XCHRX SINCERE SECURITIES LTD. v. LI MOU TONG, VINCENT

HCA 255/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 255 OF 2001

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REASONS FOR JUDGMENT

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1. This is an appeal of the defendant against the order of Master Yuen made on the plaintiff's application for summary judgment. The plaintiff's claim is on three dishonoured cheques for the total sum of HK$2,650,000.00 drawn in its favour by the defendant.

2. The learned Master gave conditional leave to defend on 11 May 2001 and adjourned the hearing to another date to determine the defendant's liability to make payment into court. Prior to that adjourned hearing, the defendant lodged an appeal against the Master's decision. On 15 June 2001, the Master ordered that the defendant should pay into court the full amount claimed within seven days. However, in view of the fact that the defendant had lodged an appeal against the order granting conditional leave to defend, the Master ordered that there be a stay of execution on the payment into court in the sum of HK$2,550,000.00 until the day of the hearing of the appeal.

3. The effect of the Master's order is that the defendant was required to pay into court HK$100,000.00 by 22 June 2001. The defendant sought an extension of time to comply with that order and on 12 July 2001, he was given another fourteen days to make payment into court of HK$100,000.00. The defendant has not made any payment into court at all.

4. In this appeal, the defendant sought to argue that he should be given unconditional leave to defend and very little was said on the defendant's behalf regarding the condition imposed by the Master. After hearing submissions, I decided to maintain the Master's order of giving conditional leave to defend. However, I have reduced the amount that the defendant is required to pay into court from the full amount of the claim to HK$300,000.00, after assessing his financial ability to make payment. My reasons appear below.

Background

5. The defendant was employed by the plaintiff as an associate director from 10 October 1997 to 15 December 2000. His responsibility was to procure clients and trading orders in respect of securities for the plaintiff. One of the plaintiff's clients was a company known as Best Group Limited. This company was introduced to the plaintiff by the defendant and the defendant was responsible for handling its account at all times. Best Group Limited opened a margin trading account with the plaintiff in October 2000. The account was granted a 30% margin so that if the debit balance on the account should exceed 30% of the value of securities maintained on the account, Best Group Limited was required to deposit further sums or securities as additional security.

6. At the end of November 2000, the debit balance in the margin account of Best Group Limited exceeded the 30% margin. The defendant requested Best Group Limited to put up sufficient margin in the sum of HK$1,000,000.00 or sell stock in its account of an equivalent value to reduce the debit balance.

7. On 6 December 2000, the debit balance was reduced to around HK$4,000,000.00 after Best Group Limited had sold some of its shares. However, this was still above the margin limit. The defendant's repeated requests to this company to settle the outstanding margin were to no avail and there was no further transaction on the account since 6 December 2000.

8. On 12 December 2000, the defendant tendered his written resignation to the plaintiff. He claimed that the last day of his employment with the plaintiff was 15 December 2000. This is disputed by the plaintiff. What is not in dispute is that after 15 December 2000, the defendant had continued to help the plaintiff on the handling of the account of Best Group Limited, notwithstanding he had by then joined another securities firm as an associate director.

9. One of the shares bought by Best Group Limited through the plaintiff was the shares of a company called Prosper e Vision Limited ("Prosper e Vision"). On 18 December 2000, trading in the shares of Prosper e Vision was suspended. When trading in the shares resumed on 28 December 2000, its price had dropped by about 80%. On that day, the defendant contacted the director of Best Group Limited and renewed his request that the company should settle the debit balance or put up sufficient security to cover the debit balance in the margin account, otherwise the plaintiff would have to close the account and start liquidating the shares in the account. As there was no or no satisfactory response from Best Group Limited when it was able to settle the debit balance, the plaintiff closed the margin account and sold the shares on 28 December 2000. The debit balance of Best Group Limited was reduced from over HK$4,000,000.00 to around HK$2,570,000.00. The defendant demanded immediate payment of that sum when he notified the director of Best Group Limited of the debit balance on 28 December 2000 after the shares were sold.

