendants abused their powers by drawing on the Plaintiff’s bank account for an improper purpose, namely, to deplete all or nearly all of the Plaintiff’s assets.”

17.  Paragraph 32 repeats the same claim in respect of the payment of HK$130,000 on 13 February 2012.  The same particulars are given although in addition it is also pleaded in sub-paragraph (3) that the 1^st and 2^nd Defendants failed to exercise reasonable care and skill in causing the payment to be made.

18.  On its face the case pleaded against the 1^st and 2^nd Defendants is that they caused the Plaintiff to make a gratuitous payment to the 3^rd Defendant.

19.  In paragraph 34 a claim of knowing receipt is pleaded in the following terms:

“34. At all material times, the 3^rd Defendant received the aforesaid $9,000,000 payment into his bank account with knowledge that there had been some breach of trust and/or breach of fiduciary duty on the part of the 1^st and/or the 2^nd Defendants in causing the Plaintiff to make that payment to him. Alternatively, he ought to have known that there had been some breach of trust and/or breach of fiduciary duty on the part of the 1^st and/or the 2^nd Defendants in causing the Plaintiff to make that payment to him.

Particulars of Knowledge

(1) The Plaintiff had no or no commercial reason to pay the 3^rd Defendant $9,000,000 at the time of the payment.

(2) At the time of his receipt of the said $9,000,000, the 3^rd Defendant knew, through his directorship of Bright Jade or otherwise, that:

(a) Bright Jade had in October 2010 received a similarly large amount of money, i.e. $10,000,000, from the Plaintiff;

(b) the Plaintiff had no or no commercial reason to pay Bright Jade the said $10,000,000 at the time of the payment;

(c) the payment to Bright Jade had been effected by a cheque drawn by the 1^st and 2^nd Defendants purportedly for an on behalf of the Plaintiff on the Plaintiff’s bank;

(d) Bright Jade repaid $10,000,000 to the Plaintiff on or about 3 May 2011.

(3) At the time of the receipt of the payment, the 3^rd Defendant knew or ought to have known that the payment was procured by the 1^st and/or the 2^nd Defendant as authorised signatories of the Plaintiff’s bank account, who stood as fiduciaries and/or directors of the Plaintiff.

(4) The 3^rd Defendant wilfully or recklessly failed to make any or any reasonable inquiries with the 1^st and/or 2^nd Defendant as to the reason for making such payment to him at the time of the payment.”

20.  A claim for knowing receipt in respect of the payment of HK$130,000 is pleaded in the same terms in paragraph 37.  Consistent with paragraph 34 the claim against the 3^rd Defendant seems to be that he received a gratuitous payment. 

21.  In the prayer the Plaintiff seeks orders that the 3^rd Defendant holds the money that he received from the Plaintiff as a constructive trustee and is liable to pay the amounts he has received and account for any profit made by him from use of the monies he received.

22.  It is not alleged that the 3^rd Defendant received the money as part of a fraudulent scheme which involved him paying any part of what he had received to the 1^st and 2^nd Defendants. 

3^rd Defendant’s Defence

23.  In the 3^rd Defendant’s draft defence he pleads in paragraphs 6 to 9:

“6. Paragraphs 28 and 29 are admitted. The 3^rd Defendant avers that:

(a) by a written agreement dated 5^th October 2010 between the Plaintiff and Bright Jade, the Plaintiff and Bright Jade agreed to jointly invest in precious stones in the sum of HK$10,000,000 (hereinafter referred to as “the First Investment”);

(b) On the same day, the Plaintiff drew a crossed cheque at HK$10,000,000 in favour of Bright Jade for the purpose of the First Investment;

(c) Unfortunately, the First Investment did not go as planned due to poor health condition of the 3^rd Defendant. Eventually, the 3^rd Defendant terminated the First Investment with the consent of the Plaintiff. On 3^rd May 2011, Bright Jade repaid the sum of HK$10,000,000 to the Plaintiff by way of cheque due to termination of the First Investment;

7. Paragraph 30 is admitted. The 3^rd Defendant avers that:

(a) by a written agreement between the Plaintiff and the 3^rd Defendant dated 22^nd July 2011, the Plaintiff agreed to purchase and the 3^rd Defendant agreed to sell 200 pieces of precious stone at HK$12,000,000 (hereinafter referred to as the “the Sales Agreement”);

(b) in pursuance of the Sales Agreement, the 3^rd Defendant delivered the precious stones to the plaintiff and the Plaintiff paid HK$10,000,000 to the 3^rd Defendant by way of cheque drawn by the 1^st Defendant personally in the sum of HK$1,000,000 and by way of cheque drawn by the Plaintiff in the sum of HK$9,000,000;

(c) the remaining balance of HK$2,000,000 was to be paid by installments.

