Easy Fortune Property Ltd v. Yung Chun Him
Read the full judgment text of HCA 1484/2014 on BabelCite. This High Court CFI judgment was delivered on 12 August 2016.
1. This is the defendant’s appeal against the Order of Master J Wong made on 14 January 2016. To properly understand the real issues involved, it is necessary to set out the relevant procedural history.
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HCA 1484/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1484 of 2014 ________________________
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________________________ JUDGMENT ________________________ Procedural history 1.This is the defendant’s appeal against the Order of Master J Wong made on 14 January 2016. To properly understand the real issues involved, it is necessary to set out the relevant procedural history. 2.The plaintiff is a licensed moneylender. Its claims against the defendant are based on a Loan Agreement (dated 24 May 2012); a Supplemental Agreement (dated 24 May 2012) in Chinese; and a Legal Charge over a property owned by the defendant (“the Property”). The principal sum of the loan was $5,000,000. Pursuant to the terms of the Loan Agreement, the defendant was obliged to make a monthly repayment of interest at the rate of 21.6% per annum (ie 1.8% per month). By the Supplemental Agreement, the plaintiff agreed to charge a preferential rate of interest at 9.6% per annum (ie 0.8% per month) provided that the defendant would make punctual repayments. The monthly interest repayment became $40,000. The principal would be repayable in a lump sum at the end of 12 months (renewable for another 12 months). As a security for the loan, the defendant executed the Legal Charge in favour of the plaintiff. It is not disputed that the principal sum of $5,000,000 was in fact received by the defendant. It is also not in dispute that the defendant made a total of $800,000 as interest repayment and had since 24 February 2014 defaulted in making any further payment. The plaintiff instituted this action on 1 August 2014 to claim for outstanding principal and interests and an order of delivery of possession of the Property. This was pursuant to leave granted by Master Lo under HCB 1233/2014 on 24 July 2014. 3.The defendant petitioned for his own bankruptcy and was declared bankrupt by an order of the court on 1 April 2014. In the affirmation filed in support of his petition, the defendant stated that he owed the plaintiff $5,000,000 together with interests. 4.In this action, the defendant acts in person. On 12 November 2014, he filed a “Statement of Defence and Counterclaim”. By the Counterclaim, he sued the plaintiff as “1st defendant by Counterclaim” and Forever Property Finance Company Limited (“FPF”) as “2nd defendant by Counterclaim”. 5.By a summons filed 30 December 2014, the defendant applied for default judgment on his Counterclaim against FPF. Since the defendant was a bankrupt, Master Lai adjourned the hearing to 23 March 2015 and required the Trustee in Bankruptcy to attend on the next hearing. 6.In the meantime, by a summons filed 19 March 2015, the plaintiff applied for leave to enter judgment against the defendant for delivery of possession of the Property pursuant to Order 88, rule 1 of the Rules of the High Court, Cap 4A. It also applied to strike out the Counterclaim against it (as “1st defendant of the Counterclaim”) pursuant to Order 18, rule 19. 7.By an Order dated 22 June 2015 (filed 5 August 2015), Master Lai struck out the Counterclaim against the “1st and 2nd defendants by Counterclaim”. Hearing of the plaintiff’s summons filed 19 March 2015 was adjourned to 24 July 2015. 8.On 30 September 2015, the plaintiff issued a summons replacing and withdrawing the 19 March 2015 summons. The plaintiff applied for leave to enter judgment against the defendant for its monetary claims and for the delivery of possession of the Property. It also applied for the striking out of the Defence filed 12 November 2014 pursuant to Order 18, rule 19 and the inherent jurisdiction of the court. 9.The hearing of the 30 September 2015 summons took place before Master J Wong on 14 January 2016. After the hearing, he ordered that:
10.By a Notice of Appeal dated 19 January 2016, the defendant appealed against the Order of Master J Wong. The defendant seemed to be under the erroneous impression that Master J Wong had struck out his Defence in its entirety. Master J Wong did not. The defendant is perfectly entitled to defend any claim for interest over and above the monthly sum of $40,000. In other words, Master J Wong decided that the defendant is obliged to repay the principal of $5,000,000 and to repay monthly interest at 0.8% per month, ie $40,000 per month. He thus ordered the total sum of $5,960,000 representing the principal plus 24 months’ interest, ie from the date of default in February 2014 to the date of his Order in January 2016. However, Master J Wong had further granted “interest on the sum of $5,000,000 at statutory rate from 1 August 2014 until 14 January 2016 at statutory rate and thereafter at judgment rate until payment”. This calls for closer examination hereunder. 11.In support of his appeal, the defendant also applied for adducing new documentary evidence by a summons issued on 23 February 2016. By an Order from G Lam J dated 6 April 2016 (filed 28 April 2016), it was ordered that:
12.YCH–1 is entitled “Statement of Defence and Further Defence”. It was in fact adopted from the earlier “Statement of Defence and Counterclaim” file on 12 November 2014. What the defendant did was to delete the word “Counterclaim” and substituted it with the words “Further Defence”. Similarly, the paragraphs that originally formed the Counterclaim against the plaintiff and FPF were merely changed into part of the “Further Defence” raised against the plaintiff. There was otherwise no change to the contents. The case of the defendant in opposition to the plaintiff’s claims is now to be considered with reference to all the paragraphs pleaded in the proposed re-named “Defence and Further Defence”. 13.The following main points can be filtered from the proposed re-named “Defence and Further Defence”:
This appeal 14.With the Order of Master J Wong properly understood, the defendant is at liberty to argue all his points in so far as the plaintiff seeks to recover interests over and above $40,000 per month. What Master J Wong determined was that the defendant is obliged to repay the principal sum of $5,000,000 which he no doubt had received and used. Master J Wong also determined that the defendant should pay for interest in the sum of $40,000 per month (ie 9.6% per annum) from the date of default to date of Judgment. He therefore ordered the sum of $960,000.00 (ie 24 months of $40,000) as interest for the period between 24 February 2014 and 14 January 2016. 15.I have difficulties in understanding why Master J Wong further ordered that “interest on the sum of $5,000,000 at statutory rate from 1 August 2014 until 14 January 2016 and thereafter at judgment rate until payment”. This seems to be a double award of interest covering at least the period from the date of Writ to date of Judgment. I asked Mr Kenneth Wong, Counsel for the plaintiff, for assistance at the hearing. Mr Wong fairly accepted that it must have been a mistake. In fact he pointed out that the draft order submitted by his instructing solicitors did not contain such a prayer. He confirmed that the plaintiff is contended with merely the judgment of $5,960,000 as having included interest up to the date of judgment. 16.Mr Wong also accepted that this being an application for striking out, the factual allegations of the defendant shall be assumed in his favour. Furthermore, he accepted that as a result of the Order of G Lam J, I have to consider the “Defence and Further Defence” as if it is now the pleaded case of the defendant. Hence, the real issues in this appeal are: (i) putting the defendant’s case to the highest, is it correct that he should at least be ordered to repay the principal sum plus the contractually agreed interest rate of 9.6% per annum (ie $40,000 per month); and (ii) whether the plaintiff should be allowed to enforce the security and to what extent. Locus standi 17.Mr Wong raised a preliminary objection. He submitted that the defendant, being a bankrupt, has no locus standi to bring this appeal. He pointed out that by a letter dated 20 January 2016, the plaintiff’s solicitors wrote to the Trustee in Bankruptcy asking whether consent was given to the defendant to lodge the present appeal. In its reply letter dated 21 January 2016, the Trustee in Bankruptcy stated that they had not given consent. 18.Yet by another letter dated 7 March 2016, the Trustee in Bankruptcy added the following clarification:
19.In my judgment, the lodging of this appeal against the Order of Master J Wong cannot be said to be outside the scope of generally defending against the plaintiff’s claims. The general consent given by the Trustee in Bankruptcy is wide enough to encompass the present appeal. This is also the view of the Trustee in Bankruptcy. It is implicit in the above quoted reply that the Trustee in Bankruptcy did not consider it necessary for a specific consent to be given. 20.The case of Wan Po Jun Mary Pauline v Au Yeung Yee Man (unreported, HCA 1478/2009, 17 May 2016) relied on by Mr Wong is distinguishable. In that case, the plaintiff was at the material time a bankrupt and faced a counterclaim by the defendant seeking an order of possession against the plaintiff in relation to a property. It was the defendant’s case that the plaintiff resided at the property as a licencee and the licence had been revoked. In defending the counterclaim, the plaintiff asserted beneficial ownership of the property. The trustee in bankruptcy wrote:
The trustee also later wrote:
The court observed that in order to defend the counterclaim successfully, the plaintiff must establish that she has a beneficial interest in the property. Yet she cannot establish that because any such interest would have been vested in the trustee. The trustee had pointed out that no interest in any property has been assigned or released to the plaintiff. The court accordingly held that the plaintiff had no defence to the claim of possession. In the present case, the defence raised by the defendant does not depend on the existence of any property right that is vested in the Trustee in Bankruptcy. Furthermore, paragraph 37 of the Judgment of the learned Deputy High Court Judge in Wan Po Jun Mary Pauline v Au Yeung Yee Man stated clearly that it was not a case on locus standi. If it were, the question of whether the trustee in bankruptcy had given the plaintiff consent to defend the counterclaim would have been relevant. 21.In the circumstances, I am of the view that the consent given by the Trustee in Bankruptcy is wide enough to cover the lodging of this appeal and the defendant does have locus standi to bring this appeal. Breaches of the provisions in the Money Lenders Ordinance (“MLO”) 22.I must first commend the defendant for behaving civically at the hearing and presenting his arguments with considerable skill and intelligence. Despite his rather lengthy “Defence and Further Defence”, his arguments were eventually condensed into the following points:
Section 18 23.First of all, Mr Wong accepted that in the Statement of Claim and the Reply, only the English Loan Agreement and the Chinese “貸款優惠書” were mentioned. He however accepted that in fact, the two other Chinese documents “合約附加條款” and the “貸款金額及供款方法確認書” were executed on 24 May 2012 simultaneously with the Loan Agreement. Mr Wong thus effectively accepted that there was a breach of section 18. He however relied on section 18(3). 24.I shall return to this issue in due course. Early repayment clause 25.Mr Wong accepted that the loan documents executed by the defendant included a clause that imposes an administrative charge of 5% of the loan amount upon early repayment of the loan. Section 21 of the MLO is thus engaged. Mr Wong however argued that:
26.I agree with Mr Wong’s submissions in this regard. Collection charges 27.This clause is also included in the “合約附加條款” and it reads:
28.Mr Wong submitted that on a true construction of this clause, the 30% collection charge means 30% of the “instalment” that has been overdue for over 30 days. For instances, the instalment due as of February 2014 was $40,000, the collection charge would be $12,000. Even assuming the instalment reverted to $90,000 under the 21.6% per annum interest rate stipulated in the Loan Agreement, the collection charge would just be $27,000. 29.The defendant however argued that the 30% collection charge would be calculated on the denomination of the overdue principal of $5,000,000 plus $90,000 as overdue interest as of February 2014. His argument was based on Clause 2 of the same “合約附加條款” which gave the lender the right, upon default, to call in the entire loan principal and outstanding interest. He therefore calculated the 30% collection charge to be $1,527,000. Basing on this premise, the defendant would further argue that such a charge would push the effective interest rate to be well beyond the 60% per annum statutory maximum. 30.I agree with the interpretation of Mr Wong and reject the defendant’s argument. Clause 3 consistently referred to the phrases “每一期到期供款”; “該期欠款”; and “追討該期欠款之費用支出” and “該期應邀款項之30%” (emphasis added). It does not deal with the specific situation stipulated under Clause 2 when the lender exercises its right to call in the repayment of the entire outstanding principal and interest. 31.Furthermore, I do not agree with the defendant that levying “collection charge” is in contravention of section 29(10) which reads:
And section 27(3) reads:
32.It is thus clear that both sections 27(3) and 29(10) are directed at the charging of fee (in howsoever form one calls it) for the procurement of a loan or a security thereunder. Imposition of collection charge in the event of default is in my judgment not covered by these sections. Rather, the imposition of such collection charge could arguably amount to charging a default interest rate in some form of a disguise. That may arguably contravene section 22(1)(c) which I will deal with below. Set-up charge 33.On the other hand, the defendant’s complaint of the “set-up charge” of $40,000 does seem to fall within the ambit of section 27(3). The effect of section 27(3) is that the charging of $40,000 was unlawful. The consequence is stipulated under section 27(4) which reads:
34.Hence, even if the defendant’s case is accepted, ie although the set-up charge was received by FPF, it was acting in collusion with the plaintiff and hence the plaintiff should be regarded as sharing this set-up charge with FPF, it does not render the Loan Agreement (and its underlying security) unenforceable. The defendant has at most an arguable case of setting off this sum of $40,000 from the loan principal. On this basis, Master J Wong’s order of repayment of the loan principal of $5,000,000 should be reduced to $4,960,000. Default interest 35.Clause (4) of the Loan Agreement [4] is entitled “Additional interest in Default of Payment” and it reads:
36.Clause (4) 4.1 does not set out the rate of such “further interest” chargeable in case of default. The Loan Agreement purported to set 21.6% per annum as the agreed interest rate. The interest rate of 21.6% was also stated as the “The Rate of Interest Charged on the Loan” in the Memorandum of the Loan Agreement [5]. Yet, at the same time as the execution of the Loan Agreement, the defendant was also required to execute the “貸款優惠書” [6] which stated that so long as the defendant makes punctual monthly repayment (not exceeding five days), he shall be entitled to a “Preferential interest rate of 0.8% pm”. That would be 9.6% per annum. If the defendant shall fail to comply with his obligations under the Loan Agreement, this “preferential agreement” will become void and ineffective. Interest will then be calculated at 1.8% per month (ie 21.6% per annum). As a matter of fact, it can be seen from the plaintiff’s demand letter dated 17 March 2014 that a sum of $1,158,794.52 was charged as “interest payable”. The plaintiff was thus seeking to charge interest retrospectively using the rate of 21.6% by reason of the default. 37.It must have been the view of Master J Wong that the defendant has an arguable case to demonstrate that the arrangement of executing the Loan Agreement and the “貸款優惠書” was a disguise for charging a default interest and hence a contravention of section 22(1)(c). I respectfully agree. Mr Wong in fact fairly accepted that the defendant has such an arguable case. Furthermore, although the plaintiff has not attempted to charge the defendant for “collection charge”, the inclusion of such a clause in the Loan Agreement is arguably a contravention of section 22(1)(c). Mr Wong submitted that even if the charging of default interest was illegal, the plaintiff can rely on the discretion of the court under section 22(2). I will deal with the exercise of discretion under both sections 18(3) and 22(2) below. Excessive interest rate 38.In this regard, it is my view that the defendant’s argument and his calculations under his various Tables have been made under a misconception about section 24 and section 22. 39.Section 24 prohibits the charging of interest on a loan at an effective interest rate of interest which exceeds 60% per annum. Section 2 defines the words “effective rate” to mean the true annual percentage rate of interest calculated in accordance with Schedule 2. However, the Court of Appeal in Kwok Ying Lung v Ko Chi Hung & anor (CACV 635/2000 and CACV 142/2001) decided that the words “effective rate” in sections 24 and 25 bear a different meaning. Where the interest charged is capable of being expressed in terms of a rate, Schedule 2 has no application. In such case, the “effective rate” must mean the actual rate of interest per annum. In particular, Yuen J (at para 41) said that where an actual rate is specified in the memorandum of loan agreement, Schedule 2 has no application. In the present case, the principal was to be repaid in a lump sum at the end of 12 months. In the meantime, monthly interest were payable at the contractual rate of 1.8% per month, ie 21.6% per annum. That is also the rate of interest stated in the memorandum. Schedule 2 has no application. 