CY CLEANING HYGIENE LTD v. CHAN KAI WAH AND OTHERS

HCA 11/2024

[2024] HKCFI 1904

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 11 OF 2024

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BETWEEN

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DECISION

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1.  There are two matters calling from my determination. First, by a Notice of Appeal dated 17 April 2024, the plaintiff brings this appeal (“the Appeal”) against Master Hui’s decision made on 10 April 2024 granting the application of the 1^st and 2^nd defendants by summons dated 3 April 2024 (“the Time Summons”) for leave to file their Defence and Counterclaim (if any) within 28 days from the date of the decision (“the EOT Decision”).

2.  Second, by summons dated 5 April 2024 pursuant to O.19 r.7 of the Rules of the High Court (“the DJ Summons”), P applies for default judgment against all the 1^st, 2^nd and 3^rd defendants.

3.  The Time Summons was not supported by any affirmation and for the purpose of the Appeal, the parties have not applied to adduce new evidence. The upshot is that I have no evidence to consider other than the undisputed background facts leading to the issue of the Time Summons and the Defence of the 1^st and 2^nd defendants filed with leave granted in the EOT Decision.

4.  Mr Zenith Chan, for the plaintiff and Mr John Chan for the 1^st and 2^nd defendants, agree that I should hear the Appeal first, which is a de novo hearing of the Time Summons.

5.  A brief introduction of the present action would suffice for present purposes. I should simply adopt the factual background narrated by Mr John Chan in his skeleton submissions, which is as follows.

6.  The plaintiff is a company incorporated in Hong Kong engaging in the business of selling hygiene-related products and providing hygiene services in Hong Kong.

7.  The 1^st and 2^nd defendants were the only shareholders and directors of the plaintiff until around December 2021.

8.  Pursuant to a sale and purchase agreement dated 15 November 2021 (the “SPA”), the 1^st and 2^nd defendants sold the plaintiff to August Wealth Ventures Limited, a member of the LBS Group at the material time.

9.  Under Clauses 12(i) (non-competition) and Clause 12(ii) (non-solicitation) of the SPA, the 1^st and 2^nd defendants covenanted to (inter alios) the plaintiff (i) not to compete with the plaintiff in its existing line of business and (ii) not to solicit the plaintiff’s pre-existing customers, for a period of 5 years after the sale (collectively, the “Restrictive Covenants”).

10.  The plaintiff’s case is that from around July 2023 onwards, the plaintiff discovered the 1^st and 2^nd defendants (through the 3^rd defendant) committing breaches of the Restrictive Covenants by (inter alia) engaging in business that directly or indirectly competes with the business of the plaintiff, and soliciting existing clients or customers of the plaintiff.

11.  The plaintiff then commenced this action to enforce the Restrictive Covenants. The procedural history can be outlined as follows.

12.  On 3 January 2024, the plaintiff issued the writ herein with a Statement of Claim.

13.  On the same day, the plaintiff took out a summons (“the Injunction Summons”) supported by affirmations for its application for, among other matters, an interlocutory injunction against the defendants to injunct them from acting in breach of the Restrictive Covenants. The return day of the Injunction Summons was 12 January 2024.

14.  Having been served the writ and the Statement of Claim, the 1^st and 2^nd defendants, then jointly represented by Messrs. TKC Lawyers (“TKC”), filed their respective Acknowledgements of Service on 9 January 2024. In these documents, both of them stated that they did not intend to contest the proceedings. The 3^rd defendant has never responded thus far.

15.  On 12 January 2024, Lisa Wong J heard the Injunction Summons. The 1^st and 2^nd defendants were represented by counsel (not Mr John Chan) and the 3^rd defendant was unrepresented and absent. Upon the confirmation of the 1^st and 2^nd defendants that they did not intend to contest these proceedings, Lisa Wong J, by consent, granted the injunction sought by the plaintiff against all the 1^st and 2^nd defendants and an order that the 1^st and 2^nd defendants should disclose to the plaintiff in writing all the particulars of their business activities in competition with the plaintiff within 14 days from the date of being served with the order (“the Disclosure Order”). The judge made a similar order against the 3^rd defendant.

