CHINA DRAGON INTERNATIONAL LTD v. PANG HONG

HCA 1864/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1864 OF 2005

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R E A S O N S  F O R  D E C I S I O N

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1.  There were 3 summonses before me:

(1)     The defendant’s interpleader summons dated 19 December 2005;

(2)     The defendant’s summons dated 24 December 2005 to set aside the judgment entered in default of defence and in breach of an unless order to file and serve his defence;

(3)     The summons by Pacific Electric Wire & Cable Co Ltd (“PEWC”) to join as the 2^nd defendant.

2.  At the hearing, I dismissed the interpleader summons, and set aside the default judgment and ordered that PEWC be joined as the 2^nd defendant.  I now give my reasons.

Background

3.  The plaintiff issued the writ on 22 September 2005 and claimed against the defendant for conversion and the return of RMB2,515,861.74.  The plaintiff alleged that the defendant was the Chief Representative of the plaintiff’s office in Beijing.  The said sum was the balance of deposits placed by the plaintiff with a bank in Beijing and the defendant possessed the chops operating the bank accounts and was solely entitled to access and retrieve the balance.

4.  The defendant obtained 3 extensions of time to file his defence, the last being the unless order ordering him to file his defence by 5 pm on 21 December 2005, failing which the plaintiff be at liberty to enter judgment as claimed in the Statement of Claim.

5.  On 17 December 2005, shortly before the expiry of time under the unless order, the defendant took out an interpleader summons joining PEWC as the claimant, and to stay the proceedings herein, or alternatively, to extend time for filing the Defence within 14 days after disposal of the interpleader summons.

6.  In support of the interpleader summons, the defendant affirmed that back in September 2004, PEWC issued proceedings against him and others in HCA 2203/2004.  The defendant was concerned that should he pay the balance over to the plaintiff, he would find himself faced with claim by PEWC in respect of the same funds.  On 24 December 2004, he transferred RMB 2.7 million to an attorney in Beijing as stakeholder, pending clarification of the ultimate beneficial ownership. 

7.  PEWC was incorporated in Taiwan.  In HCA 2203/2004, PEWC sued, inter alia, 3 of its directors Hu Hung Chiu, Tung Yu Jeh and Sun Tao Tsun for breach of fiduciary duties in making unauthorised investments without the knowledge of PEWC, and it also sued persons including the defendant in knowingly assisting the breach of fiduciary duties, and companies holding the assets acquired as a result of the breach of fiduciary duties.  The unauthorized investments included the shares in PacMos Technologies Holdings (formerly known as Win Win International Holdings Limited).  The relief claimed against the defendant included the declaration of trust in respect of assets handled by him and order for transfer.

8.  On 15 November 2004, Hu, Tung and Sun were indicted in the District Court in Taipei for false accounting and misappropriation.

9.  After the service of the writ in the Win Win action, solicitors for PEWC wrote to the defendant on 6 December 2004 putting him on notice that PEWC was the beneficial owner of all the assets acquired by the fraudulent conduct of Hu, Tung and Sun, and the PWEC was making compendious claims not restricted to the Win Win shares.

10.  Back to the present case, the interpleader summons was returnable before the Registrar on 28 December 2005.  On 22 December 2005, the defendant wrote to the plaintiff’s solicitors requesting them not to enter default judgment notwithstanding the unless order pending the hearing of the interpleader summons.

11.  On 23 December 2005, the defendant went ahead to enter default judgment.  On 24 December 2005, the defendant took out the summons to set aside the default judgment, and for the stay of the execution of the judgment, returnable also on 28 December 2008. 

12.  The Registrar adjourned both summonses before him, and granted a stay of execution of the default judgment in the meantime, recording the defendant’s undertaking not to instruct the stakeholder to dispose of the funds otherwise than in accordance with an order of the Hong Kong court.

13.  The plaintiff appealed to a judge in chambers against the stay of execution.  The appeal was heard before Barma J on 17 March 2006, and his Lordship dismissed the appeal.

