NEW CASTLE INVESTMENTS LTD v. WFC HOLDING LTD AND OTHERS

HCA 1632/2018

[2020] HKCFI 829

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1632 OF 2018

_______________

BETWEEN
	NEW CASTLE INVESTMENTS LIMITED (新港投資有限公司)	Plaintiff
and
	WFC HOLDING LIMITED	1st Defendant
	YUAN YIQIANG (袁毅强)	2nd Defendant
	FOO WAI LOK (符偉樂)	3rd Defendant

_______________

Before:  Hon Linda Chan J in Chambers

Dates of Written Submissions: 17, 21 and 23 April 2020

Date of Decision: 20 May 2020

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D E C I S I O N

_______________

1.  By summons dated 6 April 2020, the plaintiff applies for leave to appeal against the order of 25 March 2020 whereby I ordered that (1) the time limit for the Ds to appeal against the Order of Master Queenie Lau be extended; (2) save for the last paragraph giving possession of the Premises to the plaintiff, the Default Judgment entered against the Ds be set aside unconditionally; and (3) the Ds be at liberty to defend the action (“25/3/2020Order”). The plaintiff also seeks a general stay of this action including the execution of the costs order pending final determination of its intended appeal[1].

Leave to appeal

2.  It is well established that leave to appeal would only be granted if the Court is satisfied that the intended appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard.  This means the prospects of succeeding must be more than “fanciful”, without having to be “probable”.  Even if this threshold requirement is met, the Court has a discretion to refuse leave (Hong Kong Civil Procedure 2020 §59/2A/4).   

3.  Where, as here, the intended appeal is an appeal against the exercise of discretion of the judge, the applicant would have to show that it has an arguable case with reasonable chances of success that the relevant decision exceeds the generous ambit within which reasonable disagreement is possible, and is in fact plainly wrong, and not merely the appellate court would prefer a solution which the judge had not chosen (RS v YS, unrep., HCMP 1969/2012, 1 November 2012 (CA)).  This is because an appeal court will not interfere with a judge’s exercise of discretion unless the judge has misunderstood the law or the evidence or the exercise of discretion was plainly wrong (北京橙天嘉禾影視製作有限公司v張承勷, unrep., HCMP 2666/2016, 11 November 2016).

4.  Under Ground 1, the plaintiff contends that this Court’s holding that the Default Judgment was entered for incorrect amounts is  erroneous, having regard to the following matters:

(1)  Clause 5.03 of the Tenancy Agreement did not create “a mandatory set-off of the amount of arrears of rent due up to 29 November 2018”. The Court “mischaracterised or misinterpreted” the meaning of §16 of Wong 1^st where it was said that “the Plaintiff exercised its right to set-off under Clause 5.04 of the Tenancy Agreement on 28 November 2018” and “[t]he Deposit was therefore applied to offset the outstanding indebtedness of D1”.  The plaintiff was merely exercising its right under Clause 5.04 by applying the Deposit “to settle the last outstanding claim by the Plaintiff”, and the same was not the result of any “automatic” or “mandatory” set off by operation of Clause 5.03.

(2)  The Deposit held by the plaintiff was in the nature of security for the Ds’ performance of obligations under the Tenancy Agreement (Pendex Industries Ltd v Wong Wan Chu, unrep., HCA 1194/2000, 28 November 2001 §43).  The Deposit is an “earnest” which guaranteed performance of the contract (Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234 §9).  

(3)  The Court ought to have stayed or adjourned the action pending determination of the Bankruptcy Appeals.

5.  I do not think these points meet the threshold required for an appeal against exercise of discretion in that:

(1)  The arguments ignore the plaintiff’s own evidence (§16 of Wong 1^st) where it characterised its right to apply the Deposit to offset the Ds’ indebtedness as a right of set off. 

(2)  It has never been the plaintiff’s case that the Deposit was in the nature of a security.  Such contention would be untenable as the provisions under Clause 5 in particular, the plaintiff’s right to use the Deposit “as his own money” do not conform with the characteristics of a consensual security, which has been stated in Goode and Gullifer on Legal Problems of Credit & Security, 6^th ed, §§1 – 17 as: (i) it is a right given by a debtor to a creditor in an asset; (ii) the right is by way of grant of an interest in the debtor’s asset, not by way of reservation of title to the creditor; (iii) the right is given for the purposes of securing an obligation; (iv) the asset is given in security only, not by way of outright transfer; and (v) the agreement restricts the debtor’s right to dispose of the asset free from the security interest.

(3)  There was no suggestion by the plaintiff that the action ought to have been stayed or adjourned pending determination of the Bankruptcy Appeals. 

6.  In Ground 2, the plaintiff makes the same argument that the Ds had elected to comply with the Condition and, as such, should be estopped from appealing against the Master’s Order.  The point has been considered in §§46 – 47 of the Decision.  The plaintiff has not articulated any basis, whether in the draft Notice of Appeal (“NOA”) or written submissions, as to why the holding is plainly wrong. 

7.  As for Ground 3, it is submitted that even if the holding that by reason of Clause 5.03 (Deeming Provision) was correct, the plaintiff would only have been able to obtain a judgment in the amount stated in §16 of Decision.  The Court should not set aside the Default Judgment, but should have varied the same (applying Bank of Credit and Commerce International (Overseas) Ltd v Habib Bank Ltd [1999] 1 WLR 42 and Tian Yao (Xiamen) Property Development Co Ltd v Right Margin Ltd [2016] 2 HKLRD 175), as the Ds had not contended that the Default Judgment was entered for incorrect amounts.  I do not think the submission has a reasonable prospect of success.  As the authorities discussed in §§37 – 39 of Decision show, it was a matter for the Court to decide whether to set aside or vary a default judgment entered for too much.  Whether the point was specifically raised by the Ds is irrelevant. 

