Dao Heng Bank Ltd v. Hui Kwai-wing and Others

HCA001378/1975

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO. 1378 OF 1975

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Coram: McMullin, J. in Court

Date of Judgment: 15th February, 1977.

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JUDGMENT

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1. Although no formal proof was offered of the agreement pleaded in para. 5 of the Statement of Claim it is not contested by the defendants now before the court that a sum of $11,173.60 is now outstanding on the footing of a current account maintained with the plaintiff bank and operated by Mr. HUI Kwai-wing (the 1st named 1st defendant) ostensibly in connection with the business of a firm styled Tung Fook Cheung between 1963 and 1975. The amount claimed is the sum by which that account was overdrawn at the commencement of this action in 1975 together with interest thereon at the rate of 13% per annum. It is likewise not disputed that HUI Kwai-wing obtained credit from the bank upon its advancing moneys under a Letter of Credit opened in favour of a customer of the Tung Fook Cheung firm in 1974. The sum claimed on this account is the major part of the claim represents the amount thus paid by the bank less two sums re-paid by HUI Kwai-wing in reduction of this debt. Mr. HUI Kwai-wing has not appeared in the action and it has not been possible to serve him personally. He is clearly the author of the present misfortunes alike of the plaintiff bank and of his brothers, the three persons named together with him as first defendant in the action. He is sued alternatively as second defendant trading as the Tung Fook Cheung Firm.

2. The evidence has established that the two defendants who have a peared in court in answer to the claim, together with their brother Terry Hui, who though served has not so a peared, and who is said to be employed in a department store somewhere in England, were moved by a somewhat misguided filial piety to permit themselves to be named and registered as partners in the Tung Fook Cheung firm at the instance of their ailing mother in the year 1968. They, like their brother Terry, are each full time employees with business firms which have no connection with the Tung Fook Cheung. That firm was formerly the property of their father HUI Chee-chow. He was registered as sole proprietor thereof on 29th June 1952 under the Business Registration Ordinance. The nature of the business is described on the application form (Exhibit D2) as being that of "Chinese raw medicine, importers and exporters". It is common ground that this trade, which was principally in ginseng, was taken over by the eldest surviving son of HUI Chee-chow (the errant partner named with his brothers as first defendant) following the death of HUI Chee-chow in August 1963. Between that date and the 22nd October 1968 HUI Kwai-wing continued his father's trade under the same style and it is conceded that the other three brothers had nothing whatsoever to do with the Tung Fook Cheung firm in its operations in that period.

3. On the 15th October 1963, some three months after his father's death, HUI Kwai-wing opened a current account with the plaintiff bank in the name Tung Fook Cheung, the account being specifically entitled "sole proprietor's account" (Exhibit D1). The bank accepted him as its customer on the personal recommendation of Mr. C.F. Woo the then manager of the Bonham Road Branch. In the 5 years following, HUI Kwai-wing was regularly afforded overdraft and Letter of Credit facilities to maintain the trade of the Tung Fook Cheung.

4. In the year 1968 the mother of the four named first defendants, moved, as it seems, by a sudden impulse, suggested that the two present defendants and their brother Terry - then in England - should join HUI Kwai-wing in partnership to share in the profits of the Tung Fook Cheung. The two present defendants dutifully permitted their names to be submitted for registration in this guise although each was then fully employed in his own job and their evidence, which I accept, was that they neither put money into the venture nor ever received any profits from it. Indeed the unconsidered and nominal nature of their involvement in the firm's affairs is well illustrated by the fact that Terry Hui was never consulted at all before this was done but word was sent to him in England to inform him of his new and unsolicited status. The second defendant said that he was similarly informed after the event by his mother. HUI Fong-wing told the court that these formalities, in common with everything else done on behalf of the firm, were attended to by HUI Kwai-wing. Odd though this evidence may sound I believe it to be the truth. I believe that three presumably experienced men of business deferred to the wishes of an elderly, ailing mother out of affection and traditional family piety and without any real intention of contributing more than nominally to this nominal family enterprise. It is true that HUI Fong-wing did admit to having ordered samples of goods to be supplied to HUI Kwai-wing and that he occasionally delivered some samples to him in person. But I accept his evidence that that was as far as his co-operation in the business went and I accept also that the kind of goods he thus investigated for the firm yielded virtually nothing in the way of business.

