Sun Entertainment Culture Ltd v. Inversion Productions Ltd (Formerly Known As Tnc Productions Ltd)
Read the full judgment text of CACV 335/2023 on BabelCite. This Court of Appeal judgment was delivered on 27 September 2024.
1. This is an appeal by Inversion Productions Ltd against the judgment of Deputy High Court Judge Le Pichon dated 22 September 2023 (“ Judgment ”) [1] winding up the appellant on the petition by Sun Entertainment Culture Ltd. As the petition is based on a loan borrowed by the former from the latter, we shall refer to them as the “ Borrower ” and the “ Lender ” respectively. The Borrower contends that it is at least arguable that the loan is unenforceable by reason of section 24 of the Money Lend
Cited by 5 cases · Cites 21 cases
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CACV 335/2023, [2024] HKCA 884 On Appeal From [2023] HKCFI 2400 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 335 OF 2023 (ON APPEAL FROM HCCW NO 444 OF 2022) ________________________
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________________________ J U D G M E N T ________________________ Hon G Lam JA (giving the Judgment of the Court): 1.This is an appeal by Inversion Productions Ltd against the judgment of Deputy High Court Judge Le Pichon dated 22 September 2023 (“Judgment”)[1] winding up the appellant on the petition by Sun Entertainment Culture Ltd. As the petition is based on a loan borrowed by the former from the latter, we shall refer to them as the “Borrower” and the “Lender” respectively. The Borrower contends that it is at least arguable that the loan is unenforceable by reason of section 24 of the Money Lenders Ordinance (Cap 163) (“MLO”) because its “effective rate of interest” exceeds 60% per annum[2] having taken into account default interest, and that this dispute should be resolved by arbitration pursuant to the arbitration clause in the loan agreement, with the winding up petition either stayed or dismissed. Background 2.The Borrower is a company set up in Hong Kong to finance the production of a motion picture called “Inversion”. The Lender is also a Hong Kong company. There is no allegation or evidence that its business is that of making loans or that it is otherwise a “money lender” as defined in the MLO. 3.On 12 December 2014, the parties entered into a written agreement (“Loan Agreement”), in the form of a term sheet, for a pre-production loan for the motion picture. The loan amount is US$7,500,000, to be advanced in three tranches of US$1,000,000, US$3,000,000 and US$3,500,000 on 12 December 2014, 16 January 2015 and 6 February 2015 respectively, with the maturity date of the loan being 30 April 2015. Interest is stated to be 10% of the loan or US$750,000. There are terms on interest payment and default interest as follows:
4.There is also a term for a “guaranty” (“Guarantee”), as follows:
5.The Guarantee is actually in the form of a promissory note given by the Borrower itself. It was signed and issued at the same time as the Loan Agreement. Clause 1 of the Guarantee provides:
6.The Loan Agreement is specified to be governed by the laws of Hong Kong. There is an arbitration clause covering any dispute between the parties as to any matter arising out of or related to the Loan Agreement including any question regarding its validity. 7.The parties subsequently extended the maturity date of the loan six times, each by a written amendment agreement. In each case a further fixed sum of interest is specified in the amendment agreement, to be payable on the extended maturity date together with the principal and the antecedent interest. In addition, on the fifth extension, the loan amount was increased by US$1,000,000, which was advanced on 15 March 2019. Eventually, by the sixth and last amendment agreement, the maturity date was extended to 30 September 2020, on which, according to the terms of that agreement, the Borrower would have to repay the principal of US$8,500,000 and pay the initial interest (US$750,000), together with the additional interest under the six amendment agreements totalling US$6,450,000. 8.The Borrower failed to make any payment of principal or interest to the Lender on 30 September 2020 or thereafter. On 8 August, 22 September and 18 October 2022, the Lender served three statutory demands on the Borrower, which differ in the amounts demanded because of different bases of calculation. It is unnecessary to go into the changes because the winding up petition is only based on the third and last version, which demanded payment of US$24,057,419.35 made up as follows:
9.On 29 November 2022, the Lender presented a petition for the winding up of the Borrower based on a debt of US$24,528,666.67 as at that date, increased from the amount stated in the third statutory demand by the amount of further accrued default interest at 4% per month on the principal of US$8,500,000 (or US$340,000 per month). 10.The Borrower opposed the petition on the ground that the Loan Agreement seeks to impose interest of over 60% per annum and is therefore illegal and unenforceable under section 24 of the MLO, and that this dispute should be referred to arbitration pursuant to the arbitration clause in the Loan Agreement instead of being determined by the winding up court. The Borrower issued a notice of arbitration on 1 February 2023. It contended that theapproach adopted in Re Lam Kwok Hung Guy, ex p Tor Asia Credit Master Fund LP (2023) 26 HKCFAR 119, where the court dismissed a bankruptcy petition on the ground that the dispute over the petition debt should be determined in the New York court in accordance with the exclusive jurisdiction agreement between the parties, should be applied also where there is an arbitration agreement. 11.The parties had served pleadings in the arbitration, but before the substantive arbitral hearing could take place the Borrower was wound up. Relevant provisions of the MLO 12.Section 2(1) of the MLO provides that the meaning of terms used in the Ordinance shall be as set out in that section “unless the context otherwise requires”. The definitions include the following:
13.Schedule 2 provides as follows:
14.Sections 18 and 22 are provisions in Part III (the title of that Part being “Money Lenders’ Transactions”). Section 18 requires there to be a note or memorandum in writing of the loan agreement containing all the terms of the agreement and in particular the matters listed in section 18(2) including:
15.Section 22 regulates, among other things, the charging of default interest. It provides as follows:
16.Part IV of the MLO has the title “Excessive Interest Rates”. It contains only two sections: sections 24 and 25. So far as is relevant here, they provided at the time as follows:
The judgment of the Court of First Instance 17.Rejecting the Borrower’s contention, Deputy High Court Judge Le Pichon held that Easy Fortune Property Ltd v Yung Chun Him [2020] 4 HKC 1, a decision of the Court of Appeal, is binding authority that default interest is not to be taken into account in determining the effective rate of interest for the purposes of section 24. The judge also rejected the Borrower’s argument that an earlier decision of the Court of Appeal in Chan Ping Che v Gao Hunter (CACV 253/2014, 5 June 2017) was an authority to the contrary. On that basis she concluded that the Borrower’s defence based on section 24 was frivolous and an abuse of process, and that it did not afford any reason for staying or dismissing the petition even if the approach in Re Guy Kwok-Hung Lam was applied. Contentions on this appeal 18.Subsequent to the judge’s decision, this court[5] decided in Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] 2 HKLRD 1064 that the approach in Re Guy Kwok-Hung Lam should be applied by analogy where there is an arbitration agreement between the parties. It is common ground, therefore, that unless the court finds that the Borrower’s dispute of the debt borders on the frivolous or abuse of process, it should refer the parties to arbitration, there being no other reason for not giving effect to their agreement. 19.On behalf of the Borrower, Mr M C Law SC, and with him Mr Keith Chan, submit that default interest has to be included in the calculation of the effective rate of interest under section 24. Their main arguments may be summarised as follows:
20.On this basis, Mr Law submits that the effective rate of interest of the loan in this case exceeds 60%. He advances three alternative bases of calculation:
21.On behalf of the Lender, Mr Martin Li’s contentions in opposition to the appeal are, broadly, as follows:
The rate of interest 22.We shall first address the question of what amount of interest is payable by the Borrower under the Loan Agreement. Two issues divide the parties. 23.The first is whether default interest is charged on outstanding principal only or on both unpaid principal and interest. This is a question of construction of the contract. The Loan Agreement has to be construed together with the Guarantee, which is in fact in a form annexed to the former. They are part and parcel of the same transaction. Clause 1A of the Guarantee expressly says that default interest accrues on the unpaid principal. Mr Law relies on the term in the Loan Agreement that “Interest will be payable upon Maturity Date and will be added to the balance of the Loan”, but the purpose of this clause seems to us to be to specify when the initial interest is payable, and to provide that such interest is payable on maturity, on top of the balance of the loan. The clause on Default Interest Rate simply states “4% per month in addition to the Interest” and not “4% per month on the unpaid principal and the Interest” or words to that effect. The words “added to the balance of the Loan”, found in the clause on Interest Payment, have to be approached in conjunction with the Guarantee. There is also force in Mr Li’s submission that if default interest would accrue on both the principal and interest, clause 1B of the Guarantee would be pointless since the amount of default interest accruing would be the same regardless of whether the principal or interest was first paid off. Reading the documents together, we consider it plain that default interest accrues only on the unpaid principal and not on either the initial interest of US$750,000 or the additional interest under the amendment agreements. 24.The second issue is whether the stipulated default interest at 4% per month is to be compounded with monthly rests, as the Borrower contends. The answer is in our view clearly: No. Nowhere does the Loan Agreement state that compound interest is charged. Even the words “added to the balance of the Loan” only appear in relation to the interest payable upon the Maturity Date, not with regard to default interest. The fact that the rate is expressed as a monthly rate does not mean that interest is compounded monthly. It is for the Borrower, who is seeking to fatten up the interest provisions for slaughter, to show that there is an express or implied agreement for compound interest (see China Agri-Products Exchange Ltd v Wang Xiu Qun [2022] HKCFI 1533 at §38). It has failed to do so. 25.It follows that both the primary and the first fall-back calculations of the Borrower set out in §20(1) and (2) above are to be rejected. 