The Court of Appeal’s recent decision in Huang Qingzhan v China Ding Yi Feng Holdings Ltd [2023] HKCA 237 reversed the decision of Linda Chan J at the Court of First Instance and held, inter alia, that delivery of a cheque to a bank constitutes an effective transfer to a specified account.  The case serves as a reminder for note issuers and subscribers on the importance of clear drafting and providing sufficient and accurate payment information so as to avoid any ambiguity and unnecessary delay in payment. 

In that case, the Court of Appeal held that the subscriber was under an obligation to provide accurate, adequate and up-to-date information of the designated bank account for receiving interest payment, and that his failure to do so will not permit him to take advantage of his own wrong based on what is called the “prevention principle”. 

Key findings of the case are summarised below.

Background 

China Ding Yi Feng Holdings Limited (the “Company”), a company listed on The Stock Exchange of Hong Kong Limited and formerly known as China Investment Fund Company Limited, issued notes in the aggregate principal amount of HK$10 million (the “Notes”) to a Mr. Huang Qingzhan (“Huang”) through the introduction of a broker, Guoco Capital Limited (“Guoco”). The Company and Huang entered into a subscription agreement (the “Subscription Agreement”) which set out, amongst other things, Huang’s Mainland address and HK address, as well as details of a bank account maintained by DBS Bank (Hong Kong) Limited in the name of Guoco (the “Account”) set out in Schedule 5 thereto. 

The first interest payment under the Notes was due on 31 March 2016. On that date, the Company delivered to the bank the first interest payment in a cheque payable to Guoco for payment into the Account (the “Cheque”), which was later returned to the Company on the basis that the bank account details provided were insufficient for the bank to process it. The Company then delivered the Cheque (together with 3 other cheques) to Guoco (which was also the address provided by Huang) on the same day, but the cheques were later returned to the Company on 24 May 2016 since the recipient, Mason Securities Limited (i.e. the new name of Guoco), claimed that it had no agreement with the Company and could not receive the cheques. After a number of correspondence, the Company eventually sent a cheque drawn in favour of Huang to his solicitors in satisfaction of the first interest payment, about five months after the first interest payment due date. 

Huang claimed that he was entitled to seek early redemption of the Notes due to the Company’s delay in making the first interest payment in breach of the conditions of the Notes. Linda Chan J at the Court of First Instance found in favour of Huang and allowed him to seek early redemption of the Notes on the basis that (i) the Company failed to make the first interest payment on time, and (ii) there was a default as the breach continued for more than five days, amounting to breaches of conditions of the Notes. 

The Company subsequently appealed to the Court of Appeal, which ruled in favour of the Company. Huang was unable to seek early redemption of the Notes despite the Company’s delay in making the first interest payment since Huang failed to provide sufficiently up-to-date details of his bank account for the bank to process such payment. 

“Registered Account”

A question raised in the appeal was whether the Account in Schedule 5 to the Subscription Agreement should be regarded as the “registered account” designated by Huang for the purpose of receiving payments from the Company. 

The Court of Appeal pointed out that the Subscription Agreement (including Schedule 5), the notes instrument and the conditions ought to be read together and consistently with one another so far as reasonably possible and noted that the Account was expressly referred to as the registered HKD account for payment purpose. Hence, it was held that the Account was clearly the “registered account” for payment purpose.

Further, given that the parties well understood that there would be a series of payments in Hong Kong dollars to be made by the Company under the Notes, the Court of Appeal found that it was commercially sensible for the parties to agree on a designated HKD account with a bank in Hong Kong for payment purpose, especially when Huang was a Mainland resident.

Does cheque constitute an effective transfer?

There were two prescribed payment methods under the conditions of the Notes, namely:
(i) by “immediately available funds by transfer in Hong Kong dollars to the registered account of the Noteholder” or 
(ii) by “Hong Kong dollar cheque drawn on a bank in Hong Kong mailed at the risk of such Noteholder to the registered address of the Noteholder if he does not have a registered account”. 

The Court of Appeal explained that the first payment method comprised of four components, that the payment was (i) made in “immediately available funds”, (ii) by “transfer”, (iii) to the “registered account” of the noteholder, and (iv) with the relevant payment instruction being given on the payment due date. 

