CHOW HAK SING v. CHAU SAU SUEN

HCA No. 809/85

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. As pleaded the plaintiff's claim against the defendant is "as the indorser of five cheques for the total sum of $210,000.00, payable to the bearer, of which the plaintiff became the bearer". The particulars of those cheques (Ex. P1-P5) are as follows :

2. The defendant admits that he signed those cheques but denies that he indorsed them as alleged. Paragraphs l(b) and (c) state :-

 

"1(b).    The defendant further avers that he was induced to sign on the back of the said 5 cheques by the plaintiff on the representation that he was signing as a witness to a loan between one Chou Shou Ham, the drawer of the said 5 cheques and the plaintiff; and further that he was not to be held liable on any of the said 5 cheques;

 

(c).    The said 5 cheques were already in the possession of the plaintiff at the time the defendant signed on them and it was in fact the plaintiff who handed the said 5 cheques to the defendant to put his signature thereon. The defendant further avers that there was no consideration for his signing on the said five cheques. "

The defendant denies, as is pleaded by the plaintiff, that there was due presentation of the cheques and notice of dishonour given to him.

3. The defendant, who is a driver of a public minibus, is the younger brother of the drawer (D.W.2) of the cheques. The plaintiff is their uncle, and they worship the same ancestors.

4. At the material time, D.W.2 was running the Hong Kwong Jewellery Company. It is not disputed that he started borrowing money from the plaintiff in about 1982. Towards the end of that year and the beginning of 1983, D.W.2 owed his uncle a total of $210,000.00 in different loans and he admits that he gave the plaintiff those five cheques, all post-dated to the differe dates in May, 1983. The arrangement between them was that D.W.2 would pay interest at the rate of $300.00, for every $10,000.00 which, I was told by Mr. Chain for the defendant, represents a rate of 36% per annum. According to D.W.2, sometimes he paid interest in cash, took back the corresponding cheque and gave the plaintiff another cheque for interest for the following month.

5. The plaintiff maintains that in March or April 1983, D.W.2 told him that he intended to go to the United States for the wedding of his son. The plaintiff pointed out that his cheques would become due during that period of time, whereupon D.W.2 is alleged to have told him that he would ask his younger brother to act as guarantor to endorse the cheques.

6. It is agreed that sometime in April 1983 the plaintiff and D.W.2 met in a restaurant in Causeway Day. At about 9 p. m. D.W.2 telephoned the defendant to join them. According to the plaintiff, after the defendant arrived, D.W.2 told him about the loan and that the uncle did not trust him and asked the defendant to act as a guarantor, whereupon the defendant signed at the back of each of those cheques. The two brothers disagree with this version. D.W.2 maintained that his uncle wanted someone from the same family to know about the matter of the loan because the amount involved was great. The defendant said that this was what he was told when he got to the restaurant and he signed the cheques without looking at them to see how much they were for or when they were payable.

7. However, the plaintiff maintained that just before the cheques became due, he telephoned D.W.2 who asked him not to present them for payment as he did not have funds in his account. The plaintiff said that D.W.2 later saw him about the interest and, seeing no alternative, he accepted some cheques which D.W.2 handed him for interest, some of which to a total of $30,000.00 were subsequently honoured. Towards the end of September, 1983 D.W.2 is alleged to have telephoned the plaintiff to say that he had no money to pay either the interest or the principal and asked the plaintiff not to present the cheque for interest which was due on the 17th October 1983. The plaintiff maintained that during the period May - October 1983 he chased both brothers for payment of the principal and that he was prepared to forego the interest if the principal amount was paid back. The defendant is alleged to have told him that he was not willing to pay his brother's debts as he owed a lot of money to other people.

8. So it was that towards the beginning of October, 1983 the plaintiff decided to present the five cheques. He gave two reasons which prompted him to do so: first, he said that the period of six months when the cheques would become stale would have run out in October, which he agreed was a miscalculation on his part, secondly, he had been told by D.W.2 by the end of September that he could not pay either the interest or the principal. He said that he informed both of them of his decision and, having rejected D.W.2's request for a further extension, presented the first cheque for payment on the 6th October, followed by the other four on the 7th, the 10th and the last two on the 15th October. All five were dishonoured and, upon receiving notification of dishonour from his bank, he claims that he informed each brother on the telephone of the dishonour within two days of the bank's notification to him.