26.As to the alternative contention that the pre-default interest rate and the default interest rate are to be aggregated to produce an effective rate of 62.58% (see §20(3) above), with respect the proposition needs only to be stated for it to be seen to be irrational. The rate of 14.58% was the annualised percentage rate over the 5¾ years from December 2014 to the extended maturity date of 30 September 2020, whereas the rate of 48% per annum was the applicable rate after that date. There is no basis whatsoever in law or mathematics for the Borrower simply to add them up and call their sum the effective rate. 27.If one wishes to arrive at an overall average rate combining different rates applicable over different periods of time, a more involved calculation would be necessary. In the present case, the calculations are not complicated since both principal and interest are payable only at the end. Based on the petition debt of US$24,528,666.67 as at 29 November 2022, the average rate from 12 December 2014 to the date of the petition would be approximately 23.68% per annum, i.e. (24,528,666.67 – 8,500,000) ÷ 8,500,000 ÷ 7.9644 years.[6] It can be seen that the result, in effect a weighted average annual rate, would change depending on the length of default adopted in the calculations. Whether an exercise of this kind is called for in determining the “effective rate of interest” for the purposes of section 24 will be discussed below. 28.It follows that none of the three contentions advanced by the Borrower on the calculations of the effective rate of interest is sound. Its allegation that section 24 has been contravened fails in limine. There is accordingly no valid ground for opposing the petition. The appeal must be dismissed on this basis alone. Whether default interest is taken into account for the purpose of section 24 29.Though not strictly necessary, because of the state of the authorities it is appropriate that we go on to deal with the contest on whether default interest is to be taken into account in determining the effective rate of interest under section 24. We should make clear that in using the terms default and default interest, we intend to refer to the present kind of case, where the rate of interest is increased after and by reason of default in the repayment of the amount due at the end of the loan. We are not concerned with other arrangements whereby, for example, the interest rate may be increased during the term of the loan as a result of certain specified events of default. 30.The starting point is the statute. As set out above, the MLO in Part III contains section 22 which applies to loans by money lenders. Section 22(1)(c) makes it illegal for a loan agreement to provide for increased default interest, but the proviso permits the money lender to charge simple interest on overdue interest. Section 22(2) gives the court power, notwithstanding the illegality under section 22(1), to hold the agreement enforceable to such extent and subject to such modifications or exceptions as the court considers equitable. 31.Section 24, on the other hand, is in Part IV (Excessive Interest Rates) and applies to all persons, whether money lenders or not. Section 24(1) makes it an offence, punishable with a fine of HK$5 million and 10 years’ imprisonment at the maximum, for a person to lend or offer to lend money at an effective rate of interest which exceeds 60% per annum (48% after the 2022 amendment). Section 24(2) makes the loan agreement and security unenforceable. 32.Section 25, the only other section in Part IV, empowers the court to reopen extortionate loan transactions. The power is subject to section 24(2), so that a loan rendered unenforceable by that sub-section cannot be reopened and made partially enforceable under section 25: Wong Ming Wai v Tsui Kam Ming trading as Tung Tai Construction Co (CACV 179/1999, 14 October 1999). Section 25(2) specifies when a transaction is to be regarded as extortionate. Section 25(3) introduces a rebuttable presumption that the transaction is extortionate if the “effective rate of interest” exceeds 48% per annum (36% after the 2022 amendment). 33.In his construction of section 24, Mr Law has placed great store on the definition of “interest” in section 2(1) which he submits is very wide and prima facie includes default interest. In our view, however, the word cannot be construed in isolation. The question at hand is whether default interest is to be included in determining whether a person “lends or offers to lend money at an effective rate of interest” that exceeds the specified limit. “Effective rate of interest” is defined in section 2(1) to mean, unless the context otherwise requires, the true annual percentage rate of interest calculated in accordance with Schedule 2. But it has been held that where the interest is capable of being truly expressed in terms of an actual rate, that rate rather than the result of the calculations under Schedule 2 is the effective rate: Kwok Ying Lung v Ko Chi Hung & Anor [2001] 3 HKC 480, 490D-I, 492B. In that case, Le Pichon JA said (at pp 489I-490I):
