CHENGDE FINANCIAL LTD v. PASSPORT TRAVEL MANAGEMENT (FE) LTD AND OTHERS

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JUDGMENT

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1. This is an appeal from an Order of the Master dismissing an application by the 3^rd Defendant to set aside the Judgment against the 1^st Defendant.

2. The 3^rd Defendant Leung Kau, an elderly gentleman close to eighty years old ("Old Leung") was the co-owner of a Flat in North Point ("Flat") with his son Andy Leung ("Andy"). At the material times, Old Leung, Andy together with the family of the 2^nd Defendant (being the brother of Andy and the other son of the Old Leung) all lived in the Flat. In early May 1996, by fraud and misrepresentation that charging order on the Flat was to be discharged by appropriate signature from the Old Leung, Andy induced Old Leung to sign sales and assignment documents. After Old Leung signed the documents, Andy arranged to have the Flat conveyed to the 1^st Defendant, a company owned and/or controlled by him. Soon after the Flat was assigned to the 1^st Defendant, the Flat was charged to Sharpman Ltd. to raise money for Andy but this 1^st Charge was subsequently discharged and has no bearing on this case. In December 1996, Andy by way of the 1^st Defendant, obtained a loan of $1,000,000 from the Plaintiff, a licensed money-lender. The securities given for this loan consisted of a guarantee from the 2^nd Defendant and a Charge on the Flat. The 1^st Defendant or Andy could not repay the loan to the Plaintiff and by this Action, the Plaintiff seeks the possession of the Flat to realise its security on the loan.

3. Default Judgment was obtained by the Plaintiff against the 1^st and 2^nd Defendant on the basis that proper service had been effected. When execution for possession was being levied by the Bailiff, the Old Leung for the first time learnt about the proceedings and the fact that there had been a Charge on his Flat. Leave was granted for the Old Leung to intervene in the Action as the 3^rd Defendant. The Old Leung issued a Summons to set aside the Default Judgment against the 1^st Defendant on the basis that Default Judgment had been improperly obtained and that in respect of the claim for possession by the Plaintiff, the Old Leung can raise the valid defences of Non est factum, fraud, misrepresentation and undue influence. The Master dismissed the application and appeal therefore was brought by the Old Leung to this Court. At the hearing before me, three issues were contested by the parties:-

IRREGULAR JUDGMENT

4. On the question of service of the Originating Summons, there is a factual dispute between the parties. The affidavits of service filed on behalf of the Plaintiff indicate that the Court documents were properly served on the 1^st and 2^nd Defendant but in addition were also served by posting up the said Court Documents at the main entrance of the Flat (pursuant to Order 10 rule 4(HK)(2) and that this was done not just on one occasion but on three occasions, namely on the 19^th July 1997 in respect of the Originating Summons (1^st Affidavit of Frederick Cheung), 21^st of July 1997 in respect of the Notice to Occupants (2^nd Affidavit of Frederick Cheung), 4^th September 1997 in respect of the Order of Master Cannon (3^rd Affidavit of Frederick Cheung).

5. The Affirmations filed by the 2^nd and 3^rd Defendants show a totally different picture. The Old Leung said in his 3^rd Affirmation that neither he nor any member of his family had seen at any time, being posted up at the main door or anywhere the Court Documents. In fact the first time the Old Leung knew anything about this matter was in November 1997 when he saw the Notice of the Bailiff for Possession of the Flat. The Old Leung's son, the 2^nd Defendant who was also living at the Flat at all material times said in his Affirmation to the same effect that the Court Documents were never received by him and had not been seen by him or his family at the door of the Flat at any time.

6. At the hearing of the appeal, it was conceded on behalf of the Plaintiff that there was bad service on the 2^nd Defendant but Mr. Yip for the Plaintiff still contended that there was good service on the 1^st Defendant. With this factual conflict, which version should prevail in the absence of cross examination? This is not easy. Doing the best I can, I must declare that I prefer the evidence of and for the 3^rd Defendant. Firstly, having regard to the concession made by the Plaintiff that there was not good service on the 2^nd Defendant, it seems to me that I cannot confidently place any or sufficient reliance on the 3 Affidavits of Frederick Cheung which are of course the foundation of Plaintiff's case of good service on all the Defendants. Secondly, it seems to me more likely than not that there was no posting up of the Court Documents as affirmed by the 2^nd and 3^rd Defendants. If there had been proper posting up at the main door, it is difficult to understand why the 3^rd Defendant who has everything to lose by doing nothing, should take no step to defend the proceedings. Thirdly, it seems to me that the Court cannot be confident that the solicitors firm acting for the Plaintiff would have done what it ought to have done or said it had done. Counsel for the 3^rd Defendant referred me to the alleged notification to fix hearing date given by that firm of solicitors to the 3^rd Defendant in respect of the 3^rd Defendant's Summons to set aside the Default Judgment. As said in paragraph 15 of the Old Leung's 3^rd Affirmation, that notification was given by a letter dated 7^th January 1998 to attend the court on Monday the 12th of January 1998 at 11.30 a.m. to fix the hearing date. But that letter was not even posted until 6 p.m. on Saturday 10^th January 1998 thereby making it impossible for the 3^rd Defendant to receive any proper notice of the Monday morning's fixing of date. If Mr. Lam the solicitor in charge of this litigation on behalf of the Plaintiff (the same solicitor before whom the alleged fradulent assignment document was signed by the 3^rd Defendant) could not be trusted to properly give notice of attendance for fixing of date for hearing of this present Summons then it seems to me that the same solicitor Mr. Lam also could not be relied upon to ensure that his clerk would have properly effected service of proceedings. I therefore conclude on the basis of the materials before me that the 3^rd Defendant has made out a case of irregular judgment.