8.  As to Ground 4, the plaintiff argues that this Court plainly erred in failing to “reinstate the Master’s Condition” or to impose any other condition when setting aside the Default Judgment.  The matters which it is said that this Court failed to appreciate or take recognizance have all been considered in the Decision.  In any event, it was a matter within the discretion of the Court to set aside ex debito justitiae a default judgment obtained irregularly (see §37 of Decision).   

9.  In Ground 5, the plaintiff challenges the Court’s exercise of discretion in granting an extension of time of 29 days for the Ds to appeal against the Master’s Order.  The issue was considered in §§43 – 47 of Decision. The plaintiff has not identified why the exercise of discretion was plainly wrong.

10.  For the above reasons, I do not find the grounds set out in the NOA have a reasonable prospect of success. 

11.  Lastly, the plaintiff contends that leave to appeal should be granted on the “some other reason” ground, as the focus of the intended appeal turns on the construction of Clause 5.03 which, it is said, “substantially overlaps with the focus of the Bankruptcy Appeals”.  It is argued that granting leave to appeal would unlikely result in any additional costs and time, but refusing leave would “cause difficulties and prejudice” to the plaintiff in that it would have “to re-apply for leave out of time and/or to force the intended action to go ahead to trial for no good reason” (the latter is based on my holding that no meritorious defence has been demonstrated by the Ds)[2].  

12.  I do not find that the matters relied upon by the plaintiff constitute “some other reason” for leave to be granted:

(1)  Amongst the grounds of appeal, only Ground 1partly overlaps with one of the issues raised in the Bankruptcy Appeals.  I say partly overlaps because in the Bankruptcy proceedings, Mr Lok, on behalf of the plaintiff, argued that the plaintiff “had no obligation to apply the Deposit to offset any debt or [sic] the tenant at any point in time”[3]. On the other hand, in this action, the plaintiff said that it had applied the Deposit to set-off the amount due and payable by the Ds[4]. 

(2)  The plaintiff acknowledges that if leave to appeal is granted, it will have to apply to the Court of Appeal for the intended appeal to be heard together with the Bankruptcy Appeals[5].  As the Court of Appeal will have to consider the plaintiff’s application in any event, it is difficult to see how additional costs and time will be wasted, as the plaintiff suggests.  

(3)  While I hold that all the other defences raised by the Ds in their affirmations do not meet the requisite threshold of a meritorious defence, such holding is not a final determination on the merit of the issues.  In any event, it does not preclude the Ds from formulating their defence and/or counterclaim when they file their defence to address the deficiencies identified in the Decision, if there is a proper basis to do so.  For example, the holding that the alleged repudiatory breach of the tenancy only constitutes a claim against Goodwell Property Management Limited[6] was a view I formed on the basis of the evidence then filed by the parties.  The point was not taken by the plaintiff, and the evidence filed did not distinguish the position between the plaintiff and Goodwell Property Management Limited. 

(4)  In any event, the action has not come to an end.  The Ds have not filed any pleadings in the action.  Nor have the plaintiff proceeded with assessment of damages in respect of the interlocutory judgment. 

(5)  I do not understand why refusing leave to appeal would have the effect of forcing the plaintiff to re-apply for leave out of time.  The time limit for the plaintiff to apply for leave to appeal from the Court of Appeal only starts to run when this Court refuses to grant leave.

13.  For the above reasons, leave to appeal is refused. 

Stay of proceedings

14.  The Summons was issued under Order 59 rule 13 and inherent jurisdiction of the court, but the plaintiff seeks a general stay of the entire action pending final determination of its intended appeal. 

15.  The plaintiff has not addressed why in circumstances where the action has not come to an end and it only seeks to appeal against the 25/3/2020 Order, there is a proper basis for the Court to stay the entire action.  An obvious point which has not been addressed by the plaintiff is why determination of its intended appeal will have any effect on the Ds’ right to file a counterclaim or third party proceeding against the other parties mentioned in their affirmations.   

16.  It is argued on behalf of the plaintiff that “no active steps would need to be taken in the meantime by either party including dealing with the costs order”.  If the plaintiff succeeds in its intended appeal, “all such steps taken in the interim will prove to be wasted” [7].  The argument must be rejected:

(1)  For the reasons identified in §12(3) – (4) above, I do not think that the suggestion that no active steps needs to be taken by the party is well founded.

(2)  As can be seen from the background fact set out in §§17 – 20, 29 – 32 of the Decision and the chronology in §18 of Wong 3^rd, it is clear that the plaintiff has taken many steps in pursuing all possible proceedings against the Ds including issuing multiple statutory demands and commencing bankruptcy proceedings against Mr Foo and Mr Yuan.  As matter now stands, the plaintiff was largely unsuccessful in their proceedings and substantial costs must have been incurred by both parties.  Looking at the matter in the round, the suggestion that the plaintiff is concerned about waste of costs rings very hollow. 

17.  The plaintiff also seeks an interim stay of the action pending determination of its renewed application to the Court of Appeal, in the event that I do not accede to its application for stay.  For the same reasons discussed above, I do not consider that there is justification to grant an interim stay of the action.   

18.  This leaves the application for stay of execution of the 25/3/2020 Order. 

19.  As I hold that the plaintiff has not demonstrated that there exists reasonable grounds of appeal, there is no proper basis to consider granting a stay (Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 at 88I – 89B).

20.  The purpose of seeking a stay is to ensure that the plaintiff does not have to pay the $123,700 awarded to the Ds.  The only justification advanced by the plaintiff is an assertion that “there would be no reasonable probability of getting the costs back if the appeal were to succeed”, having regard to the chronology set out in §18 of Wong 3^rd. 

21.  I do not think that the plaintiff has discharged the onus of showing that there would be no reasonable possibility of getting the costs back if it succeeds in the intended appeal. 

(1)  The chronology relies upon by the plaintiff concerns the $250,000 costs awarded under the Master’s Order, which has now been reversed[8]. Apart from that, the only costs order which has not been complied with is the $64,000 costs awarded by Au-Yeung J against the plaintiff in HCB 7480/2018.