5. Both of the present defendants deny having had anything to do with the ginseng and herbal medicine part of the firm's trade. Mr. Hoosen did endeavour to demonstrate that after October 1968 two quite distinct lines of business, and indeed two distinct businesses, were being operated under the name of Tung Fook Cheung. There is some evidence to support this idea. The partnership was registered on 22nd October 1968. The application form (Exhibit P3) - which is, by virtue of s.19(2) of the Ordinance, prima facie evidence of the truth of the contents - shows not merely that the business is to be a partnership but states the nature of the business in these words : "Importers and Exporters and Manufacturers Representatives." The corresponding form showing the business as that of Chinese raw medicine import and export and which presumably was filled in and filed by the defendant's father in 1952 (Exhibit D2) bears on the face of it in the form of "chops", two legends to the following effect : "Business ceased in 1963 as per letter dated 23rd October 1968" and : "File cancelled 21st November 1968". I do not know what was the contents of the letter thus referred to but a reasonable inference might be that, when he caused the partnership to be registered in 1968, HUI Kwai-wing represented to the registration authority that the raw medicine business had ceased with his father's death. If that be so it would lend some support to the idea that despite the retention of the same firm name a wholly new business of a different nature was projected. It is true also that in giving evidence HUI Fong-wing at first said that the idea was that the partnership was to be concerned with import and export of any products manufactured in Hong Kong and that this was to be managed by HUI Kwai-wing who was to carry on that business and also the previous business in the same firm name. Later, however, in cross-examination he said, in effect, that he could not say whether there were two businesses or one only, and he even suggested that prior to 1968 HUI Kwai-wing had dealt in goods other than ginseng and herbal medicines. What is not in doubt, however, is that between 1963 and 1968 HUI Kwai-wing carried on a trade in ginseng, dependant for his financing on the plaintiff bank. That was how Mr. Yuen (P.W. 1) described the trade and I cannot see any good reason to believe anything other than that in these years HUI Kwai-wing simply continued to trade as his father had done in the name of his father's registered business although not himself registered as proprietor thereof. The continuity of the trade even after re-registration in 1968 is attested by the fact that the current account was opened under the original registration number; by the fact that the business of the firm continued to be entirely in the hands of HUI Kwai-wing and by the fact that the major debt which the plaintiff now seeks to recover by action concerns a large ginseng deal in the year 1974. I would not therefore sustain Mr. Hoosen's argument that a wholly new business began in 1968 which was to be carried on separately from the ginseng business and that the latter was the sole proprietorship to which the bank gave credit and the former an abortive partnership which never became the bank's customer. Such as it is, the evidence suggests rather that the defendants were joining an existing business no doubt with some idea of diversifying the products of trade in which it was proposed thenceforth to deal. I find as a fact, however, that the bank continued after 1968 to deal in practice with HUI Kwai-wing as it had done prior to that as though he were effectively the firm of Tung Fook Cheung. He, though formerly regarded as a reliable customer, has now failed to honour the firm's obligations. The simple issue before the court is whether the plaintiff is now entitled to look to the other partners to satisfy its debt. It is not disputed that there were no partners before October 1968; it is admitted that the two present defendants took steps to withdraw from any obligations they had assumed in 1968 and caused themselves and their absent brother Terry to be de-registered as partners in February 1973, i.e. prior to the arising of the major claim in this action. The bank lays claim to their resources on two grounds. Firstly it is said that the defendants were in fact partners after October 1968 and were known to the bank to be so. This would, it is claimed, fix them with responsibility at any rate for the smaller of the sums claimed viz. : the overdraft debt. Even if this contention had been substantiated it is difficult to see what sum could be awarded by the court under this head of claim. The same current account has been in operation since 1963. It was never converted into a partnership account in 1968 and there is of course, no evidence to show that the incoming partners had consented to shoulder pre-existing debts of the firm. No details have been given of the history of the account and I do not know whether it was already overdrawn before October 1968 and remained so until suit. This, however, is by the way for on balance it seems to me that I cannot rely on Mr. Yuen's evidence purporting to show that the bank was made aware of the change in the nature of the firm in 1968. He told the court that in that year on a day between mid-October and the end of that month, HUI Kwai-wing came to the bank with his brother HUI Fong-wing (the 2nd named of first defendant) and told him that the business was being converted into a partnership involving himself and his three brothers whom he named. The witness said that HUI Fong-wing confirmed this. HUI Fong-wing, however, denied that any such meeting had ever taken place. I would not care to say that Mr. Yuen was telling a deliberate untruth on this matter. He was, after all, speaking of events of 9 years ago. While it may seem unlikely that a senior bank official could be wholly mistaken in so positive a recollection there is evidence before the court of the patent unreliability of his evidence on a matter which one might suppose to be equally beyond the imputation of confusion. He recalled the occasion in 1963 when the current account was opened in favour of Tung Fook Cheung and he identified the specimen signature card which he said was signed by HUI Kwai-wing in his presence. This signature, which appears in two places on the card, is not challenged, but on the same card, (Exhibit D3 dated 15th October 1963), another name appears, KOH Yan-ke, as that of an additional authorised signatory. The two signatures, though ostensibly different names, are strikingly similar even to the lay eye and it transpired eventually, although the evidence was at first a little confused on the point, that the name romanized as KOH Yan-ke is either the same as or closely similar to the pronounciation of the name HUI Kwai-wing in the Swatow variant of the Chiu Chow dialect. Nevertheless Mr. Yuen insisted that a person identifying himself as KOH Yan-ke had accompanied HUI Kwai-wing and had signed the card in the presence of the witness. I cannot accept that any such thing occurred. Apart from the evidence to which I have just now referred Mr. Yuen himself said that all the Tung Fook Cheung documents continued to be signed as before by HUI Kwai-wing who had assured him in 1968 that the other partners agreed that he, HUI Kwai-wing, would continue to sign on behalf of the partners, and further Mr. Yuen said that no documents were ever signed by the person he purported to remember as KOH Yan-ke.

