BANK OF CREDIT AND COMMERCE HONG KONG LTD v. HONG KONG YUNG HONG TRADING CO LTD

H E A D N O T E

Commercial law -Banking - Crossed cheque drawn to order in favour of named payee - Cheque Raid into the payee's bank without indorsement - Payee's account already overdrawn for amount in excess of the face value of the cheque - Payee's bank discounting the cheque and crediting payee's account with discounted amount - Drawer countermanding - Cheque dishonoured when presented by payee's bank for payment - Whether Payee's bank, as holder in due course, entitled to sue the drawer - Section 84 of Bills of Exchange Ordinance - Whether payee had delivered the cheque to his bank "for collection"

Effect of post-dating

Effect of crossing "A/C Payee Only"

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The Defendant company drew a cheque post-dated to the 15th September 1932 for $550,000 in favour of Mr. Lo who is a customer of the Plaintiff bank. It was an order cheque which bore a crossing "A/C Payee Only". On 23rd July 1982, at which date Mr. Lo's account with the Plaintiff bank was overdrawn by $664,737 65, Mr. Lo paid the cheque into the Plaintiff bank, but without indorsing it. The Plaintiff bank thereupon discounted the cheque, crediting Mr. Lo's account with $535,353.42. The cheque was not presented to the Defendant company's banker for payment till 14 March 1983 when it was dishonoured, the Defendant company having countermanded payment. The Plaintiff bank, claiming to be a holder in due course, sued the Defendant company for the face value of the cheque. The Defendant company disputed that the Plaintiff bank was a "holder" within the meaning of section 2 of the Bills of Exchange Ordinance, Cap. 19 "the Ordinance", and further disputed that a cheque marked "A/C Payee Only" could be transferred.

Held, (1) Notwithstanding the absence of indorsement, the Plaintiff bank was a "holder" because the cheque had been delivered to it for collection" within the meaning of section 84 of the Ordinance. As the Plaintiff bank had given value or had a lien, and as there was no suggestion of absence of good faith, the Plaintiff bank was a holder in due course. (2) The words "A/C Payee Only" did not affect transferability.

Judgment was accordingly given for the Plaintiff bank in the sum of $550,000.

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JUDGMENT

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1. The defendant company drew a cheque dated the 15th September 1982 on the Bank of Communications for $550,000 in favour of Mr. Nicky Lo Man-hoi("Mr. Lo") as payee. That cheque was post-dated.

2. Mr. Lo had a current account with the plaintiff bank. As at the 23rd July 1982, that current account was overdrawn by $664,737.65. That day, Mr. Lo paid the cheque into the plaintiff bank but without indorsing it. The plaintiff bank discounted the cheque by crediting Mr. Lo's account with $535,353.42, so that his overdraft was thereby reduced to $129,384.23. The difference between the face value of the cheque of $550,000 and the figure of $535,353.42 credited to Mr. Lo's account represented the interest element charged by the plaintiff bank in respect of the period between the 23rd July and the 15th September 1932 when the cheque fell due.

3. The cheque originally bore the words "OR BEARER" but those were crossed out. It is common ground that by virtue of section 8(4) of the Bills of Exchange Ordinance, Cap. 19, ("the Ordinance") this became an order cheque as it was expressed to be payable to a particular person, namely Mr. Lo.

4. On the cheque was a crossing with the words "Account Payee Only". The defendant company has sought to argue that those words affect the transferability of the cheque with the result that Mr. Lo is the only one entitled to sue upon it. However, I do not regard that point as any longer arguable at first instance in Hong Kong. Trial judges in Hong Kong have consistently held that the words "Account Payee Only" do not affect transferability or negotiability, but are no more than a warning to the collecting banker to ensure that it applies the proceeds of the cheque for the account of the named payee only or to an account authorized by the named payee. See Asiatic European Corp. Ltd. v Overseas Trust Bank Ltd.⁽¹⁾; Edward Wong Finance Co. Ltd. v Infinity Industrial Co. Ltd. ⁽²⁾; and Wayfoong Credit Ltd. v Remoco (Hong Kong) Ltd. ⁽³⁾. Academic opinion is to the same effect in Hong Kong. See 1979 Hong Kong Law Journal at page 341. There is also a privy Council decision involving an appeal from Australia to the same effect: Universal Guarantee Pty. Ltd. v National Bank of Australasia Ltd.⁽⁴⁾.