(2)  As for the other matters identified in §19 of Wong 3^rd, they do not support the plaintiff’s contention that the Ds are so impecunious that there would be no possibility of their paying the costs back if the plaintiff were to succeed in its intended appeal. 

22.  As the plaintiff has not demonstrated any good reasons to justify a stay of execution of the 25/3/2020 Order, the application must be rejected. 

Disposition

23.  The Summons is dismissed.  I make a costs order nisi that the plaintiff is to pay the costs of and occasioned by the Summons to the Ds.

24.  The parties have submitted statements of costs for gross sum assessment, with the plaintiff claiming $447,508 and the Ds claiming $111,100.  My preliminary view is to award costs against the plaintiff in the amount of $100,000.  I give liberty to the plaintiff to provide its comments on the Ds’ statement of costs, if any, within 3 days hereof.   

	(Linda Chan)
	Judge of the Court of First Instance
	High Court

Mr Edward Chan SC leading Mr Michael Lok and Ms Euchine Ng, instructed by Wilkinson & Grist, for the plaintiff

Mr Wong Hok Yan, instructed by M.C.A. Lai Solicitors LLP, for the 1^st to 3^rd defendants

HCA 1632/2018

[2020] HKCFI 537

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1632 OF 2018

_______________

BETWEEN
	NEW CASTLE INVESTMENTS LIMITED (新港投資有限公司)	Plaintiff
and
	WFC HOLDING LIMITED	1st Defendant
	YUAN YIQIANG (袁毅强)	2nd Defendant
	FOO WAI LOK (符偉樂)	3rd Defendant

_______________

Before:  Hon Linda Chan J in Chambers

Dates of Written Submissions: 6, 10 and 12 March 2020

Date of Decision:  25 March 2020

_______________

D E C I S I O N

_______________

1.  This is an appeal by the 1^st to 3^rd defendants (collectively “Ds”) against the order made by Master Queenie Lau on 16 September 2019 (“Order”) whereby the default judgment entered against the Ds was set aside upon the condition that the Ds do pay HK$1,400,818.87, being half of the judgment sum, into court within 28 days of the Order (“Condition”).

2.  The appeal was scheduled to be heard on 27 February 2020, but was adjourned due to the general adjournment of court proceedings announced by the Judiciary.  By letters dated 27 February 2020 and 2 March 2020, the parties agreed that the appeal is suitable for determination on paper, thereby waiving their right to an oral hearing. 

A.   BACKGROUND FACT

3.  Both counsel refer to the bankruptcy proceedings brought by the plaintiff against the 2^nd and 3^rd defendants, but the relevant papers are not included in the bundles.  At the request of the court, the bankruptcy petitions are subsequently provided.  Where references are made to the bankruptcy proceedings, they are taken from the facts and matters set out in the petitions or the following Judgments of Queeny Au-Yeung J in:

(1)  [2020] HKCFI 259, being the bankruptcy proceedings (HCB 7480/2018) commenced by the plaintiff against Mr Yuan Yiqiang, the 2^nd defendant herein (“Mr Yuan”),  where Her Ladyship set aside the bankruptcy order made on 25 November 2019 (“Yuan Judgment”); and

(2)  [2020] HKCFI 258, being the bankruptcy proceedings (HCB 6077/2018) commenced by the plaintiff against Mr Foo Wai Lok, the 3^rd defendant herein (“Mr Foo”), where Her Ladyship dismissed the bankruptcy petition (“Foo Judgment”). 

4.  The plaintiff is the landlord of a luxury family private residence known as Houses A, B and C including the Garden and Flat Roof of Nos 22A, 22B and 22C Shouson Hill Road, Hong Kong and 6 car parking spaces (“Premises”). 

5.  By a Guarantee dated 28 March 2018 executed by Mr Yuan and Mr Foo as a deed, Mr Yuan and Mr Foo agreed, inter alia, that in consideration of the plaintiff “at [their] request” entering into the Tenancy Agreement with the 1^st defendant (“WFC”), they:

(1)  “jointly and severally guarantee the punctual payment by [WFC] to the [plaintiff] of the rent and the due performance and observance by [WFC] of the terms of the Tenancy Agreement throughout the term of tenancy created thereunder” (preamble);

(2)  “shall indemnify the [plaintiff] against all damages and/or loss suffered and/or to be suffered by the [plaintiff] as a result of such default” (clause 2); and

(3)  “agree that any rent, damages, loss and/or other sums payable by [WFC] … for whatever reason shall nevertheless be recoverable from any of us as principal debtor in respect of it and shall be paid by us on demand” (clause 3).   

6.  By a written tenancy agreement dated 27 April 2018 (“Tenancy Agreement”) made between the plaintiff and WFC, the Premises were let to WFC for a term of 3 years commencing on 2 March 2018.

7.  The Tenancy Agreement provided, inter alia, as follows:

(1)  WFC shall pay in advance the rent of HK$2 million (inclusive of Government rent, rates and management charges) to the plaintiff on the first day of each month, and WFC “shall have no right to make any deduction from the rent by reason of any claim which [WFC] may have against the [plaintiff] whether for breach of any agreement, stipulation, term or condition herein … and [WFC]’s remedy in respect of any such claim shall exclude set-off” (clause 4); and

(2)  if the rent or any other sum payable by WFC to the plaintiff shall not have been paid on the due date, then the plaintiff shall be entitled to recover from WFC as a debt and WFC shall pay to the plaintiff forthwith upon demand the expenses incurred by the plaintiff (as listed in clause 8.02) in the course of recovering the rent and/or other sums unpaid (clause 8.02).

8.  At the time of the Tenancy Agreement, Mr Yuan and Mr Foo were the only directors of WFC. 

9.  It is common ground that the plaintiff received HK$8.5 million as deposit (“Deposit”) prior to commencement of the tenancy on 27 April 2018[1].   

