Premier Capital Management Ltd v. So Wang Fung and Another

CACV 167 /2024, [2026] HKCA 601

On appeal from [2024] HKCFI 849

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 167 OF 2024

(ON APPEAL FROM HCA NO 2337 OF 2015)

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BETWEEN

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.This appeal is brought by the defendants against the judgment of Cheng J on 21 March 2024 after a trial (“Judgment”)[1]. The plaintiff is a registered money lender under the Money Lenders Ordinance, Cap 163 (“MLO”). The 1^st and 2^nd defendants, Mr So and Ms Ma, are husband and wife. Both have been certified as being mentally incapacitated persons under the Mental Health Ordinance, Cap 136 and act by their guardian ad litem Mr W M So in these proceedings[2].

2.The plaintiff claimed against the defendants $2,917,500, said to comprise principal of $885,000 and interest of $2,032,500, as amounts due under a loan agreement they signed as borrowers dated 10 November 2014 (“Loan Agreement”).  By the Judgment, judgment was entered in favour of the plaintiff of $371,583, being the amount “actually lent”[3] to the defendants (for which no repayment has been made)  with interest at the contractual rate of 30% per annum from 10 November 2015 until the date of the Judgment on 21 March 2024, less 3 years and 9 months on account of unreasonable and inexcusable delay in bringing this action to trial[4], and interest at judgment rate from the date of Judgment.

3.In this appeal, the defendants seek to set aside the Judgment on the basis that the Loan Agreement is not enforceable under section 24 of the MLO in that the effective rate of interest (“ERI”)  exceeds 60% per annum.  They contend in the grounds of appeal that the ERI should exceed this figure by one or both of these routes:

(1)  the amount of $180,000 retained by the plaintiff’s solicitors Messrs K B Chau & Co (“KB Chau”)  at drawdown and paid by KB Chau to the plaintiff via 8 cheques, each for $22,500 from December 2014 to July 2015 for payment of the first 8 months of contractual interest[5], should be regarded as “deemed interest” under section 2(1)  of the MLO[6] and added to the contractual interest for the purpose of calculating the ERI (“Ground 1”); and/or

(2)  the amount of $333,417 charged as “administrative and intermediary fees” by the intermediary, Jone’s Consultant (HK)  Co (“Jone’s”)[7], which was found by the judge to have acted in collusion with the plaintiff in the context of section 27(3)[8], should be deducted from the principal[9] for the purpose of calculating the ERI (“Ground 2”).

4.In respect of (1), the judge held that the $180,000 should not be added to the contractual rate of interest for calculating the ERI, as that would be double counting[10].

5.As for (2), the judge did not deduct the $333,417 charged by Jone’s from the principal in calculating the ERI[11], although she held that Jone’s received this sum in contravention of section 27(3)[12] and this amount “should be set off against the amount actually lent, and the amount should be reduced accordingly”[13] pursuant to section 27(4)[14].

Background

6.The relevant background matters for the purpose of this appeal may be stated as follows.

7.Mr So was married in 2000.  In 2001, his parents financed his purchase of a property in his name for him and Ms Ma to reside.  In about 2014, Mr So came to know one Chan Cheong Yin (“Mr CY Chan”)  and regarded him as a good friend.  Mr CY Chan told him that he (Mr So)  could borrow from finance companies to improve their living and pay off their credit card and other debts.  Mr So was initially reluctant but relented due to the continual lobbying of Mr CY Chan.

8.On 10 November 2014, Mr CY Chan and two employees of Jone’s, Ms Chan and Mr Franky Lee Pui Yu (“Mr Franky Lee”), accompanied the defendants to the plaintiff’s office, where they met Raymond Siu Wai Man (“Mr Siu”), a manager of the plaintiff.  Mr Siu asked them to sign various documents.  After that, the defendants were taken to the office of KB Chau by Mr CY Chan and Ms Chan, where they signed the Loan Agreement in the presence of a female employee of the solicitors, who did not explain the document to them.

9.Under the Loan Agreement, the plaintiff was to lend $900,000 to the defendants.  The rate of interest stated was 30% per annum and it was to accrue on the basis of monthly rests.  The principal and interest were to be repaid by 12 monthly instalments.  Each of the first 11 instalments was to be of interest of $22,500, and the last instalment was to be for $922,500, being the principal and last instalment of interest.  The first instalment was to be payable on 10 December 2014, the last instalment on 9 November 2015.