5. The plaintiff bank did not present the cheque to the defendant company's bank for payment until the 14th March 1983. The defendant company having countermanded payment, the defendant company's bank refused to pay. As at the 14th March 1983, Mr. Lo's account with the plaintiff bank stood overdrawn to the extent of $217,551.95. No debit entry has been made in Mr. Lo's account as the result of the dishonour of the cheque.

6. By the present proceedings, the plaintiff bank seeks to sue the defendant company for the face value of the cheque, namely $550,000.

7. The point at issue is an extremely narrow one. Because of the absence of an indorsement from Mr. Lo, the payee of the cheque, the plaintiff bank has to overcome the problem of showing that it is a "holder" of the cheque. "Holder" is defined in section 2 of the Ordinance as meaning "the payee or indorsee of a bill or note who is in possession of it or the bearer thereof". To overcome the absence of indorsement, the plaintiff bank has to show that it comes within the scope of section 84 of the Ordinance. That section, which is identical to section 2 of the Cheques Act, 1957 in England, provides as follows:-

"84. A banker who gives value for, or has a lien on, a cheque payable to order which the holder delivers to him for collection without indorsed it, has such (if any) rights as he would have had if, upon delivery, the holder had indorsed it in blank."

 

8. The only arguable point is whether the cheque was delivered to the plaintiff bank "for collection". In all other respects, the plaintiff bank plainly satisfies the requirements of the section.

9. The plaintiff bank is obviously "a banker". The defendant company concedes that the plaintiff bank has given value. Even though the defendant company does not admit that the plaintiff bank has a lien, there can be no room for doubt that the plaintiff bank has in fact a lien for the full value of the cheque, because, at the time the plaintiff bank took the cheque from Mr. Lo, his overdraft exceeded the amount of the cheque.  See the Ordinance, section 27(1) (b) and section 27(3). It is also common ground that this was a cheque payable to order and that the holder, Mr. Lo, delivered it to the plaintiff bank without indorsing it. The only remaining element, as I have indicated, is whether that delivery was "for collection". If such delivery was "for collection", then the plaintiff bank will have the same rights as if, upon delivery, Mr. Lo had indorsed the cheque in blank. Bearing in mind that this is an order cheque for which the plaintiff bank has given value or has a lien, the rights which the plaintiff bank would have if Mr. To had made an indorsement in blank are those of a holder in due course. See the Ordinance, section 34 (1); section 31; and the definition of "bearer" in section 2. As the plaintiff bank has given value or has a lien, and as there is no suggestion of any absence of good faith on the pleadings, if the plaintiff bank is a "holder" at all, it will be a holder in due course. See section 29(1) and section 30(2) of the Ordinance.

10. Attention can now be focused on the meaning of the words "for collection" which are crucial for the determination of the present case.

11. I do not think that there can be any serious doubt that in one sense Mr. Lo can be said to have delivered the cheque to the plaintiff bank for collection. As a matter of commercial reality, there was no conceivable purpose, apart from collection, for which the cheque was delivered to the bank. There is not the slightest suggestion, for example, that the cheque might have been delivered for the purposes of pledge or some other form of security. Nor can it be seriously suggested that the plaintiff bank might have acquired the cheque for the purpose of selling or otherwise negotiating it to some other bank or finance house. Not only would such a possibility be utterly farfetched in itself, but the prospect of any such sale or negotiation is precluded by virtue of the absence of Mr. Lo's indorsement. Collection is the only realistic possibility. But collection for whom? That is really the vital question.

12. According to the submission on behalf of the defendant company, "for collection", in section 84, is confined to collection on behalf of the payee, Mr. Lo, and cannot extend to collection by the plaintiff bank on its own behalf.

