XCHRX EDWARD WONG CREDIT LIMITED v. PEARLY STRATEGY LIMITED trading as LEADERTRONICS COMPANY

1995, Nos A3305 and 4973

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. In action A3305, the plaintiff alleges that, on 8 March 1995, Koven Electronics Limited (Koven) asked the plaintiff to discount a cheque dated 20 March 1995 in the sum of $138,000 drawn by the defendant in favour of Koven. The cheque was endorsed by Koven and delivered to the plaintiff for value, and thus the plaintiff became the holder in due course of this cheque.

2. In action A4973, the plaintiff says that, 17 February 1995, Koven asked the plaintiff to discount another cheque dated 24 April 1995 in the sum of $128,000 drawn by the defendant in favour of Koven. The cheque was endorsed by Koven and delivered to the plaintiff for value, and thus the plaintiff became the holder in due course. Another cheque drawn by the defendant in favour of Koven dated 3 May 1995 in the sum of $105,000 was dealt with in the same way.

3. The plaintiff claimed final judgment against the defendant on all three cheques, but this application failed; the defendant was granted unconditional leave to defend. The plaintiff appeals against these decisions.

4. The defendant's evidence about the giving of these cheques to Koven is as follows: Mr Arthur Ng of Koven told the defendant that it had cash flow problems. He proposed to the defendant that the defendant issue the cheques to Koven, and Koven would then discount these cheques. In return, Koven would issues cheques in the same amounts to the defendant, dated one day earlier. Mr Ng personally guaranteed that Koven would have sufficient cash to meet its cheques. If Koven's cheques were dishonoured, the defendant could stop payment of its cheques. Mr Ng said that Koven's cheques were to be marked "A/C Payee Only", which would ensure that no one except Koven would get the money. The defendant agreed to this arrangement, and issued the cheques. Shortly after this, Koven closed its business and Mr Ng disappeared. The defendant countermanded payment of its cheques.

5. I assume, for the purposes of these appeals, that Koven's title to the cheques given by the defendant to Koven was defective by reason of a fraud perpetrated by Koven and Mr Ng. The question that arises is whether or not the plaintiff had notice of this defect at the time the cheques were negotiated to it.

6. Miss Cheng does not suggest that the plaintiff had any knowledge of the arrangements made between the defendant and Koven, or any knowledge of Mr Ng's state of mind when he gave the defendant the assurances. She submits that the plaintiff knew that Koven was in financial difficulties, and this was sufficient to put the plaintiff on notice. She says that the plaintiff must have had a suspicion that something was wrong, but deliberately refrained from asking questions to avoid having the suspicion turned into knowledge. I made it clear to Miss Cheng I was not able to understand this argument. The evidence does indicate that the plaintiff knew that Koven was involved in litigation, and this led to the recommendation that a cautious attitude be adopted in dealing with Koven, but this is a long step to suspecting that there was an defect in the title to the bills. I suggested to Miss Cheng that, even if one assumes that the plaintiff's knowledge should have led it to make further inquiry into the giving of the cheques, such an inquiry would not have led to any knowledge of any defect. If the plaintiff had asked the defendant why it gave the cheques to Koven, it would have been told, presumably, that the defendant had given the cheques to help Koven with its cash flow problem, that the defendant knew that the cheques were to be discounted, that Koven had given cheques to the defendant by way of repayment, and that the defendant had received assurances that Koven's cheques would be met on due date. If the plaintiff had questioned Koven, it would have been told the same story. The defendant would not, at that time, have complained that Koven's title to the cheques was defective. There was nothing there that should have made the plaintiff believe that the title to the cheques might be defective, and, in my view, there was nothing else that the most cautious of businessmen would, or could, have done to make further inquiries. Miss Cheng points out that, over a space of a few months, Koven discounted with the plaintiff some eight cheques drawn in its favour by the defendant and three other companies, but there is nothing here that should have made the plaintiff suspicious. The total value of the cheques discounted with the plaintiff during this period was less than $800,000, which was a very long way from the limit imposed by the plaintiff. And none of the other cheques had been dishonoured when the plaintiff discounted the defendant's cheques. There was no unusual pattern here, and no action by the drawers of the other cheques that might put the plaintiff on notice about any difficulty regarding the defendant's cheques. There was nothing to put the plaintiff on inquiry.

7. My conclusion is that the plaintiff did not have, at the times the cheques were negotiated to it, any notice (particular, general, implied, constructive or any other kind of notice) of any defect in Koven's title to the cheques. It follows, in my judgment, that the defendant does not have an arguable defence to the claims, and the plaintiff is entitled to final judgment as prayed in the summonses.