10.  WFC has since 1 July 2018 failed to pay the rent due to the plaintiff, despite the demand made on 4 July 2018 by the plaintiff’s solicitors. 

11.  The plaintiff commenced this action by a writ of summons issued on 13 July 2018, which was endorsed with a statement of claim (“SOC”).  In the SOC, the plaintiff claimed (1) HK$2,001,818.87, being arrears of rent and balance of repair and maintenance charges of the air conditioner installed for the period from 1 – 31 July 2018 and costs of demand letter; (2) mesne profit at HK$2 million per month and air conditioners maintenance charge (“Charge”) at HK$16,610 per month from 1 August 2018 until delivery of the Premises to the plaintiff; (3) damages for repudiation of the Tenancy Agreement; (4) daily compound interest on the arrears of rent at 12% p.a. until judgment; (5) vacant possession of the Premises; and (6) costs on indemnity basis.   

12.  In the SOC, the plaintiff quoted extensively clauses 2, 4, 6 and 8 of and Schedule 1 to the Tenancy Agreement but omitted to mention clause 5, which dealt with the Deposit.  Clause 5 provided as follows:

“5. Deposit

5.01 On or before the signing of this Agreement the Tenant shall pay the Deposit to the Landlord to secure the due observance and performance by the Tenant of the agreements stipulations and conditions herein contained and on the Tenant’s part to be observed and performed. The Deposit shall be used and enjoyed by the Landlord as his own money free of any trust to the exclusion of and free of any interest to the Tenant.

5.02 Should the First Schedule hereto provide for an increase in Rent during the Term of Tenancy, the Tenant shall upon receiving written notice from the Landlord or its agent pay to the Landlord in cash by way of an increase in the Deposit a sum proportional to the said increase in Rent in order to restore the ratio of Deposit to Rent to that previously subsisting prior to such increase. Upon payment of the said sum, all references herein to the Deposit shall be deemed to be references to the Deposit as increased by the said sum.

5.03 Without prejudice to any other rights or remedies of the Landlord hereunder, in the event of the amount of any Rent or other charges payable hereunder being in arrear or any loss or damage being incurred or sustained by the Landlord as the result of any non-observance or non-performance by the Tenant of any agreements stipulations or conditions contained in this Agreement, the amount of the Deposit paid to the Landlord by the Tenant shall be deemed to have been reduced by the amount of Rent or other charges in arrear or the loss or damage suffered by the Landlord [‘Deeming Provision’] and the Tenant shall on demand by the Landlord forthwith further deposit the amount by which the Deposit is deemed to have been reduced and failure by the Tenant so to do shall entitle the Landlord forthwith to re-enter the Premises and to determine this Agreement as herein provided.

5.04 Subject as aforesaid, a sum equivalent to the Deposit (reduced by the amount of Rent or other charges in arrear or the loss or damage suffered by the Landlord, if applicable) shall be paid to the Tenant by the Landlord without interest within thirty days after the expiration or sooner determination of this Agreement and the delivery of vacant possession of the Premises and the Furniture to the Landlord in such repair and condition in accordance with Clause 6.08 hereof or within thirty days of the settlement of the last outstanding claim by the Landlord against the Tenant in respect of any breach, non-observance or non-performance of any of the agreements stipulations or conditions herein contained and on the part of the Tenant to be observed and performed, whichever is the later.” (underlined added)

13.  The Ds did not file any notice of intention to defend, but made partial payments of HK$100,000 on 10 August 2018, HK$300,000 on 14 August 2018 and HK$200,000 on 22 August 2018 (collectively “Partial Payments”) to settle the arrears of rent for July 2018.

14.  On 7 September 2018, the plaintiff obtained a “Final and Interlocutory Judgment”, whereby the Ds were ordered to pay (1) HK$1,400,818.87 (after deducting the Partial Payments but not the Deposit) (§(a)); (2) daily compound interest at 12% p.a. for various periods (§§(b) – (e)); (3) arrears of rent and/or mesne profit at HK$2 million per month and Charge at HK$16,610 per month from 1 August 2018 until delivery of vacant possession of the Premises to the plaintiff (§(f) – (g)); (4) damages to be assessed (§(h)); (5) possession of the Premises, and costs at HK$11,045 (“Default Judgment”). 

15.  It is not in dispute that the plaintiff was entitled to possession of the Premises. The issue is whether the plaintiff or WFC was in repudiatory breach of the Tenancy Agreement.

16.  Had the Deposit been deducted in accordance with the Deeming Provision, on the date of the Default Judgment, the plaintiff would only have been able to obtain (1) a final judgment requiring the Ds to pay arrears of rent/mesne profit and Charge from 16 November 2018[2] at HK$2,016,610 per month, and (2) an interlocutory judgment for damages to be assessed, as the Deposit represented 4.2 times of the monthly rent and Charge. 

17.  On 14 September 2018, based on the Default Judgment, the plaintiff issued 2 statutory demands against each of Mr Yuan and Mr Foo requiring them to pay HK$4,401,248.73 within the next 21 days (“SDs”).  Again, no reference was made to the fact that the plaintiff had received the Deposit or that by virtue of the Deeming Provision, no debt was owed to the plaintiff as at the date of the SDs. 

18.  On 24 October 2018, the plaintiff presented a bankruptcy petition against Mr Foo for failure to satisfy the SD issued against him.

19.  On 29 November 2018, the plaintiff obtained vacant possession of the Premises.  Although the Tenancy Agreement contained an option of forfeiture in clause 8.01, as Au-Yeung J held in §45 of Yuan Judgment, the plaintiff had decided not to exercise that option and, as such, the Deeming Provision continued to operate until 29 November 2018. 

20.  On 28 December 2018, the plaintiff presented a bankruptcy petition against Mr Yuan based on non-compliance with the SD served on him.  In the petition the plaintiff stated, inter alia, that:

(1)  based on the Default Judgment, as at 14 September 2018 (i.e. date of the SD), Mr Yuan was indebted to the plaintiff in the sum of HK$4,401,248.73 (§4); and

(2)  the aforesaid debt “is for a liquidated sum payable immediately and [Mr Yuan] appears to be unable to pay it” (§12).

