XCHRX SILVERLINK (HONG KONG) FINANCE LTD. v. ZHANG SABINE SOI FAN

HCA2783/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2783 OF 1998

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J U D G M E N T

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1. The Plaintiff's claim in this action is for non-payment of a cheque drawn by the Defendant in the sum of $38,434,600 as pleaded in the Statement of Claim. The Plaintiff applied for summary judgment on 24th March 1998. This application was heard by Master Bennett on 8th October 1998 who ordered that judgment be entered in the sum of $7,000,000 to the Plaintiff and gave unconditional leave to the Defendant to defend the balance with costs in the cause and with certificate for Counsel. The Defendant is now appealing that order and contending that unconditional leave to defend should be given to the whole claim.

2. I must, however, deal first with a preliminary point of procedure. After the Master made his order on 8th October 1998, the Defendant lodged a Notice of Appeal to a Judge in Chambers on 13th October 1998. The Plaintiff did not file any formal Notice of Appeal from the order of the Master but did by letter dated 4th November 1998 inform the solicitors for the Defendant that since the appeal is a complete re-hearing of the O.14 Summons, they will be seeking judgment for the full sum claimed and will be asking the judge to reverse the leave given by the Master to defend the balance of the claim.

3. In short the Plaintiff is seeking to cross appeal the Master's order.

4. In this context, I was referred to the case of Europa Property and Finance Services Ltd. v. Stubbert, The Times 25th November 1991, where the Court of Appeal in England held that on a defendant's appeal against a master's order, under O.14 of the Rules of the Supreme Court, giving conditional leave to defend, the judge in chambers, if satisfied that there was no defence to the claim, was entitled, in the exercise of his discretion under O.14 r.3, to give summary judgment for the plaintiff, notwithstanding that no formal notice of cross appeal had been given by the plaintiff.

5. Furthermore, it has always been accepted that an appeal from a master to a judge in chambers is by way of complete re-hearing of the application.

6. On this basis and given the fact that ample notice had been given to the Defendant by the Plaintiff's solicitors of their intention by their letter of 4th November 1998, so that the Defendant was not in any way taken by surprise or prejudiced, I shall treat the Plaintiff's submissions as a cross appeal for summary judgment of the full amount claimed.

The Plaintiff's claim

7. As already stated above, the Plaintiff's claim is a straightforward claim for the dishonour of a cheque drawn by the Defendant in favour of the Plaintiff for the amount of $38,734,600. The cheque, drawn on the Liu Chong Hing Bank Ltd. and dated 20th November 1997 was presented for payment by the Plaintiff on 17th February 1998 and dishonoured by reason of payment having been countermanded by the drawer thereby notice of honour is dispensed with under section 50(2)(c)(iv) of the Bills of Exchange Ordinance.

8. The only claim made by the Plaintiff in the Statement of Claim is for the amount of this dishonoured cheque on the basis of its having been dishonoured upon presentation. No other claim has been pleaded.

The defence raised

9. In a nutshell the defence is that as a result of negotiations conducted on 6th and 9th October 1997 between the Defendant in her capacity as representing Fortune Bell Venture Ltd. ("Fortune Bell") on the one hand and one Madam Wang Dawei representing China Merchants Bank ("CMB") on the other hand, a joint venture agreement was concluded whereby CMB would provide $200 million for the exclusive purpose of purchasing 20,000,000 shares of China Telecom (Hong Kong) Ltd. ("China Telecom") when it was floated some time later in October, such shares to be held for one month before being re-sold. Apart from the Defendant and Madam Wang, these meetings on 6th and 9th October were also attended by representatives from the solicitors firm of Baker & McKenzie being the solicitors for CMB and also representatives from Goldman Sachs (Asia) LLC and Goldman Sachs International (jointly called "Goldman Sachs") with whom Fortune Bell had an account which would be utilized for the joint venture project of buying and holding the China Telecom shares.

10. However, documents prepared for the joint venture and entered into by Fortune Bell were prepared not as joint venture agreements but as loan documents by which the Plaintiff was named as the lender and Fortune Bell the borrower of the $200 million. This dressing up was necessary because under PRC laws, CMB, being a bank operating in the PRC was prohibited from buying or investing in shares or securities.

