ZANDA INVESTMENT LTD v. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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CL No.78 of 1989

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AND

CL No.79 of 1989

BETWEEN

Consolidated pursuant to the Order of
Mr Justice Mayo dated the 11 th day of May 1990

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JUDGMENT

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INTRODUCTION

1. Since 1976, when the Deposit-Taking Companies Ordinance, Cap.328 ("the Ordinance") was first enacted, Deposit-Taking Companies (D.T.C.s) in Hong Kong have, over the years, in the interests of lenders, been subjected to progressively stricter regulation by a series of amendments to the Ordinance. The need for such regulation is amply illustrated by the present litigation which stems from the fraudulent way Asean Merchant Credit And Investment Limited ("Asean"), a registered D.T.C., conducted its business in the early 1980s.

2. Asean started business as a Registered D. T. C. in April 1979. It was suspended by the Commissioner of D.T.C.s on 9th March 1983, following which it went into liquidation with liabilities exceeding assets by more than HK$160 million. Subsequent to Asean's suspension, it became clear that its managing director, Mr Alexis Chan, and its general manager, Mr Jesse Perez were both rogues who had dishonestly mismanaged the company's affairs over a long period of time.

3. One of the victims of Asean's collapse was Zanda Investment Limited ("Zanda"), the plaintiff in the present proceedings.

4. Zanda was a company formed in 1980 to buy NKIL5048 at Ming Fung Street, Kowloon ("the Ming Fung Street property"), develop it by erecting a building, and then sell it off at a profit. Asean owned 50% of the shares in Zanda, and played a major role in financing and supervising that development. Zanda had its registered office at, and conducted its business from the same premises in New World Tower, Central where Asean ran its own business.   Zanda having no separate staff of its own, instead used Asean's. Mr Jesse Perez was one of Zartda's two directors. Mr Alexis Chan had no formal position in Zanda, but, in practice, was the prime-mover in arranging for its development project to be carried out.

5. When Zanda bought the land in May 1980, the price was $16.5 million.

6. In 1981, it agreed to sell the land to Tai Ting Estates Limited ("Tai Ting Estates") for HK$41 million on the basis that completion was not to take place until Zanda had finished erecting a twenty-three storey building on the site, and the Occupation Permit for it was issued. As provided by the Agreement, Tai Ting Estates paid Zanda a deposit of $4.1 million, and four progress payments of $2.05 million each on architect's certificates when the building reached the eighth, twelfth, sixteenth floors and roof, respectively. That deposit together with the progress payments totalled $12.3 million, leaving a balance of HK$28.7 million payable to Zanda after the issue of the Occupation Permit.

7. The building was finished in or about June 1983 and the, Occupation Permit was issued on 6th August 1983.

8. Asean, purporting to act on behalf of Zanda, received a series of four cheques and two cashier orders totalling $28.7 million for the balance of the purchase money from the solicitors for the purchasers, Tai Ting Estates, between the 9th August and 7th September 1983.

9. Had the whole proceeds of those four cheques and two cashier orders been applied properly by Asean for Zanda's benefit, Zanda would have finished up with a profit of HK$6,856,670 (before tax) for distribution amongst its shareholders after the payment of all creditors (excluding the Inland Revenue Department). Instead of that, Zanda finds itself $15,738,706 short because of the dishonest way in which Mr Alexis Chan and Mr Jesse Perez caused funds to be directed from Asean to their own purposes.

10. One of the four cheques relating to the completion monies was for $5 million drawn on American Express International Banking Corporation. That cheque was dated 7th September 1983 and Zanda was shown as the payee. The solicitor for Tai Ting Estates, in issuing the cheque, deleted the printed words "or bearer" from its face after the space for the payee's name. He also crossed the cheque with a chop which included the words between the transverse lines of the crossing, "Not Negotiable A/C Payee Only".

11. Ms Stephenie Chan, who, besides being employed by Asean as personal secretary to Mr Alexis Chan and Mr Jesse Perez, was also an alternate director and authorised signatory of Zanda, indorsed the cheque in blank at a time Mr Jesse Perez was away from the office by signing it on the back along the dotted line left by a chop she applied, showing the words, "Zanda Investment Ltd" immediately above her signature, and the words "Authorized Signature" below. She did that on the 7th September 1983 on the instructions of Mr Alexis Chan. After signing in the way just described, she handed the cheque over to him.

12. Mr Alexis Chan that same day had the cheque indorsed on behalf of Asean and caused it immediately to be paid into Asean's current account with the Bank of America.

13. As at the 7th September 1983, Asean's current account with Bank of America was over-drawn by $6,259,079. Bank of America immediately credited that account with the $5 million face value of the cheque, thereby reducing the debit balance to $1,259,079, and then, through the inter-bank clearing system, collected the $5 million represented by the cheque from the paying bank, American Express International Banking Corporation, on which that cheque was drawn.

14. Besides the cheque for $5 million just described, Ms Stephenie Chan at the same time had also received a cheque for $1 million from the solicitors for Tai Ting Estates in favour of Zanda as payee, drawn on the Causeway Bay Branch of Barclays Bank International Limited ("Barclays") as part of the completion monies. That cheque for $1 million was in exactly the same form as the cheque for $5 million I have just described. Following Mr Alexis Chan's direction, she indorsed this $1 million cheque in exactly the same way as the $5 million cheque, after which she handed it to Mr Alexis Chan who had it indorsed in blank by Asean in the same way as the $5 million cheque, and caused it to be paid into the Gloucester Tower Branch of Barclays with a view to having the proceeds credited to the Causeway Bay Branch of Barclays where Asean had a current account.

15. As at the 7th September 1983 when the payment-in took place, that current account with Barclays was overdrawn by $5,669,184. On payment-in, Barclays straight away credited Asean with $1 million, thereby reducing the overdraft to $4,669,184.

16. As a matter of coincidence, the collecting bank and the paying bank were the same - Barclays - in relation to the $1 million cheque, but this is of no significance.

17. By the present consolidated proceedings, Zanda sues Bank of America for the $5 million and Barclays for the $1 million represented by the cheques I have just described, alleging that the purported indorsement by Ms Stephenie Chan of the cheques was unauthorised so that, in collecting the proceeds of the cheques, the banks are liable in conversion or for money had and received.

18. Those acting for Zanda do not allege that either bank acted in bad faith while making these collections for Asean.

19. Each of the Defendant-banks claims by way of defence that Asean acted with the authority of Zanda, actual or apparent, in delivering the cheques to the banks for collection into an Asean account. Moreover, both Defendant-banks contend they fall within the ambit of the protection afforded by s.86 of the Bills of Exchange Ordinance, Cap.19 to collecting banks which in good faith and without negligence collect the proceeds of cheques on behalf of their customers. There are contributory negligence, estoppel and an equitable defence also pleaded on behalf of the Defendant-banks.

20. The Defendant-banks in their turn have joined in Ms Stephenie Chan as a third party in case their defences against Zanda do not prevail. Those third party proceedings have been stood over pending the outcome of the main action between Zanda and the Defendant-banks.

21. Asean, too, was joined in as a third party by the Defendant-banks. Judgment by consent was allowed against it in their favour, but, in practice, such judgment would be virtually worthless to the banks should they need to enforce it due to Asean's extreme insolvency.

FACTUAL BACKGROUND

22. For a full understanding of the present case, it is important to know what was happening to Hong Kong's economy and financial markets at material times. An invaluable source of information on that has been Mr T.K. Ghose's book, The Banking System of Hong Kong, to which those appearing for Zanda drew the court's attention. The history it recounts serves well to refresh the memory of anyone who lived in Hong Kong during that era, as do the official Hong Kong Annual Reports for that same period.

23. At the time Asean commenced operations as a registered D.T.C. in April 1979, Hong Kong's economy was thriving. A land and share-market boom was by then already well under way. Banks and D.T.C.s generally helped fuel that boom by liberal lending policies which, with hindsight, can be seen to have encouraged speculation in real estate.

24. D.T.C.s can loosely be described as "secondary banks". They were in the business of borrowing and lending money, frequently operating in areas such as trade financing and currency dealing where one also finds ordinary banks.

25. The great advantage enjoyed by D.T.C.s over banks was the former not being bound by the interest-rate-agreement of the Hong Kong Association of Banks which imposes a ceiling on the rate of interest banks can pay for money on deposit.

26. A further advantage enjoyed by D.T.C.s then was the relatively light way in which they were regulated compared to banks.

27. To become eligible for registration under the Ordinance, the minimum paid-up capital required of a D.T.C. was $2.5 million. That was no problem for Asean which started off with paid up capital of $10 million, later increased to $15 million.

28. Disadvantages suffered by D.T.C.s compared to banks were that D.T.C.s were not permitted to offer cheque-cashing facilities on their customers' current accounts, and could not accept deposits from the public of less than $50,000 at a time.

29. To avoid the restrictions of the interest-rate-agreement of the Hong Kong Association of Banks, many a bank formed its own subsidiary to become registered and conduct operations as a D.T.C.

30. Time was to show that the wholly bank-owned D.T.C.s, because of the backing of a parent bank, were safe from the point of view of customers not losing their money, whereas some of the non-wholly bank-owned D.T.C.s were to prove disastrous for lenders.

31. While Asean was not owned by any bank, some of its shareholders had strong indirect links with banks. The largest shareholder in Asean was a company controlled by Mr Johnny Cheng who had a controlling interest in Hang Lung Bank and a substantial holding in O.C.I.L. which, through I.C.I.L., owned Overseas Trust Bank ("O.T.B."). Mr Johnny Cheng is the father of Mr Jesse Perez who became general manager of Asean. A company controlled by the family of Mr Chang Ming Thien, which owned the controlling interest on O.C.I.L., and hence, via I.C.I.L., in O.T.B., also had a small equity holding in Asean.

32. Besides the families of the wealthy bankers Mr Johnny Cheng and Mr Chang Ming Thien, there was another wealthy family which had a substantial stake in Asean. That was the family of Mr Chan Ching Pau, the father of Mr Alexis Chan who became managing director of Asean. The wealth of Mr Chan Ching Pau's family stemmed from textiles, real estate dealing and property development. Mr Chan Ching Pau's principal company was Kin Fung Hong Limited ("Kin Fung Hong").

33. Mr Johnny Cheng, Mr Chang Ming Thien, Mr Chan Chau Ping and their families were not only generally known for their wealth, but they were also widely regarded as people of integrity.

34. A further feature of Asean calculated to increase the confidence of potential lenders to it from the outset was the perceived competence of its top management. Mr Alexis Chan, Asean's managing director, had gained experience as a banker working for O.T.B. over a period of years, while Mr Jesse Perez, Asean's general manager, had worked in his father's bank, Hang Lung.

35. With this alluring combination of wealthy, respectable owners and experienced management, Asean looked set for a bright future, starting off as it did in a booming economy.

36. One potential source of funds for Asean was deposits from the public. Far and away its greatest source of financing in practice, though, was borrowings from banks.

37. The first of the banks to grant credit facilities to Asean was Bank of America through its branch at Western. That branch already had Mr Chan Ching Pau's company, Kin Fung Hong Textiles Ltd, as a much-prized account which generated considerable business for the branch.

38. It was clearly regarded as something of an honour by Bank of America's Western branch when Mr Alexis Chan and Mr Jesse Perez indicated they wanted that branch to be Asean's main bankers. The staff of Bank of America liked the idea that in Mr Alexis Chan and Mr Jesse Perez they were dealing with fellow bankers, and were happy to take on a customer backed by such wealthy families.

39. The initial facility agreed between Asean and Bank of America was US$1.3 million. Some of that was secured, the rest not. Of great comfort to Bank of America were the personal guarantees given by Mr Johnny Cheng, Mr Jesse Perez and Mr Alexis Chan in respect of the Asean account. Based on the extensive material from Bank of America's records relating to this account, and on the oral evidence of its staff who handled the account, I have no doubt of the sincerity of Bank of America's personnel in their belief at all material times in the integrity of those managing and owning Asean.

40. In June 1979, Asean opened a line of credit for US$3 million with the Causeway Bay Branch of Barclays Bank, the staff of which were just as dazzled by the wealth, apparent integrity, and competence of those owning and running Asean as had been their competitors at Bank of America. Like Bank of America, Barclays offered Asean lines of credit, some secured, some unsecured, and took personal guarantees from Johnny Cheng and Mr Alexis Chan for the sum of US$3 million.

41. With time, Barclays' superseded Bank of America as Asean's principal bankers, but Bank of America still continued to offer substantial credit facilities to Asean.

42. A long procession of different banks opened lines of credit for Asean. By 1982, there were no less than ten banks besides Bank of America and Barclays, with lines of credit to a combined value of $150 million.

43. To attract and then keep banks as lenders, Asean was able to show it was engaged in the type of business of which bank lenders would be likely to approve. It did a substantial volume of trade financing which involved letters of credit, lending against trust receipts and discounting of bills of exchange. Such work was right up the street of Mr Alexis Chan and Mr Jesse Perez with their background in banking. To know that Asean was engaged in that type of work with Mr Alexis Chan and Mr Jesse Perez at the helm must have been reassuring to its bank-lenders. That was conventional banking work for an entity like Asean which, as I have said, was in the nature of a secondary bank. The other type of financing in which Asean was engaged - real estate development - did not fit so readily in the mould of conventional banking, secondary or otherwise.

44. The conventional wisdom in banking has generally been, "Lend short, but borrow long". As Mr Ghose's book shows, the banking community in Hong Kong largely either forgot or chose to disregard the more cautious approach of earlier generations of bankers, and, in the few years of the land boom in Hong Kong climaxing in the crash of 1982, bankers lent large sums of money, either directly, or indirectly through D.T.C.s, for land speculation.

45. When the chickens came home to roost for Asean after the suspension of its registration in March 1983, a high proportion of its bad debts related to real estate loans it had made. It subsequently came to light, too, that much of Asean's lending for real estate transactions involved criminal infringements of provisions in the Deposit-Taking Company Ordinance, as well as oughtright fraud. Certainly Bank of America, and probably Barclays, knew that Asean was involved in financing real estate developments - The Zanda project being one example - but they had not the slightest inkling of the illegalities Asean was perpetrating.

46. Many of the financial ventures with which Asean was associated turned out to be catastrophic. One, however, involving a sound concept, good timing and what should have been a profitable conclusion for those backing it was that centred on Zanda.

47. Zanda is a Hong Kong Company incorporated in 1980 with an authorised capital of $10 million, and issued capital of 4 million $1 shares.

48. Asean took a 50% interest in Zanda by subscribing for 2 million $1 shares, O.C.I.L. took a 40% interest with 1.6 million of the issued shares, and a company called Northbourne Ltd. (Northbourne) took the remaining 10%.

49. Reference has already been made to O.C.I.L. as the majority shareholder of I.C.I.L., the holding company for O.T.B. The major shareholder of O.C.I.L. at that time was Mr Chang Ming Thien, the Chairman of O.T.B. Mr Chang Ming Thien had a son, Mr Patrick Chang, who was a director of O.T.B.

50. Mr Patrick Chang and Mr Jesse Perez each held 50% of the shares in Northbourne.

51. The first two directors appointed for Zanda were Mr Jesse Perez and Mr S. Y. Ho.

52. Mr S.Y. Ho had been the General Manager of O.C.I.L. since 1969, and of both O.C.I.L. and I.C.I.L. since 1975 when I.C.I.L. was interposed between O.C.I.L. and O.T.B. as the holding company of O.T.B. Mr S.Y. Ho was simply an employee of O.C.I.L. and I.C.I.L., unrelated to the owners. He did, however, form part of the web of connections between Zanda and Asean in that he was a former colleague of Alexis Chan, both of them having worked together in the bills department of O.T.B. in the early 1960s. They became friends then, and remained so.

53. On behalf of Zanda, it has been asserted that Mr S.Y. Ho was on Zanda's board to look after the interests of O.C.I.L. That is broadly speaking correct, but is something of an oversimplification in that it fails to acknowledge that in reality he was exposed to a host of conflicting pressures due to the various cross-holdings between O.C.I.L. and Asean, and the various interests of the three wealthy families - Mr Chan Ching Pau's, Mr Chang Ming Thien's and Mr Johnny Cheng's - in Zanda. Such influences, plus his friendship with Mr Alexis Chan, were not always to make it easy for Mr S.Y. Ho to treat Asean in an arm's length way in relation to Zanda's affairs.

54. Mr S.Y. Ho served as director on the boards of many companies in which O.C.I.L. had an interest.

55. Mr Jesse Perez was on Zanda's Board ostensibly to represent Asean. Although Mr Alexis Chan was never on the board of Zanda, his presence looms large in the conduct of its business.

56. From the outset, the shareholders of Zanda knew what they wanted from the company: it was to be used in effect as a joint venture vehicle by the shareholders to buy the Ming Fung Street property, develop it by putting up a new building, sell that off at a profit for distribution amongst the shareholders, after which, the company would be voluntarily wound up, having achieved its purpose.

57. It was Mr Alexis Chan who took the initiative in finding the Ming Fung Street property for Zanda to buy.

58. The first formal step of any significance taken on behalf of Zanda was to enter into a written Agreement dated 21st May 1980 to buy from The Grand English College Company Limited ("The Grand English College") the Ming Fung Street property together with the various buildings on it for $16.5 million. As part payment of the purchase money, Zanda had to pay a deposit of $ 4.5 million. That $ 4.5 million deposit was funded from Zanda's capital, and by advances from its shareholders in proportion to each one's shareholding, Asean thus contributing 50%, O.C.I.L. 40% and Northbourne 10%. Shareholders' advances in the same proportions funded the $12 million balance of the purchase money paid to The Grand English College on 15th August 1980, the date of the formal assignment of the Ming Fung Street property to Zanda.

59. Zanda's first directors' meeting was held 3rd June 1980 at Room 2608, New World Tower, Central. That was the address of Zanda's registered office. It was also the address of the actual office where Asean carried on its business as a D.T.C. with a staff of approximately twenty.

60. To save money, it had been agreed amongst the shareholders of Zanda that, instead of having its own accommodation and staff, Zanda, without charge, could use Asean's office and Asean's staff. Under this arrangement, Asean's staff did all the clerical work necessary for Zanda, kept its records, books of account and its minute book. All Zanda's day-to-day business with outsiders was conducted from Asean's office premises by Asean personnel.

61. The member of Asean's staff who did most of Zanda's routine clerical work, and wrote up its ledger was Ms Stephenie Chan. She was with Asean as a personal secretary to Mr Alexis Chan and Mr Jesse Perez from the time Asean commenced business as a D.T.C. in April 1979. She was aged only 19 then. Her training had been as a secretary, having spent one year at a secretarial training school after leaving school at the age of 16. She plays an important role in the present case as the one who, on 7th September 1983, alone indorsed the two cheques in issue at a time when she was an alternate director to Jesse Perez in Zanda.

62. At the first meeting of Zanda's Board, on 3rd June 1980, not only were its directors, Mr S.Y. Ho and Mr Jesse Perez present, but so was Mr Alexis Chan, accompanied by his friend and business associate, Mr Edward Wong, a partner in the firm of architects and engineers, Messrs Leung and Wong.

63. On that occasion Zanda's directors formally decided to develop the Ming Fung Street property by demolishing the existing structures and erecting a mixed commercial-residential building. Messrs Leung and Wong were appointed architects for the project.

64. A further decision taken at that first directors' meeting was for Zanda to open a current account with O.T.B. That current account was kept in funds by Zanda's shareholders in the ratios 5:4:1 by Asean, O.C.I.L. and Northboume, respectively.

65. For the purpose of opening that account with O.T.B., Mr S.Y. Ho and Mr Jesse Perez both signed O.T.B. standard forms (Trial Bundle A394/4-6) for the opening of an account by a company. The mandate they gave O.T.B. was to pay cheques drawn on behalf of Zanda signed by Mr S. Y. Ho and Mr Jesse Perez jointly.

66. A major purpose to which that current account was put was the payment of interest on a $6 million mortgage of the Ming Fung Street property to Daiwa Overseas Finance Limited ("Daiwa Overseas Finance") on 15th August 1980.

67. Daiwa Overseas Finance was a registered D.T.C., jointly owned by O.T.C. and Daiwa Bank of Japan. In connection with that mortgage, Zanda opened a loan account with Daiwa Overseas Finance. (See Trial Bundle A, pages 50, 51 and 57). The mandate for that, too, required the joint signatures of Mr S. Y. Ho and Mr Jesse Perez.

68. That $6 million mortgage loan was used, in effect, to re-finance part of the outlays by Zanda's shareholders for the purchase of the Ming Fung Street property. Of the $6 million, $3 million went to Asean, $2.4 million to O.T.B. and $0.6 million to Northbourne, that is to say, in proportion to their shareholdings in Zanda.

69. Of considerable relevance for the purpose of the present case is the way the $6 million from Daiwa Overseas Finance was distributed to Zanda's shareholders.

70. Mr S.Y. Ho was the one who, on behalf of Zanda, liaised with Daiwa Overseas Finance's solicitor over the mechanics of the actual payment of the $6 million mortgage monies to Zanda. After instructing the solicitor to make the cheque for the $6 million payable to Asean, Mr S.Y. Ho, by a letter dated 3rd September 1980 to Asean, requested Mr Alexis Chan to arrange for Asean to issue its cheque for $3 million, made up, in effect, of the $2.4 million due to O.C.I.L. and the $0.6 million due Northbourne under the re-financing arrangement already described. Asean was to keep $3 million of the $6 million mortgage monies for itself. Without wishing to overload an already complicated narrative with unnecessary detail, I merely note that the vehicle nominated by Mr S.Y. Ho to receive Asean's cheque for $3 million was Kang Sun Enterprises Ltd, a subsidiary of O.C.I.L. which accounted to O.C.I.L. for its $2.4 million share and to Northboume for its $0.6 million share of the Daiwa Overseas Finance mortgage monies. (See Trial Bundle A, pages 264/1 to 10).

