DENG MINGHUI t/a TIANYE INDUSTRIAL (HONG KONG) CO v. CHAU SHUK LING ELAINE

HCA 749/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 749 OF 2005

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J U D G M E N T

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Service of the Writ:

1.  On 27 April 2005, Mr Deng issued a Writ with a statement of claim attached against Ms Chau seeking damages totalling $4,340,551.00 arising from breach of an oral agreement.  The affidavit of service shows that on Thursday 28 April 2005, the Writ and other relevant documents were inserted in the letterbox for the address of Ms Chau in Hong Kong.  In accordance with O 10 R 1(3)(b)(i), the affidavit of service expresses the opinion that a copy of the Writ would have come to the knowledge of Ms Chau within seven days.

2.  The precise date upon which the Writ did come to the notice of Ms Chau is not disclosed.  On her own admission however it is plain that it came to her notice at least prior to 23 May 2005.  She says so in an affidavit.  Her son had visited the premises in Hong Kong and found an envelope in the letterbox which contained a copy of the Writ of Summons and other documents.  She says he forwarded to her, what she describes in her affidavit, as an “incomplete set” of the documents.  She does not condescend to particulars as to the nature in which the documents were “incomplete”.

3.  By 23 May 2005, her solicitors were in receipt of instructions from Ms Chau.  On that day Ms Chau's solicitors wrote to Mr Deng's solicitors asserting that the documents were incomplete and asking for a copy of all documents.  Like their client in her affidavit, the solicitors in their letter, did not condescend to particulars as to the way in which the documents were incomplete.  I am not told what instructions Ms Chau gave to her solicitors.  In any event no steps were taken by Ms Chau following her receipt of the documents.

The judgement is entered:

4.  On 14 June 2005, no notice of intention to defend having been filed, judgement by default was entered.  At the same time Mr Deng obtained a charging order absolute against a residential property owned by Ms Chau in Hong Kong.  That was the property at which service had been effected.

5.  It is not clear when Mrs Chau's solicitors were notified that that judgement had been entered.  On 23 August 2005, Ms Chau's solicitors wrote to Mr Deng's solicitors informing them that:

“We have instructions to advise our client.  We do not however have instructions to accept service.  If you let us have copies of any documents you may wish to serve upon her we will obtain instructions as to whether she wishes us to do so.”

The application to set aside the judgement:

6.  On 6 October 2005, nearly 4 months after the judgement was entered, Ms Chau, by her solicitors, filed a summons pursuant to O 13 R 9 to set aside the default judgement.  The summons also sought the vacation of the charging order.

7.  The ground upon which Ms Chau relies to justify the setting aside of the judgement and the vacation of the charging order is that proper service had not been effected upon her. 

8.  Ms Chau asserts that she no longer lives in Hong Kong and now lives in the USA.  She says that she was in the USA when the Writ was served. She acknowledges that she remains the owner of the property in Hong Kong at which the Writ was served by insertion through the letterbox.  She acknowledges that she received the Writ, it being forwarded to her in the USA.  The argument was to be that for there to be proper service there should have been an application for leave to serve out of the jurisdiction.  The challenge is accordingly a jurisdictional challenge.

9.  At the commencement of the hearing Mr Chung abandoned the jurisdictional challenge.  He accepted that the service was good service.  I am satisfied that that was a proper concession.  Whatever the precise intricacies of the whereabouts of Ms Chau at the relevant time, and the knowledge Mr Deng may have had as to her usual residence, it is quite plain that the proceedings were properly drawn to her attention, the Writ having been served as an address that is properly described as the last known address of Ms Chau in Hong Kong.

10.  The evidence is absolutely clear that she then became fully aware of the proceedings.  It is simply not open to her to take no steps and then say that the service was bad, because at the time it was effected in accordance with the Rules she happened to be out of the jurisdiction.  In this respect I agree fully with the judgement of the Yeung J., (as he then was), in Penrose Industries Limited v Tam Yan Lung, unreported, HCA 5738/2000.

11.  It follows, service having been properly effected, that the judgement entered is a regular judgement.

Setting aside a regular judgement:

12.  Mr Man accepts that a regular judgement, entered by default, may be set aside when the defendant shows a defence on the merits to which the court should pay heed, not as a rule of law, but as a matter of commonsense: see Evans v Bartlam [1937] AC 471, and Hong Kong Practice 2006, Vol 1, § 13/19/13.  That is not to say that a defendant who is able to demonstrate a defence which has a real prospect of success has an automatic entitlement to have the default judgement set aside.  In exercising the discretion under this rule, the court has regard to all the relevant circumstances.  It is necessary first to examine the defences alleged, and then the whole of the circumstances to determine whether or not the judgement ought to be set aside.