9. This is denied by the brothers. The defendant said that it was not until June 1984 following the arrest of D.W.2 that the plaintiff started chasing him for the money. D.11.2 said that he had continued to pay interest after 1983 until his arrest and detention in June, 1984. He said that as the cheques would have become stale in November, 1983 he had offered to replace them with new cheques as had been the practice of dealings between them but the plaintiff had turned this down because those cheques bore the defendant's signature also. D.W.2 maintained that he had paid interest in cash for the cheques due in October and November 1983, which were dishonoured, as he had done for the subsequent months until his arrest in June, 1984. He admitted under cross-examination that he had not obtained any receipts for such payments of interest in cash and that in spite of the fact that his uncle did net return him those cheques every time he paid interest in cash, he still went on issuing him another cheque for the following month, with the result that the plaintiff was left holding nine cheques for interest for the period 17th October, 1983 until the 7th June, 1984.

10. For the defendant, Mr. Chain submitted that there are three areas of dispute with which Mr. Fenton for the plaintiff also agrees. those are : (1) what was said by all the parties before the defendant signed the cheques; (2) whether notice of dishonour was given by the plaintiff to the defendant in October 1983; and (3) whether interest was paid by D.W.2 between October, 1983 and June, 1984.

11. It is quite clear that the meeting in the restaurant was as a result of the fears which the plaintiff had expressed about the five cheques. An interesting aspect of the plaintiff's evidence during cross-examination was his comment to the defendant after D.W.2 had explained to the latter the purpose of the meeting, when the plaintiff said to him, "Look, you act as a witness. " In the next breath he denied ever telling the defendant so since he had no need to ask him to be a witness. He maintained that all he said to him in the restaurant was, "Now you have heard", and he went on to say, "To my understanding, one who indorses a cheque acts as a guarantor. I wanted the defendant as indorser as guarantor. " This may very well have been his own view of the situation but his initial remark from which he renegued would seem to indicate that the defendant may probably have been told differently. I bear in mind that the defendant denied categorically as is pleaded in his defence that he acted as a witness and likewise he disowned a statement to the same effect in his affirmation filed during the interlocutory proceedings. Mr. Chain argued that the 'stigma', which the defendant apparently felt attached to the word 'witness', was clarified by D.W.2 when he explained that there was no witness at the time the loans were advanced. Learned Counsel described this as an unsatisfactory feature but submitted that it was not fatal to the defence in so far as the essential character in which the defendant was summoned to the restaurant on the defence version remained that of a witness. Mr. Fenton, however, questioned the purpose of asking someone to come all the way down to the restaurant to be a witness almost to nothing or, if the defendant knew everything about the indebtedness of D.W.2, he asked to what purpose would that have served the plaintiff. It is true that the defendant did say that he was none the wiser after he had appended his signature to those cheques. Even on the plaintiff's evidence, he was not told the details of the loan or when the cheques were payable. D.W.2 said that a member of the same family was brought in at the insistence of the plaintiff to save them loss of face. Mr. Fenton sought to discredit D.W.2 on two grounds: first, he relied on the contradiction in his evidence concerning the exact moment in time when D.W.2 knew that the plaintiff had presented those cheques. D.W.2 mentioned a telephone conversation with the plaintiff in November, that is, just before the expiry of the six months period allowed by the banking practice for the cheques to become stale, when he was told that the cheques had already been presented. Later he said that his memory was faulty and he came to know of this fact when the plaintiff came to visit him in the prison. The other ground upon which learned Counsel relied is his story, which he described as absurd, concerning the allegation that D.W.2 continued to pay interest in cash for nine months giving another cheque every time, accepting the plaintiff's explanation for not returning the cheque on which payment in cash was made in that he lead left the cheque somewhere.

