The China State Bank Ltd v. Sinoearn International Ltd

DCCJ004192/2002

DCCJ 4192/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4192 OF 2002

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(By original writ and order to carry on)

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Coram: Her Honour Judge C.B. Chan in Court

Date of Trial: 16 and 20 May 2003

Date of Handing down of Judgment: 27 June 2003

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J U D G M E N T

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1.The Plaintiff, a Bank incorporated in the People's Republic of China, and having a branch in the Hong Kong SAR claims against the Defendant as drawer of 3 dishonoured cheques the details of which are as follows:-

No.	Date	Amount	Payee
1.	28 Sept 1998	HK$100,000.00	Central Plaza Investment Limited
2.	20 Oct. 1998	HK$250,000.00	Top Summit Finance Limited
3.	30 Oct. 1998	HK$250,000.00	Yim Yuen

2.The 1st Cheque was indorsed by Central Plaza Investment Limited in blank and the Plaintiff claims as the bearer and holder in due course thereof. Upon presentment for payment on 28 September 1998, the cheque was dishonoured and returned to the Plaintiff marked "insufficient funds". Notice of dishonour of the 1st Cheque was stated by the Plaintiff to have been given to the Defendant by a letter dated 21 October 1998 by the Plaintiff's solicitors Messrs. K.W. Ng & Co. Further it was pleaded by the Plaintiff in their Amended Statement of Claim that notice of such dishonour is otherwise dispensed with under Section 50(2) (c) (iv) of the Bills of Exchange Ordinance Cap. 19.

3.The 2nd Cheque was indorsed by Top Summit Finance Limited in blank and the Plaintiff claims as the bearer and holder in due course. Upon presentment, for payment on 20 October 1998, the said 2nd Cheque was dishonoured and returned to the plaintiff marked "insufficient funds". Notice of dishonour in respect of the 2nd Cheque was stated by the Plaintiff to have been given to the Defendant by a letter dated 4 December 1998 by the Plaintiff's solicitors Messrs. K.W. Ng & Co. Further it was pleaded by the Plaintiff in their Amended Statement of Claim that notice of such dishonour is otherwise dispensed with under Section 50(2) (c) (iv) of the Bills of Exchange Ordinance Cap. 19.

4.The 3rd Cheque was specially crossed with the name of the Plaintiff. The Plaintiff claims as bearer and holder in due course thereof. Notice of dishonour in respect of the 3rd Cheque was stated by the Plaintiff to have been given to the Defendant by a letter dated 4 December 1998 by the Plaintiff's solicitors Messrs. K.W. Ng & Co. Further it was pleaded by the Plaintiff in their Amended Statement of Claim that notice of such dishonour is otherwise dispensed with under Section 50(2) (c) (iv) of the Bills of Exchange Ordinance Cap. 19.

5.It is not denied that despite demand for payment in respect of the 3 Cheques sent by the Plaintiff's aforesaid solicitors to the Defendant, the Defendant had failed to pay the respective sums on the 3 Cheques.

The Defence

6.By a Contract in Chinese dated 10th August 1998 ("the Contract"), the Defendant agreed to purchase from Central Plaza Investments Limited ("Central Plaza") its 35% shares ("the Shares") in a PRC company called “珠海立旺船運有限公司” ("the PRC company") for a total price of HK$889,700.00

7.It was provided in the Contract that the purchase price of the Shares shall not be due and payable until a vessel of the PRC company has been sold and the Defendant received its 35% of the sales proceeds.

8.At the request of Central Plaza, the Defendant on or about 11th September 1998 drew the 3 cheques the subject of this action were post-dated cheques.

9.The 1st, 2nd and 3rd cheques were given to Central Plaza at its request and on its representation as security for payment of the purchase price of the Shares under the Contract only and upon the undertaking of Central Plaza not to negotiate or cause the same to be negotiated, present or caused the same to be presented for payment, or otherwise deal with the same until the purchase price was due under the Contract.

