A. AND E. ENTERPRISES CO. (A FIRM) v. IP CHUN FONG AND OTHERS

1991 No. A 7257

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is the 3rd Defendant's appeal against the decision of Master Yam, given on 17th January 1992, whereby he gave judgment to the Plaintiffs in the sum of $lm against the 3rd Defendant on a dishonoured cheque.

2. A default judgment was entered against the 1st Defendant in the sum of $3.35m and judgment under 0.14 was awarded against the 2nd Defendant in the sum of $2.35m. The 2nd Defendant's appeal against this judgment is proceeding separately from this appeal.

3. The following facts appear from the various affirmations filed. At all material times, a Mr. Lam and the 1st Defendant were the only directors of the 3rd Defendant and each had one share in the 3rd Defendant.

4. The Plaintiffs carry on the business of import and export of textiles. For some 4 years before the matters in dispute, the Plaintiffs had, on various occasions, either bought from or sold goods (being mostly cotton yarn) to the 3rd Defendant. The Plaintiffs dealt with the 1st Defendant in these transactions. The 1st Defendant signed the cheques and contracts on the 3rd Defendant's behalf. Mr. Cheng of the Plaintiffs affirmed that neither the Plaintiffs nor himself had any doubt as to the authority of the 1st Defendant to act on behalf of the 3rd Defendant.

5. In or about April 1991, Mr. Cheng affirms that the 1st Defendant asked if Mr. Cheng was interested in financing him in his dealings with 3rd parties over the sale and purchase of yarn. Apparently the 1st Defendant told Mr. Cheng that the amount of loans made to him would normally be repaid within a short period of time ranging from 2 to 3 weeks. Mr. Cheng says that the 1st Defendant said he would be willing to pay 50% of the profit he made out of the transactions by way of interest. Mr. Cheng said that he might not have the sort of money being sought and he might from time to time have to ask friends or the Plaintiffs to lend the monies to him instead. Mr. Cheng says that he demanded from the 1st Defendant that he had to deposit with Mr. Cheng cheques of a reputable person or company in the amount loaned as security. He contends and the 1st Defendant denies that it was made clear to the 1st Defendant that the creditor would present the cheques so deposited for payment if the 1st Defendant could not repay the monies in time. Turning to the matters in dispute, Mr. Cheng says that on four separate applications, three in July and one in August of 1991, the Plaintiffs lent the 1st Defendant four sums, namely $1m, $650,000, $850,000 and $850,000. Mr. Cheng says that on each of these four occasions, he was given cheques issued by the 2nd Defendant in the sum equivalent to the amount loaned and he was reasonably satisfied with the soundness of the security given in the light of the business history which he has referred to. Unfortunately, these 4 cheques were later dishonoured.

6. A few days prior to 7th August 1991, namely the due date of the first of the said four cheques issued by the 2nd Defendant, the 1st Defendant approached Mr. Cheng and asked if the creditor could give a few weeks extension in respect of the payment of this first cheque. Mr. Cheng says that to impress upon the 1st Defendant the importance of observing the obligation to repay in time or otherwise honour the cheques given, it could only be granted if the 1st Defendant could procure a cheque issued by another party and the Plaintiffs would treat the loan as retired and the new loan given on the strength of the security of the fresh cheque. The 1st Defendant apparently agreed and he therefore gave a cheque drawn upon the account of the 3rd Defendant in the sum of $1m. This cheque was dishonoured hence the proceedings against the 3rd Defendant.