21.  In light of the Deposit admittedly received and retained by the plaintiff, it seems to me that both statements in the petition are incomplete, if not misleading.

22.  By summons dated 20 June 2019 (“Summons”), the Ds sought to set aside the Default Judgment. 

23.  In the affirmation of Wong 1^st filed on 13 August 2019 in opposition to the Summons the plaintiff acknowledged, for the first time, that the plaintiff had applied the Deposit to set-off the amount due and payable by the Ds in this way:

“The Plaintiff exercised its right to set-off under Clause 5.4 of the Tenancy Agreement on 28 November 2018 (i.e. after the obtaining of the Judgment) upon recovery of vacant possession and ascertainment of the amount of mesne profits owed by the Defendants. The Deposit was therefore applied to offset the outstanding indebtedness of [WFC] pursuant to paragraphs (a) to (g) of the Judgment on 29 November 2018, upon the court bailiff delivering vacant possession of the Premises to the Plaintiff. The Plaintiff is advised and verily believes that it was entitled to do so pursuant to Clause 5.04 of the Tenancy Agreement.” (underlined added)

24.  On 16 September 2019, Master Queenie Lau made the Order and awarded costs at $250,000 against the Ds (“Costs”).

25.  Upon the Ds’ application, on 9 October 2019, the deadline for complying with the Condition and paying the Costs was extended to 23 October 2019. 

26.  On 22 October 2019, the Ds again applied for an extension of time to comply with the Condition and pay the Costs, which was dismissed by Master Kot on 25 October 2019.

27.  On 29 October 2019, the Ds filed a notice of appeal against the Order, which was out of time by 29 days. 

28.  On 7 November 2019, Mr Yuan’s application for stay of execution of the Default Judgment was dismissed by Recorder S Wong SC.

29.  On 20 November 2019, the bankruptcy petition against Mr Yuan was amended, to plead the fact that (1) the plaintiff had received the Deposit[3], (2) the plaintiff had on 29 November 2018 applied the Deposit to “partially set-off the outstanding indebtedness owed by [Mr Yuan]” under the Default Judgment, and (3) as at 29 November 2018, there was an outstanding debt of HK$966,336.88 owed by Mr Yuan.

30.  On 25 November 2019, Au-Yeung J made a bankruptcy order against Mr Yuan[4]. On 9 December 2019, Mr Yuan issued a summons, in HCB 7480/2018, to review and set aside the bankruptcy order against him[5].

31.  The review summons was heard on 7 January 2020. By Yuan Judgment handed down on 22 January 2020, Au-Yeung J set aside the bankruptcy order against Mr Yuan on the ground that there was no debt due as at the date of the SD.  Alternatively, there is a bona fide dispute on the validity of the Default Judgment on substantial grounds in view of the Deeming Provision[6].

32.  By Foo Judgment dated 22 January 2020, Au-Yeung J dismissed the bankruptcy petition in respect of Mr Foo on the ground that upon setting off the Deposit, as at the date of the SD, there was no debt due from Mr Foo.   

B.   APPLICABLE PRINCIPLES

33.  The principles are well established. 

34.  An appeal from the master to the judge in chambers is dealt with by way of a rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time.  The judge is in no way fettered by the previous exercise of the master’s discretion.  Fresh points may be raised before the judge which were not raised or taken before the master (Hong Kong Civil Procedure 2020, Vol 1, §§58/1/2, 58/1/5).

35.  Order 58 rule 1(5) provides that no further evidence, other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made, may be received on the hearing of an appeal under Order 58 except on special grounds.  This requires the conditions laid down in Ladd v Marshall [1954] 1 WLR 1489 to be satisfied (Hong Kong Civil Procedure 2020, Vol 1, §58/1/3).

36.  The time limited for the appeal may be extended by the judge on the hearing of the appeal, without a summons being taken out for that purpose.  The time for appealing can be enlarged after the order has taken effect.  In considering whether to extend time to appeal, the court has to consider all relevant factor, particularly (1) the length of delay, (2) the reasons for the delay, (3) the merits of the proposed appeal, and (4) the degree of prejudice to the other party.  In the post CJR era, it is incumbent on the court to give effect to the underlying objectives of the Rules of High Court when exercising any of its powers, and the court must always recognise that the primary aim in exercising the powers of the court is to secure the just resolution of disputes in accordance with the substantive rights of the parties (Hong Kong Civil Procedure 2020, Vol 1, §58/1/9).

37.  Where a default judgment was obtained irregularly, the judgment would be set aside ex debito justitiate, and the court does not have to consider the merits of the proposed defence (Po Kwong Marble Factory Ltd v Wah Yee Decoration Co Ltd [1996] 4 HKC 157 (CA); Hong Kong Civil Procedure 2020, Vol 1, §13/9/4(2)(d)).

38.  Amongst the instances where an irregular judgment would typically be set aside, the following 2 are relevant to the present appeal:

(1)  Bad or ineffective service of the writ: where a defendant was not physically present within the jurisdiction at the time the writ was served, the defendant should be entitled, as of right, to have the default judgment be set aside (Shanghai Land Holdings Ltd v Chau Ching Ngai & anor, unrep., HCA 2704/2003, 8 January 2004).  When a defendant deposes that he has not received the writ through the post, the court has little option but to believe this save when there is sufficient material to cast doubt upon the defendant’s credibility to enable the court to disbelieve him (Wei Bingqing v Xie Diangrong, unrep., HCA 2654/2003, [2006] HKEC 634; Hong Kong Civil Procedure 2020, Vol 1, §13/9/5).