The defences raised:

No cause of action disclosed:

13.  The first matter raised by Mr Chung is that the statement of claim does not disclose a cause of action.  The statement of claim is quite simple.  It pleads an oral agreement to receive money on behalf of the plaintiff in relation to goods sold by the plaintiff.  It pleads an obligation to account for that money.  It pleads a failure to account.  That is plainly a good cause of action.

14.  The essence of the argument was that there was no consideration for the agreement.  The argument is one which is bound to fail, and has no merit at all.

15.  Under the terms of the agreement, the arrangement was that Ms Chau would receive monies for the sale of Mr Deng's goods, and would pay those monies into her own bank account.  Her liability was to reimburse Mr Deng the value of the monies, in other words to account for the monies.  No trust arose, because she had no particular duties regarding the use of the actual money received, and was free to intermingle the funds with her own monies in her bank account.  That that is so is plain from her own affidavit.

16.  There is plain consideration in the arrangement in that Ms Chau has the use of Mr Deng's funds in her bank account until such time as she is required to account to him for those funds.  That is a clear benefit to her, and, with the corresponding detriment to Mr Deng; he was deprived of the funds until an account was given and payment made; plainly constitutes sufficient consideration.  The argument is simply unsustainable.

An entitlement to commission:

17.  Ms Chau contends that she is entitled to commission on the transactions received by her and upon which she accounted to Mr Deng.  In her affidavit she says that she and a messenger were the only staff of Mr Deng's office in Hong Kong.  She was the sole person in charge.  She says that purchasers paid for their purchases to her savings account with the Bank of China in Hong Kong.  She was then instructed to transfer the monies to her current account at the same bank, and then by cheque to Mr Deng's Hang Seng Bank account in Hong Kong.

18.  Ms Chau asserts that the commission had been agreed to in late spring of 2001, at the rate of 3%, and that the commission was to be payable at the end of each year.  She says that between 2002 and 2004 she asked Mr Deng many times to account to her and to pay her the commission.  It is not without significance that she asserts that during the three years she worked for Mr Deng over $200 million worth of business had been transacted with buyers in China, and that all of those monies were paid to her personal bank account.  A commission of 3% on that sum amounts to some $6 million.  In any terms that is a very significant sum to earn over a three-year period.

19.  Ms Chau has produced no documents whatsoever in relation to the claim for commission.  Had there been, as is asserted, an agreement for commission, one would have expected, in the absence of deduction from the payments made to Mr Deng, at the very least, some form of documentation in which a claim for commission was made to Mr Deng.  It would have been a simple matter for Ms Chau, had she been entitled to commission, to have kept a regular records of the sums paid to Mr Deng, to have calculated the commission entitlement, and to have sent to Mr Deng a statement of the sum due.  Certainly, one would expect at the very least, an annual statement setting out the entitlement to commission, particularly when the sum due may be in the order of $2 million per year.  There are no such documents.  That she should not make any written claim, on the annual basis she says she was entitled to, for such substantial sums, renders the entitlement to such sums to be simply beyond belief.

20.  Instead Ms Chau has simply appropriated a sum of money to herself, there being no evidence that she has in any way disclosed to Mr Deng how that sum has been calculated.

21.  The evidence establishes that on 19 October 2004, Mr Deng complained to the police regarding the theft of a sum of approximately $4,300,000 by Ms Chau.  The police have investigated the matter, taken advice from the Department of Justice, and have formed the view that there is sufficient evidence to prosecute Ms Chau.  Ms Chau has been placed on the wanted persons list, that no doubt explaining her reluctance to return to Hong Kong.

22.  There is nothing in the evidence other than a bare assertion on the part of Ms Chau that she is entitled to commission.  Even now she does not produce any proper calculation of her claimed entitlement to the court.  The defence is quite without merit.

The claim of illegality:

23.  Ms Chau contends that the business carried on by Mr Deng is being conducted illegally, and that as a matter of public policy the court ought not to allow Mr Deng to profit from his illegal actions.  Ms Chau says that there are two areas in which the business is being operated illegally.  First it is said that Mr Deng was evading income tax in Hong Kong.  Second it is contended that the business involved the smuggling of the goods into the PRC.

Income-tax evasion:

24.  The claim of evasion of income tax is founded primarily upon the fact that the arrangement was that buyers of goods from Mr Deng would make their payments into Ms Chau's savings bank account in Hong Kong, and the funds would be then passed through her current account and into Mr Deng's personal account, and not the account for the sole proprietorship company under which Mr Deng operated the business.  Ms Chau says that this demonstrates at least an arguable case that Mr Deng is concealing funds from the Inland Revenue Department.

