Totalcorp (Nominees) Ltd v. Hong Kong Sai Kung Ngong Wo Resort Development Ltd
Read the full judgment text of CACV 72/2020 on BabelCite. This Court of Appeal judgment was delivered on 29 September 2021.
1. This is an appeal by the plaintiff from the judgment of Deputy High Court Judge Patrick Fung SC after trial below (“ Judgment ”) [1] dismissing its action against the defendant for enforcement of a loan and its security on the ground that the effective rate of interest charged for the money lent exceeded 60% per annum in contravention of section 24 of the Money Lenders Ordinance (Cap 163) (“ Ordinance ”).
Cited by 1 case · Cites 7 cases
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CACV 72/2020 [2021] HKCA 1437 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 72 OF 2020 (ON APPEAL FROM HCMP NO 674 OF 2017) ____________
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____________ Before: Hon Kwan VP, Au and G Lam JJA in Court Date of Hearing: 15 September 2021 Date of Judgment: 29 September 2021 __________________ J U D G M E N T __________________ Hon G Lam JA (giving the Judgment of the Court): 1.This is an appeal by the plaintiff from the judgment of Deputy High Court Judge Patrick Fung SC after trial below (“Judgment”)[1] dismissing its action against the defendant for enforcement of a loan and its security on the ground that the effective rate of interest charged for the money lent exceeded 60% per annum in contravention of section 24 of the Money Lenders Ordinance (Cap 163) (“Ordinance”). The facts 2.The background facts, which were mostly not in dispute, together with the judge’s findings on the main events, may be set out briefly below. In late 2014, a Mainland company called Zhuhai Free Trade Zone Zhong‑Gang Exhibition Co Ltd (“Zhuhai Company”) urgently needed a loan to settle certain construction costs and, through a middleman called Lau Hoi Tuen (“Lau”), approached a potential lender called Mr Wong Wing Chung (“Wong”) for a loan. 3.It was eventually agreed that a loan of $45 million would be granted by the plaintiff, which is a company incorporated in the British Virgin Islands and held in the name of Wong’s wife, to the defendant, which is a Hong Kong subsidiary of the Zhuhai Company, on the security of various lots of land in Sai Kung belonging to the defendant which are specified in the title of these proceedings and will be referred to below collectively as the “mortgaged land”. The loan was for the term of 3 months, with interest at the rate of 2.5% per month, totalling $3,375,000, to be deducted from the loan proceeds at the outset. Two loan application letters dated 26 January 2015 and 2 February 2015 respectively containing these terms were signed by the defendant. 4.The Legal Charge in respect of the mortgaged land was dated 5 February 2015 and executed on the same day. (There was also an equitable mortgage over some other land in favour of the plaintiff[2] but since nothing turns on this we shall for simplicity ignore it below.) The loan was advanced on the same date. Of the $45 million:
5.The loan became due for repayment on 5 May 2015, but the defendant was unable to repay it. On the same date, an extension to 4 June 2015 was agreed, with interest at 3.5% per month (ie $1,575,000) of which $225,000 was to be paid immediately. This extension was evidenced in a loan extension application letter signed by the defendant dated 5 May 2015. The sum of $225,000 was paid to the plaintiff. 6.On 4 June 2015, a second extension to 4 July 2015 was agreed, with interest at 3.5% per month (ie $1,575,000), as evidenced in a loan extension application letter of 4 June 2015. The defendant agreed to pay $225,000 on 4 June 2015 towards interest and to pay a further sum of $2,722,050 on 18 June 2015 being unpaid interest for the previous month together with interest thereon and the remainder of the interest for this second extension. The sum of $225,000 was paid to the plaintiff, but the further sum of $2,722,050 was not paid on 18 June 2015. 7.The loan was not repaid on 4 July 2015, and on 6 July 2015 by another loan extension application letter the parties agreed a third extension of 10 days to 14 July 2015, on terms that the defendant would repay on 14 July 2015 the loan of $45 million, the unpaid sum of $2,722,050, together with a fee in the sum of $157,500, totalling $47,879,550, and interest thereon for 10 days at 4% per month ($63,839.40 per day). 8.No repayment was made by the defendant on 14 July 2015. A fourth extension was agreed between the parties, as evidenced in yet another Loan Extension Application Letter dated 17 July 2015. The length of the extension and the new repayment date were however left blank in this document. The defendant agreed to pay $15,000 as fees for each of the third and fourth extensions, and to continue to pay interest on $47,879,550 at 4% per month ($63,839.40 per day). 9.The defendant still failed to make repayment. In early 2016, the defendant managed to enter into an agreement to sell the mortgaged land but the purchaser defaulted, and the deposits paid in the sum of $6 million were forfeited to the defendant, out of which it paid $5.84 million to the plaintiff. The defendant did not pay any further sum to the plaintiff thereafter. 10.On 14 June 2016, as it transpired in the trial, Eric Yu & Co issued a demand letter on behalf of the plaintiff to the defendant (“2016 Demand Letter”). As this letter was central to the judge’s conclusion, we set out its terms as follows:
11.The judge found that the 2016 Demand Letter must have been based on at least one prior document, either in the form of a loan application or loan extension application or a loan agreement, recording an agreement between the parties that had not been disclosed by the plaintiff, the terms of which were reflected in that letter.[3] We shall refer to this as the “Inferred Agreement”. 12.On 28 July 2016, the plaintiff issued an originating summons commencing the first set of proceedings (HCMP 1936/2016) against the defendant claiming the same form of relief as in the second originating summons which eventually went to trial. 13.On 14 October 2016, the parties entered into a further agreement evidenced by a loan application letter dated 14 October 2016 (“Final Agreement”). That document read as follows (in English translation):
14.On 6 March 2017, Eric Yu & Co issued a demand letter on behalf of the plaintiff to the defendant based on the Final Agreement, which read as follows:
15.On 8 March 2017, the first set of proceedings (HCMP 1936/2016) were discontinued by the plaintiff. The judge found that this was a result of the plaintiff’s realisation that the Inferred Agreement was “seriously problematic” by reason of its terms.[4] 16.On 24 March 2017, the plaintiff issued the originating summons in HCMP 674/2017 which was subsequently dismissed in the Judgment now under appeal, claiming payment of all monies due and owing to the plaintiff under the covenants contained in the Legal Charge, delivery of vacant possession of the mortgaged land, and costs on full indemnity basis. The judge’s findings and reasoning 17.The defendant had raised at trial a number of matters in defence, putting in issue the authenticity of the documents relied on by the plaintiff and the authority on the part of the individuals who acted on the defendant’s behalf in the dealings with the plaintiff. Most of the defences were rejected by the judge and are no longer relevant. The two defences that are relevant in this appeal are: (1) that the plaintiff was a money lender who had not been registered as such under the Ordinance and had not complied with the formalities required by statute; and (2) that the plaintiff had charged interest on the loan at effective rates of over 60% per annum in contravention of section 24 of the Ordinance. 18.On the first point, the judge directed himself on the law with reference to the summary in Chitty on Contracts — Hong Kong Specific Contracts (5th ed) at §9-047. He noted that on the plaintiff’s evidence it had only granted one loan other than the loan to the defendant in this case, and that the defendant had not been able to adduce any evidence of other loans granted by the plaintiff to other borrowers. The judge concluded that he was not satisfied that the plaintiff was a “money lender” within the meaning of the Ordinance.[5] 19.As to the defence based on section 24, as mentioned above the judge found that there was the Inferred Agreement between the parties, reached at some point before 14 June 2016, whose terms were reflected in the 2016 Demand Letter. The judge found the evidence of the plaintiff’s two witnesses, namely, Lau and a conveyancing clerk in Eric Yu & Co, in relation to the 2006 Demand Letter to be incredible. He found that the plaintiff did not disclose the 2016 Demand Letter in the proceedings because it did not wish the court to find out that there was an agreement in those terms. He found that Lau had deleted WeChat messages between him and the defendant’s representative for the same reason.[6] 20.After the trial, the judge called for further written submissions from the parties on what the effective rate of interest was on the footing that the parties had reached agreement in terms reflected in the 2016 Demand Letter. The plaintiff’s trial counsel (not Mr Victor Dawes SC or Mr Joshua Chan) submitted that it would be 67.46% (calculated as $63,241,006 × 4% × 12 ÷ $45,000,000 = 67.46%). The judge essentially adopted this methodology though he took the view that the principal should be $41,004,220 instead of $45,000,000, arriving at an effective rate of 74% per annum.