LEE MAN FAI v. LEE YU LEUNG

HCA 2396/2016

[2018] HKCFI 1429

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2396 OF 2016

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D E C I S I O N

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1.  The plaintiff claims on a dishonoured cheque drawn by the defendant in his favour. The defendant disputes the claim. After the pleadings have closed, the plaintiff applied for summary judgment on the ground of no valid defence. The master found against him. He now appeals.

The master’s order

2.  In finding against the plaintiff, the master made an order to the following effect:

(1)   the plaintiff’s summons for summary judgment was dismissed;

(2)   the defendant had unconditional leave to defend;

(3)   the plaintiff do restore the application for directions in respect of the further conduct of the case in 14 days; and

(4)   costs of the summons, including all costs reserved, be in the cause with certificate for counsel.

The principles

3.  An appeal pursuant to Order 58 of the Rules of the High Court takes the form of rehearing of the application before the master, though the court may give due weight to the reasons for the decision of the master, if it thinks fit: see Hong Kong Civil Practice 2018 (Vol 1) at §58/1/2.

4.  Summary judgment may be entered only in clear cases, that is where there is either no defence or other reason calling for the trial of the case. The exercise is not a mini-trial on affidavit, but to consider if the matters raised in defence are credible for constituting triable issues.  Whilst the plaintiff has the burden of proof of the claim, the defendant has the burden of condescending upon particulars in raising the defence: see Hong Kong Civil Procedure 2018 (Vol 1) at §14/4/9.  These are trite principles.

5.  It is trite that a cheque is a bill for unconditional payment upon demand, and is as good as cash.  Defence in action on a cheque is limited, and this is equally trite.

The cheque in question

6.  The cheque in question was presented on 1 March 2016 (“the Cheque”) but was returned dishonoured for the reason “Refer to Drawer”.  Notice of dishonour was given by the plaintiff’s solicitors to the defendant on 30 June 2016.

The parties’ respective versions of events

7.  There is no dispute that the parties have known each other and engaged in, amongst others, stock investment and financing for years before the dispute.

8.  The defendant gave the following account of how he came to draw and deliver the Cheque to the plaintiff:

(1)   The plaintiff runs a company specialised in selling high end race cars in Hong Kong.

(2)   Prior to 2014, the defendant had on occasions assisted the plaintiff to obtain substantial loan from finance companies by acting as guarantor of the loan repayment.

(3)   In 2014, the plaintiff intended to form a new motor company, later known to be Musketeers Motorsports Services Limited (“the New Company”).  For reason unknown to the defendant, the plaintiff did not want the public to know he was behind the New Company.  The plaintiff asked the defendant to assist by acting as the apparent shareholder while the shares of the company would in fact be held by the defendant for the plaintiff.  The defendant agreed.  At the plaintiff’s request, the defendant also signed blank transfer documents in respect of the shares in the New Company, which were kept by the plaintiff.

(4)   The plaintiff would also be financing the New Company by way of initial loan to the company in the sum of HK$5,000,000.  As it would also appear on the record to be a loan by the defendant to the company, the plaintiff requested, as a counter measure and for some kind of guarantee or evidence of the actual arrangement behind the scene, that the defendant in return drew a cheque for such sum in favour of the plaintiff.  The defendant did so, and delivered the Cheque to the plaintiff.  The date of the Cheque was left blank.

(5)   Whilst the defendant thus became the majority shareholder and director of the New Company, he never participated in its management, operation or activities.

(6)   In late 2015, the plaintiff sent a deed of assignment to the defendant, asking him to sign it for the assignment to the plaintiff of the total loan amount apparently owed by the New Company to the defendant in excess of HK$6,000,000. For reason which will be mentioned when I come to the counterclaim, the defendant refused to cooperate this time.

(7)   The defendant subsequently discovered that the shareholdings in the New Company in his name had in fact been transferred to the plaintiff, and the defendant also ceased to be the director of the New Company.  Seeing that his apparent role in the company for the plaintiff had come to an end, the defendant saw no reason for the plaintiff to hold onto the Cheque.  Yet despite requests, the plaintiff did not return the cheque.  Instead the plaintiff had filled in the date of the Cheque and attempted to present the same for payment, as mentioned, on 1 March 2016.

9.  On the above basis, the defendant raises the defence of (i) total failure of consideration and (ii) delivery of the Cheque as an escrow.

