LAM MAN LAI AND ANOTHER v. OJ VC LTD AND OTHERS

HCA 985/2019

[2020] HKCFI 2495

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 985 OF 2019

________________________

________________

______________

D E C I S I O N

______________

A.      Introduction

1.  By my Decision dated 3 June 2020 [2020] HKCFI 975 (“Decision”), I made various orders on an application brought by the plaintiffs’ summons dated 8 October 2019, by which the 1^st and 2^nd plaintiffs (“Madam Hui” and “Mr Lam” respectively, together “plaintiffs”) sought various declarations and other relief against the 1^st and 2^nd defendants (“OJVC” and “Mr Wong” respectively) under RHC Order 19 rule 7, in light of their default of filing any defence.  Though the claim had been served on the 3^rd defendant (“Mr Hui”), the action had previously been resolved as against Mr Hui by consent, and he took no part in the argument leading to the Decision.

2.  As is clear from the Decision, however, there was still some argument between the plaintiffs and OJVC and Mr Wong, who had previously indicated that no defence had been filed by them because they were willing to compromise and to settle with the plaintiffs on a good faith basis.  As a result, and on the exchange of the written submissions, the only question left to the court was as to the nature or scope of the relief which should be granted to the plaintiffs.  I granted default judgment in the terms of §38 of my Decision.

3.  Because the claims had already been dismissed against Mr Hui, and judgment had been given against OJVC and Mr Wong, that appeared to bring the action to an end.

4.  But now, by summons dated 2 July 2020, the intended 4^th defendant (“Company”) – of which Mr Hui is the sole shareholder and director – wishes to be joined as a party for the purpose of setting aside the default judgment, alternatively to permit it to appeal from the default judgment (which appeal has been launched and even set down).  Mr Hui is the deponent whose evidence has been filed for the Company.  Insofar as it is necessary, Mr Hui also seeks to be re-joined as a party.  Mr Hui is one of the applicants seeking to set aside the Decision, and he is one of the appellants in the appeal.

5.  I am now asked to disentangle this procedural entanglement.

6.  I directed that the matter would be determined on the papers, and submissions have been filed by Counsel Mr Michael Lok and Mr Jonathan Lee on behalf of Mr Hui and the Company (together), and by Counsel Mr Kam Cheung for the plaintiffs. OJVC and Mr Wong have in the meantime ceased to be legally represented, and have taken no part in the current applications, despite being parties to it and being given the opportunity to file submissions.

B.      Procedural Chronology

7.  It is necessary to see and consider the current application against a proper history of the disputes between the parties, and the procedural chronology.

8.  The proceedings were commenced by writ of summons dated 5 June 2019.  On the writ was a specially endorsed Statement of Claim (“SOC”).

9.  However, there had been a letter before action dated 26 March 2019 addressed to OJVC and Mr Wong, in which the thrust of the claim was made clear.  The letter referred to a Deed of Grant of Share Warrant dated 28 January 2013 (“Deed”) under which the Company granted to OJVC certain warrants giving the right to subscribe for shares in the Company within a prescribed exercise period.  The letter then referred to a written trust agreement dated 26 June 2014 (“Declaration of Trust”) under which OJVC and Mr Wong agreed with the plaintiffs that OJVC would hold a certain proportion of the warrant shares on trust for the plaintiffs, in line with the financial contribution made for them. Therefore, by the payments they made, the plaintiffs were to have become beneficial owners of those shares, or the property into which they might be traced including shares of SEMK International Holdings Ltd (“SEMK International”) and ENS International Enterprises Limited (“ENS”), as a result of an unauthorised sale by OJVC to Mr Hui. But OJVC have never transferred any proportion of the shares to the plaintiffs.

10.  As well as identifying the Declaration of Trust as the basis of the claim, the letter before action was precise in the relief claimed, and was also copied to the Company, SEMK Enterprises Ltd, SEMK International and ENS.  There is no doubt the letter came to the attention of Mr Hui.  Therefore, Mr Hui and the Company would have known that the plaintiffs threatened to pursue their alleged rights under the Declaration of Trust against OJVC should OJVC not meet the demand made.

11.  In the absence of any prior settlement, proceedings were subsequently commenced.  On the SOC, the plaintiffs claimed against OJVC for breach of the Declaration of Trust, in that OJVC sold certain shares to Mr Hui without the plaintiffs’ instructions.  Those shares are the two parcels (together, “Trust Shares”) of 18,000 shares and 6,000 shares in SEMK Products (Holdings) Limited, ie the Company.  The plaintiffs claimed against Mr Wong for dishonest assistance of OJVC’s breach of trust.  The plaintiffs also claimed against Mr Hui on the basis that he had constructive notice of their beneficial interest in the Trust Shares, and sought declarations that Mr Hui is liable as constructive trustee and an order for delivery up of the Trust shares to Mr Lam.