71. Thus, from a relatively early stage in the relationship between Zanda and Asean, one finds Asean, with the full concurrence of O.C.IL. via Mr S. Y. Ho, being used as a repository for and distributor of Zanda's funds amongst Zanda's shareholders.

72. Chronologically, the next milestone of significance in the affairs of Zanda was the decision by Mr S.Y. Ho and Mr Jesse Perez at its board meeting of 3rd October 1980 to exercise the power in Article 48 of Zanda's Articles of Association to appoint alternate directors. I now set out the relevant parts of that Article : -

"48. A Director may at any time appoint any other person (whether a Director or Member of the Company or not) to act as Alternate Director at any Meeting of the Board at which the Director is not present, and may at any time revoke any such appointment. An Alternate Director so appointed shall not be entitled as such to receive any remuneration from the Company, but shall otherwise be subject to the provisions of Table A and of these presents with regard to Directors. An Alternate Director shall be entitled to receive notices of all Meetings of the Board and to attend and vote as a Director at any such Meeting at which the Director appointing him is not personally present, and generally to perform all the functions, rights, powers and duties of the Director by whom he was appointed in his capacity as a Director but not in his capacity as a manager or working Director. An Alternate Director shall ipso facto cease to be an Alternate Director if his appointor ceases for any reason to be a Director: Provided that if a Director retires by rotation and is .... "

73. The resolution passed at the board meeting was as follows:

"ALTERNA TE DIRECTORS

It was suggested to appoint two alternate directors to Messrs. J. Perez and S.Y. Ho who would carry out the Company affairs in their absence.

It was resolved that Miss Carmencita Cheng and Mr Eddie Leung Sze Shing be and are hereby appointed alternate directors to Mr J. Perez and Mr S.Y. Ho respectively and that their appointment be made effective with retrospect on 15th August, 1980."

74. The Miss Carmencita C. Cheng there referred to as the alternate director to Mr Jesse Perez was his half-sister, both of them having Mr Johnny Cheng as their father but different mothers. She worked as the cashier in Asean.

75. Mr Eddie Leung, Mr S.Y. Ho's alternate director was, like Mr S Y Ho, one of O.C.I.L.'s paid staff unconnected to the families of the major shareholders in O.C.I.L. In O.C.I.L., as assistant manager, he was subordinate to Mr S.Y. Ho, the general manager.

76. In due course, it will be necessary to look at some of the other Articles of Zanda, including those brought in by Table A of the Companies Ordinance, in the context of whether an alternate director of Zanda could be empowered to indorse away a cheque made payable to the company.

77. A follow-up to the resolution at the board meeting of 3rd October 1980 was a document dated 4th December 1980, signed by Mr Jesse Perez and Mr S.Y. Ho, as well as by Miss Carmencita Cheng and Mr Eddie Leung, in the following form:

“SPECIAL RESOLUTION

Passed on the 3rd day of October 980

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At a Meeting .of the Board of Directors of the Company duly convened and held at Room 2608, New World Tower, Central, Hong Kong on 3rd day of October, 1980, it was resolved THAT:

'Miss Carmencita C. Cheng and Mr Eddie Leung Sze Shing be and are hereby appointed alternate directors to Messrs Jesse Perez and S.Y. Ho respectively and that their appointment date be made effective with retrospect on August 15, 1980.

Miss Carmencita C. Cheng and Mr Eddie Leung Sze Shing are hereby admitted to be the Company's additional authorized signatories. Impressions of their specimen signatures are shown hereunder.’”

78. That foreshadows the time when, on 1st May 1983, Ms Stephenie Chan would be substituted for Miss Carmencita Cheng as alternate director to Mr Jesse Perez in Zanda, and Zanda's board would resolve that, with effect from the same date, Miss Carmencita Cheng would be replaced by Ms Stephenie Chan as Zanda's authorised signatory (Trial Bundle A, p.67).

79. After becoming alternate directors, Miss Carmencita Cheng and Mr Eddie Leung became signatories for Zanda's current account with O.T.B. and its loan account with Daiwa Overseas Finance on the basis of Mr S.Y. Ho and Mr Eddie Leung comprising an "A" group, and Mr Jesse Perez and Ms Carmencita Cheng comprising a "B" group. Those accounts could be operated on the joint signatures of one person from the "A" group, and one from the "B".

80. Messrs Leung and Wong, the architects retained by Zanda, got their plans and specifications for the proposed development of the Ming Fung Street property approved by the Building Authority on 5th November 1980. The approved plan was for a 23-storeyed building consisting of shops on the ground floor, offices on the first floor and flats on the remaining floors.

81. All that Zanda needed now was a buyer for the proposed development.

82. This it got after an uneventful phase of clearing the site when, in about the third quarter of 1981, Mr Alexis Chan, prominent as ever in the affairs of Zanda, found a purchaser through his brother-in-law, Mr John Chau, a partner in Messrs Tsang, Chau and Shuen, a firm of solicitors which also became Zanda's solicitors.

83. That purchaser was Tai Ting Estates, a public company.

84. Because of the work already done by Zanda in planning a development, and clearing the site, Zanda was able to sell the Ming Fung Street property to Tai Ting for $41 million (of which $4.1 million was to be paid as a deposit) on the basis the price was to include a 23-storeyed building to be erected by Zanda in accordance with the plans approved by the Building Authority on 5th November 1980.

85. Although there was no reference to this in the Agreement, the contractor to erect the building was Ray On Limited, a company substantially owned by Mr Johnny Cheng, Asean's largest shareholder. Mr Alexis Chan was instrumental in getting that contractor for this Zanda development.

86. The written Agreement concerning this transaction between Zanda and Tai Ting Estates was made on 3rd September 1981. It provided that Zanda must erect the building within 660 working days, which meant by the 25th June 1983.

87. Payment of the purchase price by Tai Ting Estates to Zanda was to be in accordance with a Schedule to the Agreement. I now set out the content of that Schedule:

"1. A sum of $4,100,000.00 shall be paid as deposit and part payment of the purchase price on the signing of this Agreement.

2. A further sum of $2,050,000.00 shall be paid as furhter deposit and part payment of the purchase price upon completion R.C.C. (reinforced concrete, my parenthesis) flooring of the 1st floor.

3. A further sum of $2,050,000.00 shall be paid as further deposit and part payment of the purchase price upon completion of RC.C. flooring of the 8th floor.

4. A further sum of $2,050,000.00 shall be paid as further deposit and part payment of the purchase price upon completion of RC.C. flooring of the 16th floor.

5. A further sum of $2,050,000.00 shall be paid as further deposit and part payment of the purchase price upon completion of R.C.C. flooring of the Roof.

6. The balance of purchase price in the sum of$28,700,000.00 shall be paid on completion."

88. By paragraph 7 of the Agreement, completion was to be within 14 days of Tai Ting Estates being notified in writing that the Occupation Permit had been issued for the building.

89. Each and every one of those payments referred to in the Schedule, (apart from the exception, immaterial for present purposes, of two cashier orders dated 23rd, August 1983, making up part of the balance of the completion monies), took the same form of a cheque or cheques drawn by Messrs Tsang, Chau and Shuen on one of its bank accounts, in favour of Zanda as payee, with the printed words "or bearer" crossed out on the face of the cheque, and the crossing "Not Negotiable A/C Payee Only" stamped on the face of the cheque with a chop. The cheque payable to Zanda for the $4.1 million deposit had also taken the same form.

90. Payment on behalf of Tai Ting Estates was made by Messrs Tsang, Chau and Shuen sending the cheques and cashier orders I have just described to Zanda at its registered office which was the same place where Asean had its actual office.

91. Each and every one of those cheques, starting with the cheque for the deposit, was indorsed in blank on its back by at least one director or alternate director of Zanda, with his or her signature on the dotted line left by the Zanda chop under the words "Zanda Investment Ltd" and above the words "Authorized Signature".

92. The cheque for the deposit of $4.1 million was endorsed by a director or alternate director from the O.C.I.L. side in Zanda, and likewise from the Asean side. The proceeds from that cheque, less some agent's commission, were placed on deposit with Asean to earn interest initially, but later were uplifted to help, inter alia, payoff the Daiwa loan.

93. The cheque for the first stage payment was dated the 12th July 1982, and sent to Zanda's office on the same day. The second stage payment was made in the same way by a cheque dated and sent to Zanda's office on 2nd September 1982. The cheque for the deposit and the cheques for the first two stage payments had been treated in the same way, by being indorsed in blank on behalf of Zanda by Mr Jesse Perez or his alternate Miss Carmencita Cheng for the Asean side, and Mr S.Y. Ho or his alternate Mr Eddie Leung for the O.C.I.L. side. Such indorsements had the effect of making the cheques bearer cheques. With the full concurrence of Mr S.Y. Ho, and Mr Eddie Leung, those cheques were left with Asean so that Asean could pay them into any of its own bank accounts. It would have been Miss Stephenie Chan, under the direction of either Mr Alexis Chan or Mr Jesse Perez, who set about arranging the indorsements by Mr S.Y. Ho or Mr Eddie Leung on those cheques.

94. The processing of the cheque for the third stage payment, made on the 28th October 1982, did not follow the same course as the cheques for the earlier stage payments. This time, an indorsement on behalf of Zanda was made by Mr Jesse Perez alone, without any signature of Mr S.Y. Ho or Mr Eddie Leung representing the O.C.I.L. side. That cheque was collected for Asean's current account by the Bank of America. There was no protest either from Mr S. Y. Ho or Mr Eddie Leung at what Asean had done in receiving the proceeds of that cheque made payable to Zanda without securing a joint signature by way of indorsement from the O.C.I.L. side. It is quite possible that at the time it simply escaped the attention of Mr S.Y. Ho and/or Mr Eddie Leung that the third stage payment must have been collected by Asean without Asean first of all seeking a signature from the O.C.I.L. side to acknowledge it was in order for Asean to collect the money. I have no doubt, based on the evidence in this case as a whole, that, if at the time Asean collected payment on that cheque, Mr S.Y. Ho and/or Mr Eddie Leung had known what Asean was doing, there would have been no objection from either of them since they regarded it as Asean's role to collect all payments in favour of Zanda. This collection for Asean of a cheque made payable to Zanda on the strength of an indorsement from the Asean side only foreshadows what was to happen on the 7th September 1983 when the disputed cheques in Zanda's favour were collected by Bank of America and Barclays on the basis of an indorsement of Miss Stephenie Chan alone as alternate director on behalf of Zanda.

95. The last of the four stage payments was made by a cheque in Zanda's favour on the 14th December 1982. No doubt, it would have been signed by either Mr Jesse Perez or his alternate Miss Carmencita Cheng on behalf of the Asean element of Zanda, but whether it was also endorsed by Mr S.Y. Ho and/or Mr Eddie Leung cannot be deduced from the evidence. The cheque itself is missing.

96. Each and everyone of the first five cheques payable to Zanda under the agreement with Tai Ting, namely, in respect of the deposit and the four stage payments, can be seen to have been indorsed in blank, with the result that they could be paid into one of Asean's bank accounts. That was the result Mr S.Y. Ho and Mr Eddie Leung wanted since they had, in effect, left it to Mr Alexis Chan and Mr Jesse Perez to administer the building project, which of course, included the payment of all the expenses incurred in building.

97. The four cheques (including the two in issue collected by Bank of America and Barclays) and two cashier-orders making up the $28.7 million balance on completion carried the single signature of either Mr Jesse Perez or his then alternate, Ms Stephenie Chan, in combination with Zanda's chop, as purported indorsement. Those appearing for Zanda dispute that a single signature could be a valid indorsement for Zanda : there had to be joint signatures of one director or alternate director from the O.C.I.L. "A" group, and one from the Asean "B" group, they argue.

98. The individual cheques by which the various payments under the Schedule to the Sale and Purchase Agreement between Zanda and Tai Ting Estates were made, will be looked at again in more detail as the narrative unfolds.

99. Returning to September 1981 when Zanda and Tai Ting Estates made their Agreement, one can see it roughly marked a watershed in Zanda's history.

100. Up until then, Mr S.Y. Ho and Mr Eddie Leung on the O.C.I.L. side had been relatively involved in Zanda's financial affairs by signing a cheque from time to time drawn on its O.T.B. current account, and making sure that O.C.I.L. provided its 40% share of payments into that account by Zanda's shareholders. Once the Agreement with Tai Ting Estates was signed, however, that account became more or less dormant. The last time any funds were paid into that account was 10th October 1981when $200,00 was deposited. That brought the accounts credit balance up to $248,367. Apart from debit items for $132,000 on 10th December 1981 and $114,750 on 7th December 1982, the account was virtually inactive, although it remained open. Without having to do as much as sign cheques even, Mr S. Y. Ho and Mr Eddie Leung, took even more of a back-seat in the running of Zanda's affairs. Once in a while, they might go to have a look from the outside at the progress being made on the development at the Ming Fat Street property, but otherwise, the people at Asean were left to get on with the running of Zanda's affairs.

101. From the time of Zanda's Agreement with Tai Ting Estates, Asean took over both the administering of Zanda's finances in relation to the erection of the building, and the provision of funds for Zanda, insofar as the stage payments under the Agreement proved insufficient to pay the building contractor. Asean furnished loans to Zanda to make up the deficiency. In the fullness of time, Zanda would have to pay them back, thereby making it not unnatural for Asean to be receiving money from Zanda.

102. September 1981 was very close to the edge of the watershed between the boom in Hong Kong's real estate market, and the collapse which supervened. No doubt, the shareholders in Zanda at the time of making the sale to Tai Ting Estates were very pleased with themselves at their profitable exploitation of the opportunities available in a rising real estate market. Little did they realize the rude awakening they were to receive when the market turned.

I. PERIOD FROM 3rd SEPTEMBER 1981 UP TO 7th SEPTEMBER 1983

A. ECONOMITC BACKGROUND

103. The Agreement between Zanda and Tai Ting Estates must have been amongst the last of the profitable real estate transactions in Hong Kong before land prices started to suffer steep declines as boom turned to slump. When entering into that Agreement, Zanda had hopes of a profit in the vicinity of $14 million.

104. The first indicators that all was not well in Hong Kong's real estate market occurred towards the end of 1981. By that stage, banks and D.T.C.s, through their lending policies, had created a vast balloon of credit which at some point was bound to burst. Between 1978 and 1982, loans granted by banks to the property sector had jumped from $10,228 million to $47,578 million, that is to say, a more than four-fold increase. Lending by D.T.C.s over that period for real estate deals had increased nine-fold, from $2,48 million to $21,064 million. Such a situation could only end in tears. During the year 1982, real estate prices tumbled by something like 60 to 90 per cent from what, looking back, was the peak period of 1980 to 1981.

105. Adding to the discomfiture of anyone who had borrowed to speculate on land was the phenomenon of record high interest rates in the early 1980s. Anyone owing money to banks in respect of real estate dealings at a time of softening prices accompanied by rising interest rates is likely to find himself caught in a credit squeeze. That is what happened to Asean, as well as to many other D.T.C.s.

106. As time was to show, many D.T.C.s, including Asean, had, by committing too high a proportion of their borrowings to real estate transactions, been guilty of the folly of having, in effect, too many eggs in one basket.

107. The first publicly revealed casualty arising from Hong Kong's credit excesses of the previous four or five years was Tse Lee Yuen Jewellery Group, which went into liquidation in early September 1982 when it was no longer able to honour so-called "gold certificates", issued to many small investors who found out, too late, that there was nothing to back up the pieces of paper they were left holding. Soon after that, there was a run on one of the branches of Hang Lung Bank as the result of rumours that Hang Lung Bank had close connections with Tse Lee Yuen Jewellery Group. Because of the close connections between Hang Lung Bank, via Mr Johnny Cheng, and Asean, I think it safe to infer that at least a tiny amount of confidence in Asean must have been sapped on account of its major Hang Lung Bank connections.

108. That all was far from well with registered D.T.C.s became manifest on the 15th November 1982 when Dollar Credit and Financing Limited ("Dollar Credit"), one of the larger registered D.T.C.s, announced it could no longer meet its liabilities. From that time onwards, the writing was on the wall for D.T.C.s such as Asean which, as time would show, had played fast and loose with the money of those from whom they had borrowed. A domino effect then set in with six more registered D.T.C. collapsing in the 4 months following the Dollar Credit debacle. From late 1982 onwards, a whole host of highly leveraged companies which had dabbled in real estate started going to the wall. Amongst the more notorious were Eda Investments and the Carrian Group.

109. When Dollar Credit went under, doubts about the stability of Hang Lung Bank started to re-surface, because Hang Lung Bank had two directors who also served on the board of Dollar Credit. The resignation of those two directors from Hang Lung Bank must have gone some way to restoring public confidence in Hang Lung Bank, but there must have been at least a modicum of damage done to Hang Lung Bank's reputation, and there would have been a ripple effect on Asean in which the ubiquitous Mr Johnny Cheng featured.

110. To add to Hong Kong's economic woes, the question of what was to happen to Hong Kong when the lease of the New Territories ran out in 1997 started to obtrude in the public consciousness due to wide coverage of that issue in the media. Public concern on the topic of Hong Kong's future intensified throughout 1983, with a low point arriving in late September 1983 when there were wild currency gyrations. Confidence in Hong Kong's currency was restored by government's introduction of a currency "peg" linking the Hong Kong dollar to the United States dollar.

111. On 30th June 1983 a two year breathing-space elapsed for registered D.T.C.s which, by amendments to the Deposit Taking Companies Ordinance in mid-1981, had been required to increase their capital from the minimum $2.5 million allowed up until then to $10 million immediately after June 30th 1983. Six registered D.T.C.s, failing to meet this $10 million capital requirement, automatically had their registration suspended on 1st July 1983. This, yet again, exposed the vulnerability of non-bank-owned-D.T.C.s. In July 1983 yet further adverse publicity for D.T.C.s arose when two more underwent de-registration.

112. By mid 1983, Hong Kong's land market had reached a chronically depressed condition, with unrelieved gloom about land prices having existed for over 18 months by then. A bright spot, at a time of many companies being driven into liquidation and many individuals falling into bankruptcy because of their greed over former speculation in land, was Tai Ting Estates which, so the evidence before me suggested, never looked as if it would be in any difficulty when it came to the point of completion of its Agreement with Zanda.

B. ACTIVITIES OF ZANDA, ASEAN, BANK OF AMERICA AND BARCLAYS

113. For the purposes of exposition, it is convenient to break up the period from 3rd September 1981 up to 7th September 1983 into two parts - one up to and including 30th June 1983, and the other, from 1st July to 7th September 1983.

1. Phase from 3rd September 1981 to 30th June 1983

i) Zanda

114. Looked at from Zanda's point of view, the period I am now considering was relatively uneventful. Work progressed on the building it was putting up for Tai Ting Estates. The reinforced concrete flooring of the 1st floor was completed by July 1982, triggering the first stage payment of $2.05 million. The cheque for that sum was indorsed over to Asean by the joint signatures of Mr Jesse Perez and Mr Eddie Leung on behalf of Zanda.

115. By the 2nd September 1982, the 8th floor must have been completed, since, on that date, Zanda received a cheque for $2.05 million, being the second stage payment. That was indorsed to Asean by Mr S Y Ho, and Miss Carmencita Cheng.

116. The 16th floor having been built, Zanda on 28th October 1982, received the third stage payment of $2.05 million. For the first time, a cheque was negotiated to Asean by Zanda on the signature of a sole director on behalf of Zanda, that director being Mr Jesse Perez. The proceeds of that cheque were collected for Asean by Bank of America. The officer in Bank of America who approved that collection was Mr Arthur Lee. It was he who, approximately ten months later, was to approve the collection of the fateful cheque for $5 million, dated 7th September 1983, in issue in the present proceedings.

117. The flooring of the roof must have been finished by December 1982, since Zanda received the fourth stage payment that month. There is no dispute that cheque was indorsed over to Asean. Whether that indorsement was on the signature of Jesse Perez alone, or jointly with Mr S.Y. Ho or Mr Eddie Leung from the O.C.I.L. side, is an area of penumbra, since none of the parties in the case has been able to find a copy of the cheque. On the view I take, it is just as likely that the cheque was indorsed by Jesse Perez alone as it is that he indorsed it jointly with Mr S.Y. Ho or Mr Eddie Leung.

118. By March 1983, Zanda must have felt it was falling behind in the building work: it decided to offer the contractor, Ray-On Limited, ("Ray-On"), an inducement to get the building finished before the 25th June 1983, when the 660 working days provided for under the Agreement between Zanda and Tai Ting Estates expired. The inducement took the form of paying Ray-On an extra $3,000 a day, so that Ray-On could pass that on to its workforce by way of overtime. As always, it was Mr Alexis Chan who arranged that. There was some degree of involvement by Mr S.Y. Ho, too, since he joined with Mr Jesse Perez in passing a Zanda board resolution approving the extra payment. At the same time, Zanda, with Mr S.Y. Ho's participation, approved guaranteeing a loan to Ray-On of $1 million from Kin Fung Hong, the family company of Mr Alexis Chan. Another similar loan of $1 million, with the same arrangements and parties, was made on 20th June 1983.

119. By late May 1983, one finds Mr S.Y. Ho, reasonably, expecting that the building will by then have been finished. On that day he wrote to Mr Alexis Chan at Asean in the following terms:

"Dear Alexis,

I refer to our joint venture projects in Ming Fung Street, Kowloon and in Keelung, Taiwan.

In the Ming Fung Street development, Ray On Construction Co. Ltd promised to complete the project in early May, 1983, after our agreeing to pay them HK$3,000. - per day as overtime compensation since 1st March, 1983. I shall be pleased if you could let us be informed of the present situation.

In the Keelung, Taiwan project, we discussed some time ago how we could settle our accounts with you in view that Mr Johnny Cheng had arranged another party to take over the whole project. May I hear from you soon as we wish to bring a close to this matter before the end of June.

Please feel free to call me any time at my office.

With personal regards.

