Li Po Lai and Another v. Tai Wo Finance Ltd

DCCJ 556/2017

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 556 OF 2017

--------------------

--------------------

----------------------------------------

DECISION

----------------------------------------

1.This is the plaintiffs’ application for summary judgment pursuant to Order 14 of the Rules of the District Court.

Background

2.The defendant is a money lender licensed under the Money Lenders Ordinance, Cap 163 (“MLO”).  This case concerns three loans extended by the defendant to the plaintiffs. 

3.By the 1^st agreement made between the defendant as lender and the plaintiffs as borrowers on 3 October 2016, the defendant agreed to lend $500,000 to the plaintiffs for a period of 6 months subject to the terms of the agreement and upon the security of the plaintiffs’ property in a residential development known as The Reach in Yuen Long.

4.By the 2^nd agreement made between the defendant as lender and the 1^st plaintiff as borrower on 3 October 2016, the defendant agreed to lend $300,000 to the 1^st plaintiff for a period of 6 months subject to the terms of the agreement and upon the security of a property in a residential development known as The Apex in Kwai Chung and a commercial property in New East Sun Industrial Building in Kwun Tong both owned by the 1^st plaintiff.

5.By the 3^rd agreement made between the defendant and the 1^st plaintiff on 14 October 2016, the defendant agreed to lend $100,000 to the 1^st plaintiff for a period of 12 months subject to the terms of the agreement and upon the security of the 1^st plaintiff’s property in The Apex.

6.It is common ground that the plaintiffs have subsequently made the following repayments:

(a)   $10,000, $6,000 and $2,500 were repaid in November 2016 against the 1^st loan, the 2^nd loan and the 3^rd loan respectively.

(b)   Upon the sale of the plaintiffs’ property in The Reach, a sum of $902,000 was paid to the defendant on 19 December 2016. 

(c)   Upon the sale of the 1^st plaintiff’s property in The Apex, a sum of $89,500 was paid to the defendant on 10 February 2017.  The parties have also tried to pay $18,226 into court, but the payment was not effected as they have not answered the Master’s requisitions satisfactorily.

7.The defendant has confirmed that all the principal and interests due under the 1^st loan and the 2^nd loan had been settled.  As for the 3^rd loan, the defendant was apparently comforted by the payment received in February 2017 and released the security.

The claim

8.It is the plaintiffs’ case that notwithstanding the loan amount stated in the loan agreements, only $480,000, $286,000 and $92,000 were in fact lent.

9.According to the 1^st plaintiff, she was told on each occasion when she received the money that the difference “was deducted from the loan as legal fees charged for preparation of the loan agreement and all other relevant documents.”[1]

10.The plaintiffs contend that such deductions contravened s 27 of the MLO and rendered the loan agreements illegal. Consequently (so the argument goes), the defendant may only recoup from the plaintiffs the amounts actually lent but not to charge further for interest or other charges.

11.By this action, the plaintiffs claim:

(a)   in respect of the 1^st loan, a declaration that the loan agreement was illegal and that the plaintiffs were only indebted to the defendant in the sum of $470,000 (being $480,000 – $10,000) as at 19 December 2016;

(b)   in respect of the 2^nd loan, a declaration that the loan agreement was illegal and that the 1^st plaintiff was only indebted to the defendant in the sum of $280,000 (being $286,000 – $6,000) as at 19 December 2016; 

(c)   in respect of the 3^rd loan, a declaration that the loan agreement was illegal and that the 1^st plaintiff was only indebted to the defendant in the sum of $89,500 (being $92,000 – $2,500) as at 10 February 2017; and

(d)   repayment of $152,000.

The defence

12.The defendant has yet to file a Defence.

13.It is not apparent from the affirmation in opposition that the defendant is disputing the fact that only $480,000, $286,000 and $92,000 had been lent under the respective loan agreements.

14.At the hearing, Mr Yip (counsel for the defendant) mounted a threefold defence: (i) the loan agreements were not illegal under s 27 of the MLO; (ii) the parties were in pari delicto so much so that the court should not assist the plaintiffs in recovering any money paid under an illegal contract; and (iii) the defendant would rely on the severance clause in the loan agreements insofar as any part of the loan agreement is ruled illegal by the court.

