Shun on Finance Ltd v. Lau Lee Sung

HCA 795/2016

[2018] HKCFI 1441

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 795 OF 2016

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J U D G M E N T

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A. INTRODUCTION

1.In this action, the plaintiff claims against the defendant for the balance of unrepaid loan/unpaid interest under a loan agreement, and an order for possession of the defendant’s property under a mortgage.  The defendant’s defence is fraud.

B.   THE UNDISPUTED FACTS

2.The plaintiff is a licensed moneylender.  The defendant is a specialist doctor.

3.The defendant is the owner of a property in Sai Kung known as Unit A on the Ground Floor of Block 1, Green Park, 29 Razor Hill Road, Lot No 1175 in DD 253 (the “Property”). It is and was at all material times subject to a Legal Charge and Further Charge in favour of the Bank of East Asia (“BEA”) dated 19 August 2010 and 6 April 2015 respectively.

4.On 12 October 2015, the defendant attended a law firm.  The defendant filled in the plaintiff’s Loan Application Form and signed the “Offering Letter for Property Owner Loan”. 

5.After Wesley Ng of the plaintiff (“Wesley”) explained the Loan Agreement, and law firm clerk Jacqueline Tsang explained the Second Mortgage to the defendant, the defendant executed both documents.  

6.The defendant was also given copy of these documents together with the Repayment Schedule and “Terms of Summary of Provisions of the Ordinance”.

7.Upon the defendant’s execution of the Loan Agreement/Second Mortgage, a cheque of $2 million payable to the defendant, ie the loaned money, was handed to the defendant.  The cheque was cashed by the defendant on the same day.

8.On 12 November 2015, pursuant to the Loan Agreement, the defendant duly repaid the 1^st instalment, ie $43,333 to the plaintiff.  The defendant failed to make further repayment thereafter.

C.   THE PLAINTIFF’S CASE

9.The plaintiff’s case is straight forward.  The plaintiff lent $2 million to the defendant secured on the Property under the Loan Agreement/Second Mortgage.  The defendant failed to repay after the 1^st instalment.  The plaintiff now relies on the 2 documents to sue for the outstanding loan and an order for possession of the Property.

10.The plaintiff has no knowledge of the fraud or the Arrangement alleged by the defendant.  The plaintiff is also not related to Vincent or Jy International Enterprises (HK) Co, Ltd (“Jy International”).

D.   THE DEFENDANT’S CASE

11.The defendant’s case is that he was misled into entering into the Loan Agreement and there was fraud involved.

12.In late September 2015, the defendant received a call from a BEA staff.  That staff asked if the defendant wanted to borrow an extra $2 million under his present mortgage with BEA as the Property had increased in value.  The defendant showed interest. That staff referred the defendant to an intermediary, namely Jy International.

13.On 7 October 2015, the defendant discussed with Vincent of Jy International.  Vincent said the defendant’s credit rating with TransUnion could be improved in the following ways: the defendant would borrow an unsecured loan of $2 million, the defendant would give these $2 million to Vincent to repay part of the defendant’s personal loans.  In the meantime, BEA would re-mortgage/re-finance the defendant’s present mortgage so that an extra $2 million would be lent with low interest and monthly repayment of $27,000 for 25 years.  These $2 million from BEA would be used to repay the unsecured loan of $2 million. [Cross-examination of the defendant]

14.Subsequently, Vincent arranged the defendant to attend the law firm to execute a loan agreement by a finance company, ie the plaintiff.

15.On 12 October 2015, the defendant attended the law firm.  The defendant was surprised to find that the Loan Agreement involved a Second Mortgage as security.  The defendant asked Wesley to clarify.  Wesley directed the defendant back to the defendant’s own intermediary.  The defendant therefore called Vincent.  Over the phone, Vincent informed the defendant that this Second Mortgage was just a formality, which the plaintiff knew already.  Vincent told the defendant that the Second Mortgage would be replaced with another loan which did not involve a mortgage, and the money was not for the defendant but for safekeeping for loan rearrangement (collectively “the Arrangement”). [Witness Statement of the defendant dated 28 November 2016, paragraph 8]

16.In view of what Vincent said over the phone, ie the Arrangement, the defendant executed the Loan Agreement/Second Mortgage.  The plaintiff passed the defendant a cheque of $2 million as loan under both documents.  The defendant cashed the cheque.  The defendant passed $2 million cash to Vincent for repaying the defendant’s personal loans.  Vincent absconded with the $2 million (less $44,000).

E.   ISSUES

17.The issues are: –

(1)   Whether there was fraud?

(2)   If there was no fraud, whether the defendant is liable to repay the balance of the loan under the Loan Agreement, and whether the plaintiff is entitled to an order for possession of the Property under the Second Mortgage?

