Mar 2021

Full and frank disclosure in applying for a default judgment?

In the recent judgment of Alan Chung Wah Tang & Kan Lap Kee v Chung Chun Keung & Joint Group Investment Limited & Vicfont Company Limited [2021] HKCFI 369, the Court of First Instance remarked that in applying for a default judgment, an applicant should make full and frank disclosure so that the court could properly assess the merits of granting such relief without having the benefit of full submissions from both sides.

This judgment concerns an application to set aside a default judgment granted by Hon Coleman J.  In summarising the applicable principles when setting aside a default judgment, the learned Judge highlighted the unsatisfactory manner in which the default judgment was obtained and the subsequent consequences in finding that the plaintiff had misled the Court.

Facts

The joint and several liquidators of Company A (“the Liquidators”) commenced an action in the High Court and obtained default judgment against a former director and another company in which property of Company A was transferred to (“Company B”), for, inter alia:-

1. a declaration that the former director had acted in breach of fiduciary duties owed to Company A;

2. an order that the sale of Company A’s property to Company B be rescinded.

The former director and Company B then applied to set aside the default judgment, and for leave to defend the action.  Apart from these proceedings, there were parallel proceedings of the matter (“Misfeasance Proceedings”).

Court was misled in granting the default judgment

In assessing the former director and Company B’s application, Hon Coleman J found that he was misled by the Liquidators when they applied for default judgment – they gave the Court the impression that nothing substantive had occurred in the Misfeasance Proceedings and that there was apparent inaction on the defendants’ part.  Furthermore, it was alleged that the defendants had no viable defence notwithstanding their silence.

However, based on the evidence filed in the application to set aside the default judgment, Hon Coleman J found, inter alia, that substantial evidence had been filed by the Liquidators, the former director and Company B in the Misfeasance Proceedings. The learned Judge noted that this was “clearly” the result of significant work on both sides.  The Misfeasance Proceedings were also remarked to have progressed to a stage where “the ball was in the Liquidators’ court”, and no explanation was offered by the Liquidators for “the change in tack” and the commencement of this action.

In this regard, the learned Judge remarked that:

“24. …had the full picture been painted at the application for Default Judgment, I would almost certainly have chosen to exercise my discretion not to have granted declaratory relief, and I would almost certainly have refused the application for judgment in default in full.”

He further observed that:

“22.     Whilst it may be strictly correct that there is no clear obligation on an applicant for default judgment to comply with the requirement of full and frank disclosure as is applicable on, say, an application for a Mareva injunction, I would express my full agreement with the comments made by DHCJ William Wong SC in Sky Joy Investment Ltd v Zheng Dunmu (unreported, HCA 395/2016, 16 August 2017), when he said that given the nature of an application for default judgment, akin to an ex parte application, the applicant ought to make full and frank disclosure of matters which militate against the grant of declaratory relief, so that the court could properly assess the merits of granting such relief without having the benefit of full submissions from both sides.” [Emphasis added]

Result

In light of the above and other considerations, the Court set aside the default judgment with no order as to costs of the application, and the parties were to bear their own costs.  The Court departed from the usual practice in awarding costs to the plaintiff in any event on an application to set aside a regular judgment where the defendant has been at fault, because “it might be said that both sides have been at fault”.

Significance

In view of the above judgment, parties must bear in mind the implicit requirement of full and frank disclosure in making an application for a default judgment.  As observed by the learned Judge, the similar nature of an application for a default judgment to an ex parte application means that an applicant “ought to” make full and frank disclosure of matters which militate against the grant of declaratory relief.

Where an applicant is found to have failed to do the same and misled the Court, the usual practice for the party who has obtained the default judgment to be awarded costs on an application to set aside a regular judgment may not apply.

Written by: Paul Lui, Partner and Ryan Chau, Paralegal