RE MAI XI HONG

HCB 550/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 550 OF 1996

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Before: Hon Barma J in Court

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D E C I S I O N

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1.  This is an application by Mr Mai Xi Hong (“Mr Mai”) seeking the review and variation of an order which I made on 17 December 2004 dismissing his application for annulment of an adjudication order which had been made against him on 26 November 1996.

2.  The background to Mr Mai’s earlier application and the reasons for my decision on that occasion are set out in my written judgment of 17 December 2004. 

3.  Briefly, the adjudication order against Mr Mai was based on a bankruptcy petition presented against him on 31 July 1996.  The petition was, in turn, based on his failure to comply with a bankruptcy notice issued on 13 May 1996 and served on him on 9 July 1996.  That bankruptcy notice was based on a default judgment obtained against Mr Mai on 8 March 1996 in the sum of HK$216,821, in an action commenced on 13 February 1996 against Mr Mai and a company in which he was interested, Mai Lok Investments Limited (“Mai Lok”), in respect of cheques in that amount provided by each of them to a company called Superwealth Development Limited (“Superwealth”) which was the Plaintiff in the action and Petitioner in the bankruptcy proceedings, such cheques having been provided in about June or July 1995.

4.  Mr Mai’s case is that he admits having provided a cheque in that amount to Superwealth.  He says that it was issued in order to pay a debt of Mai Lok and that it was dishonoured due to insufficiency of funds in his bank account.  He says, however, that shortly after the cheque was dishonoured, he agreed with a Mr Wong representing Superwealth that if he paid or procured the payment of the sum of HK$70,000 to Superwealth, the remaining balance of the debt due from Mai Lok would be waived in its entirety.  Mr Mai says he thereupon procured another company in which he had an interest called Mak’s Holdings Limited (“Mak’s Holdings”) to pay the sum of HK$70,000 to Superwealth pursuant to the alleged agreement.  As I observed in my earlier judgment, there does appear to be evidence that such a payment was made by Mak’s Holdings to Superwealth on or about 8 August 1995. 

5.  At the last hearing, Mr Mai’s position was that as a consequence of such payment, the default judgment entered against him by Superwealth was irregular and liable to set aside as of right because it was for too much, the true position being that either nothing was owing from him to Superwealth or, at most, a lesser sum of HK$146,821 odd was owing from him at the time that the default judgment was entered against him.

6.  In my earlier judgment, I held that the default judgment was not irregular and, in paragraphs 15 to 21 of that judgment, I considered the authorities cited to me by Mr Griffiths SC, who appeared for Mr Mai on that occasion, and concluded that a judgment could not be said to be irregular simply because it failed to take account of a payment allegedly made before the issue of the writ in the action.  I went on in paragraphs 22 to 26 of my judgment to say that in the light of the available evidence at that stage, I was not, in any event, satisfied that there had been an undisputed payment made prior to the issue of the writ, which had to be taken into account by Superwealth. 

7.  At this hearing, Mr Mai supported his application for review by submitting further evidence from himself, and the solicitor acting for him at the time of the action in which the default judgment was obtained, with a view to establishing that the payment made by Mak’s Holdings was indeed made in partial or total satisfaction of the debt on which the claim against himself and Mai Lok was based, and that Superwealth could not have thought that it had a good claim for the whole of the HK$216,000 odd in respect of which it entered judgment.

8.  Today, Miss Eu SC appearing for Mr Mai submitted that in the light of this evidence, it was clear that Superwealth’s claim against Mai had been overstated at least to the extent of HK$70,000 and that the judgment against him was therefore irregular.  As a fallback position, she submitted that even if the judgment were, contrary to her first submission, a regular judgment, Mr Mai had at least a strongly arguable defence to the claim against him either in whole or in part.  In consequence, Miss Eu submitted , the default judgment would have been liable to be set aside on the merits had an application to do so been made.  In these circumstances, she submitted that the adjudication order should not have been made against Mr Mai and that it should therefore be annulled. 

9.  Miss Cheung for the Official Receiver submitted that I should limit my consideration of the application to the question of whether or not the new evidence put forward would lead to the conclusion that the earlier default judgment was, in fact, regular.  She drew my attention to the observations of Chadwick LJ in Mond & another v Hammond Suddards (a firm) [2000] Ch. 40 at 49D-F, where he said:-

“… But, although I would hold that, as a matter of jurisdiction, the power to review conferred by [the English equivalent of s.98 of the Bankruptcy Ordinance] is unfettered, it is, of course, a power which is to be exercised judicially.  It would, in my view, be inappropriate – save in the most exceptional circumstances – for a judge to exercise that power in order to substitute his own decision for that of another judge of co-ordinate jurisdiction reached on the same material after a full consideration of the arguments.  The power to review is not to be used in order to hear an appeal against a judge of co-ordinate jurisdiction.  The exercise of the power should be confined, as a matter of discretion, to cases in which there has been some change in circumstances (which may, perhaps, include the consideration of material which was not previously before the court) since the original order was made:  see the observations of Millett J in In re a Debtor (No. 32-SD-1991) [1993] 1 WLR 314, 318-319.”

