BANK OF CHINA (HONG KONG) LTD v. YIU CHEONG METAL LTD

HCA 10615/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10615 OF 2000

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J U D G M E N T

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1. The Plaintiff is the successor to The Kwangtung Provincial Bank (the Bank).

2. In this action, the Plaintiff sues the Defendant on a dishonoured cheque dated 26 December 1997 in the sum of $2,014,660 drawn on Yien Yieh Commercial Bank Limited. The Defendant is the drawer of the cheque.

3. There is no dispute that the cheque, post-dated to 26 December 1997, was issued by the Defendant in October 1997 and made payable to one Sunic Co. Ltd (Sunic) - a customer of the Bank, "or bearer". Sunic had banking facilities from the Bank, including an overdraft facility against post-dated cheques to the extent of $3,000,000. The cheque was negotiated by Sunic to the Bank pursuant to the overdraft facility. When the cheque was subsequently presented by the Bank for payment on 27 December 1997, it was dishonoured by non-payment. It has since remained unpaid.

4. According to the evidence which I accept, the Defendant was at all material times a company carrying on the business of metal trading. Sunic was one of its agents or middlemen for sourcing metal supply. Mr Ma, the then manager of the Defendant, told the Court in evidence that in October 1997, he was told by his boss (Madam Wong) that she had on behalf of the Defendant asked Mr Au Yu Sang, the boss of Sunic, to source a quantity of stainless steel for the Defendant. For that purpose, in order to secure the Defendant's payment of the purchase price if Sunic should be successful in obtaining the supply of the stainless steel, the Defendant had issued in favour of Sunic a cheque post-dated to 26 December 1997. Madam Wong told Mr Ma that Mr Au had agreed with her that Sunic would not present the cheque for payment unless and until the transaction should materialise and only if the Defendant should fail to issue the letter of credit for payment of the purchase price. Mr Ma was also told by his boss, who however did not give evidence at trial, that she and Mr Au had also agreed that if the transaction should fail to materialise, the cheque would be forthwith returned to the Defendant.

5. According to the evidence of Mr Ma, he learned subsequently from his boss that the intended purchase had fallen through. He was not told the details or why. His boss asked him to contact Mr Au for the return of the cheque. He therefore spoke to Mr Au on the phone, who however told him that the accounts clerk of Sunic who had kept the cheque was on leave, and he did not know where the accounts clerk had placed the cheque. Nonetheless, he assured Mr Ma that he was fully aware of the agreement that had been reached with Madam Wong, that the cheque would not be presented for payment, and indeed it would be returned to the Defendant upon the accounts clerk's return. Mr Ma also said in evidence that he could not recall the first time he called Mr Au for the return of the cheque, but that should have taken place after 27 October 1997 (see below), as generally Sunic would have required one month or so to see if it could source the required metal and procure its shipment to Hong Kong.

6. Anyway, Mr Ma said in evidence that he had subsequently made phone calls to Mr Au whenever he remembered about the matter, but invariably Mr Au would tell him that he could still not locate the cheque. Mr Ma said that it did not occur to him at the time to ask Mr Au whether the accounts clerk had returned to work or not, nor did it occur to him that he should inform the Defendant's own bank to stop payment in respect of the cheque in those circumstances. More importantly, Mr Ma said in evidence that it had never gone through his mind that Sunic would, without the knowledge and consent of the Defendant, have negotiated the cheque to any third party despite the falling through of the transaction.

7. Mr Ma said that on his part, he was not particularly worried that Sunic would present the cheque for payment, as plainly the intended transaction had failed to materialise through and there would be no consideration for the cheque even if presented for payment.