12.  The plaintiffs claimed various types of relief on a “further or alternatively” basis, being:

 (1) tracing and a claim for equitable title against OJVC

(a) Mr Lam claimed: (i) 843.75 shares in SEMK International, and (ii) 750 shares (being 1.5%) in ENS International (SEMK International and ENS together, “Two Companies”);

(b) Madam Hui claimed: (i) 281.25 shares in SEMK International, and (ii) 250 shares (being 0.5%) in ENS;

 (2) an account by OJVC and Mr Wong;

 (3) restitution by OJVC to Mr Lam of HK$2,160,000 and to Madam Hui of HK$720,000;

 (4) equitable compensation by OJVC and Mr Wong;

 (5) delivery up by Mr Hui of the Trust Shares.

13.  By summons dated 16 July 2019, OJVC and Mr Wong sought an extension of time for filing their Defence and Counterclaim (if any).  On 18 July 2019, Master Kot made an unless order permitting them until 4pm on 15 August 2019 to file their Defence and Counterclaim (if any), failing which they would be debarred from doing so and the plaintiffs would be at liberty to apply for judgment to be entered.  No Defence having been filed, the plaintiffs issued the summons seeking judgment in default on 8 October 2019.

14.  But, in the meantime, matters were resolved as between the plaintiffs and Mr Hui.  By Notice dated 5 August 2019, the plaintiffs accepted the sanctioned payment into court made by Mr Hui on 8 July 2019, in the sum of $1, and in settlement of the whole of their claim against Mr Hui.  On 27 September 2019, I made an order by consent that the plaintiffs’ costs of their claims against Mr Hui in the proceedings up to 5 August 2019 be paid by him to be summarily assessed on paper.  This was in response to the suggestion made by solicitors for Mr Hui, who proposed that way of dealing with the costs together with the dismissal of the proceedings against Mr Hui.  The assessed costs of HK$60,000 were paid by Mr Hui on 29 October 2019, under cover of a letter which again proposed a consent summons dealing with the dismissal of proceedings against Mr Hui.

15.  Since that time, the heading of the action on various court documents has tended to show the claim against Mr Hui as having been “dismissed” or “discontinued”.  For example, the plaintiffs’ application for default judgment referred to “discontinued”.

16.  That matter first came before me on 8 November 2019.  On that occasion, I was informed that OJVC and Mr Wong had made an open offer by their solicitors’ letter dated 6 November 2019 (“Open Offer”), so that it ought not to be necessary nor appropriate to grant any form of order sought by the Summons.  As that letter was only shortly before the hearing, I was asked to and I agreed to adjourn the matter for a few days to permit further discussions between the parties.

17.  The skeleton argument filed by then Counsel appearing for OJVC and Mr Wong also indicated that Mr Wong had a claim against Mr Wong for no less than HK$21 million in a separate matter, and that OJVC and Mr Wong were desirous that a global settlement be reached.  That was part of the practical basis upon which I was invited to adjourn the summons, to permit the parties to engage in settlement negotiation.

18.  When the matter came back before me on 28 November 2019, no resolution had yet been reached and there remained apparently unanswered queries between the parties.  I therefore directed OJVC and Mr Wong to respond to the plaintiffs’ solicitors’ letter dated 21 November 2019 within 14 days, and further adjourned the matter to a hearing on 21 January 2020.

19.  That hearing was later vacated by consent and re-fixed for 10 March 2020.  Nevertheless, that date fell within the General Adjournment of Proceedings and so the matter was later directed to be dealt with on written submissions.

20.  As stated above, Mr Hui was not involved in the application.  The default judgment summons was not addressed to or served on him, and he made no submissions.  Of course, in light of the fact that he had not filed a Defence but had made and the plaintiffs had accepted a sanctioned payment into court in settlement of all claims against Mr Hui in the action, and he had paid the assessed costs which flowed from the sanctioned payment, his non-participation was not in any way surprising nor was participation apparently necessary.

21.  In the Decision, I made the following order:

Upon OJVC and Mr Wong giving an undertaking personally to indemnify Madam Hui and Mr Lam for any loss caused by any encumbrance of the 18,000 and 6,000 shares of the Company (together, “Trust Shares”) referred to in this Order or their traceable proceeds:

(1) Mr Lam is entitled to a declaration that OJVC holds the traceable proceeds of the transfer of 18,000 shares of the Company on trust in favour of him.

(2) Madam Hui is entitled to a declaration that OJVC holds the traceable proceeds of the transfer of 6,000 shares of the Company on trust in favour of her.

(3) OJVC shall transfer to within 14 days:

(a) 843.75 shares in SEMK International Holdings Ltd (“SEMK International”)

(b) 750 shares (being 1.5%) in ENS International Enterprises Limited (“ENS”)

(c) proceeds of sale of 18,000 shares of the Company at HK$0.01 per share, thus HK$180; and

(d) the sum of HK$472,500 (being HK$3,150,000 x 15%) representing his share of the Dividends, plus interest at judgment rate from the date of the writ until payment.