34.Yuen J (as she then was, sitting in the Court of Appeal) described the deemed rate under Schedule 2 as a “‘statutorily averaged’ true rate of interest”, and the actual rate as a “single, constant rate charged on the entire loan”, both being a “true annual percentage rate of interest”.[8] 35.Whichever method is adopted, the essence is to find an overall rate of accrual of interest in relation to time. For this purpose it is necessary to take into account the principal, the interest payable and the time in which payment is to be made. This raises at once an obstacle for the Borrower’s argument. Whilst there is a term, usually fixed, during which non-default interest accrues on a loan, the default period is indefinite and default interest is typically charged on an open-ended basis. Without an end date of the default it is not possible to calculate an average rate covering both periods. Different end dates will produce different average rates. There is no “single, constant rate” that applies. Nor do the steps in Schedule 2 make sense when one seeks to apply them in this situation. 36.It is not an answer to confine the calculation to the default period, because the section refers to the effective rate of interest at which a person lends or offers to lend money, not to any rate specified in the agreement as applicable at any one time. As a matter of construction, we cannot see how this can be confined to the default interest rate. On the contrary, it may be said that the statutory language is more apt to refer to the non-default rate of interest which is the agreed rate under the contract, rather than the default rate which is only applicable when the contract is breached. As Mr Li submits, which is not disputed by Mr Law, under the Loan Agreement the payment of default interest is a secondary obligation, engaged only upon the Borrower’s breach of its primary obligation of repaying the money lent together with interest at the agreed maturity date. Where the rate of interest under a loan agreement is stated as or capable of being expressed as X% per annum during the term, with interest in default of repayment at a higher rate of Y% per annum, it seems to us to strain the language to say that the lender “lends or offers to lend money at an effective rate of interest” of Y% or a combination of X% and Y% that depends on the proportional lengths of the term and the eventual period of default. Further, Mr Li submits on behalf the Lender that the “rate of interest charged on the loan” that has to be set out in the note or memorandum of the loan agreement required (for money lenders) under section 18(2)(i) is the non-default rate. Mr Law has not disputed this which seems to us to be correct (though for money lenders by reason of section 22(1)(c) the default rate cannot be higher). 37.It needs to be recalled that in addition to imposing absolute unenforceability on the contract, section 24 also creates an imprisonable offence, committed when a person lends or offers to lend money at an excessive effective rate of interest. Difficult questions present themselves when one attempts to apply the section to default interest. For example, if in a particular loan agreement the non-default interest rate is an ordinary, relatively low rate, but the specified default interest rate itself exceeds 60% per annum, is the offence committed at the inception of the loan, as Mr Law seems to suggest? But there is not yet any default then and there may well be none in the end. Is the offence instead committed by the lender immediately upon the borrower’s default? Or is it only committed by the lender as and when the borrower has defaulted for a sufficiently long time such that the default interest accrued, averaged with pre-default interest from the beginning, yields a rate per annum of just over 60%? None of these approaches seems satisfactory as the touchstone of criminal liability. The lender may say he is not “lending or offering to lend” at the default rate (or indeed at any rate) after the maturity date. On the contrary he is not prepared to lend beyond the term, on the expiry of which the borrower is bound to repay the money, and judgment may be entered against him if he does not. On this view default interest is not an agreed price for the use of money as a loan, but stipulated compensation for the wrongful detention of money after the loan has expired. We agree with the judge[9] that the principle against doubtful penalisation militates against the Borrower’s interpretation: Bennion, Bailey & Norbury on Statutory Interpretation (8th ed), §26.4. 38.Mr Law has referred us to the records of proceedings in the Legislative Council in 1980 leading to the enactment of the MLO, and pointed out that the Attorney General, moving the Bill, expressed the view that it was “quite unsatisfactory and wrong to have rates up to 1,400% being possible to be charged” and that the proposed provision that was to become section 24 was “absolutely crucial to the success of the Bill as a means of ending the reign of loansharks”.[10] Mr Law submits that these concerns are equally valid in relation to excessively high rates of default interest, and that if default interest were not caught by section 24, lenders could easily evade the controls by “end-loading” excessive interest as default interest. 