Yours sincerely, Sd. (S.Y. Ho)"

120. Without knowing the precise date, I am satisfied that the building had been completed by about the end of June 1983, at the latest. All that remained at that point was the issue of the Occupation Permit by the government to entitle Zanda to call on Tai Ting Estates for payment of the balance of the purchase monies within 14 days.

121. With effect from 1st May 1983, Ms Stephenie Chan took over from Ms Carmencita Cheng as alternate director to Mr Jesse Perez. The Zanda minute recording that is as follows:

"ZANDA INVESTMENT LIMITED

MINUTES OF A MEETING OF DIRECTORS OF THE COMPANY HELD AT ROOM 2608, NEW WORLD TOWER, QUEEN'S ROAD CENTRAL, HONG KONG ON 30TH APRIL. 1983.

PRESENT	Mr Jesse Perez Mr Ho Sheung Yin
CHAIRMAN	Mr Jesse Perez was in the chair.
CHANGE OF ALTERNATE DIRECTOR	There was tabled before the meeting a letter from Mr Jesse L Perez, director regarding the appointment of Miss Chan Siu Ling, Stephenie to be his alternate director to take the place of Miss Carmencita C Cheng with effect from 1st May, 1983.
CHANGE OF AUTHORISED SIGNATORY	It was resolved that with effect from 1st May, 1983 Miss Carmencita Cheng would cease to be the Company's authorised signatory and would be replaced by Miss Stephenie Chan. Specimen signature of Miss Stephenie Chan is as follows: Sd.  ________________ Save as aforesaid, all other existing signing arrangements should remain valid and effective.
END OF MEETING	This concluded the business of the meeting.
	Sd. (Jesse Perez) Chairman"

ii) Asean

122. Although, with hindsigh, one can now see that the worm was already in the bud, no outsider observing Asean in September 1981 could have imagined how rotten the company was, and how far it had to fall. At that time, a long list of different banks were only too happy to lend Asean money for its business. Largest of all the lender-banks was Barclays, which extended facilities of US$22 million to Asean. Some of that was secured, some not. The next biggest lender, Bank of America, granted Asean a lending-facility of approximately US$8 million. Much of that was secured. There were at least ten other banks lending money to Asean. Much of that lending was done on the basis of personal guarantees from Mr Johnny Cheng and Mr Alexis Chan, the two most influential figures in Asean.

123. The impression I get from the evidence as a whole is that, from the time Asean started business in 1979, right through until about the last quarter of 1983, the major figures in Asean, namely, Mr Johnny Cheng, Mr Alexis Chan, and Mr Jesse Perez, (in descending order of importance), were regarded as men of complete probity, and so wealthy that any reasonable person would assume there would never be any temptation for them to do anything dishonest.

124. Even as real estate prices dived sharply in 1982, Asean was still outwardly perceived by the financial community in Hong Kong as a stable, well-run company, the wealth of Mr Johnny Cheng, in particular, being a source of comfort to those lending to Asean.

125. As early as April 1982, however, Mr Arthur Lee, the Account Officer handling Asean's account in Bank of America, did dimly perceive that trouble could lie ahead for Asean because of its exposure to a softening real estate market, and a harsher regulatory climate for registered D.T.C.s as the result of amendments made to the Ordinance in 1981.

126. Throughout 1982, I think that, in all probability, Mr Alexis Chan had no problem in raising finance for the Zanda development. Besides the money indorsed over to Asean from the $4.1 million deposit and the four stage payments of$2.05 million each from Tai Ting Estates, it is obvious, from the evidence as a whole, that Asean had to come up with additional money to finance the building for Zanda.

127. As a D.T.C., Asean infringed the Ordinance whenever it lent more than 25% of its own capital and reserves to anyone borrower. A provision to that effect was in the Ordinance when first enacted in 1976, and, with increasing refinements introduced by way of legislative amendment, has remained a part of the legislation to this day. Asean, through its Managing Director, Mr Alexis Chan, had lent Zanda sums of money considerably in excess of 25% of Asean's capital and reserves. Mr Alexis Chan evaded the D.T.C. legislation by the simple expedient of having a dummy company appear to lend money to Zanda. The dummy company brought into being by Mr Alexis Chan for this purpose was Clyde Investments Ltd ("Clyde Investments").

128. Clyde Investments features as an indorsee on the three cheques for stage payments of $2.05 million each, regarding which the court has copies. As likely as not, Clyde Investments was also an indorsee on the missing cheque for $2.05millibn relating to the fourth stage payment. Nothing turns on whether Clyde was shown as an indorsee on that fourth stage-payment.

129. Besides Clyde, the other indorsee on the stage-payment cheques was Asean. As far as I can make out from the photostat copies of the three cheques for stage payments put in evidence, each indorsement on behalf of either Clyde Investments or Asean is on the strength of a single signature.

130. Arthur Lee was the Account Officer who approved the collection by Bank of America of two of the three stage payments in relation to which the court has copies. I have previously mentioned how it was Mr Arthur Lee who approved the collection by Bank of America on the 7th September 1983 of the $5 million cheque in issue. I have also mentioned how he had at least once previously approved the collection for Asean of a Zanda cheque where Mr Jesse Perez was the sole indorsee on behalf of Zanda. That was the cheque for the third stage payment of$2.05 million, dated 28th, October, 1982. That cheque, too, had an indorsement by way of a single signature on behalf of Asean. Thus, when Mr Arthur Lee, on the 7th September 1983, approved collection of the $5 million cheque in issue, he was no stranger to cheques made payable to Zanda being indorsed over on the strength of a single signature on behalf of Zanda, and another single signature on behalf of Asean.

131. Although there is nothing to indicate Asean experienced any difficulty in 1982 in raising finance for the Zanda, building, I do not doubt that the suspension of-Dollar Credit as a registered D.T.C. on 15th November 1982 must have sent a shiver through Mr Johnny Cheng, Mr Alexis Chan, Mr Jesse Perez and anyone else privy to the dishonest way in which Asean ran its business. I think that, in all probability, some of the overseas banks lending to Asean would immediately have terminated their facility as soon as the news of the Dollar Credit suspension broke. Asean, like Dollar Credit, fell into the category of non-bank owned registered D.T.C.s lacking the depths of reserves associated with bank-owned registered D.T.C.s. Those running Asean must have felt that the credit-owned registered D.T.C.s. Those running Asean must have felt that the credit-corset was tightening on them as banks withdrew lending facilities, and while borrowing prospects for Asean could not have looked good from the point of view of those running Asean as at the end of 1982, the situation was not yet critical.

132. With each item of bad news in the first half of 1983, such as for example, the suspension of yet another registered D.T.C. or the calling in of receivers for a land development company, say, the liquidity crisis for Asean and those running it must have become more acute.

133. One bright spot for Asean as June 1983 drew to a close must have been the prospect of its share of the profit from the Zanda development it was soon due to garner.

iii) Bank of America

134. It is difficult to determine precisely how much credit Bank of America granted to Asean in the period from 3^rd September 1981 up until November 1982 when the news of Dollar Credits’s collapse broke. A bewildering array of different figures relating to the grant of credit-lines to Asean from Bank of America are dotted around in a variety of material emanating from Bank of America in respect of the period I am now considering. A further complication is introduced by the fact that Bank of America’s credit lines to Asean are shown in at least three different currencies, namely, HK dollars, US dollars and Singapore dollars, all of which, at that time, were freely floating in relation to each other. The value of any security from Asean at any particular time was far from clear to the Court. The general impression I get in respect of this period from September 1981 up until November 1982 is that Bank of America’s unsecured loan facilities to Asean were of the order of from HK$20 million to HK$30 million. Nothing turns on knowing the precise amount of Bank of America’s unsecured exposure to Asean during that time.

135. Already I have noted how, as early as April 1982, on the occasion of making a routine annual assessment of its customer, Bank of America had slight reservations about Asean's financial prospects. In that annual assessment, it was noted that amendments to the Ordinance requiring that registered D.T.C.s after June 1983 would no longer be allowed to accept loans from the public of a maturity of less than 3 months, would make the business climate less favourable for such D.T.C.s. Also, reference was made to declining real estate values which might cause problems for Asean. Bank of America knew Asean to have advanced money for real estate transactions.

136. From at least July 1982, Bank of America knew the shareholders and officers of Zanda from a search it caused to be conducted against that company at the Companies' Registry. This was done to follow up a reference in Asean's annual audited financial statements which showed that, besides its interest in Zanda, Asean was also involved in a real estate development in Taiwan. While knowing that Asean owned no more than 50% of the shares in Zanda, Bank of America's officers saw that, in fact, it was Asean, the largest shareholder, which, through Mr Alexis Chan and Mr Jesse Perez, was actively managing the Zanda development. Bank of America knew, too, that Asean was financing the development by loans as a shareholder. Bank of America, undoubtedly, would also have known that O.C.I.L. and Northbourne had made shareholder-loans to Zanda, but their loans remained at the same level as they had been at the time when Zanda purchased the Ming Fung Street property, whereas the loans made by Asean, either directly or indirectly, had increased as the Zanda development progressed.

137. As soon as Bank of America learnt about the Dollar Credit collapse on 15th November 1982, it reacted swiftly and decisively. Bank of America realized that Asean was basically in the same boat as Dollar Credit in that neither of them was bank-owned and both of them had lent to the high risk end of the market.

138. Mr Hemholz, Bank of America's Vice-President in Hong Kong in charge of credit policy, consistently adopted the stance that no new credit was to be extended to Asean, and any existing credit lines were to be cut off unless Asean could come up with adequate security. At the time of the Dollar Credit collapse, Asean's borrowing from Bank of America, not backed by adequate security, was in the $20 to $30 million range.

139. The impression I get from the somewhat confusing Bank of America documentation is that Bank of America terminated one line of credit for about $14 million before the end of December 1982.

140. Despite Mr Hemholz's declared policy of more or less immediately terminating any credit line for Asean which lacked adequate collateral backing, Bank of America, in practice, did not act as drastically against Asean as one might have expected from the way Mr Hemholz was writing. Part of the explanation for why Bank of America's deeds did not match Mr Hemholz's word is probably that Bank of America was impressed by the efforts Mr Alexis Chan made to co-operate with Bank of America in reducing Asean's debt to Bank of America in an orderly way. By drawing on the resources of his family's company, Kin Fung Hong, Mr Alexis Chan was, in December 982; able to hand over to Bank of America a time deposit of about $15 million in favour of Kin Fung Hong. That time deposit was not actually pledged to Bank of America, but it gave Bank of America comfort to know that Mr Alexis Chan's family still had substantial assets, the certificate of deposit being an example.

141. During the first quarter of 1983, continuous but polite pressure was exerted by Bank of America on Asean to reduce its outstanding borrowings.

142. For reasons not entirely clear, Bank of America, in practice, allowed Asean to drift on until June 1983 with part of its outstanding loan from Bank of America still unsecured. In early January 1983, one sees Mr Hemhplz continuing his refrain that unless security was provided by Asean, Bank of America should cancel any uncovered loan. As late as April 1983, Mr Arthur Lee was proposing to his superiors that Asean's revolving-credit for $27 million should be renewed, provided sufficient security was forthcoming. However, an event had occurred shortly before that which brought home to those responsible for supervising Asean's account with Bank of America that the time had arrived to discontinue credit to Asean. That event was Asean, on 31st March 1983, for the first time, defaulting on an obligation to Bank of America by failing to meet a deadline for the repayment of $2 million.

143. Mr Arthur Lee's suggestion to his superiors in mid-April 1983 that there should be a renewal of the revolving-credit for Asean was swept aside, in favour of a policy requiring Asean to repay all its debts to Bank of America within a period of a few months.

144. Although it was undoubtly serious for a financial institution in the nature of a secondary bank such as Asean to default over a payment, I accepted the evidence of Mr Arthur Lee that the circumstances surrounding this default did not point to the possibilty Asean might be insolvent, and even less did it suggest that there might be something dishonourable about those running Asean. As Bank of America perceived the position at the time, Asean was experiencing a liquidity problem brought about by having assets such as land which could not be disposed of quickly enough to settle its debts on time. On the other hand, though, there can be no doubt that from the end of March 1983 onwards, Bank of America regarded Asean's business as highly risky, and was anxious to get repayment as soon as possible. Certainly, from about the end of April or the beginning of May 1983, it is clear that the Bank of America had firmly made up its mind to cut off Asean's credit, after allowing Asean a few months grace to make repayment in full. The actual mechanics involved in Bank of America's cutting off credit to Asean was to cancel Asean's revolving-credit, and replace it with a short term advance which Asean was required to pay by instalments.

145. Looking at Asean’s position on the 18^th June 1983, it owed Bank of America approximately $27 million, of which approximately $11 million was secured by certificates of deposit, leaving an unsecured balance of approximately HK$16 million. To eliminate that debt, Bank of America required Asean to sign promissory notes for the following amounts and maturities:-

$8.25 million 14^th July 1983

$5,714,514 on 29^th July 1983

$5 million on 30^th August 1983

$5 million on 30^th September 1983.

146. Part of the monies comprised within those promissory notes was secured by certificates of deposit.

147. Bank of America, somewhat euphemistically, described this process as a "re-scheduling" of its loans to Asean, but there can be no doubt, as those appearing for Zanda asserted, that the exercise embarked upon by Bank of America was its requiring Asean to liquidate all its borrowings within a period of approximately three month, expiring at the end of September 1983.

148. Viewed at the end of June 1983, relations between Bank of America and Asean remained amicable. Mr Alexis Chan continued to co-operate fully with Bank of America, and showed that he was doing his level best to see that Bank of America got paid. Neither he nor Mr Jesse Perez had, at that stage, done anything to Bank of America's knowledge which might have led Bank of America to regard them as tricky or unreliable. At worst, Mr Alexis Chan and Mr Jesse Perez could have been regarded as a little foolish by Bank of America for overstretching themselves financially, but, in this, they were no worse, to outward appearances, than a whole bevy of other Hong Kong businessmen, assisted by banks, who had forgotten that booms are invariably followed by slumps. Illiquidity was no indicator of illegality.

(iv) Barclays

149. No one was available on Barclays' behalf to speak about what was happening between Barclays and Asean during the period from 3rd September 1981 up until the Dollar Credit bombshell on 15th November 1982. Judging from the absence of panic on the part of Barclays when the news of Dollar Credit's demise broke, I regard it as reasonable to assume that Barclays must have been happy with the way Asean had conducted its account.

150. Whereas Mr Helmholzl, on behalf of Bank of America, unswervingly pursued a policy aimed at cancelling Asean's credit-lines, Barclays took a comparatively casual approach. It is not easy to tell from the documentary evidence how much Asean owed Barclays without security. I gather from the evidence generally that it must have been in the $50 million region.

151. Some pressure was brought to bear by Barclays on Asean to reduce one credit line from approximately $33 million to $27 million in November/December 1982, the effect being that Asean towards the end of December 1982 did pay down its debts to Barclays by over $5 million, but, generally, Barclays' staff in Hong Kong give the impression, from what they were committing to paper at the time, that they were not unduly worried about Asean's debts to their bank.

152. What comes across when reading reports from Barclays' Hong Kong staff is that, in their eyes, Asean was a well-run company, headed up by able and honest people.

153. Barclays' head office in London did not share the equanimity of those running the Hong Kong operation. It is quite extraordinary how the Barclays' people in London, eight thousand miles away, as early as the 14th January 1983, woke up to what Asean's problems probably were, whereas the Hong Kong staff, on the spot, appeared blissfully unaware of what might ail their customer. I set out London's prescient letter of 14th January 1983 to the Hong Kong manager of Barclays:

"The General Manager in Hong Kong

Hong Kong

ASEAN MERCHANT CREDIT AND INVESTMENT HOUSE LTD

Thank you for your letter of 16th December 1982 with which you enclosed Balance Sheets and Accounts for the above Company. We are not happy about this account and we shall be obliged to receive your comments on the queries and observations that follow:

1) There has been a general deterioration in the latest Balance Sheet. The Company looks stretched and its other bankers should perhaps be uncomfortable if only holding Director’s guarantees.

2) Liquidity problems may be real. What has been the recent trend on placings? What are the maximum and typical terms on our placings, and are they solid?

3) The term contrapart liabilities shown on the Balance Sheet do appear to be high in relation to the level of capitalisation.

4) Our sanction of the present limits totalling US$21.1 million was subject to your obtaining the Company's undertaking to increase the capital to at least HK$50 million by 1983. There seems to have been little progress towards this target and we shall be interested to know if, when and how the Company plans to keep to its undertaking.

5) In addition to the above undertaking you have obtained the authority, from the owners of the properties, to which we look as security, to upstamp the Mortgages on the properties. While the Company's other bankers provide a considerable sum in total on an unsecured basis, do you agree that it is now appropriate for you to exercise your authority and upstamp the Mortgages with a view to improving our security position?

6) The Company's major assets are its debtors about whom we have no knowledge what so ever. The provision for bad debts in 1982 was more than twice that in 1981 and while this is perhaps, an indication of the fact that in early 1982 the rumblings of the present difficulties in Hong Kong were being felt, it could be that this increased provision is a warning that there may be far worse to come in 1982/3. What is the Company's involvement in advances to the property sector?

If this Company is heading for difficulties any action to improve our position should not be delayed. We trust that you appreciate our concern and await your reply.

Sd. (General Managers' Assistant)"

During the first half of 1983, nothing appears to have been done by Barclays Hong Kong to get Asean to reduce it unsecured borrowings, which, by the end of June 1983, were in the, $53 million range.

2. Phase from 1st July 1983 to 7th September 1983

(i) Zanda

154. By the 1st July 1983, Zanda had done everything required of it by its Agreement with Tai Ting Estates in relation to finishing the new building at the Ming Fung Street property. All that Zanda needed do now to become entitled to receive the $28.7 million balance of the purchase money from Tai Ting Estates was to have the Building Authority issue the Occupation Permit for the building.

155. The Building Authority issued the Occupation Permit on 6th August 1983. Both Mr Alexis Chan and Mr Jesse Perez knew that straight away, but refrained from passing on that information to Mr S Y Ho or Mr Eddie Leung.

156. Mr Alexis Chan and/or Mr Jesse Perez straight away informed Tai Ting Estates that the Occupation Permit had been issued. Mr Alexis Chan and/or Mr Jesse Perez let Tai Ting Estates know they would like to complete as soon as possible. Tai Ting Estates, which already had the funds available, indicated its willingness to go along with their wishes. Tai Ting Estates then caused its solicitors, Messrs Tsang, Chow & Shuen, which were also Zanda's solicitors, to release the completion monies to Zanda.

157. On behalf of Tai Ting Estates, Messrs Tsang, Chau & Shuen had placed the funds for completing the purchase on deposit with various banks. One such deposit was for $10 million with Citibank. On 9th August 1983, Messrs Tsang, Chau & Shuen sent Zanda, at its registered office, which was, of course, Asean's actual office, a cheque of that date, drawn on Citibank, for $10 million, made payable to Zanda. As I described earlier, that cheque bore the crossing on its face, "Not Negotiable A/C Payee Only" and the printed words "or bearer" were deleted after the payee's name. On receipt of that cheque at Zanda's/Asean's office that same day, Mr Jesse Perez signed the back of the cheque where the Zanda chop was applied. As I have previously explained, that chop reproduced a dotted line with the words, "Zanda Investments Ltd." above, and the words, "Authorized Signature", below. Assuming for the time being that the sole signature of a director or alternate director was sufficient to constitute a valid indorsement on behalf of Zanda, the indorsement in the form I have just described would amount to an indorsement in blank. The chop of Asean was also stamped on the back of the cheque. That had a single signature, namely, that of Mr Titus Lee, the Chief Assistant Manager of Asean. That cheque was, the same day, paid into Asean's account with Hang Lung Bank which collected the proceeds for Asean from Citibank.

158. Since more than $10 million was due from Zanda to Asean, Zanda now makes no complaint about Asean receiving that particular sum, though Zanda, nonetheless, contends that a purported indorsement by a single director of Zanda was ineffectual, legally.

159. Still unbeknown to Mr S.Y. Ho and Mr Eddie Leung at the time, Messrs Tsang, Chau & Shuen sent a further $4.5 million to Zanda/Asean on 24th August 1983. That took the form of one cashier-order for $2 million and another for $2.5 million in favour of Zanda as payee. There is no need to go into the details of those two cashier-orders, other than to note that each of them was indorsed in blank by Mr Jesse Perez who had Zanda's chop applied, and then they were indorsed by Mr Alexis Chan who had them paid into his own personal account with Algemene Bank Nederland N.V. (ABN).

160. There still remained $14.2 million of the purchase money outstanding. Three cheques in respect of that amount were sent by Messrs Tsang, Chau & Shuen to ZandalAsean on 7th September 1983. Mr S.Y. Ho and Mr Eddie Leung were still in the dark then about what was happening in relation to the Zanda completion. Each of those three cheques followed the familiar pattern of being crossed "Not Negotiable A/C Payee Only" and the printed words "or bearer" were deleted after Zanda's name as payee.

161. One cheque was for $8.2 million drawn on O.T.B. Again, there was a purported indorsement in blank on behalf of Zanda, the signatory this time being Ms. Stephenie Chan, at that time alternate director to Mr Jesse Perez. Mr Jesse Perez was out of the office when the cheque arrived. Mr Alexis Chan was there, though. On his instructions, she indorsed the cheque by signing where the Zanda chop was stamped on the bank. Mr Alexis Chan then paid the cheque into his own personal current account with A.B.N. which collected the $8.2 million proceeds for him. (At this point it is convenient to note that Zanda sued A.B.N. in respect of its collecting the $4.5 million in respect of the two cashier orders of 23rd August 1983 and the cheque for $8.2 million of 7th September 1983 for Mr Alexis Chan's personal account. Unsurprisingly, that claim was settled by ABN which had fallen into the classic negligence trap of collecting a cheque payable to a corporation for a private individual, the actual settlement figure paid to Zanda being $12 million, which included Zanda's costs.)

