Lei Shing Hong Credit Ltd v. Accufast Ltd and Others

HCMP 1749/2014

[2021] HKCFI 853

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1749 OF 2014

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BETWEEN

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Before: Hon K Yeung J in Chambers

Date of Hearing: 4 November 2020

Date of Decision: 30 March 2021

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DECISION

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Introduction

1.This is the appeal by the 1^st and 3^rd defendants (“D1” and “D3”, and together “Ds”) against the order of Master Winnie Tsui (the “Master”) dated 14 July 2020 (the “14/7/2020 Order”) dismissing Ds’ summons of 18 December 2019 (“Subject Summons”) for leave to adduce expert evidence.

2.The principal issue is whether the conditions set down by the Court of Appeal in Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd [2019] 2 HKC 175 for expert evidence to be admissible are satisfied. 

3.Mr Jose Maurellet SC together with Mr Justin Lam and Mr Cyrus Chua appear for D1 and D3.  Mr Anson Wong SC for the plaintiff (“P”).

The claim, and Ds’ defences

4.P is a licensed money lender.

5.By a facility letter dated 29 July 2013 issued by P (the “Facility Letter”) and subsequently accepted by Ds, P agreed to grant D1 a loan of HK$168,000,000 (the “Loan”).

6.The Loan was for one year.  It comprised 2 revolving loans of HK$138,000,000 and HK$30,000,000.  Interest for the former was at 10% per annum, and the latter 18%[1]. Both carried “Service Charge” calculated as follows:

“ 4.00% per month on a day to day basis for any outstanding amount due and not paid from the due date of payment.”

7.Ds’ case is that the Service Charge was in effect default interest at the annual rate of 48%.

8.The Loan was secured:

(a) by a first legal charge by D1 effected by deed dated 21 August 2013 (the “Deed of Charge”) over his property (the “Property” or the “Loan Collateral”) in favor of P; and

(b) a guarantee by the 2^nd defendant (“D2”) and D3 (the “Guarantee”) effected by deed dated 19 August 2013 (the “Deed of Guarantee”).

9.On 21 August 2013, P advanced the Loan to D1.

10.D1 defaulted on the Loan when he failed to pay the instalments due on 21 November 2013.

11.On 18 July 2014, the present action was commenced.

12.Ds’ Re-amended Defence and Counterclaim is dated 8 May 2018.  Various defences have been raised:

(a) The defence that is relevant for the present appeal (which I will call the “Extortionate Transaction Defence”) is pleaded at §10 therein, that:

“ RE-OPENING OF EXTORTIONATE TRANSACTION UNDER THE [Money Lenders Ordinance, Cap 163, (“MLO”)]

10. …[Ds] aver that the transaction in respect for the said Loans, the [Charge] and the Deed of Guarantee fact [sic] by reason of all the circumstances relating to the agreement evidenced and/or contained in the Loan Documentation, including the excessive and grossly exorbitant effective interest rates and contravention of ordinary principles of fair-dealing, extortionate within the meaning of section 25 of the MLO, and accordingly renders the transaction on the said Loans extravagant and unconscionable is liable to be reopened pursuant to section 25(1) of the MLO … ”

(b) 9 paragraphs of particulars have been pleaded thereunder.  Of particular relevance is paragraph 10(5), that:

“ … [P] saw fit to charge the Original Interest and/or Service Charge which exceeded the interest rates and/or default rates prevailing in the market in Hong Kong at the time in respect of similar transactions.”

The Effective Rates and the Prevailing Rates

13.Mr Maurellet submits that the establishment of the Extortionate Transaction Defence requires Ds to prove (1) the effective interest rates charged by P under the Facility Letter (the “Effective Rates”); (2) the interest rates prevailing at the time of the transactions between P and Ds relating to the Loan under the MLO[2] (the “Prevailing Rates”); and (3) the Effective Rates substantially/grossly exceeded the Prevailing Rates. 

14.On 16 May 2018, Ds took out a Summons[3] (the “16/5/2018 Summons”) for leave to adduce expert evidence on certain issues.  Those issues included the Effective Rates, and the one framed at §3 of the Annex thereto, that:

“ What is the interest rate of loans prevailing in the market at the time the Loan was made?”

15.On 17 April 2019, Ds took out another summons[4] (the “17/4/2019 Summons”) for leave to amend the 16/5/2018 Summons.  Leave was sought to amend, inter alia, §3 of the Annex to the 16/5/2018 Summons as follows:

“ What is the interest rate of loans prevailing in the market at the time the Loan was made for a lender who takes on the same or similar level of risk as [P] did by reference to the loan-to-value ratio in the present case?”

