CHINA MERCHANTS BANK v. JENSON INTERNATIONAL DEVELOPMENT LTD.

HCA 5743/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5743 OF 2000

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D E C I S I O N

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1. In this action, the Plaintiff claimed against the Defendants as guarantors in respect of loan advanced by the Plaintiff to Chang Jiang Power Development (HK) Co Ltd. The total amount outstanding under the loan up to 28 April 2000 was in the sum of US$20,670,763.35. No notice of intention to defend has been filed by the Defendants and default judgment was entered by the Plaintiff against the two Defendants on 3 February 2001. On 21 February 2001, the Defendants took out an application for setting aside the default judgment. Interim stay of execution was granted by Registrar C Chan on 2 March 2001 and directions for filing of affirmations were given.

2. The substantive hearing of the application for setting aside came before Master Au Yeung on 19 July 2001. It was conceded by the Defendants before Master Au Yeung that on the existing evidence, the Defendants would not be able to succeed in their application. They therefore sought an adjournment to enable them to file further evidence. Master Au Yeung made an order, the material part is as follows,

"Defendants to pay security for cost in the sum of HK$200,000.00 into court by 4:00pm on or before 2 August 2001. In the event the Defendants do pay the security into court as provided for in (2) above, there shall be :-

(i) leave for the Defendants to file and serve further affirmation in support of application to set aside judgment on or before 30 August 2001;

(ii) leave to Plaintiff to file and serve an affirmation in reply thereto on or before 11 October 2001;

(iii) expert opinion, if any, shall be limited to one expert on each side;

(iv) no further affirmation be filed without leave;

(v) the Defendants' summons to set aside judgment be adjourned to a date to be fixed in consultation with counsel diary, half day morning reserved;

(vi) interim stay of execution of judgment until next hearing of summons or further order. "

3. That was an order made on 19 July 2001. The Defendants lodged an appeal on 2 August 2001 against that order. In the notice of appeal, the Defendants asked for the following,

"(i) the Defendants to have unconditional leave to file further affirmation to set aside judgment dated 3 February 2001.

(ii) the time prescribed in the said order for the Defendants and the Plaintiff to file further affirmation in relation to the Defendants' application to set aside judgment shall be suspended until this appeal is heard or disposed of."

What the Defendants sought to challenge was the condition imposed by Master Au Yeung in terms of the payment of HK$200,000 as security for cost.

4. The matter therefore came to me as an appeal against the order of Master Au Yeung. However, since the appeal against the Master's decisions is by way of re-hearing, I accept the submissions of Mr Wong (who appears on behalf of the Plaintiff) that since I am seized with the matter I have the power to consider the matter afresh and treat the application for setting aside as before me and if I shall deem fit, I should also dispose of that application.

5. However, the appeal itself, in so far as the Defendants' challenge to the order of Master Au Yeung is concerned, is no longer pursued by them when the matter was heard by me this morning. This is because the Defendants indicated to me that they would abandon their appeal and instead they took out a summons on 16 October 2001, one day before the hearing before me on 17 October 2001, in which they asked for leave to extend time for payment of the HK$200,000.00 security for costs pursuant to the order of Master Au Yeung and also for extension of time to file further affirmation by the parties. It is agreed between the parties that I should deal with the application for extension of time first because if the Defendants were not successful in that application, that would effectively dispose of other matters before me. It is accepted by Mr Chan (who appears for the Defendants) that if the Defendants were not allowed to file further affirmations (and they could not do so without an extension of time), their application for setting aside the default judgment cannot succeed. In that event, I see no reason why I should not dismiss the application for setting aside the default judgment.

6. Before I deal with the application for extension of time, I should also mention that even up to today, the Defendants are still not ready with regard to their evidence in support of their application for setting aside. This is because, according to Mr Chan, of the fact that documents and information has to be gathered by the Defendants in Mainland China with regard to a transaction relating to 30% of the shareholding in the capital of City Hotel in Beijing. Those shares were pledged as securities for the Plaintiff's loan and it is alleged that because of the Plaintiff's failure to register the security document, the other shareholder of the City Hotel was able to utilise the 100% shareholdings of City Hotel (thus including the 30% shares) to obtain a second credit facilities which has priority over the Plaintiff's security. By virtue of this, it is said on behalf of the Defendants that their interest as sureties were compromised by the neglect of the Plaintiff. They wish to raise these matters as a defence in the present action and for that purpose, they need more time to obtain the necessary information and document from China. It is indeed extraordinary for a defendant who took out an application for setting aside default judgment in February 2001 to say that even by mid-October 2001, he was not ready with his evidence.

7. The order of Master Au Yeung directed that the payment of the security for cost was to be made on or before 2 August 2001. The Defendants now seek leave to pay the same within two days from today. In respect of the filing of affirmation although Master Au Yeung granted leave to the Defendants to file and serve further affirmation on or before 30 August 2001, that was conditional upon the Defendants' payment of the security on or before 2 August 2001. Since the Defendants did not make the said payment of security for costs, the condition was not complied with and I have to consider the matter afresh. According to the direction of Registrar Chan dated 2 March 2001, the Defendants could file and serve an affirmation in reply within 21 days after the Plaintiff filed its affirmation. The Plaintiff's affirmation was filed on 20 March 2001 and the time limit for the Defendants to file their affirmation in reply expired on 10 April 2001. Registrar Chan also directed that no further affirmation be filed without leave of Court. Looking the matter from that perspective, the Defendants are grossly out of time in terms of the filing of affirmations. Mr Chan explained that it was only shortly before the hearing before Master Au Yeung that he obtained sufficient fund from the Defendants to seek advice from counsel. And it was only upon counsel's consideration of the matter that the Defendants realised that the existing evidence filed by the Defendants were not sufficient to support their application for setting aside default judgment. An affirmation of Mr Chan himself was filed on 18 July 2001 outlining the new defence as alluded by me in paragraph 6 above. Even accepting that to be the case, the Defendants have almost three months' time by now to prepare the necessary evidence in support of such a defence, but they still fail to do so.