10.  Miss Eu submitted that the power to review or vary an order under section 98 of our Bankruptcy Ordinance was not so limited or so confined.  In support of her submission, she relied on well-known passages from Williams and Muir Hunter on Bankruptcy and the decision of the Hong Kong Court of Appeal in Wing Lung Bank Limited v Ho Shiu Sun [1986] 1 HKLR 1134.  Although the observations of Chadwick LJ were, I think, obiter, they appear to be grounded in good sense.  That said, however, at the hearing today I permitted Miss Eu to address me on the question of the regularity of the judgment, having regard to the fact that the payment that was said to have been made so as to reduce the amount of that judgment, was made before the judgment.  I did so on the basis that if Miss Eu was able to persuade me that my earlier judgment was wrong in principle or my earlier conclusions were incorrect, it would be unsatisfactory for that state of affairs to be allowed to continue, particularly having regard to the consequences for Mr Mai of such an outcome. 

11.  I have carefully considered the submissions of Miss Eu on this point.  However, I am afraid that I remain of the view that the default judgment against Mr Mai obtained on 8 March 1996 was and remains a regular judgment.  The reasons for my conclusion are those which I expressed in my earlier judgment at paragraphs 15 to 21.

12.  Miss Eu submitted that it was unsatisfactory and unjust that a default judgment should be regarded as irregular where a defendant made a payment after issue of a writ so as to reduce the amount claimed but not where the payment was made at an earlier stage prior to the issue of the writ.  It seems to me, however, that the answer to that submission is to be found in the reasons which I gave on 17 December 2004. 

13.  As I said then, it seems to me that in bringing a claim against a party, a plaintiff is necessarily asserting a right to be paid the amount that is stated in his statement of claim.  If there is a dispute as to that amount, in my view, that is a matter of defence.  The difference between the two situations is that where a payment is made after the issue of the writ which is indisputably linked to the claim, that must reduce the claim which the plaintiff asserts that it has and therefore must be taken into account.  Where a claim is allegedly made before the issue of the writ, it seems to me that the question of whether or not that payment was made and, if so, what effect it has on the Plaintiff’s claim is properly a matter of defence.  If this were not the case, almost any case in which a default judgment was obtained in respect of a liquidated sum, it would be open to a defendant to have that judgment set aside almost as of right simply by asserting (and perhaps putting forward some evidence to support the assertion) that it had made a partial payment prior to the issue of the writ. 

14.  I therefore remain of the view that the default judgment entered against Mr Mai in March 1996 was a regular judgment, but I do not think that that is the end of the matter.  I would accept that if Mr Mai were able to show that default judgment would have been set aside and that there were good reasons for his failure to have made the application to set aside the default judgment or otherwise contest the bankruptcy proceedings at the time that they were brought, it might be open to the court nonetheless to take that into account in considering whether or not to annul the adjudication order against Mr Mai. 

15.  So far as this is concerned, I should say at the outset that I do not think that the additional evidence that has been put forward by Mr Mai, taken from the files of the solicitors whom he then instructed, as to various conversations between his solicitor’s clerk and his opposite number with the Plaintiff’s solicitors, take matters much further. 

16.  It seems to me on consideration of those attendance notes that, at best, they show that there were perhaps negotiations between the two firms of solicitors for an overall settlement which appear, at the end of the day, to have come to nothing.  This is, I think, made clear by an attendance note in which Mr Mai’s solicitor’s clerk asked his principal to obtain Mr  Mai’s instructions as to what appears to have been a proposal that a certain amount should be paid by two instalments in order to dispose of the entire claim against Mr Mai. 

17.  I do not think that these notes can be regarded as clearly indicating an acceptance or an unequivocal acceptance by the Plaintiff’s solicitors that the claim by Superwealth was excessive. 

18.  Miss Eu, however, submitted that even if that were right, there were two arguable defences in respect of the entire claim against Mr Mai.  She submitted first that there was an arguable defence based on total failure of consideration in that there was no consideration pleaded in respect of the cheque on which the claim was based.  She submitted secondly, that even if there were consideration for the cheque, the payment by Mak’s Holdings, a third party, of HK$70,000 would have the effect of discharging the entire obligation owed by Mr Mai under the cheque.

19.  As to the former of these arguments, I do not think that the criticism of the statement of claim is justified.  The statement of claim pleaded the cheque and its dishonour.  It does not seem to me that it is necessary, in a claim based on a dishonoured cheque to plead that the cheque was in fact supported by consideration.  This is normally a matter for the defendant to plead by way of defence if he wishes to defend the claim.

20.  As to the latter argument, the only evidence in support of it would appear to be Mr Mai’s statement in his affirmation to the effect that there was an agreement between himself and Mr Wong of Superwealth that the payment by Mak’s Holdings should discharge the entire obligation whether owed by Mai Lok or Mr Mai himself.  However, this case is not one that was suggested at the time that the proceedings were ongoing.  It is, indeed, contradicted by the correspondence from Mr Mai’s then solicitors to those acting for Superwealth in which it was suggested that, at best, HK$70,000 should be deducted from the amount claimed without any suggestion that there was a defence to the entire claim.