The principles

15.The applicable principles are well established and have been fully set out in Hong Kong Civil Procedure 2018 (“HKCP 2018”).

16.For the purposes of this application, the following points may be emphasized:

(a)   The underlying policy of the summary procedure is to prevent a defendant from delaying the plaintiff from obtaining judgment in a case in which the defendant clearly has no defence to the plaintiff’s claim.

(b)   In every summons for summary judgment, the first considerations are whether the case comes within the Order and whether the plaintiff has satisfied the preliminary requirements for proceedings under Order 14.  If these procedural considerations are satisfied and the plaintiff has raised a plausible and prima facie sustainable case, the burden (as it were) then shifts to the defendant to satisfy the court why judgment should not be given against him. 

(c)   In practice, the court will generally require an affidavit from the defendant before it will feel satisfied that the defendant is entitled to leave to defend.  The defendant’s affidavit must condescend upon particulars and should, as far as possible, deal with the plaintiff’s claim and affidavit, and state clearly and concisely what the defence is, and what facts are relied on to support it.

(d)   The test at this summary stage is simply whether the defendant’s assertions are believable.  The court must not embark on a mini trial on affidavits and the summary procedure is not appropriate where the plaintiff’s entitlement to recover any sum is the subject of any serious dispute, whether of law or fact.

Discussion

(1)   No statement from the plaintiffs of no defence

17.One of the necessary conditions for proceeding under Order 14 is that the application must be supported by an affidavit that states the deponent’s belief that there is no defence.[2]

18.At the beginning of the hearing, I drew parties’ attention to the fact that the plaintiffs had omitted to state in their supporting affirmations that there was no defence and referred parties to Hongkong Chinese Bank Ltd v Delon Photo & Hi-Fi Centre Ltd [2000] 3 HKC 71 at 74F-75D.  The plaintiffs’ solicitors gave an undertaking through the plaintiffs’ counsel (Ms Tang) to rectify the defect upon the defendant raising no objection and the argument proceeded.  Eventually, the 3^rd affirmation of the 1^st plaintiff was filed before the conclusion of the hearing and the defect is cured.

(2)   Contravention of section 27 of the MLO

19.Section 27(1) materially provides that:

“Any agreement entered into between a money lender and a borrower … for the payment by the borrower … to the money lender of any sum for or on account of costs, charges or expenses (other than stamp duties or similar duties) incidental to or relating to the negotiations for or granting of the loan … or the guaranteeing or securing of the repayment thereof shall be illegal.”

20.The plaintiffs have exhibited the cheques in question evidencing the amounts actually received by them.  It is clear (and not disputed by the defendant) that $20,000, $14,000 and $8,000 (totaling $42,000) had been deducted from the loans.

21.Mr Yip has obviously missed the point when he argued that there was no contravention of s 27 as the repayments were neither charged during the negotiation process nor for the procurement of the loans (see paras 30-31 of his skeleton submissions).  As I have made plain to him, the focus should be on the deductions.

22.At the hearing, Mr Yip tried to distance the defendant from the illegality by suggesting that the defendant might not know about the deductions.  This is futile.

23.It is trite that the defendant must condescend upon particulars and state clearly and concisely what the defence is and what facts are relied on to support it.[3] In the opposing affirmation, the defendant’s General Manager (Mr Chu) is curiously silent on the amounts advanced to the defendant’s solicitors for the purpose of the loans (see paras 13 and 23 of his affirmation).  Against the plaintiffs’ clear assertions that legal fees had been charged in contravention of s 27, Mr Chu was only prepared to say that he “was not present for the discussion of the legal charge and issuing the cheques to the Plaintiffs” (see paras 19 and 26 of the affirmation in opposition) without specifically denying the defendant’s knowledge of or involvement in the arrangement. 

24.This court is entitled to act on the plaintiffs’ evidence when such evidence is not contradicted by the defendant.  I find that there is a contravention of s 27(1) in making the deduction totalling $42,000 as “legal fees charged for preparation of the loan agreement and all other relevant documents”.