By its definition, a cheque is an unconditional order in writing given by the drawer of the cheque to his banker to pay on demand a sum of money to the payee or the bearer. It was held that, by delivering the Cheque to the bank, the Company in substance gave a payment instruction to the bank to transfer the amount into the Account since transfer of funds would have been effected had the Cheque been accepted by the bank and cleared. Therefore, presenting a cheque to the payee’s bank for deposit into the payee’s account (and not simply giving it to the payee) could be considered as an effective transfer so long as the account is ultimately credited with money. 

Further, the Court of Appeal found that despite Huang’s claim that he did not know why his information relating to Guoco’s account appeared in the Subscription Agreement, this alleged lack of knowledge does not assist his case since the information must have been provided by him or by Guoco on his behalf, and he is bound by the Subscription Agreement the moment he signed it. It is also an implied term of the Subscription Agreement that Huang is under an obligation to provide accurate, adequate and up-to-date information of the bank account for receiving payment so as to give business efficacy in a commercial setting. 

Should the alternative payment method be used?

A question arose on whether the Company should have mailed the Cheque to Huang’s Mainland address. 

The Court of Appeal took the view that, based on the language of the relevant provisions, the Company was not entitled or obliged to use the alternative method to make the first interest payment as the Subscription Agreement stated that the alternative method could only be resorted to when Huang did not have a registered account, which the Court of Appeal concluded that he did have. Even though there are alternative methods for making the first interest payment, such methods shall only be applicable where the noteholder does not have a registered account in accordance with the drafting of the Subscription Agreement.

Prevention principle – A person is not permitted to take advantage of his own wrong

The Company complained that the delay in making the first interest payment was due to the fault of Huang, who should be precluded by the “prevention principle” from seeking early redemption of the Notes. 

The “prevention principle” was explained by Ribeiro PJ (with whom the other members of the Court of Final Appeal agreed) in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381. This long-established legal principle states that a person is not permitted to take advantage of his own wrong, whatever the contract may say and however clearly the contract may appear to confer on the wrongdoer an unqualified right to enjoy such advantages. In the contractual context, two elements must be present in order to apply the “prevention principle”, namely (i) a relevant breach of contract by a party, and (ii) contractual rights or benefits which the party is seeking to assert or claim arise as a direct consequence of its own prior breach. 

Applying the prevention principle in this case, it was held that Huang was in breach of his obligation to provide accurate, adequate and up-to-date details of the Account to receive payment, and was therefore not entitled to early redemption of the Notes on the basis that the default would not have continued for five days but for Huang’s own breach of his obligations.

Conclusion

The judge at the first instance took a narrower and more legalistic approach to interpret the relevant contract clauses, whereas the appeal court applied a more holistic and balanced approach in their interpretation which would give effect to business efficacy. Chow JA commented that: 

“Generally speaking, a transfer of money to a bank account may be effected in a variety of ways, eg by depositing cash into the bank account, inter-bank transfer/CHATS, intra-bank transfer, telegraphic transfer, or some other more modern methods such as FPS, PayMe etc. So long as the account is ultimately credited with the money, there would be an effective transfer.”

This case reminds us of the importance of clear drafting and providing sufficient and accurate payment information in a contract to avoid ambiguity and unnecessary delay in payment. It also reminds us that one is not allowed to take advantage of his own wrong such that a party cannot claim damages for a breach of contract if the breach was caused by its own prior breach. 

Key takeaways

A few points to consider for issuers and subscribers:

• A contract should set out permissible (or impermissible) payment methods as clearly as possible and specify relevant payment details where applicable. 
• A payee should ensure that his payment details set out in a contract are correct, accurate and up-to-date. The burden rests on a payee to do so. 
• A cheque, upon being presented to the payee’s bank for deposit into the payee’s account, should be considered as effective so long as the account is ultimately credited with money. It is advisable for a payor to deposit a cheque in advance to allow time for clearance (if cheque is permitted and used) and seek clarification, and use alternative method(s) in case of unsuccessful payment.
• According to the “prevention principle”, one is not permitted to take advantage of his own wrong.

Pan Tsang and Ruby Cheng

 

For specific advice, please contact:-  
Chris Lambert | clambert@robertsonshk.com | + 852 2861 8417
Frank Szeto | frank@robertsonshk.com | + 852 2861 8436
Pan Tsang | pan_tsang@robertsonshk.com | +852 2861 8487

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.