8. Paragraph 31 is denied. The 3^rd Defendant avers that both the First Investment and the Sales Agreement were bona fide and legitimate business dealings between the Plaintiff, and Bright Jade and the 3^rd Defendant.

9. Paragraph 32 is admitted. The 3^rd Defendant avers that the payment of HK$130,000 was part of the remaining balance of the Sales Agreement as referred to in paragraph 7(c) hereof.”

24.  This is consistent with the defences filed by the 1^st and 2^nd Defendants. The Reply to the Defences pleads no new relevant factual matters.

25.  The 3^rd Defendant filed an affirmation made on 20 January 2014 to substantiate his defence.  He states that he had a stroke in November 2010, which necessitated an operation and affected his ability to walk and look after himself.  This is why, he says, that he decided to withdraw from the joint venture agreed in October 2010 and he returned the money Bright Jade had received.  He exhibits the October agreement.  He also exhibits the July agreement and cash memo dated 22 July 2011 recording the sale of the Jade, which he says he delivered to the Plaintiff and that he understands was seized by CCB.

26.  In Ms. Chan’s 3^rd affirmation filed on behalf of the Plaintiff in opposition to the 3^rd Defendant’s application, she does not dispute that the 3^rd Defendant had a stroke in November which seriously affected his health.  She says that she has not managed to find copies of the October agreement or the July agreement and cash memo amongst the Plaintiff’s records, but  she does not suggest that the documents the 3^rd Defendant has produced are not genuine.  Neither does she suggest that the Jade had not been given by the 3^rd Defendant to the 1^st and 2^nd Defendants.

27.  The existence of the July agreement supports the 3^rd Defendant’s case that the payment of HK$9,130,000 was not gratuitous and was consideration for the sale of the Jade.  This would be a defence to the claim pleaded in the Statement of Claim.  If the matter ended there it seems to me that the Plaintiff would clearly have demonstrated a defence with a real prospect of success.  But the evidence did not end there.

28.  Ms. Chan filed a 5^th affirmation after obtaining access to the Jade and having it valued by an expert in gemology, Miss Chan Pik Kwan.  Ms. Chan exhibits the valuation report, which estimates the value of the Jade on a wholesale basis at between HK$193,508 – HK$324,036.  Ms. Chan goes onto argue that this is inconsistent with the evidence of the 1^st and 2^nd  Defendants contained in their witness statements filed in the consolidated action that the purchase of the Jade was a very good investment.  She says in paragraph 8 of her 4^th affirmation that given the huge disparity between the sale price (HK$12,000,000) and the valuation “I verily believe that the purported sale agreement alleged by the 3^rd Defendant was not a genuine transaction and that he was fully aware of the wrongdoing of the 1^st and 2^nd Defendants in making the HK$9,130,000 payments to him.” 

29.  The 3^rdDefendant addresses this in his 2^nd and 3^rd affirmations.  He explains he acquired an interest in jade when he was child.  He says that his Grandmother was fond of and knew a lot about jade.  She taught him how to appraise it.  Overtime he built up a collection consisting of items inherited from his Grandmother and items he had purchased himself.  He understood that the 1^st Defendant and her mother knew a lot about jade.  He had shown them the Jade in the middle of 2010 during their discussions about the venture that eventuated in the October agreement.  That agreement was ended as a consequence of his stroke and he returned the money Bright Jade had received.  Subsequently, the 1^st Defendant expressed an interest in buying the Jade.  The 3^rd Defendant was initially reluctant to sell, but given his health, the medical expenses he had incurred and the prospect of having to engage a helper to take care of him, he agreed to sell his collection.  Negotiations over the price followed.  The 1^st Defendant eventually offered HK$12,000,000 and he agreed.  The 3^rd Defendant says that after he discovered that the Plaintiff alleged that the Jade was worth far less than this he spoke to the 1^st Defendant, who told him that her mother had assessed the Jade’s value at HK$16,000,000 at the time they were negotiating and he was provided with her assessment, which he exhibited.  He also obtained an independent valuation of the Jade by Mr. Chung Yam Ming of City Gem Testing Laboratory.  He valued the Jade on a retail basis at about $1,168,400 to $1,394,900 but claimed that the price of jadeite articles/items, which depended on the purchaser, market trend, supply/demand and cost of cutting/carving (which had increased), could fluctuate substantially and might fetch 10-20 times more than the assessed price [para 61 of the Judgment].  That being said it does appear that the 3^rd Defendant did an extremely gooddeal.  Even if the 1^st and 2^nd Defendants’ decision to conclude the July agreement on behalf of the Plaintiff was sufficiently ill considered that they were in breach of their fiduciary duty to act in good faith in the interests of the Plaintiff or their common law duty to exercise due care, skill and diligence, with respect to the Deputy Judge, what seems to have been overlooked below is that this of itself is not a basis for claiming recovery of the purchase price from the 3^rd Defendant.