14.  On 31 January 2007, PEWC took out a summons to be joined as the 2^nd defendant in the action herein.  The plaintiff claimed to be the ultimate beneficial owner of the plaintiff.  PEWC claimed that it wholly owned PCL Holdings Ltd, which in turn wholly owned Pillion Investments Ltd.  In respect the RMB2.5 million at suit, it is common ground between the parties that the funds came from Pillion.  PEWC also claimed that the other source of funds of the plaintiff came from PCL Holdings.

Setting aside

15.  Mr. Shum for the defendant submitted that the default judgment was irregularly obtained, and should be set aside ex debito justitiae.  His grounds were:

(1)     The plaintiff wrongly entered final judgment for a liquidated sum instead of interlocutory judgment for damages for conversion.

(2)     The plaintiff ought not to have entered judgment on an ex parte basis, but should have taken out an inter partes application, as the defendant had already taken out the interpleader summons before the expiry of the time under the unless order.

(3)     The plaintiff failed to make full and frank disclosure of the interpleader cum time summons and the defendant’s request to withhold any application for judgment when applying ex parte to enter the default judgment.

(4)     The plaintiff defeated the due administration of justice by stealing the defendant’s march in the interpleader cum time summons.

(5)     The defendant’s non-compliance of the unless order was neither intentional nor contumelious and the action should proceed as it would have as if the default had not taking place.

16.  Mr. Shum submitted that under O.19, r.4(1), where the plaintiff’s claim against a defendant relates to the detention of goods only and the defendant fails to serve a defence, the plaintiff may enter interlocutory judgment against the defendant for the delivery of the goods or their value to be assessed. 

17.  However in this case, the plaintiff claimed the balance of the bank deposits, which is a sum certain expressed in money terms, and there is nothing to be assessed.  Hence, I find that the plaintiff could have entered final as opposed to interlocutory judgment.

18.  Mr. Shum submitted that the plaintiff ought not to have applied ex parte to enter the default judgment under the unless order.  He relied on Lau Chi Wang & ors v. Ip Fook Chuen & anor [2003] 1 HKLRD 486 where the master ordered that unless the defendants do file an affidavit giving specific discovery, the defence would be struck out and judgment be entered for the plaintiffs.  The defendants filed an affirmation setting out documents which were claimed to fall within the order.  The plaintiffs considered that the affirmation did not comply with the order.  Sakhrani J held that unless order was a time order.  Discovery was made by the affirmation and it was not illusory.  There was a genuine conflict of opinions which could only be resolved by further adjudication.  Hence, the plaintiffs ought not have entered judgment on an ex parte basis and should have taken out an ex partes application, and the judgment was irregular on that basis.

19.  In the present case, the unless order was a time order.  But the taking out of an interpleader summons could not be said to be in compliance of the unless order, nor would the application for extension of time until after the determination of the interpleader summons deprive the plaintiff the right to enter judgment.

20.  An application for extension of time will not stop time running, nor will it prevent the plaintiff from entering or applying for default judgment under O.19, RHC, and extension of time should be applied for at the earliest opportunity, if necessary, with a summons applying for abridgment of time (see Schindler Lifts (Hong Kong) Ltd v. Ocean Joy Investments Ltd per Ma J (as he then was)).

21.  An unless order confers on the other party an accrued right to execute the sanction, and in this case to enter judgment, and the unless order cannot be complied with by doing something which is not apparent on the face of the order (see Dongguan Dongxiang Decoration Co Ltd v. Universal Right Ltd [1999] 1 HKC 790 per Barnett J – the decision was allowed on appeal but on other points).

22.  Mr. Sun for the plaintiff accepted that when the defendant was sued, it was open to him to take out an interpleader summons, but it must be taken out early enough for it to be heard before the expiry of the unless order.  I agree with Mr. Sun that with the unless order, the defendant run the risk of judgment entered unless a defence was filed within the time stipulated.

23.  I also do not see any point in the plaintiff not disclosing the interpleader cum time summons upon applying to enter judgment.

24.  Mr. Shum further submitted that once it is shown that the non-compliance of the unless order was not intentional nor contumelious, the action should proceed as it would have done if the default had not been taken place.  He referred to my judgment in China Interbational Water & Electric Corp v. Talford Development Ltd & anor HCA 36/2004, where I distinguished Golden Tech (Asia) Ltd v. Po Yuen (To’s) Machine Factory Ltd HCA 4517/2001 per Deputy Judge Poon (as he then was) and followed Chow Kai Sang v. Toi Samuel [1996] 4 HKC 330 per Keith J (as he then was) in holding that the requirement on the party in default to demonstrate by credible evidence that he had a real prospect of success does not apply to judgments entered for failure to comply an unless order. 