21.  It seems to me that, at best, these two defences put forward might be said to be arguable, but I would not put it very much higher than that.

22.  Miss Eu would appear, however, to be on stronger ground in submitting that, on the evidence available, there may well have been a pro tanto discharge of Mr Mai’s liability under his cheque to the extent of HK$70,000 as a result of the payment by Mak’s Holdings.  Even if this is right, however, that would leave a substantial balance still owing by Mr Mai to Superwealth and would, I think, at best have led to leave to defend being given as to part of the claim. 

23.  In those circumstances, it seems to me that the position is essentially this:  at the time the adjudication order was made, there was a bankruptcy notice and petition which appear to have been properly served (Mr Mai does not suggest in his evidence that there was any question as to service), coupled with a failure on Mr Mai’s part to take any steps to have either the default judgment set aside or to contest the bankruptcy proceedings.

24.  In this situation, the position would appear to me to be rather different from that which obtained in Re Luk Tsun Yin [2000] 1 HKC 774, where Le Pichon J, as she then was, held that the court could annul a bankruptcy order or adjudication order on the basis that a regular default judgment was liable to be set aside.  In that case, Madam Le Pichon J was satisfied that there was a strongly arguable case for disputing the underlying debt and it is clear from the context that the defence in that case would have gone to the entirety of the debt on which the petition was based.  Le Pichon J was also satisfied in that case that there was a satisfactory explanation for the failure of the debtor to have taken steps either to contest the proceedings or to seek to set aside the default judgment or to contest the bankruptcy proceedings against him.

25.  In this case, Mr Mai has put forward evidence in paragraph 11 of his affirmation of 6 January 2005 to seek to explain his failure to take any steps at the time either to set aside the default judgment or to contest the bankruptcy proceedings.  In essence, he says that as a result of his discussions and ultimately the failure on his part to receive either the receiving order or adjudication order made against him, he thought that the matter had been dropped by Superwealth and that there was nothing further to be done.  But, with respect, this does not appear to me to be a satisfactory explanation.  It is quite clear that Mr Mai was well aware of the action against him.  This is clear from the fact that he instructed solicitors and that he gave instructions to them, as evidenced by certain correspondence which was exhibited to his affirmation, to indicate that he was disputing, at least in part, the claim made by Superwealth against him.  It would appear equally to be the case that Mr Mai was aware of the bankruptcy notice and the petition against him.  There is certainly no suggestion that these were not properly served on him and, in those circumstances, it is difficult to see that Mr Mai could have been under any misapprehension as to the attitude or the approach being taken by Superwealth.  The fact that he instructed solicitors to deal with the action itself and appears to have continued to have had dealings with those solicitors throughout 1996, it appearing that the solicitors had opened a file in relation to the High Court action involving himself and Mai Lok as late at December 1996 suggests that Mr Mai must have been well aware of the actions that were being taken against him by Superwealth. 

26.  In these circumstances, I do not regard the explanation which Mr Mai puts forward in his affirmation of 6 January 2005 as being a convincing explanation or providing any good reason for his failure to have taken any steps to challenge the default judgment or to challenge the bankruptcy proceedings against him.

27.  It therefore seems to me that the adjudication order was correctly made at the time that it was made.  I am far from satisfied that that it should not have been made, and I decline to vary the order made at the last hearing. 

28.  I therefore dismiss Mr Mai’s application for review or variation of the order of 17 December 2004, and will now hear the parties as to costs. 

Miss Karen Cheung for the Official Receiver

Miss Audrey Eu, SC, leading Miss Linda Chan, instructed by Messrs Kong & Tang, for the Defendant

HCB 550/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 550 OF 1996

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J U D G M E N T

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The Application

1.  This is an application by Mr Mai Xi Hong, also known as Mak Sik Hung (“the Applicant”), by Summons dated 3 August 2004 to annul the adjudication order made against him on 26 November 1996, pursuant to section 33 of the Bankruptcy Ordinance.  As the Applicant was adjudicated bankrupt in 1996, before the coming into effect of amendments to section 33 of the Ordinance on 1 April 1998, his application is to be determined by reference to the provisions of the Ordinance in force during 1996, when the material events leading to his bankruptcy occurred.  References in this judgment to “the Ordinance” are references to the Bankruptcy Ordinance as it stood in 1996.

2.  Although the petition was not among the papers with which I was provided, I was given to understand that the adjudication order was made on the basis of a petition presented by Superwealth Development Limited (“Superwealth”) which alleged that the Applicant had committed an act of bankruptcy by failing to make payment of a judgment debt owed by the Applicant to Superwealth, pursuant to a default judgment obtained by Superwealth against the Applicant on 8 March 1996, despite the service of a bankruptcy notice requiring him to pay it. 

3.  Before me, Mr Griffiths S.C. appearing for the Applicant contended that the default judgment on the strength of which the bankruptcy notice had been issued was irregular, as it was for a sum in excess of what was actually due from the Applicant to Superwealth at the time that it was entered.  He submitted further that on the evidence put forward by the Applicant, Superwealth had been guilty of fraud or an abuse of process in entering the default judgment which it did, as it knew that the judgment was for more than was actually due.  Mr Griffiths went on to submit that in consequence, the bankruptcy notice issued on the basis of that judgment was invalid, and that the Applicant should not have been adjudicated bankrupt for failing to comply with it. 

