SHANGHAI LAND HOLDINGS LTD (IN RECEIVERSHIP) v. CHAU CHING NGAI AND ANOTHER

HCA2704/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2704 OF 2003

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J U D G M E N T

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1. I have before me a large number of interlocutory applications.  By my order, I have directed that the first part of the 10-day hearing fixed for these interlocutory applications should be devoted to the question of jurisdiction.  This is my judgment on the question of jurisdiction which had been argued before me over the last five days.

2. The case came about as a result of the plaintiff pursuing the claim against Mr Chau (the 1^st defendant) in this action for money of the company alleged to have been misappropriated by Mr Chau.  Mr Chau was an entrepreneur from Shanghai.  He and his wife came to Hong Kong from Shanghai in the late 1990s and he was soon well established in Hong Kong.  He lived in Hong Kong at No.81 Perkins Road.  He had soon acquired companies, properties and other assets in Hong Kong.

3. Shanghai Land was a public company which Mr Chau, through the vehicle of New Nongkai with the assistance of Bank of China, managed to acquire 75% shares in that public company.  The relationship between Mr Chau and the Bank of China was close.  The reason that the company was so valuable to Mr Chau is because the company was cash rich.  I will describe a little bit later as to the intricate way that the cash was used by Mr Chau and by the Bank of China for the acquisition of the plaintiff.

4. The good fortune, however, of Mr Chau did not last too long because in late May 2003, while he was on the trip to Shanghai, he was arrested and was subsequently tried and jailed, and my understanding is that his jail sentence would come to an end in mid 2006.

5. What has led to this piece of litigation was that in early May 2003, some US$39 million of the plaintiff’s money sitting in the bank account with the Bank of China on deposit was taken out at the request of Mr Chau, and through various routes, eventually they ended up, or at least US$34 odd million of it, in Shanghai in the bank account of a sub-sub-subsidiary of the plaintiff, Shanghai Hongxin Real Estate Development Company Limited (“Hongxin”).  That money which went to Hongxin soon afterwards towards the end of May went to two different entities, one is Fuyou Securities Brokerage Co. Ltd (“Fuyou”) and the other is Shanghai Mechanics International Trading Limited (“Shanghai Mechanics”).  It is the loss of the plaintiff’s money in these circumstances that has caused the plaintiff to make the present claim.  The plaintiff makes the present claim through its receivers because upon the arrest of Mr Chau in Shanghai, the directors of the company found that the company was rudderless and without direction.  So application was made to the court for the appointment of receivers.  Receivers were appointed by the order of Mr Justice Sahkrani in June 2003 and this was very soon after the arrest of Mr Chau.

6. The question that had to be decided on this jurisdiction dispute arose out of the fact that Mr Chau is now in Shanghai and not in Hong Kong, and there is the question of the necessity for service out under Order 11.  A number of issues arise under that jurisdiction rubic.  It may be convenient as a starting point, first, to refer to the White Book as to the general consideration under Order 11.

7. It is well established that in a case of an Order 11 situation, there must be shown under each of the sub-rules (I think in this case we are talking about sub-rules (1)(a), (d), (e) and (p)) relied upon by the plaintiff, a good arguable case which is the appropriate standard of proof.  A good arguable case is as laid down by the principle of the Korner case and explained in the White Book at page 99 thus:

“What this means was discussed in The Brabo[1949] A.C.326; [1949] 1 All E.R. 294 and Vitkoviche Horni v. Korner (above), followed in Natarajan Subramaniam v. Lincoln Financial, unreported, HCA No. 3150 of 2002, December 10, 2002.  It indicates that though the court will not at this stage require proof to its satisfaction, it will require something better than a mere prima facie case.  The practice, where questions of fact are concerned, is to look primarily at the plaintiff’s case and not to attempt to try disputes of fact on affidavit; it is of course open to the defendant to show that the evidence of the plaintiff is incomplete or plainly wrong.  On questions of law, however, the court may go fully into the issues and will refuse leave if it considers that the plaintiff’s case is bound to fail.”

That is the standard of proof in relation to a good arguable case under each of the sub-rules.  That is the first issue I have to decide.  The second issue is the consideration of the general discretion of the court, and the exercise of the discretion includes questions of whether there is a serious question to be tried (applying a slightly less stringent standard of proof) and the question of forum conveniens.  The third issue that I will have to consider is the question of submission to jurisdiction.  I will take each of these issues in turn.  I will start first with the consideration of the good arguable case under each of the sub-rules.  But before I do that, perhaps I should start with the nature of the relationship that has led to the money being taken out of the company.

8. The nature of relationship between the plaintiff, Mr Chau and the Bank is that there was a large loan made by the Bank in 2002 to New Nongkai.  The loan had to be secured with some kind of protection and what was put in place by the Bank was firstly the shares of the public company of the plaintiff acquired were pledged to the Bank.  There were other safety measures taken.  The attraction of the acquisition of the plaintiff was because it was cash rich and it had large sums of cash on deposit with the Bank.  The arrangement made between Mr Chau and the Bank was that the plaintiff’s cash deposit sitting at the Bank was not to be taken out without the Bank’s consent.

8. The Bank also took further step to ensure that the Bank’s appointed directors would sit on the board and these would be in the form of Mr Koo and Ms Fan who were solicitors well trusted by the Bank.  The Bank also required an Executive Committee to govern the affairs of the plaintiff and those members of the executive committee were Mr Chau, Ms Gong, Mr Koo and Mr Lee.  The Bank required also that the operating account of the plaintiff with Dao Heng Bank be protected so that in terms of large transfers of sums over $10 million, a joint signature by the Bank’s side of the signatories would be required.  The control of the Bank in the function of the plaintiff was to enable supervision by the Bank of the plaintiff’s activities and dealings so as to protect the Bank’s interest in relation to its large loan to New Nongkai.  Mr Chau, of course, was the controlling owner of New Nongkai.

10. In late 2002, Mr Chau put forward to the Bank the proposal that the plaintiff would undertake a new project in Shanghai by way of a proposed development of a piece of land in Wuzhong Road, involving the usual steps of buying the land, getting the occupants to vacate the land, developing the land by putting up suitable attractive units on it, selling the units and then taking the profit arising out of this development.  Letters in January 2003 as well as the application in January 2003 which had been shown to the court all point to this project and there was, in fact, in the January 2003 documentation which the court had seen, talk of a projected profit of about RMB200 million odd arising out of a possible sale price of $900 odd million and acquisition costs of something like $700 million which, of course, included the acquisition of the land.

11. On 4 February 2003, the Creditor Committee of the Bank of China met and approved the idea of the asset injection, namely of the Wuzhong Road Project, into the plaintiff.  The land was in fact acquired and some HK$350 million was paid for the acquisition of the land on 11 February 2003.  A month later, that land was pledged to SRRC for RMB300 million for development.  On 22 April, there was a critical letter signed by Mr Chau addressed to the Bank requesting for payment out of the plaintiff’s bank account with the Bank of the sum of US$39 million.  On 30 April, at the Creditors Committee Meeting of the Bank, that request for the payment of the US$39 million was considered and was approved.  Nothing was said in the Minutes of that Meeting about the US$39 million being required for the specific purpose of development costs to be paid soon or at all.  The flow of the fund after the US$39 million was paid out by the Bank from the plaintiff’s bank account was helpfully described in Report A of the Receivers dated 22 September 2004 and was fairly summarised in the multi-colour Fund Flow Chart* which was presented to the court, which I attach to this judgment. On that Fund Flow Chart, the various steps, numbered 1 to 9, were marked and these steps formed the subject matter of the presentation to the court.

12. What it amounts to, from the Fund Flow Chart, is that out of the total US$39 million which had left the company’s account with the Bank of China, of the US$34.2 million which eventually ended up in Shanghai, RMB44.5 million went to Fuyou and RMB222.9 million went to Shanghai Mechanics.  The land in question was in fact not developed and no building work has been done.  The occupants are still there.  As far as the Receivers are concerned, no documents were found by them which could support a case that the US$39 million were paid out or could be said intended to be used for development of the land.  The money that had gone to those two entities in Shanghai, i.e. Fuyou and Shanghai Mechanics, were unlikely to be recovered as the Receivers had made attempts to seek repayment with no success.  It is in these circumstances that the Receivers contend before this court that there were both breaches of contract of employment by Mr Chau as well as the incurring of liability by the defendant, Mr Chau, as constructive trustee.

13. The above recital sets the background against which I have to decide on the first issue on jurisdiction, namely whether it falls within any of the four sub-rules.  I will first take sub-rule (a).  The words of sub-rule (a) is “relief is sought against a person ordinarily resident within the jurisdiction”.  “Ordinarily resident” I believe both sides have agreed is to be given its ordinary and natural meaning.  I am fortunate in that we have the judgment of Lord Sumner which could said to be the fons and origo of subsequent judgments on the meaning of “ordinary resident”.