8. In any event, on 29 December 1997, Mr Ma learned from the Defendant's own bank that the cheque had been presented for payment. He immediately instructed the Defendant's bank to stop payment. However, that appears to have been the only thing done by Mr Ma until 15 months later when the Defendant received a solicitors' letter on behalf of the Bank demanding payment. Mr Ma said that he then telephoned Mr Au to inquire into the matter. He said he was informed by Mr Au that Sunic was unable to repay loans due to the Plaintiff, and therefore the Bank sent a staff member to visit Sunic's office. Mr Au further told Mr Ma that the Bank's staff member asked Mr Au to give him whatever security that Sunic could give to the Bank, so that the staff member could have something to report (交代) to the Bank. Mr Au explained to Mr Ma that it was under those circumstances that he handed over the cheque in question to the bank staff member, despite the fact that he had told the staff member that the cheque had been cancelled and could not be presented for payment.

9. The story of Mr Ma, or more correctly, the story that Mr Ma learned from Mr Au over the telephone, was strenuously denied by the Plaintiff's only witness, Mr Chung, the then manager of the Bank's Tai Kok Tsui sub-branch. (He has since become the manager of the Plaintiff's Tong Mi Road branch.)

10. Essentially, Mr Chung's evidence was to the effect that Sunic was a customer of the Bank. It only went into financial difficulties in the early part of 1998. Back in late 1997, Sunic's account was still running apparently normally. The cheque in question was accepted by the Bank in the course of its normal operation of the overdraft facility. Indeed, taking October 1997 as an example, the overdraft facility account had fluctuating account balances, ranging from over $5,000,000 credit to nearly $4,000,000 debit. The credit limit was, as mentioned above, $3,000,000, but of course, one needs to take into account the yet-to-mature cheques, like the cheque in question, that had been negotiated to the Bank by Sunic under the overdraft facility, which would not be reflected in the account balances, in order to evaluate the overall situation.

11. According to documentary evidence which I accept, the cheque in question was negotiated by Sunic to the Bank on 27 October 1997. Prior to the negotiation, there was a debit balance of about $1,700,000 in the overdraft facility account, and apparently on the strength of the cheque so negotiated in favour of the Bank, the Bank allowed Sunic to withdraw further monies from the overdraft facility.

12. Anyway, Mr Chung strenuously denied that he or any member of his staff, had ever visited Sunic or Mr Au's office to ask for provision of further security, or to take away the cheque in question from Mr Au. In particular, Mr Chung denied any knowledge on his part or on the part of the Bank that the cheque had been cancelled and could not be presented for payment. Mr Chung explained in evidence that as the sub-branch manager, he was the person responsible for marketing and contacting customers. And in the unlikely event of a staff member of his visiting a customer, it would have been done pursuant to his instructions, or at the very least, he would have been informed of it afterwards. He confirmed in evidence that there was no such visit and he heard of no such visit at all to Mr Au or Sunic's office at the time in question.

13. At one stage of Mr Chung's evidence, he was, according to him, confused as to whether he was on leave on 27 October 1997 when the cheque was negotiated to the Bank. This was because according to the bank documents, the negotiation was apparently processed by a Mr Lee, an operation supervisor, who would stand in to help with processing cheques for negotiation at the sub-branch in his absence. However, Mr Chung emphasized that even in such a situation, Mr Lee would only be responsible for operational matters, i.e. the processing of the negotiation of cheques, and he would not be concerned with contacting customers, and still less would he have any reason to visit a customer. However, towards the latter part of Mr Chung's evidence, after having the chance to go through the bank documents again, he confirmed to the Court that in fact he took part in the processing of the negotiation of the cheque in question, because his own bank code appeared on the bank's internal record. He told the Court that the cheque went through the bank's counter (the counter staff member's bank code appeared on the record), was processed by Mr Lee (his signature appeared on the bank record) and the details were input by him into the computer on 27 October (as his code appeared on the record). He explained that probably he was absent from office in the morning, and Mr Lee helped him to process and approve the negotiation, whereas he input the negotiation into the bank's computer later on in the afternoon.

14. However, neither Mr Lee (who has since retired and with whom the Plaintiff has kept no contact) nor the counter staff member was called to give evidence at trial regarding the negotiation.

