SIN HUA BANK LTD. v. LEE YUK WAH FIENNA t/a ACCU-TEK

HCA 8075/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8075 OF 1999

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(BY ORIGINAL WRIT AND ORDER TO CARRY ON)

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J U D G M E N T

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1. This is an appeal against a Master's decision in an application for summary judgment made under Order 14 rule 1 RHC in which he gave the defendant unconditional leave to defend.

History

2. These proceedings are founded in a transaction struck between a local company called Topearn Industrial Limited (Topearn) and the defendant, under which Topearn agreed to sell 32,600 yards of cotton denim at $20.00 per yard ex factory. The deal, reduced to writing in an agreement of 10 June 1998 included the following terms:-

"(a) partial shipments to be effected in October and November 1998;

(b) payment to be effected by post-dated cheque in favour of the seller for each shipment at least 60 days before approximate shipment date to secure production;

(c) buyer reserves the right to stop payment in the event of production samples being rejected by buyer or failure by seller to deliver on latest delivery date."

3. With the first two partial shipments expected to be delivered to the defendant in October 1998 the defendant drew two cheques, one for $208,000.00 post-dated to 15 October 1998, the other for $246,000.00 post-dated to 20 October 1998. Subsequently, with a third shipment expected to be delivered to the defendant in November 1998, the defendant drew a third cheque for $198,000.00 post-dated to 30 November 1998.

4. In the event there was no delivery at all. The defendant exercised her right to stop payment on the cheques and did so. But by this time the plaintiff had come into possession of the three cheques in circumstances which I shall come to. Claiming to be holder in due course of all three cheques and deprived of their worth because they were dishonoured on presentment the plaintiff looked to the defendant for their total face value of $652,000.00. When this was not forthcoming it issued a writ.

The Proceedings

5. The writ was filed in May 1999. The defence was filed in June 1999. Both the statement of claim and defence were amended several times the most recent by leave granted prior to this hearing. The plaintiff's claim is that Topearn endorsed the cheques in favour of the plaintiff for value and as holder in due course it is entitled to sue for their total worth. The defence is that the cheques were not endorsed in favour of the plaintiff which is thus not the holder in due course and not entitled to sue on them.

The Order 14 rule 1 RHC Summons

6. By summons of 13 March 2001 the plaintiff applied for summary judgment on the grounds that there is no defence to the action. The defendant opposed. Following a hearing before Master Rogers on 3 December 2001 he gave the defendant unconditional leave to defend.

7. It is against that order the plaintiff now appeals.

The Evidence

8. Affidavits were filed by Yung Yat-ming (Mr Yung) and Li Kit-man (Mr Li), officers of the plaintiff and authorized to depose on its behalf, Cheung Chiu-yi (Madam Cheung) who is a director of Topearn and the defendant.

9. I come now to summarize what they all had to say.

10. Madam Cheung said the first two cheques post-dated to 15 October and 20 October 1998 came into the possession of Topearn in June 1998. She attended at the plaintiff's Tsuen Wan Branch where she showed Mr Li both the two cheques and the agreement between Topearn and the defendant. He told her that in view of the let out clause in the agreement, Topearn could not discount the cheques. But in July Mr Li asked her to return with her husband, a fellow director, with the cheques, and the agreement. He took a copy of the agreement and returned it to her. Whilst repeating the cheques could not be discounted, he invited her to deposit the cheques with the plaintiff so that if and when they were presented the proceeds would be used to reduce Topearn's indebtedness with the plaintiff. At his request the cheques were endorsed in favour of the plaintiff and a printed letter was also signed, said by Mr Li to be an authorization. Neither she nor her husband bothered to read the letter. Now realizing the letter contained an undertaking that the goods for which the cheques were intended consideration had been delivered she came to realize that the letter misrepresented the true story. But all along she had made it clear that delivery had not been made. Subsequently a second letter was signed, purportedly an authorization for the second cheque. The third cheque post-dated to November 1998 came from the defendant in late September. That was dealt with in the same way as with the previous two cheques, with the same disclosure.

11. Mr Li for his part said he was based in the Tsuen Wan Branch of the plaintiff and had been in charge of Topearn's account since it was opened in 1997. At the time Topearn was given a limited overdraft. From time to time when the account approached its limit Topearn would endorse post-dated cheques in favour of the plaintiff received from customers for goods supplied. Since November 1997 this had been done on ten separate occasions. This is a common enough procedure, details of which are fully explained to customers wanting to discount post-dated cheques for cash. It is an important feature that customers may only endorse post-dated cheques for goods already supplied. The endorsed cheques are accompanied by a declaration in which the customer is required to undertake that the goods have been delivered and the cheques will not be stopped. He produced eight separate declarations that Topearn had signed prior to the transactions giving rise to this litigation. Madam Cheung or her husband were signatories for and on behalf of Topearn on each occasion. It is not necessary in the light of the protection afforded by the declaration for the plaintiff to see or note the contents of any agreement made between its customer and the drawer of the cheque. He denied having asked for or seeing the agreement that Topearn had with the defendant, that Madam Cheung said she had handed to him. He made no copy of it. He denied that he misrepresented to Madam Cheung and her husband that the declaration was an authorization.

12. In the meantime, Topearn has defaulted in repayment of its indebtedness to the plaintiff. The plaintiff has realized on security held and thereafter withdrew its services.

13. Mr Yung's role in the proceedings was to produce the endorsed cheques and declarations signed for on and behalf of Topearn and the subsequent notices of dishonour.