39.We do not think this argument assists the Borrower. The relevant social evil targeted by the Legislature was the lending of money at excessively high interest rate. The measure adopted was the criminalisation (with civil unenforceability) of loans with an effective rate of interest exceeding 60% per annum, and the presumption of being extortionate for those with interest rates over 48% per annum. The figures of 60% and 48%, according to the records, were selected after studying the rates charged by reputable institutions and similar legal limits in other jurisdictions. In particular, the thinking behind the 60% limit was “to choose a rate of interest which reputable commercial people and society generally all agree to be safely high enough, and then to make it an offence to lend money at a rate in excess of that.” Whilst 60% per annum appears to be a very high rate in this era, it should be seen against the finding at the time that “[m]ost reputable institutions in the personal loan field in Hong Kong charge effective rates of interest between 34% and 44% per annum depending upon the circumstances of the borrower.” It was in this context that “a rate of interest in excess of 60% per annum [was] considered wholly unacceptable.”[11] What was studied seems to be lending rates. There is nothing to suggest that the Legislature had in that exercise considered what would be acceptable or not as rates of default interest which are by definition only applicable where the borrower has failed to repay and as such presents a higher credit risk: see Re Mandarin Container & Ors [2004] 3 HKLRD 554, §§15, 22‑23; Lordsvale Finance plc v Bank of Zambia [1996] QB 752, 763. 40.As to the suggested risk of circumvention by “end-loading” interest, default interest is only incurred if the borrower fails to repay under his primary obligation. It would be of doubtful wisdom for a lender to end-load his hoped-for profit into the default interest rate. And sham arrangements can be dealt with by the law as such. 41.In any event, default interest does not fall within an unregulated legal vacuum. Section 22 shows that the Legislature had given specific attention to default interest and decided to regulate it in the case of money lenders in the way set out in that section, balanced by a power for the court to give relief from the consequence of unenforceability. Control over default interest is also afforded by section 25. Section 25(2)(a), which applies to any loan whether lent by a moneylender or not, deems a transaction extortionate, which may for that reason be reopened by the court, if “it requires the debtor … to make payments (whether unconditionally or on certain contingencies) which are grossly exorbitant”. There is no dispute that payments on contingencies are apt to cover default interest. Section 25(2)(b) more generally states that a transaction is extortionate if “it otherwise grossly contravenes ordinary principles of fair-dealing.” On either limb default interest provisions can potentially be found extortionate and denied validity. 42.Mr Law refers to section 25(3) and says that there is no reason why the phrase “effective rate of interest” there does not include default interest. He submits that the same phrase in section 24 ought to have the same meaning as in section 25. We are content to assume that the phrase has the same meaning in the two sections. But there is no difficulty if effective rate of interest in section 25(3) likewise does not encompass default interest. This will only mean that default interest is not taken into account in determining the effective rate of interest so as to trigger the rebuttable presumption of being extortionate where the limit is exceeded, but the transaction with default interest taken into account can still be found to be extortionate under either limb of section 25(2) and for that reason reopened by the court. 43.There is in addition the common law on penalties, which may render default interest unenforceable if the increase in the rate upon default is so large as to show that it is not just an adjustment to reflect a change in credit risk or in the cost of administering the loan but imposes a detriment on the borrower out of all proportion to any legitimate interest of the lender in the enforcement of the primary obligation: see Cavendish Square Holding BV v Makdessi [2016] AC 1172, §§ 32, 146-148, 152, 255; Re Mandarin Container & Ors, supra; Houssein v London Credit Ltd [2024] EWCA Civ 721, §§32-43, 48-54. 44.We can turn now to the authorities. In Easy Fortune, the agreements between the parties provided that the defendant was to make monthly interest payment at the rate of 21.6% per annum (i.e. 1.8% per month), but a preferential interest rate of 9.6% per annum (i.e. 0.8% per month) was applicable instead provided the borrower made repayment punctually. On the plaintiff lender’s application for judgment under Order 88 and for striking out the defence, the master inter alia struck out the defendant’s defence in part and entered judgment for the plaintiff in a specified sum. On appeal by the defendant, the judge in chambers, Recorder J Pow SC, held it was arguable that 21.6% was a disguised default interest rate and that there was a breach of section 22(1)(c) (which prohibits a money lender from charging interest at a rate increased by reason of any default in the payment of sums due).[12] 45.As to section 24, the defendant there had put forward various calculations[13] stating that based on a scenario of a default in making one monthly repayment, the effective interest rates on the loans would exceed 60% per annum, and argued that the loan agreements were therefore illegal and unenforceable by virtue of section 24.[14] The defendant alleged that under the agreements, in the event of a minor default, all loans in the portfolio would be deemed to be in default with the consequence of higher interest rates being applicable and the retrospective charging of higher interest rates dating back to the inception of the loans.[15] This would result in the interest rate being in excess of 60% per annum, contrary to section 24. On this argument, the Recorder stated in his judgment under the heading “Excessive interest rate”:
46.In short, the Recorder reasoned that where the true interest rate is capable of being expressed as an actual annual percentage rate, that is the rate to be stated in the memorandum under section 18 and is also the effective rate for the purpose of section 24. There is no scope for taking into account default interest, which is a matter for section 22. In the result, the judge gave judgment in favour of the plaintiff for the unpaid balance of the principal, with leave to the defendant to defend any additional claim including all claims for interest. 47.The Recorder’s holding on default interest was directly but unsuccessfully challenged by the defendant on further appeal. The Court of Appeal (Yuen, Chu and Poon JJA), examining what the “effective rate of interest” of the loan is for the purpose of section 24, referred to Kwok Ying Lung and held that the Recorder was correct in stating that where the interest charged was capable of being expressed in terms of a rate per cent per annum, the “effective rate” was that actual rate, which was also the rate stated in the memorandum under the first limb of section 18(2)(i). There was no scope for application of Schedule 2.[16] The court also rejected the defendant’s submission, which relied on three cases, that default interest was to be taken into account in arriving at the effective rate. The court concluded that the judge “did not err … where he pointed out that in analysing whether s 24 has been contravened, this should not be done on a scenario of default”.[17] 48.Easy Fortune was heard by the Court of Appeal shortly before another division of the Court handed down their reasons for judgment in Chan Ping Che v Gao Hunter (CACV 253/2014, 5 June 2017) (Lam VP and Barma JA). In Chan Ping Che, the action was for recovery of three loans. The first was a loan of HK$40 million for three months, at an interest rate of 15% per annum. Default interest would be payable at the rate of 5% per month on any sum not paid when due. The third loan was relevantly similar. The defendant borrower failed to repay and the plaintiff lender applied for summary judgment. At first instance the judge granted the defendant leave to defend on condition that the outstanding amount of all three loans was paid into court. On appeal, it was argued that in relation to those two loans, there was a breach of section 24 rendering the loans irrecoverable. Taking the first loan as an example, after the 3-month term, default interest would run at 5% per month on the outstanding principal and interest, totalling HK$41.5 million, so that, for any 12-month period after the maturity date, HK$24.9 million (41.5m × 5% × 12) would be payable which would yield an effective rate of interest of 62.25% based on a principal amount of HK$40 million. 49.So far as we can ascertain from the decision, the plaintiff’s counsel made only two points in response, both of which were rejected by the court. First, the plaintiff did not in fact charge default interest on the outstanding interest. The court held that it was what the agreement provided, rather than what the plaintiff might in fact have done, that was relevant. Secondly, the effective rate of interest for the first year (including the 3-month term of the loan) would be less than 60% per annum because the rate for those 3 months was much lower. The court said that this was not an answer because in the second and subsequent years, the effective rate of interest would seem to be as suggested by the defendant. In conclusion, allowing the appeal in part, the court held that there was an arguable defence and that unconditional leave to defend should have been granted in respect of those two loans. Mr Law relies on this decision as one that conflicts with and undermines Easy Fortune. 50.Mr Law further relies on Ngan Pui Chi v Bao Quan, supra, also decided whilst the Court of Appeal’s judgment was pending in Easy Fortune. There the loan agreements provided that any outstanding balance after the due date would incur “penalty interest” at the rate of 0.16% per day (i.e. 58.4% per annum). The borrower contended that the default interest rate was extortionate for a number of reasons, including that being in excess of 48% per annum it was presumed extortionate under section 25(3). At first instance, Deputy High Court Judge Cooney SC accepted that contention. He reopened the loan agreements and struck out the term providing for default interest in each of them.[18] On appeal, the Court of Appeal (Lam VP, Yuen and Au JJA), whilst allowing the appeal on a wholly different issue, simply said they would not disturb the judge’s findings on default interest.