15. Mr Chung explained in evidence, upon cross-examination, that in early 1998, when difficulties appeared, the Bank entered into negotiations with Sunic for possible restructuring; however, the effort eventually failed. The matter was, at some point, passed to the claims or recovery department of the Bank, and subsequently solicitors' letters were written. He accepted that the first solicitors' letter was only written 15 months after the dishonouring of the cheque, and the writ was issued only in December 2000. Mr Chung said that he was not directly involved in the recovery process, but he explained that in the present case, there was an attempted restructuring which took time, and he also explained that generally speaking, litigation was a means of last resort, particularly in the present case a third party (i.e. a non-customer as opposed to a customer, like Sunic) was involved. He maintained that the apparent delay in taking action on the dishonoured cheque had nothing to do with the alleged impropriety in the negotiation of the cheque by Mr Au to the Bank.

16. Neither side called Mr Au or anybody from Sunic to give evidence.

17. Mr Wong, appearing for the Plaintiff, accepted in final submission that despite the hearsay nature of Mr Ma's evidence - which he did not object (in the light of the new hearsay provisions), the Plaintiff had really nothing concrete to counter Mr Ma's evidence on what he had been told by his boss regarding the oral agreement reached with Mr Au or Sunic on the circumstances under which the cheque could be presented for payment and when the cheque should be regarded as cancelled and be returned to the Defendant. I think this concession is wise. First, I am satisfied on the evidence of Mr Ma that Mr Ma was indeed told what he said in evidence he had been told by his boss. Furthermore, despite the hearsay nature of Mr Ma's evidence and despite the fact that Madam Wong did not give evidence at trial, and having borne in mind the matters that this Court should bear in mind in receiving hearsay evidence as provided in section 49 of the Evidence Ordinance (Cap. 8), I am quite satisfied that what Madam Wong told Mr Ma regarding the cheque was true.

18. However, the more crucial question is what Mr Ma said in evidence about the things he had been told by Mr Au regarding the whereabouts of the cheque after the falling through of the intended transaction. Here what Mr Ma said he had been told by Mr Au was not in the nature of hearsay - he heard it personally from Mr Au. But of course, assuming that Mr Au did tell Mr Ma those things, whether Mr Au was telling the truth to Mr Ma is quite another matter.

19. In relation to the first question, whether Mr Ma was indeed told those things that he mentioned in evidence by Mr Au over the telephone on various occasions regarding the whereabouts of the cheque, I bear in mind the points I mentioned above when I summarised Mr Ma's evidence, namely, Mr Ma's failure to follow up on whether the accounts clerk of Sunic had returned from his/her leave to work in his subsequent telephone conversations with Mr Au, Mr Ma's failure to notify the Defendant's own bank regarding the cheque following the cancellation of the cheque and the failure in those circumstances by Sunic to return the cheque to the Defendant, and Mr Ma's rather curious lack of action for 15 months after learning from the Defendant's own bank that somehow the cheque had been presented for payment. I also bear in mind the obvious doubts over Mr Au's explanations regarding the whereabouts of the cheque that he gave to Mr Ma over the telephone. All this notwithstanding, having observed closely the demeanour of Mr Ma in the box, and having considered his evidence as a whole, I have reached a rather firm conclusion that Mr Ma was an honest and reliable witness at trial. He was, perhaps, over-confident that the cheque could not be presented by Sunic for payment given the falling through of the transaction. He was quite satisfied at the time that the Defendant had really nothing to fear. That really explains why he took no action, apart from accepting Mr Au's words, to protect the Defendant's position regarding the cheque that was supposed to have been cancelled. That also explains why he was not alerted, as he ought to have been, by the non-return of the cheque by Sunic to the Defendant despite the falling through of the intended transaction. In my judgment, Mr Ma is a rather straightforward and credulous person.