25.The consequence of a contravention of s 27 is provided under s 27(4), which is in these terms (insofar as it is relevant):

“If any money … is directly or indirectly paid to or received by any person in contravention of this section, the amount …, to the extent of such contravention and notwithstanding any agreement to the contrary, may be recovered by the borrower from such person or, if such person is the money lender or a partner, employer, employee, principal or agent of the money lender or is in any way acting or in collusion with him, may be set off against the amount actually lent (and that amount shall be deemed to be reduced accordingly) or may be recovered by the borrower from such person or from the money lender.”

26.Mr Yip nonetheless argues that the court should not grant judgment for the plaintiffs as the parties were in pari delicto (see paras 38-41 of his skeleton arguments).

27.It has been said that the common law on the effect of illegality on contracts is a large and evolving subject.[4] It is most unfortunate that both counsel did not submit fully in this regard and omitted to address me on the recent judgment of the UK Supreme Court in Patel v Mirza [2016] UKSC 42.

28.Prior to Patel v Mirza, the law was as stated by Lord Browne-Wilkinson in Tinsley v Milligan [1994] 1 AC at 376E:

“In my judgment the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable title: he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction.”

29.This has been known as the rule of reliance.[5] The current edition of Chitty on Contract carries this elaboration:[6]

“While cases in which the plaintiff seeks the enforcement of an illegal contract are governed by the maxim ex turpi causa non oritur actio, those in which he seeks some release from its operation fall within the principle in pari delicto potior est conditio defendentis. The result of the application of this principle is that where parties, contracting on an equal footing, are aware of the illegal nature of the contract, whether it be on its face illegal or whether the common intention be to carry out the contract in an illegal manner, neither party can recover anything paid or transferred thereunder.”

30.Patel v Mirza has fundamentally changed the law.  By a majority, the UK Supreme Court decided that the reliance rule should no longer be followed.[7] Lord Toulson (speaking for the majority) has restated the law thus:[8]

“The essential rationale of the illegality is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear …). In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather than by the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate.”

31.This has led the learned editors of Chitty on Contracts to replace the above elaboration with the following:[9]

“It would normally permit the recovery of any money or property transferred under the contract. As Lord Toulson stated:

‘a person who satisfied the ordinary requirements of a claim in unjust enrichment will not prima facie be debarred from recovering money paid or property transferred by reason of the fact that the consideration which has failed was an unlawful consideration.’”

32.Patel v Mirza was applied locally at first instance in Chung Tin Pui, as manager of Chung Man Yiu Tso v Li Pak Sau, HCA 568/2007, 29 September 2017.  However, the Court of First Instance entertained an argument in Tse Chun Wai v Leung Kwok Kin Joseph trading as Joseph Leung & Associates [2017] 4 HKLRD 563 that Tinsley v Milligan remains binding on the local courts by reason of the Court of Appeal decision in Kan Wai Chung v Hau Wun Fai [2016] 5 HKC 585.

33.This is what the Court of Appeal said in Kan Wai Chung v Hau Wun Fai:

“7.6 The majority approach in Tinsley was adopted in Best Sheen Development Ltd and was expressly approved by the Court of Final Appeal in Lau Kam Ying at paragraph 20. As Mr Chong had submitted, this was also the approach of this Court in cases such as Loyal Luck Trading Ltd v Tam Chun Wah [2008] 4 HLRD 681; Wong Kwok Learn Baldwin & Another v International Trading Co Ltd & Another [2010] 2 HKLRD 334, CA, at pp. 338-9, para. 15-18; Tang Wai Cho v Tang Wai Leung [2011] 1 HKLRD 1, CA; Lau Kwai Kiu v Bian Xintian & Another [2012] 2 HKLRD 954, CA, at p 967 para. 54-55; Ryder Industries Ltd (formerly Saitek Ltd) v Chan Shui Woo, CACV 164 & 165/2013, unreported, 22 September 2014, at paragraph 22.

