XCHRX CHU TAK YIN WINSTON v. GENERAL-TECH ELECTRONIC LTD.

HCA12473/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.12473 OF 1998

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J U D G M E N T

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1. This is an appeal against a refusal by Master Poon to order summary judgment against the Defendant in Order 14 proceedings. The claim is in relation to two dishonoured cheques made payable to the Plaintiff by the Defendant, each for $260,000.

2. The two cheques are two out of 12 post-dated cheques (each cheque is dated one month apart) made as part of payment for 80% of the issued share capital in a company called Artchief Industries. The actual sellers were two BVI Companies, Global Marketing and Cheerful Gain Ltd. It is said by the Defendant that the Plaintiff is the beneficial owner of Artchief through these vendor companies of "Global" and "Cheerful".

3. The original agreed price (subject to Clause 3.03 of the Agreement) was $4.8 million. This was to be paid by way of an initial deposit of $300,000, a further sum of $1.38 million upon the execution of the agreement and 12 monthly post-dated cheques of $260,000 each.

4. For reasons which I shall now outline, the 6th and 7th cheques were dishonoured. By mistake, cheque number 8 was paid. The Plaintiff has not yet presented cheques numbers 9-12 for payment because of these proceedings.

5. The Agreement for the purchase of the 80% shareholding is a lengthy document running to 30 pages (including schedules). Many of its clauses were refered to in argument. The two which are at the crux of this matter are :-

6. Clause 3.01(e)

"In the event of the dishonour of any of the cheques upon presentment for payment on the respective due dates, the entire balance of the unpresented cheques shall be immediately due and payable."

This is the so-called "immediate default" clause upon which the Plaintiff, inter alia, relies.

7. Clause 3.03

"The Purchaser and the Vendor agree that the management accounts of the Company for the period from 1st April 1997 to 31st October 1997 should be prepared in accordance with the provisions in Clause 10. The management accounts set out total assets and total liabilities, being for the determination of the net remaining value of the Company attributable to the Purchaser subject to the provision hereof. The net remaining value of the Company, as calculated from the management accounts, should be determined by total assets minus total net book values of fixed assets minus total liabilities (other than contingent liabilities if any). If the net remaining value shows a positive figure or surplus, the Purchaser shall pay 80% of such sum to the Vendor. If the net remaining value shows a negative figure or deficit, the Vendor shall pay 80% of such sum to the Purchaser, and in such latter event, the Purchaser shall be entitled to withhold the consideration for the shares of such part thereof as shall be equivalent to such sum until all the said sum is paid or set-off by the Vendor." (emphasis added)

This is the "price adjustment" clause upon which the Defendant relies.

8. The Defendant says that after the preparation of the certified management accounts in accordance with this clause and because of what was contained in them he withheld further consideration, also in accordance with this clause.

9. The Plaintiff does not agree the accounts. He says they were prepared unilaterally and not jointly as required by Clause 10.01 of the Agreement. There is a dispute between the parties as to whether the accounts do or do not reflect the true asset value of the Company. If they do there is an argument (the Defendant's argument) that the Plaintiff misrepresented the worth of the Company prior to the Agreement. The Defendant goes on to say that such misrepresentation as there was, was fraudulent.

10. The Plaintiff, not surprisingly, says there was no misrepresentation, there was no fraud and the accounts are misconstrued. He further says that although he is the payee of the dishonoured cheques he was not the owner of the shares, neither was he the beneficial owner of the shares nor was he the vendor of them. All these were the two BVI Companies, "Global" and "Cheerful".

11. This further point in fact needs to be addressed first of all. The cheques were made out to Winston Chu, the Plaintiff. It is submitted that as Winston Chu was not a party to the agreement therefore the terms of the agreement have no relevance and this is a simple case of a dishonoured cheque to which there is no defence. I find there is merit in the Defendant's answer to this argument. The Defendant points to the fact that on page 1 of the Agreement Winston Chu is named as the "2nd Warrantor". Clause 9.03 of the Agreement states that :

"The Vendor and the Warrantor are jointly and severally liable for all of their warranties, undertakings and obligations under this Agreement."