162. Attention can now be focused on the other two cheques dated 7th September 1983 and received by Zanda/Asean on that day. The larger of the two cheques was for $5 million drawn on American Express Bank. That cheque's number was 269602. That is the cheque which was collected by Bank of America, and gives rise to the present action against that bank. It was crossed "Not Negotiable A/C Payee Only", with the printed words "or bearer” deleted, and was indorsed by Ms Stephenie Chan, on behalf of Zanda, on the direction of Mr Alexis Chan. The cheque also was indorsed on behalf of Asean by Mr Titus Lee, the Chief Assistant Manager of Asean. How Bank of America dealt with that cheque when it was presented for collection that same day is a topic I will explore later under sub-heading (iii), “ Bank of America”.

163. The other cheque, being No. 016871, was drawn on Barclays’ Causeway Bay Branch in favour of Zanda, and had the same crossings, deletions and indorsments as the $5 million cheque I have just described. This $1 million cheque was presented on behalf of Asean to Barclays’ Gloucester Tower Branch for collection on behalf of Asean that same day. I will consider how Barclays dealt with that cheque when I come to subheading (iv), “Barclays”.

164. As at the 7^th September 1983, I am satisfied that Mr S.Y. Ho and Mr Eddie Leung still did not know that the Occupation Permit had been issued for the Ming Fat Street premises, and, therefore, did not at the time know that completion took place between the 9^th August 1983 and 7^th September 1983 by Tai Ting Estates paying Zanda the full balance of the purchase money.

165. With some audacity, Mr Alexis Chan, on the 6^th September 1983, got Mr S.Y. Ho, as a director of Zanda, to sign a power of attorney from Zanda to Tai Ting Estates for the purpose of endabling Tai Ting Estates to make sub-sales. That must have been an indication to Mr S.Y. Ho that completion of the sale from Zanda to Tai Ting Estates was imminent, but I accept that Mr Alexis Chan must have fobbed him off with a story about government delays hoding up the Occupation Permit.

166. I have no doubt that, as at the 7^th September, 1983, Mr S.Y. Ho and Mr Eddie Leung intended that any cheque or cheques payable to Zanda in respect of the completion monies would be indorsed over to Asean for collection through an Asean bank account, after which Asean would in due course account to O.C.I.L and Northbourne by paying O.C.I.L. and Northbourne their share of the profits. If Mr S.Y. Ho and/or Mr Eddie Leung had been contacted by either Bank of America and/or of Barclays on the 7th September 1983, asking if it was alright to collect the Zanda cheques of that date for the $5 million and $1 million, respectively, for Asean, I do not doubt that both would have agreed with alacrity. They would have assumed that, at long last, the Occupation Permit had been issued, and that the balance of the purchase monies was being paid in more than one lot. If Mr S.Y. Ho and/or Mr Eddie Leung had contacted either Mr Alexis Chan or Mr Jesse Perez, in both of whom they obviously had great faith, Mr Alexis Chan and/or Mr Jesse Perez would, no doubt, have lied, making out that the two cheques in issue, received on the 7th September 1983, were the first payments of the $28.7 million balance of the purchase money, rather than the last.

(ii) ASEAN

167. On 1st July 1983, the first day of the period I am now considering, the law changed so that a registered D.T.C., such as Asean, could receive deposits only if they were for a minimum period of three months. That change had been in the pipe-line since mid-1981.

168. By the beginning of July 1983, Asean was in a desperate plight, financially. For over seven and a half months by then – ever since the Dollar Credit crisis the previous November - creditor banks had been forcing Asean to reduce, or wholly pay off, its borrowings. In a badly depressed land market, Asean was holding substantial loans in respect of real estate. In particular, there was the sum of $63 million advanced to a Mr Henry Hung for land speculation. At about this time, one can see, from the evidence which emerged about the situations with Bank of America arid Barclays, how Mr Alexis Chan had to juggle with his few sound assets to keep Asean's creditors at bay. The lies told by Mr Alexis Chan and/or Mr Jesse Perez to Mr S.Y.Ho and/or Mr Eddie Leung after the 6th August 1983 about the Occupation Permit still not having been issued were part of a dangerous game played by Mr Alexis Chan and/or Mr Jesse Perez in the nature of robbing Peter to pay Paul. Obviously, the truth about when completion in fact took place was bound in due course to become known by Mr S. Y. Ho and Mr Eddie Leung, but, by then, Mr Alexis Chan and Mr Jesse Perez were, no doubt, hoping that something would have turned up, so that they could repay O.C.I.L.'s and Northbourne's loans as well as paying their share of the profit.

169. The deception practised by Mr Alexis Chan on the Bank of America was basically the same as the one he used in relation to Mr S.Y. Ho, except that in addition to the part about waiting for the Occupation Permit, he concocted a variation about a "Letter of Compliance", which was supposed to be holding up receipt of purchase monies for Asean arising from the Zanda development.

(iii) Bank of America

170. Bank of America's concerned staff generally, and Mr Arthur Lee, its Account Officer for Asean, in particular, had known from at least July 1982 that Asean was managing the development of Zanda's Ming Fung Street property, and was furnishing loans to Zanda for that purpose. Because of the way in which Bank of America's Account Officers closely monitored customers owing money to their bank, I am sure that Mr Arthur Lee and his superiors had a good idea of the progress being made on the erection by Zanda of the building for Tai Ting Estates.

171. Throughout July 1983, Mr Arthur Lee, who, at that time, was keeping a very close eye on Asean, must have been aware that the building was more or less finished, and that payment for it would be coming up soon.

172. On the 29th July, 1983 Asean was supposed to repay Bank of America $5,714,514 under the second of the promissory notes signed by Asean towards the end of June 1983, but defaulted.

173. No doubt to placate Bank of America, which was clamouring for payment under that second promissory note, Mr Alexis Chan informed Mr Arthur Lee on the 5th August, 1983 that the Occupation Permit for Zanda's building would be issued on the 10th August, with the result that $10 million from the completion monies would become available to pay Bank of America by the 17th August 1983.

174. It might well be that, at the moment of informing Mr Arthur Lee about that, Mr Alexis Chan really did intend to pass on $10 million of the completion money to Bank of America on or about the 17th August. However, the 17th August came and went without Mr Alexis Chan choosing to pay $10 million to Bank of America, despite Asean's having collected that amount from the cheque in Zanda's favour of 9th August 1983.

175. It would have been on or shortly after the 17th August 1983 that Mr Alexis Chan dreamt up the idea of fobbing off Bank of America with the story about completion now being delayed pending the issue of a Letter of Compliance by government in respect of the Zanda building.

176. At the same time as telling Bank of America the story about the Letter of Compliance on or about 17th August 1983, Mr Alexis Chan also promised it that Asean would, in any event, pay in $2 to $3 million before the end of August 1983.

177. Not only did Mr Alexis Chan fail to pay any $2 to $3 million to Bank of America before the end of August 1983, but also Asean defaulted on the third of the promissory notes when it failed to pay the $5 million due under it to Bank of America on 30th August. By that time, therefore, Asean had defaulted on the promissory note for $5,714,514 due on the 29th July, the $5 million due on the 30th August, and the $2 - $3 million which Mr Alexis Chan had promised before the end of August. These defaults were occurring at a time when the Hong Kong economy was looking more sick than ever.

178. In late August, early September 1983, Mr Alexis Chan promised Mr Arthur Lee that a payment of $5 million in favour of Asean would be shortly made to Asean from a source other than Zanda. That $5 million was due to arrive before the 15th September, according to Mr Alexis Chan. At the same time, he also repeated his assertion that Bank of America would be paid $10 million from the Zanda completion monies which would be released as soon as the Letter of Compliance was issued.

179. Obviously, Mr Arthur Lee, for Bank of America, was anxious to receive payments from Asean in reduction of the outstanding loans, but I am satisfied that he still thought that Asean's problem was merely one of liquidity, and he was confident that the Bank of America would in due course make full recovery from Asean. He still had great faith in the value of the personal guarantee for $26.5 million from Mr Johnny Cheng.

180. Under sub-heading (i) above relating to Zanda I have already described how Mr Alexis Chan directed Ms Stephenie Chan on behalf of Zanda to indorse the cheque for $5 million received for Zanda on 7th September 1983. The cheque was also indorsed on behalf of Asean by Mr Titus Lee, Asean's assistant general manager.

181. That cheque, with the indorsement I have described, was presented on 7th September at Bank of America's counter to a teller who referred it to Mr Arthur Lee for approval. As I have mentioned, Mr Arthur Lee had been told by Mr Alexis Chan a few days earlier, in effect, to expect a cheque for $5 million from a source other than Zanda, and a cheque for $10 million from Zanda. Instead of either of those, Mr Arthur Lee now found this cheque for $5 million from Zanda being presented. Without making any reference to Asean or Zanda, Mr Arthur Lee went straight ahead and approved the collection of that cheque for Asean, immediately crediting Asean's current account with the $5 million, thereby reducing Asean's overdraft from $6,259,079 to $1,259,079.

182. I am satisfied that, as at the moment when Mr Arthur Lee. approved the collection of that cheque on 7th September 1983, he genuinely believed it was part of the proceeds arising from the sale by Zanda of the Ming Fung Street property, and I regard it, in the light of the circumsances known to Mr Arthur Lee at the 7th September, as reasonable for Mr Arthur Lee to have held that belief then.

183. True, the Zanda cheque he was now approving was for $5 million only, whereas Mr Alexis Chan had promised $10 million from that source. Just because Asean, through the action of Mr Alexis Chan, was trying to pay in only $5 million from Zanda when $10 million had been promised, was not an indicator, in my view, that Mr Alexis Chan was untrustworthy.

184. Mr Arthur Lee was only too aware of Asean's chronic liquidity problem, which made it reasonable for Mr Arthur Lee to believe, in effect, that Asean could only come up with this smaller amount because of its need to keep other, equally pressing, creditors happy. There was also the point that Mr Arthur Lee did not know as at the 7th September 1983 whether Tai Ting Estates would pay the balance of the purchase money in one lot or several lots. In fact, Tai Ting Estates had paid the balance of the purchase money on three different occasions, employing six different cheques or money-orders, as I have already described.

185. When he approved collection of the cheque, Mr Arthur Lee noticed the signature purporting to be that of Miss Stephenie Chan, a woman whom he knew to be the personal secretary to Mr Alexis Chan and Mr Jesse Perez. He did not know her signature, since he had never seen anything signed by her before, and he did not know that she was an alternate director and/or a signatory for Zanda. From the little he knew of her, he had no reason to doubt her honesty.

186. Another factor operating on Mr Arthur Lee's mind on that occasion on 7th September 1983 was his recognition of the signature of Mr Titus Lee by way of indorsement on behalf of Asean. As he trusted those running Asean at that time, it was reasonable for him to think that Asean would not be a party to any dishonest conduct by way of wrongfully diverting money from Zarida so that Asean could misuse the proceeds.

187. For the purpose of considering whether Bank of America was negligent in collecting that $5 million for Asean on 7th September 1983, it is not permissible to be wise after the event by looking at what happend later.

188. On or about the 13th September 1983, information came Mr Arthur Lee's way from Mr Alexis Chan indicating that none of the completion monies would have been paid yet, since the Letter of Compliance was still awaited and had to be issued before Tai Ting Estates could be required to pay. If Mr Arthur Lee had had the mentality of a detective, Mr Alexis Chan's line of talk on the 13th September 1983 would have alerted him to their being something suspicious about the Zanda $5 million cheque of the 7th September. However, a careful banker, a category in which I include Mr Arthur Lee, would not, on 13th September 1983, have started thinking in terms of his customer being a thief. More likely, he would probably have rationalized that Zanda had somehow managed to get Tai Ting Estates to pay up some of the completion monies early. Although, as at 13th September 1983, there did emerge this evidence that in some puzzling way Asean had been able to receive Zanda's cheque arising from the completion monies at a time when Zanda was not entitled to such monies because of the outstanding Letter of Compliance, there was, however, nothing odd about Zanda's and/or Asean's position, as it had been reasonably perceived by Mr Arthur Lee, as at 7th September 1983.

(iv) Barclays Bank

189. Although the manager of the Causeway Bay Branch of Barclays where Asean had an account probably knew from Asean's financial statements for 1981/82 that Zanda was. a company in which Asean had a 50% stake, there is nothing, however, on the evidence to show that Mr Alexis Chan or anyone else in Asean laid any ground work before 7th September 1983 which might have made it reasonable for Barclays to expect that Asean would be receiving a legitimate payment from Zanda on or around that date, stemming from Asean's financing a building sold by Zanda. No one actually handling Asean's accounts for Barclays during this period was available as a witness; as with the earlier and later phases, the court had only the contemporary letters and memoranda from Barclays' staff, plus the evidence of Mr Stephen Leung, a senior manager in Barclays, who was able to tell the court about Barclays' normal practices.

190. It is clear that during the phase now under consideration, Barclays was applying some pressure on Mr Alexis Chan to reduce the unsecured borrowings of Asean, but this pressure was relatively mild and intermittent. One way in which Barclays reduced the credit-facilities available to Asean was by Barclays declining to allow itself to be used as a clearing bank for third party cheques indorsed over to Asean. A totally fair question asked by those appearing on behalf of Zanda has been, "Why should Barclays have made an exception for the third party cheque for $1 million payable to Zanda it collected on 7th September 1983?"

191. The general impression given me by the evidence is that Barclays Hong Kong, without feeling any great anxiety about their customer, allowed Asean to coast along with unsecured indebtedness of about $50 million during the phase I am now considering.

192. On or about the 14th July 1983, Mr Peart, a Barclays manager, had been promised by Mr Alexis Chan that Asean would reduce its borrowings by $3 million before the end of that month, and a further $5 million before the end of the following month.

193. The $3 million reduction in July was supposed to occur on the 25th of that month when a borrowing facility of $15 million fell due for renewal. Mr Alexis Chan had indicated that Asean would pay in $3 million to Barclays, so that only $12 million by way of loan would need to be rolled-over on the 25th July. The 25th of July came and went without any $3 million, or any lesser sum, being paid in by Asean. Mr Peart got Mr Alexis Chan to call at the manager's office for a talking-to on the 5th August 1983 when Mr Alexis Chan promised to pay $2 million by the end of the following week, and a further $2 million before the end of August. The first $2 million was in fact paid-in on or about the 11th August, and on that occasion Mr Alexis Chan informed Mr Peart that over the following twelve months Asean expected to reduce its indebtedness to Barclays at the rate of $2 million per month. Instead of paying the further $2 million promised before the end of August. Asean paid in $1 million on the 26th August, accompanied by Mr Alexis Chan's promise of the payment of another $1 million before the end of August. Mr Alexis Chan's promise of the 14th July 1983 to reduce Asean's indebtedness by a payment of $5 million before the end of August seems to have been forgotten by Barclays.

194. After the payment of the $1 million on 26th August 1983, the next money Barclays received from Asean was the $1 million collected by it on the 7th September 1983 in respect of the cheque made payable to Zanda, and purportedly indorsed over to Asean by Ms Stephenie Chan's sole signature on behalf of Zanda, and Mr Titus Lee's indorsement for Asean.

195. Although Asean kept failing to fulfill the promises of payment made by Mr Alexis Chan to Barclays, the evidence, as a whole, shows clearly that Barclays continued to trust Mr Alexis Chan and Asean by rolling-over loans to Asean as they fell due. Had Barclays not trusted Asean and Mr Alexis Chan, it would, presumably, not have hesitated to call in its loans. In all probability, Barclays, like Bank of America, did not feel that the honour and integrity of Mr Alexis Chan and those running Asean were put in question simply because Asean failed, at a time when its liquidity was tight, to meet promises of payment. From the contemporary written material of Barclays' officers in Hong Kong, it is clear they thought Asean had a viable business which was likely to weather the financial crisis engulfing D.T.C.s at the time I am now considering. There is nothing in any of the material before me to suggest that any of the Barclays officers in Hong Kong concerned with Asean's account had the slightest suspicion that any of those running Asean were in any way dishonest.

196. As previously indicated, the $1 million cheque now being considered was paid into the Gloucester Tower Branch of Barclays. I think it reasonable to assume that the Gloucester Tower Branch would have contacted the Causeway Bay Branch where Asean had its account to find out whether the Causeway Bay Branch regarded the proposed collection of this cheque for Asean as a reasonable step to take.

197. Barclays' decision to approve this collection of $1 million is in some ways harder to defend than Bank of America's decision the same day to collect the larger amount of $5 million on a Zanda cheque. Bank of America had extensive knowledge of the underlying transaction, whereas there is nothing to show that Barclays knew anything about how Asean had come by this $1 million cheque from Zanda. On the other hand, however, the amount Barclays was being asked to collect was rather small in comparison with the credit Barclays was willing to continue for Asean, and also small in relation to the massive turnover of Asean's business.

198. There is the point, of course, that Barclays had generally stopped collecting third party cheques for Asean, making it legitimate to wonder if Barclays, by 7th September 983, had decided to throw caution to the wind because of the intensifying financial crisis in Hong Kong at the time, and took an unreasonable risk at Zanda's expense.

199. On balance, I think that what Barclays did was just about reasonable. I have more reservations about the way it acted than I do about Bank of America in relation to the cheque the latter collected that day. A point, though, that swings the balance entirely in Barclays' favour is that if it had phoned up any of Mr S.Y. Ho, Mr Eddie Leung, Mr Jesse Perez, Ms Stephenie Chan, or Mr Alexis Chan on that day to enquire about the cheque, I do not doubt that each and every one of them would have said it was in order for Asean to collect the proceeds of that $1 million cheque on behalf of Zanda. This is a point on which I will comment further when I come to deal with causation in the context of how negligence affects a collecting banker seeking to avoid liability for wrongful conversation of a cheque by resort to s.86 of the Bills of Exchange Ordinance.

II. PERIOD 8TH SEPTEMBER 1983 ONWARDS.

A. Economic Background

200. Hong Kong's economy, and, with it, the land market, remained in the doldrums until at least 1985.

201. One of the severest tests to which the Hong Kong economy has ever been subjected took place in September 1983 when the Hong Kong dollar went into a tailspin brought on by doubts about Hong Kong's political future. On September 23rd and 24th, 1983, the exchange rate of the HK$ in terms of the US$ fell some 15%. That particular crisis was kept at bay, and then overcome by a technically clever pegging of the Hong Kong dollar to the United States dollar at a rate between 7.78 and HK$7.82 to US$1 on 17th October 1983. That "peg" has survived, unscathed, to this day.

202. Another potential crisis arose when Hang Lung Bank, unable to meet its commitments, was poised to crash on the 27th September 1983. The Hong Kong government averted a crisis in financial markets by stepping in immediately, and taking over the bank in a way that ensured the bank's customers and creditors got paid.

203. Another salient occurrence during the phase at which I am now looking was the suspension of Asean by the Commissioner of D.T.C.s on 9th March 1984. Provisional liquidators and Special Managers were appointed for Asean on 13th November 1984. Northboume, too, went into compulsory liquidation.

204. O.T.B. was taken over by the Hong Kong government in March 1985 when a routine inspection of its books by officers from the Banking Commissioner discovered that it had concealed huge bad debts owing to it, thereby calling in question its solvency. As the result of the fraudulent way in which O.T.B. had been run, its managing director, Mr Patrick Chang, who owned half the shares in Northbourne, went to prison.

B. ACTIVITIES OF ZANDA, ASEAN, BANK OF AMERICA AND BARCLAYS

(i) Zanda

205. By the middle of November 1983 at the very latest, Mr S.Y. Ho and Mr Eddy Leung woke up to the despicable trick that Mr Alexis Chan had played on them by pretending that the completion monies from the sale to Tai Ting Estates sale were being held up due to the late issuance of the Occupation Permit.

206. Before that Mr S. Y. Ho wrote to Mr Alexis Chan on 31st October 1983 in the following terms:

"31st October, 1983

Mr Alexis H.K. Chan

Asean Merchant Credit and Investment House Ltd

26th Floor, New World Tower

16-18, Queen's Road, Central

Hong Kong

Dear Mr Chan,

Re : Zanda Investments Ltd

I refer to the attached letter from Ray On Construction Co. Ltd. dated 25th May, 1983 addressed to Zanda Investment Ltd. Ray On had indicated that the project at Ming Fung Street, Kowloon, has been completed ahead of the contract, that is 13th June, 1983. But up to the present, we have no further news from you. We shall appreciate your up-to-date information on the project. Meanwhile, please also let us have the most recent management account of Zanda Investment Ltd for our audit purpose.

Yours faithfully, For and on behalf of Sd.(Overseas Credit & Investment Ltd)"

207. No doubt, Mr S.Y. Ho and Mr Eddy Leung were horrified when they became aware that Mr Alexis Chan and Mr Jesse Perez had fraudulently spent Zanda money which Asean should have kept to pay O.C.I.L. and Northbourne, arising from the successful completion of the Ming Fung Street development.

208. It is by a letter dated the 1st December 1983 from Mr Ho on behalf of O.C.I.L. to Mr Alexis Chan at Asean that one can see Mr Ho certainly knew from about the middle of November 1983 that Asean had received the completion money in respect of the sale of Zanda's property. I now set that letter out :-

"OVERSEAS CREDIT & INVESTMENT LTD.

HONG KONG.

1st December 1983

Mr Alexis H K Chan

Asean Merchant Credit & Investment House Ltd

26/F New World Tower

16-18 Queen's Road

Central, Hong Kong

Dear Mr Chan,

Re : Zanda Investment Ltd

Further to my letter of 31st October 1983 and our telephone conversation two weeks ago, you have informed me that the sale for the project at Ming Fung Street, Kowloon has been completed. We look forward to your immediate action for a settlement of all the accounts in this respect.

Yours faithfully,

OVERSEAS CREDIT & INVESTMENT LTD."