(4) OJVC shall transfer to Madam Hui within 14 days:

(a) 281.25 shares in SEMK International

(b) 250 shares (being 0.5%) in ENS

(c) proceeds of sale of 6,000 shares of SEMK Holdings at HK$0.01 per share, thus HK$60; and

(d) the sum of HK$157,500 (being HK$3,150,000 x 5%) representing her share of the Dividends, plus interest at judgment rate from the date of the writ until payment.

(5) For the avoidance of doubt, OJVC shall sign all documents as are reasonably required to affect the transfers set out in paragraphs (3) and (4) above.

(6) OJVC shall within 28 days lodge with the Court and serve on the plaintiffs an affidavit/affirmation disclosing and accounting for all proceeds received by OJVC in disposing of the Trust Shares.

(7) Mr Wong shall within 28 days lodge with the Court and serve on the plaintiffs an affidavit/affirmation disclosing and accounting for all proceeds received by Mr Wong in providing assistance to OJVC’s disposition of the Trust Shares.

(8) OJVC and Mr Wong shall pay to the plaintiffs such sums as are found due from the taking of the account as provided for in paragraphs (6) and (7) above, and shall forthwith pay such sums to the plaintiffs save to the extent already paid or transferred to the plaintiffs in accordance with paragraphs (3) and (4) above.

(9) Liberty to apply.

22.  As I understand it, no part of the Order above has been executed.  By Court order of 26 August 2020, OJVC and Mr Wong’s solicitors ceased to act.

C.      The Current Applications

23.  There are now three summonses before the court.

24.  By summons dated 2 July 2020, the Company seeks to be joined as the 4^th defendant in the action for the purpose of setting aside the Decision and any execution on it.  Further or alternatively, in so far as it is necessary, the Company asks for the execution of the Decision to be stayed pending the determination of the summons and Mr Hui’s and the Company’s appeal against the Decision, for which the Company also asks for an extension of time (the Notice of Appeal was filed within the ordinary 28-day limit, but the Company is not yet a party).  This is the main application and the summons is supported by Mr Hui’s 1^st and 2^nd Affirmations, and opposed by the 2^nd affirmation of Mr Lam.

25.  By summons dated 24 August 2020 Mr Hui asks, in so far as it is necessary, to be joined as the 3^rd defendant in the action for the purpose of setting aside the Decision and any execution on it.

26.  Lastly, by summons dated 17 September 2020, Mr Hui and the Company seek leave to file and serve (and, of course, rely upon) Mr Hui’s 3^rd affirmation.  It seeks to respond to a factual point said to have been made for the plaintiffs only in Mr Cheung’s submissions.  No reaction to that summons has been received from the plaintiffs, and I propose to let in the affirmation as it provides fuller information for the context of the main application before me.

27.  Mr Hui’s 1^st affirmation sets out the basis of the main application.  In essence, reliance is placed on what is said to be the proper interpretation of the Deed, and in particular the “non-assignment” provisions in it which are said to constitute the Declaration of Trust a breach of the Deed.  Reliance is placed on Recital (B) which identifies the Company’s desire to provide OJVC (and impliedly no one else) with the opportunity to invest in the Company by the grant of the Warrants on the terms and conditions set forth in the Deed; that clause 10.1 stated that if OJVC became a shareholder of the Company pursuant to the Deed, its rights and obligations as a shareholder would be subject to the terms and conditions of the annexed shareholders agreement (which had a clause 7.1 specifically restricting any sale, transfer, charge, encumbrance, or grant of options over or otherwise disposing of any of the shares or any beneficial interest in any of them to any person other than Mr Hui); and in particular that clause 12.1 said in terms that the Warrants should not be assigned by OJVC without the prior written consent of the Company.

28.  The argument is that the terms of the Deed prevent the plaintiffs from relying on the Declaration of Trust as somehow founding their claim to beneficial interest in the Trust Shares.  Therefore, because the Declaration of Trust cannot be relied upon to ground the claim in the proceedings, judgment in favour of the plaintiff ought not to have been granted by the Decision.

29.  Mr Hui also says that he and the Court “were somewhat kept in the dark with regard to these proceedings, leading to the Action being short-circuited and the Decision being made prematurely”.  As regards the procedural history, Mr Hui says that he was told by both OJVC and Mr Wong that they themselves did not accept the existence of the Declaration of Trust, and that they intended to contest the action.  On that basis, and though he had been fully intending to defend the claims against himself, Mr Hui considered (based on what he says was represented by Mr Wong to him) that his interests and rights would be adequately protected by relying on OJVC and Mr Wong.  Hence he negotiated for the action to be wholly dismissed against himself and he made payment of the plaintiffs’ assessed costs up to 5 August 2019.  However, Mr Hui says, unbeknownst to him it now transpires that OJVC and Mr Wong had been actively negotiating with the plaintiffs from even before the first hearing of the default judgment application.  That led to the improper “short-circuiting” of the proceedings, and led to the Decision being given “in questionable circumstances”.