14. In the case of Inland Revenue Commissioner v. Levene [1928] AC 217 at page 243, Lord Sumner said this :

“…. the word ‘ordinarily’ may be taken first.  The Act on the one hand does not say ‘usually’ or ‘most of the time’ or ‘exclusively’ or ‘principally’ nor does it say on the other hand ‘occasionally’ or ‘exceptionally’ or ‘now and then’, though in various sections it applies to the word ‘resident’, with a full sense of choice, adverbs like ‘temporarily’ and ‘actually’.  I think the converse to ‘ordinarily’ is ‘extraordinarily’ and that part of the regular order of a man’s life adopted voluntarily and for settled purposes, is not ‘extraordinary’.”

That passage was relied upon by Madam Justice Kwan in the case of In Re Kok Hui Pan, ex parte Wing Lung BankLtd [2002] 3 HKLRD 20 as well as by the very full judgment of Mr Justice Cheung in an unreported judgment of Lau San Ching v. Liu on 19 January 2005 in the case of HCMP3215/1994.  What I perhaps should emphasize by a reading of Lord Sumner’s judgment as well as what Madam Justice Kwan and Mr Justice Cheung had said in their separate judgments is that the emphasis is not only on resident, but on the other word ordinarily.  My emphasis is particularly on these key words : “regular order of a man’s life”, “adopted”, “voluntarily”, “for settled purposes”.  It is by reference to those criteria that we therefore must look to see whether having regard to the evidence before this court, Mr Chau, was ordinarily resident.  I think it made very little difference whether the applicable time for the test of ordinary resident in Hong Kong is at the time of the writ or now.

15. The 18^th affidavit of Mr Stephen Liu shows the extensive reliance by the plaintiff on the various facts pointing to the ordinary residence of Mr Chau being in Hong Kong.  I start first with his home, No.81 Perkins Road.  That is not only the home, that is also the residence of Chau given in numerous documents by him as his residence, not least of which is of course the employment contract, as well as all the statutory documents, filed with the Companies Registry.  Secondly, one can see, No.81 Perkins Road, is also where his wife lives, namely the address also given as the residence of his wife.  The fact, therefore, that this is the wife’s residence as well as his residence, makes it therefore his home and this strongly points to Hong Kong being his residence.  Thirdly, one can look at where he works.  He works in an office of the plaintiff’s company in Hong Kong, and that is the location where decisions are made, dealings are made with local banks, and where the executive committee meets.  If one then turns to companies owned or controlled by him, again, these are all residents in Hong Kong or connected with Hong Kong, and of course he controls, as I understand it, quite a number of companies in Hong Kong.  Then there is also the reference in Mr Liu’s affidavit to properties in Hong Kong, to cars in Hong Kong including Bentley and Lamborghini, bank accounts in Hong Kong and for what it is worth also his Hong Kong Identity Card.  The overwhelming evidence, therefore, all point to Hong Kong being the place of the ordinary residence of Mr Chau.  Is there a competing “ordinary residence” candidate?  No.  Because I have not seen a single document where there is a residential address of Mr Chau being outside Hong Kong, let alone in Shanghai.  I can understand, of course, that he came from Shanghai but the fact that he came from Shanghai does not mean that his ordinary residence is in Shanghai.  I think at the end of the day, Mr Smith, counsel for the 1^st defendant, was driven to rely on the imprisonment in Shanghai of Mr Chau as in some way taking away from the Hong Kong, the ordinary residence that had been so overwhelmingly demonstrated by the plaintiff.  But that residence (an uncomfortable residence) in Shanghai prison was not adopted, was not voluntary, was not the settled intention, and was imposed upon Mr Chau.  If I may say so, it was an extraordinary residence.  So, the fact that there was the imprisonment in Shanghai cannot in anyway convert what is otherwise an ordinary residence of Mr Chau in Hong Kong into a non-ordinary residence.  I am satisfied, therefore (on whatever may be the standard of proof required because the evidence is all one way) that a good arguable case has been made out under Order 11(1)(a).

16. Strictly speaking, having come to that conclusion, it is really not necessary for me to go on to deal with the other three sub-rules because both the claims in contract as well as in constructive trust would then be all be covered by sub-rule (a).  Out of courtesy to the submissions made to me, I would say, just very briefly, a few words about the other three sub-rules.

17. In relation to sub-rule (d), the words of the rule are that :

“the claim brought to enforce, rescind, dissolve, annul or otherwise affect a contract, or to recover damages or to obtain other relief in respect of the breach of contract being (in either case) a contract which—

(i) was made within the jurisdiction, or

(ii) …

(iii) is by its terms, or by implication, governed by Hong Kong law, or

(iv) contains a term to the effect that the Court of First Instance shall have jurisdiction to hear and determine any action in respect of the contract.”

18. The contract in question is of course the employment contract.  I think there is no argument to the contrary that the contract was made in Hong Kong, therefore it satisfied (i); it was governed by Hong Kong law, it satisfied (iii); and that Hong Kong court is to have jurisdiction, therefore it satisfied (iv).  The dispute is possibly as to whether there might have been a breach under that contract.

19. The question under sub-rule (e) is :

“the claim is brought in respect of a breach committed within the jurisdiction of a contract made within or out of the jurisdiction.”

20. The claim under sub-rule (p) is “

“the claim is brought for money had and received or for an account or other relief against the defendant as constructive trustee and the defendant’s alleged liability arises out of acts committed, whether by him or otherwise, within the jurisdiction.”

21. It seems to me two questions called for consideration :

(1) Whether there was a good arguable case made out for a breach.

(2) Whether there was a good arguable case made out that the breach took place within the jurisdiction or the act was committed within the jurisdiction, that is, under sub-rules (e) and (p).

22. In considering the above questions, I must give proper regard to the recital of the aforesaid facts and to the totality of the material before me and, more importantly, to the general principle that, primarily, one looks at the plaintiff’s evidence to see whether a good arguable case being made out unless the defendants’ evidence is such as to show that the plaintiff’s evidence plainly cannot be credibly relied upon.  I have looked carefully at the Fund Flow Chart, and I have done so, in combination with three other Charts : the first chart, which I would call the Connected Persons Chart* (at page B181) which shows the relation between Mr Chau and the various people who had dealings with the various entities; the second chart is in relation to the Fuyou Chart* (at page B236) which shows the connection of Fuyou with the various persons connected to Chau; and the last chart is the Shanghai Mechanics Chart* (at page B234) which shows Shanghai Mechanics’ connection with the various persons connected to Chau.  All of these charts I adopt as part of the annexure to this judgment. 

23. The combination of the four Charts, that is, Fund Flow Chart, Connected Persons Chart, Shanghai Mechanics Chart and Fuyou Chart, paint a very powerful picture that the flow of the money on 7 May out of the plaintiff’s Bank of China account must have been part of a premeditated scheme to deprive the plaintiff of its money for a purpose not sanctioned by the company (because there were no company board minutes to sanction that) and not for the purpose of Wuzhong Road Project because there is no evidence that the usual steps that one would expect to be taken of contracts, tenders, viability studies, stage payments, so on and so forth, exist in this case.  The money had been taken out not for the proper purpose of the company but as misappropriation by Mr Chau for improper purposes.  

24. It seems to me that there are five factors which are critical in the court coming to a view that there is a good arguable case.  There was first, no proper authorization by the Board; secondly, there were no documents to support that the money was for development or how much money was required for the development; thirdly, it was the manner of the money obtained and that included, of course, the various ways it had been shown in the Fund Flow Chart; fourthly, the receipt of the money by the two recipient companies which are all closely connected to Mr Chau as can be seen from the Connected Persons Chart, the Fuyou Chart and the Shanghai Mechanics Chart; and fifthly, the lack of repayment or the loss of the money to the plaintiff. 

25. Mr Bleach, for the plaintiff, says that the payment out, long before the arrest of Mr Chau, was already in breach of Mr Chau’s obligation.  He has a secondary case that if the breach was later, it was also sufficient for the purpose of the plaintiff.  I agree.  It is not necessary for me to go into the details of how the breach or the act could be categorized as taken place at any particular point of time.  I am satisfied that there is a good arguable case under sub-rules (d), (e) and (p).  It seems to me that in these circumstances that the first requirement of the jurisdiction dispute has been satisfied.