30.  The right of a company to recover the price paid pursuant to an agreement, whose propriety is questioned, from the recipient is explained by Lord Nicholls and Lord Scott in Criterion Properties plc v Stratford UK Properties LLC [5]:

“4. I respectfully consider the Court of Appeal in Akindele’s case fell into error on this point. If a company (A) enters into an agreement with B under which B acquires benefits from A, A’s ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A’s ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of “knowing receipt” by B do not arise. So far as B is concerned there can be no question of A’s assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. A will have a proprietary claim, if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject  always to a defence of change of position. B’s personal accountability will not be dependent upon proof of fault or “unconscionable” conduct on his part. B’s accountability, in this regard, will be “strict”. ”

….

27. My Lords, I must express my respectful disagreement with the approach both of Hart J and of the Court of Appeal to the critical issue in this case. This is neither a case of “knowing receipt” nor one of “knowing assistance”. The word “receipt” in the expression “knowing receipt” refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a “receipt” of assets when the contract is completed and the question whether there is “knowing receipt” may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contact of contractual rights does not constitute a “receipt” of assets in the sense that a “knowing receipt” involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a “knowing receipt” are recoverable from the recipient. To confuse these two questions is likely to lead, and in the present case has, in my opinion, led, to further confusion. It is fair to say, however, that it appears to me that the courts below dealt with the case on the basis on which it was presented to them by counsel. It was indeed presented to your Lordships as being a case to which the principles of “knowing receipt” ought to be applied. ”

31.  In order for the Plaintiff to succeed against the 3^rd Defendant it is necessary for the Plaintiff to establish that the July agreement was bogus or that it is for some other reason liable to be set aside.  The Statement of Claim does not plead a fraudulent conspiracy, and Mr. Paul Leung, who appeared before us for the Plaintiff, confirmed that this was not its case.  Presumably this is because there is no evidence that the sums received by the 3^rd Defendant in July 2012 ever made their way into the hands of the 1^st and 2^nd Defendants.  This would be consistent with the fact that following his stroke in November 2010 the 3^rd Defendant returned the money Bright Jade had received and tends, if anything, to suggest that whatever the commercial wisdom of the October agreement, the motive for reaching it was not dishonest.

The Deputy Judge’s assessment of the Defence

32.  The Deputy Judge approached the matter differently.  It is convenient to take by way of illustration of the Deputy Judge’s approach to the matter she considers first when dealing with factual issues.  In paragraphs 45 to 48 of her decision she considers in detail the October agreement.  She suggests that in the face of the suggestion that it was a sham transaction the 3^rd Defendant should have produced concrete plans for the business including projected income and an explanation of how he would have been able to meet the requirement under the agreement to repay the loan by 120 monthly instalments at an interest rate of 5% if he was to receive 30% of the net profits of the business.  The Deputy Judge suggests that the business would have had to make a profit of over HK$650,000 per month in order for the 3^rd Defendant to make the required monthly repayment instalments and that the 3^rd Defendant should have adduced evidence to demonstrate that this was possible or that he could repay the loan from some other source[6].

33.  It is apparent from paragraph 47 that the Deputy Judge concluded that the absence of such evidence called into question the genuineness of the October agreement and in turn this supported the suggestion that the July agreement was bogus.  In my view this was an error in approach.  What had to be determined was whether or not the defence had a realistic prospect of success.  Insofar as the October agreement was relevant at all what the Deputy Judge should have focused on, at least in the first instance, was the credibility of what the 3^rd Defendant did say, namely, that he had had a stroke (which was not in dispute), he was not able to proceed with the joint venture and that he had returned the entire HK$10,000,000 (which was also not in dispute).  This  was sufficient, given the interlocutory nature of the application, to address the suggestion that the October agreement was bogus.  It was not necessary to go into the kind of detail the Deputy Judge seems to have expected in order to address what was a background matter, which itself was not the subject of any claim. 