10. Also on 28 December 2000, the defendant signed a note to the plaintiff stating that he was personally liable for all outstanding sums in the account of Best Group Limited with the plaintiff, and that he was willing to pay the entire outstanding sum immediately. On the same occasion, the defendant issued three cheques dated 28 December 2000 in favour of the plaintiff for the total sum of HK$2,650,000.00. These are the cheques being the subject of this action. The total amount of the cheques was higher than the debit balance of about HK$2,570,000.00 because it was to include interest and all related charges, according to the plaintiff. The circumstances under which the defendant had signed the note and issued the three cheques are in dispute.

11. In about late December 2000 or early January 2001, the defendant signed a service agreement with the plaintiff which was back-dated to 1 December 1999 ("the Service Agreement"). It is not in dispute that this Service Agreement was executed by the defendant after he had served written notice to the plaintiff to terminate his service. Again, the circumstances in which the Service Agreement was signed by the defendant are in dispute.

12. The plaintiff was unable to recover any money from Best Group Limited in late December 2000 and early January 2001 notwithstanding the defendant's attempts to contact its director. On 4 January 2001, the defendant made an affirmation on behalf of the plaintiff in support of the plaintiff's application against Best Group Limited for a Mareva injunction. An ex parte injunction was obtained on 4 January 2001, this was continued on the inter partes application on 4 January 2001. Final judgment was obtained by the plaintiff against Best Group Limited on 23 January 2001 in the sum of HK$2,571,769.90. The plaintiff was able to recover part of the judgment debt by obtaining a garnishee order, a charging order over the shares held by Best Group Limited and an order for sale of such shares. In June 2001, HK$701,143.22 was recovered by the plaintiff from Best Group Limited.

The grounds of defence

13. In the Defence filed by the defendant on 9 February 2001, the only lines of defence pleaded are that there was either no consideration or only past consideration which was not sufficient in law to support the contract on the cheques. In the defendant's affirmations, he raised other lines of defence. The grounds of defence relied on by the defendant may be stated as follows:

(1) total failure of consideration;

(2) conditional delivery of the cheques;

(3) misrepresentation;

(4) duress; and

(5) that it is inequitable to permit the plaintiff to rely on the cheques.

14. I shall consider the various lines of defence in the order set out above.

Total failure of consideration

15. The Service Agreement signed by the defendant contained, inter alia, the following provisions:

"10. INDEMNITY

The Agent [i.e. the defendant] shall indemnify the Company [i.e. the plaintiff] and hold the Company harmless against all claims, costs, expenses and losses whatsoever which may be brought against or incurred or suffered by the Company by reason of or arising out of any transaction entered into by the Company or liability incurred by the Company in relation to business introduced or dealt with by the Agent... during the period of his/her appointment with the Company. Without prejudice to the generality of the other terms herein, the Agent shall be strictly liable for all overloss or bad debts of the Company incurred by any client(s) introduced or handled by the Agent... and the Agent shall be liable to make reparation in full and shall indemnify the Company against all costs and expenses that may be incurred by it in claiming against the relevant client(s) and/or the Agent.

11. GUARANTEE OF CLIENTS' ACCOUNT

In consideration of the Company agreeing at the Agent's request to open and to continue to maintain the trading accounts of the clients which are introduced or handled by the Agent, the Agent irrecoverably and unconditionally guarantees to the Company the due and punctual payment of all monies and settlement of all liabilities and obligations which may at any time be owing or incurred or due to the Company by client(s) introduced or handled by the Agent or in relation to business or transaction introduced or dealt with by the Agent and undertakes to make such payment on behalf of the relevant client(s) on demand by the Company."

16. The plaintiff's case is that the defendant was liable to indemnify the plaintiff in respect of the loss suffered by the plaintiff due to the failure of Best Group Limited to settle its indebtedness in respect of the debit balance in the margin account. The cheques issued by the defendant were supported by good consideration.