10.Up to the date of trial, the PRC company has not yet been able to sell the vessel, and therefore the purchase price of the Shares has not been due for payment under the Contract.

11.Further, in breach of the Contract, Central Plaza has failed to transfer or caused to be transferred the Shares to the Defendant. In the premises there is a total failure of consideration for which the 1st, 2nd and 3rd cheques were issued.

12.The Defendant asserts in paragraph 8 of his Defence:-

(i) Central Plaza has obtained the 1st, 2nd and 3rd cheques from the Defendant by misrepresentation and/or fraud, and that it transferred or negotiated the 1st, 2nd and 3rd Cheques in breach of faith and/or in the circumstances as stated and it amounts to fraud. In the premises, Central Plaza's title to the 1st, 2nd and 3rd Cheuqes are defective within the meaning of the Bills of Exchange Ordinance Cap. 19.

(ii) At the time of negotiation of the 1st, 2nd and 3rd Cheques, the Plaintiff had knowledge and was aware of the matters related to the background for the issue of the cheques referred aforesaid. Further and/or in the alternative, the Plaintiff has colluded in obtaining the 1st, 2nd and 3rd Cheques from the Defendant by the misrepresentation and/or fraud as pleaded aforesaid.

(iii) Further and/or in the alternative, the Plaintiff has not given any value for the 1st, 2nd and 3rd cheques.

(iv) In the premises, the Plaintiff is not a holder in due course in respect of the 1st and 2nd Cheques and its' title to the 3rd Cheque is defective, and therefore the Plaintiff is not entitled to sue upon the 1st , 2nd and 3rd Cheques.

13.Further the Defendant pleaded:-

(i) The Defendant denies that it received due notice of dishonour of the 1st , 2nd and 3rd Cheques.

(ii) The 1st , 2nd and 3rd Cheques were dishonoured respectively on 28th September 1998, 20th October 1998 and 30th October 1998 as alleged and the only notices received by the Defendant were by the respective letters of Messrs. K.W. Ng & Co. dated 21st October 1998, 4th December 1998 and 4th December 1998 which said notices were invalid in that they were not given within a reasonable time after dishonour. In the premises, the Defendant has been discharged from its liability under the 1st , 2nd and 3rd Cheques.

The Issues

The Plaintiff's Evidence

15.The Plaintiff's only witness was Wong Mau Sing (PW1) who was the former Deputy Manager of the Hung Hom Sub-branch of the then China State Bank Limited now the Bank of China.

16.He stated in evidence that on 23rd April 1998, Top Summit wrote to the Bank in relation to its Indebtedness to the Bank (see pages 16-18 of the Agreed Bundle of Document "ABD"). Amongst other things, by this letter, Top Summit informed the Bank that its debtors owed Top Summit debts, including principal and interest, totaling HK$16,517,858.30 and that the Defendant ("Sinoearn") was one of those debtors, with an outstanding principal debt due to Top Summit of HK$2,461,937.00 and interest of HK$198,947.00 as at 31 March 1998. In the same letter, Top Summit stated that Sinoearn had agreed to repay Top Summit by 29th June 1998, whereupon Top Summit intended to pay the whole of this amount to the Bank in part payment of its indebtedness to the Bank.

17.On 13 August 1998, Top Summit wrote to the Bank (see page 28-30 ABD) in relation to its outstanding indebtedness, saying, amongst other things, that Top Summit had demanded that Sinoearn repay its indebtedness to Top Summit by 5th November 1998, and that Sinoearn had given Top Summit its undertaking to do so. Top Summit went on to say that upon receipt of this money it would pay it to the Bank in reduction of its indebtedness.

18.Also on 13 August 1998, (see page 33 of ABD), the Bank received a letter from Central Plaza Investments Limited stating that it had outstanding debts and returns on investment of HK$1,300,000.00 due to it and that a post dated cheque for HK$100,000.00 in page 33 of ABD repayment of part of that debt was charged to the Bank. This cheque was the 1st cheque referred to above.