10.  The defendant also put forward a counterclaim on the following basis:

(1)   In 2015, the defendant asked the plaintiff to meet for an account settlement exercise in respect of their mutual indebtedness.  A sum of HK$3,800,000 was found owing by the plaintiff to the defendant, which was acknowledged in writing by the plaintiff’s assistant, Wong Tik Tung.

(2)   The plaintiff has since used various excuses not to repay the debt.  It was in these circumstances when the defendant, as mentioned, refused to cooperate with the plaintiff in executing the deed of assignment later that year.

11.  The plaintiff avers in reply the following version of events leading to the drawing and delivery of the Cheque:

(1)   Since 2012, the defendant had assisted the plaintiff to invest in stocks through his investment company.  The plaintiff would pay to the defendant money for such purpose from time to time.  By mid-2012, the plaintiff had paid a total sum of about HK$50,000,000 to the defendant for such purpose.

(2)   The plaintiff would not request to withdraw money from his funds with the defendant immediately upon investment gain.  The plaintiff would do so if he required cash.

(3)   On two to three occasions when the plaintiff sought to withdraw from his funds with the defendant but the latter was reluctant or unable to do so on the ground of cash flow, the plaintiff would take out short-term loans from finance companies with the defendant acting as the guarantor of the repayment.  The idea was to address the plaintiff immediate need for cash and the defendant would be ultimately liable for such sum.

(4)    In about late 2013, the defendant was unable to meet the plaintiff’s payment request when the outstanding amount payable by the defendant to the plaintiff was HK$14,000,000.  The plaintiff therefore took out a HK$14,000,000 short-term loan from Kingston Finance Limited with the defendant again acting as a guarantor.  That has subsequently been fully repaid by the defendant to him.

(5)   In early 2014, the defendant was again unable to make payment to the plaintiff a sum of HK$5,000,000.  The parties entered into a similar arrangement, and the plaintiff obtained a short-term loan from Get Nice (Union) Finance Company Limited on 20 February 2014, which was repayable by 22 April 2014.  Again the defendant acted as the guarantor.  It was in respect of this 2014 arrangement that the Cheque was also drawn in favour of the plaintiff in guaranteeing the repayment.

(6)   The 2014 loan was not repaid, and the due date had been twice extended by agreement amongst the parties and the finance company eventually to 20 July 2016, and the amount should be repaid by 12 monthly instalments.

(7)   Due to the failure of the defendant to repay him, the plaintiff sought to cash the Cheque in March 2016 but the same was dishonoured.  The plaintiff eventually had also repaid the loan.

(8)   As to the deed of assignment referred to by the defendant, the plaintiff denies any actual loan by the defendant to the New Company, and explained that the deed was unrelated and sent by mistake.  Like the defendant’s reference to the New Company, the reference to such deed was also extraneous to the action on the Cheque.

12.  The plaintiff also disputes the counterclaim.

13.  No defence of set-off by the counterclaim has been pleaded.  It is also trite that such counterclaim, even if allowed, would not serve to offset the claim on the Cheque.  Therefore, the dispute between the parties in the counterclaim really need not be explored in detail for the purpose of the application for summary judgment.  One point is worth noting though.  The handwritten document relied on by the defendant as evidence of the settlement of account between the parties on its face does seem to suggest the business relationship between the parties in respect of investments as the plaintiff depicts.

The parol evidence rule

14.  Mr Lok, appearing for the plaintiff, took issue as to the admissibility of the evidence introduced by the defendant.

15.  The starting point is that cheques are treated as cash.  The cheque constitutes a contract for unconditional payment upon demand.  Generally, oral evidence cannot be adduced to contradict the written terms of the cheque.  See Hong Kong Civil Procedure 2018 (Vol 1) at §14/4/9.

16.  Mr Lok was right about the rule mentioned above.  However, the peculiar feature of the present case is that the parties are putting forward two completely different versions of events giving rise to the Cheque.  Even the context and circumstances surrounding the drawing and delivery of the Cheque were no way in common.  For the present purpose, the parol evidence rule must be considered in the context and circumstances surrounding the drawing and delivery of the Cheque asserted in the defence.