17. The defendant's argument that there was total failure of consideration was put on these bases. Firstly, there was no debt owing to the plaintiff by Best Group Limited when the cheques were issued on 28 December 2000. Secondly, even if there were such a debt, the defendant was under no liability to indemnify the plaintiff because he had not signed any service agreement with the plaintiff containing the above provisions on 28 December 2000.

18. The argument on the first basis was as follows. It was contended by Mr Yeung, who appeared for the defendant before the Master and in this appeal, that no debt was due and owing from Best Group Limited unless and until the plaintiff had closed the margin account and sold the shares being the security held by the plaintiff for the account. I reject this submission. As pointed out by Mr Coleman, who appeared for the plaintiff, there was a debit balance in the margin account which Best Group Limited was liable to pay to the plaintiff being the overdue balance with interest thereon. It is clear from the summary of background facts given above that in November and the early part of December 2000, the defendant had made demands to Best Group Limited for a further deposit in the margin account to reduce the debit balance. Best Group Limited did not make any further transaction of its own on the account since 6 December 2000. The plaintiff's losses were incurred within the meaning of clause 10 of the Service Agreement before the cheques were issued by the defendant on 28 December 2000. I do not think it material that the losses were reduced on that day to about HK$2,500,000.00 when the plaintiff closed the margin account and liquidated the security it held.

19. As for the second basis relied on by the defendant that he did not sign any service agreement before he issued the cheques, I propose to consider this in connection with the defence of duress.

Conditional delivery of the cheques

20. The defendant relied on Section 21(2)(b) of the Bills of Exchange Ordinance, Cap. 19 to say that the delivery of the cheques was "conditional or for a special purpose only, and not for the purpose of transferring the property in the bill". The defendant has alleged that when he was asked by Mr Shum and Mr Tse of the plaintiff to issue the cheques, he was assured by one or both of them that the cheques would not be cashed unless and until Best Group Limited should fail to pay the plaintiff. Leaving aside the question if such oral evidence is admissible and assuming that it is, the alleged condition would appear to me to have been satisfied. In the defendant's affirmation made on behalf of the plaintiff to obtain a Mareva injunction, the defendant described at some length the attempts he had made to chase for payment and he concluded that it was obvious to him that Best Group Limited was "trying to evade liability". When the plaintiff presented the cheques on 10 January 2001, the alleged condition would appear to have been satisfied. I do not think there is any substance in this line of defence.

Misrepresentation

21. The alleged misrepresentation was that when the defendant was asked to issue the cheques, he was assured by Mr Shum and Mr Tse that before the plaintiff was to bank in the cheques, he would be given prior notice. I understand from Mr Yeung that this representation was alleged to be false in that the plaintiff did not give prior notice to the defendant before the cheques were presented. It was not, however, alleged in any of the defendant's four affirmations that he did not receive such prior notice. This does not appear to me to be a valid ground of defence. Even if such a representation were made, I fail to see how it was material in the sense that the defendant would have been influenced by it in deciding whether or not to issue the cheques. There is no suggestion that he could have arranged for payment of the cheques if he were given prior notice that any of them would be presented.

Duress

22. The allegations of duress were twofold. Firstly, the defendant said he was in fear of physical assault by Mr Tse who had said to him in a fierce manner that the defendant would be held responsible for the account of Best Group Limited. It was because of such fear that he had issued the cheques and signed the note acknowledging his liability on 28 December 2000. Secondly, the defendant has alleged that in January 2001, he was demanded by Mr Tse and/or Mr Shum to sign the Service Agreement which was back-dated and if he should fail to do so, Mr Tse would continue to visit the defendant at the office of the defendant's new employer until he had signed the Service Agreement. The defendant claimed that he was forced into signing the Service Agreement because of this.