16.  On 1 February 2024, the 1^st and 2^nd defendants duly complied with the Disclosure Order by filing their respective affirmations giving the relevant information (“the Disclosure Affirmations”).

17.  On 22 March 2024, in an open letter, TKC suggested to Messrs. Tony Kan & Co. (“TK”) acting for the plaintiff that the parties should settle the action amicably to save costs.

18.  On 26 March 2024, the 1^st and 2^nd defendants instructed Messrs. David Fenn & Co. to file an Amended Acknowledgment of Service stating that they intended to contest the proceedings. Apparently, TKC was replaced by Messrs. David Fenn & Co. (“DF”).

19.  On 28 March 2024, DF made a written request for an extension of time for 28 days to file and serve the defence of the 1^st and 2^nd defendants.

20.  On the same day, TK issued a Notice under O.19 r.8A, the Rules of the High Court (“the Notice”), which gave the 1^st and 2^nd defendants notice that the plaintiff intended to enter judgment against them.

21.  On 3 April 2024, the 1^st and 2^nd defendants issued the Time Summons seeking an extension of time for 28 days to file and serve their defence.

22.  On 5 April 2024, the plaintiff took out the DJ Summons against the 1^st and 2^nd defendants and, pursuant to O.13 r.6, against the 3^rd defendant. The return day of the DJ Summons was 21 May 2024.

23.  On the same day, by way of service of the DJ Summons, TK replied to DF referring to their letter dated 28 March 2024. TK reminded the 1^st and 2^nd defendants of their original position.

24.  On 10 April 2024, the Master disposed of the Time Summons and made the EOT Decision.

25.  On 17 April 2024, the plaintiff filed and served the Notice of Appeal asking for an order that the EOT Decision be set aside and indemnity costs be borne by the 1^st and 2^nd defendants.

26.  On 8 May 2024, the 1^st and 2^nd defendants filed and served the Defence pursuant to the EOT Decision.

27.  By an order dated 21 May 2024, this court adjourned the hearing of the Appeal and the DJ Summons to 18 July 2024 and granted leave to the plaintiff to file and serve its Reply to the Defence of the 1^st and 2^nd defendants (if any) within 28 days after the final determination of the DJ Summons.

Relevant legal principles relating to the Appeal/Time Summons

28.  Both counsel agree on the relevant legal principles regarding applications for time extensions. Mr Zenith Chan relies on Chu Fung Chee v Apple Daily Ltd [2023] HKLRD 1466. He refers in particular the following paragraphs (§§11-12) for a summary of the applicable legal principles:

“Under O.3 r.5 of the RHC, there is very wide discretion in the court to extend time that accords with the justice of the case.

In Astro Nusantara International BV v PT Ayunda Prima Mitra (2018) 21 HKCFAR 118, Ribeiro PJ stated as follows:

“53. It has often been emphasised that the discretion to extend time conferred by O.3 r.5 is broad and unrestricted, designed to enable justice to be done between the parties. Thus, in Kwan Lee Construction Co Ltd v Elevator Parts Engineering Co Ltd, Litton V-P in the Court of Appeal, stated:

‘The court’s jurisdiction to extend time, as conferred by O.3 r.5, is as broad as it can come and, in the exercise of that discretion, the court would, generally speaking, have some regard to what might ultimately be in issue.’

54. In Costellow v Somerset County Council, dealing with the equivalent provision in England and Wales, Sir Thomas Bingham MR noted that the discretion involves the intersection of two principles. The first promotes the enforcement of time limits for the expeditious dispatch of litigation in the public interest and the second recognises that a plaintiff should not ordinarily be denied adjudication of his claim on the merits because of a procedural default ‘unless the default causes prejudice to his opponent for which an award of costs cannot compensate’. His Lordship noted that the second principle ‘is reflected in the general discretion to extend time conferred by O.3 r.5, a discretion to be exercised in accordance with the requirements of justice in the particular case.’