30.  The stay of execution of the Decision is sought on the basis that the Declaration of Trust constituted a breach of the Deed, but that was not taken into account, because the Court simply proceeded on the erroneous assumption that the Declaration of Trust was valid and effective.  There is, it is argued, a strong ground of appeal or strong likelihood of success on appeal, or strong merits for setting aside the Decision.

31.  Mr Lam’s affirmation in response essentially just points out that Mr Hui was a party to the proceedings and was served with the writ and endorsed SOC, as well as being a recipient of the letter before action (as the director of the Company).  As Mr Lam puts it, Mr Hui was aware of the plaintiffs’ claims “from day one”, but chose not to file a Defence nor to assert the matters now put forward on affirmation.  In the absence of sensible explanation, and where there is no basis for holding the plaintiffs responsible for any allegedly misleading representation by Mr Wong, the current application should not be allowed.

32.  Mr Lam also makes clear that neither he nor Madam Hui was told by Mr Wong that the Deed prohibited any assignment or disposing of the subject shares.  It might be noted that Mr Lam does not address Mr Hui’s evidence that he was essentially misled by OJVC and Mr Wong as to their intention towards the claim, but nor is there any reason to believe that Mr Lam would necessarily have known what they said to Mr Hui.  Indeed, from Mr Lam’s point of view, OJVC and Mr Wong were from an early stage making clear that they would not contest the claim.  Mr Hui had, of course, done the same.

33.  In his 2^nd affirmation, Mr Hui repeats that he was repeatedly reassured by OJVC and Mr Wong, both before and after the commencement of the proceedings, that they would contest the action going forward because they themselves did not accept the existence of the Declaration of Trust.  It was on the basis of that misrepresentation that he offered to have the claims against himself dismissed.  He suggests that had the Court been told that the Declaration of Trust amounted to a breach of the Deed, the terms of which are something the Company has a direct interest in enforcing, and where the Company is exposed to potential unanticipated claims, then it is highly unlikely that the Court would have granted default declaratory judgment without the benefit of full argument.

34.  Mr Hui also suggests that it is disingenuous for Mr Lam to have suggested that he did not know the terms of the Deed, when the SOC pleads a reference to Mr Wong not wanting other parties to the Deed to know that the plaintiffs knew the information concerning the Deed.  However, it seems to me that the pleading in the SOC does not suggest the plaintiffs knew all of the terms of the Deed, but rather that there was some element of secrecy, which does not necessarily mean knowledge of any bar to assignment or creation of trust.

35.  Mr Hui’s 3^rd affirmation seeks to address a factual issue said to have been raised for the first time in Mr Cheung’s submissions, namely that Mr Hui must be aware of the share exchange arrangement with OJVC on 25 February 2019, which resulted in OJVC being the legal owner of the shares that the plaintiffs are now seeking to recover.  Mr Hui confirms that the share exchange agreement effected the transfer of all the original shareholders’ shareholdings in SEMK International, resulting in SEMK International Holdings holding 100% of the shares of SEMK International and the original shareholders becoming the shareholders of SEMK International Holdings.

36.  Mr Hui signed the share exchange agreement for and on behalf of SEMK Global, and Mr Wong signed it on behalf of OJVC.  Under its terms, all original shareholders (including OJVC) agreed to sell their shares free from all charges, liens, equities, encumbrances, claims or restrictions whatsoever and warranted the ability to do so.  Therefore, whilst Mr Hui did indeed have knowledge of the share exchange agreement, he says the terms of it reinforced his understanding all along that OJVC was the sole legal and beneficial owner of its shares in SEMK International.

37.  There is also a Notice of Appeal dated 2 July 2020, by which Mr Hui and the Company (as “named 3^rd Defendant and Intended 4^th Defendant”) say they appeal from the Decision on various grounds, which are duplicated in the argument on the setting aside application. As put in the Notice, those grounds include that:

(1) The Decision was plainly wrong because there was a failure properly to construe the express terms of the Deed, which prohibit OJVC from assigning or otherwise transferring the Warrants without the prior written consent of the Company, or that there was an implied term to the same effect.  As a result, the purported Declaration of Trust was in breach of the express or implied terms of the Deed and would have been void and/or invalid and/or ineffective in law.

(2) There was a failure to have adequately appreciated the existence of the Deed and its express or implied terms; whether the Declaration of Trust is in breach of those terms; whether the Declaration of Trust is void and/or invalid and/or ineffective as a matter of law; whether the plaintiffs had any locus standi to seek the remedies sought by them in the SOC; and whether the default judgment application should have been determined without a hearing, especially when declaratory relief was sought by the plaintiffs.

38.  On 9 July 2020, notice of setting down the appeal was given.

D.      The Contest

39.  The starting point is that it is accepted that if I am minded to grant the setting aside application and make relevant ancillary directions, then the appeal does not arise.

40.  There is no suggestion that the Decision produced anything but a regular (as opposed to irregular) default judgment.  Further, Mr Lok is careful to identify that Mr Hui and the Company are not trying to point any fingers or to attribute blame to the plaintiffs for their previous position (as if the application to set aside was on grounds of material non-disclosure), but he submits that there are plainly issues of merit which ought to affect whether it was appropriate to have granted the declaratory relief in the Decision.