11. Another company, Ocean Capital Ltd. was the arranger of the loan and a letter from Ocean Capital Ltd. to Fortune Bell dated 9th October 1997 had the effect of taking upon itself to reimburse Fortune Bell for the amount of interest which Fortune Bell would have to pay the Plaintiff under the loan documents for the $200 million loan.

12. Needless to say therefore that all the agreements involving CMB was made orally only and that CMB would not appear as a party in any of the documents signed.

13. There was also a further tri-partite agreement involving the parties to this joint venture agreement as well as Goldman Sachs such that the account held by Fortune Bell with it would hitherto be transferred to the exclusive control of Madam Wang which account would be used to purchase and hold the shares of China Telecom for one month after their acquisition until their disposal.

14. Upon all the necessary agreements relating to this joint venture being entered into, immediately on 9th October 1997, $130 million was remitted by the Plaintiff into Fortune Bell's account with Goldman Sachs and a further $70 million was remitted on 13th October 1997. In effect these funds came from CMB.

15. On or about 23rd October 1997, when China Telecom shares were floated, the Defendant was informed by Madam Wang that there were insufficient funds in Fortune Bell's account with Goldman Sachs to subscribe for the China Telecom shares as there had been unexplained movement of funds and unauthorised trading relating to that account. Madam Wang then asked the Defendant for help to make good the losses and promised to arrange project finance for the Defendant of $400 million. Pursuant to this request the Defendant had paid over sums of $800,000 on 30th October and $1.2 million on 20th November to Madam Wang. Moreover, a cheque for $43,743,600 was also given to Madam Wang on 9th November 1997 but post dated to 20th November 1997. This cheque, however, was returned to the Defendant on or about 20th November in exchange for a Cashier Order for $5 million and the present cheque sued upon. When this cheque and the cheque which was returned to the Defendant were handed over by the Defendant to Madam Wang, there was an understanding between them that the cheques were not to be handed over to the Plaintiff by Madam Wang nor were they to be cashed but was only for record purposes of CMB.

16. In November 1997 the Defendant discovered that Madam Wang's representations as to arranging project finances were untrue, and as a result she stopped payment on this cheque, the subject matter if the claim herein.

17. Apart from these facts relied on by the Defendant, the Defendant also relies on the following defences to the Plaintiff's claim -

(a) That if the loan agreement alleged by the Plaintiff is a genuine loan agreement, then it contravenes section 18 of the Money Lenders Ordinance, Cap.163 in that it does not comply with the form as provided for in that section and furthermore it contravenes section 22 by prohibiting repayment by instalment and by charging compound interest. The Plaintiff is a licensed money lender and is not a person exempted under Part I of Schedule 1 of that Ordinance. The effect of such contravention of that Ordinance is that section 18 provides that the security (in this case the cheque the subject of this claim) is unenforceable.

(b) That the cheque was obtained by the misrepresentation of Madam Wang and that there was no consideration given for the cheque sued upon, alternatively such consideration had wholly failed.

(c) That the circumstances of this case cries out for a thorough investigation which could only be done if the matter went to trial with all relevant witnesses heard and cross-examined.

The Plaintiff's position

18. The Plaintiff accepts that there are numerous areas of disputed facts between the parties. Some of these areas of dispute are as follows :-

(a) The Plaintiff disputes that the agreement between the Plaintiff or CMB on the one hand with the Defendant and Fortune Bell on the other hand was a joint venture agreement to invest in China Telecom shares maintaining that it was a loan agreement. However, the Plaintiff does not dispute that there was a fee arrangement between Fortune Bell and Ocean Capital by which Ocean Capital would reimburse Fortune Bell the interest it had to pay the Plaintiff for the loan;

(b) Whilst admitting that it was the intention of all parties present at the negotiation that Madam Wang was to be given exclusive control over Fortune Bell's account with Goldman Sachs, the Plaintiff alleges that this was not achieved despite the fact that Goldman Sachs was represented at the meetings in which the negotiations were carried out;

(c) Along with such allegation, the Plaintiff further alleges that the unexplained movement or misappropriation of funds from the Goldman Sachs account of Fortune Bell came about as a result of the Defendant's instructions to Goldman Sachs. In other words the Plaintiff says that it was the Defendant who had misappropriated such funds from the Goldman Sachs account.