(2)  Judgment entered for too much:  if the court is satisfied from the affidavits and exhibits as to the correct amount for which judgment should have been entered, it may vary the judgment appropriately (BCCI (Overseas) Ltd v Habib Bank Ltd [1999] 1 WLR 42).  A default judgment entered for an amount that fails to give credit for undisputed payments, made after the issue of the writ,  would appear to be irregular.  However, it is 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 (Re Mai Xi Hong, unrep., HCB 550/1996, 17 December 2004, [2004] HKEC 1547; Hong Kong Civil Procedure 2020, Vol 1, §13/9/7).

39.  The court will not shut its eyes to the surrounding circumstances and why things went wrong and there is a residual discretion to impose terms for setting aside an irregular judgment having regard to the parties’ conduct (Po Kwong Marble Factory Ltd, supra, 161C – G, 162E – F).  These include, for example, (1) substantial delay by the defendant before applying to the court to set aside judgment and prejudice to the plaintiff as a result, (2) evading service or enforcement by the defendant, and (3) where the defendant gave the plaintiff an address at which it could not be found or forwarded correspondence (Hong Kong Civil Procedure 2020, Vol 1, §13/9/10). 

40.  By contrast, on an application to set aside a regular default judgment, the major consideration is whether the defendant has shown a defence on the merits.  For this purpose, the defendant must show that he has “a real prospect of success”.  In the exercise of the discretion under the rule, the court will have regard to all relevant circumstances in order to see where the justice of the case lies.  The factors include why the default occurred, the defendant’s conduct after he had notice of the proceedings, an explanation for the time taken where there has been delay in making the application, and any prejudice that would be caused to the plaintiff or to third parties if the default judgment were to be set aside (Hong Kong Civil Procedure 2020, Vol 1, §§13/9/13, 13/9/14).

C.   DISCUSSION

41.  It is not in dispute that Ds’ appeal is out of time by 29 days.  As to service, WFC and Mr Foo concede that service of the writ on them was regular.  Mr Yuan, however, contends that there was no proper service of the writ on him and, as such, the Default Judgment was irregular by reason of bad or ineffective service.

42.  Accordingly, the issues which require determination of the court are:

(1)  whether the Ds should be allowed to appeal out of time;

(2)  whether service of the writ on Mr Yuan was bad;

(3)  whether the Default Judgment was irregular;

(4)  whether the Ds have shown a defence on the merits; and

(5)  whether the Condition imposed was appropriate or justified. 

C1. Appeal out of time

43.  The explanation for the delay in filing a notice of appeal against the Order was only provided in Yuan 6^th and Foo 5^th both dated 20 February 2020, 7 days before the scheduled hearing of the appeal and without leave of the court.  In short, the Ds believed that if they were able to comply with the Condition, they could defend the proceedings, thereby saving the time and costs in pursuing the appeal against the Order, which was an alternative open to them.  It was only after their second application for extension of time to comply with the Condition failed on 25 October 2019 that they had to instruct their solicitors to file the notice of appeal. 

44.  Mr Wong Hok Yan, counsel for the Ds, submits that the court should allow the Ds to appeal out of time, having regard to the prospect of success of the appeal, the delay was only a matter of days, and the prejudice suffered by the plaintiff was minimal.   

45.  Mr Michael Lok (appearing with Ms Euchine Ng) submits that no extension of time should be granted as the delay is substantial and inexcusable and, as such, the Ds must show “a real prospect of success on the merits”, and absence of prejudice is not a ground for extending time (The Hongkong and Shanghai Banking Corporation Ltd v Sy Shun Wu & ors[2018] HKCA 736 §§8 – 10, per Lam VP).  Wong 6^th and Foo 5^th were made only 7 days before the scheduled hearing and the court did not make any order on the Ds’ summons to file them. 

46.  Mr Lok further submits that even if the court were to take into account the explanation provided in Yuan 6^th and Foo 5^th, the Ds have clearly abused the process of the court as they are “taking a diametrically inconsistent position in the same set of proceedings”.  The inconsistency lies in the Ds’ decision to seek extension of time to comply with the Condition twice without reserving their right to challenge the Condition, and their subsequent act in seeking to challenge the Order.  The act of the Ds in applying for extension of time to comply with the Condition also constituted an “election”, and the Ds were bound by their earlier decision.  I do not think that seeking extensions of time to comply with the Condition constituted an election. Had the appeal been lodged within time, the Ds would have the right to pursue the appeal, and it is difficult to see how their acts in seeking extension of time can be said to constitute an election.     

47.  I agree that the delay in lodging the appeal out of time is substantial and the Ds should not be allowed to rely on evidence filed late.  However, I consider that the court can take note of the fact that it would be a waste of time and costs for the Ds to appeal against the Order if they were able to comply with the Condition.  This is because once the Ds complied with the Condition, the appeal would become academic.  This is a point which is open to Ds to advance by way of submission without Yuan 6^th and Foo 5^th. More importantly, as discussed in Section C3 below, I consider that the Default Judgment was irregular, and such irregularity was the result of the plaintiff’s failure in referring to and giving credit for the Deposit paid by WFC.  This alone provides a good reason which justifies the court taking the exceptional course of allowing the Ds to appeal out of time.   

C2. Service of the writ on Mr Yuan  

48.  It is the plaintiff’s case that the writ was served on Mr Yuan in the following manner:

(1)  On 16 July 2018, by sending the writ in a sealed prepaid envelope through registered post addressed to Mr Yuan at Room 401, Wah Yuen Building, 149 Queen’s Road Central (“Wah Yuen Address”).  This was the registered office of WFC. 

(2)  On 23 July 2018, by inserting the writ in a sealed envelope addressed to Mr Yuan through the letter box at Flat B, 39/F, Block 1, The Harbourside, No 1 Austin Road West, Kowloon (“Harbourside Address”).  This is said to be the “correspondence and contractual last known address of [Mr Yuan] as stated in the Guarantee”.

