Edward Wong Credit Ltd. v. Man Hing Handbag Co. Ltd. and Others

DCCJ20208/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 20208 OF 2001

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J U D G M E N T

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1. These are order 14 proceedings by the plaintiff against the 4th and 5th defendants. The plaintiffs have already obtained default judgments against the 1st, 2nd and 3rd defendants, and I am not concerned with the 6th defendant.

2. It is necessary to give some of the background to this matter. The plaintiffs are a deposit-taking company and they also lend money to customers of theirs and discount cheques. The 1st defendants, who are manufacturers of handbags, were one such customer. The 2nd defendant is the major shareholder of the 1st defendant and the person who operates the business of the 1st defendant. The 3rd defendant is the 2nd defendant's wife. She has a small shareholding in the 1st defendant and assists the 2nd defendant in conducting the 1st defendant's business. The 4th defendant is also a handbag manufacturer. He has been doing business with the 2nd defendant and his wife for a number of years; they know each other well. Similarly, the 5th defendant also manufactures handbags and he too knows the 2nd defendant and his wife, with whom he has also been doing business for some years.

3. The 1st defendant became a customer of the plaintiff upon entering into a general commercial agreement dated 22 November 2000 (see page 71) signed on its behalf by the 2nd defendant. Under that agreement, the 1st defendant agreed to repay the plaintiffs on demand all monies paid or advanced to it, whether by loan or in any other form, together with interest, commissions, fees and so forth.

4. Subsequently, on 20 July 2001, the plaintiff extended to the 1st defendant further general credit facilities up to $900,000 in respect of cheque discounting services, this amount being an upward revision from the existing and, I presume, original $700,000 limit (see page 74).

5. The 1st defendant's liabilities to the plaintiffs under the agreement of 20 July 2001 were guaranteed by both the 2nd and 3rd defendants by guarantees in writing dated 24 July 2001. Following the initial agreement in November 2000 and thereafter, the 1st defendant entered into a number of cheque discounting transactions with the plaintiffs which were completed in a regular fashion and without mishap.

6. These proceedings against the 4th and 5th defendants arise out of this running account between the plaintiffs and the 1st defendant as guaranteed by the 2nd and 3rd defendants.

7. In relation to the 4th defendant, he drew a cheque No. 664299 dated 15 October 2001 in the sum of $118,300, payable to the 1st defendant. In due course, I must relate the circumstances in which the 4th defendant says that cheque was drawn. Having obtained the cheque on behalf of the 1st defendant, the 2nd defendant then endorsed it over in favour of the plaintiffs. The plaintiffs assert that it gave the 1st defendant value in respect of that cheque.

8. As will appear more fully in a moment, the 4th defendant stopped payment on the cheque. The plaintiffs now sue the 4th defendant as the drawer of the cheque, the plaintiffs being the holders of the cheque in due course. I would also need to address the significance of this presently.

9. As against the 5th defendant, the case is that he drew a cheque No. 363432 dated 28 October 2001 in the sum of $106,300, payable to the 1st defendant. This was done in identical circumstances to those of the 4th defendant, again more of which in due course. With this cheque as well, the 1st defendant endorsed it in favour of the plaintiffs. The plaintiffs say that good value was given by it to the 1st defendant for that cheque.

10. The 5th defendant also stopped payment. The plaintiffs sue the 5th defendant also as a holder in due course of this cheque.

11. The plaintiffs' action against the 1st defendant is based on the 1st defendant's indebtedness to it on the running account with it following the granting of credit facilities.

12. Against the 2nd and 3rd defendants the action is brought on the basis of the guarantees given by them. The claim against them is for $326,960, being the combined total of three cheques drawn by the 4th, 5th and 6th defendants and all endorsed by the 1st defendant in favour of the plaintiffs.

13. As I have already indicated, default judgments have been obtained in this amount, together with interest against the first 3 defendants.

14. To succeed against the 4th and 5th defendants as drawers of their two cheques, the plaintiffs must show that they are a holder in due course. The 4th and 5th defendants say that this is not the case.