7. Mr. Lam, who as I have said is a director of the 3rd Defendant, has also affirmed an affidavit in which he states in July 1991 he discovered certain highly irregular trading related to the 3rd Defendant's stock in trade. He spoke to the 1st Defendant, his co-director, about the irregular trading and he then decided to withdraw the 1st Defendant's authority to sign and endorse cheques drawn against the 3rd Defendant's account. There was a director's meeting held on 1st August 1991 attended by the two directors where it was resolved, inter alia, that all cheques drawn by the 3rd Defendant against a particular account must be signed by Mr. Lam only. On or about 5th August 1991, Mr. Lam discovered that a blank cheque from the 3rd Defendant's current account with its bank was missing from the cheque book. He confronted the 1st Defendant as to the whereabouts of the missing cheque and the 1st Defendant confessed that he had signed the missing cheque and had further given the same to the Plaintiffs. After this confession, Mr. Lam notified the manager of the bank that all cheques drawn against the 3rd Defendant's account at the bank were to be countermanded. I pause only to say that it is a sham that the bank were not given notice of the revocation of authority on the 1st August 1991.

8. Mr. K.Y. Thong for the 3rd Defendant takes a number of points as to why the 3rd Defendant should have leave to defend. Firstly, he questions whether the Memorandum of Association of the 3rd Defendant is wide enough to cover the transaction in question. In this regard he referred to a number of cases which deal with the distinction between "powers" and "objects". He cited copiously from Gore-Brown on Companies 44th edition. He contends that there is evidence of actual knowledge on the part of Mr. Cheng that the cheque in question was handed over to secure the personal loan to the 1st Defendant and thus he contends it was unconnected with any intra vires object of the 3rd Defendant. He also referred me to the Rolled Steel case [1986] 1 Ch. 246 and made a number of submissions thereon.

9. Mr. Thong went on to argue that there can be neither usual nor ostensible authority of the 1st Defendant to bind the 3rd Defendant to a transaction of this nature. He contends that it is neither common nor usual for a director to be authorised to draw a cheque on the company's account to be used as security for his own personal loan. He further denies that the 3rd Defendant held out the 1st Defendant as being so authorised.

10. Mr. Thong further relies upon Sections 157H and 157I of the Companies Ordinance which prevents companies from, inter alia, entering into a guarantee or providing security in connection with a loan made by any person to a director. Section 157I deals with the civil consequencies of contravening Section 157H.

11. Finally Mr. Thong submitted that there was in fact evidence to show that the 1st Defendant had informed Mr. Cheng of the Plaintiffs at the time that the 1st Defendant no longer had authority to sign any of the cheques on the 3rd Defendant's account. This is, of course, disputed but, says Mr. Thong, this is an important issue of fact to be determined only at trial.

12. Mr. Edward Chan Q.C. presented a number of attractive arguments to counter Mr. Thong's submissions. He referred me to Bank of India v. Murjani [1990] 1 HKLR 586 and made a number of submissions on the facts which he submitted showed that the 3rd Defendant ought not to be believed and had not met the necessary threshold test.

13. He referred me to other parts of the Memorandum of Association which he submitted were wide enough to cover this transaction. He further relied on apparent authority. He also submitted that the loan made to the 1st Defendant was not absolutely prohibited by Section 157H and he relied upon Section 157H(3) (b). He relied on the rule in Turquand's case and he referred me to Freeman & Lockyear v. Buckhurst Park Properties [1964] 2 Q.B. 505.

14. Tempting though it is to decide all these interesting points of law the fact remains that this is an application for summary judgment under 0.14. There is additionally an important issue of fact to be resolved. The points of law although very interesting are not easy. This is a case on a dishonoured cheque which usually leads to summary judgment but it is clear to me that this is a somewhat unusual case which requires to be sorted out both factually and legally at trial. I mean no disrespect to Mr. Chan's attractive arguments, which may in the end all be sound, but I have come to the conclusion that enough has been raised to justify this matter going to trial. Accordingly, I propose to allow the appeal.

15. I heard argument on costs at the end of the hearing. I propose to make the following order, namely that the costs be in cause both here and below. The ultra vires point which featured large in the submissions of Mr. Thong was not taken below and an affidavit to support this submission was put in after the hearing before the master. There will also be a certificate for two counsel for the Plaintiffs.