7. The disagreement at the hearing is over the consequence of irregular judgment against the 1^st Defendant. The argument of Mr. Yip for the Plaintiff is that while the 1^st Defendant (if he is here defending the proceedings) could take advantage of the irregular judgment and can ask the court to set aside the default judgment without going into his merits, the 3^rd Defendant does not enjoy the same benefit. I do not accept this submission. Although there is no authority on the point, it seems to me sensible and reasonable that the same consequence should follow for the 1^st Defendant and for the 3^rd Defendant if the Court finds that there had been irregular judgment against the 1^st Defendant. Of course service was in fact never effected on the 3^rd Defendant since he was not a party at that time. But I cannot understand why the 3^rd Defendant should be in a worse position than the 1^st Defendant in respect of the irregular judgment entered against the 1^st Defendant. The example of both the 1^st Defendant and the 3^rd Defendant applying to set aside the Default Judgment against the 1^st Defendant was discussed at the hearing and as I indicated at the hearing, there could be no justification for a different test (and therefore possibly a different result ensuing) in respect of the 1^st Defendant's application and in respect of the 3^rd Defendant's application. I am of the judgment therefore that the 3^rd Defendant in this Summons to set aside enjoys the same benefit of an irregular judgment as would be enjoyed by the 1^st Defendant. The parties agreed at the hearing that in such a case so found by the court, then Po Kwong Marble Factory v Wah Yee [1996] 4 HKC 157 decision applies specially as such Court of Appeal judgment binds this Court (see Desirable International Fashions Ltd. v Chiang Shiu Chau [1997] 3 HKC 170). There is nothing special in this case which can or should induce this court to exercise its residual discretion against the 3^rd Defendant. It follows in my judgment therefore that the Default Judgment against the 1^st Defendant should be set aside without consideration of the merits of the defence of the 3^rd Defendant.

DEFENCE OF NON EST FACTUM

8. The main defence of the 3^rd Defendant to the claim for possession of the Plaintiff is that the assignment document signed by the 3^rd Defendant was the result of fraud or misrepresentation by Andy and that the 3^rd Defendant acted without negligence. The issue under this head is that assuming everything said by the 3^rd Defendant in his Affirmations are true, would the 3^rd Defendant still fail to show a good defence of Non est factum.

9. At the hearing, Mr. Yip does not seek to attack or to contend that the document signed by the 3^rd Defendant is radically different from what he thought he was signing. The suggestion of Mr. Yip is that the Old Leung could not meet the requirements of Non est factum because on the evidence adduced to the Court there was plainly negligence on the part of the Old Leung. With respect, I disagree. It has to be borne in mind that this is an interlocutory application to set aside a Default Judgment and the Court must not therefore lightly come to a conclusion that a Non est factum cannot be made out at the trial unless the Affidavit evidence taken as a whole powerfully point to the lack of any reasonable prospect of the 3^rd Defendant to succeed at the Trial. Of course, the Court must bear in mind the heavy burden on a defendant to show a bona fide defence of Non est factum to a claim by an innocent third party (which I will assume the Plaintiff to be for present purposes). But when the uncontested facts are that the Old Leung was at the time close to 80, and he (like many old Chinese of his generation and background) could not read or write English, who relied entirely on his son to tell him that it was a favourable document (to discharge a charging order on the Flat) he was to sign before the solicitor approved by the son Andy, I cannot see how it can be said that the Old Leung was unarguably negligent. I would have thought that in the context of Hong Kong, where many elderly Chinese mothers and fathers of even top professionals who cannot read or write English and therefore would need to rely on their sons or daughters to tell them what to do, it is perfectly reasonable for such parents to go to a solicitor, named by their children and pursuant to arrangements already made by the children, sign a document at places indicated by such nominated solicitor.

10. Mr. Yip points to the figure of $750,000 in the document and says that therefore the Old Leung was negligent. I disagree. Mr. Yip cannot ignore the primary fact that the Old Leung could not read or write English and therefore any English document put before him is meaningless to him. I do not believe that this proves negligence. The other point raised by Mr. Yip about title deeds could be even more summarily dismissed. The point was not raised or mentioned in the affidavits and the 3^rd Defendant cannot be shut out from a valid defence by a submission or allegation from the Bar Table.

11. In the circumstances, I therefore conclude that the 3^rd Defendant has demonstrated a viable defence of Non est factum which impreses me as having a good prospect of success and it follows therefore that even if I should apply the regular judgment test, I will be satisfied that this is a suitable case whereby the Court ought to order the setting aside of the Default Judgment against the 1^st Defendant.

DEFENCE OF FRAUD, MISREPRESENTATION, UNDUE INFLUENCE

12. In the light of my above finding, it is not necessary for me to consider the alternative defence of setting aside for fraud, misrepresentation and undue influence because the Plaintiff was a purchaser with constructive notice of the 3^rd Defendant's equitable interest. But as the point had been argued, I will briefly also state my conclusion on this issue of constructive notice.

13. The submission of Mr. Lam for the Old Leung is that the Plaintiff is a purchaser mortgagee with notice, because:-

In my view there is merit in the submission of Mr. Lam. It is for me more than arguable that the Plaintiff took the Charge with constructive notice of the Old Leung's equitable interest. This alternative defence of the 3^rd Defendant therefore also has a good prospect of success.

14. For reasons given above, I am of the judgment that the Default Judgment against the 1^st Defendant should be set aside. The Plaintiff should pay the costs of the 3^rd Defendant in respect of the application before the Master and of this appeal.