41.  In fact, it is common ground between Mr Lok and Mr Cheung that in the discretionary approach to whether or not to set aside a regular default judgment, focus is primarily on the merits of the applicant’s defence.  The applicant must show a meritorious defence with a real prospect of success or which carries some degree of conviction.  But there are other considerations which a court must consider in deciding whether or not to set aside a default judgment, which include the reason why default judgment was allowed to occur in the first place, and any delay in setting aside and any consequent prejudice caused to the plaintiff.  Essentially, the court’s approach is to conduct a balancing exercise of all relevant factors, though the critical factor and starting point are the merits of the defence.

42.  In this context, it is relevant to bear in mind that the Decision granted declaratory relief, and that declaratory relief is itself a discretionary remedy.  As I pointed out in the Decision, it is not the normal practice of the court to make a declaration without a hearing, but there can be appropriate circumstances when declaratory relief might be given even without a hearing on an application for default judgment.

43.  In the circumstances that OJVC and Mr Wong demonstrated no serious intention to contest the claim or the default judgment application (save as to the nature or scope of the relief which should be granted), and where the only other defendant had resolved the claim against him by making a payment into court (which was accepted) and by paying the plaintiffs’ costs of the action up to the date of that payment, it seemed to me that it would not be inappropriate to grant declaratory relief.

44.  But I think it must be correct that, had I been informed that there was a serious argument that the very foundation for the claim to beneficial interest in the Trust Shares was open to significant challenge because the Declaration of Trust was arguably invalid or ineffective, I would not have thought it appropriate to grant declaratory relief without further investigation of that matter.

45.  So, it seems to me the real contest I have to resolve at this point turns on the following questions:

(1) First, is there still an action in existence (where I am not functus), to which somebody might be joined as a party?

(2) Secondly, is it open to a third party (at this point a non-party) to apply to set aside the Decision?

(3) Thirdly, does the basis upon which it is said the Decision should be set aside have a real prospect of success or carry some degree of conviction?

(4) Fourthly, if so, does the balance of those merits against the other circumstances (including why default judgment was allowed to occur in the first place) point in favour of setting aside the Decision?

(5) Fifthly, should there be joinder of the Company and, if necessary and appropriate, re-joinder of Mr Hui?

E.      Is the Action Over?

46.  Mr Lok submits that there is still an existing set of proceedings to which somebody might be joined.

47.  First, he points out that there can be no doubt that the Decision led to a judgment entered in default of Defence pursuant to RHC Order 19 rule 7. The fact that there was some argument prior to the Decision does not mean that there was any adjudication of the case on its merits.  I agree with that point.

48.  Secondly, he submits that it follows that there is a broad discretion under Order 19 rule 9 to vary or set aside any judgment entered in pursuance of Order 19. Where the proposed defence has sufficient merit, the court would not prima facie desire to let a judgment pass on which there has been no proper adjudication.  Indeed, the wide discretion vested in the Court is directed to avoid any injustice that may be caused by the entering of judgment in default.  As it was put by Zervos J (as he then was) in Hugo Boss Trademark v The Britain Boss International Co Ltd [2015] 3 HKLRD 4 at §28, two underlying principles come into play in the exercise of the power.  They are, on the one hand, that a party should observe procedural rules with judgment entered against him in default and, on the other, that a party should not be deprived of an adjudication of the case on its merits.

49.  Mr Lok has properly reminded me of the case of United States Garment Factory Ltd v Sea-land Service Inc [1995] 1 HKLR 323, where it was held that, when the action between the owners and carriers had been finally resolved and so was no longer in existence, the action was dead and there were simply no proceedings to which a further application could relate, irrespective of any merits the applicant might have.  The expressed rationale was that there must be an end to litigation, and it is not right that parties, between whom all issues have been resolved, should be vexed by a third party who seeks to re-open their action.

50.  Mr Lok says that case is distinguishable from the present, because it concerned a judgment having been given under Order 14 (involving a consideration of the merits), and where the judgment had been fully satisfied.  Instead, Mr Lok says, the present case is on all fours with Chan Kin Yuen v Chan Kin Yip (unreported, HCA 17878/1999, 27 July 2000), which was similarly concerned with a third party seeking to set aside default judgment, and thereafter to be joined as a defendant to defend the action.  There, the court distinguished the United States Garment case on the basis that default judgment is obtained where there is no hearing on the merits, which is a very different situation from that of judgment under Order 14.

51.  In circumstances, I accept that the Court may set aside or vary all or any part of the judgment in the Decision, which was a judgment in default under Order 19.

52.  The question nevertheless arises as to whether there is any difference between the position of Mr Hui and that of the Company.  Whilst the consequences of the settlement between the plaintiffs and Mr Hui might be dealt with under this heading, I think they can more conveniently be considered under the heading relating to the broad range of factors to be taken into account in the exercise of the discretion whether or not to set aside the Decision (see below).  As to the position of the Company, it has plainly to date not been a party to these proceedings.  Leaving aside that the Company’s knowledge must be attributed from the knowledge of Mr Hui (which matter may be taken into account under the broader consideration of discretionary factors), what follows from the fact that it is a third party or non-party can be considered in the next section under the following heading.