55. The approach advocated on First Media’s behalf as formulated by the Court of Appeal in The Decurion, is in line with the foregoing authorities. Citing Costellow v Somerset County Council, Cheung JA acknowledged the intersecting principles and stated:

‘It is clear that the applicable principle in deciding whether time should be extended is to look at all relevant matters and consider the overall justice of the case. A rigid mechanistic approach is not appropriate...’” (original emphasis)

29.  Mr John Chan draws my attention to the often-cited decision of Ma J (as the former Chief Justice then was) in Schindler Lifts (Hong Kong) Ltd v Ocean Joy Investments Ltd [2002] 1 HKLRD 279. There, the judge first referred to the decision of Hartmann J (as he then was) in Mobil Petroleum Co. Inc. v Registrar of Trade Marks [2001] 1 HKLRD 225 for a statement of law in this respect.

30.  Before concluding that an extension should be granted to the defendant to file a defence, Ma J (as the former Chief Justice then was) took into account the oral explanations given by counsel for the defendant in the absence of affidavit evidence and, additionally, the following matters: (1) It was the first application for an extension by the defendant; (2) upon receipt of the notice under O.19 r.8A, the defendant acted expeditiously, taking out a time summons at the earliest date possible and seeking to have a hearing as quickly as possible; and (3) no prejudice was caused to the plaintiff if time were to be extended.

31.  In view of the detailed submissions of Mr Zenith Chan on the substantive merits of the parties’ respective case, Mr John Chan submits that consideration of the merits of the defence should be limited to considering whether the defence is unarguable (i.e. frivolous and practically moonshine). He refers to Koo Ming Kown v The Baptist Convention of Hong Kong [2017] HKCFI 1917 at §36 per Lisa Wong J.

Discussion

The Appeal/the Time Summons

32.  The plaintiff essentially advances two broad grounds to oppose the 1^st and 2^nd defendants’ application for an extension of time. First, there was no reasons given for their deliberate non-compliance of the time requirement to file the Defence and second, the Defence has no substantive merit.

33.  Mr John Chan relies heavily on Schindler Lifts and submits that the three specific factors considered by the judge in favour of the grant of an extension are present here. This is also the first time extension application of the 1^st and 2^nd defendants and they took out the Time Summons only 8 days after the Notice was given. The action is very much at its infancy stage and no prejudice could be caused to the plaintiff in view of the interlocutory injunction granted against the defendants. Mr John Chan points out that in the written submissions of Mr Zenith Chan, no allegation of prejudice is made.

34.  Mr John Chan further submits that a defendant is expressly enabled by O.20 r.2(2)(b) to amend his acknowledge of service without leave of the court. It is submitted that it is only reasonable that the court gives a defendant in such a position an opportunity to file his Defence by granting a retrospective extension of time. I should add that had the plaintiff acted promptly and obtained judgment against the 1^st and 2^nd defendants before they sought to file the Amended Acknowledgment of Service, O.20 r.2(2)(b) would not have been available to them at all.

35.  Lastly, Mr John Chan submits that this is not a case where a defendant procrastinated in preparing his defence so as to fail to meet the prescribed time. The 1^st and 2^nd defendants only found themselves to be in need of a time extension in the wake of their filing of the Amended Acknowledgment of Service. Thus, this is not a case of intentional non-compliance with the prescribed time limit.

36.  I accept the cogent submissions of Mr John Chan. The 1^st and 2^nd defendants have acted expeditiously in these proceedings. Their filing of their respective Acknowledgments of Service, their agreement to the Interlocutory Summons and their compliance with the Disclosure Order were done timeously and there is no sign of any procrastination.

37.  It has taken some weeks for the 1^st and 2^nd defendants to get DF to replace TKC. Obviously, the Amended Acknowledgment of Service represents a drastic change of their position with the legal advice of their new solicitors. To complete the change, they were bound to take out the Time Summons.

38.  I do not think that it is necessary for them to give an explanation for the change, which inevitably necessitates disclosure of the privileged communication between DF and them.

39.  Mr Zenith Chan highlights the fact that the 1^st and 2^nd defendants have, to a large extent, accepted the factual allegations of the plaintiff’s claim and have made the relevant disclosure of their breach of the Restrictive Covenants in their Disclosure Affirmations. It is submitted that there is no genuine reason for their change of position.

40.  I do not accept this submission. I am not convinced that change of the 1^st and 2^nd defendants’ position is not bona fide notwithstanding their disclosure of their alleged wrongful trade activities in breach of the Restrictive Covenants.

