Shing Fung Finance Company Limited v. Waylee Textiles Limited

HCA007708/1997

1997, No.A7708 and A8077

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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Coram: Hon Mr Justice Cheung in Chambers

Date of hearing: 7 November 1997

Date of delivery of judgment: 7 November 1997

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J U D G M E N T

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The appeal

1. The Plaintiff is a licensed money lender. On 16^th June 1997, the Plaintiff discounted three cheques drawn by the Defendant in favour of Kaworld Textile Limited ("Kaworld"). Kaworld negotiated the cheques to the Plaintiff by indorsement at the back of the three cheques. The Plaintiff sued on the three cheques as holder in due course against the Defendant and applied for summary judgment. The Master granted the Defendant unconditional leave to defend. The Plaintiff now appeals.

Defendant's argument

2. A holder in due course is someone who, inter alia, has taken a bill complete and regular on the face of it. The Defendant argues that the three cheques were not complete or regular on their face. The argument proceeds like this. The words "or bearer" were struck out from the cheques, hence they were order cheques payable to Kaworld or its order. However, the indorsement by Kaworld was in blank and by virtue of s.34(1) of the Bills of Exchange Ordinance ("the Ordinance"), the cheques become payable to bearer. Thus there is a discrepancy, because on the one hand, the cheques were payable to order and on the other, as a result of the indorsement, they became payable to bearer.

Cheques regular

3. I am unable to accept this argument. What the law requires is that when the Plaintiff took the cheques, they must be complete and regular on their face. In Arab Bank Limited v. Ross [1952] 2 Q.B.216, a distinction was drawn between validity and regularity. Lord Denning at p.227 stated that :

"... the question is when is an indorsement irregular. The answer is, I think, that it is irregular whenever it is such as to give rise to doubt whether it is the indorsement of the named payee."

4. Under s.31(3) of the Ordinance, a bill payable to order is negotiated by the indorsement of the holder completed by delivery. This is what had happened in this case. Byles on Bills of Exchange 26^thed. at p.87 stated that :

"A bill drawn payable to order becomes payable to bearer by a subsequent indorsement in blank."

The cheques here were order cheques payable expressly to Kaworld : s.8(4). However, by virtue of s.8(5), the cheques were nonetheless payable to Kaworld or its order at its option. Kaworld had by the indorsement made the cheques payable to the Plaintiff. The so-called discrepancy simply does not arise in this case.

5. There is no requirement in law that a cheque payable to order can only be negotiated by the payee by specific indorsement. Certainly no authority has been cited that by indorsing in blank the cheques would become irregular on their face. The observation of Rhind J. in BBC (Hong Kong) Limited v. Hong Kong Yung Hong Trading Company Limited [1985] HKLR 391 showed that the normal negotiation of order cheques in Hong Kong was by indorsement in blank. Furthermore, under s.34(4), any holder may convert the blank indorsement into a special indorsement by writing above the indorser's signature a direction to pay the bill to the order of himself or some other person. If the holder is to have such a right, surely it cannot be said that the cheques were irregular, if, on their face, an indorsement in blank were made.

Holder in due course

6. This, as I see it, is the only point in this appeal. Once this argument is rejected, then the presumption of value and good faith under s.30 applies. In fact, the Plaintiff produced evidence of the value it had given for the three cheques and there is no evidence of any lack of good faith.

Personal defence

7. By virtue of s.38(b), the Plaintiff holds the cheques free from any defects in title of prior parties as well as from mere personal defences available to the prior parties amongst themselves. What the Defendant said regarding the dealings with Kaworld is clearly personal defences which the Plaintiff is not bound. In gist, the Defendant said that Kaworld had given five cheques to the Defendant to settle Kaworld's liability to the Defendant. In return the Defendant gave Kaworld two cheques to settle its own liability to Kaworld, and one cheque to help Kaworld in its financial difficulties. The three cheques were given on the condition that if Kaworld's cheques were not honoured, Kaworld would not present the Defendant's cheques, and by way of implied condition, the cheques were not negotiable. Kaworld's cheques were later dishonoured. Hence Kaworld had no right to negotiate the cheques. Kaworld had disappeared and had committed fraud.

8. There is no evidence that the Plaintiff was aware of any of these. In any event, the Plaintiff was not bound because it was a holder in due course of the three cheques.

Conclusion

9. In my view, there is no defence to the Plaintiff's claim and judgment should be given on the three cheques. Accordingly, the appeal is allowed and judgment is given to the Plaintiff as claimed.

Representation:

Mr Luiz da Silva Pedruco, inst'd by M/s David Y.Y. Fung & Co., for the Plaintiff in both actions.

Mr Maurice J. Chan, inst'd by M/s Au Yeung, Cheng, Ho & Tin, for the Defendant in both actions.