12. I accept that the self-contradiction to which Mr. Fenton referred exists in the testimony of D.W.2, and even if I were to accept the various epithets by which the evidence of the two brothers was described, the question that remains surely is to what extent all that will enhance the evidence of the plaintiff and, more particularly, explain his initial remark to the defendant, "Look, you act as a witness. " The plaintiff's subsequent conduct  is also pertinent. The evidence indicates quite clearly in my view "that when he agreed to the request of D.W.2 not to present the cheques for payment on their due dates in May, no reference at all was made to the defendant. Indeed the plaintiff said that he accepted the cheques for interest because, as he put it, he could see no alternative. I did not find him so naive as he presented himself to be, and it must have been obvious to him that he had the simple alternative of refusing any extension to D.W.2. Relating all this to the meeting in the restaurant, it is obvious that nothing that the defendant said or did made the plaintiff alter his position in any way. In all the circumstances, albeit the various deficiencies in the evidence of the two brothers to which Mr. Fenton referred, I find that the probability about the character in which the defendant was brought in lies in the plaintiff's own remark to him when he said "Look, you act as a witness. " I find that the plaintiff was clearly of the view that his signature provided him with some security and, in giving evidence about the circumstances in which the defendant signed on the cheques, he apparently portrayed his own understanding of what that signature meant to him. In any event, Mr. Fenton conceded that the allegation of guarantee was not a live issue in these proceedings. In the circumstances I do not see anything in the discussions at the restaurant to indicate. that by placing his signature on the back of those cheques, the defendant thereby intended to become a party to them.

13. On the issue of the notice of dishonour, learned Counsel for the defendant brought in also the primary issue of the presentment. He submitted that the understanding between the plaintiff and D.W.2 was that the cheques were not to be presented so long as interest was continued to be paid. The plaintiff denied that there was any such agreement between them, although he said that in advancing the loans to D.W.2 his intention was to earn interest. Nevertheless the fact remains that his forbearance in agreeing in April not to present those cheques on their due dates in May was quite clearly based on his acceptance of the post-dated cheques for interest going well beyond November 1983. D.W.2 admits that his cheques for interest for the months of October and November were dishonoured but he maintained that he paid the interest on those cheques in cash. Mr. Fenton found his evidence on this aspect incredible and absurd. D.W.2 was a businessman and irrespective of their kinship one would have expected that, when his uncle made excuses for not surrendering the cheque upon which payment was made in cash, he would have insisted upon getting a receipt in proof of such payment. Like Mr. Fenton, I too find this aspect of his evidence quite incredible and reject it. I find that he defaulted in the payment of interest when his cheque dated the 17th October was dishonoured by him. But by the 15th of that month the plaintiff had already presented all the five cheques for the principal.   Mr. Fenton submitted that when D.W.2 informed the plaintiff at the end of September that he had no funds for paying either the interest or the principal, the plaintiff had no way to turn to. However, I do not think that this justified the plaintiff to unilaterally rescind the agreement with D.W.2 and thus present these five cheques for the principal before the 17th October when the interest payment was due; nor do I believe the plaintiff's evidence that this was due to a miscalculation on his part. On this basis, it is clear that the premature presentment of the cheques in question at the bank cannot constitute due presentment, and any notice of dishonour in that regard would, in my opinion, be equally bad and invalid.

14. Should I be wrong in my views on these matters, I shall now consider the submission of Mr. Chain that even if the whole of the plaintiff's case is accepted, still he cannot succeed against the defendant as indorser of those cheques because of lack of consideration; in other words, the defendant could not be interpolated between the drawer of those cheques as debtor and the payee as creditor without any consideration moving from the promisee/creditor. He relied on s.56 of the Bills of Exchange Ordinance (Cap.19), which provides :-

 

"Where a person signs a bill otherwise than as drawer or acceptor he thereby incurs the liabilities of an indorser to a holder in due course. "

Mr. Chain cited the well known case of Steele v. M'Kinlay (1880) 5 A.C.754, and took me through the legal fiction which courts harness by invoking the provision of s.20 of the Ordinance in fixing the liability of strangers who indorse bills, as illustrated by such cases as McDonald (Gerald) & Co. v. Nash & Co., (1924) A.C.625 and McCall Bros. Ltd. v. Hargreaves, (1932) 2 K. B.423. The position of such quasi- indorsers is summarised thus in Byles on Bills of Exchange, 25 edn., at p.188 :-

 

"But where there is clear evidence that the third person agreed to be liable on the bill to the drawer if the acceptor did not pay, the principle of Steele v. M'Kinlay has no application. The bill is to be regarded as indorsed by the drawer to the third person and reindorsed by him back to the drawer. The third person is therefore liable to the drawer upon the bill and not upon an independent contract of suretyship. Further, the fact that the bill was incomplete when the third person put his name upon it is immaterial since the drawer is entitled under section 20 to complete it. "

15. The effect of reindorsing the bill back to the drawer is that it enables him to enforce the bill as a holder in due course.