26. I go on now to consider the next issue of discretion, which includes forum conveniens as well as the matter of the serious question for trial.  Having come to the view that the high burden of the good arguable case had been made out, there is no question that there is a serious question to be tried.  The only question is whether Mr Smith has made any dent to Mr Bleach’s case by way of forum conveniens.  Again, here, the evidence is all one way.  Everything points to Hong Kong being the proper forum : the contract was made here; the accounts were kept here; monies were taken out here; and the acts were done here.  Here was the controlling mind and here was the place where all the relevant players are located — whether the Bank of China or Mr Koo or Ms Fan or Ms Gong or Mr Chau when he returns after his imprisonment.  There was simply no issue defined by Mr Smith to this court, by reference to which he could point to some issue where the trial would be more appropriate in Shanghai.  There was not even in the evidence a particular reference to Shanghai being the more appropriate forum.  There was of course a reference to Mr Li Wen Bui.  I have not forgotten Mr Li or about what he said was the part he took after the arrest of Mr Chau.  It was quite rightly said by Mr Bleach that there was considerable doubt as to the credibility of what Li said.  One needs to scrutinize the hearsay evidence of Ms Clara Leung on what Li said and it must not be given too much weight.  If Mr Li is going to be a witness, so be it, but that does not thereby make Shanghai the appropriate forum.  The overwhelming case of forum conveniens has to be trial in Hong Kong.  So, I do not think the forum conveniens would detract the court from coming to the view that a proper case for service out has been made.

27. Before I deal with the final point, I must go back, however, to the question of contract under sub-rules (d) and (e) because I neglected to refer to one point mentioned by Mr Smith, namely that the High Court does not have jurisdiction to deal with this claim by reason of the fact that the Labour Tribunal has exclusive jurisdiction under the Ordinance in relation to a dispute over employment.

28. In my view, Mr Smith is wrong.  When a defendant is outside the jurisdiction in relation to employment contract claim, the Labour Tribunal has no jurisdiction to issue and sanction a service out of proceedings.  That right of ordering service out of jurisdiction is given only to the High Court.  The High Court therefore is the appropriate jurisdiction to deal with employment dispute where the defendant is outside the jurisdiction.  Section 10 of the Labour Tribunal Ordinance expressly provides : (1) that the Labour Tribunal can decline jurisdiction; and (2) can transfer the dispute to the High Court.  I have been told that the appropriate claim has been lodged with the Labour Tribunal, but the Labour Tribunal however is not able immediately to deal with it and it would only deal with it next week.  I expect the Labour Tribunal to recognize its lack of jurisdiction to give remedy to the plaintiff because of the fact that the defendant is physically outside the jurisdiction, and because of the Tribunal’s inability to order service out.  The Labour Tribunal therefore is obliged to transfer the claim to the High Court.  If it does not, then it would be wrong in law and this court will correct such error.  So, the employment contract point on the lack of jurisdiction of the High Court to deal with this claim is a non-point.  In my view the High Court plainly has jurisdiction, and for the reasons which I have given earlier, plainly the court is satisfied that there is a good arguable case under sub-rules (d) and (e). 

29. I now go back to the final issue, namely submission to jurisdiction.  I would deal with it very shortly.  Order 12 rule 8 is a code dealing with the position when a defendant is contesting jurisdiction.  The contesting of a jurisdiction is done at the stage before judgment is entered, when of course such steps such as acknowledgement of service could possibly amount to submission.  Order 12 rule 8 by its terms referred to these various considerations pre-judgments.  If one goes to Order 12 rule 8, the words are :

“(1) A defendant who wishes to dispute the jurisdiction of the court in the proceedings by reason of any such irregularity as is mentioned in rule 7 or on any other ground shall give notice of intention to defend the proceedings and shall, within the time limited for service of a defence, apply to the Court for-

(a) an order setting aside the writ or service of the writ on him, or

(b) an order declaring that the writ has not been duly served on him, or

(c) the discharge of any order giving leave to serve the writ on him out of the jurisdiction, or

(d) the discharge of any order extending the validity of the writ for the purpose of service, or

(e) the protection or release of any property of the defendant seized or threatened with seizure in the proceedings, or

(f) the discharge of any order made to prevent any dealing with any property of the defendant, or

(g) a declaration that in the circumstances of the case the court has no jurisdiction over the defendant in respect of the subject-matter of the claim or the relief or remedy sought in the action, or

(h) such other relief as may be appropriate.”

30. It is to be observed that the setting aside of the judgment was not included in any of those sub-paragraphs from (a) to (h), at least not expressly.  The setting aside of the default judgment is of course, as everyone well knows clearly set out in Order 13 rule 9.  In my view (I say that with considerable deference and without the benefit of full argument or research on the matter by anyone, either the lawyers or by the court) Order 12 rule 8 is dealing with the situation prejudgment, so that a party, after service or even after an order sanctioning service had been made, can seek to challenge the jurisdiction of the court to prevent a judgment being entered.  But once a judgment had been entered, the applicable rule is different.  The applicable rule is Order 13 rule 9 and you first have to get rid of that wrongly entered judgment before you come to deal with Order 12 rule 8.  In my view that is the proper way it should be looked at.

31. I know that there is a judgment of Mr Justice Cheung in the case of Lee Fai v. Chan Kui [1997] 3 HKC 228 where per curium in my view Mr Justice Cheung seemed to have taken the view that Order 12 rule 8 might possibly apply to a situation of default judgment.  With respect I believe that is not a correct view.  The fact of the case of Lee Fai is very unusual and part of the reason which led Mr Justice Geoffrey as the other member of the Court of Appeal to the view of submission is because the defendant had participated in the assessment of damages in such a way as to be totally inconsistent with a non-waiver of the jurisdiction.  I think in this case we cannot say anything of that kind.  Although the defendant had taken out a summons under Order 13 rule 9, he had not, other than issued the summons, taken steps which can be said to be totally in consistent with non-waiver.  I am therefore of the view that there had been no submission to the jurisdiction.

32. It seems to me that the plaintiff, although the default judgment had been set aside, must be given the chance to have the proceedings properly brought against Mr Chau even though he is now outside the jurisdiction.  Therefore Mr Bleach is successful in this application on jurisdiction.  

Mr John Bleach, SC and Mr Michael Liu, instructed by Messrs Simmons & Simmons, for the Plaintiff

Mr Clifford Smith, SC and Mr Jose-Antonio Maurellet, instructed by Messrs Haldanes, for the 1^st Defendant

Mr Ronny Wong, SC instructed by Messrs S.Y. Wong & Co., for the Intended Intervener

Attachments :

(1)  Fund Flow Chart

(2)  Connected Persons Chart

(3)  Fuyou Chart

(4)  Shanghai Mechanics Chart

HCA 2704/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2704 OF 2003

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J U D G M E N T

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1. This is an application by Sun Hung Kai Investment Services Limited ("SHKIS") for an order that it be added as a defendant to these proceedings. SHKIS also applies for an order that copies of the documents as set out at para 3 of its summons dated 8 April 2004 be provided to its solicitors.

2. The background facts are that on 7 June 2003, on the application of the board of directors of Shanghai Land Holdings Limited ("SLH") Messrs Stephen Liu Yiu Keung and Kenneth Yeo Boon Ann, both of Ernst & Young were appointed receivers of SLH until further order with the powers set out in my order of 7 June 2003 ("the 1st order").

3. This action was commenced by the said receivers against the 1st defendant, Mr Chau Ching Ngai ("Mr Chau") and the 2nd defendant, Ms Mo Yuk Ping ("Ms Mo") on 23 July 2003 for the sum of US$34,200,000.00 which it was alleged Mr Chau and/or Ms Mo, acting for herself and/or the agent of Mr Chau, wrongfully and in breach of their fiduciary duties to SLH had misappropriated for their own use and purpose or transferred such sum from the bank accounts of SLH to some third parties through the bank accounts of SLH's subsidiaries without the authority or approval of SLH. Mr Chau and Ms Mo are husband and wife.

4. On 21 August 2003 the plaintiff obtained a default judgment in the sum of US$34,200,000.00 with interest and costs ("the default judgment") against Mr Chau. The action was discontinued against Ms Mo on 23 August 2003.

5. On 28 August 2003 on the application of the plaintiff for the appointment of Messrs Stephen Liu Yiu Keung and Kenneth Yeo Boon Ann as receivers by way of equitable execution of the assets of Mr Chau, I made an order appointing the said persons the receivers by way of equitable execution of the assets of Mr Chau as more particularly set forth in the schedule of assets annexed to the order to take into their control with powers to manage the same in order to preserve their value and to apply the same in satisfaction of the judgment for the sum of US$34,200,000.00 together with interest thereon and fixed costs in the sum HK$1,550.00 and on the terms as set out in the order ("the 2nd order"). Although Mr McCoy SC, for SHKIS, submitted that the 2nd order affected all of the assets of Mr Chau I am of the view that as a matter of construction of the order it only affects the assets of Mr Chau as more particularly set out in the schedule annexed to the order as was submitted by Mr Fung SC, for the plaintiff. I accept Mr Fung's submission.