_____________________________
Authorised Signature"

209. If Mr S.Y. Ho had done the right thing, and gone to the police or I.C.A.C. as soon as he knew that Mr Alexis Chan, together with Mr Jesse Perez, had deceived him and Mr Eddie Leung concerning the time when Asean had received the purchase monies, I very much doubt whether either Bank of America or Barclays would have had any hope of making further recovery from Asean, because, once it became known that Mr Alexis Chan and Mr Jesse Perez were being investigated for defrauding Zanda, all of Asean’s creditors, including the ten or more banks to which it owned money, could have been expected all to seek recovery at once, with the result, more likely than not, that, in practice, none of Asean’s creditors would have got anything worth talking about.

300. Likewise, neither Barclays nor Bank of America, nor any other creditor-bank, would have had any hope, in practice, of recovering against either Mr Alexis Chan or Mr Jesse Perez on their personal guarantees, since both of those guarantors would have been so swamped by claims that it would have been pointless for them to try to raise loans or scrape together money with a view to keeping any particular creditor at bay. There would have been no incentive for either of them to try to continue with their game of robbing Peter to pay Paul, since their creditors would, by then, have had a good idea they were dealing with crooks, and would not have allowed them any further scope for such games.

301. Neither Mr S.Y. Ho nor Mr Eddie Leung at any stage reported the patently fraudulent behaviour of Mr Alexis Chan and Mr Jesse Perez to the police or to I.C.A.C. Instead, Mr S.Y. Ho and Mr Eddie Leung conducted themselves in such a way, on behalf of O.C.I.L., that they gave Mr Alexis Chan and Mr Jesse Perez ample time and opportunity to try to pay O.C.I.L. and Northbourne their share of the money from the Zanda development.

302. There is a letter dated the 13^th December 1983 from Mr S.Y. Ho on behalf of O.C.I.L. to Stephenie Chan at Asean which is self-explanatory:

“OVERSEAS CREDIT & INVESTMENT LTD.

HONG KONG

13^th December 1983

Miss Stephenie Chan

Asean Merchant Credit & Investments House Ltd

26/F New World Tower

16-18 Queen’s Road Central

Hong Kong

Dear Miss Chan,

Re : Zanda Investment Ltd

Subsequent to the visit of our Mr Eddie Leung to your office this afternoon, we understand that the total of the proceeds namely HK$41 million has been received from the sale of the Ming Fung Street building project. Whilst final payments has been received sometime ago, we note that such money was not credited to the account of Zanda Investment Ltd. Please clarify this matter.

Meanwhile we would expect your immediate action in effecting disbursement of funds to all shareholders of Zanda.

Yours faithfully,

F or and on behalf of

OVERSEAS CREDIT & INVESTMENT LTD.

S.Y. Ho
AUTHORISED SIGNATURE"

303. Sending that letter was something in the nature of a charade on the part of Mr S. Y. Ho since, by then, I have no doubt, both Mr S.Y. Ho and Mr Eddie Leung knew full well that Mr Alexis Chan and Mr Jesse Perez had unlawfully borrowed i.e. stolen the money which Asean should have been holding for O.C.I.L. and Northbourne.

304. The point of that letter, as I see it, was to exert pressure on Mr Alexis Chan and Mr Jesse Perez to somehow come up with the money needed to pay O.C.I.L. and Northbourne off.

305. It bordered on the farcical for Mr S. Y. Ho to end the first paragraph of his letter with the sentence, "Please clarify this matter". Mr S.Y. Ho needed no clarification. He knew full well that Mr Alexis Chan and Mr Jesse Perez had stolen the money, but he did not want to accuse them openly of it. His motive in behaving in the way he did - giving Mr Alexis Chan and Mr Jesse Perez a long grace period to put the money back - , was, I think, based on the inference I draw from the evidence as a whole, a mixture of friendship with Mr Alexis Chan and unwillingness to offend powerful people like Mr Patrick Chang, his managing director, who was involved with Mr Jesse Perez in Northbourne.

306. Precisely who the people were whom Mr S.Y. Ho and Mr Eddie Leung did not want to offend are impossible to identify from the evidence available to me, and I cannot gauage how close his friendship was with Mr Alexis Chan, but I regard it as reasonable to infer that some such combination must have been at work, for, otherwise, his unwillingness to unmask Mr Alexis Cahn and Mr Jesse Perez would be strange, indeed.

307. In relation to Mr SY Ho’s letter of 13^th December 1983 to Ms Stephenie Chan, she was asked under cross-examination which was “the account of Zanda” to which he was referring in the second sentence of the first paragraph. She replied she thoughthe was referring to Zanda’s current account with O.T.B. Having weighted her answer carefully, I am satisfied, in the light of the evidence as a whole, that she drew the wrong inference there, and I am of the view that Mr Ho was referring to Zanda’s account with Asean.

308. For the sake of completeness, I also set out Ms Stephenie Chan’s letter of the 15^th December 1983 to Mr S.Y. Ho.

“Asean Merchant Credit And Investment House Limited

December 15, 1983

Mr Ho Sheung Yin

Overseas Credit & Investment Ltd

27/F, Overseas Trust Bank Building

160 Gloucestser Road

Wanchai

Hong Kong

Dear Mr. Ho,

Re: ZANDA INVESTMENT LIMITED

With reference to your letter of December 13, 1983, it is regretted that I cannot clarify what is asked in the said letter since I am only responsible to the bookkeeping job. Furthermore, I have no authority in effecting any fundings from either Asean Merchant Credit And Investment House Limited or Zanda Investment Limited.

As requested, the said letter will be referred to Mr. Alexis H.K. Chan for perusal.

Yours sincerely,

Stephenie Chan”

308. Laboriously, Mr S.Y. Ho went about getting solicitors to write to Messrs Tsang, Chau & Shuen on 4th January 1984, asking for copies of the cheques by which the balance of the completion monies had been paid, and he also arranged for a special audit in respect of Zanda's finances for the half year from 1st July 1983 to 31st December 1983.

309. I now set out a copy of that letter dated 4th January 1984.

"APB/AL

137062-JC-CB-KC

4th January 1984

Messrs. Tsang Chau & Shuen,

8th Floor, United Chinese Bank Building,

31-37 Des Voeux Road Central,

Hong Kong.

Attn: Mr. John Chan

Dear Sirs,

Re : Peter's House (formerly known
as Tai Hing Mansion) erected
on N.K.I.L. No. 5048

We act for Overseas Credit & Investment Limited and Northboume Limited who, as you will know, are shareholders of Zanda Investments Limited.

Zanda was previously the owner of the above premises which were sold to Tai Ting Estates Ltd. and you acted for Zanda in connexion with the sale. The purchase price was HK$41,000,000.00 payable by certain instalments payable during the construction of the premises. The final instalment was in the amount ofHK$28,700,000 which should have been payable on completion of the sale.

The sale of the premises was in fact completed recently arid you received the said sum ofHK$28,700,000.00 for and on behalf of Zanda.

We have been brought into this matter as neither our clients, nor Mr.S.Y. Ho the director of Zanda nominated by our clients have been able to establish what happened to the said completion momes.

We understand that Mr. Ho has spoken to you with regard to the matter and was informed that you have delivered to Zanda a cheque in the amount of the completion monie such cheque being drawn on your account and crossed and of course we accept that that is so. However, Zanda has only one account which is with Overseas Trust Bank and into which the completion monies have not been paid.

Assuming therefore that the cheque drawn by you has been collected (which please confirm), it would appear that the cheque must either have been negotiated in some way or paid into an account of Zanda of which our clients are not aware. Either way, you will appreciate that it is imperative that our clients obtain a copy of the cheque in question and we believe that you have already promised Mr.S.Y. Ho that you would supply him with a copy of the cheque but apparently you have to date failed to do so.

Accordingly we should be grateful if you would now supply us with copies of both the cheque in question and of the receipt which you presumably obtained from Zanda in respect of the completion monies.

Yours faithfully,

WILKINSON & GRIST"

310. The upshot of the letter to Messrs Tsang, Chau & Shuen on 4th January 1984, and the special audit which was completed by 2nd March 1984 was that Mr S. Y. Ho, acting on behalf of Zanda, wrote to Bank of America on 12th March 1984 as follows :-

"ZANDA INVESTMENT LIMITED

14TH FLOOR, OTB BUILDING,

160 GLOUCESTER ROAD,

WANCHAI, HONG KONG

12th March, 1984

Bank of America NT & SA

21/F., Bank of America Tower

12, Harcourt Road, Central

Hong Kong

Dear Sirs,

We enclose herewith a copy of a cheque (No.269602) dated 7th September, 1983 for HK$5,000,000.00 which was drawn in our favour by Tsang, Chau & Shuen and collected by yourselves. However, the said cheque was not collected on our behalf and we have not in fact received value for that cheque. Accordingly we should be grateful if you would inform us on whose behalf you collected the value of the cheque and into whose account the funds were paid.

We confirm that we will be responsible for your reasonable charges incurred in supplying the information requested.

Yours faithfully, For and on behalf of ZANDA INVESTMENT LIMITED SY HO Director

Encl."

The same letter, mutatis mutandis, was sent to Barclays on the same day in respect of the $1 million cheque in issue.

311. Those letters were followed up by further letters to those banks on the 17th March 1984 as follows :-

"ZANDA INVESTMENT LIMITED

14TH FLOOR OTB BUILDING, 160 GLOUCESTER ROAD,

WANCHAI, HONG KONG

17 March 1984

Bank of America NT & SA

21/F Bank of America Tower

12 Harcourt Road

Central

Hong Kong

Dear Sirs,

We refer to our letter to you of the 12 March 1984. We are presently discussing the question of the receipt of funds under the cheque referred to in our letter with other parties involved in the matter and at the present time do not in fact require you to investigate your records to provide the information requested in our letter.

We shall write to you again should we require you to provide the information requested.

Yours faithfully,"

312. There was silence until the 7th May 1984 when Mr S.Y. Ho on behalf of Zanda again wrote to Bank of America and Barclays as follows :-

"ZANDA INVESTMENT LIMITED

14TH FLOOR, OTB BUILDING, 160 GLOUCESTER ROAD,

WANCHAI, HONG KONG

7 May 1984

Barclays Bank International Ltd

5/F Connaught Centre Central District, Hong Kong

Dear Sirs,

We refer to our previous letter of the 12 March 1984 and should be grateful if you would now supply the information requested.

Yours faithfully,

for & on behalf of

ZANDA INVESTMENT LTD.

________________________

AUTHORIZED SIGNATURE"

313. Zanda never received any further payment trom Asean, Mr Alexis Chan or Mr Jesse Perez. Neither did Bank of America nor Barclays pay Zanda anything, since both banks denied the validity of its claim. I have previously mentioned how Zanda recovered $12 million from ABN in respect of cheques or cashier-orders for a total of$12.7 million payable to Zanda in August and September 1983, but collected for the personal account ofMr Alexis Chan at that time.

314. Apart from O.C.I.L. and Northbourne, all of Zanda's creditors have been paid.

(ii) ASEAN

315. Things went from bad to worse for Asean.

316. Government's' takeover of Hang Lung Bank on 27th September 1983 was like a death-knell for Asean which owed that bank $59 million. Without the friendly Mr Johnny Cheng at the helm any more, Asean could expect swift action from the new management at Hang Lung Bank to call in that massive loan.

317. In the period up until the end of 1983, so we learnt from Ms Stephenie Chan, Asean's creditors clamoured for payment. Before the end of that year, Mr Jesse Perez, with good reason, felt that Hong Kong was no longer a safe place for him to be, and departed for Taiwan where he has been based ever since.

318. Towards the end of 1983 and in early 1984, Mr Alexis Chan was called in by the Commissioner of D.T.C.s for questioning about the affairs of Asean. Mr Alexis Chan, who, apparently, had been planning to emigrate from Hong Kong in .any event, departed these shores before the end of February 1984, and has not been back since.

319. From Ms Stephenie Chan's evidence, it appears that Asean ceased to conduct business from the beginning of 1984, but its registration as a deposit taking company was not formally suspended until the 9th March 1984. Special Manager was appointed for Asean on 13th November 1984 by order of the Court following appointment of the Official Receiver as provisional liquidator on the same day.

320. By his report dated the 28th November 1984, the Special Manager disclosed that Asean, theoretically, had so-called "receivables" of approximately $147 million, but of that amount, a mere $7 million looked to be actually collectable. Included in the balance of approximately $140 million in bad debts was approximately $63 million owed by the one debtor, Mr Henry Hung. As a D.T.C. with issued capital never exceeding $15 million, Asean can be seen to have been well and truly in breach of the provisions in the Ordinance about not more than one quarter of a D.T.C.'s issued capital being lent to the one debtor. Mr Henry Hung in due course went to prison for 4 years after pleading guilty to innumerable charges of having conspired with Mr Alexis Chan and Mr Jesse Perez to defraud Asean.

321. From the Special Manager's report, it has clearly emerged that not only were Mr Alexis Chan and Mr Jesse Perez totally lacking in integrity, but, also, they had been extremely slapdash in the way they had managed Asean's affairs. Before granting loans to customers, they did not bother to seek any background information concerning the borrower's financial history. In some instances, loans were granted to borrowers a few days after commencing business. No security, or inadequate security was obtained from borrowers. Once loans had been granted, little, if anything, was done to follow them up. Periodic accounts were not demanded from borrowers to see whether they were still credit-worthy. There were occasions when Asean did go as far as getting a judgment against a debtor, but then nothing was done to enforce it.

(iii) BANK OF AMERICA

322. Up until the end of October 1983, and perhaps even beyond, Mr Alexis Chan kept repeating his promise to Bank of America that as soon as Zanda received a Letter of Compliance, the sale to Tai Ting Estates would be completed, and Bank of America would be paid from the part of the proceeds due to Asean as a shareholder in and lender to Zanda. Throughout, I am satisfied, Mr Alexis Chan successfully pulled the wool over the eyes of those in Bank of America whose task it was to see Asean repaid its borrowings.

323. Towards the end of September 1983, Mr Alexis Chan actually gave Mr Arthur Lee of Bank of America a copy of the Agreement dated 3rd September 1981 between Zanda and Tai Ting Estates, from which Bank of America could have gleaned that there never was any provision for the payment of any specific sum of $5 million, the sum Bank of America received on 7th September 1983 by means of the cheque in dispute made payable to Zanda.

324. I have little doubt that, if Mr Arthur Lee, or anyone else in Bank of America, had pointed that out to Mr Alexis Chan, he would have come up with some plausible explanation of how the $5 million cheque came into being. In any event, the new information which came into Bank of America's possession after 7th September 1983 which might, with hindsight, have led Bank of America to suspect that Mr Alexis Chan had not told them the truth concerning delays over completion, and raising doubts over the origins of the $5 million cheque are, to my mind, irrelevant on the all-important question of the state of Bank of America's knowledge as at 7th September 1983, the date at which it collected the proceeds of the cheque.

325. Hang Lung Bank's failure and takeover by government on 27th September 1983 quickly prompted Mr Arthur Lee, and his superior, Mr Peter Lo, to make a call on Mr Alexis Chan to weigh the implications for Asean of Mr Johnny Cheng no longer having the resources of Hang Lung Bank at his disposal.

326. As at the 27th September 1983, Asean owed Bank of America $14,918,500. By the 29th September 1983 the outstanding loan had been reduced to $11.3 million. The evidence is not clear on how that reduction came about, but I do not think anything turns on that.

327. On 30th September 1983, the fourth and final promissory note for $5 million in Bank of America's favour fell due. Asean defaulted on that, but, with the prospect of money via the Zanda completion being dangled in front of Bank of America, Bank of America agreed to a re-scheduling of all its outstanding loans to Asean, amounting to about $11 million, on the basis that it would all be paid by the one "balloon" payment on the 30th October 1983. At or about the end of September-or early October 1983, there had also been a promise from Mr Alexis Chan that Asean would pay at least $3 million to Bank of America before 19th October 1983. Nothing came of that. Around the 27th October 1983, Mr Alexis Chan again promised further payment of $2 to $3 million from a source other than the Zanda completion. Nothing materialized.

328. Although no further payment was forthcoming from Asean in October 1983, I am satisfied, from a memorandum dated 31st October 1983, from Mr Franklin Lam, the Account Officer in Bank of America who took over from Mr Arthur Lee in early October 1983, that Bank of America was at the time of that memorandum still confident of recovering its loans to Asean. Mr Franklin Lam thought that Asean's business operations were still profitable, and he regarded the risk of default as low. He also recognized, however, that other shareholders or creditors of Zanda, in addition to Asean, might have claims on the Zanda completion monies.

329. By the end of the first week in November 1983, Bank of America must have been losing patience with Asean, since it instructed solicitors to write a letter of demand to Asean in respect of the sum of $11,412,845 still owing. Bank of America's solicitors duly wrote to Asean, demanding that amount on the 11th November 1983. That letter must have had a salutary effect in that Asean paid Bank of America $5 million on 23rd November 1983. That money came from Mr Alexis Chan's family company, Kin Fung Hong.

330. Further money must have come in from Asean before the end of that month since on 30th November 1983 Asean's outstanding debt to Bank of America was by then down to $2.92 million.

331. Bank of America started taking a tougher line to recover the debt when it caused its solicitors on 20th December 1983 to send a letter of demand for the outstanding $2.932987 not only to Asean but also to its guarantors, Mr Alexis Chan, Mr Johnny Cheng and Mr Jesse Perez.

332. Further dribs and drabs of money trickled in from Asean so that the debt was down to $1.6 million by the 24th January 1984.

333. Mr Alexis Chan gave Bank of America a cheque postdated to the 31st January 1984 to discharge the outstanding balance. That cheque was dishonoured. Bank of America's immediate response was to issue a writ against Asean, Mr Alexis Chan, Mr Johnny Cheng and Mr Jesse Perez in respect of the remaining debt.

334. Bank of America stayed its hand in the litigation when Mr Johnny Cheng agreed to pay Bank of America $0.7 million before the 17th February 1984, and the remaining balance of $1 million before 15th March 1984. The bank accepted his proposal, and he duly paid the money, so that Bank of America recovered everything owing to it by Asean.

335. Under sub-heading (i) of this section, I have already mentioned how Mr S. Y. Ho, on behalf of Zanda, wrote to Bank of America on 12th March 1984, enquiring on behalf of whom Bank of America had collected the cheque for $5 million dated 7th September 1983 in favour of Zanda. I accept what Mr Franklin Lam told the Court about how he contacted those working for Asean at the time he received that letter, and was assured that there had been an internal dispute amongst the shareholders of Zanda concerning the $5 million, but it was something they would sort out amongst themselves. He also received Zanda's letter of 17th March 1984, telling him there were discussions with other parties which meant Bank of America was no longer required to investigate its records. The letter of 7th May from Zanda to Bank of America was also dealt with by Mr Franklin Lam, and once again he contacted the Bank's customer, Asean, whose staff told Mr Franklin Lam that the dispute over the $5 million cheque was an internal matter for the shareholders in Zanda.

336. Despite Bank of America's prodigious debt-collecting skills, as evidenced by their making full recovery from Asean in difficult circumstances, I regard it as unlikely in the extreme that Bank of America would have been able to collect a further $5 million, even if they had been told as early as the 8th September 1983 that they were not entitled to retain the $5 million they had collected the previous day on the cheque made payable to Zanda. I have already expressed my opinion that none of the creditor-banks would have been likely to recover anything from Asean had the truth come out at an early stage that Mr Alexis Chan and Mr Jesse Perez had helped themselves to the Asean funds which should have been held for Zanda.

337. Bank of America were affected by the same illusions as everyone else concerning the integrity, wealth and efficiency of Mr Alexis Chan, Mr Jesse Perez and Mr Johnny Cheng. I do not think I have to labour the point about the reality of the supposed integrity of that trio. No doubt, up until the end of 1982 and probably also for a considerable time after that, all three of them were wealthy, Mr Johnny Cheng being exceedingly so. However, from about the middle of 1983, much of their wealth looks to have been exhausted, and as the end of 1983 approached, they were obviously finding it difficult to raise even the odd million dollars or two. By early 1984 all three of them were obviously in poor shape, financially. There was no hope of getting anything out of Mr Jesse Perez since he had taken himself out of the jurisdiction. Mr Alexis Chan suffered the humiliation of not being able to honour a cheque for $1.6 million which was a comparatively small amount for one coming from a family which had been hugely rich. Mr Johnny Cheng, whose shares in Hang Lung Bank alone were thought to be worth over $250 million at the end of 1982, needed, in effect, six weeks to pay Bank of America the final $1.6 million outstanding to it.

338. On the view I take, even assuming that the type of estoppel claimed by Bank of America can exist as a matter of law (and I strongly doubt that it does), I am satisfied, on the facts, that Bank of America suffered no prejudice as the result of any inaction by Zanda after 7th September 1983, because there was no realistic prospect of Bank of America extracting a further $5 million, or any other sum of that order of magnitude, from Asean, Mr Johnny Cheng, Mr Alexis Chan or Mr Jesse Perez, either singly or collectively.

(iv) BARCLAYS

339. Mr Stephen Leung, the Senior Manager of Barclays who gave evidence on Barclays' procedures, described how, in the run-up to the 7th September 1983, Barclays must have felt comfortable with its client, Asean, for otherwise Barclays would not have allowed Asean to roll-over credits as they expired. He pointed out how, for example, on the 2nd September 1983, Barclays gave its approval to extend its loan of $3.5 million to Asean for three more months, from 6th September 1983, the date the lending facility would otherwise have expired.

400. Despite its feelings of comfort at the beginning of September 1983, Barclays had good cause to feel extremely uncomfortable about Asean and its managing director, Mr Alexis Chan, before that month expired:

401. On 27th September 1983 - the very day on which the Hong Kong government took over the Hang Lung Bank - Asean bluntly announced to Barclays that it could no longer repay its borrowings from any of the banks which had lent to it. As Mr Mills-Owen so rightly put it, matters must have become calamitous in Asean for any of those managing it to make a statement like that.