20. My acceptance of Mr Ma's evidence does not, however, mean that what Mr Au had told Mr Ma over the telephone was true. In fact, on the evidence before me, I have no doubt that Mr Au had lied to Mr Ma. As mentioned above, according to the indisputable documentary evidence, the cheque in question was negotiated by Sunic to the Bank on 27 October 1997, soon after it had been issued by the Defendant in favour of Sunic. According to Mr Ma's evidence, the intended transaction could not have fallen through yet by that time, and his recollection of the sequence of events also tallied with that conclusion. In other words, the subsequent story by Mr Au that the cheque was taken from him by the Bank staff member despite his having told the staff member that the cheque had been cancelled and could not be presented for payment cannot possibly be true.

21. Moreover, this subsequent story of Mr Au about the cheque having been taken away by the Bank from his office is plainly contradicted by what he had told Mr Ma earlier, i.e. that the cheque had been kept by the accounts clerk of the Defendant somewhere, and he could not locate it pending the clerk's return to work.

22. Thirdly, I have already alluded to the fact that on the documentary evidence before me, Sunic was still in acceptable financial shape in October 1997. At one stage in that month, the credit balance in the overdraft facility account was $5,000,000 odd. On 27 October, prior to the negotiation of the cheque, the debit balance was only $1,700,000 odd, well within the credit limit of $3,000,000. On the strength of the cheque so negotiated, further advances were allowed to be made from that account in favour of Sunic. All this contradicts Mr Au's subsequent story that the cheque was taken away from him by the bank's staff member because his company had no money to pay the Bank and the staff member was anxious to grab whatever security there was from Sunic in order to report to the management of the Bank.

23. Finally, I do have the evidence of Mr Chung, which I accept, that he as the sub-branch manager was the only person really responsible for contacting customers, and neither he nor to his knowledge, his staff had ever paid any visit to Sunic for the obtaining of further security at that period of time.

24. Bearing all this in mind, and on the totality of the evidence before me, as I said, I have no difficulty whatsoever in rejecting this story of Mr Au relating to the whereabouts of the cheque, as related to this Court by Mr Ma.

25. Where does all this leave the Defendant? According to sections 29 and 30 of the Bills of Exchange Ordinance (Cap. 19),

"29. Holder in due course

(1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely -

(a) that he became the holder of it before it was overdue, and without notice that it had been previously dishonoured, if such was the fact;

(b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

(2) In particular, the title of a person who negotiates a bill is defective within the meaning of this Ordinance when he obtained the bill, or the acceptance thereof, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith or in such circumstances as amount to a fraud.

(3) A holder (whether for value or not) who derives his title to a bill through a holder in due course, and who is not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards the acceptor and all parties to the bill prior to that holder.

30. Presumption of value and good faith

(1) Every party whose signature appears on a bill is prima facie deemed to have become a party thereto for value.

(2) Every holder of a bill is prima facie deemed to be a holder in due course; but if, in an action on a bill, it is admitted or proved that the acceptance, issue, or subsequent negotiation of the bill is affected with fraud, duress, or force and fear, or illegality, the burden of proof is shifted unless and until the holder proves that, subsequent to the alleged fraud or illegality, value has in good faith been given for the bill."

26. Counsel are ad idem that if the Bank is a holder in due course of the cheque, it will take the cheque free from the personal defences of the Defendant vis-à-vis Sunic. On the other hand, if the Bank is a mere holder in value of the cheque, it will be affected by the personal defences.

27. In the pleading of the Defendant, only one defence has been pleaded: after the falling through of the intended transaction, there was no longer any consideration for the cheque; its negotiation by Sunic in favour of the Bank was done fraudulently given the prior oral agreement between the parties and by reason of the various lies that Mr Au had told Mr Ma about the whereabouts of the cheque after the falling through of the intended transaction. More importantly, it has been pleaded that the Bank "took and always held the said cheque with notice of the said fraud".

28. At one stage, Mrs Chan, counsel appearing for the Defendant, attempted in her final submission to run a defence of conditional delivery. But she eventually agreed with this Court that the defence was a non-starter: first, it was not pleaded; secondly, on the facts, delivery of the cheque was not conditional; rather, presentation of the cheque for payment was subject to the oral agreement reached between the parties (see Lin Hsien Tseng v. So Siu Mui Bonnie [2002] 4 HKC 532, 535B-D); thirdly and in any event, this defence would not add anything substantive to the defence based on fraud. It was not pursued further during final submission.