16. Mr. Fenton submitted that the issues of capacity and consideration were linked and he sought to distinguish a drawer of a bill of exchange from a payee and holder for value of a cheque. He agreed that in cases where a drawer succeeded against a holder, there was evidence of consideration but stressed that none of those cases said that consideration was a necessity. I think that the short answer is provided by s.27. By virtue of s.29(l)(b) a holder is due course is one "who has taken a bill ........ in good faith and for value .......". Section 2 defines "value" as valuable consideration. And it is well established that an original payee of the bill is not a holder in due course.

17. In a nutshell, therefore, Mr. Chain is simply saying that the plaintiff was not a holder in due course of those cheques for lack of consideration. But Mr. Fenton argues that even if the defendant signed as Pa stranger, he thereby incurred the liability of an indorser under s.56. With that I would agree but only if it were proved that the plaintiff was a holder of the class therein stipulated. Mr. Fenton submitted that in so far as consideration is concerned, the defendant indorsed as accommodation party under s.28 of the Ordinance "without receiving value therefor". This was not pleaded but Mr. Chain indicated that he was not taking any point on the pleadings.

18. It is not every signature of a relative or a friend which serves as a "backer". According to Goode on Commercial Law at p.450:-

 

"Sometimes a person in need of finance 'raises the wind' by persuading a friend or acquaintance of known financial standing to accommodate him gratuitously by signing the bill in order to make it acceptable for discount. "

And Holden on the Law and Practice of Banking, 3rd edn., Vol. 1, states at p.165 :-

 

"The object of 'backing' a bill in this way is to increase its value by reason of the additional credit which it derives from the signature of the person concerned. "

Mr. Fenton seeks to draw support from the following passage in Halsbury, Vol.4 at p.212:-

 

"This ambiguity as to the true relation of the parties can arise in relation to bills which are accommodation bills. In the case of such a bill, the signature of a relation or friend of the acceptor for whose accommodation the bill is drawn, placed on the back of the bill, constitutes the party an indorser of the bill, and it is immaterial whether the drawer who advances money to the parties accommodated on the strength of their acceptance does so before or after the signature is placed on the back of the bill. "

19. The obvious flaw in learned Counsel's argument clearly is that it ignores the important word of s.28(2) "when such holder took the bill". The object of backing as stated above must, in the words of the Ordinance, relate to the time the holder took the bill, which in this case was at least four months earlier at a time when the defendant was nowhere in the picture and played no part in lending his name to raise the loan or loans for his elder brother. In the circumstances and with respect, I find that submission to be wholly misconceived. In my opinion the defendant was not a backer in terms of s.28.

20. We are here concerned with cheques which are commonly termed as bearer cheques. The name of the payee is not stated. It is not disputed that the plaintiff acquired them for value, and as bearer. So long as he retained that status of a holder for value, he did not have the benefit of the rights of a holder in due course. When he handed them to the defendant for his signature and he returned them to him after signing them, the question arises what exactly was it that the defendant was passing ever to the plaintiff. Quite clearly the defendant had no title or righte in those cheques; he had acquired no such rights for the brief moments he had them in his own possession for the simple reason that no consideration had passed between him and the plaintiff. I find nothing in the evidence which might indicate anything on the part of the plaintiff in the form of a promise or forbearance to his detriment which might constitute consideration for a simple contract. In other words, the plaintiff's position had not altered in any way when he received the cheques back from the defendant, and it was, as was submitted by Mr. Chain, a simple case of re-delivery of those cheques, so that the adage "once a bearer, always a bearer" was certainly true of the plaintiff both before and after the defendant's signature on them with nothing intervening to make him a holder in due course. To illustrate this further, it seems that the plaintiff's bank had no qualms about the signature of a third party at the back of those cheques in accepting to clear them on behalf of their client whom they took for what he was, a holder of bearer cheques. In the circumstances, I find that the signature of the defendant on those cheques was meaningless and a mere surplussage which did not connote any legal liability to the plaintiff.

21. For the reasons I have endeavoured to give, I find no substance in the plaintiff's claim against the defendant. The action is dismissed with costs.