NG KONG SHEEN SMILE INTERNATIONAL INVESTMENT LTD v. COLOR BRIDGE INDUSTRIAL CO LTD

HCA 1551/2013 & HCA 2497/2014 (Consolidated)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NOS 1551 of 2013 AND 2497 OF 2014

(Consolidated pursuant to the Order of Master Lai dated 16 July 2015)

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D E C I S I O N

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The application

1. This is a consolidated action of two actions HCA 1551/2013 and HCA 2497/2014 pursuant to the court’s order dated 16 July 2015.

2. The Plaintiff (“P”) has taken out an application for summary judgment under O.14 of RHC.  The application is contested and the parties are legally represented.[1]

The brief facts

3. The facts of this case are convoluted.  I distill the relevant facts from the affirmation filed on 12 October 2016 of Mr. Chen, a director of P. Relevant to the present application, the facts of the case are that the defendant had issued ten post-dated cheques in favour of P as guarantee for the payment of money due to P’s director and shareholder by two other companies related to the Defendant (“D”).  Mr. Chen is P’s director and Mr. Yu is P’s director and sole shareholder.[2]  The related companies are called “Wahha and Dongguan Wahha” respectively.

4. Of all the nine post-dated cheques, only the 4^th and the 10^th post-dated cheques were dishonoured, the rest of them were settled by Dongguan Wahha and Wahha paying money direct to Mr. Chen and Mr. Yu.  The 4^th post-dated cheque forms the subject matter of HCA 1551/2013, the 9^th post-dated cheque, HCA 2497/2014.

5. There is no dispute of the above facts.

6. The burden is on D to show that there is triable issue.

The defence

7. D’s defence is that the 2 dishonoured cheques were supported by no consideration.[3]

8. D’s argument is based on the special factual feature in this case that P had no contractual relationship with D at all. There was no detriment moving from P to D in return for the 2 dishonoured cheques.  There was also no debt or liability owed by D to P.  D further submits that there was no valuable consideration as the law requires that an antecedent debt or liability must be that of the drawer of the bills but not a third party.[4]

9. As submitted by D, the cheques were issued in relation to an antecedent debt or liability of a third party (namely, Wahha and Dougguan Wahha) but not of the drawer of the bills (who was the Defendant).

Discussion

10. Section 27(1) of Bills of Exchange Ordinance provides:

“Valuable consideration for a bill may be constituted by-

(a) any consideration sufficient to support a simple contract;

(b)  an antecedent debt or liability.  Such a debt or liability is deemed valuable consideration whether the bill is payable on demand or at a future time.”

11. D further submits that P has not pleaded consideration in support of a simple contract in the pleadings.

12. In reply to D’s allegation in relation to the pleadings, P replies that it is not necessary for P to plead consideration in the pleadings.  There is a presumption that valuable consideration has been given for the dishonoured cheques and every party whose signature appears on them is prima facie deemed to have become a party thereto for value.[5]

13. D agrees that there is a presumption of consideration for issued cheques in law.  P has, therefore, established its prima facie case against D for the dishonoured cheques.  The burden is on D to show that there is triable issue for trial.

14. However, Counsel for D admits that D has already pleaded the facts leading to the issuance of the nine cheques.  See paragraphs 4-9 of the Defence.  Those cheques were issued by D in favour of P pursuant to the Termination Agreement between Mr. Chen, Mr. Yu on the one part and Dongguan Wahha and Wahha on the other part.

15. Under paragraph 8(b) of the Defence, D pleaded that the cheques were delivered to Mr. Chen and Mr. Yu on the understanding mutually that they would not be presented  for payment, but “they would serve as evidence that Dongguan Wahha would have to pay to Yu and Chen….”.

16. However, in D’s written submissions, the argument for this hearing is simply based upon that there was no valuable consideration in support of the dishonoured cheques.  I shall therefore consider this application upon the case argued by D’s counsel as set out in his written submissions.  See Part A(3)7 of Practice Direction 5.4 – Preparation of Interlocutory Summones and Appeals to Judge in Chambers for Hearing and paragraph 18 of the written submissions.  D has not applied for leave to argue based upon the facts pleaded in paragraph 8(b) of the Defence.

17. In support of D’s argument that an antecedent debt or liability must be that of the drawer of the bills but not a third party , D relies heavily on the authority of Oliver v Davis & Another [1949] 2 K.B. 727.