(3)  On 16 July 2018, the writ was served on WFC by leaving the sealed envelopes each addressed to WFC at the Premises, and by affixing the writ at a conspicuous part of the main entrance of House A, House B and House C and the 6 car parking spaces at the Premises.  As Mr Yuan admittedly resided in the Premises from April 2018 to August 2018, the writ would have been brought to his attention.  It is for Mr Yuan to provide “convincing and compelling evidence to show that he has no notice of the Writ and the Court is clearly not obliged to accept [Mr Yuan’s] bare assertion however improbable”, citing Bank of China (Hong Kong) Ltd v Cheung King Fung Francis & anor [2007] 1 HKLRD 462 at §§32 – 34, per Tang JA (as he then was).  I think the passages relied on by Mr Lok are cited out of context, as the Court of Appeal was dealing with a different question as to whether the court must accept a defendant’s assertion that he has not received the writ through the post, no matter how improbable. 

49.  There is no dispute that the envelope sent to the Wah Yuen Address was returned by Hongkong Post on 20 July 2018.   

50.  I do not think it is open to the plaintiff to rely on service of the writ on WFC as service of the writ on Mr Yuan, given that (1) the process servers did not say in their affirmations that service on Mr Yuan had been effected in such manner, and (2) there was no application made by the plaintiff for leave to serve Mr Yuan by way of substituted service. 

51.  This leaves only the service of the writ at the Harbourside Address. 

52.  Mr Wong submits that there is a real dispute as to whether Mr Yuan signed the Guarantee, as Mr Yuan only said he had only signed the execution page of a guarantee in Chinese, but not the Guarantee (in English) relied on by the plaintiff.  Mr Lok, on the hand other, submits that the assertion that Mr Yuan’s signature on the Guarantee was a forgery was only raised, for the first time, in the Ds’ Skeleton used at the hearing below and there is no cogent evidence in support of such assertion. 

53.  I do not think the alleged forgery is a bona fide or credible defence, having regard to the following matters:

(1)  In the SOC, the plaintiff pleaded extensively the Tenancy Agreement and the Guarantee as the contractual bases in support of its claim against the Ds. 

(2)  Mr Foo all along admitted that he had signed the Guarantee.  Mr Foo’s signature appeared on the same page as the signature of Mr Yuan, and was witnessed by the same witness. 

(3)  In Yuan 1^st filed on 21 March 2019 in support of the application to set aside the Default Judgment, Mr Yuan (in the context of showing a meritorious defence to the claim) challenged the validity of the Guarantee, but confirmed that he had signed on the “signature page” of the Guarantee[7].

(4)  In §31 of Yuan 2^nd filed on 20 June 2019 in further support of the setting aside application, Mr Yuan said he had signed on the “signature page” of the Chinese version of the guarantee exhibited thereto. 

(5)  The Tenancy Agreement was signed by Mr Yuan (qua director) on behalf of WFC.  In §6 at Schedule 2 to the Tenancy Agreement, there was a warranty by WFC that Mr Yuan and Mr Foo jointly and severally gave a guarantee to the plaintiff to guarantee the punctual payment of rent and due performance of the terms of the Tenancy Agreement.   

(6)  Likewise, in the Guarantee, Mr Yuan (and Mr Foo) agreed, inter alia, that in consideration of the plaintiff “at [their] request” entering into the Tenancy Agreement, they gave the Guarantee in favour of the plaintiff. 

(7)  In neither Yuan 1^st nor Yuan 2^nd did Mr Yuan suggest that his signatures on the Guarantee or the Tenancy Agreement were forgeries. 

(8)  It was only in Yuan 3^rd filed one week before the hearing of the Summons (i.e. on 9 September 2019) that Mr Yuan belatedly asserted that his signature on the Tenancy Agreement was a forgery[8].  Even then, Mr Yuan did not assert that his signature on the Guarantee was a forgery.

54.  I accept Mr Lok’s submission that the Ds’ alleged oral tenancy agreement is incredulous, given that (1) the allegation was only raised, for the first time, in Yuan 3^rd; (2) the Ds have not been able to give any particulars as to when and how the alleged oral agreement was reached; (3) in the email dated 30 August 2018 sent from Mr Peter Wong on behalf of WFC and Mr Yuan, reference was made to a “soft copy of the rental agreement signed”, which suggests that WFC/Mr Yuan knew that a written tenancy agreement had been entered into; and (4) Mr Yuan had signed a written resolution dated 27 February 2018 resolving to appoint a representative to sign the rental agreement on behalf of WFC.   

55.  As matter now stands, I do not think there is any credible, let alone cogent, evidence in support of Mr Yuan’s bare assertions that his signatures on the Guarantee and the Tenancy Agreement were forgeries.

56.  As the Harbourside Address was the address used by Mr Yuan in the Guarantee, it was the usual or last known address of Mr Yuan to which the plaintiff had sent the writ. As such, service of the writ on Mr Yuan complied with Order 10 rule 1(2)(b).

C3. Whether the Default Judgment was irregular

57.  I consider that §§(a) – (e) of the Default Judgment was entered for incorrect amounts and, as such, was irregular.

58.  First, at the time the plaintiff applied for and obtained the Default Judgment, it failed to mention clause 5 of the Tenancy Agreement or to give credit for the Deposit.  Had credit been given to the Deposit, the plaintiff would not have been able to obtain judgment in terms of §§(a) – (e).  See §§13 to 16 above.

59.  Second, as Au-Yeung J held,[9] by virtue of the Deeming Provision, there was mandatory set-off which operated to extinguish or set-off the amount owed by WFC (and hence Mr Yuan and Mr Foo) up to 29 November 2018.  Her Ladyship’s holding is reinforced by the admission (in Wong 1^st §16), that the plaintiff itself considered that it was entitled to set-off the amount owed by the Ds against the Deposit (contrary to the arguments advanced on behalf of the plaintiff in opposition to Mr Yuan’s application to set aside the bankruptcy order, as described in §§36 – 42 of Yuan Judgment). 