6. The 2nd order also set out the powers of the said receivers.

7. In June 2003 SHKIS also commenced an action being HCA 2085 of 2003 against, inter alia, Mr Chau in respect of sums owing to it under a loan and guarantee. A default judgment dated 27 August 2003 was entered in favour of SHKIS against Mr Chau and SHKIS became a judgment creditor of Mr Chau in the amount of HK$35,736,438.32 plus fixed costs of HK$1,615.00 and interest on the principal sum of HK$35,000,000.00 at judgment rate. As SHKIS had received a payment of HK$11,500,000.00 in reduction of the amount outstanding, the principal amount of debt outstanding and due to SHKIS by Mr Chau was approximately HK$24,300,000.00 as at 27 August 2003.

8. The affirmation of Mr Hulme sets out the grounds in support of SHKIS's application at paras 8 to 10 as follows:

" 8. The Applicant as a substantial judgment creditor of Mr Chau has a direct interest in the assets over which Mr Chau's Receivers have taken control, and in the costs and expenses of the receivership which have been or will be paid out of these assets. I am advised by the Applicant's legal advisers and verily believe that Mr Chau's Receivers, as officers of the Court, are appointed for the benefit of all interested parties and in the premises it is appropriate that the Applicant now be joined as a party to these proceedings.

9. At the time of making this Affirmation, the Applicant does not have any detailed information as to the conduct of the receivership, in particular as to what assets of Mr Chau have been collected and realised by Mr Chau's Receivers and what costs and expenses have been incurred by them. The Applicant has also expressed its concerns to Mr Chau's Receivers as to an apparent conflict of interest in acting as receivers of both SLH and Mr Chau. These are matters that will directly impact on the Applicant's ability to recover the outstanding balance of its judgment debt. Now produced and shown to me marked "TH-4" is a true copy of the letter sent by the Applicant's solicitors to the Receiver's solicitors expressing these concerns.

10. For these reasons the Applicant seeks to be joined as a party to these proceedings and to be provided with copies of the documents, affidavits and accounts referred to in the Summons filed by the Applicant herein."

9. At para 1 of the written skeleton submissions for SHKIS it was made plain that the jurisdiction of the Court under O.15 r.6(2) was invoked as the basis for the application for joinder. However, in his oral submissions Mr McCoy did not dispute Mr Fung's submission that the Court had no jurisdiction to add SHKIS as a defendant under O.15, r.6(2) and instead relied on the rules set out in the marginal note to the summons namely, O.30 and O.51 RHC and the inherent jurisdiction.

10. O.15, r.6(2) RHC provides that:

"Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such application-

(a)........................................................................................................

(b) order any of the following persons to be added as a party, namely-

(i) any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjucated upon, or

(ii) any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter."

11. Mr Fung submitted that SHKIS cannot bring itself within the provisions of either r.6 (b) (i) or (ii). As to (i), it seems to me that it is not necessary to have SHKIS before the Court to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjucated upon. The plaintiff's claim was for a specific sum of US$34,000,000.00 which the 1st and 2nd defendants wrongfully and in breach of their fiduciary duties misappropriated from SLH. There were no other matters in dispute in the cause or matter.

12. As to (ii), the relief or remedy claimed in the cause or matter is the sum of US$34,200,000.00, alternatively damages including damages for breach of fiduciary duties, interest and costs. It cannot be said that there exists a "question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter" either between SHKIS and the plaintiff or between SHKIS and the defendants or one of them. Hence it was submitted that the Court had no jurisdiction to add SHKIS in these proceedings.

13. In the case of In re IG Farbenindustrie A.G. Agreement [1944] 1 Ch 41 it was held that the Court has no jurisdiction to add a party to proceedings a person who only has a commercial interest in those proceedings, even though his interest may be affected by the result of the proceedings.

14. In Sanders Lead Co. Inc. v Entores Metal Brokers Ltd [1984] 1 W.L.R. 452 the English Court of Appeal also came to the view that under the provisions of O.15 r.6 2(b) (ii) the Court had no jurisdiction to join the applicant. Kerr L J said at page 460:

"In my view the rule requires some interest in the would-be intervener which is in some way directly related to the subject matter of the action. A mere commercial interest in its outcome, divorced from the subject matter of the action, is not enough. It may well be impossible, and would in any event be undesirable, to attempt to categorise the situations in which the interests of would-be interveners are sufficient to satisfy the requirements of the rule. The authorities show that the existence of a cause of action between the intervener and one of the parties is not a necessary prerequisite for this purpose. But they also go no further than to show that there must be some direct interest in the subject matter, such as an alleged infringement of a patent, trademark or copyright with which the intervener is concerned (see Tetra Moletric Ltd. v. Japan Imports Ltd [1976] R.P.C. 547 and Rexnord Inc v. Rollerchain Distributors [1979]F.S.R. 119) though even in such cases the interest of the intervener must raise an existing issue and not merely a contingent one: see Spelling Goldberg Productions Inc. v. B.P.C. Publishing Ltd [1981] R.P.C. 280. Another illustration is provided by cases where the intervener can show that he will in some way be compelled to "foot the bill," depending on the outcome of the action: see Gurner v. Circuit [1968] 2 Q.B. 587,595, though I bear in mind that the wording of R.S.C., Ord. 15,r. (6) (2) was then much narrower than it is now. However, as Mr Hirst rightly conceded, no case has gone so far as to allow intervention by someone who is only a creditor, or alleged creditor, with no more than a creditor's commercial interest in the outcome of the action, and in my view it makes no difference whatever that the creditor in question is one who has obtained a Mareva injunction whose fate may in some way depend on the outcome."

15. It is plain that the Court has no jurisdiction under O.15, r. 6 (2) to add SHKIS as a party to this action. I accept Mr Fung's submissions.

16. Mr McCoy did not seek to argue to the contrary. However, he relied in his oral submissions on the other references in the marginal note to the summons namely, O.30 and O.51 RHC and the inherent jurisdiction of the Court.

17. There are no specific provisions for joinder of a party under the provisions of O.30 and O.51.

18. I turn to the inherent jurisdiction of the Court. In Deloitte & Touche A.G. v. Johnson and another [1999] 1 W.L.R. 1605 in respect of liquidators of a company Lord Millet said at page 1612:

"2. The inherent jurisdiction of the court over its own officers.
As liquidators of the company the liquidators are officers of the court. The court's inherent jurisdiction to control the conduct of its own officers is beyond dispute. But it does not follow that the plaintiff is a proper person to invoke that jurisdiction. It says that the liquidators are behaving unconscionably by reason of their conflict of interest. But it cannot say that the liquidators are acting unconscionably to it."

19. The same receivers who have been appointed by the 1st order and the 2nd order are undoubtedly officers of the Court. They are subject to the supervision of the Court. That being so, the Court has an inherent jurisdiction over its own officers. However, SHKIS must establish that it is a proper person to invoke the Court's inherent jurisdiction.

20. As Lord Millet said in Deloitte & Touche A.G. at page 1611:

"Where the court is asked to exercise a statutory power or its inherent jurisdiction, it will act only on the application of a party with a sufficient interest to make it. This is not a matter of jurisdiction. It is a matter of judicial restraint. Orders made by the court are coercive. Every order of the court affects the freedom of action of the party against whom it is made and sometimes (as in the present case) of other parties as well. It is, therefore, incumbent on the court to consider not only whether it has jurisdiction to make the order but whether the applicant is a proper person to invoke the jurisdiction."

21. It was submitted by Mr McCoy that the receivers were appointed for the benefit of all interested parties. He submitted that the receivers owe duties to SHKIS under the 1st order. By O.51 r.3 it is provided that r.2 to 6 of O.30 applies to the appointment of receivers by way of equitable execution under O.51. However, r.7 of O.30, which deals with default by the receiver and the Court's powers in relation thereto, does not apply to the appointment of receivers by way of equitable execution under O.51. Hence it was submitted that SHKIS could invoke the inherent jurisdiction of the Court which the Court should exercise in its favour as the receivers have an interest under the 2nd order which conflict with a duty they owe to SHKIS.

22. Mr McCoy also referred to Re Nickel Mines Ltd (1978) 3 ACLR 686 where it was held that it was undesirable that the same person be appointed provisional liquidator of two companies who were engaged in litigation against one another.