19.The 1st cheque was indorsed by Central Plaza Investments Limited in blank and deposited with the Plaintiff on 12th August 1998. The Bank thereby became the bearer and holder in due course.

20.The 1st cheque was presented for payment on 28th September 1998, but was dishonoured and returned to the Bank marked "Insufficient funds".

21.On 21st October 1998, the Bank's solicitors, Messrs. K.W. Ng & Co. wrote to Sinoearn giving it notice of dishonour in respect of the 1st cheque.

22.On 20th October 1998, Sinoearn drew the 2nd cheque made payable to Top Summit Finance Limited for the amount of HK$250,000.00 upon the Daiwa Bank Limited.

23.The 2nd cheque was indorsed by Top Summit Finance Limited in blank and deposited with the Bank on 12th August 1998. The Bank thereby became the bearer of the cheque and holder in due course.

24.On 20th October 1998, the 2nd cheque was presented for payment but was dishonoured and returned to the Bank marked "insufficient funds".

25.On 4th December 1998, K.W. Ng & Co. wrote to Sinoearn giving it notice of dishonour in respect of the 2nd cheque.

26.On 30th October 1998, Sinoearn drew the 3rd cheque cheque no. 067536 made payable to Yim Yuen for the amount of HK$250,000.00 upon the Daiwa Bank Limited.

27.The 3rd cheque was deposited with the Bank on 12th August 1998. The Bank thereby became the bearer and holder for value.

28.On 30th October 1998, the 3rd cheque was presented for payment but was dishonoured and returned to the Bank marked "account closed".

29.The Plaintiff's Solicitors Messrs. K.W. Ng & Co. wrote to Sinoearn by a letter dated 4 December 1998 giving it notice of dishonour in respect of the 3rd cheque.

30.Despite K.W. Ng & Co.'s letters of 21st October 1998 and 4th December 1998, demanding the payment of the monies due in respect of the 3 cheques, Sinoearn has failed and/or refused to pay any of the money due.

31.He further stated that he had no knowledge of the matters pleaded in the Defence.

32.PW1 stated that he met Mr. Tsang the representative of the Defendant at this trial, on the 21 October 1998 at his office in the afternoon at about 4 p.m. It was then he told Mr. Tsang about the dishonour of the 1st and 2nd Cheques.

33.PW1 referred to the Facility Letter at page 7 of ABD whereby a certain loan was given to Mr. Yim Yuen and Lau Yuk Chun. The 3rd Cheque was banked into the bank account of Lau Yuk Chun and Yim Yuen with the Plaintiff Bank, to repay the sums they owed to the Plaintiff Bank. After its dishonour, he did not contact the Defendant but instructed the Bank's solicitors to institute proceedings against the Defendant.

34.Under cross-examination, PW1 stated that Mr. Tse of Central Plaza brought the 1st cheque to him for payment into the bank account of Central Plaza. He stated that each of the payees of the 3 cheques had requested that the cheques be paid into their bank account to reduce their liability to the bank. He stated that Mr. Tse of Central Plaza did not tell him that the cheques were not to be paid into their bank accounts until the Defendant had sold the vessel.

The Defendant's Evidence

35.Mr. Tsang Cheung Kang (hereinafter referred to as "Mr. Tsang") the representative of the Defendant adopted his witness statement at page 100 to 105 of the ABD and Supplemental Witness Statement at pages 164 to 170 of the ABD as his evidence- in-chief. The evidence in his witness statements supported his pleaded case.

36.In addition in paragraph 14 and 15 of his Witness Statement at page 103 of the BD, he stated that at the time when he gave the 3 cheques respectively to Mr. Tse Shiu Yim, Central Plaza, Top Summit Finance Limited and Yim Yuen, they were indebted to the Plaintiff and the Plaintiff pressed them for payment.