F.      Third Party or Non-Party Applicant?

53.  It is common ground between Mr Lok and Mr Cheung that it is open to a third party to apply to set aside a judgment entered in default.

54.  Of course, as Mr Cheung points out by reference to the Hong Kong Civil Procedure 2020 at §13/9/22, the rules are designed to enable judgment by default to be set aside by those who have, or can acquire, a locus standi; it does not give a locus standi to those who have none.  Therefore, a third party who desires to apply to set aside a judgment must show that he has a direct interest in so doing and must either do so in the name of the defendant with his leave, or he must make both the plaintiff and the defendant parties to the application and ask for leave to intervene.

55.  I am satisfied that, other things being equal and subject to any broader considerations, Mr Hui and the Company each have sufficient locus standi to bring the application.  Mr Hui either was or is a party to the claim predicated on the validity of the Declaration of Trust.  The Company is a party to the Deed which is said to prevent the Declaration of Trust from being valid or effective.

G.      What are the merits?

56.  As Mr Lok submits, and Mr Cheung accepts, whether the Declaration of Trust is prohibited by the Deed is predominantly a question of contractual interpretation.  The principles of contractual interpretation are well-settled, and probably do not need to be set out at any great length.  The construction of a contract is an attempt to discover what a reasonable person would have understood the parties to have meant, by reference to the words used and in light of the natural and ordinary meaning of those words and the overall purpose and context of the contract, including the facts known or assumed by the parties at the time the contract was made.  Of course, subjective evidence of any party’s intention is to be ignored.  The exercise of construction is one unitary exercise involving an iterative process by which rival meanings are checked against the provisions of the contract and the commercial consequences are investigated.

57.  Applying those principles, I accept that it is strongly arguable that the express terms of the Deed identify the Warrants and the Shares were specifically intended only for the benefit of OJVC as investor.  I have set out those clauses above, but in particular clause 12.1 of the Deed strongly suggests that assignment of the rights created by the Warrants would be permitted only with the prior written consent of the Company, which was in fact neither sought nor obtained.

58.  It is probably not necessary for present purposes also to have regard to the terms of the annexed shareholders agreement, but those terms also support the stance now put forward by Mr Hui and the Company.  As Mr Lok submits, the apparent intention of the Deed included ensuring that the original parties to the contract were not brought into direct contractual relations with third parties except as expressly permitted by the covenant.

59.  Mr Lok has also fairly referred to the possible argument that the prohibition on “assignment” under clause 12.1 of the Deed does not encompass a prohibition against declarations of trust.  He refers to Don King Productions Inc v Warren [2000] Ch 291 at 321, which has had some support in Hong Kong.

60.  But Mr Lok also submits that even if clause 12.1 of the Deed does not expressly prohibit OJVC from making the Declaration of Trust without the prior written consent of the Company, the same result can be reached by way of the suggested implied term, which would satisfy the test of necessity to make the contract work.

61.  As to a series of backup arguments raised by Mr Lok, I do not think I need to deal with them at any length, save to recognise that there is some force in them which adds to the overall indication of merits.  One of those points is the submission that Mr Hui was a bona fide purchaser for value without notice of the suggested beneficial interest of the plaintiffs.  So it is argued that Mr Hui’s taking the shares would have extinguished the property rights of the plaintiffs and defeated the proprietary claim absolutely: see, for example, Tang Ying Man v Leung Ka Chun (unreported, HCA 2166/2011, 31 August 2016, DHCJ Marlene Ng) at §107.

62.  I also note that Mr Cheung does not really address the question of merits in his own submissions, being content to focus on the broader factors relating to the exercise of discretion whether or not to set aside the Decision.  As it happens, on the materials and arguments identified, I am satisfied that there is the real prospect of success on the points now put forward, which points carry some degree of conviction, as might justify setting aside.  As I have already noted, if these matters had been brought to my attention prior to making the Decision, it is unlikely that I would have been prepared, or would have thought it appropriate, to grant declaratory relief sought on a default judgment application.

H.      How Should the Discretion be Exercised?

63.  As Mr Cheung points out, an important question is why Mr Hui and the Company chose not to participate in these proceedings.  Mr Cheung says that there can be no truth in Mr Hui’s allegation that he dropped out of the action because of some alleged concealment on the part of OJVC and Mr Wong. This is because, he says, Mr Hui was a party to the proceedings from day one, and had been served with the writ and endorsed SOC making clear that the claim to declaratory relief in relation to the shares was based upon the Declaration of Trust.  As Mr Cheung says, if the prohibition against assignment in the Deed was of any real significance to Mr Hui and the Company, they could, would and should have filed a Defence to argue that the Declaration of Trust is invalid.  Indeed, the alleged right to say ‘no’ to any assignment is a right personal to the Company, not a right to be defended through or by either of OJVC or Mr Wong. Hence, the present stance of Mr Hui and the Company is totally against Mr Hui’s previous decision not to participate in the proceedings.