15. Before I turn to the relevant law on this issue, I need to relate the factual basis upon which these two defendants contest the case. The accounts that they give are, in effect, identical.

16. The 4th defendant's evidence is contained in his affirmation made on 15 December 2001, starting at page 40. He says that he had had business dealings with the 2nd defendant since 1982, although there had not been much business since 1998, but they continued to be friends. In mid-July 2001 the 2nd defendant asked him to meet him for dinner. He asked him to issue a post-dated cheque for $118,300 to assist him in his business. He was assured that he need not worry, because the 2nd defendant would issue him with a cheque of equivalent value. The 2nd defendant asked the 4th defendant to date his cheque for October. The 2nd defendant told the 4th defendant that he would use this cheque to show to his suppliers to demonstrate to them that his company, the 1st defendant, had monies due to it, and in that way persuade them to allow the 1st defendant further credit terms.

17. The 4th defendant was prepared to do this for the 2nd defendant on this basis. He had in fact done it before on three occasions: once in March 2001 and twice in May. On those occasions he had provided the 2nd defendant with cheques made out to the 1st defendant in the amounts of $125,000 and two for $108,000. On each of those three occasions the 2nd defendant had paid him back in full. And so on this occasion, the 4th defendant made out the cheque payable to the 1st defendant. It was crossed and the words "or bearer" were struck out so that it could only be payable to the 1st defendant. He left the date blank because the 2nd defendant wished to post-date it.

18. On receiving this cheque, the 2nd defendant presented the 4th defendant with a cheque for an identical amount made payable to the 4th defendant's company, Cheung Mei Company. The 2nd defendant then dated the cheque that the 4th defendant had given him 15 October 2001.

19. Then, on 15 October 2001, the 4th defendant was visited by the 3rd defendant. She asked him to sign a pre-prepared document to the effect that the 4th defendant's company had ordered goods from the 1st defendant and that, in the event of a delayed delivery, or if the goods were unmerchantable, they, the 4th defendants, could refuse to accept them. The 4th defendant refused to sign such a document simply because it was untrue; they had not ordered goods from the 1st defendant.

20. The 3rd defendant then explained that what all this meant was that the 4th defendant's cheque was no longer required and that he could stop payment on it. He said this was unnecessary, since they could merely return to each other their original respective cheques. The 3rd defendant then said that she had mislaid the 4th defendant's cheque, but would return it once she located it. On hearing this, the 4th defendant, together with the 3rd defendant, went to his bank to stop payment. As he had stopped payment, he did not present the 1st defendant's cheque for payment.

21. On 17 November 2001 he received the writ in this action and was surprised to learn of the allegations made in the writ and that he was being sued by a finance house on a cheque that he had issued to the 1st defendant, particularly that the agreement between them was that the cheque would not be negotiated, but was merely to be shown to the 1st defendant's suppliers.

22. The 4th defendant now says that he has been duped by the 2nd defendant in particular. He has now reported these facts to the CID for them to investigate. He now says that there is an issue worthy of trial as to whether the plaintiffs were aware of these underhand dealings by the 2nd and 3rd defendants.

23. The 5th defendant's case is, as I have said, identical in its effect. His case is related in the affirmation of Mr Yeung Ying-chung made on 14 December 2001, starting at page 50-05 of the bundle. He says that in September, the 2nd defendant telephoned him to say that his business was in difficulty and that he owed a finance company a large sum of money, and that he was unable to repay it. The finance company were insisting on immediate repayment unless he could produce a cheque for $102,360, which could be post-dated. If he did that, the finance company would allow him to delay payment of his indebtedness to it until the end of October 2001.

24. The 5th defendant says that he asked the 2nd defendant what would happen if the finance company presented the cheque. He said that the finance company only needed to see the cheque, which they might photocopy for their own records. The 2nd defendant also assured him that he would not present the cheque, and in order to reassure him he gave him a cheque of his own in an identical amount. At the end of October he learnt that the 2nd defendant had closed down his business (the 1st defendant). He telephoned the 2nd defendant at his office. The number was disconnected. He spoke to his bank manager, who advised him to stop the cheque that he had issued to the 2nd defendant. He received the writ in November. On advice, he paid in the cheque that the 2nd defendant had given him as security. That was dishonoured on presentation.