41.  As summarized by Mr John Chan, their main defence is that the Restrictive Covenants are unenforceable for being excessively wider than necessary to afford adequate protection to the plaintiff and unreasonable with reference to the interests of the parties and the general public. In my view, these pleas can still be made despite the admission of their alleged wrongful trade activities.

42.  On the other hand, I do not find any significant, let alone culpable, delay though the 1^st and 2^nd defendants could have acted more promptly.

43.  I am reluctant to embark on a detailed analysis of the substantive merits of the parties’ cases. In the first place, it is not an essential requirement for a party to produce his draft pleading in an application for more time to file a pleading or to adduce evidence to show its merits. In Schindler Lifts, there was no discussion about merits at all.

44.  In Mobil Petroleum, Hartmann J (as he then was) adopted the approach of the English Court of Appeal in Mortgage Corp Ltd v Sandoes (The Times, 27 December 1996, unreported). In Mortgage Corp, the court made reference to guidelines approved by Lord Woolf MR and Sir Richard Scott, Vice-Chancellor and adopted them as guidance to the future approach. The judge set out ten such guidelines and I do not find it necessary to reproduce them in this Decision. Suffice it to say, none of them concerns the merits of the parties’ cases.

45.  Hartmann J then referred to another decision of the English Court of Appeal in Finnegan v Parkside Health Authority [1988] 1 WLR 411 in which the principles laid down in the Mortgage Corp decision were approved. In particular, the judge referred to Hirst LJ’s disapproval of a rigid mechanistic approach and rejection of the contention that dismissal of the action is an inevitable result if the applicant failed to show good reason for his procedural default.

46.  In California Insurance Company Limited and Ors. v Choung Suk Wah (also known as Choung Yah Wah), HCA 172/2002 (unreported, 19.9.2002), DHCJ A. Cheung (as the CJ then was) said this at §20,

“Furthermore, if the defendant has put forward a defence albeit out of time and without leave, the Court should look at the merits of the defence as disclosed in deciding whether to accede to the plaintiff’s motion for judgment, and if so, to what extent; the Court cannot simply disregard the defence: See Gill v Woodfin (1884) 25 Ch D 707; Gibbings v Strong (1884) 26 Ch D 66; Hong Kong Civil Procedure 2002 (Vol. 1) para. 19/7/4. Whilst in the present case, no defence has yet been filed by the Defendants and all that I have got is a time summons to file a defence as well as a draft defence presented to me by counsel on the day of hearing, in my judgment, the same principles apply in the present case. I should look at the merits of the matter.”

47.  This approach was adopted in Koo Ming Kown by Lisa Wong J, Lee Leung Nang Stewart v Karen Lee [2007] 3 HKLRD 615 by Johnson Lam J (as he then was) and Wynn Resorts Holdings, LLC v Gold Winning Printing Co Ltd. HCA 553/2015 (unreported, 21.7.2015) by Chow J (as he then was).

48.  In all these decisions where the merits of the draft defence were examined, the judges merely sought to find out whether there was an arguable defence. It was one of the factors to be taken into account when the court was required to look at all the circumstances of the case.

49.  Mr Zenith Chan argues that the plaintiff’s claim is an open and shut case and the defendants could not possibly have any arguable defence. He submits that there are differences between restrictive covenants in a sale of business and those in an employment contract.

50.  First, he refers to Degreeasia Limited v Paules Lee Siu Yuk, HCA 1686/2006 (unreported, 25.6.2010) in which Recorder Paul Shieh SC stated the following at §33(2) :

“A distinction is, however, to be drawn between (a) a covenant against competition entered into by a vendor with the purchaser of the goodwill of a business, which will be upheld as necessary to protect the subject-matter of the sale, provided that it is confined to the area within which competition on the part of the vendor would be likely to injure the purchaser in the enjoyment of the goodwill he has brought, and (b) a covenant between master and servant designed to prevent competition by the servant with the master after the termination of his contract of service : (see for example Kores Manufacturing Co Ltd v Kolok Manufacturing Ltd [1959] Ch 109 at p.118 per Jenkins LJ).”