402. On the 29th September 1983, the management of Bar clays got the opportunity to see Mr Alexis Chan, at last, in his true colours: that day he denied knowing anything about the promise he had given Mr Peart of Barclays on 11th August 1983 to reduce Asean's outstanding loans to Barclays by the mount of $2 million per month.

403. One can immediately detect a change in Barclays' attitude towards its customer from the 29th September, 1983, onwards. From internal correspondence of Barclays of 29th September 1983, one sees the management in Hong Kong informing the London Headoffice that Barclays in Hong Kong was not only unwilling to consider increasing borrowing facilities to Asean, but was in fact looking for further deductions in the amount outstanding, with the ultimate aim of having the Asean account fully secured or otherwise repaid in full.

404. Barclays' new-found disenchantment with its customer can be discerned in the letter sent from the manager of the Causeway Bay Branch of Barclays to Asean, for the attention of Mr Alexis Chan, on 3rd October 1983. No longer is the tone of the correspondence deferential, but, instead, Barclays asked Mr Alexis Chan straight questions about Asean's affairs.

405. Barclays' attempt in the present proceedings to blame Zanda for not letting Barclays know earlier about Asean's fraudulent dealings with the $1 million from the cheque in dispute has a hollow ring to it when one sees how ineffective Barclays' own efforts at recovery were from the beginning of October 1983 onwards, by which time it had been unmistakably revealed to Barclays that not only was Asean insolvent, but, also, its managing director was a liar, and hence, not to be trusted.

406. The suggestion that Barclays might have been galvanised into action if only Zanda had informed them earlier about Asean's misdeeds in relation to the $1 million in dispute flies in the face of the evidence.

407. No formal letter of demand went out to Asean, seeking recovery of the monies owed to Barclays until 4th January 1984. That letter was from the manager at the Causeway Bay Branch. On 1st February 1984, another formal letter of demand went out from Barclays, this time, not only addressed to Asean, but also to Mr Alexis Chan and Mr Johnny Cheng who were jointly and severally liable under a guarantee for US$3 million.

408. Barclays did not get round to issuing a writ against Asean, and the guarantors, until 14th July 1984. That was for $26,636,183. Judgment was obtained on that on 28th August, 1984. That judgment remains unsatisfied. A letter from Barclays' solicitors dated 11th October 1984 showed that besides the judgment in Barclays favour, 11 other banks were engaged in proceedings against Asean for a total of $124 million.

409. Perhaps, theoretically, Barclays might have been able to recover a further $1 million before the flood of legal proceedings taken against Asean by its various creditor-banks in early 1984 - Bank of America had been successful and so had the Bank of Malaysia which recovered $1 million from Asean in January 1984 - but, in practice, I regard it as highly unlikely that Barclays would have succeeded in recovering an additonal $1 million, since the evidence indicates that Barclays' tactics were insufficiently aggressive to make Asean or its guarantors pay much heed.

410. In relation to Bank of America under sub-heading (iii) above, I have already set out the correspondence nom Zanda to Bank of America in early 1984, and having already explained that mutatis mutandis Barclays received the same letters, need say nothing further on that.

CREDIBILITY

1.  Oral Witnesses

411. Only three witnesses who gave oral testimony in the case had possible purposes of their own to serve. That trio comprised Mr S. Y. Ho, Mr Eddie Leung, and Ms Stephenie Chan. The remaining witnesses were staff from the Defendant banks, Mr Gary Wong then of the accountancy firm, Ernst & Whimey, who conducted the special audit on Zanda in early 1984, and Mr Etches, an accountant who was the liquidator and Special Manager of Asean. All of the bank and accountancy witnesses impressed me as honest and accurate, telling the truth to the best of their ability.

A. Mr S.Y. Ho

412. Mr S.Y. Ho had the following possible purposes of his own to serve: -

(i) To divert all possible suspicion nom himself that he might have been implicated in the wrongful disposal of money which should have found its way to Zanda;

(ii) To forestall any possible suggestion he might have been involved in evading provisions of the D.T.C. Ordinance by Asean's lending money to Zanda, indirectly via Clyde, in excess of the maximum a D.T.C. was permitted to lend to anyone customer;

(iii) To explain away his dilatoriness in requiring Mr Alexis Chan and Mr Jesse Perez to explain what had happened to the balance of the completion monies paid to Asean.

413. I will now deal with each of those apparent purposes in turn.

414. (i) Although I was wholly satisfied that Mr S.Y. Ho had absolutely nothing to do with any misappropriation of Zanda's money, I, nonetheless, formed the view that he probably tailored his evidence in a way he thought most likely to minimize the risk of his being wrongfully accused of acting in concert with Mr Alexis Chan and Mr Jesse Perez to steal Zanda's money.

415. Endeavouring to put distance between himself and anything to do with Asean's activity, I think there were two ways in which he probably tried to mislead the Court. Firstly, I think he was less than frank over his knowledge of Zanda's account with Asean, and, secondly, I did not believe I what I came to regard as his self-serving evidence about O.C.I.L. invariably requiring two signatures in relation to all operations of any sort of account involving one of its subsidiaries.

416. If Mr S.Y. Ho knew nothing about the Zanda account with Asean, he could not be faulted for any money of Zanda's disappearing from that account. Zanda, so I am satisfied, had had an account with Asean since 1980. There was nothing secret about the loan account Zanda had with Asean. Zanda's auditors, Ernst Whinney, knew about it all along (See Trial Bundle A, pages 158 and 172). Mr S.Y. Ho's answers under cross-examination that he never asked Mr Alexis Chan what was being done with Zanda's money, and his constant refrain of having left everything concerning the financing of Zanda to Mr Johnny Cheng stretched credulity too far. His claimed lack of curiosity concerning Zanda's finances, and his "Hear no evil, see no evil, speak no evil" - performance in the witness box did not ring true.

417. If, as Mr S.Y. Ho claimed, O.C.I.L. had this iron rule to the effect that any account for one of its subsidiaries could only be operated with two signatures, one of which had to be from the O.C.I.L. side, it followed, of course, that Mr S.Y. Ho had to be exonerated for the payment-in on the 7th September 1983 of the two disputed cheques endorsed by         Ms Stephenie' Chan alone.

418. In support of his contention that the O.C.I.L. rule of two signatures applied to Zanda in the same way as to any other O.C.I.L. subsidiary, he identified documents in Bundle A at pp.256 and 394/7 which purported to show that steps had been taken in pursuit of the objective of furnishing O.T.B. with a mandate only to accept cheques requiring indorsement paid into the Zanda account if the endorsement was made by one signature from the so-called "A" group and the other from the so-called "B" group. Those documents in Bundle A at pp.256 and 397/7 were put forward on behalf of Zanda as vindication of Mr Ho's evidence on how any dealing with a Zanda cheque required two signatures.

419. Far from vindicating Mr S.Y. Ho, that evidence, in my view, seriously undermined his credibility. Those documents from Trial Bundle A at pages 256 and 394/7 apparently supporting Mr S.Y. Ho's evidence that any dealing with a Zanda cheque, including indorsement, required two signatures were simply too good to be true. To my mind, it is virtually unthinkable that any bank would choose to burden itself with a requirement that it was only empowered to treat cheques as properly endorsed if they carry two signatures. A banker would, in effect, be shooting himself in the foot if he did that, since he would then be throwing away the protection banks managed to gain for themselves when section 60, and sections 82 to 86 of the Bills of Exchange Ordinance Cap .19, were passed, affording banks a measure of relief from liability in relation to endorsements on cheques.

420. Besides the exceedingly strange coincidence that D.T.B. Bank, for reasons impossible to fathom, should have wanted to burden itself with this unusual mandate for endorsed cheques in relation to its current account with Zanda, there are other oddities about the documents from Trial Bundle A at pages A256 and 394/7 which call in question their authenticity.

421. A circular resolution under Zanda's articles requires the signature of all directors to be effective. However, the purported resolution which found its way into O.T.B. archives happens to bear the signature of Mr S.Y. Ho alone. Were this a genuine document made contemporaneously with the date it bears, there should have been no difficulty in securing Mr Jesse Perez's signature on it then. If, however, the document was brought into existence after Mr Jesse Perez disappeared from Hong Kong, the absence of his signatures becomes no cause for surprise.

422. Under Zanda's Article 46, it was permissible for a circular resolution to become effective by each director signing a separate document. If that course had been adopted in the present instance, there would then be the strange circumstance that the part supposedly signed by Mr Jesse Perez was not returned to O.T.B., and kept with the part signed by Mr S.Y. Ho.

423. Another strange feature of the purported O.T.B. indorsement mandate documents for Zanda is that there are two versions, which, by itself shows this was no standard-form O.T.B. documentation, but something being specially crafted for the occasion.

424. The combination of Mr S.Y. Ho's intrinsically unlikely evidence about O.C.I.L. having given special thought to indorsements on cheques, resulting in its always requiring two, and the strange documents in Trial Bundle A at pages 256 and 394/7 centring on the indorsement position between OT.B. and Zanda made me doubt Mr S.Y. Ho's evidence on the topic of indorsement.

425. In fact, the simple truth was all that was needed to exonorate Mr S.Y. Ho from any suggestion of peculation, but, to be on the safe side, he appears to have thought he had better try to improve upon it.

426. I think that more likely than not the documents A 256 and 394/7 were devised by Mr S.Y. Ho, and planted either by him, or at his direction, in the O.T.B. archives to lay the ground-work in case he were ever called upon to explain how Zanda's money could have disappeared while he was a director of that company. Mr S.Y. Ho had plenty of time to do that in the interval between his learning that Mr Alexis Chan and Mr Jesse Perez had tricked him, and Mr S.Y. Ho being ousted from O.C.I.L. when O.T.B. was taken over by the government in 1985.

427. The fact that the document from bundle A p.394/7 bean; the chop number 30098556, which is the same as that on other Zanda documents in the O.T.B. archive, does nothing to increase the likelihood that the document is genuine, rather than concocted. A simple adjustment to a chop can produce any number at any time.

428. The witness who produced these documents from the O.T.B. archive was, obviously, in no way involved in tampering with any documents there. She did not commence working for O.T.B. until 1988, and would have known nothing of the history of the document from Bundle A at p.394/7. She simply produced to the court the documents that had been in the archive.

429. (ii) If Mr S. Y. Ho were to be believed, he knew next to nothing about Asean, and even less about Clyde. His anxiety to' distance himself from Clyde is understandable. Clearly, that company was used by those running Asean to avoid the provisions of the D.T.C. Ordinance designed to prevent a D.T.C. lending more than 25% of its paid up capital and reserves to anyone borrower. While I find it difficult to accept that Mr S.Y. Ho never knew about Clyde until receiving Ernst and Whinney management accounts in February or March 1984, I, nonetheless, do not think he was in any way responsible for any of the stratagems devised by Mr Alexis Chan and Mr Jesse Perez to evade the D.T.C. Ordinance.

430. Mr S.Y. Ho's claim to total ignorance on how Zanda was to pay the building contractors, and his insistence on how he left everything concerned with financing to Mr Johnny Cheng struck me as somewhat unlikely, bearing in mind that Mr S.Y. Ho was one of only two substantive directors of Zanda. He could have saved himself the trouble of distorting the truth about his state of knowledge concerning the sources of Zanda's funding, because the way Asean and Clyde were run was outside of his control, but he gave his evidence in the way he did to forestall any possibility of his being linked to either Asean or Clyde, companies which were operated in reckless disregard of the law.

431. (iii) I found it difficult to believe Mr S. Y. Ho's contention that he did not know about Asean receiving the balance 'of the completion money from the Zanda/Tai Ting Estates transaction until mid-November 1983. I regard it as more likely that he knew about that some time in or about the second half of September 1983.

432. He knew that the building was physically completed by the end of June 1983, and I regard it as unlikely that he would have kept on believing Mr Alexis Chan until mid-November on the point about the Occupation Permit not having been granted by the government until then.

433. Mr S.Y. Ho was not limited to Mr Alexis Chan and Mr Jesse Perez for information concerning the Occupation Permit, and the receipt of the balance of the completion money. There was nothing to prevent Mr S.Y. Ho asking either the architect, Mr Edmond Wong, or the solicitor, Mr Chau about the status of the new building. Bearing in mind that Mr S. Y. Ho was the secretary of O.C.I.L. and I.C.I.L., through which O.T.B. was owned, Mr S.Y. Ho's evidence on how Messrs Tsang, Chau & Shuen, solicitors with a practise which included conveyancing, did not return his phone call, is simply unbelievable.

434. The letters which Mr S.Y. Ho sent to Mr Alexis Chan from and including the one of 31st October 1983 (Trial Bundle "A" page 303) do not necessarily preclude his already knowing by then that Mr Alexis Chan had misappropriated Zanda's money. From a not wholly dishonourable sense of loyalty, Mr S.Y. Ho, looks, from the evidence, to have tried to give Mr Alexis Chan and Mr Jesse Perez time to put the money back. Even from the time that Mr S.Y. Ho himself admits that he became aware of Mr Alexis Chan and Mr Jesse Perez having taken Zanda's money, Mr S.Y. Ho can be seen to have refrained taking any really drastic action against either of that pair. The impression I got from the evidence was that, to avoid trouble for himself as much as anything, Mr S.Y. Ho applied some pressure on Mr Alexis Chan and Mr Jesse Perez to get them to put the money back, but always stopped short of any measure which might have resulted in police action against them. Mr S.Y. Ho's letters of the 31st October 1983 (Trial Bundle "A" page 303), and 13th December 1983 (Trial Bundle "A" page 305) went as far as Mr S.Y. Ho was prepared to go in putting pressure Mr Alexis Chan and Mr Jesse Perez under pressure without crossing the threshhold of openly accusing them of the theft of Zanda's money.

435. At no stage does one see Mr S.Y. Ho going all out against Mr Alexis Chan and Mr Jesse Perez: he always held back when it came to the point of grasping the nettle of accusing them of what must have become unmistakably clear to him from at the very latest, mid-November 1983, namely, that they were thieves.

436. In a misguided effort aimed at deflecting suspicion from himself, I think Mr S.Y. Ho came up with a version of the facts which, incidentally, might assist Zanda in the present claim against Asean. In particular, I disbelieve his evidence about cheques payable to Zanda always requiring two signatures for a valid indorsement, and, despite his prevarication, I was, ultimately, left in no doubt that his intention as a director of Zanda had consistently been that the completion monies from the sale to Tai Ting Estates were all to be deposited with Asean for the purposes of paying creditors and distributing profits to the shareholders. In the end, under cross-examination, he himself had to admit that the intention of Zanda’s directors was to deposit the completion monies with Asean. I have the following passages from the court’s record in mind:-

437. “(Mr Barlow’s cross-examination)

P.248   Q.     At 81, Jesse signed pro Zanda and Chau witnessed it. Was it your expectation when full proceeds of sale received, Jesse and Alexis would distribute them amongst Zanda’s shareholders.

A.     Seems to have been.

Q.     Confirm that September 1983, only communication pro Zanda with its solicitors coming from Alexis or Jesse?

P.249   A.     I cannot remember specific dates or times now, but during that period we rang the solicitors for enquiry but got no reply.

Q.     Confirm distribution of shares of profit of the development was going to be made through Asean?

A.     Not clear as to which company the profits to be distributed through, but at that time I expected the profits were to be distributed to company’s shareholders. However, I was not clear or never gave thought to question of machanics of how distribution to be done.

P.250   Q.     Look at A304 1.12.1983: letter you to Alexis of Asean you refer to phone conversation 2 weeks earlier project completed. Shows you expected Asean to distribute the profit.

A.     Yes.”

“(Mr Bell’s cross-examination)

P.381   Q.     You told Barlow it was anticipated Asean would distribute the profits to the shareholders.

In order for Asean to distribute those profits, they would have to have the money first.

A.     Right.

Q.     So followed you must have anticipated that Zanda would pay the money to Asean?

P.382   A.     I did not kow the details at that time.

Q.     Simple common sense expect sale proceeds after payment of expenses would be placed on deposit pending distribution of profits?

A.     yes, that’s what I expected.

Q.     Obvious party with whom to deposit was Asean?

A.     Yes, they would handle the deposits.

Q.     You would not expect millions of dollars to be kept in O.T.B. Current Account.

P.383   A.     Did not occur to me then.

Q.     You said as matter of practice large sums not paid into O.T.B. Current Account?

A.     I did not say that.

Q.     As matter of practice substantial sums not paid into O.T.B. Current Account?

A.     Possibly the practice.

Q.     Your complaint against Jesse, Alexis and Asean is not that they were paid the sale proceeds: your complaint is they did not distribute them.

A.     What’s the difference.”

Mr Eddie Leung

438. Mr Eddie Leung had the same purposes of his own to serve as his boss, Mr S.Y. Ho. Most of his evidence consisted of denials of knowing anything. I think he knew more than he cared to let on, but failed to tell the whole truth for the same reasons as those I have identified as leading Mr S.Y. Ho to tell less than the truth.

Ms Stephenie Chan

439. The possible purpose of her own she had to serve was avoiding the prospect of finding herself liable in third party proceedings brought by Bank of America and Barclays if Zanda's present action against them on the disputed cheques were to succeed. Despite the temptation to give her evidence in a way which would support the defence of the Defendant-banks that her signature alone on cheques made payable to Zanda was sufficient to constitute a valid indorsement, I was satisfied she resisted it, and told the truth to the best of her recollection.

2. The Witness Beyond the Seas

440. The witness falling into this category was Mr Jesse Perez whose sworn statements made specially for use in the present trial were worthless, bearing in mind the character of the maker, except insofar as the content was either inherently probable, or corroborated by independent credible evidence. On that basis, I rule those statements as admissible and they become Exhibits - BA20 and BB4.

LAW

1. Delegation of Authority by Zanda

441. A company as an artificial legal entity must of necessity act through the medium of its human officers or agents. But not every act of theirs will bind the company. Whether the company is bound will depend, first, on whethe the act is within the capacity of the company, and secondly on whether they have acted within the scope of their employment or authority.

442. Can Ms Stephenie Chan be treated as having been authorised by Zanda to indorse the two cheques, the subject of the present proceedings?

443. It will be recalled that by a Zanda board resolution dated 30th April 1983, Ms Stephenie Chan, with effect from 1^st May 1983 became an alternate director of Zanda in substitution for Ms Carmencita Cheng and had also replaced Ms Cheng as an authorised signatory for Zanda.

444. The first and last documents Ms Stephenie Chan purported to sign on behalf of Zanda were the three cheques she indorsed on 7th September 1983 under the direction of Mr Alexis Chan in the absence of Mr Jesse Perez. Shortly afterwards - probably later the same day or the next day - Mr Jesse Perez gave her to understand he approved what she had done.

445. The impression I got from the evidence as a whole was that Ms Stephenie Chan, who was young and inexperienced in the ways of business at the time, had no idea then of the duties and powers of a director, whether alternate or otherwise, and simply did whatever Mr Alexis Chan or Mr Jesse Perez told her to do, without exercising any independent judgment of her own.

446. There is nothing specific in Zanda's articles on the topic of who in the company was empowered to sign cheques.

447. Under the provisions of the Companies Ordinance in force at that time a single signatory could, as a matter of law, be endowed by a company with capacity to endorse cheques. Section 33 of the Companies Ordinance Cap. 32, in force on 7th September 1983, provided as follows:

"33. A bill of exchange or promissory note shall be deemed to have been made, accepted, or endorsed on behalf of a company if made, accepted, or endorsed in the name of, or by or on behalf or on account of, the company by any person acting under its authority."

448. That has since been changed so that, to make a valid endorsement nowadays, at least two persons have to be authorised by the company to sign on its behalf, a change which, however, makes no difference to the present case.

449. Despite there being no objection in principle at the material time to one person enjoying capacity by his or her sole signature validly to indorse a cheque on behalf of a company, it was, of course, still crucial to look at the company's articles and to consider the position of the purported signatory within the company in order to arrive at a decision in a particular case whether a particular individual should be treated as authorised by the company to endorse.

450. The extent of Ms Stephenie Chan's power to endorse on behalf of Zanda can conveniently be considered from the point of view of the two capacities in which she served, namely, first, as an alternate director, and, secondly, as a personal secretary to Mr Alexis Chan and Mr Jesse Perez.

451. To find out Ms Stephenie Chan's powers as an alternate director, recourse has to be made to Zanda's' articles including (insofar as not inconsistent) those brought in pursuant to Article 2 from Table A in the First Schedule to the Companies Ordinance then in force.

452. The following articles govern the position:-

"1. In these Articles, unless there is something in the subject or context inconsisted therewith :- ………

'Manager' means the Managing Director and any other Manager or Managers for the time being of the company ………………

'Working Director' means the Managing Director and any other Director holding an office or place of profit as provided in Article 38(d) hereof ………

38(d). A Director may hold any other office or place of profit other than that of Auditor under the Company in conjunction with his directorship. Any such director and any manager may be appointed to office upon such terms as to remuneration, tenure of office or otherwise as may be arranged by the Directors. Such remuneration may either be in addition to or in substitution for his share in the remuneration hereinbefore provided for the other Directors.

48. A Director may at any time appoint any other person (whether a Director or Member of the Company or not) to act as Alternate Director at any Meeting of the Board at which the Director is not present, and may at any time revoke any such appointment. An Alternate Director so appointed shall not be entitled as such to receive any remuneration from the Company, but shall otherwise be subject to the provisions of Table A and of these presents with regard to Directors. An Alternate Director shall be entitled to receive notices of all Meetings of the Board and to attend and vote as a Director at any such Meeting at which the Director appointing him is not personally present, and generally to perform all the functions, rights, powers and duties of the Director by whom he was appointed in his capacity as a Director but not in his capacity as a manager or working Director"

The following are from Table A

"67. The business of the company shall be managed by the directors, who may pay all expenses incurred in getting up and registering the company, and may exercise all such powers of the company, as are not, by the Ordinance, or by these articles, required to be exercised by the company in general meeting, subject, nevertheless, to any regulation of these articles, to the provisions of the Ordinance, and to such regulations, being not inconsistent with the aforesaid regulations or provsions, as may be, prescribed by the company in general meeting; but no regulation made by the company in general meeting shall invalidate any prior act of the directors which would have been valid if that regulation had not been made.