64.  Mr Cheung goes on to suggest that, because it was always clear that the plaintiffs’ claim to be beneficial owner of the shares in question is based on the Declaration of Trust, the earlier decision in these proceedings not to challenge that as being arguably prohibited under the terms of the Deed identifies that Mr Hui and the Company removed the prohibition.

65.  Mr Lok, of course, relies on the explanation now offered by Mr Hui on affirmation as to his previous stance, which he says is supported by contemporaneous documents.  However, I do not think the explanation for his earlier stance towards the proceedings is supported by the contemporaneous documents.  Nowhere in the exchange of solicitors’ correspondence produced by him is there any suggestion that the proposal to compromise the proceedings was predicated on, or followed, any statements by the other defendants as to what stance they would take in the proceedings.  It is right that Mr Hui has now affirmed that he proposed resolving the proceedings because of what he now says was represented to him by Mr Wong, and there is no evidence from Mr Wong to contradict it.  But that explanation makes little sense to me.  First, it must be assumed that Mr Hui did not tell his own solicitors what he now says he was told by Mr Wong, or one would expect them to have protected Mr Hui’s position by making that clear in some way.  Secondly, even acknowledging that it was a one dollar payment, resolving matters by paying money into court by way of a sanctioned payment, with the costs consequences that entailed on its acceptance, does not seem to me like a clear assertion that there was no proper basis for any claim against him (let alone the other defendants).  Thirdly, Mr Hui’s knowledge must be attributed to the Company, as he is its controlling mind.  Yet he and the Company took no steps properly to protect the position they now say is endangered by the Decision.

66.  Even if Mr Wong had said that he and OJVC would defend the plaintiffs’ claim because they did not accept there was a Declaration of Trust, that ought to have rung alarm bells in Mr Hui’s mind because the letter before action and the SOC made it absolutely clear that it was OJVC and/by Mr Wong themselves who created and declared in writing the existence of that trust.  At the very least, it must have been obvious that a court might find the Declaration of Trust properly to exist in those circumstances. Further, Mr Hui’s and the Company’s stance now does not depend upon the existence or non-existence of the Declaration of Trust, but upon its validity or effectiveness in light of the terms of the Deed.  Those terms, in so far as they are said to have protected the Company, were really only able to be protected by action on the part of the Company (or at least by Mr Hui).  Also, the relevant protection would be as against the plaintiffs, and nothing said by Mr Wong could have been thought in any way to bind the plaintiffs.

67.  There was also on the face of the SOC a clear conflict of interest between Mr Hui (and the Company) and OJVC/Mr Wong.  It is difficult to see how Mr Hui could in those circumstances really have thought that his own interests would be protected by whatever Mr Wong said he might do.

68.  There is further some force in Mr Cheung’s submission that the suggestion on behalf of the Company that it should be relieved from the possibility of potential claims being brought by the plaintiffs is a suggestion without many particulars as to what alleged potential claims might arise.  The mere possibility of potential claims is of little substance, and those claims canvassed by Mr Lok in his submissions (to which he says the Company may be “susceptible”) seem speculative and remote from the Company itself.  Though the Company is their ultimate parent company, the Company is not a direct shareholder of either of SEMK International or ENS.  I also bear in mind that the shareholding interests claimed by the plaintiffs are very small minority shareholders’ interests in the relevant companies.  They are even a relatively minor part of OJVC’s minority interests.

69.  I previously indicated that I would deal with the consequences of the settlement between the plaintiffs and Mr Hui in this section.  Mr Lok argues that Mr Hui remains a party to these proceedings because the Consent Order merely dismissed the plaintiffs’ claims against him, but not the action.  Though it may or may not matter, I do not agree.  First, the intention of the parties evident from the exchange of solicitors’ correspondence was to effect a dismissal of the whole claim against Mr Hui.  Indeed, Mr Hui made a sanctioned payment seeking precisely to compromise the whole claim against him (instead of adopting some other settlement process).  When that payment was accepted, with the consequence that Mr Hui also became liable for the plaintiffs’ costs of the action against him up to that date, I think that ended any dispute or lis between the plaintiffs and Mr Hui.  It must have been the expectation of them, and of the Court, that Mr Hui would no longer feature in these proceedings.  In effect, and as a matter of procedure, where there was no longer any lis, Mr Hui ceased to be a party to the action.

70.  It can be noted that there is also no attempt by Mr Hui to unravel the compromise of the proceedings between the plaintiffs and himself.  Therefore, whilst apparently maintaining that the claim against him has been compromised, he somehow wishes to assert a defence to a claim brought against different defendants.  That is far from the usual situation where an application is made to set aside a default judgment on the basis that there is a sufficiently meritorious defence to a claim by a person against whom that claim is made.  I do not see Mr Hui as a third party, nor as an existing party who ought now to be permitted to raise criticisms of the basis of the plaintiffs’ claim against others, which can have no conceivable impact on him because he has settled his dispute, and where in any event he has deliberately chosen not to raise those matters at the obvious time to do so.