[19] Mr Law relies on this case as an authority that default interest may be taken into account in determining whether the “effective rate of interest” exceeds the specified threshold in section 25(3). However, it should be noted that there was no argument from the lender whether default interest ought to be taken into account. It appears that the relevant rate was assumed to be the daily rate for penalty interest specified in the contracts.[20] 51.It appears that neither Chan Ping Che nor Ngan Pui Chi had been drawn to the attention of the Court of Appeal in Easy Fortune after the hearing but before it gave judgment on 27 September 2019. Mr Law submits that Easy Fortune and Chan Ping Che amount to conflicting decisions of the Court of Appeal on the point in question and that we are at liberty to choose which decision to follow: see Solicitor (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117 at §§29, 39-40. 52.Going further, he submits that in Easy Fortune should be regarded as plainly wrong and not binding (see Solicitor (24/07) v Law Society of Hong Kong at §47) because: (1) neither the Recorder nor the Court of Appeal had the benefit of proper assistance from the defendant who acted in person or the benefit of the arguments advanced on behalf of the Borrower in this case; (2) the Court of Appeal’s attention was not drawn to Chan Ping Che or Ngan Pui Chi; (3) the courts’ attention was apparently not drawn to the definition of “interest” in section 2(1) of the MLO; (4) the courts’ attention may not have been drawn to the fact that section 22 applies only to money lenders whereas section 24 applies generally; and (5) there is no previous authority which positively supports the Recorder’s ruling. 53.We do not accept either submission. As the judge pointed out,[21] all that the Court of Appeal decided in Chan Ping Che was that there was a triable issue in that case. The court specifically said it was “not necessary to come to a concluded view as to the merits of the defence” at that stage.[22] That means the court did not make a ruling on the point of law. It is misconceived for the Borrower to submit that the ratio decidendi is that the point of law is arguable. Furthermore, there was no argument advanced by the lender there that default interest is not to be taken into account in determining the effective rate of interest for the purposes of section 24. It seems to us that the Court of Appeal simply proceeded on an implicit assumption that default interest could arguably be taken into account and held accordingly that there was on the facts an arguable defence. As Yuen JA said in Chiu Hoi Po v Commissioner of Police [2008] 4 HKLRD 67 at §45, what is binding is not the result of an appeal, but the reasons for it – an unreasoned decision would have no binding effect. A case is not binding authority for a proposition that has been assumed sub silentio, rather than actually considered and decided: Man King Chuen & Ors v Hong Lok Yuen International School Association Ltd & Anor [2018] 4 HKLRD 294, §44. Properly examined, Chan Ping Che is plainly not an authority that conflicts with Easy Fortune in any relevant sense. 54.Nor does Ngan Pui Chi take matters any further. Again, there was no argument advanced to the Deputy Judge or the Court of Appeal that default interest should not be taken into account in calculating the effective rate of interest for the purpose of section 25(3). The Deputy Judge actually went on to consider whether the rate was unreasonable or unfair notwithstanding the presumption, and held that it was, which suggests that the same result would have obtained even without applying any presumption under section 25(3). The Court of Appeal merely said it would not disturb the Deputy Judge’s findings. 55.In contrast, Easy Fortune is a considered decision on the point by the Court of Appeal. Although the precise contents of the default interest provisions in that case and their apparent effect are not entirely clear (see §45 above), the court seems to have espoused the rule that default interest is not to be taken into account for the purposes of section 24, at least on one reading, as the basis of its decision. The defendant’s argument that the true intention of the MLO is to prohibit excessive interest rate irrespective of the circumstances giving rise to the interest, and does not differentiate between default interest and non-default interest, was rejected by the court.[23] The fact that the defendant appeared in person and that not all the arguments raised by Mr Law before us had been advanced there are not valid grounds for regarding this court as free to depart from it. It is true that there was no mention in the judgment of the meaning of “interest” as defined in section 2(1) of the MLO, but the controlling concept in section 24 is not “interest” but “effective rate of interest” which the court discussed at length. Further, it is clear from §§34 and 36 of the Court of Appeal’s judgment that it was well aware of the fact that section 22 applies only to money lenders whereas section 24 applies generally. We are far from persuaded that there is any ground for saying that Easy Fortune is plainly wrong so that we may depart from it. On the contrary, we consider that it is consistent with our discussion above on the application of section 24 to default interest. 