17.  Section 21(2)(b) of the Bills of Exchange Ordinance, Cap 19 (“BEO”) provides that delivery of a bill 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.  It is permissible to adduce evidence to establish that parties intended that the cheque should be held in escrow by the payee [1]. Total failure of consideration, where the drawer received no part of the benefit for which the cheque was drawn, is also a good defence; and evidence is admissible for the purposes of such defence [2]. These are indeed the major defences put forward in the present case.

18.  In court, Mr Lok accepted the above observation, and focused his argument on the credibility of the defence on the basis of the defendant’s versions of events.

Whether the defence is credible

19.  On the basis of his version of events, the defendant contends that the plaintiff had in fact provided no consideration for the Cheque.  Miss Choy, appearing for the defendant, submitted that no part of the HK$5,000,000 loan by the plaintiff to the New Company went to the defendant, and therefore the defendant never owed the plaintiff any part of such sum.  The defendant was also given no personal benefit for acting as the shareholder and director of the New Company as agreed.  By April 2016, the plaintiff had also transferred the legal ownership of the shareholdings back to himself.

20.  Miss Choy submitted that his client’s case on total failure of consideration is strengthened by the various gaps in the plaintiff’s case. Such alleged gaps will be studied in detail below, and it suffices at this juncture to say that Miss Choy essentially criticized the lack of particulars and evidence of the alleged flow of money from the plaintiff to the defendant and the alleged indebtedness of the defendant to the plaintiff in support of the liability under the Cheque.  However, it apparently became Miss Choy’s turn to lose sight of the fact that the defence and her argument in respect of total failure of consideration had to be based on the defendant’s version of events leading to the Cheque.  That the plaintiff’s version allegedly lacked substance or evidence in support per se would not strengthen her client’s defence on the basis of his completely different version of events.

21.  The defendant has another difficulty in running the defence of total failure of consideration.  Such a defence exists and makes sense only insofar the Cheque is otherwise enforceable as a cheque.  But this is exactly not what the defendant says.  The defendant says the Cheque was issued as “counter-measure for guarantee and/or evidence” to support the arrangement whereby the defendant would become the apparent holder of the majority shareholdings and a director of the New Company for the plaintiff who was behind the scene.  There was then no written proof for his appointment as trustee for the plaintiff in respect of the shareholdings in the New Company.  The Cheque was therefore drawn and delivered to the plaintiff “for the purpose of evidencing such an arrangement”.  In case either party died, the Cheque could be produced to show the rest of the world that the defendant owed the plaintiff a sum of HK$5,000,000 [3].

22.  In her submissions, Miss Choy explained that the Cheque was clearly not intended for payment and the parties’ mutual agreement in relation to the Cheque was that it was to be used as evidence of the arrangement.  She emphasized that the defendant did not say “if I die, the plaintiff can cashthe Cheque immediately”.  Nor did the defendant say “if the plaintiff dies, his family can cash the Cheque immediately”.  She submitted that the Cheque was clearly not to be treated as cash even after either party has died.  The Cheque was not intended to have the qualities of a cheque at all and was plainly a form of evidence showingthe dealing between the parties.  The evidence adduced by the defendant was not only to contradict the terms of the Cheque, but also to show that the Cheque was given to the plaintiff as a form of proof of the arrangement only.  It was on such basis that the Cheque was said to be an escrow.

23.  In view of the defendant’s above case that the Cheque was not intended to have the fundamental quality of being treated as cash at all in any event, it is difficult to see how on the same set of facts he could run an alternative case of total failure of consideration, but for which the Cheque would have been enforceable as cash.  This compromises the overall integrity of the defence on the basis of his version of events.

24.  Miss Choy submitted that the present case is on all fours within the one dealt with in Lin Hsien Tseng v So Sin Mui Bonnie [2002] 4 HKC 532.  I fail to see how.  In Lin Hsien Tseng, the defendant first asserted an agreement for payment by the cheque subject to conditions precedent.  She subsequently asserted conditional delivery or delivery of the cheque to the payee in escrow.  The defence eventually filed sat more readily with the former instead of the latter case. In those circumstances, the case of delivery of the cheque as an escrow was rejected as being not arguable in the circumstances.

25.  What Mayo VP said in Lin Hsien Tseng [4] in relation to delivery of the cheque as an escrow is relevant though.  A defendant who is attempting to make use of section 21 of the Bills of Exchange Ordinance, Cap 19 (regarding delivery) has to establish that what was contemplated by the parties was that the cheque was intended to be held in escrow by the payee so that the document did not have the qualities of a cheque at all as it had not been delivered.  It would appear that this is what the defendant is now contending.