34.  The material factual issue was quite a narrow one: Did the valuation evidence point so strongly to the July agreement being a sham that there was no realistic prospect of the 3^rd Defendant defeating a claim to set it aside.  In my view it did not.  It is for the Plaintiff to prove that the July agreement was a sham and it seems to me that without evidence that suggests that the July agreement was an attempt to misappropriate the Plaintiff’s property for the benefit of the 1^st and 2^nd Defendants, it is difficult to see how the possibility that the July agreement was simply a very good deal for the 3^rd Defendant can be ruled out.

35.  The fact that I have reached a different view to the Deputy Judge is not of itself sufficient to justify the appeal being allowed.  This Court needs to be satisfied that the Deputy Judge’s decision erred in principle or that she was otherwise plainly wrong in her conclusion.  With respect I think she did.

36.  The Deputy Judge did not analyse the claim that the 3^rd Defendant faced and how it could be defeated.  She seems to have proceeded on the assumption that the Plaintiff was prima facie entitled to have the sums paid returned to it unless the 3^rd Defendant could demonstrate that he received them in good faith.  This was wrong.  Once the 3^rd Defendant had demonstrated, as he clearly had by adducing written agreements and evidence that the Jade had passed to the Plaintiff, that he had a realistic prospect of succeeding in establishing that he had received HK$9,300,000 pursuant to an enforceable agreement, it became necessary for the Plaintiff to demonstrate that the July agreement was liable to be set aside. It seems to me that if the Deputy Judge had asked whether the 3^rd Defendant had a realistic prospect of successfully defending a claim to set aside the July agreement, on the evidence before the court she would have been compelled to conclude that the answer was “yes”.  In my view the Deputy Judge erred in her understanding of the claim that the 3^rd Defendant had to answer and, as a consequence, she reached the wrong conclusion in her assessment of whether or not the 3^rd Defendant had demonstrated a defence with a realistic prospect of success.

Other Issues

37.  As I have already explained the prospect of success is not the only relevant issue and in the penultimate section of her decision the Deputy Judge addresses other considerations relevant to the determination of the application.  First, she deals with the 6-month delay in making the application.  The 3^rd Defendant says that the decision was sent to the registered office of Bright Jade, not his residential address, which had mistakenly been put on the acknowledgment of service in December 2012 by his previous solicitors.  He then applied, unsuccessfully, for legal aid.  He did not find out about the default judgment until told about it by the 1^st Defendant in December 2013.  The implication of his evidence, although he does not say this expressly, is that he did not receive the default judgment because it was sent to the registered office of Bright Jade and not sent on to him.  He also explains that he was not alerted to the default judgment by the granting of the Mareva injunction because the Police had already frozen his bank accounts.  The Deputy Judge thought that the 3^rd Defendant should have explained in more detail why the default judgment and Mareva injunction might not have been sent to him and, although not so stating, the implication of her comments is that she doubted that he was unaware of the default judgment.  It is correct that the 3^rd Defendant does not say, for example, that the registered office was a firm of accountants or company secretarial provider, who he assumes did not bother to forward to him the default judgment or Mareva injunction.  It would have been sensible for his solicitors to have assisted him in producing a more comprehensive explanation of the likely reasons why he did not receive the default judgment, but it does not seem to me that there is any particular reason to doubt his explanation or that the delay is a significant factor in the present case.

38.  Of more significance is the fact that as a result of the payment orders the Plaintiff received HK$7,820,101.70 and it is the Plaintiff’s evidence that it used this sum to settle a debt owed by the Plaintiff to Dr Tsang’s estate.  It has only retained about HK$380,000 of the sum it received.  I accept, as did the Deputy Judge, that if the consequence of setting aside the default judgment would be that the Plaintiff had to repay the sums it had obtained with the consequence that it was forced into liquidation and prevented, potentially, from pursing its claim against the 1^st and 2^nd Defendants, this would be a substantial matter weighing against setting aside the default judgment.  However this is not the case.  The 3^rd Defendant offered an undertaking to this Court not to demand repayment of the sums paid to the Plaintiff pursuant to the payment orders until the final determination of the High Court Actions.

39.  Further, the fact that there are common issues which involve the other defendants whose trial has yet to take place is a further factor that should have led to the conclusion that the default judgment should have been set aside. 

Conclusion

40.  I would allow the appeal with costs to be paid by the Plaintiff.  Having considered the matter more thoroughly I take the view that the costs below should be the 3^rd Defendant’s costs in the cause.