6. The situation thus far or I see it is that the bank was never aware that any partnership had come into existence until long after 1968. The existence of this partnership - a legal entity of a wholly nominal kind as I must regard it - only came to the notice of the bank in 1972 when, following upon an amalgamation with the National and Grindleys Bank, the plaintiff was urged by its new associates to carry out an inspection of files dealing with the existing accounts of its customers. Mr. Yuen frankly admitted that the plaintiff bank's procedures had hitherto been of a somewhat casual and informal nature in various ways, including such matters as the due documentation of changes in the business and trading identities of its customers. Thus spurred, the plaintiff, as I find, at last became aware of the existence of a partnership behind the firm of Tung Fook Cheung. It is of course admitted that this tardy discovery occurred prior to the formal withdrawal of the defendants from the firm. The information was contained in the registration form (Exh. P3) dated 6th April 1972 obtained by the plaintiff upon its inquiry. On the view I have taken of the evidence thus far, however, one would have expected that the bank would then have made due inquiry to ascertain what the true position was. Mr. Kotewall argues that there was no onus on the bank to do anything of the kind. I do not say that there was a legal duty to make inquiry but I find the plaintiff's performance in this situation curious and revealing on the issue of knowledge, in the light of the evidence given by its own representative. Mr. Yuen conceded that recent and contemporary procedures in dealing with customers, following the reforms initiated in 1972, would now oblige the observance of certain formalities to regularize the bank/customer relationship upon the occurrence of any such change as we are here concerned with. But, as I understood it, his evidence was that the amendment by the bank of its customary habits was a slow process. At all events nothing was done in 1972 to bring the bank's records into alignment with the altered situation; no new account was opened in the name of the partnership and no inquiry was made as to the representative authority of the sole signatory. What this conveys to me is that the Bank was undisturbed by this discovery because it was evident that despite the apparent change in 1968 the effective customer for practical purposes had continued to be HUI Kwai-wing the dealer in herbs and ginseng who had for many years sustained by his personal probity and steady performance the trust initially reposed in him. Undoubtedly the existence of the partnership came to the knowledge of the bank before the partners withdrew. It is true also that no express notice of withdrawal was ever given to the bank and the plaintiff claims that this fact only came to its notice in 1975 after the commencement of suit when a further inspection of the register (Exh. P. 8 and P8A) apprised it of the fact that the defendants and their brother had caused their retirement to be registered in February 1973. It is these latter circumstances - since I have rejected the claim of the bank to have had notice of the partnership in 1968 - which afford ground to the plaintiff bank for seeking to fix the defendants with liability. In this regard the plaintiff relies on s.16 of the Partnership Ordinance and on s.19(2) of the Business Registration Ordinance for the contention that the defendants were holding themselves out as partners in Tung Fook Cheung and that, at least after April 1972, they were, vis-a-vis the bank, no longer dormant partners but were to be dealt with as disclosed and apparent partners. Mr. Kotewall relies on s.38 of the Partnership Ordinance for the contention that express notice of withdrawal was required and also upon the proposition that registration of such a change in a firm does not constitute notice either to the general public or to an interested party. He draws support for this from a passage in Lindley (13th Edition at page 109) where, in dealing with the corresponding English legislation the learned authors say :

"4. It is apprehended that the registration under this Act of a change in the firm will not, of itself, be notice of that change either to the former customers of the firm or even to the general public; for though an index of all the firms, and a file of all the particulars, which have to be registered and kept, and are open to public inspection, they are not published, and can only be inspected on payment of a fee."

