FU CHUEN KWAN v. KE JUNXIANG

DCCJ 4769/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4769 OF 2005

--------------------

--------------------

___________________

J U D G M E N T

___________________

Introduction

1.  This is an appeal by the Defendant against 2 Orders of the Master made on 19 December 2005.

Background

2.  In this action, the Plaintiff's claim is based on a cheque dated

6 December 2002 drawn by the Defendant in favour of the Plaintiff for the sum of HK$600,000.  Upon its presentment on or about the due date, the cheque was dishonoured.

3.  The Plaintiff applied for summary judgment.

4.  During the first call-over hearing of the Plaintiff's application, directions were made including that the Defendant should file and serve his affidavit in opposition within 14 days.  After default in complying with these directions, the Defendant took out an application for extension of time for filing his affidavit.  During the second call-over hearing, the Master dismissed the Defendant's application for extension of time and granted the Plaintiff's application for summary judgment.

5.  The Defendant appealed against the Master's orders after the statutory time limit has expired.  The Defendant took the unusual course of applying separately for leave to appeal out of time instead of doing so in the appeal.  Anyway, leave was granted.  Separate leave was also granted to him to rely on his only affirmation in the appeal.

The Defendant's case

6.  The defence may be summarised as follows:

(1)   By an oral agreement in the beginning of June 2002, the Plaintiff agreed to invest HK$200,000 which would be part of the capital needed by the Defendant to procure the exercise of an option to acquire 2,000 million shares in CIL Holdings Limited, a listed company in Hong Kong.

(2)   It was agreed that subject to the collateral condition of successful acquisition of the 2,000 million option shares, the Defendant guaranteed the price of the option shares to rise by 3 times in 6 months.

(3)   As security for that guarantee, the Defendant drew the cheque (for $600,000 representing 3 times the amount of the Plaintiff's investment) in favour of the Plaintiff and post-dated it for 6 months to 6 December 2002.

(4)   Pursuant to the oral agreement, the parties entered into a written agreement.

(5)   The Defendant eventually failed to enlist all the required capital and thus failing to procure the exercise of the option to acquire the 2,000 million option shares.

(6)   In the premises, the collateral condition for the delivery and enforcement of the cheque was not satisfied and the consideration for the cheque has totally failed.

7.  A draft Defence and Counterclaim to the abovementioned effect is exhibited to the Defendant's affirmation.  The intended counterclaim is essentially consequential in that it asks for “an order” that the Defendant is not liable and an order that the Plaintiff delivers up the cheque for the Defendant's cancellation.

The Plaintiff's case

8.  The Plaintiff's case as to what gave rise to the cheque is completely different from the Defendant's.  The Plaintiff's case is that the cheque was for repayment of his cash loan of HK$600,000 to the Defendant in about June 2002.

The appeal

9.  It is for the Defendant to satisfy the court that there are in this case issues in dispute which ought to be tried or that this case ought to proceed to trial for some other reason.

10.  During the hearing of the appeal, the arguments advanced by the parties focussed on the following 2 aspects:

(1)   whether the evidence of the defence is admissible; and

(2)   if yes, whether the defence is credible.

Admissibility of evidence

11.  Mr. J. Wong, appearing for the Plaintiff, first argued that the Defendant's evidence to contradict the unconditional payment nature of the cheque is as a matter of law inadmissible.

12.  By statutory definition, a cheque is an order requiring the drawee to pay on demand.  The court has reiterated the unconditional nature of the order and the contractual obligation under the written contract embedded in the cheque.  Extrinsic evidence is in general inadmissible to prove that the terms of the contract differ from those expressed on the cheque.

13.  However, evidence is admissible to show that the delivery of the cheque has been conditional or for a special purpose only.  Section 21(2)(b) of the Bills of Exchange Ordinance, Cap.19 (“the Ordinance”) provides that:

“(1) Every contract on a bill, whether it is the drawer's, the acceptor's or an indorser's, is incomplete and revocable, until delivery of the instrument in order to give effect thereto:

……

(2) As between immediate parties, and as regards a remote party other than a holder in due course, the delivery-

(a) ……

(b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill;

……

(3) Where a bill is no longer in the possession of a party who has signed it as a drawer, acceptor, or indorser, a valid and unconditional delivery by him is presumed until the contrary is proved.”