23. As set out in Mr Hulme's affirmation, SHKIS has expressed its concerns to the receivers as to an apparent conflict of interest in acting as the receivers of both SLH and Mr Chau. As to conflict of interest, it is useful to bear in mind what Lord Millet said in Deloitte & Touche A.G. at page 1612:

"The plaintiff's case is not advanced by alleging that the liquidators have a conflict of interest. This is not the same as impropriety or want of probity. Their Lordships observe that the expression "conflict of interest" is an abbreviation for "conflict of interest and duty". The rule is that a fiduciary may not without the informed consent of his principal place himself in a position where his interest may conflict with his duty to the principal. The danger is that his interest may affect him in the discharge of his duty to the prejudice of his principal. The only person with a legitimate interest in complaining of a breach of the rule are the persons to whom the duty is owed; and they may have waived the breach. The plaintiff does not allege that the liquidators have an interest which conflicts with any duty owed to it. It does not plead any such duty. It alleges that the liquidators have an interest which conflicts with their duty to the company and its creditors. If such a conflict exists, it is for the creditors alone to decide what if anything to do about it."

24. I am unable to accept the submission that the receivers under the 1st order owe any duties to SHKIS. The case of Viola v. Anglo-American Cold Storage Company [1912] 2 Ch. 305 provides no assistance to SHKIS. The situation was quite different there and the case is distinguishable on the facts. There the receiver was appointed in a debenture-holder's action. The object was to protect and realize the assets of the company. This was for the benefit of all concerned. That case provides no assistance to SHKIS.

25. I accept Mr Fung's submission that the receivers under the 1st order owe no duties to SHKIS. The receivers under the 1st order were appointed on the application of the directors of SLH as receivers of SLH with the powers as set out in the order. It seems to me that the receivers of SLH owe no duties to SHKIS which is a judgment creditor of Mr Chau.

26. The receivers under the 2nd order were appointed as receivers by way of equitable execution to enable them to take into their control Mr Chau's assets as more particularly set out in the schedule to the order with powers to manage the same in order to preserve the value thereof and to apply the same in satisfaction of the judgment entered in favour of the plaintiff for the sum of US$34,200,000.00 with interest and fixed costs. The receivers were appointed for that specific purpose. They owe no duties to SHKIS. They were appointed primarily for the benefit of the plaintiff as judgment creditor subject to safeguards in the 2nd order in respect of the interests of Mr Chau.

27. I would observe that that although SHKIS's application has been served on Mr Chau's solicitors, Messrs Morrison & Foerster ("M & F"), they have not appeared on this application and have not taken part in the application. By a letter dated 9 July 2004 written to the solicitors for the plaintiff and SHKIS and copied to the Court, M & F indicated that Mr Chau adopted a neutral position towards this application and that he neither supported nor opposed it without prejudice to his right to do so in respect of any future application by SHKIS.

28. Mr Chau has applied to set aside the default judgment obtained by the plaintiff on 21 August 2003 and as a consequence of setting aside the judgment Mr Chau also seeks an order that the 2nd order be set aside. The plaintiff has also issued a summons to set aside the notice to act entered by M & F on the basis that they do not have authority from Mr Chau to act for him. Those matters are outstanding and have yet to be determined.

29. Mr McCoy also relied on Searle v. Choat (1884) 25 Ch. 723. In my view that case does not provide any assistance to SHKIS. The relevant facts were that an order was made in another action, namely, the action of Choat v. Davies by way of equitable execution of a judgment obtained by Choat against Davies that a receiver should be appointed to receive the rents and profits, inter alia, of certain premises in which Davies was interested. The appointment was to be without prejudice to the rights of any prior incumbrancers on the premises who might think proper to take possession of the same, or if any prior incumbrancer was in possession, then without prejudice to such possession. At that time the premises were mortgaged to Searle by Davies. The receiver served a notice to the tenants of the premises to pay rent to him after the tenants had been served with Searle's notice to pay rent to him. It was held that the receiver was wrong to have taken possession as against Searle in violation of his rights as the receiver was appointed without prejudice to the rights of prior incumbrancers. It was also held that Searle should have applied for relief in the action appointing the receiver rather than bringing a separate action for the same. That case provides no assistance to SHKIS.

30. In my judgment it is plain that SHKIS merely has a commercial interest in this action in the sense that if the plaintiff successfully enforces its judgment against Mr Chau it would mean that Mr Chau's assets will be diminished or reduced to the same extent. That being so, there would be less assets of Mr Chau available for the satisfaction of SHKIS's judgment against Mr Chau when SHKIS seeks to enforce it against Mr Chau. The inescapable conclusion is that SHKIS has only a commercial interest in these proceedings.

31. As to the allegation of apparent conflict of interest on the part of the receivers in acting as the receivers of both SLH and Mr Chau, it seems to me that SHKIS is not a proper person to complain of the same. The only person with a legitimate interest in complaining of this are the persons to whom the duty is owed. No duty is owed to SHKIS by the receivers.

32. In my judgment SHKIS is not a proper person to invoke the Court's inherent jurisdiction to add it as a defendant to this action. It seems to me that, whether as a matter of jurisdiction or the exercise of discretion, the application of SHKIS ought to be dismissed.

33. I dismiss the application. I also make an order nisi for costs of the application to be costs to the plaintiff to be borne by SHKIS.

Representation:

Mr Patrick Fung SC, instructed by Messrs Simmons & Simmons, for the plaintiff

Mr Gerard McCoy SC and Mr Steven Kwan, instructed by Messrs Denton Wilde Sapte, for Sun Hung Kai Investment Services Limited

HCA 2704/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2704 OF 2003

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D E C I S I O N

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Introduction

1. This is an appeal from the decision of Master Kenneth Wong made on 5 November 2003 in respect of the 1st Defendant's summons dated 29 September 2003 (the "Default Judgment Summons"), the Plaintiff's summons dated 10 October 2003 (the "Authority Summons") and the 1st Defendant's summons dated 29 October 2003 (the "Directions and Discovery Summons"). Subsequent to the Order of Master Kenneth Wong, the Plaintiff filed another summons dated 24 December 2003 (the "Handwriting Experts Summons").

2. The circumstances leading to the filing of these summonses are as follows. On 21 August 2003, the Plaintiff obtained a default judgment against the 1st Defendant in the sum of US$34,200,000. There was no statement of claim filed but a two-page endorsement of claim alleging that these monies had been misappropriated by the Defendants. On 29 September 2003, Messrs Morrison & Foerster ("M&F") issued the Default Judgment Summons on behalf of the 1st Defendant seeking to set aside the default judgment entered against the 1st Defendant. On 10 October 2003, Messrs Wilkinson & Grist ("W&G") issued the Authority Summons to challenge M&F's authority to act for the 1st Defendant. By this summons, the Plaintiff seeks to have the Notice to Act filed by M&F and the 1st Defendant's Default Judgment Summons set aside or stayed pending the final determination of the Plaintiff's Authority Summons. Following that, M&F took out the Directions and Discovery Summons on 29 October 2003. All three summonses were heard before Master Kenneth Wong on 5 November 2003.

3. In respect of the Default Judgment Summons and the Authority Summons, Master Kenneth Wong ordered, inter alia, that the 1st Defendant's Default Judgment Summons be heard after the final determination of the Plaintiff's Authority Summons and that the costs of hearing the Authority Summons be paid by the 1st Defendant. The 1st Defendant now appeals against these two orders. Master Kenneth Wong also gave the usual directions for filing of affidavits and costs in respect of the other parts of the summonses, for which there is no appeal.

Setting aside the default judgment

4. Since the making of the orders appealed against, M&F filed additional evidence which was not available before the master. Now, there is incontrovertible evidence that the 1st Defendant was out of Hong Kong since 5 May 2003 and has since been detained by the PRC Authorities. The submission on behalf of the 1st Defendant is essentially that the 1st Defendant is entitled to have the default judgment set aside as of right because the service of the writ was irregular in that the 1st Defendant was not within the jurisdiction at the time the writ was served or at the time the default judgment was entered. Mr Smith, SC quoted the case of Barclays Bank of Swaziland Ltd and Hahn [1989] 1 WLR 506 and Wing Lung Bank Ltd v Ho Man Iam [1999] 3 HKC 368 in support of his proposition.

5. Mr Fung, SC, referred me to the headnote in Chu Kam Lun v Yap Lisa Susanto [1999] 3 HKC 378 which reads:

"O 10 r 1(2)(b) authorised service of writ by inserting it enclosed in an addressed envelope in a letter box at the last known address of the party to be served. For such service to be effective the party must be physically within the jurisdiction and/or the proceedings were brought to the notice of the party."

He submitted that it is arguable that service was effective if the proceedings had been brought to the notice of the party.