10.It was found by the judge that Mr Franky Lee and Mr Siu were co-operating with each other with a view to facilitating the conclusion of the loan transaction, against the interest of the defendants, who, as Mr Siu knew on the basis of the information available to him, had no need for a loan as large as $900,000, no ability to make monthly interest repayments of $22,500 let alone the principal, and no known intention to obtain a mortgage on his property to fund such repayments.  They were acting in collusion within the meaning of section 27[15].

11.Another document the defendants signed was an Instruction and Confirmation Letter (“Withholding Letter”)  dated 10 November 2014, by which they instructed KB Chau to withhold $180,000 for repayment of the first 8 instalments under the Loan Agreement, and to issue a cheque each month to make repayment to the plaintiff.  The amount of $180,000 was never paid to the defendants.

12.An amount of $15,000 (made up of $6,000 being “legal fees” and $9,000 being “upfront fee”)  was deducted from the principal by the plaintiff and this was never paid to the defendants.

13.The remaining $705,000 of the contractual principal of $900,000 was disbursed by 2 cheques issued by KB Chau, both dated 11 November 2014, with Mr So as payee.  The cheque for $205,000 was marked “Account Payee Only”.  The cheque for $500,000 had “bearer” crossed out, it was a cash cheque and not required to be paid into a bank account of Mr So.

14.The proceeds of the $900,000 loan were used as follows:

Plaintiff’s fees deducted from the principal	$15,000
Amount withheld by KB Chau	$180,000
Cash given by Mr So to Mr CY Chan at the latter’s request	$85,000
Administrative and intermediary fees charged by Jone’s	$333,417
Payment of Mr So’s credit card and other debts owed to Bank of China	$120,000
Payment of other credit card and other debts of Mr So and Ms Ma	$166,583

Relevant holdings in the Judgment

15.It was common ground that the amount of $15,000 should not be included as principal as it was not an amount “actually lent”.  It was deducted from the principal of the loan and added to the interest for the purpose of calculating the ERI under section 24[16].

16.For the amount of $180,000 withheld by KB Chau, it was also not in dispute that it should not be included as principal, in light of section 2(3), and it should be deducted from the principal in calculating the ERI[17].  What was in dispute is whether the $180,000 should be added to the contractual interest for calculating the ERI under section 24.  As mentioned, the judge held it should not as that would be double counting[18].

17.For the amounts paid to Mr CY Chan ($85,000)  and Jone’s ($333,417), the judge rejected the defendants’ submission these amounts should also be deducted from the principal for the purpose of calculating the ERI.  We will come back to the reasons.

18.On the basis of these holdings, the ERI found by the judge is 40.43% per annum:

Principal	Under Loan Agreement	$900,000
	Less plaintiff’s fees	($15,000)
	Less withheld “interest”	($180,000)
		$705,000
Interest	Under Loan Agreement	$270,000 ($900,000 x 30%)
	Add plaintiff’s fees	$15,000
		$285,000
ERI	$285,000 ÷ $705,000 x 100%	40.43%

19.As the ERI does not exceed 60% per annum, the judge rejected the defendants’ contention the Loan Agreement is unenforceable for breach of section 24[19].

20.The judge then considered whether various amounts ($333,417, $85,000, $180,000, $15,000)  engage the operation of section 27.

21.In the context of section 27(3), she found it established on the facts that Jone’s was acting in collusion with the plaintiff but did not go further to find that Jone’s was the plaintiff’s agent in the legal sense.  As Jone’s received $333,417 in contravention of section 27(3), this amount “should be set off against the amount actually lent, and the amount should be reduced accordingly” pursuant to section 27(4).  The judge noted “[this] will in turn affect the amount due by way of interest under the Loan”[20].

22.For the amount of $85,000, the judge did not find the plaintiff was acting in collusion with Mr CY Chan[21].  Section 27 was not engaged.

23.For the sums of $180,000 and $15,000, the judge held they should be deducted from the principal simply by virtue of the plaintiff’s concession in light of section 2(3)[22].  The same result could be reached by applying section 27(1)  as these amounts, which were never paid to the defendants and they never enjoyed the use of these sums as loan principal, constituted “costs, charges or expenses” which were “incidental to or relating to … the granting of the loan … or the guaranteeing or securing of the repayment thereof”.   Pursuant to section 27(4), they should be “set off against the amount actually lent, and the amount should be reduced accordingly”[23].

24.After deducting $333,417, $180,000 and $15,000, the judge ordered the defendants to repay $371,583 as the amount “actually lent”[24], for which no repayment has been made by the defendants.  When ordering interest to be paid on the outstanding principal, the judge did not take the figure of $705,000 (which she used for the calculation of the ERI)  but ordered interest to be paid on $371,583, at the contractual rate from the date when payment was due until judgment less 3 years and 9 months on account of inexcusable delay[25].