71.  The position of the Company might be regarded as being different.  It is not a party to this action, and so is a third party.  It has not compromised any claim against it, whilst now taking the point that is said to defeat that claim.  It is a party to the Deed, which is said to bar the creation of the trust interests on which the plaintiffs have claimed.  On the other hand, its controlling mind is Mr Hui, and its knowledge comes only from Mr Hui.  Mr Hui and the Company are privies.

72.  In those circumstances, particularly in light of the very subject matter of these proceedings, I think it must be taken that the Company knew all the matters it needed to know to have sought to intervene in the proceedings so as to protect the interests now said to be at risk.  Indeed, a copy of the letter before action which identifies the basis of the plaintiffs’ claim and the intended relief was addressed directly to the Company more than two months before these proceedings were issued.  The Company is not in the typical position of a true third party which learns about the claim and potential judgment affecting its interests only after the judgment has been granted (such as a bank affected by an order in proceedings to which it was not a party and of which it had no prior knowledge).

73.  Insofar as it is relevant, I reject the submission that I was “misled into believing that the Action was essentially uncontested”.  In fact, the action was indeed uncontested.  It was uncontested by all the defendants (that is, including Mr Hui), and there was no suggestion that any third party might wish to intervene to raise any contest, notwithstanding that all relevant individuals had the necessary knowledge to decide whether or not to raise any contest to the claims against them (and/or for those corporate bodies under their control).

74.  Whilst I accept that this case is not the same situation as the United States Garments case, some of the underlying rationale to the decision in that case is applicable. There must be finality to litigation, and the question arises why the plaintiffs should now be vexed with the intervention of the Company on the basis that it seeks to raise matters which it and/or Mr Hui (its controlling mind and privy) could and should have raised much earlier in the proceedings, and long before any default judgment.

75.  I also reject the submission that the plaintiffs have not demonstrated any prejudice which would be occasioned by setting aside the Decision.  It is obvious that removal of a judgment in their favour, not least one which requires acts on the part of defendants who are no longer active participants in these proceedings, risks real prejudice to the plaintiffs.  I acknowledge it might be said that there is no prejudice to be deprived of a judgment which ultimately a court might after full argument decide should not have been granted.  But, in context, I think there is some prejudice which the plaintiffs would suffer if the Decision were to be set aside, including in the potential loss of a real effective practical alternative remedy against defendants who have not challenged that they acted in a way which would entitle the plaintiffs to some form of judgment against them.  That prejudice falls to be taken into the balance of the discretionary exercise.

76.  I confess to having some pause in light of the apparent merits of at least some of the points which the Company now seeks to raise, and because the default judgment was one which unusually granted declaratory relief.  But, balancing those matters against all the other factors, and in the exercise of my discretion, I decline to set aside the Decision.  Even where focus might be on the merits, I think the overall balancing exercise in this unusual case leads to a refusal to set aside the Decision.

I.      Joinder?

77.  It seems to me that the question of joinder – essentially turning on whether it is just and convenient – stands or falls with the application to set aside.  If there is ultimately insufficient merit in the setting aside application, there is no point in joinder.  If, however, there is sufficient merit in the setting aside application, joinder would seem logical and appropriate.

78.  In light of the fact that I have found that it is not, or should not be, open to Mr Hui to seek to set aside the Decision, I would refuse any application to re-join him as an active party.  In light of my conclusion that I will not set aside the Decision for the benefit of the Company, I would also refuse its joinder as a party.

J.      Result

79.  Mr Hui’s and the Company’s applications to be joined as a party and for the Decision to be set aside are refused.

80.  I might also state that had I been prepared to accede to the Company's application, I would only have done so on a stringent condition that it (or perhaps it and Mr Hui jointly and severally) pay forthwith the costs thrown away as a result of the prior decision not to raise these points in these proceedings but only much later to seek the substantial indulgence sought by the applications.

81.  As to the ‘fall-back’ position (as Mr Lok described it) arising from having served a Notice of Appeal, Mr Hui and the Company respectfully ask for a stay of the Decision and Order of 3 June 2020 pending appeal from the Decision.  Where that appellate challenge is to a discretionary decision made by me in the circumstances which I have canvassed in some detail above, I do not think it can be said that there exists a strong appeal which by itself might constitute good reason for granting a stay. Nevertheless, because I did grant a stay pending the determination of the summonses to set aside for joinder, I am prepared to continue that stay for a short period pending any renewed application for a stay as may be made to the Court of Appeal, if such application is made within the next 14 days.

82.  As to costs, I see no reason why costs should not follow the event, and therefore order the plaintiffs’ costs relating to these various applications to be paid by Mr Hui and the Company (on a joint and several basis), to be taxed if not agreed.  I will make that order in the first instance on a nisi basis, and it will become absolute if there is no application for variation made to me within 14 days.