68. The directors may from time to time appoint one or more of their body to the office of managing director or manager for such term and at such remuneration (whether by way of salary, or commission, or participation in profits, or partly in one way and partly in another) as they may think fit, and a director so appointed shall not, while holding that office, be subject to retirement by rotation, or taken into account in determining the rotation of retirement of directors; but his appointment shall be subject to determination ipso facto if he ceases from any cause to be a director, or if the company in general meeting resolve that his tenure of the office of managing director or manager be determined.

85. The directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the directors."

453. It can be seen that the scheme of Zanda's articles is for its business to be managed by its directors, that is to say, the board as a whole (Article 67). The directors can delegate their powers to committees consisting of such directors as they think fit. As Zanda had only two directors at all material times - Mr S.Y. Ho and Mr Jesse Perez - it meant that, in practice, Mr S.Y. Ho could delegate his powers to Mr Jesse Perez and vice-versa (Article 85). One of the directors could be appointed by the other or others as managing director or manager but such appointment would automatically terminate if he ceased to be a director (Article 68). The effect of that was Zanda's manager had to be a serving director.

454. Turning now to alternate directors, it is clear from Article 48 and the definitions of "Manager" and "Working Director" that, at board meetings, they had the same powers as the substantive director to whom they were alternate, but had none of his powers outside board meetings to perform managerial functions.

455. Almost certainly, I would have thought, the endorsing of cheques in Zanda has to be regarded as a managerial function. Hence, Ms Stephenie Chan's position as alternate director could not endow her with the capacity to endorse away cheques on Zanda's behalf.

456. Under the doctrine of constructive notice, any outsiders dealing with Zanda are deemed to know the limitations imposed on Zanda's officers by the articles. Thus, neither Bank of America, nor Barclays can treat Ms Stephenie Chan's purported indorsement in her capacity of alternate Director as authorised by Zanda.

457. How about in her position as personal secretary to Mr Alexis Chan and/or Mr Jesse Perez?

458. Based on a whole raft of cases, Diplock L.J., in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 506 propounded a test for determining whether a party, who deals with an agent purporting to act on behalf of a company but lacking actual authority, can, nonetheless, treat the company as bound in contract on the basis of ostensible authority. The test embodies four conditions, failure to meet any one of which on the part of a claimant seeing to enforce the contract will result in the company not being bound. Those four conditions require the claimant ("contractor" in Lord Diplock's word) to show:-

(1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;

(2) that such representation was made by a person or persons who had "actual" authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

(3) that he (the contractor).was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and

(4) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.

459. For convenience, I will consider Condition 4 first. Bearing in mind the specific articles to which I have already made reference, one quickly sees that not only does Condition 4 disqualify any claim Zanda might have delegated power to Miss Stephenie Chan to endorse cheques qua personal secretary, but it could, also, have been used to defeat the suggestion I have already dealt with that she might have enjoyed power to endorse qua alternate director. Condition 4 merely embodies the constructive notice doctrine. The same Zanda articles which demolish the claim that Ms Stephenie Chan, as alternate director, might have been authorised to endorse cheques on behalf of the company apply with equal force to dispel any notion that as a personal secretary such authority might have been delegated to her.

460. At the risk of over-kill, I will briefly say why I think the claim that she, as a personal secretary, should be treated as clothed with authority from Zanda to endorse away cheques fails to satisfy any of Diplock L.J.'s other three conditions.

461. Condition (1) embodies the agency principle found in a long line of cases to the effect that if a company holds out one of its staff as a particular kind of employee - In our case, Ms Stephenie Chan was held out as a personal secretary - the company will be liable for her acts if they result from her exercising a power that sort of employee would usually have, regardless of whether the company has conferred such actual authority on her or not. Cases illustrating that concept are Royal British Bank v Turquand (1856) 6 E. & B.327; Mahony v East Holyford Mining Co (1875), L.R. 7 H.L. 869; Biggerstaff v. Rowatt's Wharf Ltd [1896] 2 Ch. 93; and British Thomson Houston Co v Federated European Bank Ltd. A case subsequent to Freeman & Lockyer, illustrating its principles is Hely-Hutchison v Brayhead Ltd [1968] 1 Q.B. 549.

462. In my view it would be far from usual for a company in Zanda's line of business, namely, property development, to permit a personal secretary, whether alone, or even with any other officer of the company, to indorse away cheques.

463. Insofar as Condition (2) is concerned, the simple fact is that those who had actual authority to manage Zanda's business, namely, Mr SY Ho and Mr Jesse Perez, neither jointly nor separately represented that Ms Stephenie Chan as a private secretary had authority to indorse cheques ; nor was it within their power to delegate such authority to her.

464. Mr Alexis Chan had no actual authority to manage Zanda's business, since he was not a director.

465. For the purposes of Condition 3, there is not even a scintilla of evidence to suggest that any representation was made to either Bank of America nor Barclays suggesting that Ms Stephenie Chan might be authorised to indorse away cheques, so the question of their being induced by such a representation simply does not arise. Insofar as Bank of America is concerned, there was positive evidence from Mr Arthur Lee that his bank did not rely on Miss Stephenie Chan's purported indorsement on behalf of Zanda. What he relied on, for Bank of America, was the indorsement of Mr Titus Lee, the Assistant General Manager of Asean on behalf of Asean, Mr Arthur Lee's customer.

466. In the context of authorisation, it was argued on behalf of Zanda that Mr S.Y. Ho and Mr Eddie Leung would never have authorised paying the balance of the completion monies to Asean, since, from 1st July 1983 onwards, it had become illegal for a registered D.T.C. to accept money on deposit for a period of less than three months; and, since O.C.I.L. would have wanted access to its share of the profits straight away, therefore neither Mr S.Y. Ho nor Mr Eddie Leung for O.C.I.L. would have pennitted Asean to hold money for Zanda on deposit.

467. In fact, there was no evidence that the prohibition against registered D.T.C.s accepting deposits for a shorter duration than three months played any part in the thinking of either Mr S.Y. Ho or Mr Eddie Leung. Neither of them made any reference to it.

468. I am far from persuaded that the evidence shows O.C.I.L. expected its share of the profits immediately. I regard it as equally likely that O.C.I.L. would have been content to wait for its share of the profits until Asean had paid off all Zanda's creditors. Meanwhile, whatever money was to go to O.C.I.L. by way of its share of profit would have been earning interest from Asean.

469. Strictly speaking, Zanda could only make a distribution of profits to shareholders if a resolution to that effect was passed by the company in general meeting, and previously, Zanda had held general meetings in December each year. If Zanda followed the same pattern as previous years, by the time the annual general meeting came round in December 1983, three months would have elapsed, assuming Zanda received the balance of the completion monies in August, September 1983. Of course, Zanda could have held its general meeting earlier if that was what the shareholders wanted.

470. Moreover, there would have been nothing illegal about paying Zanda's money into Asean in September 1983. Illegality would only arise if the deposit were uplifted before three months elapsed, and Mr Ho and Mr Eddie Leung could have avoided being implicated in that in the same way they had avoided involving themselves in Asean's other breaches of the D.T.C. Ordinance when it lent Zanda more than 25% of Asean's capital and reserves via Clyde Investment.

471. Since neither Mr S.Y. Ho nor Mr Eddie Leung was a signatory of Zanda's account with Asean, each of them was in the happy position of being able to blame others if Asean in any way inftinged the D.T.C. Ordinance in relation to the way in which it dealt with money it was holding for Zanda.

472. Prominent in the opening address on behalf of Zanda was the argument that as Zanda could only draw on its accounts with O.T.B. and Daiwa Overseas Finance if there were joint signatures from the "A" (O.C.I.L.) and "B" (Asean) groups, the court should infer that indorsement away of cheques payable to Zanda should only be treated as authorised by Zanda if there were, likewise, a joint indorsement of such cheques from the "A" and "B" groups. That argument is clearly fallacious since Zanda's authorisation to O.T.B. and Daiwa Overseas Finance to recognize only joint signatures for drawings stemmed from the specific written mandates Zanda gave O.T.B. and Daiwa Overseas Finance in relation to the drawing of cheques. Those mandates did not even cover the position where O.T.B. or Daiwa Overseas Finance collected third party cheques for Zanda, let alone the postiion where strangers to those mandates such as Bank of America and Barclays were concerned.

473. By the time of the closing arguments those appearing for Zanda while not abandoning the point about the analogy between the number of signatures Zanda required for drawing cheques and indorsing them placed little emphasis on the point and instead concentrated on the far more effective argument concerning the lack of authorisation for an alternate director to indorse in the light of Zanda's Articles, a point I do not recall being even touched upon in Zanda's opening.

474. On the view I take, the argument on Zanda's behalf by way of analogy with the bank mandates was thoroughly bad, whilst its argument based on Zanda's argument was good insofar as it went, but did not carry the day because of the way s.86 of the Bills of Exchange Oridnance, Cap. 19 and other defences operated in relation to the facts of the present case. Section 86 is my next topic.

2. Section 86 of Bills of Exchange Ordinance

475. If I am correct in regarding Ms Stephenie Chan as unauthorised to indporse away cheques made payable to Zanda because of the limiting provisions of Zanda's Articles, the consequence would normally follow that her purported indorsements on behalf of Zanda would be ineffective for the purpose of entitling the Defendant-banks to retain the proceeds of the cheques in dispute against the claims of the true owner, Zanda. That result would flow from Section 24 of the Bills of Exchange Ordinance, Cap. 19.

"24. Forged or unauthorized signature

Subject to the provisions of this Ordinance, where a signature on a bill is forged or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill, or to give a discharge therefor, or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded trom setting up the forgery or want of authority:

Provided that nothing in this section shall affect the ratification of an unauthorized signature not amounting to a forgery."

476. In the present case, however, the opening phrase of Section 24, namely, "Subject to the provisions of this Ordinance", is significant, since it signals that there might be other provisions in the Ordinance to modify the normal rule that an ".... unauthorized signature is wholly inoperative ...”.

477. The Bills of Exchange Ordinance opens up the possibility for the Defendant-banks of defeating Zanda's claim if they can prove they fall within the protection of its Section 86, which is as follows :-

"86. Protection of bankers collecting payment of cheques, ete.

(1) Where a banker, in good faith and without negligence-

(a) receives payment for a customer of an instrument to which this section applies; or

(b) having credited a customer's account with the amount of such an instrument, receives payment thereof for himself,

and the customer has no title, or a defective title, to the instrument, the banker does not incur any liability to the true owner of the instrument by reason only of having received payment thereof

(2) This section applies to the following instruments, namely -

(a) cheques;

………

(3) A banker is not to be treated for the purposes of this section as having been negligent by reason only of his failure to concern himself with absence of, or irregularity in, indorsement of an instrument."

478. Bank of America and Barclay's each received payment on a disputed cheque for itself, having credited the account of the customer, Asean, with the amount of the cheque by immeditely reducing Asean's overdraft. In such circumstance, both banks were collecting for themselves by virtue of the lien they enjoyed through the operation of Section 27(3) of the Bills of Exchange Ordinance. I set out the whole of s.27 :

"27. Value and holder for value

(1) 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.

(2) Where value has at any time been given for a bill, the holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who became parties prior to such time.

(3) Where the holder of a bill has a lien on it, arising either from contract or by implication of law, he is deemed to be a holder for value to the extent of the sum for which he has a lien."

479. In this way, both Defendant-banks gave value.

480. I disagree with counsel for Ms Stephenie Chants contention that the banks were collecting as agent for Asean, but I do not think much turns on whether the banks were collecting for themselves or as Asean's agent: either way, they fall within the ambit of Section 86.

481. The crucial issue in relation to Section 86 is whether the Defendant -banks can satisfy the court they were not negligent, good faith being conceded by Zanda. In view of that concession, there is no scope for Zanda to rely on the part of its Reply alleging the Defendant-banks had actual or constructive knowledge of defects in title to the disputed cheques. Moreover, I am satisfied, on the facts, that there was nothing by way of knowing assistance or turning a blind eye on the part of either Defendant-bank to the dishonest way in which Mr Alexis Chan andMr Jesse Perez ran Asean : see Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All E.R. 393:

482. If either Defendant-bank could bring itself within subsection (3) of Section 86, by showing that its only negligence was failure to concern itself with "absence of, or irregularity in, indorsement", it would have a cut-and- dried defence. On the view I take, however, the operation of sub-section (3) is confined to the situation where the absent or irregular indorsement is that of the collecting banker's customer (in the present case, Asean), and not some earlier indorsement, (Zanda's), along the chain. I think the following passage from Goode's Commercial Law, page 504 correctly summarises the position:

"Since it is no longer necessary to indorse a cheque purely for collection, the collecting banker has no duty to call for his customer's indorsement, nor to examine such an indorsement if made, given that the customer is the ostensible payee or indorsee. On the other hand, the banker is still obliged to ensure that the cheque carries all indorsements necessary to establish its customer's title to the cheque. Accordingly, if the customer is not the original payee the banker must examine the back of the cheque for the indorsements of the payee arid of any intervening special indorsee."

483. At first blush, it might appear that Ms Stephenie Chan's signature fell within the ambit of "irregularity", since, in layman's parlance, an unauthorised signature could be described as irregular. However, in this branch of the law, “irregularity” is a term art, confined to such minor matters as discrepancies in the name of the payee of a cheque and the indorser, e.g., the payee being shown as "John A Smith", but the indorsee signing "John B. Smith": see Cowen on The Law of Negotiable Instruments in South Africa (which also deals with the situation in England from which Hong Kong borrowed its bills of exchange legislation), page 120.

484. The language of sub-section (3) of s.86 was never intended, in my view, to deal with cheques suffering from the fundamental defect of an indorsement, other than that of the banker's customer, being either forged or unauthorised. Where such an earlier indorsement is forged or unauthorised, the collecting banker, instead of enjoying the special exoneration afforded by sub-section (3), is thrown back on the general defence afforded him by sub-section (1) if he can show he acted without negligence.

485. It cannot be doubted that where, as in the present case, cheques are crossed "Not Negotiable A/C Payee Only", and the collecting bank is not collecting for the original payee but an indorsee, the collecting bank owes a duty of care to the true owner to take such steps as may be reasonable to satisfy himself that the payee has authorized receipt of the money for the bank's customer. The standard of care required of a banker is the ordinary prudence expected of those carrying on a banking business in accordance with normal and proper banking practice : see Lloyds Bank Ltd v Chartered Bank of India, Australia and China [1929] 1 K.B. 40.

486. The approach the court should adopt for the purpose of determining whether a banker has been negligent is explained by Diplock, L.J. (as he then was) in Marfani & Co. Ltd v. Midland Bank Ltd [1986] 1 WLR 956, where the Court of Appeal in England had to consider s.4 of the Cheques Act 1957 which Hong Kong has replicated in s.86 of its Bills of Exchange Ordinance. The following passages from his judgment showthe duty of care required of a banker:-

Page 972A-

“A purist might also comment (and some have) on the use of the expression 'negligence,' a term of art appropriate to a cause of action different in its legal characteristics from that of conversion or money had and received in respect of which the qualified immunity is conferred. It is, however, in my view, clear that the intention of the subsection and its statutory predecessors is to substitute for the absolute duty owed at common law by a banker to the true owner of a cheque not to take any steps in the ordinary course of business leading up to and including the receipt of payment of the cheque, and the crediting of the amount of the cheque to the account of his customer, in usurpation of the true owner's title thereto a qualified duty to take resonable care to refrain from taking any such step which he foresees is, or ought reasonably to have foreseen was, likely to cause loss or damage to the true owner.

The only respect in which this substituted statutory duty differs from a common law cause of action in negligence is that, since it takes the form of a qualified immunity from a strict liability at common law, the onus of showing that he did take such reasonable care lies upon the defendant banker. Granted good faith in the banker (the other condition of the immunity), the usual matter with respect to which the banker must take reasonable care is to satisfy himself that his own customer's title to the cheque delivered to him for collection is not defective, i.e., that no other person is the true owner of it. Where the customer is in possession of the cheque at the time of delivery for collection and appears upon the face of it to be the 'holder,' i.e., the payee or indorsee or the bearer, the banker is, in my view: entitled to assume that the customer is the owner of the cheque unless there are facts which are, or ought to be, known to him which would cause a reasonable banker to suspect that the customer was not the true owner.

Page 973B –

“What the court has to do is to look at all the circumstances at the time of the acts complained of and to ask itself: were those circumstances such as would cause a reasonable banker possessed of such information about his customer as a reasonable banker would possess, to suspect that his customer was not the true owner of the cheque?"

Page 975H –

"It is to be borne in mind that, whatever inquiries it might be prudent for the bank to make for their own purposes, the only inquiries which they were under any duty to the plaintiff to make were inquiries directed to discovering whether their new (or, in the present case "old", my parenthesis) customer might use the account for the fraudulent purpose of cashing cheques belonging to other people."

487. Various authorities emphasize how the courts should adopt a practical, commercial view in detennining whether a banker has acted reasonably. Diplock L.J. in Marfani at page 973H emphasizes that the Bills of Exchange legislation "was intended to apply to business transactions as they are carried out in real life". Observations to similar effect are to be found in Australia and New Zealand Bank Limited v Ateliers De Construction Electriques De Charleroi [1967] AC, 86, 113, and Souhrada v Bank of New South Wales [1976] 2 Lloyd's Rep 444.

488. A suggestion from those appearing for Zanda that'Mr Arthur Lee should have insisted on a copy resolution from Zanda authorizing Ms Stephenie Chan to indorse away cheques payable to Zanda on her sole signature were, I feel, ignoring commercial reality.

489. Although the Marfani case was concerned with the liability of a collecting banker to the drawer of a crossed cheque without any special markings in a situation where a dishonest employee had opened a new bank account for the purpose of paying in the cheque made payable to a customer of his employer, the duty of the collecting banker there to take reasonable care in the light of all the surrounditig circumstances is no different, in principle, from that applicable to the present case before me where the Defendant collecting banks collected cheques crossed "Not Negotiable A/C Payee Only" for other than the true owner.

490. Crossed cheques marked ''Not Negotiable A/C Payee Only" are transferable by indorsement to a third party, but the collecting banker has to exercise the reasonable care of a prudent banker to satisfy himself that the named payee has authorised collection for the indorsee. The burden of proving the absence of negligence is on the banker, Midland Bank v Reckitt [1933] A.C. 1, 14, and is, "no doubt heavy", per Cairns L,J. in Marfani, 980D.

491. In the context of cases involving the collection of third party cheques with markings, "A/C Payee Only" (or words to the like effect such as "Payee Account Only", which featured in the Hong Kong case I am about to cite), those appearing for Zanda were correct to pray in aid the observation of Rigby, J. in Asiatic European Corporation Ltd v. Overseas Trust Bank Ltd [1967] HKLR 1 at p.3 "that a collecting banker which ignores a cheque endorsed 'Payee Account Only' does so at his peril," but that does not take really the matter very far, since it does not define what the "peril" is to which the collecting bank is exposed in such circumstances. The peril faced is not that of an absolute duty, but, rather, the qualified duty owed by the collecting bank to the true owner, under s.86, of exercising-reasonable care in all the circumstances.

492. Needless to say, one of the salient circumstances to which the collecting banker must pay heed in his endeavour to discharge the onus on him of satisfying a court that he acted without negligence is the fact of a crossing such as "Not Negotiable A/C Payee Only". A crossing like that puts a careful banker on enquiry. The actual enquiries the banker will need to make if he is to be absolved rrom negligence must depend on the actual circumstances of the case.

493. The collecting banker is entitled, in an appropriate case, to rely on information he has gathered from past enquiries. The significance of past enquiries is dealt with by Diplock L J in Marfani, p.972H:-

" Any antecedent inquiries which he may have made are relevant only in so far as they have already brought to his knowledge facts which a careful banker ought to ascertain about his customers before accepting for collection the cheque which is the subject-matter of the action and so relieved him of any need to ascertain them again when the cheque which is the subject-matter of the action is delivered to him."

494. So far as Bank of America is concerned, judged by the standard of a careful banker I would not have expected it to make any further enquiries in relation to the disputed cheque for $5 million presented to it on 7th September 1983. Mr Arthur Lee already had deep knowledge, gleaned over an eighteen month period, about his customer, and he also knew all he could reasonably have been expected to know about Zanda.

495. He knew that Asean owned 50% of Zanda, and that Asean had helped finance Zanda's building project, so there was nothing unnatural or unusual about Zanda indorsing over the proceeds .of the cheque to Asean.

496. There was also the circumstance that Asean was a D.T.C., a type of financial institution likely to have money placed with it.

497. Moreover, Mr Arthur Lee, at the time, was actually expecting a cheque for the Zanda sale proceeds from Tai Ting Estates to be deposited by Asean with Bank of America. Mr Alexis Chan had laid the groundwork for Asean to be in possession of this cheque, with a credible story about paying Bank of America $10 million of the Zanda proceeds as soon as the sale went through on the issue of a Letter of Compliance to Zanda. I have explained earlier how, in my view, the circumstance that Asean paid in a cheque for $5 million, rather than the $10 million Mr Alexis Chan had spoken of earlier, was not such as reasonably to raise any suspicion on Bank of America's part that Asean might be stealing Zanda's money.

498. Nor do I think the circumstance that the cheque was indorsed over to Asean by Ms Stephenie Chan alone, purportedly on behalf of Zanda, should have raised doubt in his mind over what Asean was doing. He knew Ms Stephenie Chan was personal secretary to Mr Alexis Chan and Mr Jesse Perez. What Ms Stephenie Chan was doing was obviously all right with both Mr Alexis Chan and Mr Jesse Perez: it was totally consistent with what the latter pair had led Bank of America to believe was going to happen with some of the proceeds from the Zanda completion. The matter would have been very different, of course; if Ms Stephenie Chan had tried to pay the proceeds of the $5 million cheque into her own personal account, but her part in paying Zanda money into an Asean account was in no way suspicious.