37.Mr. Tse informed Mr. Tsang that shortly after entering into the Contract between the Defendant and Central Plaza, he informed Mr. Wong (PW1), about the Contract made between Central Plaza and the Defendant and that Central Plaza would be able to receive the purchase price under the Contract shortly. Mr. Tse informed Mr. Tsang that in order to obtain from the Plaintiff an extension of time for repayment of the debt owed to the Plaintiff, he, Mr. Tse Shiu Yim told Mr. Wong, namely PW1, that Mr. Tse would obtain post-dated cheques drawn by the Defendant as security for payment of the purchase price payable under the said Contract. He and Mr. Tse would deliver the 3 post-dated cheques to the Plaintiff in part payment of the debt owed to the Plaintiff by Central Plaza, Top Summit Finance Limited and Yim Yuen.

38.Mr. Tsang stated that Mr. Tse Shiu Yim obtained the cheques from the Defendant by fraudulent misrepresentation. The Plaintiff accepted negotiation of the cheques to itself.

39.In paragraph 5 of the Supplementary Witness Statement of Mr. Tsang at page 165 of the ABD, Mr. Tsang alleged that the Plaintiff had knowledge of the Contract and the fact that payment in respect of the shares was conditional upon the sale of the Vessel. By reason of the aforesaid knowledge of Mr. Wong, PW1, the Plaintiff was not a holder in good faith and was neither a holder for value nor a holder in due course of each of the 3 cheques. Mr. Tsang also alleged that there was a prior defect in title in respect of each of the cheques and the Plaintiff took the cheques subject to these defects.

40.In relation to the 3rd Cheque, Mr. Tsang stated that he recalls that the 3rd Cheque contained the name of the payee with the words "or Bearer" crossed out and was therefore an order cheque. The named payee could not pass a valid title of the cheque to the plaintiff by mere delivery of it. The 3rd Cheque was not endorsed by the payee. He stated that the 3rd Chegue had not been negotiated in favour of the Plaintiff.

41.Further he stated that he had not received notice of dishonour in respect of each of the cheques.

42.Under cross-examination he referred to his statement wherein he said that the Plaintiff has colluded with Mr. Tse Shiu Yim, with Central Plaza, Top Summit Finance Limited and Yim Yuen in obtaining the Cheques from the Defendant by misrepresentation and/or fraud. He said that he came to that conclusion from their bahaviour. This was because Central Plaza obtained the cheques from the Defendant as security but despite their undertaking not to do so they banked in the cheques with the Plaintiff. He deduced that the Plaintiff colluded with the others from this.

43.When it came to the allegation of fraud on the part of Tse Shiu Yim, Central Plaza, Top Summit and Yim Yuen, under cross-examination, Mr. Tsang stated that they were not fraudulent. It is the same as breach of contract. Mr. Tsang was cross-examined on the allegation in paragraph 14 of the Supplemental Witness Statement at page 168 of the ABD, wherein Mr. Tsang stated that the "Plaintiff knew of the existence of the Contract and knew or ought to have known of the misrepresentation of Central Plaza in obtaining the cheques from the Defendant and so at all material times was not a holder of the cheques in good faith ...the Plaintiff had actual or constructive notice of the defect at the time of the purported transfer of each of the cheques to the Plaintiff". Mr. Tsang agreed with the Plaintiff's Counsel that when he stated the Plaintiff "knew", it should have read "ought to have known".

Credibility of Witnesses and Standard of Proof

44.I find the Plaintiff's witness PW1 to be a credible witness. I accept his evidence as contained in his witness statement and his evidence under cross-examination in its entirety. In relation to the evidence of Mr. Tsang, I am not able to accept as wholly reliable. However, I find that the issue is not so much a matter of credibility but the lack of direct evidence of fraud or collusion which he alleged as against the Plaintiff.