40.Section 22 prohibits the charging of default interest rate which is higher than the contractual rate of interest. It is subject to a proviso that permits charging of simple interest on overdue interests so long as it does not render the effective rate to exceed 60% per annum payable in respect of the principal apart from any default. 41.In other words, when one seeks to analyze whether section 24 has been contravened, one does not analyze it on a scenario of default. One simply looks at the rate of interest agreed to be charged and compare it with the statutory maximum of 60% per annum. One should not analyze it in the context of a default situation. If a higher rate of interest is charged by reason of default, it runs into the realm of section 22 and would be illegal / unenforceable but for the proviso therein. 42.At the hearing, the defendant clearly confirmed that his case is that under normal situation, the interest rate (taking the 1st and 2nd loans together, and including the set-up charge as if it were an interest element) would not result in an effective interest rate of over 60%. There was thus no contravention of section 24. 43.The defendant’s case is that upon default, a higher interest rate and retrospective interest would be charged resulting in an effective interest charge above 60% per annum. That would be a contravention of section 22. In this scenario, Mr Wong accepted that the defendant has an arguable case of contravention of section 22. Sections 18(3) and 22(2) 44.Section 18(3) reads:
The wording of section 22(2) is nearly identical to that of section 18(3). The court will consider the question of what is equitable under the same principles. The court has to look at “all the circumstances”. 45.In Brother’s Company (a firm) v Ah Puk Transportation (a firm) [1986] HKLR 821, the court held that the factors to be taken into account include (i) relative status of the parties; (ii) the nature and extent of the default; (iii) the way in which it arose; (iv) the implications for the borrower; (v) the attitude of the lender; and (vi) the general appearance of the contract throughout. See also Emperor Finance v La Belle Fashions (2003) 6 HKCFAR 402, at para 119. 46.Mr Wong accepted that the court has to look at all circumstances. In the context of a striking out application, the court has to assume the facts pleaded in the defendant’s case are true. Mr Wong however submitted that it must be inequitable not to enforce the Loan Agreement to the extent of requiring the defendant to repay the principal of $5,000,000 and the monthly interest of $40,000 from the date of default to judgment. He relied on the following objective facts:
47.In my judgment, I have also to take into account the following factors particularly in the light that this is after all a striking out application:
48.Having assumed all factors in favour of the defendant, I am of the view that it will definitely be inequitable not to require him to repay the amount of $4,160,000 and I am satisfied that the Loan Agreement should at least be enforced to that extent. If the plaintiff wishes to pursue against the defendant for any amount above $4,160,000, the action will have to proceed and the defendant should be allowed to defend such claims. Accordingly, the Judgment / Order of Master J Wong should be set aside. 49.I am also satisfied that it would definitely be inequitable not to allow the plaintiff to enforce the security to the amount of $4,160,000. Accordingly, I will grant the order of possession and allow the plaintiff to enforce the security to that extent. 50.On the question of costs, the defendant has succeeded partially in this appeal and I will make an order nisi that there should be no order of costs for the appeal. As for the costs of the application and the hearing before Master J Wong, each party should bear its own costs as neither party fully wins. Depending on whether the plaintiff would still wish to pursue against the defendant for the rest of its claims, this action may or may not proceed further. The costs of the action cannot be resolved once and for all at this stage and I will have to make it in the cause. I will however give general liberty to apply. 51.In the end, I make the following orders:
Mr Kenneth Y F Wong, instructed by Wong, Fung & Co, for the plaintiff The defendant appeared in person | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 1484/2014