51.  Next, Mr Zenith Chan cites Thorsten Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 in which Lord Macnaghten, in dealing with a 25-year-long covenant, observed that one might not sell the cow and sup the milk. Lord Macnaghten went on to hold that a lower level of scrutiny might be imposed on restrictive covenants in the context of the sale of businesses and goodwill as opposed to master-servant covenants.

52.  Similarly, in Allied Dunbar (Frank Weisinger) Ltd v Frank Weisinger [1988] IRLR 60, Millett J (as he then was) held that the validity of the covenant fell to be determined in accordance with the less stringent approach adopted by the courts where the covenant is taken for the protection of the goodwill of the business sold by the covenantor to the covenantee to that adopted where it is taken by an employer from an employee.

53.  Mr Zenith Chan then lays emphasis on the fact that in the present case, the covenantees are the vendors of the business and the consideration of the SPA was a substantial amount. He submits that it was an arm’s length transaction between the parties with equal bargaining power. Thus, the Restrictive Covenants were reasonable to protect the commercial interest of the plaintiff and there could be no valid challenge to the duration of the Restrictive Covenants.

54.  As pointed out by Mr John Chan, the starting point is that the plaintiff bears the burden to prove the reasonableness of the Restrictive Covenants, which are, prima facie, unenforceable. Whilst Mr Zenith Chan refers to the affirmations filed by the plaintiff in support of the Injunction Summons, the 1^st and 2^nd defendants have not filed any evidence on merits. They were not required to do so when they filed the Time Summons. The 1^st and 2^nd defendants should be allowed to substantiate their attack on the enforceability of the Restrictive Covenants by proper evidence in all fairness.

55.  Despite Mr Zenith Chan’s attractive presentation of the plaintiff’s case, I am of the view that the 1^st and 2^nd defendants have pleaded an arguable defence in the Defence and the reasonableness of the Restrictive Covenants have to be determined in light of the evidence adduced by both parties.

56.  Having come to the conclusion that the 1^st and 2^nd defendants have a reasonably arguable defence, it would be neither necessary nor appropriate for me to make further comments on other defences raised by the 1^st and 2^nd defendants in any length: see Wynn Resorts at §22.

57.  For the reasons given, I would exercise my discretion to grant the extension. The Time Summons must be allowed. The 1^st and 2^nd defendants should not be deprived of their chance of resisting the plaintiff’s claim properly. I dismiss the Appeal and uphold the EOT Decision.

The DJ Summons

58.  As against the 1^st and 2^nd defendants, given my decision on the Appeal, the DJ Summons must fall away.

59.  As regards the 3^rd defendant, it has never indicated that it intends to contest these proceedings and has defaulted in filing its defence.

60.  I have gone through the pleaded case of the plaintiff. Taken all the factual allegations as proved, the reliefs sought in the draft judgment annexed to the DJ Summons (“the Draft Judgment”) are justified. I am inclined to accede to the application of the plaintiff as against the 3^rd defendant.

Dispositions and Orders

61.  Once the Defence was filed, there is no reason why the plaintiff should proceed with the Appeal and the DJ Summons. However frustrated the plaintiff is about the change of position of the 1^st and 2^nd defendants thereby depriving it of an easy victory, the plaintiff should grab the bull by the horns and move on. Should the plaintiff believe that its case is unanswerable, it could apply for summary determination of the parties’ cases properly.

62.  In the premises, I dismiss the Appeal and the EOT Decision do stand. The plaintiff should file and serve its Reply (if any) within 28 days from the date of this Decision.

63.  The DJ Summons is dismissed against the 1^st and 2^nd defendants and I enter judgment against the 3^rd defendant and make an order in terms of the Draft Judgment with the deletion of the references to the 1^st and 2^nd defendants.

64.  Costs should follow the event. The plaintiff should pay the 1^st and 2^nd defendants their costs of and occasioned by the Appeal and the DJ Summons together with all costs reserved, to be taxed if not agreed.

65.  The 3^rd defendant should pay the plaintiff its costs of and occasioned by the DJ Summons, to be taxed on the usual basis, if not agreed. There is simply no justification for indemnity costs.

66.  Lastly, I thank Mr Zenith Chan and Mr John Chan for their invaluable assistance in this matter.