XIE SHILI v. CHEUNG WAI KEUNG

HCA 2889/2017

[2018] HKCFI 2431

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2889 OF 2017

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REASONS FOR DECISION

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INTRODUCTION

1.  There were a total of three summonses before me but the defendant informed the court at the hearing that he decided not to proceed with the amended summons dated 19 March 2018.  I therefore dismissed that summons with costs to the plaintiff.

2.  This leaves the plaintiff’s application for summary judgment and the defendant’s application for security for costs.  At the conclusion of the hearing, I granted unconditional leave to defend to the defendant and ordered the plaintiff to provide security in the total sum of HK$400,000 with reasons to be handed down later which I shall do now.

BACKGROUND

3.  The plaintiff’s claim is for HK$6.9 million (equivalent to RMB 6 million) being the amount of a dishonoured cheque drawn by the defendant in favour of the plaintiff (“Cheque”). The Cheque was dated 29 November 2017 and presented on the same date. 

4.  The defendant’s case is as follows:

(1)   The plaintiff is a PRC national and used to work as the General Manager of a company known as 常德宏進農副產品批發市場有限公司 (“PRC Company”) from 2014 to about 27 March 2017. That company was wholly owned by CAPC.  As the General Manager, the plaintiff was responsible for managing and developing a piece of land in Hunan, PRC (“Land”) owned by the PRC Company.  

(2)   The plaintiff and the defendant are parties to an agreement in Chinese dated 7 November 2016 for the sale and purchase of 5% shares (the “Purchase”) in a company known as China Agri-Products (Changde) Limited (中國農產品 (常德) 有限公司) (“CAPC”) held by the plaintiff (“Agreement”).  A Mr Wilson Wu (“Wu”) is both a witness and a third signatory to the Agreement.

(3)   The Agreement provides, inter alia, that: (i) the purchase price is RMB 6 million (the “Price”); (ii) the Price is to be paid in four installments from 15 December 2016 to 30 March 2017; (iii) in the event that payment was not made in accordance with the agreed schedule, the outstanding balance would be subject to interest at 10% per annum.

(4)   When the Agreement was signed, the defendant also signed the Cheque but left the date in blank.   

(5)   The Cheque was given “purely to demonstrate his sincerity andgood faith in completing the Agreement. It was never meant to be presented by the Plaintiff for payment as the payment of the purchase price had been separately provided for in the Agreement …”

(6)   There is a remark at the bottom of the Agreement which provides that: “备注 (二) ：暂收一張港元陆佰玖拾万元(折合人民币陆佰万元) 支票”.  This remark was made because the Cheque was provisionally received and expected to be returned upon completion of the Purchase.

(7)   Between 15 December 2016 and 26 April 2017, the defendant paid the plaintiff the total sum of RMB 4.5 million in eight instalments. The said sums were not paid in accordance with the agreed timetable due to the defendant’s own cashflow problem and they were paid in RMB as opposed to HKD for the plaintiff’s own convenience.  In any event, the plaintiff did not complain.

(8)   Despite the above payments (which represented 75% of the Price), the plaintiff had failed to acquire any shares in CAPC and was not in a position to perform his obligation under the Agreement.  The defendant therefore stopped making further payments. 

(9)   Given the defendant’s inability to transfer the subject-matter ofthe Agreement to the plaintiff, the presentation of the Cheque was wrongful and the plaintiff is not entitled to the sum claimed due to a total failure of consideration.

(10)   In addition, the Defendant is entitled to counterclaim the sum of RMB 4.5 million (being the payments already made to the plaintiff). I note that no counterclaim has yet been pleaded at this stage.  

5.  It appears to be common ground that there were two copies of the Agreement but nothing turns on this.

6.  The plaintiff alleged a wholly different set of facts as follows:

(1)   The PRC Company was engaged in developing the Land since 2012 (“Land Development Project”).  Both the plaintiff and Wu were investors in the PRC Company.  In about 2014, it wasclear that further funds were needed for the Land Development Project and hence they were introduced to one Mr Yeung and one Mr Chi.  This led to a Financing Agreement dated 12 March2014 signed by Wu, the plaintiff and Mr Chi but the said agreement fell through thereafter.