56.Easy Fortune has been followed in a number of first instance decisions as having decided that default interest is not taken into account in assessing the effective rate of interest for the purposes of sections 24 and 25, without any concern expressed that there may be something remiss, unjust or impractical about the law: see Key Step Ventures Ltd v Fuguiniao Group Ltd [2020] HKCFI 1087 at §§19-27 (Deputy Judge K Wong);[24] Grade One Ltd v Chow Chin Yui Angela [2022] HKCFI 2328 at §77 (Cheng J); Trillion Wide Credit Finance Ltd v Ample Sky Holdings Ltd [2022] HKCFI 3813 at §33 (Au-Yeung J); China Sun Finance Co Ltd v Morality International Trading Ltd & Ors [2023] HKCFI 2150 at §§39-40 (Lisa Wong J); Chen Simon Guomin v Chan Choi Har Ivy & Ors [2023] HKCFI 3135 at §45 (Deputy Judge M K Liu). 57.Finally Mr Law has also relied on Reading Trust Ltd v Rimmer (1930) 46 SLR 285, a decision of the Sheriff Court of Lanarkshire, Scotland, referred to in Meston, The Law relating to Money Lenders (5th ed), pp 163-165. There the loans were repayable with interest at the rate of 60% per annum, and in the case of default in payment, interest on the combined sum of principal and interest at the rate of 60% per annum would be chargeable until payment. Section 7 of the Moneylenders Act 1927 contained a provision similar to the proviso in section 22(1) of the MLO which permitted a money lender, upon the borrower’s default, to charge simple interest on the interest due and provided that any interest so charged would not be reckoned as part of the interest charged in respect of the loan. Section 10 of the Act provided that where it is found that “the interest charged exceeds the rate of [48%] per annum,” the court shall, unless the contrary is proved, presume that “the interest charged is excessive, and that the transaction is harsh and unconscionable”. The money lender argued that section 10 did not apply to the interest on the combined sum after default because of the proviso in section 7 that it was not to be reckoned as part of the interest on the loan. This argument was rejected, the court commenting that if section 10 could be invoked for an attack on the reasonableness of the interest on the principal loan, it could also be invoked in an attack on the interest on the combined sum of principal and interest. In our view this decision provides no assistance to the Borrower here. The language of section 10 of the 1927 Act is quite different from the language of both sections 24 and 25(3) of the MLO. Further, the contractual rate in that case of 60%, as applied to the principal alone, well exceeded the statutory standard of 48%. 58.In conclusion, quite apart from its untenable calculations, the legal premise of the Borrower’s opposition to the petition is contrary to the Court of Appeal’s decision in Easy Fortune and therefore not open to the Borrower. The judge was correct in deciding to proceed on the petition and wind up the Borrower notwithstanding the arbitration clause. Conclusion and costs 59.For the above reasons, the Borrower’s appeal is dismissed. 60.Mr Li asks for indemnity costs, relying on Re S Y Engineering Co Ltd (CACV 1896/2001, 27 February 2002) at §20. That however is a case where the court concluded the appeal was entirely devoid of merit and should never have been brought (§19) and also where a contributory of the company was ordered to bear the costs (§§20-21). We are inclined to think that the present appeal does not call for indemnity costs, and would therefore make an order nisi that the Borrower do pay the Lender’s costs of the appeal on the party and party basis.
Mr Martin Li, instructed by Messrs A Lee & Partners, for the Petitioner Mr Law Man Chung SC and Mr Keith Chan, instructed by Messrs Deacons, for the Respondent [2] The threshold as set out in section 24 was amended to 48% per annum in 2022 (see L.N. 208 of 2022) but the applicable limit for the purposes of this appeal is 60% per annum. [3] This was amended to 48% per annum in 2022: L. N. 208 of 2022. [4] The rate was amended to 36% per annum in 2022: see L.N. 208 of 2022. [5] Kwan VP, Barma and G Lam JJA. [6] For simplicity, we have assumed that the principal of US$8,500,000 was advanced at once in one sum at the inception of the loan and ignored the fact that it was advanced in 4 tranches on different dates. [7] Askinex Ltd v Green [1969] 1 QB 272 at 281F-282A. [8] p 492B, D and G. [9] Judgment, §§35-36. [10] Hong Kong Hansard, Official Report of Proceedings, 28 May 1980, pp 849 and 851. [11] Hong Kong Hansard, Official Report of Proceedings, 28 May 1980, p 852. [12] (HCA 1484/2014, 12 August 2016), §37. [13] The details of the calculations cannot be seen from the judgments. [14] (HCA 1484/2014, 12 August 2016), §13(17) & (18). [15] (HCA 1484/2014, 12 August 2016), §13(6) & (12). [16] [2020] 4 HKC 1, §§38-44. [17] [2020] 4 HKC 1, §§45-54. [18] §§27, 39, 70, 111(7), 153, 157, 162. [19] [2019] 4 HKLRD 135 at §91. [20] See the first instance judgment, at §§155-156. [21] Judgment, §27. [22] §§24. [23] §§32-33. [24] We should point out that Deputy Judge K Wong seems to have considered that because the effective rate of interest (without taking into account default interest) did not exceed the limit in section 25(3), section 25 was altogether not engaged: see §§25-27. As explained above, section 25(3) only supplies a presumption. Where no presumption applies, a transaction may yet be found to be actually extortionate under section 25(2)(a) or (b). |
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