25. The plaintiffs say that they are merely a finance house. They gave the 1st defendant value for the 4th and 5th defendants' cheques by paying out against them in both cases over 95 per cent of the face value of those cheques. The cheques were endorsed over to them by the 1st defendant through its authorised signatory, the 2nd defendant.

26. The plaintiffs are, therefore, a holder in due course, and these two defendants cannot possibly have any defence to this action. Accordingly, they should have judgment on the cheques against the 4th and 5th defendants as to the amount of each cheque.

27. As to any duplicitous behaviour on the part of the 2nd and 3rd defendants, the plaintiffs are in no position to say anything. They were certainly not aware of the circumstances in which these cheques were handed over by the 4th and 5th defendants to the 2nd and 3rd defendants, and there is not a scintilla of evidence to show that they were aware of what went on between these individuals.

28. In such circumstances, they must succeed on what is a clean point of law.

29. The matter turns on section 29 of the Bills of Exchange Ordinance. In order to constitute himself a holder in due course of a bill of exchange, the holder is required to take in good faith. This is dealt with in Byles, 26th edition, at page 221. Section 29(1)(b) is as follows:

"That he took the bill in good faith and for value and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it."

30. The question of notice of defect in title is considered in Byles as follows (see pages 221 - 222):

"Notice of illegality or fraud is either particular or general. Particular or express notice is where the holder had notice of the particular facts voiding the bill, but notice of the facts more or less in detail is not necessary in order to invalidate the title. It is sufficient if the holder had general notice. General or implied notice is where the holder had notice that there was some illegality or some fraud vitiating the bill, though he may not have been apprised of its precise nature.

Thus, if when he took the bill he was told in express terms that there was something wrong about it without being told what the vice was, or if it can be collected from circumstances fairly warranting such an inference that he knew or believed or thought that the bill was tainted with illegality or fraud, such a general or implied notice would equally destroy his title.

A wilful and fraudulent absence of enquiry into the circumstances when they are known to be such as to invite enquiry will, if the jury think that the absence from enquiry arose from a suspicion or belief that enquiry would disclose a vice in the bills, amount to general or implied notice. There must, however, be something to put the holder on enquiry. For the purposes of section 29, however, there is no question of constructive notice. Notice means actual notice ..."

31. As to the nature of both cheques, it is perfectly obvious that they were cheques payable to order (section 8(4) of the Bills of Exchange Ordinance). On their face, both cheques were drawn so that they could be presented for payment and cashed. There are no limiting words on the cheque. There is no issue about the effective endorsement of the cheque in the plaintiff's favour. The matter is defended on the basis that there is a triable issue as to whether the plaintiffs had notice of the representations made by the 2nd and 3rd defendants to the 4th and 5th defendant as to the use to which these cheques would be put, and that they were not to be endorsed in favour of another party and presented for payment.

32. I have had some very strong submissions addressed to me on behalf of both defendants, but when one stands back from the evidence and views it in a dispassionate and sensible way, it really can only admit of one conclusion. From the plaintiff's point of view, these were ordinary commercial transactions between it and its customer, the 1st defendant. These cheques were being paid in to reduce the 1st defendant's running debit balance. There is simply nothing here to suggest that the plaintiffs were even remotely aware of what went on between the 1st, 2nd and 3rd defendants, on the one hand, and the 4th and 5th defendant.

33. These were clean cheques available for payment. There was nothing to put the plaintiffs on enquiry, and certainly there was nothing to suggest that the plaintiff may have put the 2nd and 3rd defendants up to this, which I think was close to being suggested.

34. There is no defence. Accordingly, there must be summary judgment in favour of the plaintiff against the 4th and 5th defendants in the amounts claimed in the writ. I am afraid that if what the 4th and 5th defendants say is true, they have their cause of action against the 1st to 3 defendants, although I fear these rights may be more theoretical rather than real, given the probable impecuniosity of those particular defendants.