4.  Superwealth did not appear at the hearing.  However, the Official Receiver was represented at the hearing, and opposed the making of the order sought.  Ms Cheung, appearing for the Official Receiver, submitted that the evidence adduced by the Applicant did not show that the default judgment against him was irregular, still less that Superwealth was guilty of any fraud or abuse of process in obtaining it.  She submitted further that the default judgment, even if irregular, remained effective unless and until it was set aside, and that as no application to set it aside had ever (even now) been made, the bankruptcy notice issued on the strength of it was valid.  Finally, she suggested that even if I were satisfied that the judgment was for too great a sum, the bankruptcy notice would not be invalidated, having regard to the terms of proviso (b) to section 4 of the Ordinance.

The Background

5.  According to the Applicant, in about mid 1995, Superwealth was owed some HK$604,658 by one of his family companies, Mai Lok Investment (Holdings) Limited (“Mai Lok”), in respect of outstanding invoices arising out of business dealings between Superwealth and Mai Lok.  On about 22 May 1995, Superwealth and Mai Lok entered into an agreement for this amount to be settled in three instalments, the last of which, in the sum of HK$216,821, was to be paid by way of a post dated cheque before 18 July 2000.  The Applicant says that after this agreement was made, there were further discussions between himself and a representative of Superwealth, as a result of which Superwealth agreed to waive the remaining balance if the Applicant paid or procured the payment of HK$70,000, and that he therefore arranged for HK$70,000 to be paid on 8 August 1995 to Superwealth by another family company, Mak’s (Holdings) Limited (“Mak’s Holdings”), by way of a cash cheque which was paid into Superwealth’s bank account.  The Applicant did not obtain a receipt for this payment.  However, it is clear from the evidence before me that a cash cheque issued by Mak’s Holdings for HK$70,000 was in fact paid into a bank account of Superwealth on that date.

6.  The Applicant says that notwithstanding this payment, Superwealth brought a claim (HCA 1871 of 1996) against him claiming HK$216,821.  It is not clear from the evidence before me when these proceedings were brought, or what the basis of the claim against the Applicant was.  I was, however, informed by Ms Cheung in the course of her submissions that the claim was based on a dishonoured cheque. 

7.  The Applicant says that on being served with the writ in these proceedings, he instructed his then solicitors to dispute the amount claimed (but not to dispute liability altogether, because he thought it would be difficult to establish the agreement waiving payment of the balance in the absence of a receipt or written agreement).  His solicitors wrote to Superwealth’s solicitors on 14 March 1996, evidently unaware that judgment in default for the full amount of the claim, plus interest and costs, had been entered some six days earlier, stating that their client (i.e. the Applicant) had paid HK$70,000 to Superwealth, and that this amount should be deducted from the amount claimed and the Statement of Claim amended accordingly.  In fact, as I have noted, a payment of HK$70,000 had been made not by the Applicant but by Mak’s Holdings on 8 August 1995.  There is no evidence of any such payment having been made by the Applicant himself. 

8.  On 19 March 1996, Superwealth’s solicitors replied, declining to make any amendment, and enquiring whether the Applicant’s solicitors had instructions to act for him in bankruptcy proceedings to be instituted in the near future. 

9.  The Applicant says that there was then a telephone conversation between litigation clerks in the two firms, in which the litigation clerk of Superwealth’s solicitors acknowledged that the HK$70,000 had been paid.  In support of this, there was exhibited an attendance note, apparently made by his then solicitors’ litigation clerk, which recorded that certain calculations (showing the amount of the claim, a deduction of HK$70,000 and an addition of HK$15,000 apparently in respect of costs and interest) had been confirmed by his opposite number.  There was also a notation alongside the net amount (HK$161,821) which appears to read “10/4/95 payment”. 

10.  On 9 May 1996, Superwealth applied for a bankruptcy notice against the Applicant.  The Applicant’s then solicitors eventually became aware of the default judgment, and on 28 May 1996 wrote again to Superwealth’s solicitors, stating again that the Applicant had paid HK$70,000 and asking that the default judgment be amended, failing which an application to set it aside was threatened.  The next day, 29 May 1996, Superwealth’s solicitors replied, stating that Superwealth would not agree to amend the judgment.  Despite this, no application to set aside the default judgment was ever made.

11.  It would seem that the bankruptcy notice was served on the Applicant at some point after its issue, and that having gone unpaid, a bankruptcy petition was presented by Superwealth on 31 July 1996, supported by an affirmation dated 30 July 1996, affirming that the Applicant was indebted to Superwealth in the amount of HK$216,831.  Thereafter, as the Applicant did not appear in the bankruptcy proceedings, a receiving order was made against him, followed by the adjudication order of 26 November 1996.  The Applicant says that he was unaware of the making of the receiving and adjudication orders, as he had by then changed his address.  The Applicant does not, however, appear to say that he was unaware of the bankruptcy notice or the petition.  At any rate, Mr Griffiths did not suggest that these had not been duly served on the Applicant.

