LEE & POON CO. LTD. v. RAINBOW ELECTRICAL TRADING & DEVELOPMENT LTD.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1997, No. 193
(Civil)

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J U D G M E N T

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Liu, J.A.:

1. The plaintiff claims against the defendant company on six cheques, four of which were for $250,000 each, totalling $1 million and the remaining two were for $25,000 and $10,000 respectively, totalling $35,000. The aggregate of the plaintiff's claim against the defendant therefore stands at $1,035,000.

2. Mr Wong is a director of the defendant limited company and claims to represent it today. The procedural application for a director to represent a limited company does not seem to have been fully compiled with. Counsel for the plaintiff raises no objection and consequently we allow Mr Wong to be heard.

3. The matter came before master Cannon on an Order 14 application. The master ordered the defendant to pay into court $500,000 as a condition to come in to defend the action. The defendant company felt aggrieved and took the matter to appeal before Pang, J. The judge affirmed the master's decision. Therefore, the defendant company was given leave to defend but only on condition. The defendant now appeals against the decision of Pang, J.

4. There are no recorded reasons given by either the master or the judge as to why conditional leave was granted and why, in particular, $500,000 out of an over $1 million claim was ordered to be paid into court by the defendant company.

5. Evidently, both the master and the judge concluded that the matters raised before them were triable issues. As to that, on the defendant's allegations both the master and the judge would seem to be correct. Why then was conditional leave granted? Why then was just below half of the plaintiff's claim ordered to be paid in by the defendant company? In the analysis which I will endeavour to make, nothing really seems to call for a payment into court of $500,000 or the granting of only conditional leave.

6. It is, perhaps, more comprehensive to begin with the statement made by Mr Wong, the director of the defendant company, that the total indebtedness as claimed by the plaintiff against his company is disputed and that as calculated on pages 208 and 209 of the defendant's Appeal Bundle, the amount outstanding should be considerably less.

7. Turning to the allegations of the defendant set out in the three affirmations of Mr Wong, first, for the four cheques for $250,000 each totalling $1 million, it is the defendant's case that when the company faced financial difficulties, an agreement was struck between Mr Wong and the plaintiff to allow the defendant to pay at a later time and in smaller sums. These four cheques arose from an agreement entered into between the plaintiff and the defendant for utilizing some $4,000,000 and $800,000 local letter of credit facilities. The scheme was such that cheques were to be delivered by the defendant as security. It is apparent in Mr Wong's submission that the plaintiff's case against the defendant is not strictly one on bills of exchange. The arrangement as to how these security cheques were to be presented or, in other words, how the security was to be from time to time realised was left fairly fluid. After all, the understanding was for the defendant to meet the cheques out of its commissions earned in future substantial contracts brought to the plaintiff. Later, on account of financial difficulties of the defendant, the scheme for realising the security was modified in the sense that cheques were not to be presented at any particular date but at a later time and that the defendant company was allowed to repay the plaintiff in smaller sums, either in cash or by cheques.

8. On what must be the contended basis that this was not a strictly bills of exchange transaction, the alleged adjustment as to how security was to be realised would not be, so it would seem, caught by the parole evidence rule and the more robust principles for dishonoured cheques.

9. The defendant alleges that pursuant to the adjusted payment schedule, it had paid cash in the sum of 218,000 odd dollars, 15 small cheques of $10,000 each totalling $150,000, a cheque for $25,000 being one of six cheques sued upon by the plaintiff, 41 cheques of $15,000 each totalling $615,000 and another cheque of $10,000 again being another cheque sued upon by the plaintiff.

10. In the alleged adjustment for realising the security, so the defendant company argues through Mr Wong, the plaintiff was not then entitled to present the four $250,000 cheques or claim against it by writ as it did. For the remaining two cheques of $20,000 and $15,000 respectively, totalling $35,000, the defendant company asserts that in fact it had paid the plaintiff in excess of its liability in their arrangement for provision of security. Hence, the plaintiff was also not entitled to sue upon these two cheques for $35,000. Moreover, the defendant relies on a cross-claim to the extent of over $1.99 million together with the damages it seeks to recover. To this claim, I shall now turn.

11. The defendant company has placed on record by Mr Wong's affirmations that it has a substantial claim against the plaintiff to the extent of $1.99 million and damages for breach of contract. The claim arose from three purchase orders worth $7.69 million, all procured for the plaintiff by the defendant in December 1996. Under the purchase orders, the defendant had caused to be paid to the plaintiff $1.99 million. It is alleged by the defendant that the plaintiff was in breach and that hence, it is liable to return the $1.99 million and pay damages for breach.