…

8.7 In terms of the application of precedents, this Court is bound by the decision of the Court of Final Appeal which adopted the majority view of Tinsley. As Tang VP (as he then was) observed in Loyal Luck Trading Limited at paragraph 48:

‘The potential conflict between Tinsley v Milligan and Nelson and Anor v Nelson and Anor can only be resolved by the Court of Final Appeal.’”

34.In my view, it does not matter by what means we examine the defence as the defendant’s contention is bound to fail anyway.

35.Applying the “trio of considerations” advocated in Patel v Mirza:

(a)   The aims of the MLO include “to provide for the control and regulation of money lenders and money-lending transactions” and “to provide protection and relief against excessive interest rates and extortionate stipulations in respect of loans”.  In my view, s 27 serves the dual-purpose of: (i) forbidding money lenders and their agents from charging costs, charges or expenses incidental to or relating to the negotiation for or the granting of loans or the guaranteeing or securing of the repayment of such loans; and (ii) protecting borrowers from such extortionate stipulations.  Such purpose will be frustrated if the $42,000 is not returned.

(b)   The defendant has not identified for my consideration any public policy on which the denial of the plaintiffs’ claim may have an impact. 

(c)   Refusal to let the plaintiffs recover the deductions would be a disproportionate response to the illegality as the defendant (or its agent, as Mr Yip has attempted to argue) would be able to benefit from the illegality.

36.On the other hand, the Supreme Court has noted in Patel v Mirza that under the old law the courts had recognised certain exceptions to water down the harshness of the reliance rule, one of which was “membership of a vulnerable class protected by statute”.[10]

37.In the UK Law Reform Commission’s Consultation Paper No 189 entitled “The Illegality Defence – A Consultative Report” published in 2009, the Commission recognized that:

“4.18 There is also a number of cases in which the claimant has been permitted to recover benefits conferred on the defendant in breach of a statutory provision, where the object of that provision is the protection of a vulnerable class of which the claimant is a member. It would seem here that the unjust enrichment claim is based on the vulnerability of the claimant, and, because of this vulnerability, it is assumed that the parties are not ‘equally guilty’ and the illegality defence does not apply.

4.19 Lord Mansfield clearly explained the basis of the principle in Browning v Morris. He said:

‘Where contracts or transactions are prohibited by positive statutes, for the sake of protecting one set of men from another set of men; the one, from their situation and condition, being liable to be oppressed or imposed upon by the other; there, the parties are not in pari delicto; and in furtherance of these statutes, the person injured, after the transaction is finished and completed, may bring his action and defeat the contract.’

4.20   The scope of this claim based on statutory class protection is far from settled. It appears not to be lightly invoked by the courts.  For example, in Green v Portsmouth Stadium, the Court of Appeal refused the bookmaker’s claim for the recovery of course charges which he had paid to the defendant in contravention of the Betting and Lotteries Act 1934.  For the purposes of the case it was assumed that the claimant knew that he had paid more than the lawful charge, and it was not argued that he had paid the money under a failure of consideration, because he had been allowed to conduct his business on the track.  The Court held that it was a question of the true interpretation of the statute whether an action lay to recover the overcharge.  Here the statute was not enacted for the purpose of protecting bookmakers, but for the purpose of regulating race courses.  The mode of regulation was by means of the criminal rather than the civil courts, and no recovery was therefore allowed.”

38.In my view, the legislature has deemed borrowers (such as the plaintiffs) vis-à-vis money lenders (such as the defendant) vulnerable and mandated protection by declaring that the borrowers are not “equally guilty” for any illegality under s 27.

39.Mr Yip has drawn my attention to some WhatsApp exchanges between the parties and submitted that the 1^st plaintiff “had knowledge of the illegal conduct and yet elected to participate in the illegal arrangement with the defendant” (see paras 43-47 of his skeleton submissions).  As the English Court of Appeal has decided in Green v Portsmouth Stadium (see above), it is a question of the true interpretation of the statute whether an action lies to recover the overcharge.  In my view, the legislature has modified the common law position by enacting s 27 to protect borrowers such as the plaintiffs. 