25.Two things should be noted at the outset about the deduction of $333,417, $180,000 and $15,000 from the principal.

26.First, in respect of $333,417, the deduction was made only via sections 27(3)  and (4), not via sections 2(1)  and (3).  In other words, the judge did not make a finding on the facts that this amount was not “actually lent” or “not shown to have been lent”.

27.Second, in respect of $180,000 and $15,000, the deduction was made via sections 2(1)  and (3)  and the judge also found the same result could be reached by applying sections 27(1)  and (4).  In other words, these two methods of deduction are alternatives and would not lead to double counting.

Ground 1: if $180,000 should be added to the contractual interest for calculating the ERI

28.Mr Lucas Lau, who appeared for the defendants on appeal[26], made elaborate submissions why adding the $180,000 would not lead to double counting.  His arguments ran as follows.

29.First, there is no double counting because the $180,000 falls within the definition of “interest” in section 2(1).  This amount was withheld from the principal drawdown and applied to service repayment obligations.  This is indistinguishable from Skyline Credit Ltd v Leung Hing Chung [2022] 4 HKLRD 561 in which the Court of Appeal held at §53 that a sum of $49,680 being “interest for three months” should be included as “deemed interest”, as this was or could be regarded as monies “paid … in consideration of or otherwise in respect of [a loan]” in section 2(1).

30.The calculation would be as follows:

(1)    The “principal” is $705,000. This is arrived at by deducting from the contractual principal of $900,000 the amounts of $15,000 (plaintiff’s fees)  and $180,000 (amount withheld by KB Chau).

(2)    The total amount payable by the defendants under the Loan Agreement is $1,170,000.  This is arrived at by adding the first 11 instalments of interest ($22,500 x 11)  and the last instalment of $922,500.

(3)    On the statutory definition, “interest” is the total amount paid or payable in excess of principal, being $1,170,000 less $705,000 = $465,000.  The amount of $465,000 is precisely the aggregate of $270,000 (total contractual interest being $900,000 x 30%), $15,000 and $180,000.

31.Excluding $180,000 from “interest” would omit the fact that the defendants received only $705,000 as principal, notwithstanding the Loan Agreement required repayment of the full contractual principal of $900,000.

32.Further, there is no dispute that $180,000 should be deducted from the “principal”.  As according to the statutory definition, “interest” is the total amount paid or payable in excess of principal, when the principal is reduced by $180,000, the interest must increase correspondingly by $180,000 as the total amount payable under the Loan Agreement remains at $1,170,000 (because the borrowers’ repayment obligations have not changed).  Mr Lau called this the “arithmetic consequence of the statutory definition”.  This is not double counting, but the “unavoidable consequence” of the statutory definition.

33.He prayed in aid the judgment of the Court of Appeal in Gain Wealth Global Credit & Investment Ltd v Chan Suk Fong [2020] 4 HKLRD 831 at §63:

“In Skyline Credit Ltd v Leung Hing Chung, there was no dispute that the amounts defrauded should be deducted from the contractual sum to arrive at the deemed principal (at [110]). In calculating the effective rate of interest, the Judge included the same amounts as interest (at [111], [121])  and rejected the lender’s submission there would be double counting in this situation (at [115], [123], [135]). We are inclined to agree there would not be double counting. $37,000 should be included as ‘interest’ as it falls within the definition. This sum should be deducted from the contractual sum of the principal as it does not come within ‘the amount actually lent’. It is only right that this amount should be accounted for in considering the amount of interest and the amount of the deemed principal. There is no valid reason why it should be taken into consideration just once.”

34.Second, the judge said this in respect of the $180,000 at §75 of the Judgment:

“It is not correct to say that the amount was used and enjoyed by the Defendants for the purpose of repaying contractual interest. The fact is that the Defendants never received the $180,000, which was withheld by KB Chau right from the drawdown of the Loan, even though none of the interest payments had either accrued or fallen due for payment at that time. The Defendants effectively paid the $180,000 upfront, which was not in discharge of any contractual obligation under the Loan Agreement, but pursuant to a separate arrangement imposed by Premier Capital on the Defendants. The fact that the amount of $180,000 was subsequently used to pay interest amounts under the Loan Agreement does not change the nature of the $180,000 at the time it was withheld.”

35.On the above finding, the $180,000 was not paid in discharge of contractual interest under the Loan Agreement.  How it was used subsequently could not change its nature.  It therefore falls within the statutory definition of an amount “paid … otherwise in respect of a loan”.  