25.  I find that the defendant’s non-compliance was neither intentional nor contumelious, but that is not the end of the matter.

26.  In the Golden Tech case, the defendant failed to file a defence as ordered by an unless order.  Deputy Judge Poon held that the judgment entered in default was regular and the defendant needs to demonstrate a defence with a real prospect of success.  In the China International Water case, the unless order related to the serving of adequate further and better particulars of the defence, and I saw fit to distinguish the Golden Tech case on the facts.  In Chow Kai Sang v. Toi Samuel, the unless order also related to further and better particulars of pleading.  However, in the present case, the unless order related to the filing of defence as in the Golden Tech case, and with respect, I consider the ruling of Deputy Judge Poon as apposite.  If the judgment were simply entered in default of defence without any unless order, the defendant would need to show merits.  I cannot see that he should be in a better position where he was actually in breach of an unless order. 

27.  Hence, I find that the judgment was regularly entered and the defendant is required to show merits in setting it aside.  I shall return to the merits later.

Interpleader

28.  Mr. Shum submitted that the defendant as agent may interplead even as against the plaintiff as his principal.  He refers to Bowstead and Reynolds on Agency (18^th ed., 2006), Article 70:

“(1)     Where adverse claims whether legal or equitable are made upon an agent in respect of any money, goods, or chattels in his possession, and he claims no interest in the subject-matter of the dispute other than for costs or charges, he may claim relief by way of interpleader, even as against his own principal whose title he has acknowledged, provided that he had no notice of the adverse claim at the time of the acknowledgment.”

29.  In Tsun Fat Finance Co Ltd v. Commissioner of Police HCA 7017/2000, I referred to Belcher & ors v. Smith (1832) 9 Bing 82; de la Rue v. Henru, Peron & Stockwell Ltd [1936] 2 KB 164; NYK (Hong Kong) Ltd v. Wilfond Ltd & anor [1997] 3 HKC 127 and Unionix Development Ltd v. Roe Investment Ltd & anor [1999] 1 HKC 593 on the law relating to interpleader.  The principles can be briefly stated as follows:

(1)     Where 2 or more persons claim the same thing or fund, the holder of the thing or fund does not claim any interest in the property, and not knowing to which of the claimants he ought to deliver the property, and he is sued or fears that he may be sued by some of them, he may apply for interpleader relief against the claimants.

(2)     The relief is discretionay and it will not be granted unless there appears to be some real foundation that the applicant may be sued.

(3)     The applicant does not in any manner collude with any claimant, or has not voluntarily put himself into the situation from which he calls on the court to extricate him.

(4)     He is ready to bring into court, or to pay or dispose of the subject matter of the action in such manner as the court may direct.

30.  Mr. Suen submitted that the defendant had colluded with PEWC and had voluntarily put himself into the situation from which he called on the court to extricate him, and should be denied interpleader relief.

31.  In Murietta & ors v. The South American Etc Co Ltd & ors  (1893) 62 LJQB, 396, 397, Wills J said that:

“… Colluding may be said to be an equivalent for playing the same game.  That is the literal meaning of the word.  Here the applicant has identified himself in interest – he has a strong interest that one side should succeed rather than the other.  In my opinion one of the things intended when these rules were drawn was that the stakeholder who claimed the benefit of the Act should be in a real position of impartiality between the parties.”