25.  I am satisfied that there is no possible merit in the suggestion.  In the first place it is perfectly normal in Hong Kong for business people to use their own bank accounts for another person's business.  Second, I had initially suggested that there may be a trust involved in the facts of this case.  Mr Man has drawn my attention to the fact that it is not suggested that the arrangement imposed any particular duty regarding the use of the particular property, the funds, received by Ms Chau on Mr Deng's behalf.  In such circumstances no trust arises.  Mr Man read to me the following passage from An Introduction to the Law of Trusts,  2^nd ed, Simon Gardner, OUP, at p 146:

“An agent arranging the sale of her principal's goods will commonly be authorised also to receive the buyer's payment for them, for example.  In some cases, the fiduciary's terms of engagement leave her to treat the incoming property as her own (and thus to mix it with her own property, e.g. by running a single bank account), with liability only to reimburse the principal its value, i.e. to ‘account' for it.”

The factual circumstances cited as an example are directly identical to the present case.  There is no suggestion that such an arrangement raises an inference that income taxes to be avoided.

26.  The money trail is perfectly straightforward and simple.  It is not necessary for Mr Deng to open a separate bank account for a sole proprietorship company.  On Ms Chau's own case the funds went from her account to Mr Deng's account and would be perfectly easily traceable by the Inland Revenue Department. 

27.  In any event, the submission is fundamentally flawed.  That income tax is being avoided by a business proprietor, while itself a criminal offence, does not make his business illegal.  The business itself may be perfectly legal, in which case there would be no bar to an action against an agent to recover funds earned through that business.  The suggestion that the circumstances raise an inference of income tax evasion is without merit, and in any event is quite irrelevant.

Smuggling:

28.  The allegation that the goods were being smuggled into China seems to revolve around the fact that the goods are repacked in Hong Kong and then shipped by coastal barges to different seaports in Guangzhou province.

29.  Again there is not a shred of evidence to indicate any suggestion of smuggling.  Some 45 pages of Hong Kong export declarations signed by Mr Deng have been produced.  Some 38 pages of sample PRC import declarations have been produced.  A further 9 pages of documents show the extent of Mr Deng's involvement as an established player in the recycled plastic industry.  None of these documents were the subject of any challenge at all by Mr Chung.  All demonstrate the conduct of a perfectly legal business, being operated with appropriate customs clearance, both in Hong Kong and in the PRC.

30.  Ms Chau asserts that on about 20 February 2006, the Shenzhen Customs, Tax Authorities and Commercial Crimes Office raided Mr Deng's Shenzhen office for smuggling, tax evasion, and possession of unlawfully imported goods.  She asserts that the Shenzhen authorities are looking for Mr Deng.

31.  Mr Deng in reply says that there has been no such raid, and has produced his passport showing numerous instances of free travel to and from China.  If as Ms Chau asserts, Mr Deng is wanted by the Shenzhen authorities, it would be surprising that he would be able to travel freely into and out of China after February 2006.

32.  Again, the suggestion that there may be smuggling on the part of Mr Deng is quite unsubstantiated by the evidence.

The conduct of the defendant:

33.  There is no rigid rule that the applicant must satisfy the court that there is a reasonable explanation why judgement was allowed to go by default, though obviously the reason, if any, for allowing judgement and thereafter applying to set aside is one of the matters to which the court will have regard in exercising its discretion.

34.  It is beyond argument that Ms Chau was fully aware of the proceedings against her.  She received the Writ with its statement of claim attached.  She knew precisely the nature of the claim.  She has offered no explanation at all as to why a notice of intention to defend was not entered and the jurisdiction of the court challenged pursuant to O 12 R 8.  She offers no explanation for a delay of nearly 4 months.

35.  The explanation may be seen in the background circumstances.  She is undoubtedly aware of the police investigation and is unlikely to wish to return to Hong Kong where she faces arrest.  That she sought to evade service by relying upon technicalities is plain from the instruction she gave her solicitors to advise her on the proceedings, but not to accept service.  In the absence of any merit in the defences proposed the Court should not disregard this delay.  It is quite apparent that Ms Chau chose to play procedural games simply in an effort to delay the process of the proceedings against her.

Conclusion:

36.  There is no merit in the defences proposed.  Ms Chau's failure to explain why no intention to defend was entered, and the consequent delay following the entry of judgement count against her.

37.  The summons to a set aside a default judgement and vacate the charging order absolute are dismissed.  Ms Chau must pay Mr Deng's costs on the summons to be taxed on a party and party basis.