The China State Bank Ltd v. Leung Lin Yan t/a Man Nin Clothing Co
Read the full judgment text of HCA 1983/1970 on BabelCite. This High Court CFI judgment.
1. This seemingly straight-forward case has ranged widely over the field of banking and because the estimate of four days for the trial of the action was exceeded by 2 1/2 days, the trial being further interrupted by a typhoon, there had to be an adjournment over the Long Vacation. In addition, my difficulty in the case has been multiplied many times by the fact that I was not given copies of many of the documents (at least until very late in the proceedings) and was therefore unable to follow t
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HCA001983/1970 IN THE SUPREME COURT OF HONG KONG ORIGINAL JURISDICTION ACTION NO. 1983 OF 1970 -----------------
----------------- Coram: Huggins, J. Date of Judgment: 22nd October, 1971. ----------------- JUDGMENT ----------------- 1. This seemingly straight-forward case has ranged widely over the field of banking and because the estimate of four days for the trial of the action was exceeded by 2 1/2 days, the trial being further interrupted by a typhoon, there had to be an adjournment over the Long Vacation. In addition, my difficulty in the case has been multiplied many times by the fact that I was not given copies of many of the documents (at least until very late in the proceedings) and was therefore unable to follow the trend of some of the evidence at the time. 2. The Plaintiff bank sued as the bearers and holders in due course of sixteen cheques, payment of which was stopped by the Defendant, the drawer. The cheques were drawn in favour of Seng Kee Co., who endorsed them in blank and delivered them to the Plaintiffs. Seng Kee Co. were importers with connections in China and the Defendant purchased from them materials for the manufacture of trousers over a period of several years. The sixteen cheques were issued on account of the purchase price of 80,000 yards of twill ordered by the Defendant in December, 1969. According to the Defendant, and I accept this evidence, he had previously purchased materials in smaller lots, not exceeding about 4,000 yards. In late 1969 Seng Kee Co. informed him that as a result of circumstances arising from the cultural revolution in China importers in Hong Kong were being allotted a quota and that in consequence materials might be more difficult to obtain in future. Thereupon the Defendant agreed to take up the whole of Seng Kee Co. 's quota of 80,000 yards for delivery during the months of June to September 1970. The contracts stipulated that payment was to be effected by cheques post-dated sixty days, which were to be delivered to the vendors upon receipt of notice that the goods were packed and ready for shipment from the manufacturers. Seng Kee Co. on divers dates from 8th April, 1970 onwards gave notice to the Defendant that shipments of goods would arrive two months later and thereupon the Defendant handed over a total of sixteen cheques and Seng Kee Co. issued sixteen receipts. 3. The only substantial dispute as to the facts relates to the circumstances in which Seng Kee Co. delivered the cheques to the Plaintiffs. Seng Kee Co. had a current account with the Plaintiffs but they apparently required credit facilities to enable them to finance the importation of the goods ordered by the Defendant. According to the bank the credit took the form of an overdraft authorised upon the current account. They say the arrangement was that a maximum limit of overdraft was agreed but that no part of this credit would in fact be granted except upon delivery to the bank of post-dated cheques which, by virtue of their having been endorsed in blank, were payable to bearer. Thus, when a customer of Seng Kee Co. such as the Defendant paid for goods by post-dated cheque Seng Kee Co. would deposit the cheque with the bank and the bank would then allow Seng Kee Co. to draw on their current account to the extent of that cheque. Upon the due date the bank would credit the cheque to the current account to offset the overdraft which had been allowed against it. As I understand the position, it is not disputed that if this version of the facts is true the bank did become holders of the cheques so deposited, but the case for the Defendant is that the agreement between the bank and Seng Kee Co. was different from that just cutlined: he contends that the cheques were only to become security in the hands of the bank if and when the goods were received in Hong Kong and the bank released those goods without being paid in full. In effect he says that, the goods never having reached Hong Kong, the Plaintiffs were merely agents for collection. It is contended on behalf of the Plaintiffs that that has not been pleaded but in my view it was not necessary that it should be. 4. Counsel for the Defendant relies upon some documents signed by Seng Kee Co. as being evidence of the agreement they made with the bank. The first such document - or rather there is a series of documents - was admitted as Ex.C: there are three forms of "Undertaking for Repayment of Overdraft" and two of them are accompanied by a "Letter of Guarantee". The forms of Undertaking are in these terms:
The Undertakings therefore contain no reference to any condition that the overdraft account which had been opened might be drawn against only to the extent of post-dated cheques lodged with the bank: the only consideration for the opening of the account is stated to be the undertaking to repay. The two Letters of Guarantee are signed only by the two partners of Seng Kee Co. and at least in reality give no added protection to the bank. The Letters of Guarantee commence:
Again there is no mention of any requirement that post-dated cheques be lodged. However, it is a fallacy to regard these documents as though they were an agreement in writing which it was sought to vary by parol evidence. They are not agreements binding the bank in any way. I cannot disregard the evidence of the bank officials and I have no doubt at all they were telling me the truth, supported as they were by the forms of application in Ex.D. I am fully satisfied that those forms were signed on behalf of Seng Kee Co. I do not overlook the book (Ex. AF) which shows credit facilities in excess of those disclosed by the Undertakings (Ex. C), but I find nothing in that book which makes the case of the bank insupportable. Mr. Shen was cross-examined at very great length upon this book and since I was not supplied with a copy I was, of course, completely unable to follow the evidence at the time. Having subsequently read through the evidence with the book in front of me I am still at a loss to understand what most of the cross-examinations sought to establish. There are two things recorded in this book, (a) the maximum limit of approved overdraft facilities allowed against post-dated cheques and (b) the daily total of post-dated cheques actually deposited with the bank as security for such overdraft facilities. As might be expected the total of cheques deposited was sometimes more and sometimes less than the approved limit of overdraft. The fact that in the took the total of cheques deposited exceeds that of the permitted overdraft does not indicate that an overdraft has been allowed in excess of the former figure and, in consequence, throw doubt on the alleged relationship between the sixteen cheques and their related application slips (Ex.D) and the book (Ex. AF). Certainly I see nothing suspicious in the daily totals of cheques deposited. It has, however, been argued that the approved limit of overdraft facilities as shown in this book do not coincide with the figures shown in the Undertakings (Ex.C). Mr. Shen said that they should. I therefore set out the two sets of figures:
It does appear that between 3rd January, 1968 and 24th October, 1968 the limit of credit was set at a sum of $200,000 although the only relevant Undertaking in Ex.C was in the sum of $150,000. Unfortunately these particular figures were never clearly drawn to the attention of Mr. Shen in cross-examination and I have no explanation directed specifically to them. He did indicate that whenever an increase in approved credit required a new entry in Column 2 of the book (Ex. AF) an additional Undertaking had to be made out. He further said that when the figure was reduced (or, as he put it, "when the increased overdraft facility was finished") the Undertaking would be given back. It may be, therefore, that another Undertaking in the sum of $50,000 or some larger sum did exist between 3rd January, 1968 and 24th October, 1968 and has since been returned to Seng Kee Co. Mr. King said that on 17th April, 1970 there was an Undertaking for $50,000 which was returned when the Undertaking dated 11th May 1970 was signed. He did not mention this when he was questioned about the latter Undertaking in the first instance but only when I put some questions to him at the end of his evidence. However, I am inclined to believe that this was not a fabrication on the spur of the moment. Similarly it may be that the same or another Undertaking covered the period 29th May, 1969 to 2nd June, 1969, but that is so short a period that in any event I would regard the discrepancy as of no great significance. I find nothing in the evidence of Mr. King which leads me to have any doubt that the explanation given by Mr. Shen is probably true. The only matter upon which I have had any doubt at all is the evidence of Mr. Shen that on 17th April, 1970, when a cheque with a number ending in 659 was drawn, the bank had allowed Seng Kee Co. "to draw up to $300,000 because they put in a cheque temporarily as security". On his evidence that would normally have required the signature of an Undertaking like those in Ex.C and an increase in the total of approved credit shown in Column 2 of the book (Ex. AF). Again, this specific point was never clearly put to him when the book had been produced and he did say that "temporary extensions" might be allowed upon an application, of the kind found in Ex. D without its being recorded in the book. That could explain his previous answer and it would still be true when he said that the post-dated cheques facility and the overdraft facility were not entirely separate and unrelated. No one from Seng Kee Co. was called either to give oral evidence or to produce documentary evidence which might have raised the least doubt that the agreement between the company and the bank was such as that to which the bank officials have testified. I am satisfied that the Plaintiffs are holders otherwise than for collection of the cheques which were delivered to them and that the Plaintiffs gave value in that they agree to give credit to the full value of the cheques deposited. They are holders for value and need not rely upon s.27(3) of the Bills of Exchange Ordinance to be deemed to be holders for value. Contrary to the assertion of counsel for the Defendant the Plaintiffs do contend that they are holders in due course: they so pleaded, they have so argued and I think their plea is well founded. 