SMELOAN HONG KONG LTD PREVIOUSLY KNOWN AS GREENWOOD CAPITAL LTD v. WONG WING CHEUNG t/a HUNG WAN TRADING CO

HCA 882/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 882 OF 2003

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D E C I S I O N

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1. This is the plaintiff's appeal against the Master's order made on 15 July 2003 staying the execution of an order she made on 23 June 2003, whereby the defendant was granted leave to defend the action on condition of payment into court the amount claimed by the plaintiff.

Background

2. By a credit facility agreement, the plaintiff lent a loan to a company called Henry Trading Limited, which traded in the name of Ho Yeung Textiles Company ("Ho Yeung").

3. In High Court Action 2478 of 2002, the plaintiff obtained a judgment against Henry Trading Limited on 29 July 2002 for the sum of $731,114.25, being amounts due under the credit facility agreement, together with interest and costs ("the Judgment Sum"). Ho Yeung ceased business in about late May of 2002, and the Judgment Sum was not paid. The plaintiff carried out examinations of the directors of Henry Trading Limited. During the examination of one of its directors, Madam Ho Kit-ying, it was revealed that the business of Ho Yeung was taken over by the defendant in satisfaction of an indebtedness owed by another director, Madam Yeung Lan-fong, to the defendant. It is not in dispute that the defendant is the boyfriend of madam Ho.

4. According to the business registration application filed the defendant, the defendant commenced business on Ground Floor, 15 Wong Chuk Street, Shum Shui Po, Kowloon ("Wong Chuk Street address"), being the previous business address of Ho Yeung, on 1 May 2002. The plaintiff has also produced a tenancy agreement dated 21 May 2002 under which the Wong Chuk Street address was rented to the defendant commencing 1 June 2002. The investigations carried out by the private investigator engaged by the plaintiff also shows that the defendant in the course of his trade used some goods of Ho Yeung.

5. In a letter dated 25 February 2003 from the defendant's former solicitors to the plaintiff's solicitors, it was stated that the defendant had lent $200,000 to Yeung Lan-fong, and madam Yeung had failed to make repayment. It was further stated that the defendant, after knowing madam Yeung had vacated the Wong Chuk Street address, rented the premises and made use of chattels left there by madam Yeung.

The Action

6. The present action was commenced on 10 March 2003. The plaintiff claims against the defendant for the Judgment Sum on the basis that the defendant is a transferee within the meaning of section 3 of Transfer of Business Protection of Creditors Ordinance.

7. On11 April 2003, the plaintiff applied for Order 14 judgment against the defendant. At the hearing on 23 June 2003, the Master granted leave to the defendant to defend the action on condition that the defendant made payment into court within 28 days of the amount claimed by the plaintiff. The defendant is appealing against this decision, and the appeal is scheduled to be heard on 23 September 2003.

8. The defendant did not comply with the condition. Instead, on 10 July 2003, the defendant applied to stay the order of 23 June 2003. In his affirmation in support of the application, the defendant based his stay application on two grounds. Firstly, he said that he had merits on the appeal. Secondly, he said had no money to satisfy the condition for defending the action. On 15 July 2003, the Master granted the stay sought by the defendant. Hence this appeal.

Reasons for decision

9. There is no dispute that the Master's decision granting a stay involves an exercise of discretion. For the defendant, it is submitted that the appellate court should not lightly disturb a master's exercise of discretion. Mr Wong for the plaintiff, however, argues that because the appeal operates by way of a re-hearing, this court's discretion is not fettered by the fact that it is an appeal against the Master's exercise of discretion. I am in agreement with this. Additionally, both parties had filed further evidence since the hearing before the Master. That being the case, this court must approach the case from afresh and has to exercise the discretion unfettered by the Master's decision.

10. I now turn to the merits of this appeal. Primarily, the defendant's application for stay is based on two grounds: (1) the defendant has a real prospect of success on the intended appeal; and (2) it was impossible for the defendant to satisfy the condition imposed by the Master. In fact, the defendant says in his affirmation that his business will close down if a stay is not granted.

11. On the first ground, the defendant makes two challenges to the Master's order granting conditional stay. Firstly, it is said that the Master was wrong in acting on hearsay and conflicting evidence. Given that leave to defend was granted on condition of payment into court of the whole amount claimed, the necessary inference must be that the Master considered the defence case to be shadowy. What is said to be hearsay evidence is the testimony of madam Yeung given in her examination by the plaintiff in HCA 2478/2002. While what madam Yeung said in her examination may well have been hearsay, one has to bear in mind that her account is, to say the least; partly consistent with what was put on behalf of the defendant by his former solicitors. There is also other documentary evidence with regard to the cessation of business of Ho Yeung and the commencement of the defendant's business.

12. On the second ground, it is said that the Master had, before imposing the condition of payment into court, failed to afford the defendant an opportunity to adduce evidence with regard to his means. The defendant relies on the House of Lords' decision in M. V. Yorke Motors v. Edwards [1982] 1 WLR 444, an authority that has been consistently followed in Hong Kong: see, for example, Hwang Yiou Kwa Victor & Anor v. Morgan Guaranty Trust Co of New York [1985] 1 HKC 294, Kwong Key Construction and Engineering Limited v. Sunlink Limited (unreported) CACV 457/2002, per Ma JA (as he then was) at para. 16. In my view, this argument is closely tied to the other ground of the defendant's application for stay; namely, it is impossible for him to satisfy the condition imposed by the Master. They both point to the defendant's ability to meet any financial condition.