18. Counsel for D cites Lord Denning’s judgment at 742-743:

“Section 27 sub-s.(1)(b) of the Act gives statutory effect to this rule. But this does not apply to a promise to pay an antecedent debt or liability of a third person. In such a case in order that the promise may be enforced there must be shown a consideration which is sufficient to support a simple contract. This was the view adopted by Byles J. in his book on Bills, and it is also adopted in Crofts v. Beale and Crears v. Hunter. If Ayres v. Moore contains anything to the contrary, I cannot agree with it.” (at 742)

19. The above paragraph was a discussion on s.27(1)(b), which provides that antecedent debt or liability, if relied upon, must be by the parties, that is to say, the drawer and the drawee of the cheques, not by the third party.  However, it further says that for a promise to pay an antecedent debt or liability of a third party, in order that the promise may be enforced, there must be shown a consideration which is sufficient to support a simple contract.  The latter scenario applies to the facts of this case.  The cheques were issued to P as a promise to pay the third parties’ debts (Dongguan Wahha’s and Wahha’s debts).  The question therefore turns on whether there is consideration which is sufficient to support a simple contract.

20. Lord Denning had provided the answer in the same paragraph of his judgment where he said:

“Now as to what is sufficient consideration, an express or implied agreement by the creditor to forbear from suing the third person is, of course, good consideration. So also is the simple fact of forbearance by the creditor, even if it only arises ex post facto, providing that the promise to pay was given with the intention of gaining forbearance Wigan v English and Scottish Life Assurance Association (2), per Parker J.”

21. Whether there had been a promise of forbearance or actual forbearance to pay the debt by the third parties is a matter of fact. It is quite clear and is not disputed by D that the cheques, including those two dishonoured ones, were issued by D to P upon the direction of Mr. Chen and Mr. Yu of P for forbearance to pay by the third parties (Dongguan Wahha and Wahha) to Mr. Chen and Mr. Yu.  In fact, the nine cheques were issued by D in favour of P for Mr. Chen’s and Mr. Yu’s forbearance of payment of the debts owed by Dongguan Wahha and Wahha.  Seven of those cheques had been paid.  Only these two cheques were dishonoured.

22. D also relies upon the judgment of Somervell LJ.  In fact, Lord Somerville had, in his judgment quoted by P confirmed that a cheque could be issued to guarantee third party’s debt or liability provided that there existed consideration of a simple contract, the same opinion of Lord Denning.  In the quoted part of the judgment, Lord Somervell said:

“… … Crears v. Hunter, in my opinion, makes it clear that when dealing with a negotiable instrument given in respect of a debt of a third party, consideration has to be found such as is now referred to in s.27, sub-s.(1)(a), namely, consideration sufficient to support a simple contract.”

23. D has also referred to Evershed M.R.’s judgment.  However, in his quoted part of the judgment, it shows that the Master of Rolls did not support his argument.  At 736:

“…where the debt or liability is that of a third party you must find something in the transaction sufficient at the very least to connect the receipt of the bill with the antecedent debt or liability and, as I think, to provide some consideration for the cheque in the form of forbearance or a promise to forbear, express or implied, on the part of the recipient of the cheque in regard to the third party’s antecedent debt or liability.” (at 736)

24. Therefore, it becomes clear that P can rely upon s.27(1)(a), ie consideration for a simple contract for the dishonoured cheques issued by D in its favour.  The consideration was forbearance of the third parties’ debt to Mr. Chen and Mr. Yu, who are P’s director and shareholder respectively.

25. D has also referred to the following cases:

(a) Fortune Focus International Ltd v The (Holdings) Co Ltd [1998] 1 HKLRD 304;

(b) Hansan v Willson [1977] 1 Lloyd’s Rep. 431; and

(c) MK International Development Company Limited v The Housing Bank [1991] WL 837755.

26. All the above cases discussed the operation of section 27(1)(b) of the Bills of Exchange Act, which is same as our Bills of Exchange Ordinance, Cap. 19.  This subsection only applies to the debt between the drawer and recipient of the cheque.  However, when a cheque is issued for third party’s debt or liability, there has to be valuable consideration sufficient to support a simple contract.  Forbearance to sue on the debt or liability against the third party is sufficient consideration as decided by the Court of Appeal in the Oliver’s case.

27. Having considered the legal authorities above, I consider that it is misconceived to say that the two dishonoured cheques in question were not supported by valuable consideration and P has no cause of action against D on the dishonoured cheques.[6]

28. D has no defence to P’s claim.  Summary judgment should therefore be granted in favour of P.  So I now do.

Costs and order

29. As to the costs of the action, including all costs reserved, this application and the hearing today (with a certificate for counsel), as the parties agree, should be given to P, to be taxed if not agreed.

30. I shall make an order in terms as follows:

(a) Summary judgment to P as per claimed;

(b) As to the interest under prayer (3) of the Statement of Claim, the parties agree that judgment rate should apply and should be calculated from the dates of the respective Writs of Summons until payment of the judgment sums.

(c) Costs as per §29 above.