26.  I have grave reservation about the defendant’s case.

27.  First, as mere proof of the arrangement between the parties, the Cheque would not serve to guarantee the arrangement for the benefit of the plaintiff.  No security whatsoever would have been created by the Cheque in the hands of the plaintiff, if it would never become cash.

28.  Second, it is difficult to understand why the plaintiff would request and the defendant would agree to make use of a cheque as proof of the arrangement between the parties.  No explanation was given, and it is difficult to accept why a simple written acknowledgement for such purpose was not prepared instead.  It was not that the parties were somehow incapable of doing so.  It is common ground that share transfer documents were prepared. According to the defendant, insofar as the matters alleged in the counterclaim are concerned, the parties had also prepared settlement account, albeit handwritten.

29.  Third, the Cheque alone could not possibly appeal to any third party as proof of the arrangement between the plaintiff and the defendant.  On its face, it remained a bill for unconditional payment on demand.  Had the plaintiff died, his estate would have had no means of knowing or accepting what the defendant would have to say about the Cheque.  In that case, the use of the Cheque as alleged by the defendant would have been completely futile.

30.  As Mr Lok submitted, the assertions must be viewed from the perspective of the parties being businessmen.  The defendant’s case, if accepted, suggests that the plaintiff requested the Cheque as “guarantee” whilst it was intended to bear no quality as cash at any stage in any event, and the Cheque as “evidence” whilst it on its face cast no light on the alleged arrangement that it was said to evidence.  This is all too improbable for these businessmen who had engaged with each other in financial dealings by the material time.

31.  Mr Lok also submitted that the plaintiff was in possession of the signed share transfer documents, and was in a position to dictate the transfer of the control of the New Company from the defendant to the plaintiff at any time.  The so-called counter-measure would have been unnecessary, and such assertion of the defendant was incredible, he submitted.

32.  Earlier I mentioned that Miss Choy questioned the plaintiff’s version of events leading to the Cheque.  Essentially she questioned the lack of particulars and evidence of the alleged original monetary flow from the plaintiff to the defendant and the alleged debt.  She also queried why the date of the Cheque was somehow left in blank, though this might not be over-emphasized as her client suggested in the pre-action correspondence between the parties’ solicitors that even the name of the payee on the Cheque was entered without his consent.  However, I do also notice that the plaintiff’s solicitors in their pre-action letter of demand suggested that it was in or about mid-2015 when the defendant represented to the plaintiff that he had some financial needs, and requested the plaintiff to lend him the sum of HK$5,000,000.  The defendant was said to have promised to repay the loan to the plaintiff on demand.  Pursuant to that, the Cheque was given as a guarantee for repayment.  One may query whether this was adequately explained by way of the plaintiff’s affirmation filed afterwards.  Whilst the plaintiff’s cause of action on the Cheque is prima facie complete, the above query may have some basis.

33.  The defence is of such quality that brings the case close to judgment against the defendant.  It was only in view of the above observation about the possible queries that I am prepared to withhold ruling against the defendant at this juncture.  To reflect my view of the case, I find it appropriate to impose condition before the defence may proceed.  The appropriateness of payment into court of the amount in dispute was explored during the hearing, and Miss Choy accepted that course if considered appropriate by the court.

Order

34.  Of the order of the master dated 27 November 2017 summarised in §2 above, (1) and (2) are set aside.  The defendant shall have leave to defend on condition of payment into court of the sum of HK$5,000,000 within 14 days.  I will not disturb (4), which was the costs order made by the master.  The parties have proceeded in accordance with (3), and I understand that further direction in respect of the conduct of this case has been adjourned pending the outcome of this appeal.  So I will not disturb that paragraph of the master’s order either.

35.  As to the costs of the appeal, the plaintiff manages to achieve showing that the defence is shadowy, and that defence may only proceed on condition.  To reflect that event, I order the costs of this appeal to be the plaintiff’s costs in the cause.  The order as to the costs of this appeal is nisi, and shall become absolute in the absence of application in 14 days.

36.  In event that the plaintiff fails to satisfy the condition, judgment shall be entered against the defendant in the amount with interest as claimed, and the plaintiff shall then be entitled to the costs of this action, including this appeal and any costs reserved to be taxed, if not agreed.

37.  I thank counsel for their assistance.