The issues

12.  By his application, the Applicant seeks the annulment of the adjudication order made against him pursuant to section 33 of the Ordinance, which provided, so far as material:-

“33. (1) Where in the opinion of the court a debtor ought not to have been adjudged bankrupt, ... the court may, on the application of any person interested, by order annul the adjudication.”

13.  It is clear that the Applicant is “a person interested” so as to be entitled to make the application.  Apart from the fact that he is the subject of the adjudication order, it also appears that he has been charged with some 14 offences under the Ordinance, all of which involve acts done by him while he was an undischarged bankrupt.  I was informed by Mr Griffths that his trial in respect of these charges (and one other charge under the Crimes Ordinance (Cap. 200)) is due to take place in January 2005.  In considering this application, I bear in mind that the onus is on the Applicant to show that he ought not to have been adjudged bankrupt.

14.  As I see it, the following issues arise for consideration:-

(1)     Was the default judgment obtained by Superwealth against the Applicant irregular, and so liable to be set aside “as of right”?

(2)     If so, would the irregularity of the judgment render the bankruptcy notice which was issued on the strength of it invalid?

(3)     If so, was the bankruptcy notice rescued from invalidity by the terms of proviso (b) to section 4 of the Ordinance?

(4)     What, in terms of my approach to this application, is the effect of the failure of Superwealth to contest it?

(5)     In any event, were the default judgment and the adjudication order obtained on the strength of it bad because obtained by fraud or an abuse of process?

Was the default judgment irregular?

15.  I shall deal first with the question of whether the default judgment obtained by Superwealth against the Applicant was irregular.  The Rules of the High Court (“RHC”) permit a plaintiff who brings a claim against a defendant to enter judgment against the defendant where he fails to give notice of intention to defend.  The procedure in relation to default judgments, and the means by which they may be set aside, is set out in RHC Order 13.  RHC Order 13 rule 1(1) provides, in the case of a liquidated claim, that:-

“Where a writ is indorsed with a claim against a defendant for a liquidated demand only, then, if that defendant fails to give notice of intention to defend, the plaintiff may, after the prescribed time, enter final judgment against that defendant for a sum not exceeding that claimed by the writ in respect of the demand and for costs, and proceed with the action against the other defendants, if any.”

16.  In this case, Superwealth’s claim against the Applicant was for a liquidated demand, in the amount of HK$216,821, plus interest (which would not, pursuant to RHC Order 13 rule 1(2) prevent the claim from being one for a liquidated demand) and costs.  On the failure of the Applicant to give notice of intention to defend the claim, Superwealth was entitled, as it did on 8 March 1996, to enter judgment for an amount up to the sum claimed by the writ (including interest) and for costs.

17.  Where default judgment has been entered against a defendant, the defendant can apply to have the default judgment set aside pursuant to RHC Order 13 rule 9.  However, in exercising its power to set aside a default judgment, the courts in Hong Kong have drawn a distinction between a judgment that was obtained irregularly, and one that was obtained regularly. Typical instances of a judgment irregularly obtained are those in which service of the writ was bad or ineffective, where the judgment has been entered prematurely, and those where judgment has been entered for too much.  In such cases, it has traditionally been held that the defendant is entitled to have the judgment set aside as of right, without having to show that he has a defence on the merits to the claim against him.

18.  In the present case, Mr Griffiths submits that as HK$70,000 had already been paid to Superwealth, the judgment for HK$216,821 entered against the Applicant was for too much, and therefore was irregular and liable to be set aside as of right.

19.  As to this, I think it necessary first to look more closely at what is meant by entering judgment for too much, in the context of setting aside a default judgment on the ground of irregularity.  RHC Order 13 rule 1(1) permits a plaintiff to enter judgment “for a sum not exceeding that claimed by the writ in respect of the demand and for costs”.  The commentary to this rule at paragraph 13/1/2 of Hong Kong Civil Procedure 2004, Vol. 1, states that “the amount for which judgment is entered should be carefully limited to the amount actually due at that time, and credit should be given for payments made after action brought”.  All of the authorities cited by Mr Griffiths to show that a judgment entered for too much was irregular, and thus liable to be set aside as of right, were cases in which the judgment was entered for too much having regard to payments which had been made after the issue of the writ.  Thus, in Hughes v Justin [1894] 1 QB 667, a writ having been issued for a liquidated demand, the parties subsequently agreed that the matter should be settled on payment of an agreed sum, which was duly paid, in ignorance of the fact that the writ had been issued.  The defendant did not enter an appearance, and the plaintiff signed judgment for the amount claimed plus costs, but sought to execute the judgment only in respect of costs.  The judgment was set aside as being for too much, as the debt itself had been settled by the payment which was made, leaving only the costs outstanding.  In Bolt & Nut Co. (Tipton) Ltd v Rowlands Nicholls & Co. Ltd [1964] 2 QB 10, a default judgment was held to be irregular when it failed to take account of the amount of a cheque which had been tendered and accepted after the issue of the writ, and which had not yet (but in due course was) cleared.  In Muir v Jenks [1913] 2 KB 412, credit was not given for a payment made after issue of the writ, but before default judgment was entered.  Moreover, in none of the cases was there any question but that the payments had been made, so as to reduce the amount of the plaintiff’s claim against the defendant.