13. In the case of Kwong Kee Construction and Engineering Limited at para. 19, after referring to the Yorke Motors case, Ma JA stated that there are two key issues in considering a defendant's means to meet a financial condition. Firstly, the burden is on the defendant to adduce sufficient and proper evidence of his means, and, in this regard, he must make full and frank disclosure of his ability to meet any condition imposed. Secondly, the defendant must show that it is impossible, not just difficult, for him to fulfil the condition sought to be imposed.

14. At the hearing of the stay application before the Master, the only evidence of the defendant's means came from the defendant's 3rd affirmation. This is also the first affirmation dealing with the defendant's financial means. The part of the affirmation that is relevant to means is paragraphs 10 and 12. They are, however, no more than bare assertions as to his lack of means and his inability to meet the condition imposed. The defendant had not put before the Master any bank statements or records, financial statements or management accounts either of his business or of himself. There was simply no objective evidence to support his assertion that he was impecunious.

15. On the other hand, the plaintiff had in the 4th affirmation of Ko Wai On Eric revealed that the defendant had sold his property on 16 June 2003, one week before the Order 14 hearing. What is more telling is the fact that the defendant's present solicitors acted for both the defendant and the purchaser in the agreement for sale and purchase. The sale of the property is a matter well within the knowledge of the defendant as well as his legal advisors. Yet, not a word was said about this in the defendant's affirmation leading the stay application, bearing in mind, too, that the application was taken out after the completion of the sale. As of today, there is still no explanation as to why the sale was not disclosed in the affirmation in support of the application for stay.

16. Clearly, the defendant has failed in his duty of full and frank disclosure, because the fact that he owned a property; that the property was recently sold; and that there was $500,000 of proceeds of sale are all pertinent matters in considering the defendant's financial ability. In failing to explain what had happened to the proceeds of sale, the defendant had also failed to show that it was impossible for him to meet any financial condition.

17. Perhaps to make up for this deficiency, the defendant has sought to put in a 4th affirmation after the plaintiff lodged the present appeal. In this latest affirmation, the defendant explained that out of the $500,000 proceeds of sale, he had repaid $180,000 to his brother, paid $100,000 into his business and also paid $100,000 to his solicitors to meet his legal costs. The plaintiff takes issue with these assertions.

18. It is correct as a matter of fact that the defendant's brother had paid a sum of $100,000 into the bank account of the defendant's business before the commencement of this action. But it is equally plain that this amount was transferred out of the account in two days' time and the evidence before the court does not show the reasons for the transfer or the ultimate application of the money. Similarly, with regard to the second sum of $80,000 paid into the account by the defendant's brother, the entire sum was withdrawn in cash a week later. Indeed, apart from the assertion in the defendant's 4th affirmation, there is nothing to support that the two sums were loans to the defendant. Further, there is no explanation as to why it was thought necessary to repay the brother on a date so close to the Order 14 hearing.

19. In respect of the proceeds of sale received on 16 June 2003, the initial deposit of $100,000 was withdrawn before 24 May 2003. As to the balance of the amount, $280,000 was withdrawn in cash and $100,000 withdrawn by ATM, both on the day after the amount was deposited into the account. The pattern does not in any way substantiate the defendant's claim that $100,000 was for the operation of his business. As to the assertion that $100,000 was to meet his legal expenses, it is noteworthy that no receipt has been produced for payment of legal fees. The plaintiff had in the 5th affirmation of Ko Wai On Eric pointed out that the defendant's solicitors had told the Master that his firm had not received any legal costs from the defendant. Mr Chua, who also appeared for the defendant before the Master, says that he only told the Master that his firm had not been paid for that hearing. On this point, Mr Wong fairly accepts that, without the transcript of the hearing before the Master, the point cannot be taken any further. That aside, there is also no evidence as to the ultimate destinations of the money withdrawn and paid out of the defendant's account by way of cash and by way of transfer. In my view, the defendant's 3rd and 4th affirmations are hardly sufficient to satisfy the defendant's obligation of full and frank disclosure.

20. With regard to the duty of showing that it is impossible for him to satisfy the condition imposed, on the defendant's own case, he was able to make loans from his brother in the past. In Kwong Kee Construction and Engineering Limited at para.19, it was pointed out the possibility of financial assistance from relatives and friends should also be satisfactorily dealt with. On this point, Mr Chua submits that borrowing $180,000 is not quite the same as borrowing over $700,000 to meet the Judgment Sum. It may well be so, but the defendant has chosen to say nothing about this in his affirmation. More importantly, the point is not so much about borrowing an amount to meet the entire financial condition, rather it is about the possibility of having financial assistance from his family members or relatives, irrespective of the amount. The failure to deal with this possibility, when viewed together with the fact that he considered it appropriate to repay his brother days before the Order 14 hearing, calls into doubt the genuineness of his assertion that it is impossible for him to meet the condition imposed by the Master.

21. Mr Chua draws assistance from the case of Pacific Telecommunications Limited v. BB Telecom Limited & Anor (unreported) HCA 19538/1998. From the very brief judgment, it is not known what was the evidence adduced in support of the stay application. On the other hand, it is clear from the judgment that the defendant in that case had filed an affidavit of means and Cheung JA accepted that the business would come to a halt without a stay. These are features that distinguish that case from the present one.

Conclusion

22. For the above reasons, I am of the view that the defendant ought to be asked to pay into court the $500,000 proceeds of sale he received after the commencement of the Order 14 application as a condition for staying the order granting conditional leave to defend. On Mr Chua's application, the defendant is given 28 days to make the payment into court.

23. Accordingly, the appeal is allowed to the extent that the Order of 23 June 2003 is stayed on condition that the defendant within 28 days from the date of this Order I make pays into court $500,000. There is no reason why costs should not follow event, and Mr Chua does not contend otherwise. I therefore further order that the costs of the appeal be to the plaintiff against the defendant, to be taxed if not agreed.