12. Mr Wong is gravely disappointed because, according to him, after having pocketed $1.99 million and denied its obligations under the three purchase orders, the plaintiff immediately presented the six cheques in question and brought this action against the defendant.

13. The claim for $1.99 million and damages is an alleged cross-claim against the plaintiff. For the reasons I have tried to give, it would appear to be arguable that the plaintiff's action against the defendant is not strictly one on bills of exchange. The circumstances were involved. The nature of the transaction was unsavoury. Counsel for the plaintiff is even prepared to argue on the basis that the arrangement to use the facilities was illegal. As a matter of fact, it might well be criminal. I am not persuaded that the cross-claim of the defendant's may not arguably spring into action against the plaintiff by way of a set off. Matters call for a full investigation in this claim on cheques which were delivered in an unusual arrangement for taking a less than fair advantage of some local letter of credit facilities. The plaintiff's claim could not be properly resolved without a thorough examination of the facts and law.

14. Like the master and the judge, I, too, find triable issues in the allegations of the defendant. Following from the two questions I posed earlier viz. "what is the justification for granting leave on condition?" and "why is it necessary for $500,000 to be paid into court?", it is inconceivable that conditional leave could properly be granted and for that amount. Counsel for the defendant has put in a detailed skeleton submission, from which I am quite unable to extract an explanation for the cause taken by the master and the judge. There seems to none. For the triable issues raised by the defence, unconditional leave should have been granted. For want of justification, both the master and the judge are plainly wrong in granting conditional leave in the way they both did. For all these reasons, the appeal should be allowed. I would allow the appeal, set aside the orders of the judge and the master, grant unconditional leave to the defendant to defend and, if both parties are willing, perhaps give directions at their invitation.

Leong, J.A.:

15. A defence has been raised in the defendant's affidavit and that is that the cheques in question were given by way of securities for loans made to the defendant by the plaintiff and these were not intended to be presented for payment and when the defendant's financial position was not in good shape, the plaintiff in breach of that agreement, presented the cheques to throw the defendant's financial position off balance. This is not purely a case based on bills of exchange and this raises a trial issue. The case cannot be disposed of without further examination.

16. I agree with my Lord Liu, J.A. that the order should have been one of unconditional leave to defend.

17. I would accordingly allow the appeal, set aside the orders of the master and the judge and grant unconditional leave to defend.

Nazareth, V.-P.:

18. I also agree that the appeal must be allowed.

19. We are considerably disadvantaged by not having the reasons which prompted the master to grant conditional leave and the judge to uphold that order. What is clear is that from the very outset the defendant had no funds and that has remained the position. Also the defendant's case has been, apparently from the beginning, that had it been supplied with the electrical goods for which the approximate amount of $2m was paid in relation to three purchase orders, it would not have got into the difficulties it now finds itself in. It is against that background that the payment of the approximately $2m must be considered for the purpose of this appeal, which is concerned with the requirement to provide security of $500,000.

20. It is said that it was agreed that the $2m was not to be appropriated towards the loan. That is the point made on behalf of the plaintiff by reference to a statement in one of the affidavits put in on the defendant's behalf. There may have been something in the point at the time that payment was made. But once the plaintiff was in breach of the agreement as to the payment of the $2m and the use to which that amount would be put, that payment must come very much into contention particularly in the context of the order for provision for security, whatever may be the technical position relating to a claim made upon dishonoured cheques as it was here. The power to grant conditional leave is a discretionary power and it can be seen that the condition cannot be met apparently because of the plaintiff's conduct. Moreover, all this has resulted from the single general relationship of the parties which turns out to be somewhat complicated. There are a number of disputes as to the facts. There are clearly issues to be tried as indeed the master and judge must have accepted given that leave albeit conditional was subscribed to by both of them.

21. Where conditional leave to defend is given, the Court of Appeal will not interfere with the discretion of the judge unless there has been some error of principle or misapprehension of facts or unless undue weight has been given to a particular aspect of the facts. See para. 14/3-4/41 at p. 173 of the Supreme Court Practice 1997 and the authorities there cited.

22. In the circumstances I have mentioned, the inability of the defendant to pay anything like $500,000 and the circumstances in which that inability apparently arose must have been overlooked, or there must have been a misapprehension of those matters, or alternatively not sufficient weight given to them.

23. On the basis of the principles mentioned, that entitles this Court to intervene.

24. Accordingly, I would also allow the appeal and grant unconditional leave to defend, subject to any directions sought.

25. The appeal is allowed, the orders below set aside and the defendant given unconditional leave to defend. Having heard the parties we direct that the defendant is to file its defence within twenty-one days of today.