WAYFOONG CREDIT LIMITED v. WONG CHUCK SHING FORMERLY t/a KIMBAL ENTERPRISES AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. The plaintiff in this action is a wellknown financial company which, inter alia, grants facilities to clients for the discounting of post-dated cheques. The claim is based on 5 such post-dated cheques drawn, apparently, by the 1st defendant on his account with the Dah Sing Bank Limited in the name of Kimbal Enterprises ("Kimbal"). They are drawn in favour of Prosperous Trading Co. (Prosperous) and were discounted by Prosperous with the plaintiff. However, on presentation they were dishonoured because :

The total amount of the cheques is $394,250.

2. The plaintiffs duly brought action against Prosperous and obtained ,judgment. That judgment has proved to be empty as the proprietor of Prosperous, one Tang Yuen Biu (Tang), has disappeared and cannot be located. The plaintiff accordingly now sues the 1st defendant as the drawer of the cheques or alternatively, that the cheques were drawn by somebody as agent of the 1st defendant with his apparent authority. Alternatively the 1st defendant is alleged to be liable on the cheques in negligence that he supplied cheque forms and the firm's chop to the 2nd defendant and/or a third party that he failed to forsee the use to which the 2nd defendant and/or third party would put the blank cheque forms and the chop and that, finally, he failed to close the account until February 1984 although he had ceased to do business in September 1983.

3. The action is brought against the 2nd defendant, whose name is on the cheques as being the drawer of the cheques.

4. The hearing of this matter, which involves some legal argument on bills of exchange, was not made any easier by reason of the fact that neither defendant was represented, both having been refused legal aid.

5. The 2nd defendant had entered an appearance but had not filed a defence. He was given leave to do so out of time.

6. Evidence for the plaintiff was given by Mr. Cheng Tak-sheng, a staff officer of that company who said that the company was engaged, inter alia, in discounting post-dated cheques. When such a cheque was to be discounted they required evidence to show that it had been obtained for value and he produced invoices which were relevant to each of the five cheques the subject of this action. He said that the cheques seemed regular on their face and that they had been discounted and funds paid to the Prosperous Trading Company in whose favour they had been drawn. He said that the plaintiff had previously discounted some 12 cheques drawn by Kimbal and that in March 1983, they had made enquiries as to this firm's standing. They had received a letter from the Dah Sing Bank stating that the 1st defendant was the sole proprietor of the firm and that its account was "moderately active". He said that some previous cheques had been dishonoured but were re-presented and were then honoured. All these cheques had been signed by the 1st defendant as manager. He said that the plaintiff could not verify the signature on the cheques as he did not think the Dah Sing Bank would inform them as to who was the authorised signatory.

7. Mr. Cheng said that as result of these and other matters, they had taken action against Prosperous and obtained judgment for $7.8M but that nothing had been recovered. The proprietor of Prosperous, Tang, has now vanished. He pointed out that the 1st defendant had advised the Business Registration Office to cancel the registration of Kimbal in September 1983 but that the bank account with Dah Sing was not closed until February of 1984. In the mean time these five cheques had been drawn on the account. He said that all 5 cheques had been sent into the plaintiff for discounting over a short period, one or two days, and that Prosperous Trading Company had a very large overdraft limit of some $5M and was, at that stage, well within that limit. He agreed however, that in` the agreement between the plaintiff and Prosperous there was not to be more than $300,000 discounted in respect of the cheques of any one company at any one time. Therefore, in this case, that amount had been exceeded. He agreed that the plaintiff should have been more careful in that they knew that the 1st defendant was the sole proprietor of Kimbal and should have been put on alert when 5 cheques came in signed by a different person as manager. However, he suggested that there could be more than one manager or that the manager could change from time to time. He went on to say that the cheques had not been all presented for payment on their due date due to a request by Tang but he did not know the details of that as he was not handling the matter at that stage on behalf of the plaintiff. However, he did go on to say that the bank records seemed to indicate that these cheques had been presented for discounting on the 12th, 17th and 23rd September 1983. On the 23rd of November, Tang had come to the plaintiff company and had discussed the question of dishonoured cheques, although these were other cheques, not the ones in dispute here, and had promised that he would pay in sufficient to cover them by the end of the year. That in fact was not done. The cheques were presented for payment on the 18th January 1984 and were dishonoured the following day. He said that they now check the credibility of the drawer with his bank before discounting cheques. They did not however do that in 1983. This evidence was supported by Miss Kot Man-fong who said that she remembered Tang coming to see Mr. Fung who was then the section head of the plaintiff company on 23rd November 1983.