14.  In S Y Chan Ltd v Choy Wai Bor [2001] 3 HKLRD 145 (which the Plaintiff relies on), the defendant alleged that he issued the subject cheque to the plaintiff so that he could show it to his wife and that he never expected it to be presented at all.  After a comprehensive reference to the local cases on the admissibility of oral evidence in action on dishonoured cheques decided by then, the learned Recorder in that case said (at paragraph 24):

“In my judgment, what the defendant is attempting to do is to contradict by oral evidence his written engagement that, on due presentment, the Cheque would be paid according to its tenor, ie unconditionally and on demand.  This is not permissible, and based on the local cases cited above, I hold that the defendant's evidence on what was said at the time of issue of the Cheque is not admissible.”

The learned Recorder went on to consider the defendant's argument on the basis of conditional delivery of the cheque (at paragraph 26):

“…… Mr Mak sought to rely on s.21(2)(b) to argue that the delivery of the instrument was “conditional or for a special purpose only, and not for the purpose of transferring the property in the bill.”  But the defendant's case is not, in the words of Hunter JA, a true case of conditional delivery.  The instrument was not delivered in escrow.  His case is not one of suspending the operation of the instrument.  He is seeking to import terms in defeasance of the instrument.  Nor was the transfer of the instrument to the plaintiff for a special purpose within the meaning of s.21(2)(b).  His case is not that there was property in the bill but his special purpose was not for the purpose of transferring the property.  His case was that there was no property in the instrument.”

15.  The question of admissibility of oral evidence to contradict a cheque again arose in a recent case in this level of court - Eurostar (Far East) Ltd v Albert Tsang Jewelry Design Limited DCCJ 2774 of 2005, 24 November 2005, Deputy District Judge K. W. Wong.  This case is also on the Plaintiff's list of authorities.  In that case, reference was made to paragraph 380 of Chalmers & Guest on Bills of Exchange (15^th ed.) which is equivalent to paragraph 2-153 of the current (16^th) edition.  It reads as follows:

“The defect in delivery may be established by oral evidence.  The parol evidence rule (see below) does not apply.  This is in conformity with the common law which admits oral evidence to show that what purports to be a written contract is no contract at all or to prove an agreement that a written contract is not to come into operation until a certain condition is fulfilled.  In practice, however, it may be difficult to distinguish between situations where it is orally agreed that the bill is not to become operative pending the fulfilment of a condition (in which case oral evidence of the conditional delivery will be admitted) and situations where the bill is delivered operatively but subject to an oral agreement in defeasance of a party's liability on the bill (in which case oral evidence to qualify the terms of the written instrument will normally not be admitted).”

16.  The defendant in the case of Eurostar (Far East) Ltd sought to distinguish its case from the case of S Y Chan Ltd by saying that its case fell into the first category of situations analysed by the authors of Chamers and Guest.  The court disagreed and found that the defendant's cheques in question were delivered operatively and the purportedly oral agreement had the effect of qualifying their nature or tenor.  Application for leave to appeal against that decision was made but was refused subsequently.

17.  It could be seen that in both S Y Chan Ltd and Eurostar (Far East) Ltd, the reason for the court not to admit the defendants' evidence was that those were effectively cases of the second category of situations analysed by the authors in Chalmers & Guest.  It would have been different if the defence had been a true case of suspension of the operation of the cheque pending the fulfilment of a condition (i.e., section 21(2)(b) of the Ordinance or the first category of situations analysed in Chalmers & Guest).

