XCHRX Wah Shing Sports Trading Co. Ltd. v. Ho Chi Hung Billy t/a Sports Station and Another

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 16358 OF 2000

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J U D G M E N T

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1. This is an Order 14 summons. The Plaintiff sue on two cheques for $106,944.90 and $13,472 respectively, drawn on the 1st Defendant's account and signed by the 2nd Defendant as the authorised signatory of the cheques. Both cheques were returned to the Plaintiff's marked "Refer to drawer". It is necessary for me to relate some of the background to this matter in order to understand how the action arises and the defences now put forward by each defendant.

2. The company, Sports Station, started to operate as from 1 September 1991 with Mr Billy Ho, the 1st Defendant, as its sole proprietor. It ceased to trade on 30 September 1993. It is significant to observe that the two cheques now sued on were drawn nearly 5 years later on 30 June 1998 and 15 July 1998 and signed on behalf of Sports Station by the 2nd Defendant, Mr David Shum, its managing director as he is described on the cheques.

3. Sports Station was registered as a sole proprietorship in the 1st Defendant's name as a retailer of sporting goods. The Business Registration Certificate is at page 14 of the Bundle. In his third affirmation starting at page 72, Mr Ho has indicated that the business was operated as a partnership in which he had 20 per cent and the 2nd Defendant, Mr Shum, had 50 per cent, with two other persons holding the balance of the shares, but these arrangements have no bearing on the issues which I must decide.

4. The bank account upon which these two cheques were drawn was opened on 6 March 1992 with the Kwong On Bank, account No. 76-002-4242-3. The bank's mandate is at page 138. Mr Ho's name is there as sole proprietor. Mr Shum is the only person who is authorised to sign cheques for and on behalf of Sports Station and the firm's stamp or chop is also required to appear with his signature on the cheque. Mr Ho says that out of ignorance and inadvertence his signature was not put onto the mandate and so all of the company's cheques were issued under Mr Shum's sole signature. It seems to me that the fact that for one reason or another Mr Ho failed to have his signature entered on the mandate as an authorised signatory cannot affect the outcome of this matter.

5. In 1992, Mr Ho and Mr Shum started another company called Germany Sports which was also a retailer of sporting goods. Towards the end of 1992 they also started USA Sports Company which was established from the profits of Sports Station and Germany Sports.

6. In 1993, Mr Ho fell-out with Mr Shum and Mr Ho says that he withdrew from all his business ventures with Mr Shum. As I have already recounted, Sports Station ceased business on 30 September 1993 and this was reported to the Business Registration office by Mr Shum. This is evidenced at page 16 by a certificate from The Commissioner of Inland Revenue.

7. What now follows cannot affect the Plaintiff's position in the action but I record it as part of the background together with the caveat that as between the two defendants many of the following facts remain in dispute.

8. Mr Ho says that upon the cessation of Sports Station's business, he had expected Mr Shum to return to him his investment in the company but he was told that there was no money to do that, this notwithstanding that by prior agreement Mr Ho had transferred back all his shares in Sports Station, Germany Sports and USA Sports Company. He also informed those three companies' suppliers that he was withdrawing from these companies. Mr Ho says, which is denied by Mr Shum, that Shum had told him that he had informed the bank that the company had ceased to trade. As a result, Mr Ho says that "inadvertently", to use his expression, he did not contact the bank himself and asked them to close the account.

9. Following Mr Ho's withdrawal from the businesses, Mr Shum continued to conduct his own sports retail business from the shop premises previously occupied by Sports Station. As such, Mr Ho says that Mr Shum would have continued to receive the bank statements on the Sports Station account and any other correspondence relating to that account.

10. Between 1993 and 1996, Mr Ho went to work for another company. On 12 March 1996, Speed International Hong Kong Limited ("Speed") was incorporated by Mr Shum who then invited Mr Ho to become a shareholder and a director without any capital contribution in view of his capital injection into Germany Sports and Sports Station. He was allocated one share and Mr Shum retained 9,999.

11. On 14 March 1996, USA Sports Company and Sports Station Company, which should not be confused with Sports Station, began to operate as trading outlets for Speed. Mr Ho says that he again became disillusioned with Mr Shum and on 3 November 1997 he resigned as a director of Speed and on 14 January 1998 returned his one share in Speed. On 1 February 1998, USA Sports Company and Sports Station Company ceased trading (see page 96 of the Bundle).