60.  On this ground alone, I hold that the Default Judgment was irregular and should be set aside.  As it was the plaintiff’s fault in obtaining an irregular judgment, fairness requires that it should be set aside without any condition.

C4. Whether the Ds have shown a defence on the merits 

61.  In light of my holding in Section C3 above, it is unnecessary to deal with the other arguments or defences raised in Mr Wong’s written submissions.  As this matter may go further, I will briefly explain why I do not consider the other defences raised on behalf of the Ds to meet the requisite threshold of a meritorious defence or a defence with real prospect of success.   

62.  As regards the alleged forgery of Mr Yuan’s signatures on the Tenancy Agreement and the Guarantee and the alleged oral tenancy agreement, for the reasons set out in §§53 – 55 above, I do not consider that they constitute a bona fide or credible defence to the plaintiff’s claim.   

63.  In respect of the alleged repudiatory breach of the tenancy, at its highest, it only constitutes a claim against Goodwell Property Management Limited, the management company appointed to manage the Premises.  The Ds have not identified any provision, whether under the Tenancy Agreement or the alleged oral tenancy agreement, which has the effect of making the plaintiff liable for the acts or defaults of the management company.  That being the case, I am unable to see on what basis the Ds can claim that the plaintiff was in repudiatory breach of the tenancy, or that it is liable to WFC for the damages suffered.  Indeed, the Ds have not particularised what damages have been suffered by WFC as a result of the alleged acts of the management company.

64.  As for the alleged contribution or indemnification by reason of the alleged misrepresentation made by Mr Chen (a third party related to the Ds) to Mr Yuan on the legal effect of the Guarantee, even if it is made out, it is not a matter which would affect the liability of Mr Yuan vis-à-vis the plaintiff. 

65.  The same goes to the alleged agreement made by Mr Ho (a third party related to the Ds) to indemnity Mr Foo against all losses and liabilities arising from the Guarantee.  Even if Mr Foo can establish such agreement, it is not a matter which would affect the liability of Mr Foo to the plaintiff.

C5. Whether the Condition should be imposed

66.  In Mr Wong’s submissions, he said that the learned Master observed that the Ds’ defence (presumably the alleged forgery) is not entirely clear and there are doubts about the defence. 

67.  Mr Lok does not refer to the reasons given by the Master.  Nevertheless, he submits that the Master “rightly considered it fair and appropriate to impose the Condition”.  In support of this submission, he relies on (1) the “shadowy” nature of the proposed defences; (2) the “substantial and inexcusable delay” on the part of the Ds in issuing the Summons, being 7.5 months after the Default Judgment; (3) the prejudice to the plaintiff in the form of steps taken to enforce the Default Judgment before the Ds issued the Summons; and (4) if valid service on Mr Yuan is not established, Mr Yuan has “clearly been evading service”.

68.  So far as the quality of the proposed defences raised by the Ds, I agree that they are shadowy, for the reasons discussed in Section C4 above. 

69.  However, I do not agree that the matters relied on by Mr Lok are matters which justify the Condition.  The time taken by the Ds to issue the Summons must be seen against the fact that the plaintiff has in the meantime taken active steps to enforce the Default Judgment including through the use of bankruptcy proceedings, which necessitated Mr Yuan and Mr Foo to defend such proceedings.  This is particularly so when the very reason why the plaintiff failed in the bankruptcy proceedings against Mr Yuan and Mr Foo is the result of its failure to mention clause 5 in the SOC or to give credit for the Deposit.   

70.  It appears that the Master’s attention was not drawn to the fact that the Default Judgment was entered for too much and, as such, was an irregular judgment.  In any event, as this appeal is a rehearing, I can take into account all the circumstances of the case and decide whether it is fair or appropriate for the Condition to be imposed.  For the reasons stated in Section C3 above and in this section, I consider that the Default Judgment should be set aside without any condition. 

D.   DISPOSITION

71.  I allow the appeal and set aside the Order. 

72.  I make the following order:

(1)  the time limit for the Ds to appeal against the Order be extended to 29 October 2019;

(2)  except the last paragraph giving possession of the Premises to the plaintiff, the Default Judgment be set aside unconditionally; and

(3)  subject to §(2) above, the Ds be at liberty to defend this action and to file and serve their acknowledgement of service and notice of intention to defend, if so advised, within 7 days from the date of this Decision.

73.  As for costs, I make a costs order nisi that the plaintiff do pay 50% of the costs of and occasioned by the Summons to the Ds (including the costs below and of this appeal), to be assessed by way of gross sum assessment on a party and party basis.  This is to reflect the fact that:

(1)  much time and costs have been wasted by Mr Yuan in arguing on service, and he failed on that issue.  I apportion 30% of the reduction in costs to such issue; and

(2)  most of the allegations and arguments raised by the Ds have not been successful. 

74.  Both parties have prepared statements of costs for gross sum assessment.  Despite the fact that counsel were instructed to argue on the appeal, much time was claimed by the solicitors on communications and perusal of documents.  In particular, in the statement of costs prepared by the Ds’ solicitors, they saw fit to claim an exorbitant amount of HK$578,375 for communications, perusal and preparation of documents.  It is unclear what documents were prepared for this appeal, given that I did not allow the Ds to adduce the further affirmations dated 20 February 2020.   

75.  I direct the solicitors for the Ds to submit and serve a revised statement of costs within the next 3 days of this Decision, which shall be prepared in accordance with the relevant Practice Direction.  The plaintiff do provide its comments on the revised statement of costs within 3 days thereafter.  If the parties do not submit the revised statement of costs or comments within such time, I will assess the costs on paper without regard to their submissions. 

	(Linda Chan)
	Judge of the Court of First Instance
	High Court

Mr Michael Lok and Ms Euchine Ng, instructed by Wilkinson & Grist, for the plaintiff

Mr Wong Hok Yan, instructed by M.C.A. Lai Solicitors LLP, for the 1^st to 3^rd defendants