16.By Order of 23 April 2019[5] (the “23/4/2019 Order”), Master H Au-Yeung granted leave for parties to adduce expert evidence on the Effective Rates.  In respect of Ds’ “Application for expert directions on prevailing interest rate”, Master H Au-Yeung ordered (at §§13 and 14 of the 23/4/2019 Order) that:

“ Application for expert directions on prevailing interest rate

13. The application be adjourned sine die with liberty to restore.

14. Any request to restore this application on the part of [Ds] shall be accompanied with a support affidavit setting out (1) the name and expertise of the proposed expert, and (2) the proposed approach of the expert in addressing the expert issue, for example, what information will the expert consider in the compilation of the expert report.”

17.On 27 November 2019, Master Ho ordered by way of an unless order that Ds’ application for leave to adduce expert evidence on the prevailing interest rate issue had to be made by 18 December 2019.

18.On 18 December 2019, Ds took out the Subject Summons for leave to adduce expert evidence on the Prevailing Rates.  Paragraphs 1 and 2 thereof read as follows:

“ 1. Leave be granted to [Ds] to relist the Summons filed on 16 May 2019 [sic] on the application for prevailing interest rate pursuant to paragraph 13 of the [23/4/2019 Order];

2. Leave be granted to [P] and [Ds] to adduce expert evidence in the field of prevailing interest rate on the following issues:

‘Having regard to (1) the quantum of the Loan, (2) the terms of the Deed of Charge, and (3) the nature and value of the Loan Collateral … (the ‘Objective Characteristics’):-

(a) What is the prevailing default interest commonly charged for similar transactions sharing these Objective Characteristics as at 29 July 2013 and 21 August 2013 (i.e. the date of the Facility Letter and the date on which the Loan was advanced to [D1])?

(b) What is the prevailing non-default interest commonly charged for similar transactions sharing these Objective Characteristics as at 29 July 2013 and 21 August 2013?’ ”

Mr Maurellet calls the issues set out in §2 of the Subject Summons the “Expert Questions”, which term I adopt.

19.The Subject Summons is supported by the 3^rd and 4^th affidavits of Mr Chow Anthony Peter Chuin Eng (“Chow”, “Chow 3^rd” and “Chow 4^th”).  On P’s behalf, Mr Lam Kam Leung (“Lam”) has filed his 2^nd affirmation (“Lam 2^nd”) in opposition.

20.Having heard parties, the Master made the 14/7/2020 Order, that:

“ 1. Leave be granted to [Ds] to relist the Summons filed on 16 May 2019 [sic, but consistent with the typographic error made by Ds at §1 of the Subject Summons] on the application for prevailing interest rate pursuant to paragraph 13 of the [23/4/2019 Order];

2. The rest of the [Subject] Summons be dismissed.”

21.It is against the part of the Master’s Order dismissing “the rest of the [Subject] Summons” which Ds are now seeking to appeal.

The law on adducing expert evidence

22.In Shenzhen Futaihong, the Court of Appeal held that the admission of expert evidence (and the giving of directions thereon) are subject to three substantive conditions for admissibility and procedural requirements contained in the Rules of the High Court (Cap 4A)(“the Rules”):

(a) The substantive conditions for admissibility are[6]:

(i) The subject matter of the opinion must fall within an area in which expert evidence may properly be given (the “Subject Matter Condition”);

(ii) The witness must be qualified as an expert to give the evidence of the type in question (the “Expertise Condition”);

(iii) His evidence must be relevant to the issues being litigated (the “Relevance Condition”).

(b) The Subject Matter Condition may be divided into two parts[7]:

(i) whether the subject matter of the opinion is such that a person without instruction or experience in the area of knowledge or human experience would be able to form a sound judgment on the matter without the assistance of witnesses possessing special knowledge or experience in the area (“Part 1 of the Subject Matter Condition”), and

(ii) whether the subject matter of the opinion forms part of a body of knowledge or experience which is sufficiently organized or recognised to be accepted as a reliable body of knowledge or experience, a special acquaintance with which by the witness would render his opinion of assistance to the court (“Part 2 of the Subject Matter Condition”);

(c) In respect of the Relevance Condition, evidence meeting the Subject Matter Condition can still be excluded by the Court if the Court takes the view that calling it will not be helpful to the Court in resolving any issue in the case justly.  Such evidence will not be helpful where the issue to be decided is one on which the Court is able to come to a fully informed decision without hearing such evidence[8], eg if the question can be determined on factual evidence and inferences to be drawn therefrom[9];

(d) In terms of procedural requirements under the Rules:

(i) In addition to the 3 substantive conditions, the use of expert evidence is subject to procedural requirements contained in the Rules to guard against misuse or mismanagement of expert evidence[10];

(ii) the courts can take account of the probative value of an expert report in exercising case management power[11];

(iii) The application for and the giving of expert directions is not a mere formality but an integral part of the case management process;

(e) In terms of what have to be established to obtain leave and get directions:

(i) In a piece of complex litigation, particularly where the area in which expert evidence is sought to be adduced is unconventional or more controversial, the party who seeks expert directions (who also bears the burden of persuading the court that expert evidence is helpful and appropriate) should consider the timing of the application and the materials to be presented to support the application more carefully.  There are cases where it may be more helpful to have the evidential issues more clearly identified with the exchange of documents and witness statements before expert directions are sought.  Also, in some cases it may be useful to have the intended expert report at hand to explain to the court the nature of such evidence and to demonstrate the necessity for having such evidence[12];

(ii) The court will not give directions for expert evidence to be adduced (carrying with it the incidence of substantial costs being incurred on its preparation and court time spent on the same) simply on the basis that the court cannot rule out a possibility of such evidence being relevant and helpful in the sense as discussed above.  If the applicant for expert directions fails to persuade the court on relevance and necessity of such evidence, the application should be dismissed[13];

(iii) There has to be a solid evidential basis to support the application for expert evidence[14].

23.I apply the above when considering the present appeal.

Parties’ submissions

24.In gist, Mr Maurellet submits that all the substantive conditions for admissibility have been satisfied, that the Expert Questions are not disproportionate in terms of time and costs, that there is no delay in the application, and in any event there are valid reasons for any delay, and P has suffered no prejudice.

25.Mr Wong submits[15] that:

(a) The Relevance Condition is not satisfied, as:

(i) the Expert Questions are formulated on the basis of an incorrect reading of section 25(4) of the MLO;

(ii) they are in any event unhelpful to the Court in resolving any issue in the action justly;

(b) The Subject Matter Condition is not satisfied, as the proposed expert evidence does not form part of a body of knowledge or experience which is sufficiently organized or recognised to be accepted as a reliable body of knowledge or experience;

(c) The Expertise Condition is not satisfied, as Mr David Taylor (“Mr Taylor”), the candidate proposed by Ds, is not qualified as an expert to give the proposed evidence;

(d) In any event, in the exercise of its case management power, this Court should refuse the application as:

(i) the probative value of the proposed expert evidence is minimal;

(ii) costs and time required to deal with the same is wholly disproportionate; and

(iii) there has been considerable delay on the part of Ds in making the present application.

Section 25 of the MLO

26.The material parts of section 25 of the MLO are:

“ (1) Subject to section 24(2), where—

(a) proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan; and

(b) subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate,

the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit.

(2) For the purposes of this section, a transaction is extortionate if—

(a) it requires the debtor or a relative of his to make payments (whether unconditionally or on certain contingencies) which are grossly exorbitant; or

(b) it otherwise grossly contravenes ordinary principles of fair-dealing.

(3) Any agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds 48 per cent per annum shall, having regard to that fact alone, be presumed for the purposes of this section to be a transaction which is extortionate; but except where such rate exceeds the rate specified in section 24(1), the court may declare that any such agreement is not extortionate for the purposes of this section if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair.

(4) In determining whether a transaction is extortionate for the purposes of this section, regard shall be had to such evidence as is adduced concerning—

(a) interest rate prevailing at the time it was made;

(b) the factors mentioned in subsections (5) and (6); and

(c) any other relevant considerations.

(5) Factors applicable under subsection (4)(b) in relation to the debtor include—

(a) his age, experience, business capacity and state of health; and

(b) the degree to which, at the time of entering into the transaction, he was under financial pressure, and the nature of that pressure.

(6) Factors applicable under subsection (4)(b) in relation to the lender or other person by whom the proceedings are taken include—

(a) the degree of risk accepted by the lender, having regard to the nature and value of any security provided;

(b) his relationship to the debtor;

(c) whether or not a specious cash price was quoted for any goods or services included in the transaction; and

(d) where one or more other transactions are to be taken into account, the question how far any such other transaction was reasonably required for the protection of the debtor or the lender, or was in the interest of the debtor.”

The Relevance Condition

27.I consider first of all the Relevance Condition.

28.The crux of Mr Wong’s submissions under this limb is that Ds are wrong in seeking to read section 25(4)(a) of the MLO as relating to “interest rate [in respect of similar transactions] prevailing at the time it was made” when the words in square brackets are not there, so that the Expert Questions, which relate to the Prevailing Rates of similar transactions, are irrelevant. In the course of the hearing, Mr Wong submitted that the prevailing interest rate under section 25(4)(a) simply means HIBOR or the prime rate.