29. For the sake of completeness, I should also mention that it is trite law that in an action on a dishonoured cheque, extrinsic evidence regarding any underlying agreement, oral or otherwise, forming the background against which the cheque was issued in the first place, is not admissible to add to, vary or contradict the terms of the cheque: Lin Hsien Tseng, supra; Po Yuen (To's) Machine Fty Ltd v. Chan Siu King [2003] 3 HKLRD L2. But here, the evidence regarding what had been agreed between Sunic and the Defendant is relied on by the Defendant in respect of its case on fraud and on the issue of whether the Plaintiff is a holder in due course of the cheque, which are quite separate matters.

30. Returning to the only pleaded defence, the crucial provisions in question can be found in section 30(2) already extracted above. According to case law (see for instance, Tatam v. Haslar (1889) 23 QBD 345, 348), the words of section 30(2), "if it is admitted or proved," mean no more than that some evidence of circumstances in the nature of fraud must be given sufficient to be left to the jury, in which event, the onus is on the plaintiff to prove both that he gave value and that he had no notice of the fraud in question.

31. In the present case, on my findings, I am prepared to accept that the negotiation of the cheque in question by Sunic in favour of the Bank was affected by fraud on the part of Mr Au/Sunic. Further, there can be no doubt that the Bank had given value for the negotiation of the cheque. Therefore the crucial question in the present case is whether the Bank had no notice of the fraud in question.

32. I have already rejected Mr Au's story (as related by Mr Ma) that it was the Bank's staff member who took the cheque from him in his office despite he or she having been told that the cheque had been cancelled and could not be presented for payment. That indeed was the story put during cross-examination by counsel to Mr Chung, who strenuously denied the same. However, during final submission, the Defendant's counsel apparently took advantage of the Defendant's rather general and bare allegation in pleading about the Bank's taking and holding the cheque with notice of fraud and argued that quite apart from the alleged incident in Mr Au's office (which I reject), the Bank or its officers could well have learned about the fraud practised by Mr Au from other sources during negotiation of the cheque, and the Plaintiff has the burden of disproving the same as per section 30(2) of the Ordinance. Counsel in both her written submission (in particular paragraphs 13 to 29) and oral argument sought to raise various doubts and suspicions regarding the evidence of Mr Chung and the documentary evidence adduced by the Plaintiff to establish the Bank's lack of notice of fraud.

33. The Plaintiff's predicament was to some extent self-induced. Notwithstanding the obviously vague and unparticularized allegation of notice of fraud contained in the defence, which cried out for particulars, no request for such particulars was ever made by the Plaintiff. The net result is that apart from running the specific case based on Mr Au's story, the Defendant was able to run in final submission a more general case of notice against the Bank.

34. However, having considered all the points raised orally and in writing by counsel for the Defendant, I have no doubt whatsoever on the evidence before me that the suggestion that the Bank somehow had got knowledge or notice of Mr Au's fraud in the present case cannot be accepted.

35. It is true that if the Plaintiff had called Mr Lee (out of his retirement) to give evidence and called the staff member who manned the counter in question through which the cheque was negotiated to give evidence, the Plaintiff's case would have been made watertight. But that is not the crucial question. The crucial question here is whether on the evidence that has been adduced by the Plaintiff, the Plaintiff has discharged the burden placed on it by section 30(2) of the Ordinance.

36. Having considered Mr Chung's evidence as a whole, and having borne in mind counsel's criticisms over his evidence, I am of the firm view that he was telling the truth in the box. He may not have been as straightforward as one would have wished in giving evidence, and sometimes his answers did not really match the questions that were put to him, but I do not accept that he was dishonest or evasive in the box. He was subjected to very hostile cross-examination by counsel, and in my view, essentially his evidence remained unshaken. On the Bank's or his knowledge or notice of the fraud practised by Mr Au in the negotiation, to be fair, the cross-examination was focused almost exclusively on Mr Au's story about the visit by the Bank's staff member to his office; very little if anything was said about the possibility of the Bank's acquiring knowledge or notice of the fraud through any other means.