8. The 1st defendant gave evidence and said that the 2nd defendant was a friend of his father and it was at his suggestion that he started Kimbal. The 2nd defendant took him along to register the firm and that he was the sole proprietor. He said that Tang could be trusted as he had substantial asset and it was his understanding that the cheques that he drew on the Kimbal account were to be discounted. He said he signed substantial number of cheques but then, as he was busy, he was persuaded by Tang to sign cheques in blank. His evidence on this was not easy to follow but it seemed that he thought that if he went along with Tang he would eventually be granted financial facilities by a bank on his own account. However, by October or November of 1983 he became suspicious and refused to sign any more blank cheques. The 2nd defendant came and pleaded with him but he refused to do so. He said he asked for the return of the firm's chop and the cheque forms but that this was not done. He then received a letter from the plaintiff advising him they were claiming against him and he reported the matter to the Police at Mongkok.

9. In cross-examination, the 1st defendant said that he had paid the fee to open the bank account in the name of Kimbal but that Tang had repaid him. The address used for Kimbal was in Kimberly Road and this was given to him by the 2nd defendant who said it was premises of a friend. He said that, in the early stages, he himself had filled in cheques with the name of the payee and the amount but later owing to pressure from Tang, he had signed in blank. He was the only signatory on the account and nobody else was authorised to draw cheques on behalf of Kimbal, which was supported by the Bank's records. He had however given Kimbal's chop to Tang and when the 2nd defendant was asked about this, he said it was safe to do so as Tang had substantial assets. He said the bank statements went to the office in Kimberly Road and he himself did not see them. He agreed it was negligent to leave cheque forms and the company chop with Tang.

10. He wrote to the Business Registration Office in October 1983 cancelling the registration of Kimbal because he did not wish to pay another annual fee, refused to sign any more cheques and asked for the return of the cheque forms and the chop. He said he did ask somebody at the Dah Sing Bank about closing the account but he was told he should get the chop back. However, he said he did not do so as he was very busy. Eventually the account was closed in February of 1984 at which time he was aware of the position regarding these dishonoured cheques.

11. Evidence was given by the 2nd defendant who said that he had been in business with the 1st defendant's father. He introduced the 1st defendant to Tang and they formed a company, Kimbal, with the intention of trading. A bank account was opened and the 1st defendant obtained a cheque book. He said, however, that all transactions were between the 1st defendant and Tang and he had no knowledge of them unless he was specifically told about them. He was not told about these cheques. He specifically denied that it was his signature on any of them. He said in cross-examination that he did not know that Tang had discount facilities but later on he agreed that it was not so and that he was aware of that. He said that when the 1st defendant closed the business, he also wanted to close the bank account but he told him not to do so as there were outstanding cheques. He agreed that he gave Tang the company chop which was to be used on the Dah Sing account. He said that he had asked Tang to return the cheque forms and the chop to the 1st defendant when Kimbal ceased to do business. He was asked to put his signature on a blank piece of paper which he did. He said that he had two signatures and the first one, at the top of the page, is his current one and the lower one is the one that he used to use. This page is P6.

12. I accepted the evidence given by Mr. Cheng that the plaintiff did come into possession of these cheques as he had related. That they were received for value and that the plaintiff did become a holder of the cheques in due course. I am also satisfied that the plaintiff was aware that previous cheques had been dishonoured and that the previous cheques did not have the same signature on them as the five ones involved here. I am also satisfied that the plaintiff had every reason to be suspicious of Tang's discounting activities. Nevertheless when the plaintiff did come into possession of these 5 cheques, it did so without notice that they were not signed by an authorised signatory, which quite clearly was the case.

13. It was submitted by counsel for the plaintiff that the 1st defendant was an honest witness who had been duped, certainly by Tang. He trusted him and in order, he thought, to obtain his own credit facilities, he allowed Tang to discount cheques which had been drawn on the Kimbal account. It is also clear that while initially he was foolish enough to sign blank cheques and that later on he refused to do so and it is clear that the five cheques were not signed by him. It is also clear that in no way did he authorise anybody else to sign cheques on behalf of Kimbal and while no doubt he should have obtained the return of the cheque form and the chop, he did not contemplate that unauthorised persons would endeavour to negotiate cheques drawn on the Kimbal account which had not been signed by him. I considered the 1st defendant to be an honest witness.