13. There is no room for doubt, in my opinion, that the plaintiff bank was collecting this cheque for itself, rather than for its customer, Mr. Lo. This was as straightforward a case of a customer negotiating or selling a cheque to his bank as could be imagined. It is precisely the sort of situation described in the following passage in Goode on Commercial law at page 495:-

"But the bank may also acquire cheques in its own right, by discounting them (i.e. by buying them at a discount) or by lending on the security of them. In these cases, the bank receives the cheques as a purchaser for value and will collect than on its own behalf. Even where the bank initially receives a cheque as agent orcollection, it may acquire an interest of its own by giving value for the cheque, e.g. by allowing its customer to draw against it. In such a case the bank will collect the cheque for its own account to the extent of the value so given."

 

14. Paget on Banking (Ninth Edition) can be seen from the following passages to be to the same effect:-

"Transferee and holder

 

If a banker gives cash over the counter for a cheque not drawn on himself or, if drawn on him, which is crossed, he takes it as transferee. If he lends against a cheque delivered to him for collection he takes it as transferee. If the cheque is paid in for the express purpose of reducing an overdraft, he takes it as transferee, the consideration being the debt; and similarly if it is paid in on the express understanding that it maybe drawn against at once and is so drawn against. (page 355)

 

A collecting banker collects for himself whenever he receives a cheque and the customer for whom he collects is indebted to him or he otherwise gives value for the cheque. (page 357)"

 

15. A passage to the same effect is to be found in Chalmers on Bills of Exchange (Thirteenth Edition), at page 311:-

"Role of the collecting banker

 

Where an instrument is deposited by a customer with his banker for the purpose of collection the banker is ordinarily deemed to be a mere collecting agent. But if the circumstances are such that the banker is, of but for a forged indorsement would have been, a holder for value or in due course then the banker acts for himself - thus, where he gives immediate cash in exchange for an instrument he has in effect purchased it and when he later collects on the instrument he does so not as an agent but on his own behalf so also if an instrument is paid in for the express purpose of reducing the customer's overdraft or if there is an understanding between banker and customer that the customer may be allowed to draw against it before collection."

 

16. There is also the following in the Sixth Edition of Lord Chorley's Law of Banking at page 115:-

"The discounter of a bill or note becomes a holder for value and takes the property in the instrument."

 

17. Strange to say, counsel for the plaintiff bank was not prepared to grasp the nettle that his client was indubitably collecting the cheque for itself. He sought to contend that there had been no transfer of the property in the cheque from Mr. Lo to the plaintiff bank, and he contended that the plaintiff bank was never more than a mere agent for collection on behalf of Mr. Lo. However, any such submission on behalf of the plaintiff bank was totally misconceived, because it flew in the face of the plaintiff's own pleading that it was a holder in due course of the cheque. How it is possible, at one and the same time, to be a holder in due course, yet not have acquired property in a cheque, is beyond my comprehension. It is, of course, possible for a banker to be at one and the same time an agent for collection of a cheque and a holder in due course of that cheque. Milmo J. gives an example of how that situation can come about in Barclays Bank Ltd. v Astley Industrial Trust Ltd. ⁽⁵⁾ at page 538 where he says:-

"It is, moreover, a commonplace occurrence for a banker to allow credit to a customer against an uncleared cheque. A banker who permits his customer to draw £5 against an uncleared cheque for £100 has given value for it but is it to be said that in consequence he is no longer the customer's agent for the collection of that cheque?"

 

However, the case before me is not one where the plaintiff bank is in fact both an agent for collection on behalf of its customer and collecting for itself at the same time, because the plaintiff bank has acquired all the customer's property in the cheque by virtue of the fact that its lien exceeds the value of the cheque.

18. I conclude, therefore, that the plaintiff bank was collecting this cheque for itself alone. Does this mean that the plaintiff bank falls outside the protection of section 84? My answer is a firm, "no". The words "for collection" in section 84 are to be read without any qualification. Westminster Bank Ltd. v Zang ⁽⁶⁾ is authority for that. In the words of Viscount Dilhorne at page 218: -

"I regard the language of that section as clear and unambiguous. I can see nothing in the section nor in the other sections of the Act from which it is to be inferred that 'collection' in section 2 (our section 84) means collection only for the payee's account. If that had been the intention of Parliament, it could easily have been expressed."