5. Then it is said that Seng Kee Co. acquired the cheques by fraud and that the bank took them with notice of that fraud. It was sought to prove the fraud by, inter alia, showing that one of the partners of Seng Kee Co. admitted to the Defendant that the 80,000 yards of twill had not been ordered from China. In my view that is hearsay and is not available as evidence that the goods had not been ordered. I do not for a moment say that what Tsang Cheung of Seng Kee Co. said to the Defendant is not admissible at all. If it had been inadmissible I would not have allowed it to be given. It is not, however, in these proceedings, to which Seng Kee Co. are not a party, admissible evidence as to the truth of what was said: it does not come within the established exceptions to the hearsay rule. Nor do I say that any evidence of fraud would necessarily have to come from Seng Kee Co. themselves. I believe that the bank did not know until long after the deposit of the last cheque by Seng Kee Co. that that company was in financial difficulties. Great play was made of the fact that evidence was given of a change in policy by Chinese exporters whereby they ceased to deal on the basis of delivery against payment and insisted on Letters of Credit. It is said that this change took place in 1970 and evidence was then adduced that two customers of the bank had received delivery against payment in 1970 - one of them late in 1970. I do not believe there was a deliberate attempt by the bank to mislead me and I accept that the change of policy did not take place suddenly but over an extended period, probably as different exporters adopted the new policy in relation to some of all of their customers. Nor do I attach much weight to the fact that generally there was an increase in the initial sums paid towards the retirement of bills accepted by Seng Kee Co. Counsel for the Defendant conceded that he had to rely upon the sum total of a number of matters which he submitted pointed to fraud. In my view what is left after the hearsay has been rejected does not begin to prove fraud and I am very far from being satisfied, even on a balance of probabilities, that Seng Kee Co. acquired the cheques in circumstances amounting to fraud. It is not without significance that in his evidence the Defendant never said that on any occasion when he was asked for a cheque he was told goods had been shipped: he said he was told the goods would arrive "soon" or at some future date. I am not even persuaded that the bank were negligent in failing to make enquiries of the Defendant when the note Ex. A5 (agreed to be dated 17th June, 1970) was received. 6. Even if fraud had been proved it is clear that this claim must succeed. The Plaintiffs would have to show that they have given value in good faith. Mr. Bernacchi has submitted that there are six matters which point to the absence of good faith. At the highest, in my view, it can be said that some of them are consistent with the Plaintiffs' not having had good faith, but that is a very different thing and on the totality of the evidence I am satisfied they acted in good faith. It may well be that if the bank had considered for what the cheques had been given to Seng Kee Co. they would have guessed that they were in payment for goods from China, but I accept that the bank did not consider the question: they were not concerned with it and were under no duty to concern themselves with it. Even less did they know that the cheques were for goods which had never been shipped. They have satisfied me that they gave consideration in that the cheques were negotiated to them as security for the overdraft and it follows that the Plaintiffs would have discharged the burden of proof which would have been upon them by virtue of s.30(2) of the Bills of Exchange Ordinance. 7. The Defence put in issue a great many matters which ought clearly to have been admitted, for example that the sixteen cheques were drawn on divers banks, that they were payable "or bearer", that they were crossed generally, that they were endorsed in blank, that they were so endorsed by Seng Kee Co., that the Plaintiffs presented the cheques, that they were dishonoured and that the Defendants counter-rended payment. All these matters I find to have been proved. There must be judgment for the Plaintiffs in the sum claimed with interest at 8% p.a. from action brought until judgment and the Defendant must pay their costs on a common fund basis. 22nd October, 1971. Representation: Litton, Q.C. & Sakhrani (Lau Chan Ko & Co.) for Plaintiffs. Bernacchi, Q.C. & P. Woo (T.M. Chow & Co.) for Defendants. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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