12. Whilst the reasons for the breakdown in relations between Mr Ho and Mr Shum may be in dispute, the dates which I have drawn from public records are not.

13. Against that background, I now turn to the precise circumstances in which the two cheques that are the subject of the action came to be issued by Mr Shum. Both were in payment of goods ordered by and delivered to USA Sports Company by the Plaintiffs. They did not relate to any transaction by the 1st Defendant, that is to say Mr Ho trading as Sports Station.

14. As appears in the second affirmation of Mr Chan Kai-yip, the Plaintiff's senior sales representative, paragraph 7 at page 19, a number of cheques drawn on this account had in the past been used to settle debts due to the Plaintiff, either from Speed or USA Sports. A list of those payments appears at page 65 as Exhibit 4 of Mr Chan's affirmation. All of these cheques are dated many years after Sports Station, the 1st Defendant, ceased to trade, the last three being in 1998 which is after Mr Ho had ceased his association either as director or shareholder of Speed International Hong Kong Limited and its subsidiaries, Speed and Sports Station Company.

15. From those facts which appear to be common as between the two defendants, Mr Ho and Mr Shum, Mr Ho's case is that he had absolutely no knowledge of how Sports Station's bank account was being operated or that it was being operated at all. He assumed the account had been closed or at least was permanently dormant. The cheques which are the subject of this action were drawn by Mr Shum without his knowledge and authority and he therefore is not to be held liable for them.

16. The matter falls to be decided very much as a question of law, firstly, as between the Plaintiffs and the 1st Defendant. If the Plaintiffs succeed on the application and get summary judgment against the 1st Defendant, then it must be a matter for the 1st Defendant, Mr Ho, to take proceedings to be indemnified by the 2nd Defendant, Mr Shum. If the Plaintiffs fail to obtain summary judgment against the 1st Defendant, then, as Mr Wong for the Plaintiffs rightly accepts, he must go to trial in order to decide whether the Plaintiffs will need to show that the 2nd Defendant is in breach of warranty or authority in signing and issuing these two cheques, but that issue can only arise in the event that the Plaintiffs fail in the action against the 1st Defendant.

17. On any view, therefore, no summary judgment can be entered against the 2nd Defendant. If there is summary judgment against the 1st Defendant that concludes the matter and subject to the question of costs, the action against the 2nd Defendant must fail. If the 1st Defendant gets leave to defend, then the question of the 2nd Defendant's liability must turn on the outcome of the Plaintiff's action against the 1st Defendant.

18. From that analysis of the respective parties' positions as between themselves, I now turn to consider the case between the Plaintiffs and the 1st Defendant.

19. Mr Wong for the Plaintiff submits that this essentially is a case where the 2nd Defendant who signed the cheques on the 1st Defendant's account had actual and/or apparent authority to do so. An analysis of what is apparent or ostensible authority is to be found in the judgment of Diplock LJ (as he then was) in Freeman & Lockyer v Buckhurst Park Properties Limited [1964] 1 All ER 630 at 644C to G:

"An actual authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts including any proper implications from the express words used, the usages of the trade or the course of business between the parties. To this agreement the contractor is a stranger. He may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the actual authority, it does create contractual rights and liabilities between the principal and the contractor maybe that this rule relating to undisclosed principles which is peculiar to English Law can be rationalised as avoiding circuity of action for the principal could in equity compel the agent to lend his name in an action to enforce the contract against the contractor and would at Common Law be liable to indemnify the agent in respect of the performance of the obligations assumed by the agent under the contract. An apparent or ostensible authority on the other hand is a legal relationship between the principal and the contractor created by a representation made by the principal to the contractor intended to be and in fact acted on by the contractor that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the apparent authority so as to render the principal liable to perform any obligations imposed on him by such contract. To the relationship so created, the agent is a stranger. He need not be, although he generally is, aware of the existence of the representation. The representation when acted on by the contractor by entering into a contract with the agent operates as an estoppel preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract."

20. Reliance is also placed on Hely-Hutchinson v Brayhead [1967] 3 All ER 98, where at 102 Lord Denning MR stated that:

"Actual authority may be expressed or implied. It is expressed where it is given by express words. It is implied when it is inferred from the conduct of the parties and the circumstance of the case."

21. Mr Wong submits that in this case the 1st Defendant has put the 2nd Defendant into possession of the company's chequebook and stamp or chop with the authority to draw and issue cheques on the 1st Defendant's behalf. He has held the 2nd Defendant out as having that authority and in particular where such cheques had previously been issued in favour of the Plaintiffs and those cheques were honoured (see the list at page 65), the 1st Defendant cannot now be heard to say that he is not bound by what the 2nd Defendant has done.