No doubt as a general statement of the law that is both accurate and commendable to common sense for it would be very unjust and conducive to deceit if it was possible for a partner who had for years dealt openly with another in the name of his firm to disembarrass himself of responsibility for acts within that period by secret notification of his retirement to an official who was under no duty to publish it further. But that is wholly different from the situation as I find it here. Here we have a bank which for 9 years dealt exclusively with one man in the belief that he was the only person who represented the firm to which the bank was affording credit facilities. At the end of that time it is given notice, somewhat accidentally, that a partnership exists; it nevertheless continues to treat with the same individual precisely as it formerly did and only when this long association, founded and sustained on personal acquaintance and trust, has broken down in the latest of a long series of similar transactions does it turn to consider its customer's nominal associates. Mr. Hoosen has sought to maintain that there is in truth no satisfactory evidence of partnership at all. I do not think that is correct. Misguidedly or not, the defendants did consent to be joined as partners in a business which they believed to be a continuation, perhaps with some modification of their father's original enterprise. I hold that their participation therein, even that of HUI Fong-wing, was of a wholly nominal and indeed distinctly unrealistic kind. That in itself might not matter if the history of the relationship between the bank and the firm were not so plainly one of individual accountability. The likelihood that it was of such a nature, and was so to the understanding of the plaintiff, is to my mind reinforced by the attempt to adduce direct evidence of the defendants' involvement in the partnership business even after 1973. Mr. Yuen spoke of an occasion in March of that year when the Tung Fook Cheung gave a dinner party to which he and some other bank officials including Mr. C.F. Woo were invited. He said that he recalled a toast proposed by HUI Kwai-wing to the bank officials somewhat in the following terms :

"We three musketeers of Tung Fook Cheung are very grateful to the Dao Heng Bank for the assistance you are rendering to us."

The defendants admit that they did once attend such a party but deny that they ever heard any such words spoken. For my own part I find it very difficult to believe that if any such toast was proposed it can have had the meaning attributed to it by Mr. Yuen. It would need only a very minor modification of the words I have set out to convey quite the opposite meaning viz. : that the three musketeers were very grateful for all the assistance they had received from the bank. Be that as it may I do not believe that the two defendants who were present on that occasion could conceivably have been agreeing to continue in this haphazard and, from their view point, abortive enterprise in the face of their express withdrawal from association with HUI Kwai-wing as notified to the Commissioner in the previous month.

7. I have called this odd arrangement a nominal partnership for that appears to me to be the best description I can give to it. There was nothing in the nature of a formal partnership agreement; the brothers seem to have fallen in with their mother's suggestion without discussion between themselves; and more especially without discussing it with HUI Kwai-wing. They joined piecemeal, two of them it would appear by supine indorsement of the fait accompli. I accept that so far as they were concerned there was virtually no participation in trade and there was no participation in profits. In these circumstances I think there is much point in Mr. Hoosen's argument that where the, plaintiff seeking to lay hold upon the defendants' assets, relies upon belated discovery in the Business Registry of the altered character of its customer and when it agrees that it never made any of the inquiries or effected any of the procedures which it now admits would have been proper in consequence, and moreover continued to deal precisely as before with one who for years had been regarded as the sole proprietor of a ginseng business, it would be just to hold the plaintiff bound by notice to the Registrar of Business names of the final alteration. I prefer, however, to base my decision on somewhat different considerations. I am assuming for the purposes of this argument that the business in which the defendants so imprudently permitted themselves to become involved in 1968 was the same business, though somewhat altered in the diversity of its intentions, to which the promise of credit had been made by the bank in 1963 under the agreement upon which the plaintiff relies as binding the several first defendants to the results of a transaction which occurred after they had formally withdrawn from partnership. On that understanding of the matter it appears to me that the decision in British Homes Assurance Corporation Ltd. v. Paterson⁽¹⁾, cited by Mr. Hoosen, is extremely helpful. In that case the plaintiff company had employed a solicitor whom it knew to be the only solicitor in a firm called Atkinson & Atkinson. Some 21 months after engaging the sole representative of the firm, Atkinson, the latter notified the company that he had taken on the defendant, Paterson as a partner and that the firm would practise thenceforth under the style of Atkinson & Paterson. The plaintiff company took no notice of this information and continued to correspond with Atkinson under the old firm name and to pay money to him in that name. Upon Atkinson misappropriating funds of the plaintiff company and thereafter absconding the company sought to make the new partner liable. Farewell, J. regarded the earlier course of conduct as an election to deal with the individual and not the firm and he declined to hold that the mere issue of the writ was effective as an election by the plaintiff to accept the substitution of Atkinson and Paterson as debtors in place of Atkinson alone on the basis of a novation of contract. On that principle alone he was prepared to dismiss the claim and I would think it is applicable also in the present case. It may, of course, be said that the act of the plaintiff company in the Paterson case showed something more positive in the way of election than the behaviour of the bank in the case at bar. Here the bank simply continued to deal with the same man under a trade name which had not altered by reason of the partnership. On the other hand, the failure of the bank to react in any way to its discovery of a partnership purporting to relate to a trade which made no mention of ginseng or herbal medicines seems to me fully consistent with an election to continue to treat with HUI Kwai-wing exclusively and to treat the partnership as of no significance in relation to the bank's dealings with the firm.