20.  In my view, these authorities establish only that a default judgment which is entered for an amount which fails to give credit for undisputed payments made after the issue of the writ is irregular.  It seems to me that by issuing a writ claiming a liquidated sum, a plaintiff will necessarily be asserting that the defendant owes him the amount claimed.  Where there are, after issue of the writ, payments made to the plaintiff in respect of his claim, it is entirely proper that credit should be given for them if default judgment is entered after such payments have been made.  However, where no such payments are made, but the defendant simply contends that the amount claimed is more than is due (or where he asserts that no debt is due at all) that would seem to be a matter of defence, in relation to which (assuming the default judgment to have been otherwise regular) it will be necessary for the defendant to demonstrate some merits, and to persuade the court to exercise its discretion to set aside the default judgment against him.

21.  In this case, the Applicant does not appear to suggest that the payment of HK$70,000 was made after the issue of the writ.  His position is therefore that he has a defence (at least to the extent of this amount) to Superwealth’s claim.  However, the Applicant having failed to give notice of his intention to defend the claim, Superwealth, as it was entitled to do under the RHC, entered judgment against him for the whole of its claim.  That does not, in my view, make the judgment so entered one which was irregular.

22.  Even if it might be considered that a default judgment is irregular not only where it fails to give credit for amounts paid after the issue of the writ, but also where there have been undisputed payments made before issue of the writ which have the effect of reducing the plaintiff’s claim, it is far from clear to me that the payment of HK$70,000 to Superwealth by Mak’s Holdings could be said to have indisputably reduced Superwealth’s claim against the Applicant.  Where the making of the payments, or their effect on the quantum of the debt claimed, is not undisputed, it seems to me that a default judgment entered for the full amount of the claim could not be said to be irregular, for the reasons explained in paragraph 20 above. 

23.  As I have noted, the Applicant did not see fit to explain the nature of the claim against him.  Even taking account of what I was told by Ms Cheung for the Official Receiver, all that I was told was that Superwealth’s claim was based on a dishonoured cheque.  It is well known that the defences available to a claim on a dishonoured cheque are limited, and it may well be that Superwealth did not consider that the payment of HK$70,000 to it by Mak’s Holdings was a matter which reduced the amount due from the Applicant to it.  While the fact of payment would appear, on the evidence before me, to be established, the purpose of the payment by Mak’s Holdings is not.  It is not immediately apparent why, where the Applicant has issued a cheque that was dishonoured, the payment by another entity to Superwealth should necessarily result in a reduction of the Applicant’s liability in respect of his dishonoured cheque.  In these circumstances, I do not consider that the Applicant has established that the HK$70,000 had to be deducted from the claim against him, so that Superwealth was not entitled to enter judgment as it did for the full amount of its claim.  For the reasons which I have sought to explain in paragraphs 20 and 22 above, it would not, in my view, be sufficient, for the purpose of establishing that the default judgment was irregular, to show that it was merely arguable that the payment reduced the Applicant’s liability.

24.  Mr Griffiths relied upon the fact that in the two letters written by Superwealth’s solicitors to the Applicant’s then solicitors, there was no denial that the HK$70,000 had been paid, and submitted that this was a tacit acceptance by them that the amount had been paid, and was referable to the claim against the Applicant.  However, in their letters, the Applicant’s then solicitors stated (incorrectly) that this sum had been paid to Superwealth by the Applicant.  In those circumstances, it is not particularly surprising that no reference should have been made by Superwealth’s solicitors to the payment by Mak’s Holdings.  More fundamentally, however, it seems to me that in declining to make any amendment to Superwealth’s Statement of Claim or to the judgment which it had obtained, Superwealth was making it clear to the Applicant that it did not accept that it was obliged to do so, and thus was not conceding that its claim (and the judgment obtained by it) was for too much.

25.  The piece of evidence on which Mr Griffith’s placed most reliance was the attendance note of the Applicant’s then solicitors’ litigation clerk.  However, the document is not as clear as the Applicant suggests when stating its effect in his evidence.  It does not in terms acknowledge that there has been a reduction to the Applicant’s liability to Superwealth.  It simply sets out a calculation which appears to contemplate the possibility of credit being given for a sum of HK$70,000.  Moreover, the notation concerning payment raises further questions - the date of 10 April 1995 is well before the agreement for instalment payments which the Applicant says was made in May 1995.  Having regard to the fact that the contents of this document are multiple hearsay, and also to the fact that the solicitors’ clerk did not himself give evidence as to the circumstances in which the note was taken (the Applicant relies only on what he was told by his former solicitor, who was not the author of the note, as to its effect), I do not think it appropriate to give the document the weight which would be necessary for it to be accepted as indisputable evidence that Superwealth’s claim against the Applicant was excessive to the extent of HK$70,000.