14. The defendant confirmed the agreement with Topearn, the failure by Topearn to deliver a sample or otherwise make any shipment and her consequent stopping of all three cheques.

The Law

15. The holder in due course of a bill of exchange who takes the bill in good faith for value, with no notice of any defect in title, is entitled to sue on the bill in his own name. His rights are not affected by any personal defences available to prior parties among themselves; he may enforce payment against all parties liable on the bill; see Bills of Exchange Ordinance, Cap. 19.

16. A plaintiff may invoke the procedure available under Order 14 RHC where there is no valid defence to his claim, or otherwise a triable issue. The White Book sets out at 14/4/1 the rationale:-

"..... The underlying policy of the summary procedure is to prevent a defendant from delaying the plaintiff from obtaining judgment in a case in which the defendant clearly has no defence to the plaintiff's claim: Man Earn Ltd v. Wing Ting Fong [1996] 1 H.K.C. 225. "Order 14 proceedings for summary judgment when there is no defence to a claim are an important feature of the legal process. It enables plaintiffs in cases where there is no defence to obtain expeditious summary judgment to avoid unnecessary delay. When applied for, it is for the defendant to show that there is a triable issue or an arguable defence if he is to be allowed his day in court. To deny him his day in court, if he shows a triable issue or an arguable defence, is indeed a fearful injustice. On the other hand, if he has no defence and he obtains leave to defend, equally, there is injustice to the plaintiff." per Mortimer J.A. in Manciple Ltd v. Chan On Man [1995] 3 H.K.C. 459 to 466. The machinery of O.14 works on the basis that if the plaintiff's application is properly constituted, he is prima facie entitled to judgment unless the defendant shows cause to the contrary or the application is dismissed."

17. It is for the defendant to show that summary judgment should not be ordered because there are triable issues; that he has evidence to put forward in defence which is reasonably capable of belief; see Banque de Paris et des Pays-Bas (Suisse) SA v. Costa de Naray [1984] 1 Lloyd's Rep. 21.

18. For the court to consider this the test is as described by Bokhary JA (as he then was) in Re Safe Rich Industries Limited CA 81/94 (unreported):-

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognized - because failure to recognize it would create a debt-dodger's charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute."

19. But unless it is obvious that the defence put forward is frivolous then judgment should not be entered, it not being the appropriate procedure for a trial to establish facts; see Mars International Limited v. Hollis Industries Limited [1996] 1 HKC 434.

20. Mortimer J went on to say in Maniciple Ltd (supra):-

"There is a difficulty because the court cannot resolve issues of fact on affidavits. However, there are some cases in which the defendant's own case, although apparently it raises issues which, if found in his favour, would provide him with a defence, are so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that his defence is a sham."

21. It has been said two tests are appropriate, namely "Is what the defendant says credible?" and, if the answer is yes, "Is there a fair or reasonable probability of the defendant having a real or bona fide defence?"

22. In Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155, Godfrey J noted that there was a trend that where a plaintiff asked for an Order 14 summary judgment where the facts were in issue, he invariably invited the court to embark on a mini-trial of the action on affidavit evidence. Of this practice, he said at p. 158:-

"That is not a proper course for the court to take. It will in future be sufficient for the court to ask itself the simple question: 'Is what the defendant says credible?' If so, he must have leave to defend. If not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed; it is whether those assertions are believable."

23. The test is clear; has the defendant been able to establish there are triable issues, serious disputes of fact, which can and should only be resolved at trial?

Applying the Law to the Facts

24. Without question the accounts of Madam Cheung and Mr Li reveal a material dispute of fact. What I have to decide is whether Madam Cheung's assertions are believable. In pursuing that I am obliged to take them not in isolation but in the context of the surrounding circumstances.

25. In that regard I pay heed to the following:-

1) the discounting of post-dated customers' cheques is a common commercial practice entered into between the plaintiff and its account holders;

2) in the short-lived history of Topearn's relationship with the plaintiff Topearn had pursued this course on many occasions;

3) the documentation such as was utilized by the plaintiff was straightforward in content and was explained to Madam Cheung and her husband as directors; there is nothing to suggest they were ignorant of the procedures or what they were required to sign, or why;

4) it is part of that procedure that the account holder sign a letter incorporating an undertaking that the post-dated cheque being discounted is for "goods already delivered and orders already fulfilled";

5) the documentation that was completed in respect of each of the three cheques the subject of this action was no different;

6) the assertion that Mr Li knew of and was handed a copy of the agreement between Topearn and the defendant is contrary to the practice that the plaintiff takes no interest in the transaction giving rise to the cheque being discounted;

7) the assertion that, having been told and having read in the agreement that the goods had not been delivered and there was thus a prospect that the drawer had a contractual right to stop payment in the event of non-delivery, Mr Li nevertheless accepted the cheques and caused Topearn to sign the usual declarations is not believable;

8) the assertion that Madam Cheung and/or her husband were ignorant of the content of the declarations before they were signed is not believable.

26. I am satisfied Topearn's directors chose to discount the cheques knowing full well that the undertakings given were false, thereby defrauding the plaintiff and the ultimate victim, the defendant.

The Outcome

27. There is no defence; the appeal is allowed.

28. There is judgment for the full amount claimed with interest at prime.

29. Costs with certificate for one counsel only are to the plaintiff taxed if not agreed. (This order for costs is nisi at first instance.)