45.The Defendant has not been able to establish fraud and or collusion on the part of PW1 and/or the Plaintiff. There is no evidence that the PW1 or the Plaintiff knew of the arrangement or undertaking by Mr. Tse Shiu Yim to the Defendant not to negotiate or indorse the cheques until the vessel has been sold. The standard of proof for fraud is a high standard. The Defendant's allegation of fraud and collusion is based on hearsay evidence related to what Mr. Tse Shiu Yim told him. In fact, as Mr. Tsang admitted in reply to cross-examination, an allegation of fraud is a serious allegation. He himself was not able to categorically assert fraud on the part of PW1 Mr. Wong or Mr. Tse Shiu Yim when being cross-examined on oath. I am not able to rely on the hearsay evidence of Mr. Tse Shiu Yim.

46.There is no evidence of collusion on the part of PW1 and/or the Plaintiff with Mr. Tse Shiu Yim, Central Plaza, Top Summit Finance Limited or Mr. Yim Yuen.

The 1st Issue

47.Section 29 of the Bills of Exchange Ordinance ("the Ordinance") state:-

"29. Holder in due course

(1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely -

(a) that he became the holder of it before it was overdue, and without notice that it had been previously dishonoured, if such was the fact;

(b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

(2) In particular, the title of a person who negotiates a bill is defective within the meaning of this Ordinance when he obtained the bill, or the acceptance thereof, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith or in such circumstances as amount to a fraud.

(3) A holder (whether for value or not) who derives his title to a bill through a holder in due course, and who is not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards the acceptor and all parties to the bill prior to that holder."

"Holder" is defined as the payee or indorsee of a bill or note who is in possession of it, or the bearer of the instrument, the bearer being defined as the person in possession of a bill or note payable to bearer. It is clear that the Plaintiff is the indorsee of the 1st and 2nd cheques who is in possession of such cheques. The Plaintiff is clearly the holder of the 1st and 2nd cheques. In relation to the 3rd cheque which was an order cheque of which the bank was not an indorsee, Mr. Hui, Counsel of the Plaintiff referred to Midland Bank Ltd. v. R. V. Harris, Ltd.[1963] 2 All ER 685. In this case the Plaintiff bank had an agreement with his customer S that S should be allowed to draw on his current account with the bank against uncleared cheques that had been credited to his account including in particular two cheques the subject of the claim. The two cheques were drawn by the defendants and both being order cheques which were payable to a third party. There was no indorsement on the cheques. It was held that "the plaintiff bank was holder of the cheques within the definition of s. 2 of the Bills of Exchange Act (similar to section 2 of the Bills of Exchange Ordinance). That definition includes not only an indorsee but also a bearer. 'Bearer' is defined by s. 2 of the Bills of Exchange Act as the person in possession of a bill or note which is payable to bearer. By s. 8;(3) of the Bills of Exchange Act of 1882 (similar to s. 8 (3) of the Bills of Exchange Ordinance), a bill is payable to bearer if the only or last indorsement on it is an indorsement in blank. Section 2 of the Cheques Act of 1957 (similar to section 84 of the Bills of Exchange Ordinance ) gives to the banker the same rights as he would have had if, on delivery, the holder, Mr. Smith, had indorsed the cheque in blank" (page 687 of the Judgment at lines D to E).

48.Section 84 of the Bills of Exchange Ordinance states,

" A banker who gives value for, or has a lien on, a cheque payable to order which the holder delivers to him for collection without indorsing it, has such (if any) rights as he would have had if, upon delivery, the holder had indorsed it in blank."

49.The evidence of Mr. Wong, PW1, shows that Lau Yuk Chung and Yim Yuen owed the bank a lot of money and this cheque was paid into the joint account of Lau Yuk Chun and Yim Yuen to repay the sums they owed.

50.In Byles on Bills of Exchange and Cheques at para 18-19 on page 226 thereof, it states,

"Bankers have a general lien on all securities for money which are deposited with them as bankers, in the way of their business . . ."