[7] On this basis the judge concluded that the Inferred Agreement was unlawful under section 24(1) of the Ordinance, with the result that both the agreement for the repayment of the loan in the sum of $63,241,006 and the security under the Legal Charge were unenforceable.[8] 21.The judge further considered that the fact that the parties subsequently entered into the Final Agreement did not assist the plaintiff. He held that the doctrine of locus poenitentiae did not avail the plaintiff because section 24(1) and (2) prohibited the making of an agreement for a loan with interest charged at over 60% per annum and once such an agreement came into existence section 24 was triggered.[9] He also held that since no money was actually advanced by the plaintiff to the defendant pursuant to the Final Agreement, it was not supported by any consideration. The only possible consideration was an unenforceable loan which was rolled over. Thus the Final Agreement was equally tainted with the illegality.[10] 22.Dismissing the action, the judge ordered the plaintiff to pay the defendant’s costs on an indemnity basis with a certificate for two counsel, in light of the plaintiff’s conduct in not having made full discovery of documents and his findings about its two witnesses.[11] The appeal 23.On behalf of the plaintiff, Mr Dawes SC and Mr Chan have put forward two main grounds for the appeal. First, they submit that section 24(2) of the Ordinance applies to agreements not bargains. The plaintiff sought to enforce the Final Agreement, not the Inferred Agreement. They are separate and distinct. The manner in which the principal is defined and the interest is calculated is different in the two agreements. The amounts payable are very different. This is not a case where a lender has utilised two or more agreements to circumvent the requirements of the Ordinance. The Inferred Agreement and the Final Agreement did not form part of an inter-connected scheme to charge extortionate interest; rather, the latter superseded the former and lowered the interest rate to below 60% per annum. The judge was wrong in holding that once an illegal agreement was made involving an effective rate of interest exceeding 60% per annum, section 24(2) would apply even to a separate agreement. The judge was also wrong to think that the Final Agreement was not supported by consideration just because the Inferred Agreement was unenforceable. 24.The second main ground is that the effective rate of interest under the Inferred Agreement did not in fact exceed 60% per annum. This is because that agreement in essence involved the deemed repayment of the pre‑existing loan and accrued interest and the grant of a fresh loan. The effective rate of interest should therefore be calculated on the basis of the principal sum being $63,241,006 (rather than $41,004,220), which equalled 48% per annum. 25.The defendant disputes these arguments. In addition, by respondent’s notice, the defendant contends that the Judgment should be affirmed on the additional or alternative ground that the plaintiff was an unlicensed money lender and the loan was therefore unenforceable by virtue of sections 7 and 23 of the Ordinance. Inferred Agreement 26.We deal with the point about the Inferred Agreement first, as this agreement came prior in time. 27.By the Inferred Agreement, whose terms the judge found to be those contained in the 2016 Demand Letter (as quoted in §10 above), the parties agreed that the defendant owed the sum of $63,241,006 to the plaintiff as at 31 May 2016, and that interest on that aggregate sum, which was presumably repayable on demand, would accrue at 4% per month from 1 June 2016 onwards until payment. In contrast, under the immediately preceding extension agreement (the fourth extension), interest was payable on the different sum of $47,879,550. The Inferred Agreement involved the intended aggregation of unpaid interest up to 31 May 2016 with the outstanding principal and a late payment fee and administration fee, from which a part payment in the sum of $5.84 million was deducted, forming a new principal sum of $63,241,006. 28.Mr Kenneth Chan who appears for the defendant says that the 2016 Demand Letter referred to the covenant to repay $45 million and to the “principal” as $45 million. It seems to us, however, that those references were simply set out for the calculation of the total outstanding amount. It was on that amount that by the Inferred Agreement interest would accrue. 29.As a matter of construction, even though no fresh funds were advanced, it seems to us that the Inferred Agreement gave rise to a new loan superseding the obligations of the defendant under the original loan and the various extension agreements: see New Japan Securities International (HK) Ltd v Lim Yiong Lin (HCA 1466/1983, 2 October 1986) and [1987] 3 HKC 153 (CA); Honip Credit Ltd v Leung Tak Sing Paul [2020] HKCA 879, §§4.28–4.32; BS Lyle Ltd v Chappell [1932] 1 KB 691. The judge himself had found in this case that “every time when there was an application for an extension and there was a renewal of the expiry of the loan period previously in force, a new loan came into existence”.