18.  Mr. C. Wong for the Defendant does contend that the Defendant's case falls within the first category of situations analysed in Chalmers & Guest.  For completeness, I quote the relevant part of the Defendant's affirmation (at paragraph 9) as follows:

“In about the beginning of June 2002, one of the interested investors introduced his business friend, namely the Plaintiff, to me for a discussion of the joint pool investment.  In the meeting with the Plaintiff, I personally showed him the public announcement of CIL in relation to the granting of the Option and I also explained to him that the Subscriber was in the process of enlisting sufficient investors to make up the requisite subscription monies of HK$20 million for the exercise within the Option period.  I also said that if the subscription is successful, the price of the optioned shares could rise to HK$0.03 within 6 months and I could guarantee that targeted price.  The Plaintiff was convinced by my proposal and agreed to invest in the joint pooled investment by providing a sum of HK200,000.00 to me for the purpose of subscribing for 20,000,000 optioned shares (being part of the 2,000,000,000 optioned shares) on his behalf.  However, he requested me to deliver my personal cheque for a sum of HK$600,000.00 to him, post dated for 6 months maturing on 6^th December 2002, as security for that guarantee of return.  I agreed but expressly informed him that my guarantee was conditional upon the successful exercise of the Option requiring capital sum of HK$20 million.  I also informed the Plaintiff that, if the Option was not successfully exercised because of insufficient capital, I will arrange to pay him back HK$200,000 only but without compensation and my personal cheque should not be enforced as security as there will be a total failure of consideration for successful subscription, as the condition for successful exercise was not satisfied.  This condition for successful subscription, in fact, applied to all investors in the investment.  After all the above terms and conditions were agreed by the Plaintiff, the Plaintiff and I signed an agreement on similar terms as the other investors as exhibited in “KJ-5”.  The Plaintiff then issued a cheque for the sum of HK$200,000.00 to me and I issued a post-dated cheque for the sum of HK$600,000.00 to him as securities for my guarantee for his return on investment subject to the successful subscription aforesaid.”

19.  The Defendant's affirmation went on about how his scheme of acquiring the option shares developed into a failure.  The Defendant contends that as no shares, and therefore the subject matter of the guarantee, had been acquired, the condition for the operation of the cheque (as security) was not fulfilled.  The consideration for the cheque has failed.  The basis of the Defendant's case is distinguishable from the 2 Hong Kong cases cited above.

20.  On the basis of the Defendant's case, I agree that his evidence is admissible.

Whether the defence is credible

21.  The alternative argument of Mr. J. Wong for the Plaintiff is that even if the Defendant's evidence is admissible, the defence is not a credible one.

22.  The principles are well established.  The court must not embark on a mini trial on affidavits: see Mass International Ltd v Hillis Industries Ltd v Anor [1996] 1 HKC 434, 439.  The court is concerned with whether the defence is believable rather than whether it would be believed: see Ng Shou Chun v Hung Chun San [1994] 1 HKC 155, 158.

23.  For the following reasons, while I would categorise the Defendant's case as being shadowy, I decide that this case ought to proceed to trial.

The alleged investment of HK$200,000

24.  The Defendant's case is that in June 2002, the Plaintiff invested HK$200,000 by way of cheque in favour of the Defendant.  Notwithstanding the Plaintiff's complete denial of that, the Defendant has produced no documentary proof of the receipt or deposit of this cheque which should in the normal course of events be obtainable.  No explanation is offered for the lack of such evidence or the Defendant's failure to obtain it.

The alleged written agreement

25.  The Defendant alleges that the parties signed a written agreement but the document could not be traced.  His solicitors by letter dated 23 November 2005 requested the Plaintiff's solicitors to provide a copy of this agreement allegedly kept by the Plaintiff but was refused.  This is not surprising in the light of the Plaintiff's stance that the alleged signing of written agreement never happened.

26.  In the circumstances, the Defendant's allegations that the Plaintiff was one of the investors, that the Plaintiff handed to the Defendant a cheque for HK$200,000 as investment and that they signed an agreement are simply his assertions without documentary support.

Other documentary evidence

27.  Mr. C. Wong for the Defendant however argues that the

Defendant's version is believable in view of the other documents produced.  In particular, there are the various company documents, agreements and announcements (exhibits “KJ-2”, “KJ-3” and “KJ-4”) as well as the Chinese written agreement between the Defendant and another investor dated 3 June 2002 (exhibit “KJ-5”).

28.  It suffices for me to say that these company documents, agreements and announcements apparently evidence the Defendant's scheme in 2002 of procuring the exercise of an option to acquire 2,000 million shares in the listed company.  I can also see that this Chinese written agreement dated 3 June 2002 indeed suggests that the investor agreed to invest in this scheme of the Defendant's.  However, insofar as the Defendant's assertions in relation to the Plaintiff are concerned, the information contained in these documents turns out to be discrediting, instead of supporting, the Defendant.