F.   ISSUE 1: WHETHER THERE WAS FRAUD ON THE PART OF THE PLAINTIFF

F1   Elements of fraud

18.The elements of fraud are (per Cheung JA in Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29, at paragraph 15):

“(1) There must be a representation of fact made by words or conduct.

(2) The representation must be made with knowledge that it is or may be false. It must be willfully false, or at lease made in the absence of any genuine belief that it is true.

(3) The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him.

(4) It must be proved that the claimant has acted upon the false statement.

(5) It must be proved that the claimant suffered damage by so doing.” [emphasis added]

19.Requisite of proof: Fraud is a serious charge, the person alleging fraud has the burden of proof. The standard of proof is still the civil standard but the evidence in support must be both strong and cogent.  Any inference to be drawn in establishing fraud on the part of the plaintiff must also be a compelling one, sufficient to overcome the inherent improbability that the serious allegation would have happened.  See ADS v Brothers [2000] 3 HKCFAR 70 at 77J-78G, per Lord Hoffmann NPJ; Smith New Court Securities Ltd v Citibank NA [1997] AC 254 per Lord Steyn at 274C-D.

20.Knowledge of dishonesty/fraudulent intent: There is a need to prove dishonesty or fraudulent intent on making the false representation.  The false statement is made knowingly, without an honest belief of its truth, or recklessly, not caring whether it is true or false.  See Armitage v Nurse [1998] Ch 241 per Millet LJ (as he then was) at 250F-H and 251A; Derry v Peek (1889) 14 App Cas 337 at 373.

F2.   The alleged representation

21.The defendant’s case is that before attending the law firm, Vincent told him it was an unsecured loan. So, the defendant found the Loan Agreement problematic as it involved a second mortgage. The defendant asked Wesley.  Wesley directed the defendant to his own intermediary.  The defendant called Vincent who told him the Second Mortgage was just a formality and the Arrangement – the representation.

22.I agree with the plaintiff that the defendant’s case is unbelievable.  The reasons are as follows.

23.First, suppose before attending the law firm, Vincent had told the defendant that it was to be an unsecured loan.  However, when the defendant found that the loan from the plaintiff was indeed secured, he would not have signed the Loan Agreement but simply left.

24.Also, the defendant himself admitted that his credit rating was not good.  BEA lent money to the defendant because the loan was secured with his Property.  Even BEA’s Further Charge of $1 million odd was secured.  It defies common sense that a moneylender would lend as much as $2 million to the defendant without security.

25.Further, I take into account the glaring inconsistencies between the defendant’s evidence given under cross-examination (see: paragraph 13 above) and the account contained in his Witness Statement (see: paragraph 15 above).

26.Further, even if the representation were made, I agree that the representor was Vincent/Jy International, not the plaintiff.  Thus, only Vincent/Jy International is liable for the consequences.

27.The only thing which might possibly link Vincent/Jy International with the plaintiff appears to be the following events as set out in the statement given by the defendant to the police (confirmed by the defendant in court to be correct): “但我 [Defendant]睇到合約為2 按感到有問題，我 [Defendant]向順安 Wesley Ng 詢問，Wesley 叫我 [Defendant]聯絡自己中介公司。於是我 [Defendant]致電Vincent, Vincent 向我 [Defendant]講無問題…”.

28.The law on agency by estoppel is clear: if one person (ie the principal) represents to another person (ie a third party) that someone is his agent, the principal is estopped from denying otherwise. 

29.In the present case, on the defendant’s own case, Wesley did not represent to the defendant that Vincent/Jy International was the plaintiff’s agent.  To the contrary, Wesley clearly told the defendant to make enquiries with the defendant’s own agent: “Wesley 叫我聯絡自己中介公司” [emphasis add].  The plaintiff cannot be held responsible for the statements/representations made by Vincent, he had not been held out by the plaintiff as the plaintiff’s agent.

F3.   Lack of knowledge

30.The defendant sought to impose knowledge on the plaintiff by suggesting that the plaintiff and Jy International were of the same entity.  The defendant’s reasons are: (i) the defendant had never met the plaintiff; and (ii) but for Vincent/Jy International’s introduction, the plaintiff would not have lent money to the defendant. 

31.I agree that the defendant’s above suggestion has no legal basis in support. 

32.In any event, it is the plaintiff’s case that before 12 October 2015, Wesley had called the defendant. Over the phone, Wesley told the defendant the interest rate/repayment term and the place for signing the Loan Agreement. 

33.I agree that Cheung Ping Sum Kenneth’s evidence to the above effect is credible.  When questioned by the court as to whether Wesley over the phone informed the defendant concerning the signing of the Second Mortgage, Kenneth Cheung’s answer was he did not remember.  Saying Wesley did mention the Second Mortgage would have advanced the plaintiff’s claim that the defendant knew all along he was required to sign a mortgage.  Yet, Kenneth Cheung honestly replied he did not remember instead.