(2)   The defendant then came into the picture in early 2015.  To recognise the plaintiff’s investment and efforts in developing the Land, the defendant promised in the presence of Wu that hewould be entitled to 5% shareholding in CAPC (“Oral Promise”).  He suggested that the 5% shares would be transferred to the plaintiff in due course after the defendant formally acquired his shareholding in CAPC.  It was on the strength of the Oral Promise that the defendant was allowed to invest in the Land Development Project.

(3)   Thereafter, the defendant eventually became the majority shareholder of CAPC via his shareholding in China Agri-Products (Changde) Logistics Ltd. (“CAPCL”) and United Fame International Limited (“United Fame”).  Wu transferred 60 (out of 100) shares in United Fame to the defendant on 8 May 2015.

(4)   The allegation that the plaintiff promised to acquire 5% shareholding of CAPC and then sell the same to the defendant was untrue.  Quite the contrary, the plaintiff was entitled to 5% beneficial interest in CAPC because of the Oral Promise.

(5)   The defendant, seeking to take back his words, offered to purchase the plaintiff’s entitlement instead.  It was eventually agreed on 7 November 2016 that, instead of issuing or transferring 5% shareholding of CAPC to the plaintiff, the defendant would purchase from him the said entitlement for RMB 6 million.

(6)   The Cheque was given by the plaintiff as guarantee for the payment of the Price under the Agreement and was already dated 29 November 2017 when it was handed to the plaintiff.

(7)   Whilst the plaintiff did receive RMB 4.5 million subsequently, it had nothing to do with the Agreement.  The money was advanced so as to reimburse him for payments he made for the Land Development Project.  The plaintiff is, however, unsure about who made the payment.

(8)   In addition to the 8 payments for the RMB 4.5 million, the plaintiff also received RMB179,000 from either the defendant or Wu.  The Wechat messages between him and the defendant on 22 January 2017 demonstrated that the money was intended for payment of wages of workers in the Mainland as Chinese New Year was then approaching.

7.  In response, the defendant emphasised that as at the date of the Agreement, he was not the majority shareholder of CAPC.  Through various corporate entities, he had (or was in control of) 43.5% of its shareholding.  Since his involvement in the Land Development Project in 2015, he had consistently increased his shareholding in CAPC and this was said to be in line with the purpose of the Agreement.

THE PLAINTIFF’S ARGUMENTS

8.  Mr Lau for the plaintiff argued that this is an open-and-shut dishonoured cheque case and his contentions could be summarised as follows:

(1)   The Agreement is a result of the defendant’s failure to fulfil the Oral Promise; hence the word “repurchase” (“回購”) therein. In fact, the Agreement does not require the plaintiff to acquire the 5% shares nor envisage an actual transfer of shares.  There could therefore be no question of a failure of consideration, partial or total.

(2)   The Cheque was drawn as a collateral security for the defendant’s obligation to pay for the plaintiff’s beneficial interest in CAPC.

(3)   The suggestion that the Cheque was drawn for the purposes of a genuine share purchase is incredible because “it does not make any commercial sense that D would agree to pay (or pre-pay) for some non-existent and yet to be acquired interest by instalments”.

(4)   The parol evidence rule disallows the defendant from adducingoral evidence which contradicts the terms of the Cheque (which operates as an unconditional order for payment).  Therefore, the defendant is barred from alleging that the Cheque was meant to be a sincerity cheque.

9.  On the other hand, Mr Leung for the defendant argued that:

(1)   The alleged events which led to the Agreement are fabricated.  In particular, the defendant had never made the Oral Promise to the plaintiff.

(2)   The Cheque was delivered to the plaintiff in escrow intended as a gesture of goodwill, which is a “special purpose” under section 21(2)(b), Bills of Exchange Ordinance (Cap 19) (“BEO”). It was never intended to transfer property to the plaintiff.