22. As against the Plaintiffs, the 1st Defendant is estopped from denying the authority of the 2nd Defendant. His recourse can only be to seek an indemnity against the 2nd Defendant if he can show that the 2nd Defendant had no authority as between the two of them to issue those cheques.

23. Mr Lau for the 1st Defendant says that this matter is covered by section 25 of the Bills of Exchange Ordinance, Cap. 19, which is in these terms:

"A signature by procuration, (and this is such a case), operates as notice that the agent has but a limited authority to sign and the principal is only bound by such signature if the agent in so signing was acting within the actual limits of his authority."

24. Mr Lau therefore submits that there was no actual authority given to the 2nd Defendant to use the bank account for any other purpose such as to settle the private debts of the 2nd Defendant or to settle the debts of other businesses controlled and operated by him. He further submits that it is inconceivable, given the background which I have already recited, that the 1st Defendant would have expressly or impliedly he authorised the 2nd Defendant to use the bank account of Sports Station, the company that had ceased trading in 1993, to finance the business operations of USA Sports, a company under the control of the 2nd Defendant, particularly where the 1st Defendant was no longer connected with that company, he having relinquished his directorship and shareholding in it.

25. Mr Lau draws attention to the case of Reckitt v Barnett, Pembroke & Slater Limited [1929] AC 176, which concerned a Power of Attorney given to an agent to deal with his principal's business affairs during the latter's absence overseas. A subsequent letter was issued by the principal to the principal's bank to the effect that the agent was given the power to draw cheques on the principal's account without restriction. The agent then used the account to pay for his own private debts. The House of Lords held that those words required a narrow interpretation. The words could not give the agent unlimited authority to issue cheques out of the principal's account to settle his own debts.

26. The case of Morrison v Kemp [1912] 29 Times Law Reports 70 is to similar effect. At page 71, Darling J stated that section 25 of the Bills of Exchange Act operates as a statutory notice to the third party of a limited authority of the agent in issuing the cheque and that the third party should seek confirmation of the actual authority. This follows from Attwood v Munnings [1827] 7B and C, 278, where at page 283 Bayley J said:

"This was an action on an acceptance purporting to be by procuration and therefore any person taking the bill would know that he had not the security of the acceptor's signature but of the party professing to act for him in pursuance of an authority from him. The person taking such a bill ought to exercise due caution for he must take it upon the credit of the party who assumes the authority to accept and it would be only reasonable prudence to require the production of that authority."

27. From this line of cases, Mr Lau submits that it must be incumbent upon the Plaintiffs who were accepting payment not from their debtor, USA Sports Company, but from a third party, the 1st Defendant, to enquire of the 1st Defendant whether the 2nd Defendant was authorised to draw these cheques on the 1st Defendant's account for the purpose of settling USA Sports Company's debts.

28. Mr Wong's reply to that comes from a passage at the foot of page 70 and the top of page 71 of Byles On Bills of Exchange, 26th Edition, where it is stated that:

"The apparent authority is however the real authority. Therefore if the agent has in fact authority, his abuse of it does not affect a bone fide holder for value."

29. Whilst that, of course, is correct, there is in my judgment the very real issue in this case as to whether the 2nd Defendant had any authority to issue these cheques. This can only be determined after a trial when the court will have had the benefit of hearing and seeing the witnesses examined and cross-examined. The matter is simply not as clear-cut as Mr Wong suggests and I find the line of cases which Mr Lau has drawn attention to very much in point. This, after all, is a case where third party cheques were being used to settle a debt owing to the Plaintiffs.

30. There is clearly a triable issue as to whether the Plaintiffs should have made enquiry of the 1st Defendant whether the 2nd Defendant had authority to settle USA Sports Company's debts by use of that account. The fact that this had been done on a number of previous occasions is, for present purposes, neither here nor there. There are real issues here which can only be determined following a trial.

31. Both defendants therefore must have unconditional leave to defend. Accordingly, the summons must stand dismissed.

32. Parties to file list of documents within 14 days. Inspection 7 days thereafter. Exchange of witness statements 21 days thereafter. The witness statement to stand as the parties' evidence-in-chief which may be the parties present affirmations. Thereafter, liberty to set down the action for trial, two days, judge alone.

33. Costs in the cause.