 

19. It is instructive to contrast section 84 with section 79(1) and section 80 of the Ordinance. In section 79(1), when the legislature wishes to make provision for a situation where a bank is to be confined to acting as an agent for collection, it uses the formula "except when crossed to an agent for collection being a banker". Likewise, in section 80 one sees the formula "or his agent for collection being a banker". If the words "for collection" in section 84 are to be limited in the way the defence suggests it is surprising that the legislature has not made its intention explicit in the way it has in section 79(1) and section 80. Nothing would have been easier than to draft section 84 along the lines "........delivers to him as agent for collection ......."  However the legislature chose not to include those words, and I see no justification for writing them in.

20. Section 84 is not alone in employing the words "for collection" without qualification. The same form is used in section 77(5) and (6). There is no justification which I can see for writing in the words "as agent" in either section 77(5) or (6). Likewise I see no justification for writing those words into section 84.

21. Although Milmo J. in Barclays Bank Ltd. v Astley Industrial Trust Ltd. ⁽⁵⁾ gave an illustration of how a banker can both collect for itself and on behalf of its customer, that case was one where in fact the bank was collecting solely on its own behalf. That the bank was collecting solely on its own behalf turned out to be no impediment when, as a holder in due course, it sought to recover from the drawer of a cheque. That case is wholly on all fours with the one before me, and I fail to see any reason why the plaintiff bank, as a holder in due course, is not entitled to recover from the defendant company on the cheque.

22. Thus, by adopting a literal construction of the words "for collection" in section 84 and by refusing to treat the section as if it were meant to include the words "as agent", I have arrived at the conclusion that a banker collecting for itself falls within the ambit of the section. An identical result is reached by adopting a purposive construction of this section. Section 84 was part of a legislative effort to do away with the unproductive effort involved in the indorse-ment of cheques. Denning LJ in Westminster Bank Ltd. v Zang ⁽⁶⁾ at page 201, having described the background to this legislation, went on to say:-

"It is plain to me that the intent of Parliament was to get rid of all the unproductive effort involved in indorsement of a cheque but to do so without impairing its value as a receipt."

 

The factual situation which the legislature had to take into account is lucidly described in paragraph 63 of the report of the Mocatta Committee which preceded the enactment of the legislation:-

"We see an important difference between cheques collected by banks and cheques encashed over the counter. Where a cheque is collected by a bank it is possible to ascertain the account to which it has been credited and hence the identity of the actual recipient, and this will continue to be so whether the cheque is indorsed or not. Where, however, cash is paid against a cheque the identity of the recipient of the payment cannot afterwards be established by the same process of enquiry, and the presence of an indorsing signature is thus a most important link in the chain of evidence."

 

23. The legislation which resulted from the work of the Mocatta Committee - in the case of Hong Kong our sections 83 to 88 of the Ordinance- in essence did nothing to alter the practice whereby indorsement is a necessity in the case of encashment at the bank's counter, but introduced a change in the law to the effect that where the payee of an order cheque deposited it with his bank for collection an indorsement was no longer necessary.

24. Adopting this purposive approach, it can readily be seen that there is no reason why there should be an indorsement in the present case. This was a crossed cheque which resulted in credit to the payee's account. As a receipt serves no useful purpose in such circumstances, there is no point in having an indorsement.

25. This leads into what could be described as the main plank of the defendant company's argument. For the defence, immense weight was placed on the following passage from Sheldon and Fidlers Practice And Law Of Banking (Eleventh Edition) at page 195:-

"Clearly a banker has given value for a cheque if he has cashed it for a customer. In that event he would be collecting the cheque for himself and as s. 2 of the Cheques Act 1957 would not apply, it would be necessary for the banker to obtain the customer's indorsement on the cheque"

 

26. Really, everything depends on what is meant by "cashed" in that passage. I think that all that is being referred to there is a case where a customer cashes a cheque over the bank's counter. In such circumstances, an indorsement is still necessary because there will be no credit to the customer's account to act as a substitute for a receipt. It is not because the banker is collecting for himself in such circumstances that an indorsement is not required but because there has been encashment without any crediting to a customer's account. That passage from Sheldon cannot really be faulted, as far as it goes. However, the defence in effect want to read words into it that are not there. The defence asked the court, in effect, to read that passage as if it stated "In that event he would be collecting the cheque for himself, so section 2 of the Cheques Act 1957 would not apply and it would be necessary for the banker to obtain the customer's indorsement on the cheque" or, alternatively, "Whenever he collects the cheque for himself, section 2 of the Cheques Act would not apply and it would be necessary for the banker to obtain the customer's indorsement on the cheque".