12. The cheques had been paid to Winston Chu personally by virtue of Clause 7(k) :-

"The Purchaser shall deliver to the Vendor 12 post-dated cheques, .... payable to a party as directed by the Vendor commencing ...."

13. Consequently it is certainly arguable that the Plaintiff and the Vendor stand in each other's shoes for the purpose of this litigation. Clearly if the Plaintiff had succeeded on this point, that would have been the end of the matter. It would have been a straightforward dishonoured cheques and summary judgment entered.

14. However I find it plainly arguable that the Plaintiff is bound by the Agreement. He is bound by Clause 3.03. That clause agrees that management accounts shall be prepared. That clause entertains the possibility that the price paid for the shares will have to be adjusted. That clause states that the Defendant has a right, at the time of the Agreement, to "withhold the consideration" should the management accounts reveal a particular picture.

15. So, the question arises - what is "the consideration" which the parties agree that the Defendant may withhold. This is unambiguously spelt out in Clause 3, namely, the deposit, the first payment and the 12 post-dated cheques. It is a simple and unarguable fact that at the time the management accounts were completed the only consideration which remained to be withheld was the balance of the post-dated cheques. The question then arises - is the deliberate dishonouring of a cheque an act of "withholding considering". In the context of this case it cannot be construed in any other way. It was the only way in which the Defendant could withhold the consideration pending negotiations or arguments on the accounts.

16. The Plaintiff's argument, skillfully advanced by Mr Yau, is that, inter alia, whatever disputes or triable issues there may be, they are not triable in the context of a claim on a dishonoured cheque. There is no doubt that usually it is very difficult to resist O.14 proceedings on a cheque. It is well established that save in exceptional cases or upon strong grounds a defendant will not be allowed to counterclaim for damages for breach of some other, albeit related, contract. The courts are regularly reminded of Lord Denning's observation :-

"We have repeatedly said in this court that a (cheque) is to be treated as cash. It is to be honoured unless there is some good reason to the contrary."

17. Mr Yau, concedes that there may be an argument that the price should be adjusted by about $800,000, but not in excess of $2 million as contended by the Defence. He contends that the management accounts were prepared not in compliance with the Agreement because they were not prepared jointly. He contends that they do not portray an accurate picture of the company's worth. He contends that there was no misrepresentation, fraudulent or otherwise, by his client. He contends that all claims of misrepresentations are "mere assertions".

18. He may succeed on all these points, however what he cannot contend is that Clause 3.03 does not apply to his client once a ruling has been made, in the context of the O.14 proceedings, that it is plainly arguable that the Plaintiff and the Vendor are indistinguishable. In these circumstances the Defence simply point to Clause 3.03 as being "a good reason to the contrary" (as per Lord Denning) for not honouring the cheque. If they were not entitled to withhold payment by dishonouring the cheque, Clause 3.03 would be wholly redundant.

19. He also has to face the fact that the reason for dishonour is given as fraudulent misrepresentation. The so-called "trump card" in such cases. It is true that a "mere assertion" will not suffice. I am however satisfied, having heard both counsel's submissions, that the allegations go beyond a "mere assertion" in this case. In the overall context and looking at the management accounts, the assertion is more than "mere" albeit, the Defence may lose at trial.

20. For these reasons, I have come to the conclusion, not without difficulty, that the learned Master was right to give leave to defend. The result of this ruling will be that the Defendant will have the opportunity of having all the matters in issue resolved one way or the other in these proceedings. Had the Plaintiff been successful in these proceedings, the Defendant would still, no doubt, have commenced new proceedings seeking a declaration under Clause 3.03 that he paid too much for the Company and an order for repayment of some money after all 12 of the "installment" cheques had been honoured. Clearly, the time has now come to see if a set of management accounts can be agreed. If they can, there will be little, if anything, left to litigate.

21. I dismiss the appeal and make an order nisi for costs in the Defendant's favour.