[12] 30.On this basis, the amount of the principal for the purpose of calculating the effective rate of interest under the Inferred Agreement should be the new aggregate principal sum of $63,241,006. In their post‑trial written submissions, the plaintiff’s then counsel conceded, wrongly as it seems to us, that the principal should be $45,000,000. Misled by that submission, the judge did not consider the implications of his own finding that a new loan came into existence upon the Inferred Agreement or explain the basis for using $41,004,220 instead of $63,241,006 as the principal. Had he done so, we have no doubt that he would have come to the conclusion that the latter sum should be taken as the principal instead and that the effective rate of interest would accordingly fall below 60%. 31.We are satisfied therefore that the judge has erred in law in failing to construe the Inferred Agreement as a new loan and in concluding that the Inferred Agreement involved a contravention of section 24. Final Agreement 32.The Final Agreement, in contrast, did not involve a roll‑over of the loan with new terms applying only prospectively. Instead, it is, on its own terms, an agreement that varied the rights and obligations of the parties retrospectively back to the date of the original loan of 5 February 2015, with all the previous agreements expressly superseded. Instead of the various different rates used in the different agreements, a flat rate of 3.8% per month was to be applied from 4 May 2015 onwards. The capitalisation of interest under the third and fourth extensions and the Inferred Agreement was cancelled, so that only simple interest on the original principal was payable. 33.Mr Chan has not been able to point to any reason why the parties cannot mutually agree to alter their legal relationship by the Final Agreement. There was no finding by the judge that the entire series of agreements were intended as an inter‑connected scheme to charge illegal interest rates. There was consideration supporting the Final Agreement since the parties agreed to vary their rights and obligations under the previous agreements. Even if one disregards the Inferred Agreement, there was still a pre‑existing loan on the terms set out in the fourth extension. Specifically, there was consideration moving from the plaintiff since by the Final Agreement, the plaintiff agreed to charge a lower rate of interest on a lesser principal in comparison with either the fourth extension or the Inferred Agreement. 34.Mr Chan submits that even if the Final Agreement was effective, the action as a mortgage action under Order 88 must still fail because that agreement gave rise to a new loan that only came into existence in October 2016 and fell outside the scope of the Legal Charge. 35.We do not accept this argument. Clause 2.01 of the Legal Charge contains the covenant for repayment, stipulating that:
“Loan” is defined to mean and include the whole of the principal sum advanced by the mortgagee to the mortgagor as referred to in clause 2.01 or the balance outstanding from time to time. By clause 3.01, the mortgaged land was charged to the plaintiff as security for the “Secured Indebtedness”, which is defined to mean and include:
36.By its own terms, the Final Agreement was a contract to vary the terms of the original loan advanced on 5 February 2015 which had still not been repaid by October 2016. As Mr Chan accepted at the hearing, the defendant’s primary case is that the Final Agreement was a variation of the loan. What the plaintiff sought to enforce by its originating summons below was the loan granted on 5 February 2015 albeit on terms amended by the Final Agreement. The plaintiff was fully entitled to and did rely on the Legal Charge in bringing the action, which therefore fell squarely within Order 88. The case of National Westminster Bank plc v Kitch [1996] 1 WLR 1316, relied upon by the defendant, concerned a claim for repayment that did not rely on the mortgage security, and is as such wholly distinguishable. Money lender 37.This leaves the point raised by the respondent’s notice that the plaintiff was a money lender operating without a licence. Mr Chan submits that there are cogent indicia that the plaintiff granted the loan to the defendant as a money lender. He relies on Lau’s evidence that he would “help other people to obtain loans in return for commissions”, that Lau drafted all the loan application and extension documents between the plaintiff and the defendant, and that he even inspected the project being undertaken by the Zhuhai Company. It is also submitted that the present case was unlike Chow Wun Sing Winston v Yiu Chun Luk (CACV 295/2006, 20 February 2008) because Wong did not give any evidence. Mr Chan submits that “there is adequate basis” for the judge to conclude that the plaintiff was acting as a money lender. 