14. The 2nd defendant was much less convincing. I did not accept a great deal of his evidence and I am satisfied that he played a considerably larger role in the management of Kimbal than what he said in evidence. I am satisfied that he did give the 1st defendant assurances as to Tang's credit and general trustworthiness and that he reassured him on several occasions as to that. I am, however, also satisfied, on a balance of probability, that he did not sign these five cheques. He has put his signature on a piece of paper and I do not think it bears any resemblance to the one on the cheques, subject of this action. It has been submitted that even if the 2nd defendant was not an authorised signatory for Kimbal, I should ignore that and just simply hold that he has himself drawn a cheque and that it becomes a bill of exchange in its own right, irrespective of the fact that it was drawn on a specific account. I do not think that is so. The cheques purports to be drawn by Kimbal acting through its manager. Whether or not the 2nd defendant signed these cheques, quite clearly he was never the manager of Kimbal and he was never a person authorised to sign cheques on its behalf.

15. It was also submitted that even if I did find that the signature on the cheques was not that of the 2nd defendant and was therefore a forgery, that the 2nd defendant could still be liable if the signatory, whoever he was, had his authority to sign. There is in my view no evidence whatever of that and I am satisfied that the 2nd defendant cannot be liable on that basis.

16. The plaintiff relies on the decision in Lloyd's Bank Limited v. Cooke & Ors.⁽¹⁾. That case related to the position where a person had signed his name on a blank piece of paper and had entrusted the paper to another person with authority to fill it up as a promissory note for a certain sum payable to the plaintiffs. That person had fradulently filled the paper up for a much larger amount and by means of it obtained an advance of that amount from the plaintiffs who had no notice of the fraud. It was held that the defendant was estopped from denying the validity of the note as between himself and the plaintiffs as holders in due course.

17. I think the position here is clearly different. If the cheques had been signed by the 1st defendant in blank, then quite clearly he would have no defence to the action brought by the plaintiff here as holder in due course. That is simply not the position. Clearly he has not signed these cheques and I am satisfied has not authorised anybody to sign them on his behalf. Similarly as regards the 2nd defendant I am satisfied that he did not sign the cheques and had no authority to sign cheques on behalf of Kimbal. I am satisfied therefore, that on this basis, the action against both the 1st and 2nd defendants on that ground must fail.

18. The plaintiff further claims against the 1st defendant on the grounds of negligence. The allegation is firstly that he allowed the cheque forms and the company chop to be held by another person who then could, if he so wished, forge a signature and negotiate the cheques to an innocent 3rd party such as the plaintiff. In addition it is alleged that in October 1983, when he decided to close down Kimbal, he should also have closed the bank account, knowing as he did that Tang still had the cheque forms and the company chop.

19. As against this allegation of negligence by the plaintiff, it seems to me that the plaintiff itself has not done as nearly as much as it could have to protect itself. It was said by Mr. Cheng in evidence that their practice has now changed, possibility because of this case, and that when cheques are now discounted, enquiries are made as to the status of the drawer of the cheque. The plaintiff was aware that previous cheques had been dishonoured and that those previous cheques were not signed by the same person.

20. I do not accept that because the 1st defendant when giving evidence agreed that he was negligent that that necessarily means that I must find he was legally liable. He was not represented and I have taken his answers to questions as being an indication that he conceded that he could have done more to protect himself and any possible innocent party. I do not find, however, that legally his actions in, first of all allowing Tang to retain the cheque forms and the chop and secondly not closing the account are such as to make him legally liable to the plaintiff in negligence. In Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. & Ors. ⁽²⁾, it was held that the only duties in connection with the operation of a current account that a customer owed to his bank was a duty to exercise due care in drawing cheques so as not to facilitate fraud or forgery, and to notify the bank if it became aware of any unauthorised cheques. Here Mr. David Yam for the plaintiff argues that the position is different in that the plaintiff is not the 1st defendant's banker but is a holder in due course for value and that the 1st defendant owed a duty of care towards the plaintiff in that capacity. It seems to me that that is taking the law a great deal further than it stands at the moment. I do not think the 1st defendant owed the plaintiff the duty of care which has been claimed nor do I think his actions were so negligent as to make him liable first to the plaintiff upon these cheques. I have not been referred to any authority for that proposition. The claim against the 1st defendamt must therefore fail on that ground also.

21. The 1st defendant, while unrepresented at this hearing, did initially employed solicitors and is entitled to his costs. The 2nd defendant did not employ solicitors at any stage and was not represented.

(1)    (1907) 1 K.B. 794

(2)    (1986) 1 A.C. 80