8. But even more in point is the decision of Farewell, J. when he proceeded to consider the case before him in the light of the principles explicitly applicable to principal and agent. Having expressed the opinion as to novation to which I have referred, he went on to say (page 410) :

"But even if this were not so, they could not, in my opinion, now elect to make the defendant liable. The principle applicable is the same as that which is applied by the Courts in the case of an undisclosed principal. It is true that the party who contracted with the agent can sue the principal when discovered, but this is subject to the qualification that nothing has occurred in the meantime to make it unjust. 'If the principal has paid the agent, or if the state of accounts between the agent here and the principal would make it unjust that the seller should call on the principal, the fact of payment, or such a state of accounts, would be an answer to the action brought by the seller where he had looked to the responsibility of the agent.' (1) It would, in my opinion, be manifestly unjust to allow the plaintiffs to deal with Atkinson alone so long as any payment was to be made by them, and to allow them to elect to deal with Atkinson and Paterson, when the liability for the sum so paid to Atkinson alone came in question."

The concluding words in that passage, notwithstanding the factual differences between the cases, admirably suit the circumstances here. Contingent upon this there is a further aspect to the situation (which, in the plaintiff's favour I am assum ng to be that of one firm trading at separate times under two managements) which it is relevant to consider on the question of fairness. The plaintiff bank relies expressly upon s.16 of the Ordinance on the ground that the present defendants by permitting their names to be registered as partners were making themselves liable for partnership debts by "holding out". At page 100 of Lindley the learned authors have this to say of the doctrines of "holding out" in partnership law :

"The real ground on which liability is thus incurred is, that credit has been thereby obtained. This is apparent from the words of the Act and was put with great clearness in Dickinson v. Va py:

An attempt was made in the present case to show that the plaintiff bank had placed express reliance on the existence of a partnership in progressively extending the limit of credit available to the firm between 1968 and 1972 as shown by the figures appearing on the reverse side of the specimen signature card (Exhibit D3). In view of my findings so far that demonstration patently fails. So far from it being the case that credit was given to the defendants as partners I am quite satisfied that the discovery of the nominal partnership in the records of the Business Names Registry in 1972 had no effect whatsoever upon the relationship between the plaintiff bank and the Tung Fook Cheung firm. Indeed had the bank made any inquiry into the substance of the partnership - as I think in mere prudence it ought to have done - it would almost certainly have discovered a state of affairs which would in no way have increased its confidence in the reliability of the firm but might even have somewhat reduced it.

9. I should add that if, contrary to the view I have taken, the true state of affairs was, as Mr. Hoosen argued, that the partnership was in truth a wholly new business venture running under the same name as the former ginseng business then it would follow, as he maintains, that the liability for these debts must remain, a fortiori, that of HUI Kwai-wing alone.

10. For the reasons given however I find that the claim against the present defendants must fail.

11. There will be judgment for the first defendant with costs.

Representation:

R.G. Kotewall (Patrick Poon & Co.) for Plaintiff.

A.A. Hoosen(H.H. Lau & Co.) for 2nd and 4th named defendants in 1st Defendant.

2nd Defendant absent.

(1) (1902) 2 Ch. Div. 404.