8. Mr Chan tried to explain the delay between July and today by submitting that up to last Friday, the Defendants believed that they had good grounds to challenge the order of Master Au Yeung in terms of the HK$200,000 security for cost. It was only at a conference of last Friday with counsel that they decided to abandon the appeal, hence their late application for extension of time by the summons of 16 October 2001. As to why they had conference with counsel at so late a stage, Mr Chan explained that again like the previous occasion it was due to late provision of funding by the Defendants.

9. I do not accept that as good explanation. Firstly, irrespective of the challenge to the order for security for costs by Master Au Yeung, it is the duty of the Defendants to prepare their case diligently and to make all necessary efforts to prepare promptly their affirmations supporting their line of defence. Apparently, they have not done so because according to some documents produced by Mr Chan to me at the hearing and his draft second affirmation which he undertakes to file, it appears that nothing happened in the preparation of the affirmations of the Defendants in between July and October. Secondly, the Defendants only have themselves to blame for not seeking counsel's advice earlier. Whilst I should not speculate on the reasons why the Defendants did not provide necessary funding for counsel to be engaged, I am entitled to take into account of the result of such dilatoriness on the part of the Defendants and its effect on the progress of the litigation. As a result of the failure of the Defendants to prosecute their summons diligently, the application for setting aside the default judgment is not yet disposed of notwithstanding that it is now ten months after the issuance of the summons. This is highly unsatisfactory. I have to bear in mind also that in the meantime there was an interim stay of execution of the judgment granted by Registrar Chan. Such delay constituted prejudice to the Plaintiff.

10. Apart from lack of proper and sufficient explanation for the delay, on the material before me, I am of the view that there is no merit whatsoever in the proposed new line of defence to be raised by the Defendants in their intended affirmation. The guarantees on which the Plaintiff relied in this action were executed by the Defendants in December 1997. However, the purported failure to register the security over the 30% shareholding occurred in 1995 and it was between 1995 and 1997 that the Chinese party borrowed money on the basis of 100% of the shares. Hence by the time of the guarantees in 1997, if there was any loss in terms of the value of the security by reason of the non-registration, it has already occurred. The Defendants therefore cannot say that their interest as guarantors have been compromised because the value of their interest in the securities had remained the same since their execution of the guarantees in 1997. Mr Chan submitted that the documents executed in 1997 were continuation of the transactions in 1995. That may be so in layman's term but in terms of legal effects, one cannot ignore that a new loan was advanced by the Plaintiff in 1997 and new set of guarantees were executed by the Defendants in 1997. In the documentation for the transaction in 1997, the obligation to register the security in respect of the 30% shareholdings was placed upon Chaoming Ltd in which the 2nd Defendant was the majority shareholder and director. In the 1995 documentation, in so far as they are relevant, there was a covenant by Chaoming Ltd not to create further encumbrances on the property which was the subject matter of the security. If further encumbrances were created as alleged by the Defendants in between 1995 and 1997, it could only be effective in law if it was created with the consent of Chaoming Ltd. In that case, Chaoming Ltd would have acted in breach of the said covenant. Bearing in mind that the 2nd Defendant was the director and majority shareholder if not the alter ego of Chaoming Ltd, and also bearing in mind the relationship between the 1st Defendant and the 2nd Defendant, it is inequitable to allow the Defendants to pray in aid of the wrongdoing of Chaoming Ltd to discharge their liabilities towards the Plaintiff. The Defendants relied on the principle derived from Wulff v Jay [1862] 7 LR QB 756. It is an equitable principle. Those who seeks relief from equity must come with clean hands. If on the other hand, as contended by Mr Chan, that the further encumbrances were not created with the consent of Chaoming Ltd, I fail to see how it could be effective in law and the interest of the Defendants would not have been affected. I therefore see no merits at all in this line of defence. It follows that it would be futile to allow further time for the Defendants to put in their affirmations which would not advance their case at all in their application for setting aside the default judgment.

11. In view of the substantial delay between the issue of the summons for the setting aside application, the lack of good and sufficient explanation about the delay, the prejudice to the Plaintiff caused by the interim stay of execution, and the lack of merits in the proposed defence, I do not consider it appropriate to exercise my discretion to grant an extension of time. I therefore dismiss the application for extension of time in the summons of 16 October 2001.

12. It follows from my dismissal of that application that the Defendants have no merits in the application for setting aside the default judgment. Since the order of Master Au Yeung has lapsed by reason of the failure of the Defendants to comply with the condition set out in the said order, the application for setting aside is at large before me. In the light of the concession by Mr Chan that on the existing material the Defendants could not succeed on their application to set aside the default judgment, I see no reason why I should not dismiss that application here and now and I would therefore make an order to dismiss that application together with costs. The interim stay of execution granted by Registrar

Chan will automatically be lifted. I would also order that the Defendants should bear the costs of the Plaintiff in respect of this appeal.