29.I do not accept those submissions.

30.I point out first of all the obvious.  Section 25(4)(a) of the MLO talks about the “interest rate prevailing at the time [the transaction] was made”, but not the interest rate of the transaction.

31.The obvious purpose of having regard to “the interest rate prevailing at the time [the transaction] was made” is to compare the prevailing interest rate with the interest rate of the transaction so as to decide, with reference to the difference, and together with other relevant considerations, whether the transaction is extortionate.

32.So as to make the comparison meaningful, the prevailing interest has got to be the prevailing interest rate in respect of comparable similar transactions.

33.There is little point in comparing the prevailing interest rate of, eg commercial letter of credit loans offered by commercial banks with that of loans offered by licensed money lenders secured by the 3^rd mortgage of a humble residential unit.

34.When deciding the prevailing interest rate under section 25(4)(a) of the MLO and when having regard to it, some facts and considerations otherwise relevant to section 25(4)(b) (and hence relevant to sections 25(5) and 25(6)) may have to be taken into account.  I see no problem with that.  I see no reason why the facts and considerations relevant to sections 25(4)(a) and 25(4)(b) (and hence relevant to sections 25(5) and 25(6)) necessarily have to be different and separate.  They do not need to be pigeonholed.

35.Even if I am wrong above, in the sense that evidence on the Prevailing Rates falls outside the ambit of section 25(4)(a) of the MLO, I would still hold, assuming satisfaction of the other substantive conditions and procedural requirements, that the same evidence can be admitted and introduced under section 25(4)(c) as “any other relevant considerations”.

36.In my view, the Prevailing Rates are relevant to the Extortionate Transaction Defence by providing the bench marks against which the Effective Rates can be considered. 

37.Mr Wong’s related submission that the Expert Questions are not helpful[16] has to be considered in the context of his other submissions, and in particular those relating to Part 2 of the Subject Matter Condition.  I will come back to this.

The Subject Matter Condition

38.Mr Wong next submits that Part 2 of the Subject Matter Condition is not satisfied.

39.The main thrust of Mr Wong’s submission is that Ds have failed to place before this Court evidence showing that the field of “prevailing interest rate” is a “sufficiently organized or recognised body of knowledge or experience to be accepted as a reliable body of knowledge or experience”[17].

40.I reiterate §§13 and 14 of the 23/4/2019 Order wherein Master H Au-Yeung gave specific directions on the materials in support that Ds would have to place before the Court.

41.I refer to the Subject Summons wherein “the field of prevailing interest rate” is mentioned at §2.  There is no evidence as to what that field is intended to be, and whether that intended field indeed exists.  Is it supposed to be the field of prevailing interest rate charged by banks?  Or by licensed money lenders?  If the former, is it relevant?  If the latter, there is no evidence of it forming part of a body of knowledge or experience which is sufficiently organized or recognised to be accepted as a reliable body of knowledge or experience, or the existence of objectively ascertainable standards or consensus within a recognised profession — see Shenzhen Futaihong §5, and The Hellespont Ardent [1997] 2 Lloyd’s Rep 547, per Mance J (as he then was) at 598.

42.Mr Maurellet seeks to rely on Chow 3^rd §11(a) and Chow 4^th section F, which in my view are not sufficient.

43.No local authorities have been cited showing that leave has ever been granted by the Court to adduce expert evidence of the type sought by Ds.

44.Mr Maurellet relies on Castle Philips v Wilkinson [1992] CCLR 83.  That case concerned the interest rate that a building society would charge on a re-mortgage.  The facts of that case are different.

45.Mr Maurellet further relies on two American cases: Koch Fuels Inc v Cargo of 13,000 Barrels Etc. 530 F. Supp. 1074(1981) and In Re Cellular Information Systems Inc. 171 B.R. 926 (Bkrtcy. S.D.N.Y. 1994).  Koch Fuels was a maritime case.  The issue of prime interest rate concerned only the pre-judgment interest rate which Koch Fuels was seeking, which the Missouri District Court found that Koch Fuels had failed to prove.  In Re Cellular Information, the Bankruptcy Court of New York referred to the methodology of “investment band technique” which the witnesses used. There is no evidence of such methodology before me.

46.§2 of the Subject Summons sets out the so-called Objective Characteristics.  There is no explanation why it is deemed appropriate to confine the Objective Characteristics to those three, but should exclude, eg the length of the Loan and the capital costs that P would need to incur.

47.Further, in formulating the issues in the way the Subject Summons has, Ds proceed on the basis that the same Objective Characteristics can be gathered from comparables so that meaningful comparisons can be made.