32.  In Famous Zone Electrics Ltd v. Hongkong and Shanghai Banking Corp Ltd & anor [1998] 3 HKC 723, the plaintiff and the claimant were the respective seller and buyer of goods under a purchase order.  They both maintained bank accounts with the defendant.  Payment for the goods was to be effected by transfer of funds from the claimant’s account to the plaintiff’s account.  The claimant cancelled the purchase order but omitted to instruct the defendant to cancel the transfer arrangement, resulting in funds transferred from the claimant’s account to the plaintiff’s account.  At the request of the claimant, the transfer was reversed.  The plaintiff then demanded from the defendant return of the funds out of its account.  When threatened with legal proceedings by the plaintiff, the defendant froze the funds in the claimant’s account.  The defendant also faced simultaneous proceedings by the claimant for wrongfully freezing its account.  The defendant applied for interpleader relief.  Sahkrani J held that collusion as used in O.17, RHC did not necessarily involve anything sinister on the part of the applicant, nor anything morally wrong.  Colluding might be said to be an equivalent for playing the same game.  The freezing of the claimant’s account on being threatened with legal proceedings by the plaintiff was collusion on the part of the defendant.

33.  Mr. Suen relied on the following facts of collusion:

(1)     Originally, the funds were in the plaintiff’s bank accounts.  Upon being sued in the Win Win action, the defendant had meetings with the representatives of PEWC, and he transferred the funds from the plaintiff’s accounts to the so called “stakeholder”;

(2)     The stakeholder is the lawyer for PEWC in related litigation in Beijing concerning the shares in a joint venture company held by Pillion where PEWC claimed the beneficial interest;

(3)     On 24 December 2004, the day the defendant transferred the funds, PEWC wrote to the Beijing joint venture company stating that it had entrusted the defendant to manage its claimed assets in Beijing until judgment of the litigation;

(4)     On 28 January 2005, an agreement was entered into between PEWC and Pillion (as per the defendant as its statutory representative) in that Pillion transferred unconditionally its 55% shareholding in the Beijing joint venture company to PEWC;

(5)     The defendant replaced the existing directors in the Beijing joint venture company nominated by Pillion with representatives nominated by PEWC;

(6)     The defendant refused to carry out the order of his direct employer Pro-Centric Group Ltd to remit funds of Pillion to Hong Kong;

(7)     In proceedings for arrears of wages brought by the defendant against Pro-Centric in the Labour Tribunal in Hong Kong, the defendant stated that when PEWC came in, he gave the money to PEWC and he did not take the money himself but he had to retain the money for the true shareholder and investor;

(8)     In his 3^rd Affirmation, the defendant stated that he was defending the action to protect the interest of the true beneficial owner.  This stance was confirmed by Mr. Shum in his skeleton arguments.

34.  Mr. Suen submitted that the defendant was not impartial, but had sided with PEWC, and in effect giving PEWC the benefit of a self help Mareva injunction.

35.  Mr. Shum submitted that collusion should not be interpreted too broadly.  The defendant was made aware of the fraud, hence he resisted the order of remittance by the employer, as a result he was dismissed.  The defendant had not actually paid the funds over to PEWC.  Placing the funds in the hand of the stakeholder did not hamper in any way the real question in the controversy between the plaintiff and PEWC to be decided. 

36.  Mr. Shum referred to Thompson v. Wright [1884] 13 QBD 632 where it was held that an auctioneer taking an indemnity from one of the 2 rival claimants was not taken to collude with the claimant who gave the indemnity.  In that case, Wright directed the auctioneer to take and sell the goods, where Thompson gave notice that the goods belonged to them.  Wright instructed the auctioneer to proceed to sell and gave them an indemnity.  The auctioneer sold the goods and applied for interpleader to try the right to the proceeds.  The master dismissed the application and the judge in chambers order the trial of the interpleader.  Wright moved to rescind the order.  The English Court of Appeal dismissed the appeal as the person objecting to the interpleader was the party who gave the indemnity.  It is obvious that the facts in Thompson v. Wright are very different from the present case.

37.  Mr. Neoh SC for PEWC made the passing comment that the defendant had refused to hand the RMB2.7 million back to PEWC, and the instructions of the stakeholding obliged the Beijing lawyer to act according to the instruction of the defendant only.

38.  In view of the facts referred to by Mr. Suen, and in particular the defendant’s stance in respect of the Pillion shares in the Beijing joint venture company, I found that the defendant had taken side with PEWC.  Hence, I declined to order interpleader relief in the exercise of my discretion.