37. Moreover, the objective circumstances and facts of the present case do not suggest that the Bank or its staff had the suggested knowledge or notice of fraud. As has been pointed out several times above, the overdraft facility account of Sunic was not in a particularly bad shape back in October 1997. Mr Chung himself was the sub-branch manager having the responsibility for the account in question. He denied having any knowledge of fraud. I believe him. If any staff member under him in the sub-branch had acquired any such knowledge of fraud in the negotiation of the cheque, inherent probabilities in the circumstances of the present case would suggest that Mr Chung, as the sub-branch manager, would have been told about it. But Mr Chung confirmed in evidence that he heard nothing about the fraud in question from his staff. Again I believe him. Mr Chung also explained in evidence that Mr Lee, his operation supervisor, was not responsible for handling the account in question. There was, according to the evidence, no reason whatsoever for Mr Lee to have wanted to hide any information that he might have obtained from Mr Au regarding the cheque from his superior, i.e. Mr Chung. And Mr Chung confirmed in evidence that he had heard nothing unusual from Mr Lee. By the same token, the staff member who manned the counter in question had no reason to hide from Mr Chung anything that he or she might have learned from Sunic or Mr Au.

38. Furthermore, on the facts of the present case, in breach of his agreement with Madam Wong of the Defendant, Mr Au had at a very early stage negotiated the cheque to the Bank. There was really, on the evidence before me, no conceivable reason why he should have wished to tell anybody in the Bank about his breach of his agreement with the Defendant in negotiating the cheque to the Bank. The inherent probabilities of the matter are that he would have wanted to conceal the truth, not only from the Defendant and Mr Ma, but also from the Bank and its staff.

39. Any suggestion of a willingness on the part of the bank's staff to become involved in the fraud of Mr Au in negotiating the cheque to the Bank would not stand well with the subsequent account record of the overdraft facility in question, because as has been mentioned above, on the strength of the subject cheque that had been so negotiated, the Bank continued to allow Sunic to operate the overdraft facility as before. Obtaining further security, by hook or by crook, in respect of a problematic and failing overdraft facility is one matter; taking part knowingly in someone else's fraud in the negotiation of a cheque by a staff member in order to facilitate further operation of an overdraft facility is quite another matter. I certainly agree with counsel for the Defendant that many things are possible; however, this Court is only concerned with an assessment of the inherent probabilities or improbabilities of competing versions of event.

40. As regards the delay in taking action on the dishonoured cheque, I accept Mr Chung's evidence, which of course did not fully explain the matter. I have certainly borne this in mind in reaching my finding of fact regarding whether the Bank had any knowledge or notice of the fraud in question. At the end of the day, I am more than satisfied that the delay was caused by totally innocent reasons extrinsic to the issues between the parties raised in the present case.

41. On the totality of the evidence before me, I have reached the firm conclusion that the Plaintiff has established that the Bank did not have any knowledge or notice of the fraud on the part of Mr Au that affected the negotiation of the cheque by Sunic to the Bank.

42. I thus conclude that the Bank is a holder in due course of the cheque, and takes the cheque free from the personal defence of the Defendant vis-à-vis Sunic in respect of the cheque.

43. In other words, there is no defence to the Plaintiff's claim. For the sake of completeness, I should mention that no issue was taken at trial regarding the notice of dishonour. In any event, the Defendant had stopped payment and this case falls within section 50(2)(c)(v) of the Ordinance.

44. I make an order that judgment be entered on the Plaintiff's claim against the Defendant in the sum of $2,014,660 together with interest from 27 December 1997 at the judgment rate until full payment.

45. As regards costs, both sides accept that costs should follow the event. I therefore further order that the costs of the present action be paid by the Defendant to the Plaintiff; such costs are to be taxed if not agreed.