6. I do not think the headnote is an accurate summary of the principle stated in that case. At 382, Leong JA, as he then was said:

"In my view, O 10 r 1(2)(b) authorised service of writ on a defendant within the jurisdiction otherwise than personally by inserting it enclosed in an envelope addressed to the defendant in a letter box at the last known address of the defendant. The authorities are clear that for service under this rule to be effective, the defendant has to be physically within the jurisdiction at the time of service (Barclays Bank of Swaziland Ltd v Hahn [1989] 1 WLR 506 applied in Desirable International Fashions Ltd v Chiang Shi Chau [1997] 3 HKC 170). Other authorities have held that service is effective when the proceedings are brought to the notice of the defendant and not on mere delivery of the writ to the last known address of the defendant (Forward v West Sussex County Council [1995] 1 WLR 1469; Fok Chun Hung v Lo Yuk Shi [1995] 2 HKC 648)."

7. In Forward v West Sussex County Council, quoted by Leong JA, the writ was served by post to the last known address of the defendant who had moved from that address. At 1476, Sir Bingham MR held:

"Thus rule 1(1) provides, as in past days, for personal service. The virtue of this of course is that it brings the proceedings to the notice of the defendant. But paragraph (2) provides for two alternatives to personal service: service by post and insertion through the letter box. Paragraph 3(a) provides that the date of service shall in either of these two cases be deemed to be the seventh day after sending or insertion as the case may be.

So far as the post is concerned, we could understand seven days being allowed as a safe if rather gloomy estimate of the time taken for delivery of a letter by ordinary first class post. So it would be a possible construction of paragraph (3)(a) to hold that in order to show the contrary the defendant would have to show that the letter had not been delivered by the seventh day, or perhaps at all, it being irrelevant (if the letter had been duly delivered) whether it had come to the defendant's notice or not. But it is not possible to apply this construction to insertion through the letter box: if a letter is inserted through a letter box it can make no sense to treat the seventh day after insertion as the deemed date of service if service takes place on delivery and is not concerned with notice. Reading paragraph (3)(a) in relation to both the alternatives to personal service provided for in (2), it seems to us that the generous time limit provided for deemed service by first class post and the allowance of seven days after insertion through the letter box are to allow for the possibility that the letter may not come to the defendant's notice at once. If this is the correct construction, a defendant could show the contrary by showing either that the letter had not come to his notice until after the seventh day or that it had not come to his notice at all.

This construction is in our view strongly reinforced by paragraph (3)(b). An affidavit proving due service must contain a sworn statement not simply that there has been compliance with paragraph (2)(a) or (b) but also of the deponent's opinion that the letter, whichever mode of delivery was adopted, "will have come to the knowledge of the defendant within seven days thereafter."

It is clear from the above well considered dicta of the Master of Rolls that the issue before the court was whether the service of the writ was effective if sent by post to or inserted in the letter box at the last known address of the defendant or that it must be brought to the notice of the defendant. The defendant in that case was within the jurisdiction. It is clear that the requirement that the proceedings be brought to the notice of the defendant is not an alternative to the requirement that he must be within the jurisdiction.

8. In Fok Chun Hung v Lo Yuk Shi, another case quoted by Leong JA, service by post which was subsequently returned was also held to be ineffective and the default judgment set aside. There is nothing said by the Court of Appeal in the judgment in that case to suggest that service would be effective if the proceedings were brought to the notice of the defendant who is not within jurisdiction.

9. Thus, in my opinion, in Chu Kam Lun, Leong JA was stating the well established principle that the defendant must be within the jurisdiction for the service to be effective. When he referred to the other authorities, he was stating another requirement for an effective service. Look at the matter from a common sense point of view. If a defendant is out of jurisdiction in a place where telecommunication is not readily available or where there are restrictions in travelling and a writ was served on his last known address in the jurisdiction, he certainly cannot attend to the matter within seven days even if the proceedings were brought to his notice. The law could not have intended that under such circumstances, he should be exposed to the risk of a default judgment. I agree with Mr Smith, SC's submission that the 1st Defendant is entitled as of right to have the default judgment set aside.

10. Mr Smith, SC's secondary attack on the default judgment is that the Plaintiff must have known of the 1st Defendant's detention in China before the issue and service of the writ of summons on 23 July 2003 because in the receivers' report exhibited in the Plaintiff's affirmation was annexed an article in the South China Morning Post dated 21 July 2003 which reported the 1st Defendant's detention in Shanghai since May 2003. Hence, Mr Smith, SC, submitted that the Plaintiff benefited from the 1st Defendant's detention by filing the endorsement of claim when it had every reason to believe that the 1st Defendant could not have defended it. I do not think the receiver's knowledge after the fact is conclusive evidence of the Plaintiff's knowledge at the time of issue and service of the endorsement. The Plaintiff did what was required to be done to enter the default judgment. Whether at the time the 1st Defendant was out of jurisdiction and whether the Plaintiff acted with that knowledge are issues which should be considered at the hearing of the Default Judgment Summons.

M&F's authority

11. M&F claims to have been properly instructed by the 1st Defendant through Tao Wu Ping ("Tao"), a senior partner of Shen Da Law office in Shanghai which was instructed to assist the 1st Defendant by the 1st Defendant's elder brother in China. According to Tao's affirmation filed after the hearing before Master Kenneth Wong, the 1st Defendant was detained in Shanghai and he was the only person to have access to the 1st Defendant on an irregular basis. He produced two letters of authorisation purportedly signed by the 1st Defendant to instruct M&F in this matter and explained that prior to 30 October 2003, the PRC Authorities did not allow the 1st Defendant to sign the two letters of instruction. The Plaintiff disputes the authenticity of the purported signatures of the 1st Defendant which are obviously different from his usual signatures on the many company documents signed by him.

12. Counsel differ as to who bears the burden of proof. Mr Smith, SC, said there is a presumption of due authority in favour of the solicitor and submitted that the burden of proving M&F's lack authority is on the Plaintiff. He quoted the decision of Richmond v Branson & Son [1914] Ch 968 at 974 and Attorney General v Foley and another [2000] 2 All ER 609 in support of his proposition. He commended me to adopt the approach of the Ch'ng Choon Eng v Phaik Keow Lucien Gladys [2000] 1 SLR 257 where the High Court of Singapore asked itself the question:

"If the solicitor had no authority, why would the plaintiff affirm those affidavits in support? Where the action against the defendant appeared rational and furthered the interest of the plaintiff, then there would arise a fairly strong presumption that the plaintiff was mentally capable at the time the action was taken."

On the other hand, Mr Fung, SC, referred me to the decision of Shing Hai Doing & others And Shing Ho Yung [1961] HKLR 331 where Blair-Kerr J held that when the authority of a solicitor is in dispute, the burden of proof lies on the solicitor to establish his authority.

13. Starting from basic principles, the rule must be that he who asserts must prove not he who denies. It is just that he who invokes the aid of the law should be the first to prove his case. The question who bears the burden of proof cannot be considered in vacuo, without first considering what is to be proved. In deciding this initial question, regard must be had to the substance of the issue and not merely to its grammatical form and that in the nature of things, a negative is more difficult to establish than an affirmative. A burden of proving the affirmative by one party can always be put as a burden of proving the negative by the opposing party. Thus the solicitors' burden of proving due authority can be framed as a burden of proving lack of authority by the party seeking to challenge that authority. Here, what is in issue is M&F's authority. M&F asserts it has authority and is asserting an affirmative which is solely within its knowledge. Having decided this initial question, it must follow that where a solicitor's authority to act for a party is in question the burden of proof rests on the solicitors asserting this authority to prove that he is duly authorised and not on the party seeking to challenge or dispute that authority. Thus, M&F bears the burden of proof of due authority.

14. The above conclusion is reached without any disrespect to the authorities cited by Mr Smith, SC. In Richmond v Branson & Son, Warrington J said at 974:

"But the real question is the authority of the solicitor. Is that a question which can be raised as a relevant issue in the action and at the trial? No authority has been cited in support of the affirmative of such a proposition, and, in my opinion, it is impossible, according to the ordinary practice and procedure of the Court, to justify that proposition. The business of this Court could not be carried on if one were not entitled to assume the authority of the solicitor unless and until that authority has been disputed and shewn not to exist in the proper form of proceeding, namely, a substantive application on the part of the parties concerned to stay the proceedings on the ground of want of authority."

What Warrington J was saying was a presumption based on common sense which operates until the authority of a solicitor is in dispute. When the authority of the solicitor is in dispute, that has to be determined in a separate proceeding in the form of a substantive application to stay the proceedings on the ground of lack of authority. He did not decide the question of which party should bear the burden of proof at the hearing of the substantive application.