38.There are two short answers to this point. First, whether or not the plaintiff was a money lender is a question of fact on which the judge made a finding. It is not suggested that he misdirected himself on the applicable legal principles or that the finding is not one that was open to him on the evidence. What Mr Chan has done is simply rehearsing the evidence already considered by the judge, without showing in any way that the judge’s finding is plainly wrong. This is far from sufficient to provide any basis for interfering with the judge’s finding of fact. 39.Secondly, a person is not a money lender for the purposes of the Ordinance if the loan in question falls within an exemption under Schedule 1 Part 2: see the definition of “money lender” in section 2 and Universe Link Industries Ltd & another v Liggars Ltd [1999] 2 HKLRD 383, 387. Since the action is based on the Final Agreement for the enforcement of a loan, which was made to a company and was, as explained above, secured by the Legal Charge, and that charge was registered under the Companies Ordinance, the loan was exempted under section 2 of Part 2 of Schedule 1. Amount of judgment 40.The question has been raised regarding the correct amount of the principal. The Final Agreement stated it to be $44 million, but Mr Dawes accepts on behalf of the plaintiff that it cannot seek to recover more than “the amount actually lent”, which is the definition of “principal” in section 2(1) of the Ordinance. The plaintiff’s primary submission is that the amount actually lent included sums paid on the instruction of the borrower and was $44 million in this case: Baystone Investments Pty Ltd v Commissioner of Stamp Duties (1977) 8 ATR 709. 41.We are unable to accept this submission. There is no dispute that what was actually lent is a question of fact: Gain Wealth Global Credit & Investment Ltd v Chan Suk Fong [2020] 4 HKLRD 831 §57. The judge made a finding that $41,004,220 was the principal.[13] This must be taken as his finding as to what amount was actually lent. Although that was said in the context of the Inferred Agreement, it is a finding concerning what happened at the outset in February 2015 and therefore equally applicable in relation to the Final Agreement. There is no appeal against that finding of fact. 42.The defendant, for its part, submits that the two sums of $225,000 each it paid to the plaintiff on 5 May and 4 June 2015 amounted to pre-paid interest and should be deducted from the principal. We do not accept this contention because interest had accrued at 2.5% per month between 5 February and 4 May 2015 although the plaintiff does not claim the balance of the interest for this period. 43.Accordingly the principal should be taken to be $41,004,220. Conclusion and orders 44.For the above reasons, we take the view that the Inferred Agreement did not contravene section 24 of the Ordinance and that there was no reason why the plaintiff could not enforce the Final Agreement and the Legal Charge as security for the loan as it sought to do in the action below. The defendant has failed in its attempt to overturn the judge’s finding of fact that the plaintiff was not a money lender. The appeal is therefore allowed. There will be judgment accordingly in favour of the plaintiff on the basis of a principal sum of $41,004,220, with interest from 4 May 2015 to the date of the judgment below (12 March 2020) at 3.8% per month, less the amounts previously paid by the defendant including the sum of $5,840,000 and two sums of $225,000 each. The precise judgment sum should be agreed between the parties before judgment is sealed. Interest shall accrue on the judgment sum at judgment rate from the date of the judgment below (12 March 2020). 45.Having regard to the matters taken into account by the judge in arriving at his costs order[14] and the erroneous interest calculations advanced by the plaintiff below, we consider, on a nisi basis, that there should be no order as to costs below. In light of the provision in the Legal Charge giving the plaintiff a full indemnity of all costs, charges and expenses incurred, we would order, again on a nisi basis, that the defendant do pay the plaintiff the costs of the appeal, to be taxed on the indemnity basis if not agreed, with a certificate for two counsel.
Mr Victor Dawes SC and Mr Joshua Chan, instructed by MinterEllison LLP, for the Plaintiff Mr Kenneth Chan and Mr Roland Lau, instructed by Kong & Tang, for the Defendant | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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