29.  I quote below the relevant terms of “KJ-5”.  Under this agreement, 甲方 (Party A) was the Defendant and 乙方 (Party B) was the investor:

“……

一. 甲方收购香港华建控股有限公司，并让购该公司之原始股票之股权证贰拾亿股 (每股代价为0.01 港币)，共计购贰仟万元。

二. 乙方同意并委托甲方为代为购买壹亿股股票，每股购入价为港币:0.01元，共计港币壹佰万元正，并同意将该壹亿股股票之表决权受权给甲方(使用权属乙方)。

三. 乙方同意并保证该壹亿股票在六个月内(即180元内)不转名、不出售该股票，股票委托甲方进行保管。

四. 甲方为使乙方的利益不受损失，同意并保证该笔股票的汇报率不低于三倍。

五. 六个月后乙方有权选择该股票，亦可选择要回叁佰万元的港币进行结算。

六. 甲方自收到乙方的通知后，七天内将股票或所得款项汇入乙方的指定账户。

……”

30.  The effect of the terms of this agreement was this:  The investor of HK$1 million agreed that the option shares successfully acquired by the Defendant on behalf of the investor (i.e., 100 million shares) would remain in the custody of the Defendant for 6 months.  In consideration of that, the Defendant guaranteed the value of the shares to rise by not less than 3 times over this period.  After the 6 months, the investor might by notice choose to have the shares or a sum of HK$3 million transferred to him.  Quite clearly, the Defendant's guarantee to the investor did not take effect until the option shares were actually acquired by the Defendant on the investor's behalf.  The 6-month period covered by the guarantee would commence from that moment.

31.  However, in relation to the Plaintiff, the Defendant alleges that the cheque in question was security for that guaranteed return on the Plaintiff's investment and was post-dated for 6 months to mature on 6 December 2002.  This is hardly consistent with the nature of the guarantee evidenced by “KJ-5”.  In June 2002 when Plaintiff allegedly invested the HK$200,000, it was still uncertain whether and, if yes, when the option shares would actually be acquired.  Even the Defendant then projected that the option to acquire the option shares would not be exercised until January 2003 (see paragraph 7 of his affirmation).  On the maturity date of the cheque, the guarantee, according to “KJ-5”, might be yet to take effect.  When I pointed this out during the hearing, Mr. C. Wong for the Defendant sought to explain by suggesting that “KJ-5” contained similar but not necessarily identical terms as those contained in the alleged agreement between the Defendant and the Plaintiff.  If the suggestion was that the terms of investment with the Plaintiff were in fact different from those with the other investors, this would be a new assertion and could not be made in this manner.  If the terms were really different, then I also fail to see how far “KJ-5” could assist the Defendant's case in relation to the Plaintiff.

Failure of the scheme

32.  According to the Defendant (see paragraph 10 of his affirmation), his scheme of acquiring the option shares did not proceed well.  Several pre-conditions for the exercise of the option were yet to be satisfied by the original deadlines.  Numerous extension agreements were entered into with the effect of extending those deadlines.  A public announcement by the listed company in relation to such extension was issued on 26 November 2002.  The Defendant allegedly informed all the investors, including the Plaintiff, of the extension and requested them to wait for a longer period.  The Defendant also allegedly informed the Plaintiff that there was still insufficient capital to procure the exercise of the option to acquire the entire 2,000 million shares.  The question is this: if the Plaintiff had already known by the end of November 2002 that the option was yet to be exercised and the guarantee was yet to take effect, I fail to see why the Plaintiff still proceeded to present the cheque on or about the due date, 6 December 2002.

33.  According to the Defendant (see paragraphs 12-13 of his affirmation), his scheme eventually failed in May 2004.  The Defendant allegedly informed all the investors, including the Plaintiff, of the failure and that he would arrange the refund of the investment to them in due course.  However, there is no dispute that this has not been done insofar as the Plaintiff is concerned.  There is not even evidence of what the Defendant has done, if any, in arranging the refund to the investors after May 2004 and, if not, why not.