15. I do not think the Singaporean High Court in Ch'ng Choon Eng v Phaik Keow Lucien Gladys has decided any question on burden of proof of a solicitor's authority to represent a party. There, the court was considering the question of mental capacity of the plaintiff. The context in which the dictum cited by Mr Smith, SC, is as follows:

"3. Prima facie, the plaintiff must be taken to have the mental capacity to affirm those affidavits and decide on proceeding with the action against the defendant. If the solicitor had no authority, why would the plaintiff affirm those affidavits in support? Where the action against the defendant appeared rational and furthered the interest of the plaintiff, then there would arise a fairly strong presumption that the plaintiff was mentally capable at the time the action was taken. Until the contrary was proved, there would be a legal presumption that the plaintiff was mentally competent.

4. Plaintiff's counsel informed me that the defendant had not taken up any substantive application to stay or set aside the writ of summons on the aforesaid grounds despite knowing the plaintiff's stand that such an application was necessary. I did not think that it was for the plaintiff to prove that she was mentally competent. Neither did I think that the matter should be allowed to proceed to a trial simply to ascertain whether the plaintiff was suffering from any mental incapacity and whether counsel lacked the necessary authority. These were preliminary issues to be settled first in a substantive application, which should be taken up by the party challenging the mental capacity of the other party to instruct counsel. In the absence of such an application, the court would be entitled to assume that counsel had the requisite authority and had been properly instructed."

The court was primarily concerned with the question of the plaintiff's mental capacity while the solicitor's authority to act was a issue dependent on the court's finding as to the plaintiff's mental capacity. The court considered that the question of the plaintiff's mental capacity and likewise the solicitor's authority should be determined in a separate substantive application. No such application was made, though the defendant knew such application was necessary. This fact is important, because it was in the absence of such application that the court found the presumptions operated in favour of the plaintiff and her solicitors. Nothing was decided as to what was to be proved and who bears the burden of proof at the hearing of the substantive application.

16. Mr Smith, SC, relied strongly on the following dictum of Schiemann LJ in Attorney General v Foley and another at 615 as placing the burden of proving lack of authority on the party challenging the solicitor's authority:

"17. It will be seen that in our judgment it is for him who challenges the fact that the solicitor has authority to commence proceedings to lead evidence which lends support to that assertion. In the absence of such evidence we see no need for the Attorney General to lead evidence in rebuttal."

17. I think that dictum has to be understood in the full context of the case. In that case, the Attorney General applied for civil proceedings orders under section 42 of the Supreme Court Act 1981 prohibiting the appellants from instituting civil proceedings without the leave of the High Court, on the ground that they had previously instituted vexatious proceedings. The evidence in support of the solicitor's authority to act for the Attorney General was an affidavit by a solicitor in the Treasury Solicitor's office, stating that she had conduct of the matter on behalf of the Attorney General. At the hearing, the appellants raised for the first time that the application was not being made by the Attorney General as required by the 1981 Act. Schiemann LJ considered that the question of a solicitor's lack of authority is a preliminary matter which should be dealt with by way of a separate application to stay. He referred to Warrington J's dictum in Richmond v Branson & Son and other decisions and then set out at paragraph 16 of page 615 how such challenge should be made by way of an application to stay listed in the Crown Office. Then he made the dictum relied on by Mr Smith, SC, at paragraph 17 and queried the dicta of Pill LJ in Attorney General v Hayward (1995) Times, 20 November, [1995] CA Transcript 1477. In that earlier decision, Pill LJ held that "an application under section 42 can have serious consequences and the Attorney General's involvement required by statute should be demonstrated plainly in the evidence submitted to court with the application." It is clear from these dicta that both Pill LJ and Schiemann LJ were directing their minds to an application under section 42 of the 1981 Act. This section is exceptional in that it authorises the Attorney General to interfere with the right of an individual in instituting civil litigation. Under section 1 of the Law Officers Act 1944, then in force, this function of the Attorney General in relation to a particular case may be exercised by the Solicitor General if authorised. Thus the solicitor's authority referred to by Pill LJ and Schiemann LJ in their judgments was the Solicitor General's delegated authority to discharge the function given by the 1981 Act personally to the Attorney General and not a solicitor's general authority to act for his client, which is the type of authority we are concerned with in the present application. Attorney General v Foley and another and Attorney General v Hayward are decisions on section 42 of the Supreme Court Act 1981 and have no bearing to the issue now before me. In any event, following the replacement of section 1 of the Law Officers Act 1944 by section 1 of the Law Officers Act 1997 by a general delegation of the power to the Solicitor General, these decisions have lost their significance. In my opinion, neither decision may be taken as authority as to who bears the burden of proving the solicitor's authority to act for a party or lack of such authority. For reasons as I have given, I am of the opinion that in an application challenging the authority of the solicitor, the burden is on the solicitor to prove due authority.

The Notice of Appeal: whether the appeal is misconceived

18. Mr Patrick Fung, SC, referred me to M&F's Notice of Appeal dated 14 November 2003 which reads:

"... 1st Defendant ... intends to appeal against the decision of Master Kenneth Wong given on 5th November 2003 ordering inter alia:

1. That the hearing of the [Default Judgment Summons] be stayed pending the final determination of the [Plaintiff's Authority Summons], in particular paragraph (1) thereof that the Notice to Act filed by Morrison & Foerster on 11th September 2003 be set aside/struck out."

He submitted that M&F's appeal against Master Kenneth Wong's order for stay of the hearing of the Default Judgment Summons is misconceived. His argument is that despite a stay had been sought under the Plaintiff's Authority Summons, the master had not ordered a stay and had impliedly refused the Plaintiff's request for a stay by giving directions for filing of further affidavits for the further conduct of the Default Judgment Summons. In my view, though the master did not expressly order a stay, he effectively granted a stay by ordering the Default Judgment Summons to be heard after the final determination of the Authority Summons. The Default Judgment Summons is not to be heard together with the Authority Summons or immediately after it, but to be heard after the final determination of the Authority Summons, allowing for the Authority Summons to run the full course of any subsequent appeal. Even though the Notice of Appeal was drafted by counsel, I do not consider I should be unduly concerned with semantics. Obviously, M&F is seeking to challenge the master's order to defer the hearing of the Default Judgment Summons until the Authority Summons has been finally determined. I shall consider the merit of the appeal on the basis a stay has been granted.

The appeal against stay of proceedings

19. In respect of the Authority Summons, the thrust of the appeal is that there is direct evidence from Tao's affirmation that M&F had authority to act for the 1st Defendant and there is no direct evidence from the Plaintiff of M&F's lack of authority, save the doubts over the authenticity of the 1st Defendant's signatures in the letters of instruction. In respect of the Default Judgment Summons, Mr Smith submitted that the 1st Defendant has a very good chance of success in setting aside the default judgment which should never have been entered and that there is little prejudice to the Plaintiff if the judgment is set aside but the 1st Defendant would suffer lengthy delay if the stay is ordered. He submitted that the proper time to determine M&F's authority is after the hearing of the 1st Defendant's application to set aside the default judgment. In short, Mr Smith SC's submission is that the Plaintiff should not be allowed to hang onto a judgment which it should not have obtained in the first place and therefore the mechanism for setting aside that default judgment should be invoked notwithstanding there is some doubt as to the authority of the solicitors purportedly acting for the 1st Defendant in challenging the default judgment.

20. As a matter of law, the 1st Defendant has a good chance of success to have the default judgment set aside. His solicitors have taken out a summons for that purpose. However, the Plaintiff has taken out a separate application to challenge the authority of the solicitors purportedly acting for him. According to the authorities I referred to above, this is the well-established procedure for making such a challenge and it is appropriate to stay the on-going proceedings pending the determination of the authority of the solicitors whose authority to act for a party is in dispute. Apart from the support of judicial authority, this approach is logical and sensible. The issue in this appeal is whether in view of the 1st Defendant's very likely chance of success in challenging the default judgment, the court should depart from logic and the well established procedure in order to achieve the purpose of setting aside the default judgment which should never have been entered. I have to consider two competing interests: the interest of justice that no default judgment should be allowed to stand and the public interest that solicitors purporting to act for a party to a litigation should satisfy the court that they are duly authorised by those whom they claim to represent.