26.  For these reasons, I do not consider that the Applicant has established that the default judgment entered against him by Superwealth on 8 March 1996 was irregular.  That being so, the second and third issues which I have identified above would not appear to arise.  However, in case I am wrong as to the conclusion which I have reached on the regularity or otherwise of the default judgment, I shall briefly state the views that I have come to on the other issues, having considered the submissions of the Applicant and the Official Receiver.

Invalidity of bankruptcy notice founded on an irregular judgment

27.  On the second issue, whether the bankruptcy notice issued on the basis of an irregular default judgment was invalid, Mr Griffiths relied on two authorities to suggest that it was. 

28.  The first was Muir v Jenks (supra).  With respect, I do not think that Muir v Jenks is authority for this proposition.  The question in that case was whether or not a default judgment which was entered for too much (having failed to take account of a payment made on behalf of the defendant after the issue of the writ) should be set aside, notwithstanding that a bankruptcy notice had been issued in which the correct amount due was stated.  It appears that the plaintiff’s counsel in that case had been offered, but had declined, the opportunity to apply to amend or vary the judgment to state the correct amount due, apparently taking the view that it was not necessary to do so.  All that the English Court of Appeal decided was that where the plaintiff admitted (as it did by issuing its bankruptcy notice for a lesser amount) that the amount for which default judgment had been entered was excessive, and did not seek to amend such judgment, then such judgment should be set aside as of right, on the ground that it was irregular.  Nothing was said by the Court of Appeal as to the validity or otherwise of any bankruptcy proceedings, which were not, it seems, before it.  All that Buckley LJ said about the bankruptcy notice was (at p.416 of the judgment) that “Under these circumstances the bankruptcy notice is founded upon a wrong judgment.  What then is to be done?”, going on to consider whether the judgment ought to be set aside as of right, and concluding that it should be.  I do not read his judgment as expressing any views, one way or another, as to the validity of a bankruptcy notice founded on an irregular default judgment.  No doubt once the judgment were set aside, the bankruptcy notice would become invalid, but that would be because the judgment on which it was founded had been set aside.

29.  However, Mr Griffiths also relied on the decision of Deputy Judge Poon in Ng Chi Wo v Aigun Export Ltd (unreported, CFI, HCB 2819 of 2003, 29 July 2004), in which an application was made under the present section 33 of the Ordinance to annul a bankruptcy order on the basis (inter alia) that the default judgment on which the statutory demand and bankruptcy petition were based was irregular because there had been no effective service of it on the bankrupt.  Having held that service of the writ in the proceedings in which the default judgment had been obtained was defective, Deputy Judge Poon went on to deal with a submission by counsel for the petitioner that the merits of the bankrupt’s defence should be considered, since there was no point in annulling the bankruptcy order if the bankrupt had no defence to the claim against him.  In rejecting this suggestion, Deputy Judge Poon had this to say (at paragraph 39 of his judgment):-

“I am unable to accede to this request.  In my view, as a matter of principle, it would be wrong to allow the bankruptcy order to stand when the default judgment which gave rise to the judgment debt is liable to be set aside and will be set aside upon application on the ground of irregularity.  The substratum of the judgment debt that triggered the bankruptcy proceedings has collapsed.  Without this proper and necessary base, all the subsequent steps taken in prosecuting the bankruptcy proceedings can no longer stand.”

30.  Ms Cheung submitted that this was not the correct approach, since the default judgment, although subsequently shown to have been irregular, remained valid until set aside.  She therefore submitted that where no application to set aside had been made, it was proper for attempts to be made to enforce the judgment by bankruptcy proceedings if necessary and that any bankruptcy order made in consequence of such bankruptcy proceedings should be allowed to stand, since it would have been made on the basis of what was, as that stage, a valid judgment.

31.  It seems to me that until the default judgment is set aside, it remains a valid judgment in respect of which a plaintiff is entitled to levy execution, although in doing so, he runs the risk that the judgment and any execution levied under it may be set aside if the default judgment is subsequently set aside.  In those circumstances, it seems to me that a bankruptcy notice issued in respect of such a judgment is a valid one.

32.  That said, however, it seems to me that the question of the validity of the bankruptcy notice is not determinative of an application under section 33 of the Ordinance, given the wide terms of that provision.  All that is required is for the court to be satisfied that the adjudication order ought not to have been made.  In those circumstances, even if the bankruptcy notice were, as I think, valid, the court would still be entitled to consider whether or not the adjudication order ought to have been made, in the light of the fact that the default judgment on which the bankruptcy notice and petition was based was irregular.

33.  In my view, if the court considering the application for annulment is satisfied that the default judgment on which the bankruptcy petition is based would have been set aside by reason of irregularity, it would be open to the court to annul the adjudication order (now a bankruptcy order) made in the proceedings on the ground that it ought not to have been made.  There would seem to be little point, in such a case, in requiring a separate application to be made in order to set aside the default judgment.