Joinder

39.  Mr. Neoh submitted that PEWC had a good claim against the assets of the plaintiff:

(1)     In a guarantee dated 1995 signed by Hu, he acknowledged that PCL Holdings was a wholly owned subsidiary of PEWC;

(2)     In a letter by PCL Holdings to the Beijing Foreign Economic and Trade Commission giving notice of the appointment of the defendant as the Chief Representative of the plaintiff, it was stated that the plaintiff was a subsidiary of PCL Holdings, and the capital of PCL Holdings came from Taiwan;

(3)     In the joint venture agreement dated 12 March 1994 between Pillion and China Beijing Hui Zhong Hotel, it was stated that Pillion was a wholly owned subsidiary of PCL Development Ltd (which is a wholly owned subsidiary of PCL Holdings);

(4)     The 2^nd Affirmation of Chung Che Ling, director of the plaintiff, stated that the funds of Pillion came from PCL Holdings.

40.  Mr. Neoh submitted that PEWC had a good proprietary claim against Hu, Tung and Sun for breach of fiduciary duties as demonstrated by the fact that they were indicted for misappropriation.  Hu, Tung & Sun were also directors of PCL Holdings and there is also good proprietary claim against PCL Holdings, and likewise for Pillion, an indirect wholly owned subsidiary of PCL Holdings.  The plaintiff received RMB2.5 million from Pillion without consideration, and it was obliged to hand back to the rightful owner (see Lipkin Gorman (a firm) v. Karpnale Ltd [1991] 2 AC 548). 

41.  As against PEWC, Mr. Suen submitted that the prosecution of Hu, Tung and Sun had not concluded and it was not a forgone conclusion that they were guilty.  Secondly, even if PEWC were the ultimate holding company of Pillion and the plaintiff, it gave PEWC no direct cause of action over the balance as it is trite law that a shareholder is not the owner of the assets of a company in which he holds the shares (see John v. Gore Wood & Co (a firm) [2002] AC 1). 

42.  Mr. Neoh submitted that the web of companies were used by Hu, Tung and Sun to hold the assets acquired in breach of their fiduciaries, and the corporate veil should not avail these companies (see Palmer’s Company Law, 25^th ed., Vol. 1, paras. 2.1519 to 2.1522).

43.  As against the defendant, Mr. Suen submitted that the defendant must account to the plaintiff money held by him as agent, and cannot set up jus tertii against the plaintiff.  Mr. Sun referred to Bowstead & Reynolds, Article 51:

“Subject to the provisions of Article 70, an agent who holds or receives money for his principal is bound to pay over or account for that money at the request of his principal, notwithstanding claims made by third persons, even if the money has been received in respect of a void or illegal transaction.”

44.  As apparent from above, I have ruled against interpleader relief and the exception under Article 70 is not applicable.

45.  Mr. Suen submitted that the defendant might or might be liable to the claims of PEWC, and even if he were so liable, he simply found himself liable to both the PEWC and the plaintiff.  Hence, the defendant had no defence as against the claim of the plaintiff.

46.  As to an agent denying the title of the principal, Bowstead & Reynolds at p. 250 para. 6-112 cited Blaustein v. Maltz, Mitchell & Co [1937] 2 KB 142, 156 per Scott LJ:

“The law is perfectly clear that an agent receiving money rightfully for his principal is not liable in respect of that money to the owner of the money even where the principal, upon receiving it, would be bound to pay it over to the owner.”

47.  But the learned authors commented that it seems that the agent may deny his principal’s title to money (or chattels) received by the agent as a result of the principal’s fraud on a third party.

48.  The plaintiff as the principal of the defendant had affixed him with notice that the funds in question had come from Taiwan. PEWC’s claim against the plaintiff would also be good against anyone who is in control of the funds with knowledge of the interest of PEWC.  Without deciding the matter, the defendant has a substantial defence in not handing the money back to the plaintiff. 

49.  Hence, I ruled that the default judgment be set aside, and PEWC be joined as the 2^nd defendant.

Costs

50.  As I found that the default judgment was regular, I ordered that the defendant do pay the costs of the setting aside and interpleader summons to the plaintiff in any event.  I also ordered that the plaintiff do pay the costs of the joinder summons to PEWC with certificate for 2 counsels.  The end result is that the defendant is to pay the costs of the plaintiff, and the plaintiff is to pay the costs of PEWC.