(d) After it became known that funds went missing from the Goldman Sachs account, the Defendant admitted the misappropriation to Madam Wang. As a result the agreement to purchase 20,000,000 China Telecom shares was never carried out.

(e) The Plaintiff's case is that the cheque now sued upon was given by the Defendant to the Plaintiff for the purpose of repayment of part of the money so misappropriated by the Defendant.

19. The basis upon which Mr Chan puts the Plaintiff's case in its application for summary judgment is that the Defendant's allegations are incapable of belief. It is on this basis that Mr Chan says I should give summary judgment to the Plaintiff.

The Test

20. Where a plaintiff applies for summary judgment under O.14 on the basis that what the defendant alleges as a defence is incapable of belief, that test is set out in the oft quoted judgment of Ng Shou Chun v. Hung Chun Sang [1994] 1 HKC 155 where at page 158, Godfrey J.A. stated this :

"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."

21. Going still further back to the case of Murjani and Others v. Bank of India [1990] 1 HKLR 586, where the Court of Appeal was dealing with the approach to the issue of credibility, one of the matters decided by the Court of Appeal was that the Court will test the credibility of an affidavit attesting a triable issue against the conduct of the defendant and contemporary documents.

Determination

22. Applying the above test in this case I readily accept that on an O.14 application, the onus is upon the Defendant to show an arguable case.

23. Whilst there are certain aspects of this case which seem to cast some doubt upon the Defendant's credibility, there are also certain aspects of the documentary evidence which support her allegations. One example is the letter from Ocean Capital to Fortune Bell dated 9th October 1997, which appear to support her allegation that there was a joint venture agreement dressed up as a loan agreement. Another example is that the calling card of Madam Wang exhibited in evidence by the Defendant clearly shows Madam Wang to be a representative of CMB.

24. Secondly, in all the midst of the cross fire of allegations levelled by the parties at each other, there does not appear to be any direct evidence one way or the other from Goldman Sachs.

25. Thirdly, there has been no satisfactory explanation given as to why, when letters of demand were written by Baker and McKenzie (on behalf of the Plaintiff) to the Defendant as early as November 1997, the dishonoured cheque which was dated 20th November 1997, was only presented for payment as late as 17th February 1998.

26. Fourthly, the central issue in this case has to revolve around the question as to who was responsible for misappropriating the funds from the Goldman Sachs account - whether it was the Defendant as alleged by the Plaintiff or whether it was Madam Wang as alleged by the Defendant. Although I was referred to certain written instructions given by the Defendant which is relied on by the Plaintiff in an attempt to show that it was the Defendant who had misappropriated the funds, these written instructions were given to Goldman Sachs at least two days before 9th October 1997, i.e. before the account was put into the exclusive control of Madam Wang. As the evidence stand, it is hardly conclusive of the issue and once again highlights the need for a Court to hear evidence, in particular evidence from Goldman Sachs before a determination can be made on this issue.

27. Ultimately an application under O.14 for summary judgment should not be a trial by affidavit. In all the circumstances of this case and for the reasons I have given above, I am unable to say that the Defendant's allegations are so incredible that she should be deprived of a chance to have the matter litigated at a trial so that all the issues can be determined after hearing evidence.

28. Accordingly the appeal is allowed, the Master's order is set aside and the Defendant will have unconditional leave to defend.

29. I should add here that where the cause of action is on a bill of exchange and where there are no other claims by the plaintiff as in this case, the Plaintiff's claim succeeds or fails in its entirety as a whole based on the amount of the bill. That cause of action is not capable of being severed and is not divisible such that the Plaintiff can be given judgment in part as the Master did here.

Costs

30. I should make the following costs order nisi :-

(a) The Defendant will have the costs of this appeal in any event;

(b) The costs of the hearing before the Master be costs in the cause with certificate for Counsel.