40.As such, the plaintiffs should be able to recover $42,000 from the defendant under section 27.

41.As the agreements to deduct “legal fees” were not part of (but collateral to) the loan agreements, the severance argument is not engaged.

(3)   The remaining claim of the plaintiffs

42.The plaintiffs’ claim goes beyond the return of $42,000.

43.They claim that all three loan agreements were illegal for contravention of s 27 (see prayers (1), (2) and (9)).  Their claim for declaratory relief on the indebtedness of the plaintiffs/1^st plaintiff as at 19 December 2016 and 10 February 2017 respectively (see prayers (3), (4) and (10)) is premised on their argument that the defendant was not entitled to charge interest or other charges (see paras 32-34 of the Statement of Claim).

44.It should be emphasised that:

(a)   under s 27(1), it is the “agreement … for the payment … of any sum for or on account of costs, charges or expenses (other than stamp duties or similar duties) incidental to or relating to the negotiations for or the granting of the loan or proposed loan or the guaranteeing or securing of the repayment thereof” that is deemed illegal; and

(b)   the scope of recoverability under s 27(4) is confined to “the amount ... to the extent of such contravention” only. 

45.In the present context, it is the agreements to deduct the “legal fees” that is caught by s 27(1) and the plaintiffs’ recoverability is confined to the “legal fees” deducted, ie $42,000. Ms Tang has advanced no argument and produced no authority in support of the proposition that the contravention has “rendered the loan agreements illegal” (paras 20 and 22 of her skeleton submissions) so much so that “the defendant should not be allowed to charge interest or any related charges to the loans” (para 25 of her skeleton submissions).

46.My interpretation of s 27 is supported by Sun Lai La v Simhan International Ltd, HCA 4537/1994, 30 July 1999.  In that case, a sum of $148,660 (said to be “various expenses”) was deducted from the loan amount before the balance was paid to the borrower.  The borrower (the 1^st plaintiff therein) mounted a claim based on s 27 and the learned Recorder ordered the money lender (the 2^nd defendant therein) to repay the $148,660 deducted less the sums paid by way of stamp duty (see pages 11 and 25 of the judgment).

47.It therefore remains for the plaintiffs to establish at trial that the loan agreements were indeed illegal and that they were indebted to the defendant as suggested.

48.At the hearing, Ms Tang has tried to put forward an alternative claim.  She relied on her own calculation of interest chargeable under the loan agreements and argued that the plaintiffs have over-repaid the defendant (see paras 29-33 of her skeleton submissions). In my view, this cause is not open to them as the only cause of action pleaded in the Statement of Claim has been contravention of s 27.  The plaintiffs may not rely on a claim that has neither been pleaded nor verified by affidavit.

Disposition

49.For the above reasons, there is really no defence to the claim to the extent of $42,000.  I enter summary judgment against the defendant:

(a)   for the plaintiffs in the sum of $20,000, together with interest thereon from 3 October 2016 to the date hereof at the rate of prime rate plus 1% per annum;

(b)   for the 1^st plaintiff in the sum of $14,000, together with interest thereon from 3 October 2016 to the date hereof at the rate of prime rate plus 1% per annum; and

(c)   for the 1^st plaintiff in the sum of $8,000, together with interest thereon from 14 October 2016 to the date hereof at the rate of prime rate plus 1% per annum. 

50.The defendant is granted unconditional leave to defend the rest of the plaintiffs’ claim.

51.As to costs, I make an order nisi that the costs of the application be in the cause of the action with certificate for counsel.

52.In pursuance of Order 14, rule 6, I direct:

(a)   the defendant do file and serve a Defence within 35 days from the date hereof;

(b)   the plaintiffs may file and serve a Reply within 28 days thereafter; and 

(c)   the parties do file and serve a Timetabling Questionnaire within 28 days thereafter and proceed in accordance with Order 25, rule 1.

Ms Candy Tang instructed by Wan Yeung Hau & Co for the 1^st and 2^nd plaintiffs.

Mr Micky Yip instructed by H Y Leung & Co for the defendant.