23. Mr Shum and Mr Tse have filed affirmations denying that Mr Tse had spoken to the defendant in a fierce manner as alleged or that there was any previous incident in which Mr Tse had physically assaulted someone in the office as alleged. As for the signing of the Service Agreement in late December 2000 or early January 2001, Mr Shum stated that the defendant had entered into a service agreement with the plaintiff on 10 July 1998, the terms of which were identical to the Service Agreement. On 1 December 1999, the plaintiff had changed its name to its present name and all the account executives were requested to sign another service agreement, the terms of which were again identical to the Service Agreement. Mr Shum alleged that the defendant had signed such an agreement on 1 December 1999. However, both the service agreements signed by the defendant on 10 July 1998 and on 1 December 1999 were lost. As a result, he asked the defendant to sign the Service Agreement which was back-dated and this was done in late December 2000 or early January 2001. Mr Shum denied that the defendant had been forced to sign the Service Agreement.

24. There is a conflict on the evidence whether the defendant had signed the note, the cheques, and the Service Agreement under duress. Mr Coleman submitted that the defendant's evidence on affirmation should be rejected as incredible. He pointed out that there was something suspicious as to the way in which this line of defence was raised. Duress has not been pleaded in the Defence. In the first affirmation filed by the defendant in opposition of the plaintiff's summons, he has only alleged duress as regards the signing of the note and the issuing of the cheques on 28 December 2000. As for the Service Agreement, what is stated in his first affirmation was that no such agreement was ever executed "on or about 1 December 1999", that no indemnity was given by him to the plaintiff "at all material times", and that he intended to challenge the authenticity of the Service Agreement produced by the plaintiff. What the defendant did not say in his first affirmation is that he had in fact signed the Service Agreement that was exhibited by the plaintiff but it was far later than 1 December 1999 and that he did so under duress. The allegation that he had signed the Service Agreement under duress was not made until he filed his latest affirmation four days before the hearing of the appeal. Mr Coleman also pointed out that in the defendant's affirmation filed on behalf of the plaintiff for a Mareva injunction, he had stated that he was giving assistance to the plaintiff voluntarily.

25. I am not prepared to reject the defendant's evidence on affirmation as wholly incredible. I note that these documents were signed after the defendant's employment with the plaintiff was terminated. It is possible that the defendant might want to assist the plaintiff to recover from Best Group Limited. What I do find a little strange was the apparent readiness of the defendant in issuing the three cheques and signing a note stating that he would agree to make immediate payment of all outstanding debts of this company before he had even made further attempts to chase Best Group Limited for payment. I do, however, agree with Mr Coleman that there was something suspicious as regards the way in which the allegations of duress were presented. I am left with a real doubt about the defendant's good faith. I think the Master has reached the right conclusion that the defence is shadowy and that this is an appropriate case to give conditional leave to defend by requiring the defendant to pay into court the full amount of the claim, subject to my consideration on the financial circumstances of the defendant.

Inequitable to permit the plaintiff to rely on the cheques

26. I propose to deal with this shortly. It was argued by Mr Yeung that it is inequitable in view of the verbal assurance given by Mr Shum and Mr Tse to the defendant (i.e. that steps would be taken to recover money from Best Group Limited and the cheques would not be cashed unless and until this company should fail to pay the plaintiff) to permit the plaintiff to sue on the cheques. I fail to see how this is an appropriate case for the intervention of equity and no case has been cited to me in which equity has intervened in this sort of situation.

Conditional leave

27. I understand that the Master made an order on 15 June 2001 requiring the defendant to make a payment into court of HK$100,000.00 within seven days and staying the payment in as to the balance until after the disposal of the appeal on the basis of what she was told by the defendant's solicitor that the defendant was able to meet a payment of HK$100,000.00. I have received no or no adequate explanation why the defendant has failed to make such payment when he had given instructions to his solicitor to inform the court that he could come up with that amount. Indeed, in the latest affirmation filed by the defendant on 6 August 2001, he did not say in his affirmation how much he could pay into court. In my enquiry with Mr Yeung as to how much the defendant could come up with, he told me on instructions that the defendant would be able to pay HK$20,000.00 within fourteen days. It is to be noted that the balance of the plaintiff's claim, after giving credit to the amount it had recovered from Best Group Limited, is about HK$1,900,000.00.