(3)   The plaintiff failed to transfer 5% shareholding to the defendantas agreed under the Agreement, which constitutes a total failure of consideration. The defendant therefore has a complete defence to the plaintiff’s claim.

PRINCIPLES

10.  Section 21 of BEO (Delivery) provides, inter alia, that:

“ (1) Every contract on a bill, whether it is the drawer’s, the acceptor’s or an indorser’s, is incomplete and revocable, until delivery of the instrument in order to give effect thereto …

(2) As between immediate parties, and as regards a remote party other than a holder in due course, the delivery—

…

(b)   may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill;”

11.  For the purposes of section 21(b), extrinsic evidence (includingoral evidence) may be adduced to show that a cheque is not intended to have the effect of transferring property from the drawer to the drawee: Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes (17^thEd; 2009) at §§2-152 – 2-153.

12.  Such evidence might be particularly probative where the partiesput forward two completely different versions of events leading to the drawing and delivery of the cheque: see, for example, Lee Man Fai v Lee Yu Leung[2018] HKCFI 1429 per Deputy Judge Simon Leung at §§15 – 18.

13.  Insofar as a total failure of consideration is concerned:

(1)   It occurs when the party against whom liability is sought to be enforced received no part of the benefit for which he bargainedin the transaction which led to him becoming a party to the bill:Chalmers and Guest at §4-008.

(2)   In the context of bills of exchange, it is trite that, as between immediate parties, a total failure of consideration has the same effect as its original and total absence and, is thus a complete defence to an action brought on the bill: Byles on Bills of Exchange and Cheques(28^th Ed; 2007) at §19-041.

DISCUSSION

Section 21 BEO

14.  As a starting point, the plaintiff and the defendant presented two wholly different narratives which they suggested gave rise to the drawing of the Cheque:

(1)   The plaintiff said that the Cheque was drawn as a guarantee for the Price under the Agreement.  It was presented as a result of the defendant’s failure to pay the balance to the plaintiff in accordance with the agreed schedule.

(2)   By contrast, the defendant said that the Cheque was drawn for demonstrating his sincerity for a genuine share transfer transaction, under which the plaintiff undertook to transfer 5% shareholding of CAPC.

15.  Notwithstanding the entirely different versions of events, the legal position is relatively straightforward:

(1)   If the plaintiff’s account were believed, he would be entitled to present the Cheque as long as the defendant defaulted in payment of the Price (which did materialise when the defendant failed to pay the balance thereof).

(2)   On the other hand, if the defendant’s narrative were believed, he would have a valid defence under section 21 of the BEO because the Cheque would be a mere escrow not intended by the parties to possess the qualities of a cheque.

16.  The disposition of the present matter therefore hinges on whose evidence is to be accepted by the Court.  This is, plainly, a question of fact which should be resolved at trial, unless the defendant’s evidence is not capable of being believed.

17.  Allegations that a cheque is merely intended to show the sincerity of the drawer is not uncommon.  Some attempts were successful, whilst some were not. In this regard:

(1)   Although “a court would normally be extremely skeptical of an assertion that the delivery of a cheque served no purpose other than to show that the drawer of the cheque was sincere in his intention to perform his contractual obligations”, each case turns on its own facts: Chung Fai Holdings Ltd v Tattune Development Ltd (unreported, HCA 13669/1997, 16 April 1999) per Keith J (as he then was) at p 5.

(2)   If a given transaction takes place in a trade or a business where the drawing of such a “sincerity cheque” is customary, the Courtwould readily draw an inference to reflect this common practice: see Phoneyork Co Ltd v Chesson International (Holdings) Ltd (unreported, HCA 2192/2007, 28 May 2012) per Recorder Yuen SC at §59 (in the context of the residential properties market in Hong Kong).

(3)   Further, if some aspects of a transaction would be rendered inexplicable unless the cheque in question is construed as a sincerity cheque, the Court would incline towards that construction.  The inherent probability of factual case advanced is important: see for example Phoneyork at §§65 – 69.

18.  In the present case, I am satisfied that the defendant has established an arguable defence that the Cheque is a sincerity cheque.