27. I see no justification for putting the strained interpretation on that passage from Sheldon which the defence urge upon me.

28. My conclusion is that both on a literal and a purposive interpretation of section 84, a banner who collects for himself comes within the ambit of the section. More particularly, the plaintiff bank can be seen to satisfy all the requirements of section 84 so that it is entitled to recover from the defendant company on the cheque.

29. Perhaps a word should be said about whether there is any significance in the fact that the cheque in the present case was postdated. I do not think that anything turns on the post-dating in the present case, and this feature in no way serves to prevent the plaintiff bank from becoming a holder in due course. On the topic of post-dating, Paget on Banking has the following to say at page 188:-

"When a post-dated cheque is sent to a banker for collection before the ostensible date, the banker either presents it at once or advises his customer that he is holding it for instructions or the arrival of the due date. If he takes it for value by letting the customer draw against it he becomes holder in due course and if it is dishonoured could sue on the cheque after the ostensible date. As post-dated cheques are recognised by the Act, s. 13(2), they cannot be said not to be complete and regular by reason of the post-dating."

 

30. Lastly, does anything turn on the fact that the plaintiff bank did not make a debit entry in Mr. Lo's account after the cheque was dishonoured on 14th March 1983? I see nothing significant in this omission. Undoubtedly, the plaintiff bank could have debited Mr. Lo's account, if it had so chosen, but the following passage from Paget at pages 361 and 362 reveals how such a course might have prejudiced the plaintiff bank in that it might have lost its lien:-

"Return of cheque on dishonour

        The right to debit the customer with a returned cheque, notwithstanding that it has been credited as cash, was recognised by Lord Lindley when he said in the Gordon case:

 

'It is no doubt true that if the cheque had been dishonoured, Jones (the customer) would have become liable to reimburse the bank the amount advanced by it to him when it placed the amount to his credit. This he would have to do where any cheque, crossed or not, was placed to his credit, and was afterwards dishonoured.'

 

        Prior to the Gordon case, in Re Mills Bawtree & Co, ex parte Stannard, Vaughan Williams J speaking of cheques paid in by Stannard, said as follows:

 

'The answer to this seems to me to be twofold. First, in all probability the cheques paid in were indorsed as Messrs. Stannard. This would give the bankers the right to debit their customer, even though they originally received the cheque as their property as a loan to them. Secondly, even if the cheque was not indorsed, the result in my opinion would be the same, because I think that, just as a cheque may operate as a conditional payment to be avoided if the cheque is not honoured, so a cheque may operate as a conditional loan, creating a debt by the recipient of the cheque to be avoided if not honoured.'

 

       Where the account for which the cheque is collected is in debit at the time of dishonour the banker has the choice of increasing the overdraft or of debiting a suspense account with a view to reserving his rights against other parties. The effect of debiting the customer's account may be to relinquish the lien, as was evident in Westminster Bnak Ltd v Zang and the banker would not acquire a fresh lien by taking the cheque back, as it would not have come into his hands qua banker but, presumably, as a plaintiff in an action on the instrument."

 

31. That the plaintiff bank does not appear to have debited Mr. Lo's account, nor to have opened a suspense account is no more than a red herring, in my opinion, and has no bearing on whether the plaintiff bank took this cheque for collection and whether it has become a holder in due course.

32. In view of the foregoing, I hold the defendant company liable to the plaintiff bank on the cheque and accordingly enter judgment for the plaintiff bank in the sum of $550,000.

(1) 1967 HKLR 1

(2) 1977 HCA 3469

(3) 1983 HCA 662

(4) (1965) 2 All E.R. 98

(5) 1970 2 QB 527

(6) 1966 AC 182