28. I have been taken by Mr Coleman in some detail to the defendant's affirmations in which he has deposed to his means. I am satisfied that he has not made a full and frank disclosure. The only complete bank statement he has disclosed was the statement for the month ended 23 January 2001. He disclosed a bank statement for the month ended 24 February 2001 which was incomplete. Other than these documents, he exhibited two computer print-outs issued by his bank giving a ledger balance in his account as on 23 May 2001 and 21 June 2001. These print-outs do not show the movements in his account and are of little assistance to the court.

29. The one and only complete bank statement he has disclosed showed considerable movements in his savings and current accounts. From 3 January 2001 to 23 January 2001, there were deposits into his savings account of over HK$230,000.00 by cash deposit and by automatic teller-machine transfer. The defendant has chosen not to explain the source of these deposits. Further, when a withdrawal of HK$15,000.00 was made on 3 January 2001 from his savings account, it was put into a savings/time deposit, which the defendant has not disclosed to the court.

30. The defendant lives in an address in Kotewall Road, which is owned by his brother and his sister. His mother and his son live in that property with him, and his son is supported by him.

31. When the defendant left the plaintiff's employment in December 2000, he was employed as an associate director by another securities firm at a basic salary of HK$50,000.00 plus commission. He left his new employer on 17 January 2001 and was paid about half the basic salary. He claimed that he had not engaged himself in employment when he made his affirmations in May and June 2001. In his affirmation in May, he claimed that he supported himself and his son "with loans from the bank or loans from friends and/or family", he has not stated what were the amount of the loans or who had lent money to him. In his affirmation in June 2001, he stated that he is unable to borrow "any money as much as HK$80,000.00 from his relatives/friends as they all do not think [he] will be able to repay them". He also stated in that affirmation that he was left with only not more than HK$20,000.000 to maintain himself and his family's living expenses.

32. The last affirmation was also suspicious in that the defendant had allegedly repaid a loan from a friend in the sum of HK$20,000.00 on 20 June 2001, just the day before he made his affirmation. No document was exhibited evidencing the loan or the terms requiring him to repay.

33. On the available information, and I emphasize that it is incumbent on the defendant to make a full and frank disclosure to the court of his means, I reject his allegation that he can only afford to pay into court a sum of HK$20,000.00. However, I am unable to say I am satisfied that the defendant can come up with the payment into court of the full amount of HK$1,900,000.00 being the balance of the plaintiff's claim.

34. For these reasons, the order made by the Master regarding the amount that the defendant was required to pay into court must be set aside. Doing the best I can, on the information before me, the amount I would order the defendant to bring into court as a condition for giving him leave to defend is HK$300,000.00. I am satisfied that this is an amount within the financial capability of the defendant, having regard to his earning capacity and the substantial sums deposited into his savings account within a short period in January 2001.

The orders

35. The orders I have made are as follows:

(1) unless the defendant is to pay HK$300,000.00 into court by 7 September 2000 4.00 p.m., the plaintiff may enter final judgment against the defendant in the sum of HK$2,650,000.00 with interest thereon at the prime rate plus 1% from 10 January 2001 until judgment and thereafter at judgment rate until payment and costs to be taxed if not agreed;

(2) if the condition in paragraph 1 is complied with, leave be given to the defendant to defend this action;

(3) in respect of the amount for which the plaintiff may enter judgment, the plaintiff is to give credit to the defendant for the sum of HK$701,143.22 being the money recovered from Best Group Limited;

(4) the order in respect of costs of the application before the Master should stand;

(5) the costs of the appeal are to the plaintiff in any event.