19.  As demonstrated from the case law referred to above, the idea that the provision of a cheque is only a symbolic gesture is not inherently inconceivable.  It all depends on the underlying circumstances.  It might therefore well be true that the defendant thought the drawing of the Cheque (albeit devoid of legal effects) would somehow assure the plaintiff. 

20.  More importantly, if the Cheque was, as the plaintiff contended, drawn to act as security for the Price, it is hard to see why (on the plaintiff’s own case) the Cheque was dated 29 November 2017. Indeed, in this situation, one would expect the Cheque to be dated 30 March 2017, which represents the due date of the last installment.

21.  That being said, contrary to the defendant’s submissions, I am of the view that the words “暫收” in the Agreement does not have much significance.  As a matter of semantics, the word “provisional” could mean at least two things in this context: (i) it could mean that the Cheque is liable to be taken back by the defendant in the manner that he suggested; or (ii) it could mean that the Cheque is to be returned to the defendant only upon satisfaction of the debt owing to the plaintiff, which would support the plaintiff’s narrative.  In this light, the critical evidence for the resolution of this case remains the parties’ testimonies, which should be examined at trial.

22.  There are, admittedly, some areas of weaknesses in the defendant’s case.  For instance, the phrase “回購” in the Agreement tends to suggest that the defendant was acquiring what he had previously sold to or otherwise conferred on the plaintiff.  This would in turn lends credence to the plaintiff’s version of events since the plaintiff maintained that the defendant was trying to purchase his entitlements under the Oral Promise.  Further, what was actually discussed when the Agreement was signed and when the Cheque was handed over could be pleaded in a clearer manner. 

23.  However, the plaintiff’s evidence is not watertight either and there are indeed a number of allegations that are very difficult to believe.  For instance, it is hard to imagine why the defendant, as a new investor whose funds were needed for the Land Development Project, would need to make the Oral Promise in order to participate in it especially when there was already a failed attempt to raise funds.  This is one important aspect of the plaintiff’s case that is inherent improbable. 

24.  All in all, I am satisfied that the defendant has raised a credible defence based on the fact that the Cheque is, on a proper analysis, a sincerity cheque.

Total failure of consideration

25.  Whether the defendant has a credible defence premised on a total failure of consideration likewise depends on whose factual account is accepted by the Court.

26.  If the Court agreed with the plaintiff and took the view that theCheque was, properly characterized, a collateral security for the defendant’s due payment of the Price, then the defence is bound to fail because the transfer of 5% shareholding (which is the purported consideration under the Agreement) would not form part of the transaction at all.

27.  If, however, the Court is to accept the defendant’s narrative, then the failure of the plaintiff to transfer the 5% shareholding would constitute a total failure of consideration under the Agreement, which would entitle the defendant to lawfully dishonour the Cheque.

28.  It is difficult to resolve the present factual disputes without hearing viva voce evidence.  For example, contrary to the plaintiff’s suggestions, it is not wholly inconceivable for the defendant, knowing that the plaintiff did not at the time own the 5% shareholding, to enter into a share transfer agreement with the plaintiff.  For instance, the defendant might be under the assumption that the plaintiff, as a loyal employee in CAPC, would acquire the said shareholding upon the successful completion of the Land Development Project.

29.  The crucial point is that these genuine disputes of fact should be resolved at trial, rather than on affidavit evidence.

30.  In light of the aforesaid, I am of the view that granting unconditional leave to defend to the defendant is the appropriate order to make.

Security for costs

31.  There is no dispute that the plaintiff is a “foreign plaintiff” as he ordinarily resides in the PRC.  Although the plaintiff referred to the fact that he has a bank account in Hong Kong, there is also no evidence suggesting that he has any meaningful assets in this jurisdiction.  The only point taken by the plaintiff in respect of this application is on the merits of his claim but given the conclusion I have reached in the summary judgment application, an order giving the defendant security is inevitable.  Mr Lau accepted that HK$400,000 is a reasonable sum in the circumstances.