499. True, Asean, to Bank of America's knowledge, held only a 50% stake in Zanda, and Bank of America must have known that Zanda would in all probability have had other creditors besides Asean. Should that knowledge have made a prudent banker wary of collecting a "Not Negotiable A/C Payee Only" cheque for Asean? I do not think so, in the light of Bank of America's overall knowledge of Asean and Zanda generally, and in relation to the information it had, in particular, about the disputed cheque.

500. It was only if Bank of America might reasonably have had some inkling that Asean might be.trying to cheat Zanda's other creditors and shareholders that Bank of America's knowledge of the existence of those other shareholders and creditors would assume some significance in the context of the issue whether Bank of America had acted in the manner of a prudent banker in collecting this cheque.

501. Is the fact that Bank of America failed to direct any fresh enquiries to Asean or Zanda before collecting the cheque indicative of negligence on the banks' part? I think not for two reasons.

502. Firstly, depending on the circumstances, it does not necessarily constitute lack of reasonable care on the part of a banker to refrain from making enquiries which it is improbable would lead to detection of the customer's dishonest purpose, if he is dishonest, and which are likely to offend him, and may be drive him away, if he is honest. To use Diplock L.J.'s precise words from Marfani, p.977B & C:

“It does not constitute any lack of reasonable care to refrain from making inquiries which it is improbable will lead to detection of the potential customers dishonest purpose if he is dishonest, and which are calcuated to offend him and maybe drive away his custom if he is honest.”

503. I think it reasonable for Bank of America to suppose that Mr Alexis Chan, and Mr Jesse Perez would be likely to take umbrage if Bank of America's staff had phoned them up enquiring whether Asean was really entitled to the proceeds of the $5 million where Zanda was shown as the payee cheque. At that stage, there was nothing to suggest that Mr Alexis Chan and Mr Jesse Perez were dishonest. In fact, all the information available to Bank of America pointed the other way. Any honest man who had been dealing with a bank as long as Mr Alexis Chan and Mr Jesse Perez, on behalf of Asean, had been dealing with Bank of America would have resented any enquiry insinuating he might be trying to get money to which his company might not be entitled.

504. An honest man would be even more indignant if his bank went behind his back making enquiries of the payee of a cheque to see whether the bank's customer was acting honestly. Once news of that got back to the customer (who, I am assuming, is honest), he would be outraged. Like Diplock L.J. in Marfani at p.974B, I think a banker is entitled to presume his customer is in all probability honest unless and until there are indications to the contrary. In the present case, there was a mountain of information leading Bank of America, as at 7th September 1983, to believe Mr Alexis Chan and Mr Jesse Perez were men of integrity, and not even a molehill suggesting otherwise.

505. Over forty years before the 1968 - Marfani decision, Scrutton L.J. in A.L. Underwood Ltd v Bank of Liverpool [1924] 1 KB 775, expressed the view that, if bankers wanted the luxury of not offending their customers in connection with the collection of third party cheques by enquiring into any unusual circumstances; they must pay the price for that in the form of being liable to the true owner if it turned out the bank's customer was dishonest. Mr Richard Mills-Owen, Q.C., for Zanda, relied on that authority.

506. I think Marfani represents the modem law on the consequences of not offending a customer whose honesty is not in question, and I am following it.

507. The second of my reasons why I do not think Bank of America's failure to make enquiries of Asean and/or Zanda about the cheque in dispute points towards negligence is that even if they had made enquiries, it is improbable they would have exposed Asean's dishonesty. This is really a causation point. The principle to be applied is found in the following passage from Diplock L.J., in Marfani at p.976H :-

"Failure to make the inquiries was not causative of the loss. There are dicta, which can be found collected in Baker v. BarcIays Bank Ltd, which suggest that, even if it could be proved that a failure to make a particular inquiry which a prudent banker would have made had had no causative effect upon the loss substained by the true owner, the banker would nevertheless be disentitled to the protection of section 4 of the Cheques Act, 1957. For my part, I think that those dicta are wrong.

508. Cairns L.J. in the same case, at p.980C expressed the same idea as follows :-

"In my opinion, if the bank can show that in all probability a particular precaution would have been unavailing, the failure to take that precaution is not such negligence as deprives them of the protection."

509. Applying that approach to the present case, from the point of view of trying to get at the truth, it would, obviously, have been pointless on 7th September 1983 for Bank of America to address inquiries to either Mr Alexis Chan or Mr Jesse Perez about the cheque in dispute. They would simply have told Bank of America plausible lies consistent with the major substratum of truth about Aseail having helped financed the development, about how the completion monies were being paid in different tranches, how, commencing with the payment by cheque of the initial deposit of $4.1 million by Tai Ting Estates on 3rd September 1981, all the cheques had been in the same form and endorsed over by Zanda in blank, and how it was the wish of all shareholders in Zanda that all monies due from Tai Ting Estates to Zanda, including the completion monies, were to be deposited with Asean to payoff creditors and then distribute the balance to shareholders.

510. If Bank of America had, on 7th September 1983, contacted either Mr S.Y. Ho or Mr S.Y. Leung, enquiring whether it was all right to collect the $5 million cheque for Asean, I am satisfied, for reasons I expressed earlier in this judgment, that both of them would have said it was all right, being what Zanda wanted. All along, Mr S.Y. Ho and Mr Jesse Perez, the directors of Zanda, contemplated and intended that all payments from Tai Ting Estates for Zanda should be channelled through Asean. Zanda's alternate directors, insofar as they thought about it at all, wanted the same thing. It is difficult to see how Bank of America can be regarded as having failed in its duty of care towards Zanda, when it was doing the very thing Zanda wanted, namely, collecting Zanda's cheque for Asean. This feature of the case will be highly relevant when I come to consider contributmy negligence.

511. In my view, failure by Bank of America to raise enquiries with Asean and/or Zanda would have made no difference to the course Bank of America took in collecting this cheque, so cannot be regarded as causative of Zanda's loss.

512. A point was made for Zanda against Bank of America in the context of negligence that it lacked guidelines for its staff on how to deal with third party cheques. As will be seen, the point was taken against Barclays, which did have guidelines, that it did not follow them.

513. It was suggested on behalf of Zanda that, bearing in mind that Bank of America is a United States bank, and that in the United States, crossings never feature on cheques, there might, therefore, be grounds for supposing that officers in the Hong Kong branches of Bank of America did not fully understand the significance of crossings on cheques, and were in no position to reach the standard expected of careful bankers in Hong Kong when it came to dealing with third party cheques. The impression I gained from the evidence of Mr Arthur Lee, the Bank of America Account Officer who approved the collection of the disputed cheque by Bank of America, was that he had a good working-knowledge of third party cheques, and knew as much about them as one would expect of officers of equivalent rank in banks of English origin. None of his former colleagues who gave evidence left me with the impression of being handicapped in his level of understanding of good practice in processing third party cheques, compared with his opposite numbers in banks in Hong Kong which have a predominantly English background.

514. My conclusion in relation to the defence raised by Bank of America in reliance on s.86 of the Bills of Exchange Ordinance is that it succeeds, smce there was nothing to arouse suspicion on the part of Bank of America's staff that Asean was not the true owner of the cheque for $5 million being tendered for collection on 7th September 1983, and I am satisfied that Bank of America has discharged the onus it bore of showing the collection was without negligence.

515. Turning now to the position of Barclays under s.86, there was a total lack of positive evidence adduced by it to support its plea of absence of negligence in the way it collected the disputed cheque for $1 million presented by its customer, Asean, on 7th September 1983.

516. There was nothing to show Barclays had taken any steps to familiarize itself with the underlying real estate transaction giving rise to this cheque, and with the state of the relationship between Zanda and Asean as at 7th September, 1983.

517. There can be no doubt that the Hong Kong staff of Barclays trusted Mr Alexis Chan and Mr Jesse Perez at that date - too much so - but that by itself would not absolve Barclays from the duties expected of a careful banker towards the payee when collecting a third party cheque for a customer. Although the amount of the cheque was small in the context of the long-standing relationship between Barclays and its customer, it was, all the same, not negligible, and the onus was on Barclays to show that, in the difficult financial conditions obtaining in Hong Kong at that time, it did not, in its anxiety to reduce Asean's overdraft, fall short of the standard expected of careful bankers in Hong Kong.

518. It so happened that Barclays had guidelines to try to live up to.

519. One guideline issued to Barclays staff provided (Trial Bundle B, pp.102 and 104) :

"Circumstances in which a Bank may be held negligent as a collecting bank ………………………

(h) collecting, without enquiry, a cheque for the account of a company, the cheque being payable to another company. In this case if the Bank is aware of circumstances which indicate that the transaction is bona fide, enquiry might not be essential; but otherwise it is advisable to obtain the authority of the payee company independently given."

(As p.1 02 is missing from my Trial Bundle B, I have had to recreate this guideline, as best I can, from p.1587 of my record.).

520. Bank guidelines are in the nature of counsels of perfection, and failure to live up to them is not necessarily fatal to a bank's averment it has not been negligent (see Motor Traders Guarantee Corporation Ltd v. Midland Bank Ltd [1937] 4 All ER 90, 96). That said, deviation by a bank from the practice embodied in a guideline it has laid down for itself will be strong prima facie evidence of negligence.

521. On the evidence as it stands, I cannot be satisfied that Barclays' personnel conformed with the practice described in the guideline I have just set out.

522. There are other Barclays' guidelines which Barclays' staff might, or might not, have followed on 7th September 1983 in relation to the cheque in dispute. I now set them out (Trial Bundle B, pp.102, 104 & 107):

"Circumstances in which a Bank may be held negligent as a collecting bank ………………………

(c) collecting a cheque crossed 'Account Payee' for an account other than that of payee."

Account Payee' Crossing

Some years before 1876 drawers of cheques, on their own initiative, had devised another method of making cheques secure from theft and fraud. They began to cross their cheques with the words 'For the account of …' or 'Account payee'. When the Crossed Cheques Bill, 1876, was being debated in Parliament, an amendment was moved which provided that where a cheque was crossed generally or specially, a lawful holder might add to the crossing the words ‘for account of’, or any abbreviation thereof, followed by the names of the persons or company to whose account he wished the cheque to be credited. The amendement was withdrawn, and to this day there is no reference to that crossing or to the 'account payee' crossing in any Act of Parliament.

This does not mean, however, that the crossings are without legal significance. The relevant decisions of the courts in regard to the collection of cheques so crossed are examined elsewhere. The position may be summarised by stating that bankers will not usually collect cheques so crossed for someone other than the payee or the person designated in the crossing, though exceptions are occasionally made, particularly if the cheque is for a small amount and the customer is one of long standing. The paying banker, however, is not concerned with these crossings; for, as Bigham, J., once observed, the words 'account A. B.' are a mere direction to the receiving bank as to how the money is to be dealt with after receipt.

The 'Safest' Crossing

On 3rd October, 1957, the Council of the Institute of Chartered Accountants in England and Wales issues a statement recommending that cheques be crossed 'Not negotiable. Account payee only'. This combination of the 'not negotiable' crossing with the words 'account payee only' is clearly prudent. The two crossings serve different purposes. The 'not negotiable' crossing takes the cheque out of the category of negotiable instruments with the advantage to the drawer which has already been explained. The 'account payee' crossing does not take the cheque out of the category of negotiable instruments. This crossing is addressed to the collecting banker and in effect it warns the collecting banker that if he collects the cheque for someone other than the payee and that person is not entitled to it, the banker may be liable in damages to the person who was entitled to it. The 'not negotiable' crossing does not imply any such warning. Thus, by combining the 'not negotiable' crossing with the words 'account payee', the drawer enjoys a two-fold advantage."

523. A point with which one could take issue is the assertion in the 'guideline that, ''Not negotiable, A/C Payee only" is the safest crossing. An even safer crossing on a cheque would be “Not transferable”. A similar result can be brought about by adding the word “only” after the payee’s name. See Asia Business law Review, 1993, No.1 at pp57 to 60. Banks do not, however, like the highly effective, “Not Transferable” crossing, nor the insertion of, “only” after the payee’s name on a cheque, since they will then almost certainly lose the protection of s.86 if they make a collection for other than the true owner.

524. As many a litigant has found out, too late, to his cost, the so-called “safest crossing”, “Not Negotiable A/C Payee Only”, is not really all that safe, since the cheque still remains transferable, and a bank which collects for a party, other than the named payee, can escape liability to the true owner under s.86 if it can prove it acted in good faith and without negligence. Paying banks enjoy similar avenues of escape: (See ss.60, 80 and 83 of the Bills of Exchange Ordinance).

525. Small comfort accrues to Zanda from Barclays’ failure, as collecting bank in the present case, to establish it acted without negligence since, on the view I take, Barclays’ negligence was not the cause of Zanda’s loss. The cause was the arrangement assented to by all those involved in directing Zanda that Asean should collect and hold, pending distribution, all the proceeds arising from the sale by Zanda to Tai Ting Estates. Such assent by Mr S.Y. Ho, and Mr Eddie Leung, as well as, of course, by Mr Jesse Perez is an inescapable inference from the evidence as a whole on how Zanda and Asean conducted their affairs. It must also be regarded as the wish of Ms Stephenie Chan during the short time she was alternate director of Zanda. With no idependent view of her own, she did whatever Mr Jesse Perez and Mr Alexis Chan, (Who were ad idem on the affairs of Zanda), asked her to do in connection with Zanda.

526. On reading many of the reported cases where banks have won by resort to s.86 of the Bills of Exchange Ordinance (or England’s s.4 of the cheques Act 1957), I get the feeling, at one level, the loser finished up at the receiving end of some rather rough justice. Marfani is a case in point. There the drawer, a comparatively small company, which had done all that might reasonably have been expected of it to guard against loss, nonetheless finished up as an innocent victim of the banking system, while Midland Bank, which no doubt, is in part responsible for, and does very nicely out of that same banking system, got to keep the money. At another level, I can understand that, for reasons of high policy concerning allocation of risk, and commercial expediency, banks do need protection in view of the vast volume of cheques passing through their hands.

527. No one need feel any qualms for Zanda on the facts of the present case. Both law and justice are on the side of the Defendant-banks. Zanda clearly intended that all the sale monies from Tai Ting Estates should be deposited with Asean, and that is what in fact happened. To have to hold against the Defendant-banks in favour of Zanda in the situation where the banks had conducted themselves in the very way Zanda intended them to act would not be an attractive outcome.

3. Contributory Negligence

528. On the authority of Lumsden & Co v. London Trustee Savings Bank [1971] 1 Lloyds Rep 114, viewed in the light of s.21 of The Law Amendment and Reform Consolidation Ordinance, Cap.23, “L.A.R.C.O.”, I am satisfied that the concept of contributory negligence can apply in relation to the tortious conversion of cheques in Hong Kong. Although counsel in that case had conceded that contributory negligence could apply in the case of conversion, the trial judge, Donaldson J. went on to give considered reasons why he thought the concession had been rightly made. See also Lipkin Gormanv Karpnale Ltd [1989] 1 W.L.R. 1340, 1360 and [1987] 1 W.L.R. 987, 997 where, for the purposes of contract, the judge at first instance considered that contributory negligence applied in the context of a bank negligently collecting a cheque, but, as on appeal, the court held the bank had not been negligent, the point about contributory negligence did not fall to be considered again.

529. Section 21 of L.A.R.C.O. is as follows:

"(1) Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage:

Provided that -

(a) this subsection shall not operate to defeat any defence arising under a contract;

(b) where any contract or enactment providing for the limitation of liability is applicable to the claim., the amount of damages recoverable by the claimant by virtue of this subsection shall not exceed the maximum limit so applicable."

That does not distinguish between different types of tort and in particular says nothing about conversion being excluded from the ambit of contributory negligence. Moreover, it needs to be borne in mind that the definition of "fault' in sub-section (10) of section 21 of L.A.R.C.O. is as follows:

"(10) In this section-

……

'fault' means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this section, give rise to the defence of contributory negligence."

The other acts or omissions referred to there as giving rise to liability in tort are, I think, wide enough to include conversion.

530. In England now, s.47 of the Banking Act 1979 is to the effect that the plea of contributory negligence is available to a collecting banker faced with a claim for conversion. Hong Kong lacks equivalent legislation, but, as I regard s.47 of the Banking Act 1979 as declaratory of the pre-existing law, and as Hong Kong's law is the same as that pre-existing law, I do not regard the enactment of s.47 in England as an obstacle to my holding that contributory negligence applies to conversion in Hong Kong.

531. Support for the view I take on contributory negligence in relation to conversion can also be found in the majority's decision in the New Zealand case of Helson v McKenzies [1950] NZLR 878, and there was a decision to similar effect in Rhodesia: Rhostar (pirt) Ltd v Netherlands Bank of Rhodesia Ltd (1972) (2) SALR 703.

532. On the other hand, the courts in Australia have consistently rejected the notion of contributory negligence applying to conversion: see Wilton v Commonwealth Trading Bank of Australia [1973] 2 NSWLR 644; Tina Motors Ply Ltd v A.N.Z. Banking Group Ltd [1977] V.R. 205; Day v Bank of N.S.W. [1978] 19 ALR 32 and Australian Guarantee Corp v Commissioners of the State Bank of Victoria [1989] V.R. 617.

533. In the light of the clear wording of s.21 of L.A.R.C.O., I prefer the view that contributory negligence can apply to conversion.

534. In the context of a claim against a collecting bank by the payee of a cheque for wrongful conversion, it would be difficult to imagine more blameworthy conduct than that of Zanda's directors and alternate directors in the present case. On blameworthiness, see Stapley v Gypsum Mines Ltd [1953] A.C. 663. They set up the arrangements for Asean to receive the proceeds of the cheques payable from Tai Ting Estates to Zanda. Really, it is I a misuse of language to describe the conduct of Zanda's directors and alternate directors as "negligent" on the material matters bringing about the state of affairs which led to the Defendant-banks being able to collect the proceeds of the cheques in dispute for Asean. What the directors and alternate directors of Zanda did was deliberately and intentionally to set up the arrangement to enable Asean's bankers to collect cheques made payable to Zanda arising from the land sale to Tai Ting Estates. The very result happened which all the directors and alternate directors of Zanda wanted to happen: Asean's bankers collected the proceeds of the disputed cheques for Asean. In such circumstances, I regard Zanda as one hundred per cent contributorily negligent, so it gets nothing on its claim against either Defendant-bank.

355. Of course, later, a further consequence ensued which neither Mr S.Y. Ho nor Mr Eddie Leung wanted to happen, namely, Mr Alexis Chan and Mr Jesse Perez running off with the money for which Asean should, in due course, have accounted to Zanda, but that was another event for which neither of the Defendant-banks was in any way responsible in the eyes of the law. That was wholly the fault of Zanda in the same way it was wholly Zanda's own fault (if fault it be) that the cheques payable to Zanda by Tai Ting Estates could be collected for Asean.

4. Estoppel

534. Because of, firstly, Zanda's alleged slowness in alerting the Defendant-banks to the dishonest conduct of Mr Alexis Chan and Mr Jesse Perez in causing the Defendant-banks to collect the disputed cheques on 7th September 1983, and, secondly, Zanda's informing the Defendant-banks on 17th March 1984 they need not make enquiries concerning those same cheques but then saying they should on 12th May 1984, it was contended, on behalf of the Defendant-banks, that Zanda was estopped from suing on the cheques, since Zanda's conduct in effect amounted to a representation that it intended the proceeds of the cheques to be collected by Asean, and the Defendant-banks were prejudiced by this since they lost the opportunity of taking early recovery action against Asean and its guarantors.

535. I have already dealt with this in my findings of fact in relation to Asean, Mr Alexis Chan, and Mr Jesse Perez, my conclusion being that if Zanda had allowed the truth concerning Asean, Mr Alexis Chan and Mr Jesse Perez to emerge earlier, it would have availed the Defendant-banks nothing, since they then would have been no better off than the rest of the huge throng of Asean's creditors which would all have stampeded to get payment at the same time. Time was to show that Asean had liabilities of over $160 million and assets in the $3 million region, so the prospect of any significant recovery by the Defendant-banks was somewhat less than roseate.

536. Insofar as Mr Johnny Cheng, as Asean's guarantor was concerned, I regard it as unlikely that any more money could have been extracted from him beyond what he paid Bank of America in January and February 1984. Once government took over Hang Lung Bank at the end of September 1983, the impression I get is he was strapped for cash. He looks to have been at his last gasp financially, paying Bank of America $1.7 million in January and February 1984 by post-dated cheques.

537. The estoppel plea on behalf of the Defendant-banks struck me as somewhat contrived, and it is just as well for them they do not need to rely on it in the light of my findings against the plaintiff on section 86 of the Bills of Exchange Ordinance, and on contributory negligence.

5. Equitable Defence

538. Those appearing for the Defendant-banks found themselves beset by the following conundrum which they thought would arise were the court to find against their clients. Asean would not only have wrongfully kept the proceeds it should have held trom the disputed cheques for Zanda, but, owning 50% of Zanda, would also stand to get the benefit of 50% of any judgment monies recovered by Zanda, a result at which Equity would stand aghast, so it was argued.

539. The problem I think is more imaginary than real. Those appearing for the Defendant-banks thought only of lifting the veil on Zanda to reveal its shareholders amongst which is Asean, but, at the same time, wanted to keep Asean's veil firmly down, thus hiding from view its creditors owed over $160 million. In such a situation Equity, even-handed as ever, requires either that both veils be lifted or both remain drawn. Then the problem disappears.

CONCLUSION

540. In view of the foregoing, Zanda's claim against Bank of America and its claim against Barclays is dismissed.