34.  However, it should be borne in mind that the Court of Appeal held in Po Kwong Marble Factory Ltd v Wah Yee Decoration Company Ltd [1996] 4 HKC 157 that there is a residual discretion in the court refuse to set aside, or to impose terms when setting aside, a default judgment even if it is held to be irregular, if there are factors (unrelated to the merits of the claim) that make it appropriate to do so - for example (as in that case) where a defendant has contributed to a failure on the part of a plaintiff to effect good service, or (as suggested by Sears J at p.161B-E) where there has been substantial delay on the part of the defendant to take steps to have the default judgment set aside, even after he becomes aware of the writ.  In this case, having regard to the fact that the Applicant would appear to have been aware of the writ, the default judgment, and the possibility of bankruptcy proceedings being taken against him, it seems to me that the wholly unexplained failure on his part to take steps to have the default judgment set aside (as he had threatened to do, through his then solicitors’ letter of 28 May 1996) might have led the court either to decline to set aside the default judgment, or to have imposed terms as a condition of doing so.  In these circumstances, I am not be satisfied that the default judgment would necessarily have been set aside, and am not, therefore, satisfied that the adjudication order against the Applicant ought not to have been made.  Thus, I would have dismissed this application for this reason also.

Applicability of proviso (b) to section 4 of the Ordinance

35.  So far as the third issue is concerned, had I been of the view that the consequence of the irregularity of the default judgment against the Applicant was that the bankruptcy notice issued against him was invalid, I would have held that it was not rescued by the terms of proviso (b) to section 4 of the Ordinance.  Section 4 provides, so far as material:-

“4.     A bankruptcy notice under this Ordinance shall be issued to a judgment creditor ... and shall require the debtor to pay the judgment debt or sum ordered to be paid in accordance with the terms of the judgment or order ...

Provided that a bankruptcy notice –

(b)     shall not be invalidated by reason only that the sum specified in the notice as the amount due exceeds the amount actually due, unless the debtor within the time allowed for payment gives notice to the creditor that he disputes the validity of the notice on the ground of such misstatement; but if the debtor does not give such notice, he shall be deemed to have complied with the bankruptcy notice if within the time allowed he takes such steps as would have constituted a compliance with the notice had the actual amount due been correctly specified therein.”

36.  Mr Griffiths submitted that the use of the words “by reason only” in the proviso to section 4 was to avoid the defeat of an otherwise valid bankruptcy notice which overstated the amount due under the judgment.  Ms Cheung, however, submitted that even if the judgment on the basis of which the bankruptcy notice was issued was irregular by reason of being for too much, the bankruptcy notice would nonetheless specify a sum which exceeded the amount actually due, so that the proviso would still come into operation. 

37.  Having regard to the fact that the bankruptcy notice is required, by the main part of section 4 to require payment of the judgment debt or sum ordered to be paid, it seems to me that where the proviso refers to amounts due, it must refer to amounts due under the judgment, so that the bankruptcy notice is not to be invalidated by reason only that it specifies as being due a sum greater than that actually due under the judgment.  Where a judgment is irregular by reason of having been entered for too much, the bankruptcy notice would specify as being due an amount which exceeds the amount in fact due to the plaintiff, rather than the amount due under the judgment.  Its invalidity would not therefore arise by reason (still less “by reason only”) of specifying as due an amount in excess of the amount due under the judgment, and the invalidity of the bankruptcy notice would not, therefore, be a matter which could be cured by the proviso.

Effect of absence of opposition by the Petitioner

38.  I turn next to consider the impact, if any, of the failure of Superwealth to appear and oppose this application.  Mr Griffiths submitted, relying on Re Luk Tsun Yin [2000] 1 HKC 774, that the fact that the petitioner had decided not to oppose the application was a relevant circumstance for the court to take into account in exercising its discretion to annul an adjudication order under section 33 of the Ordinance.  Although I would accept this as a general proposition, it should be pointed out that in Luk Tsun Yin the petitioner actually appeared at the hearing and made its position clear.  In this case, Superwealth has not appeared, and has not expressly indicated that it supports, or at least does not oppose, the application.  That being so, I do not think that too much weight can be placed on its failure to appear. 

39.  In any event, it seems to me that I should only make the order sought if I am satisfied that it would be appropriate to do so, and for the reasons which I have endeavoured to explain above, I am not satisfied that the default judgment was irregular, and in consequence do not consider that the adjudication order should be annulled, notwithstanding that Superwealth has not appeared to oppose this application.

Fraud/abuse of process

40.  Finally, I consider the suggestion that the adjudication order should be set aside on the grounds that it was obtained by fraud or an abuse of process.  Where fraud or dishonesty is alleged, the facts must point clearly and unequivocally to fraud.  For the reasons which I have explained in paragraphs 23 to 25 above, it does not seem to me that it can be said that in obtaining the default judgment as it did, Superwealth can be said to have acted fraudulently, or otherwise to have abused the process of the court.

Conclusion

41.  I therefore dismiss the application, and shall make an order nisi that the Applicant should pay the costs of the Official Receiver, to be taxed on the party and party basis if not agreed.

Ms Karen Cheung for the Official Receiver

Mr John Griffiths, SC leading Mr Andrew Bullet, instructed by Messrs Marie Tsang, Dustin Chan & Co., for the Applicant (the Bankrupt)

Respondent (Petitioning Creditor) absent