21. In my view, it is a fundamental right of an individual to have access to court. He may exercise that right personally or by his solicitors duly authorised by him. In order that the confidence in the judicial system can be maintained, it is important that solicitors who claim to represent a party in the exercise of that right must prove, if required, to the satisfaction of the court that they are so and duly authorised by those whom they claim to represent. It is unusual to make such a challenge and it is very rare that a solicitor will act without being instructed. But the court cannot be unwary of the possibility that relatives of the defendant or other third parties who may have an interest in the outcome of the proceedings or an interest in protecting the asset of the defendant might step in for practical reasons and induce solicitors to act for the defendant without defendant's authority or knowledge. If the solicitor has no authority to act for the defendant, it is only right and proper that he should not have further conduct of the proceedings. If the solicitor is properly authorised, usually there would be no difficulties in proving due authority and the defendant would suffer no prejudice as a result of the stay in having his authority verified. A default judgment is not irreversible until it has been executed. Even if the solicitor has failed to prove due authority when indeed he has been authorised, there is nothing to prevent him from perfecting his authority and restore the proceedings. A judgment which is bound to be set aside for whatever reason may only be set aside properly in accordance with the law and procedure. To allow a solicitor, whose authority is in doubt, to have conduct of the proceedings on behalf of a party in order to achieve the desired result of setting aside a judgment which should not have been entered is wrong in principle. It would be a ridicule to the judicial system and would bring the judicial system to disrepute. It derogates a court of law into a court of chances or arbitrariness. It would encourage third parties to try their luck in the hope of obtaining some collateral benefits. I consider there is a far greater public interest to protect in maintaining confidence in the judicial system than the individual's interest or the interest of justice to have a default judgment which should not have been entered set aside. Public interest therefore requires that where the authority of a solicitor is reasonably challenged, his authority must be verified first before he should be allowed to have further conduct of any proceedings on behalf of those whom he represents irrespective of the strength of the case, unless there is a real risk of grave injustice. Such challenge must be reasonably and timeously made and should not be used as an excuse to obstruct the course of justice or to take advantage of the opposite party.

22. Mr Smith, SC, submitted that the Plaintiff's challenge of the authority of M&F to represent the 1st Defendant in circumstances which precluded normal means of communication is an affront to the Court. This is a matter of conjecture. In my view, the Plaintiff has good reasons to launch the attack on M&F's authority because the signatures of the 1st Defendant on the letters of instruction are different from his usual signatures as appearing in the Plaintiff's company documents. No explanation was given for the difference in the signatures. The 1st Defendant was a director of a substantial public listed company. He must have good intelligence and understanding and must have realised the importance of putting a proper signature to a legal document. It is unlikely that the strain and stress of his detention could have so affected the way he signed his signature. While I have no doubt on the good faith of M&F, M&F does not have direct first hand information about the execution of the letters of instruction by the 1st Defendant. M&F only acted on the information of Tao whose firm was purportedly instructed to assist the 1st Defendant by the 1st Defendant's brother. Though Tao is a practising lawyer in China, in view of the obvious difference in the signatures, I cannot rule out the possibility that the signatures are not genuine and the possible lack of good faith on the part of those instructing Tao or even of Tao himself. The Court has to be wary that the 1st Defendant's relatives or others who may have an interest in the outcome of the proceedings or in preserving the 1st Defendant's asset might have over-zealously stepped in for practical reasons and gave instructions to Tao without actually obtaining the 1st Defendant's authority or without his knowledge. A curious feature in this regard is that the 1st Defendant's wife, who is the 2nd Defendant in these proceedings, and who was served the endorsement in a similar manner is legally represented, but she saw fit not to arrange legal representation for the 1st Defendant.

23. What fuelled this suspicion is M&F's contesting the Handwriting Experts Summons. If there is nothing to hide, why should M&F or those instructing M&F resist the Plaintiff's request for production of the original letters of instruction for examination by the Plaintiff's expert? If there is nothing suspicious, why couldn't those instructing M&F wait for the outcome of the hearing of the Authority Summons, but instead chose to mount an appeal against the master's decision which has the effect of delaying the hearing of the Handwriting Experts Summons and determination of the Authority Summons. I can well foresee further delay all the way up the course of the appellate route. Even if M&F had a technical reason for not producing the original letters of instruction for examination, its refusal is unreasonable. It would have been less costly and time consuming by producing the original letters of instruction for forensic examination, complying with the various directions and have the Authority Summons set down for hearing instead of contesting the Handwriting Experts Summons. For three months since the challenge to the 1st Defendant's signature was raised, M&F indulged itself in meaningless correspondence asking to be shown the usual signatures relied on by the Plaintiff. M&F did nothing to perfect its authority by asking the 1st Defendant to sign another letter of instruction with his usual signature. Instead, M&F tried what it could to avoid the hearing of the Authority Summons and attempted to jump the gap of logic by asking the Court to consider the Default Judgment Summons irrespective whether it could show it has been duly authorised to act for the 1st Defendant. If the Default Judgment Summons is heard before the Authority Summons and the default judgment set aside, the challenge to its authority would be rendered meaningless and M&F may walk out of the arena even if it has not been properly authorised by the 1st Defendant. M&F is obviously trying to avoid its burden of proving due authority. One wonders whether this appeal is so vigorously pursued because M&F realises it has insurmountable difficulties in discharging its burden of proof.

24. I consider the challenge to M&F's authority is reasonably raised. I do not think the 1st Defendant would suffer any grave injustice or detriment if the merit of the Default Judgment Summons should be considered after his solicitors have shown to the Court that they are duly authorised to act on his behalf. The default judgment is not irreversible. There is nothing to suggest that the 1st Defendant cannot wait for his solicitors' authority to be verified. If indeed he had truly authorised M&F to act on his behalf, he only had himself to blame for not signing his name in the proper manner. He must know what is his proper and usual signature. There is nothing to prevent him from perfecting his letter of instruction by appending his proper and usual signature. Even if the Authority Summons and Default Judgment Summons were all determined against him because M&F failed to prove due authority, there is nothing to prevent him from renewing his application to set aside the default judgment by perfecting his authority to M&F or by properly instructing another firm of solicitors. Even assuming that the 1st Defendant was desirous to engage M&F to represent him to have the default judgment set aside, it is of paramount importance that M&F should be able to show due authority if required to do so. In view of the rhetoric questions which I have asked myself, I do not think there is any good reason to depart from logic and the well established procedure which is supported by the authorities that the challenge to the solicitors' authority should be finally determined before hearing the application to set aside the default judgment. The appeal against the stay of the Default Judgment Summons must be dismissed.

The appeal on costs

25. M&F also appealed against the master's costs order in respect of the hearing of the Authority Summons on 5 November 2003. The summons was originally fixed for two hours. In a letter dated 16 October 2003, the Plaintiff's solicitors, W&G, wrote to M&F to confirm that the hearing was fixed for 15 minutes instead of two hours and would be a call-over hearing. As the master said in his Reasons for Decision, "although Messrs Wilkinson & Grist had requested for an affidavit to be filed, they, despite their previous written indication that today's hearing would be a call-over hearing, did not expressly tell the other side that they would instruct Leading Counsel and go for full-fledged argument today. The position was a mess and there was full of misunderstanding between parties." At the hearing, M&F confirmed that it wished to file an affidavit in opposition to the Plaintiff's Authority Summons. The master granted leave for filing of affidavit and ordered the 1st Defendant to pay costs of the hearing on the ground that had M&F field the affidavit in opposition the arguments would be wholly saved.

26. Usually, an appellate court will seldom interfere with the master's exercise of discretion in making an order for costs. However, such discretion must be exercised in accordance with legal principles. The master rightly commented that the position was a mess and full of misunderstanding. Obviously, W&G created that misunderstanding by confirming that the hearing would be a 15 minute call-over hearing. In the circumstances, M&F could not be blamed for not having armed itself with the affidavit in preparation for full argument. In any event, as the master noted, 15 minutes was insufficient to dispose of the summons. After making directions in respect of filing of affidavits, the master ordered a further direction hearing for 15 minutes. Obviously, the hearing on 5 November 2003 was a direction hearing. It would be wrong in principle to order a party to pay costs of a direction hearing when what it did was to seek leave for filing an affidavit, a matter which would usually be dealt with in such a direction hearing. The appropriate costs order would have been costs in the cause of the summons with certificate for counsel. This part of the appeal on costs must be allowed.

Conclusion

27. For the above reasons, save and except the master's costs order in respect of the hearing of the Authority Summons on 5 November 2003, the appeal is dismissed. The master's said costs order is set aside and replaced by a costs order that the costs be in the cause of the summons with certificate for counsel.

28. As for the costs of this appeal, the Plaintiff is essentially successful. Discounting for what the 1st Defendant has succeeded, I consider it appropriate that the 1st Defendant shall pay 80% of the costs of this appeal to the Plaintiff, with certificate for two counsel.

Representation:

Mr Patrick Fung, SC and Mr Michael Liu, instructed by Messrs Simmons & Simmons, for the Plaintiff

Mr Clifford Smith, SC and Mr Jose-Antonio Maurellet, instructed by Messrs Morrison & Foerster, for the 1st Defendant