48.At §11(c) of Chow 3^rd, Chow deals with the question of methodology which he has “been informed by the Proposed Expert that he will adopt”, that:

“ (i) Distil the relevant Objective Characteristics from the Loan Documentation and Loan Securities;

(ii) Consolidate market data available from the Hong Kong Monetary Authority and other relevant industry sources and to identify comparable mortgage loan transactions;

(iii) Apply his extensive experience in the mortgage lending industry to price the default and non-default interest rates for comparable mortgage loan transactions, following (if necessary) adjustments for credit-risks by reference to the Objective Characteristics;

(vi) Verify his findings for the Prevailing Interest Rates by cross-checking them with former colleagues and industry experts known to him from his time as Chairman of the Finance House Association of Hong Kong.”

49.In respect of (ii), there is no explanation as to what market data are available from the Hong Kong Monetary Authority.  There is further no elaboration on what “other relevant industry sources” are.  There is no confirmation that the Objective Characteristics of the comparables could be gathered or distilled from such data.

50.In respect of (iii), there is no particulars as to how the proposed expert would “price” the rates, and how “adjustments” are to be made.

51.In respect of (iv), no explanation has been given suggesting that “cross-checking” with former colleagues is an acceptable methodology.  On the face of things, it is in my view clearly not.

52.No draft expert report has been produced.  This Court has no material to consider how the above ambiguities and problems are proposed to be dealt with by the proposed expert.

53.For the above reasons, and on the materials before me, I accept Mr Wong’s submissions that Part 2 of the Subject Matter Condition is not satisfied.

54.Having reached this conclusion, I come back to Mr Wong’s related submission under the Relevance Condition[18]. For the same reasons discussed, I accept that the Expert Questions are not helpful to the Court to resolve any issue in the case justly.

The Expertise Condition

55.Given my conclusions above, there is no need for me to consider this limb of Mr Wong’s submissions.  I will only indicate that if necessary, I would also accept Mr Wong’s submissions in this regard.  On the basis of my conclusion that Ds have failed to satisfy Part 2 of the Subject Matter Condition, and when the formation of a body of knowledge or experience cannot be established, I fail to see how it can be established that the proposed expert (or indeed anyone) is qualified to give admissible expert evidence in respect of such an alleged field.

Case management considerations

56.Given the materials before me, I would if necessary hold that the probative value of the proposed expert evidence is minimal, and that the costs and time required to deal with the same is wholly disproportionate.  In this regard, I respectively adopt the observations made by Mance J (as he then was) in Re Ardent at p 598, which concern in my view equally applies here, that:

“ … where as here there is no recognized profession with established rules and standards involved, the case concerns the business activity of providing shipping advisory and management services and the suggestion is in effect that I need to hear evidence from other advisers or managers as to what they would have done hypothetically and with hindsight in the present situation. Such evidence would be bound to lead to extensive cross-examination to ascertain whether they had ever been in, or had ever experienced the situation presently under consideration. Even then it would not derive from any objectively ascertainable standard or consensus within a recognized profession.”

57.It is appropriate at this stage to deal with Mr Maurellet’s inequality of arms arguments.  He refers to Lam’s supplemental witness statements of 16 January 2020 (“Lam/WS”) at §19 wherein Lam says:

“ As for the fact that [P’s] terms, relative to the terms for comparable loans offered by other licenced money-lending institutions in Hong Kong at the material time, were neither unreasonably harsh nor oppressive, I am in a position to speak to this given my position as Chairman of the Hong Kong General Chamber of Property Finance …”

Mr Maurellet submits that given what Lam has said there, as a matter of fairness, Ds should be permitted to adduce expert evidence on the Expert Questions.

58.I reject that submission.  I am not expressing any view on that paragraph of Lam/WS.  But if Ds are of the view that the contents are for any reason objectionable, it is a matter for them to deal with the matter appropriately.  §19 of Lam/WS does not give Ds any entitlement to adduce expert evidence when the conditions laid down in Shenzhen Futaihong cannot be satisfied, as I have now found.

Conclusion

59.I dismiss the appeal.

60.I make a costs order nisi that P shall have the costs of the appeal, with certificate for two counsel, to be summarily assessed.

Mr Anson Wong SC, instructed by F Zimmern & Co, for the Plaintiff

Mr José-Antonio Maurellet SC, leading Mr Justin Lam and Mr Cyrus Chua, instructed by Nixon Peabody CWL, for the 1^st and 3^rd Defendants

Attendance of the 2^nd Defendant (Nixon Peabody CWL being solicitors on record) been excused