34.Further, the defendant appeared to impose knowledge on the plaintiff by stating in his Witness Statement: “I rang Vincent and was reassured that this was only a temporary measure or a ‘formality’, which Shun On knew already”. [emphasis added]

35.However, the suggestion “which Shun On knew already” did not appear in the defendant’s Police Statement which was made on 11 December 2015.  That was only 2 months after the subject incident.  The defendant agreed his memory was fresh at that time. Such suggestion in fact only first appeared in the defendant’s Defence dated 12 May 2016, and subsequently his Witness Statement dated 28 November 2016.

36.When questioned why such suggestion was missed out in the Police Statement, the defendant at first said he did not know if the police officer had jotted down everything he said. When the court pointed out that he had read the Police Statement and could add/delete as he pleased and upon further questioning, the defendant said he did not think such suggestion was important.

37.I agree with the plaintiff that it is most improbable that the defendant would have thought the plaintiff’s knowledge of the Arrangement was not important. 

38.Further, I agree it is most improbable that the defendant simply believed Vincent when Vincent told him over the telephone that “Shun On knew already” without inquiring with Wesley, who was present at the signing of the Second Mortgage.

39.For the reasons stated above, the defendant’s case against the plaintiff based on fraud must fail.

G.   ISSUE 2: DEFENDANT’S LIABILITY UNDER THE LOAN AGREEMENT AND SECOND MORTGAGE

40.On 12 October 2015, pursuant to Clause 1 of the Loan Agreement, the plaintiff duly advanced a loan of $2 million to the defendant.

41.Pursuant to Clause 2(c) of the Loan Agreement, on 12 November 2015, the defendant repaid the first instalment to the plaintiff.  Thereafter, the defendant defaulted and did not make any further repayment.

42.According to Clause 25 of the Loan Agreement, if the defendant defaulted, the whole of the sum outstanding under the Loan Agreement shall become immediately due and payable.  Thus, the defendant was indebted to the plaintiff in the sum of $2,372,784.05, as pleaded under paragraph 12 (a) to (e) and (j) of the Statement of Claim.

G1.   Plaintiff’s entitlement to an order of possession of the Property

43.According to Practice Note 88/5/11 of the Hong Kong Civil Procedure 2018, a mortgagee is entitled “as of right” to possession:

“The ordinary rule is that a mortgagee is entitled as of right (unless the mortgage deed provides otherwise) to possession of the mortgaged premises, and the Court has no power to adjourn an application for possession or to make a suspended order, with the exception of an adjournment for a short time to afford the borrower a chance of paying off the mortgage in full, which should only be granted if there is a reasonable of such payment occurring…” [emphasis added]

44.The defendant failed to repay under the Loan Agreement.  An event of default has occurred under Clauses 7 and 8 of the Second Mortgage.

45.Under Clause 8.2 of the Second Mortgage, the security became enforceable and the plaintiff is entitled to enter into possession of the Property and take any legal proceedings for that purpose. 

H.   CONCLUSION

46.For the reasons stated above, I make the following order: –

(1)   The defendant do pay to the plaintiff the sum of $2,372,784.05 as set out in paragraph 12 (a) to (e) and (j) of the Statement of Claim; and

(2)   The defendant do pay to the plaintiff contractual interest on the sum of $2,000,000.00 (being the sum set out in paragraph 12 (a) of the Statement of Claim) at the rate of 26% per annum from 30 March 2016 until payment in full.

47.As to the plaintiff’s claim for possession of the Property, as the plaintiff’s right to possession is subject to the rights of BEA as the first mortgagee, it is incumbent on the plaintiff as the second mortgagee to give notice to the first mortgagee in the proceedings before me, which the plaintiff has failed to do.  However, the failure to give notice would not affect the lis between the second mortgagee, ie the plaintiff herein, and the defendant.  An order nisi for a certain period of time in respect of the remedy of possession can augment the situation, within which the first mortgagee upon notice can take the necessary action if they deem fit [see: Startford Limited v Lam Mui Fong, HCMP 91/1995 (Judgment of Yam J dated 8/12/1995)].

48.Accordingly, I order as follows: –

(1)   There be an order nisi for delivery of possession of the Property to the plaintiff (subject to the rights of BEA therein) (the “Order Nisi for Delivery”).

(2)   The plaintiff shall serve the Order Nisi for Delivery on BEA within 21 days from the date hereof.

(3)   The Order Nisi for Delivery shall become absolute in the absence of any application by BEA to be joined as a party to these proceedings within 42 days of the service of the Order Nisi for Delivery.

49.I further order that the costs of the action be paid by the defendant to the plaintiff, such costs are to be taxed on the party and party basis if not agreed.

50.The above order as to costs is nisi and shall become absolute in the absence of any application within 21 days to vary the same.

Ms Shannon Leung, instructed by Messrs Cheung & Choy, for the plaintiff

The defendant appeared in person