Conclusion

34.  The Defendant's case is suspicious and doubtful.

35.  The parties' cases as to what gave rise to the cheque are actually mutually exclusive.  If I rule out the defence, I would be effectively accepting the Plaintiff's case.  My only reservation in doing so lies in that the Plaintiff's case as to the key issue of what gave rise to the cheque (i.e., as repayment of the alleged cash loan of $600,000) also consists of oral assertions.  I also notice the substantial time lapse since the cheque was dishonoured in December 2002.  The letter from the Plaintiff's solicitors was issued on 13 April 2005 (which is referred to in the statement of claim but not produced).  The writ herein was issued in September 2005.

36.  In the circumstances, while I could not help concluding that the Defendant's case is shadowy, I think that a conclusion should not be drawn without a trial.

Part judgment?

37.  The Plaintiff submitted that even if this case should go to trial, there should be part judgment in the amount of HK$200,000 which the Defendant admits in his own case that he is liable to the Plaintiff.  I disagree.  This is not a case where the defendant is admitting part of the plaintiff's claim so that judgment on this undisputed part could be entered while the remainder of the plaintiff's claim proceeds to trial.  The Defendant admits he owes an amount to the Plaintiff on a basis which is completely denied by the Plaintiff and is effectively mutually exclusive with the Plaintiff's case.  The legal basis for entering part judgment as requested is, in the circumstances of this case, not sound.

Conditional leave

38.  The Defendant would have leave to defend but it is just in the circumstances that such leave should be subject to condition.

39.  The Defendant alleges (at paragraph 15 of his affirmation) that he had cash flow problem which partly caused his delay in prosecuting the appeal.  Whatever weight I give to such allegation, I see no justification for the Defendant, on the basis of his case, to suggest that his own cash flow should in any legitimate manner affect the investments which he has allegedly received from the investors, including the Plaintiff.  On the basis of the Defendant's case, the sum of HK$200,000 allegedly received from the Plaintiff was for the specific purpose of acquiring the specific number of shares for the Plaintiff.  Upon failure of such purpose, the sum of money would be held on trust for and to the use of the Plaintiff.

40.  In the circumstances of this case, it is just that leave to defend should be conditional upon the Defendant's payment into court of a sum of HK$200,000 even taking into account his alleged cash flow problem.

Order

41.  I set aside the order of the Master on 19 December 2005 entering judgment against the Defendant.

42.  I do not disturb the Master's order dismissing the Defendant's application for extension of time to file his affirmation.  That application was taken out only after default in complying with the original directions.  When the application was heard, neither a draft of the Defendant's affirmation nor even an affirmation to explain the default and the extension requested was put before the Master.  His unsuccessful attempt in November 2005 to obtain a copy of the alleged written agreement between the parties from the Plaintiff's solicitors cannot be an excuse.  As mentioned above, the Plaintiff's stance is that the alleged signing of written agreement never happened.  Further, the Defendant did manage to come up with his affirmation subsequently without this alleged agreement.  Accordingly the costs order made by the Master in respect of this application remains.

43.  The evidence upon which I now give leave to defend was not before the Master.  Even though I give leave to defend on this occasion, I would not disturb the costs order made by the Master in respect of the O.14 application as far as the costs of the last hearing is concerned.

44.  I give leave to defend conditional upon the Defendant's payment into court a sum of HK$200,000 within 28 days.  Upon satisfaction of the condition, costs of the O.14 application (excluding the costs of the last hearing before the Master) and this appeal would be in the cause, to be taxed if not agreed.

45.  In the event of non-satisfaction of the condition of payment into court, judgment will be entered in favour of the Plaintiff in the sum of HK$600,000 with interest thereon at the judgment rate from 6 December 2002 until payment together with costs of this action (including the costs of the O.14 application), to be taxed if not agreed.

46.  I also make these directions:  Upon satisfaction of the condition precedent to leave to defend, the Defendant shall file the Defence and Counterclaim within 7 days.  The Plaintiff shall have leave to file the Reply and Defence to Counterclaim within 14 days thereafter.

47.  The orders as to costs made herein are nisi.