It is clear therefore that the Plaintiff is a "holder" of the 3rd Cheque.

51.There is no dispute that the cheques are complete and regular on the face of them. Section 30(2) of the Bills of Exchange Ordinance state that,

" Every holder of a bill is prima facie deemed to be a holder in due course; but if, in an action on a bill, it is admitted or proved that the acceptance, issue, or subsequent negotiation of the bill is affected with fraud, duress, or force and fear, or illegality, the burden of proof is shifted unless and until the holder proves that, subsequent to the alleged fraud or illegality, value has in good faith been given for the bill.:"

52.As I have accepted the evidence of Mr. Wong, PW1, and rejected the evidence of knowledge of fraud or of collusion on the part of Mr. Wong, PW1, the evidence is that the Plaintiff took the cheque in good faith and at the time the cheques were negotiated to the Plaintiff, the Plaintiff had no notice of any defect in the title of the person who negotiated it. As regards whether value had been given by the Plaintiff for the cheques, it is the evidence of the Plaintiff that Central Plaza, Top Summit and Yim Yuen were indebted to the bank. Hence value had been given.

53.Paragraph 23-74 of Byles on Bills of Exchange and Cheques at page 354 it states,

"A bank may also become a holder for value by virtue of having a lien on the order cheque, as where the bank collects for an overdrawn account or for an account which becomes overdrawn during the process of collection."

54.Reliance is placed on section 27(3) of the Bills of Exchange Act which is similar to the Bills of Exchange Ordinance.

55.In view of the aforesaid, it is clear that the Plaintiff is a holder in due course of the 3 cheques. S.38(b) of the Bills of Exchange Ordinance states:-

“(b) where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill;”

2nd Issue

56.As stated aforesaid, as I have accepted the evidence of Mr. Wong, PW1, there is no evidence of knowledge of fraud, or illegality or defect in title of the 3 cheques on the part of the Plaintiff.

3rd Issue

57.As already referred to aforesaid, the Plaintiff has given value for the 3 cheques.

4th Issue

58.The Plaintiff's Counsel submits that as the 1st and 2nd cheques were marked "Insufficient Funds" and the 3rd cheque was marked "Account Closed", notice of dishonour could be dispensed with by virtue of s. 50 (2) (c) (iv) of the Bills of Exchange Ordinance. The sub-section states,

"(2) Notice of dishonour is dispensed with -

(c) as regards the drawer, in the following cases, namely -

(iv) where the drawee or acceptor is, as between himself and the drawer, under no obligation to accept or pay the bill；"

59.The case of Lukin Ltd v Collins Industrial Co Ltd [1985] 2 HKC held that,

"If there were insufficient funds in the account of the drawer of a cheque, the bank was under no obligation to pay the cheque. In the present case, on the face of each of the dishonoured cheques was clearly stated 'insufficient funds'. Therefore, there was no obligation on the bank to honour the cheques. The notice of dishonour was dispensed with under s. 50(2)(c)(iv)."

60.In the same way a bank is under no obligation to pay the cheque where the account is closed. Hence it is clear that notice of dishonour is dispensed with in respect of each of the 3 cheques.

61.Having so found in respect of each of the issues, I find that the Plaintiff is entitled to judgment in respect of the three cheques.

62.Judgment for the Plaintiff against the Defendant in the sum of HK$100,000.00, HK$250,000.00 and HK$250,000.00 together with interest thereon at judgment rate in respect of the sum of $100,000.00 from 28th September 1998 and in respect of the sum of $250,000.00 from 20 October 1998 and in respect of the sum of HK$250,000.00 from 30th October 1998 until judgment and thereafter at judgment rate until payment. Costs of the action be to the Plaintiff to be paid by the Defendant to be taxed if not agreed. Certificate for Counsel.

Representation:

Mr. Lawrence Hui instructed by Messrs. K.W. Ng & Co. for the Plaintiff.

Defendant represented by Mr. Tsang Cheung Kang, present.