36.Third, as a matter of legislative intent, retaining part of the advance at drawdown to service future instalments lies at the heart of the mischief which is to curb unscrupulous money lenders.  This practice in effect compels borrowers to make immediate part-repayment, undermines the notion of instalment repayment, and masks the real cost of borrowing by presenting an artificial picture of what the borrower receives and pays.  If including the $180,000 produces what the judge describes as double counting, that is precisely what section 2(1)  is designed to neutralise and there is no reason why this amount should be taken into consideration just once.

37.If $180,000 forms part of “interest” for calculating the ERI, this would take the figure to 65.96% as submitted below[27], and the Loan Agreement is unenforceable under section 24.

38.We do not accept Mr Lau’s submissions.

39.The sum of $180,000 was subsequently applied to satisfy in part the legal obligation owed by the defendants to pay the total contractual interest of $270,000 over 12 months, comprising 8 monthly instalments of the agreed interest ($22,500 x 8).  As reasoned by the judge[28], the defendants did not have to pay $180,000 again on top of the contractual interest of $270,000.  Under the definition of “interest” in section 2(1), the amount to be paid in excess of the principal in consideration of the loan was $285,000 ($270,000 and $15,000 being the plaintiff’s fees), and not $465,000 (aggregate of $270,000, $15,000 and $180,000)  as suggested by Mr Lau.

40.Where Mr Lau went wrong is step (2)  of his calculation and his assumption that the borrowers’ repayment obligations have not changed in the “arithmetic consequence” that he argued for.  In arriving at the total amount payable by the defendants, he disregarded the 8 months’ instalments totalling $180,000 which were genuinely and actually applied to discharge in part the contractual interest of $270,000 and which had reduced the repayment obligations to that extent. 

41.What the judge said in §75 about the $180,000 was taken out of context.  In that passage, she was considering the nature of the $180,000 at the time it was withheld by KB Chau as per the Withholding Letter signed by the defendants.  She came to the view that the amount withheld constituted “costs, charges or expenses … incidental to or relating to … the granting of the loan … or the guaranteeing or securing of the repayment thereof”, and thus falls within section 27(1)  thereby triggering the operation of section 27(4).  The judge was not considering the subsequent application of the proceeds of the sum withheld, when KB Chau issued a cheque of $22,500 to the plaintiff each month for 8 months to discharge 8 instalments under the Loan Agreement which were for interest payments.

42.The reliance on Skyline Credit regarding the amount of $49,680 referred to as “interest for three months” is misplaced. We do not think that case is indistinguishable or could be regarded as support for the proposition that money already paid as interest should be brought into account again and included as “deemed interest” in calculating the ERI.  As rightly pointed out by the judge[29], the amount of $49,460, although represented by the fraudster as 3 months’ interest for the loan, did not tally numerically with the terms of the loan agreement which provided for monthly interest of $41,400.  It was in fact 40% of 3 months’ interest.  This sum was treated together with the “legal fee” and “handling fee”, all of which never went to the borrower and were never used by him, and it was on that basis that these sums were included as part of the interest (see Skyline Credit at §§53 and 55).

43.As pointed out by Mr Kenneth Lee for the plaintiff[30], this withholding of an amount used subsequently to discharge interest payments arose also in Field Finance Ltd v Cheung Mo Ching [2023] HKCFI 3311[31]. An amount of $120,000 for settling the first 3 monthly instalments comprising interest only was retained by the money lender’s solicitors on drawdown day.  The lender accepted that the principal payable should be reduced by $120,000.  The borrower argued that the $120,000, which would qualify as interest, should be added to the contractual interest of $480,000 for calculating the ERI (at §131). Deputy High Court Judge Winnie Tsui (as she then was)  rightly held that the $120,000 should not be regarded as interest on top of the contractual interest, as this would amount to double counting (at §205).  She contrasted the case with the upfront fee of $37,000 in Gain Wealth (at §210).  The reason why that upfront fee was counted as interest on top of the contractual interest was because the fee was never intended to be used by the lender to settle any sum owed by the borrower.  As was made clear in Gain Wealth at §§62 to 63, there would be no double counting in that situation.

44.As for §63 in Gain Wealth quoted earlier that was relied upon by Mr Lau, what was said should be read in context.  The court was discussing the upfront fee of $37,000 deducted at source.  It was never paid to the borrower and not applied to discharge any legal obligation owed by the borrower to the lender but was an amount in excess of the principal paid in respect of the loan.  It was in those circumstances that the sum was deducted from the contractual principal and included as interest in the calculation of the ERI.  There is good reason why the upfront fee of $37,000 was taken into consideration in arriving at the amount actually lent and again in working out the interest.  There is no resemblance to the present situation. We do not agree with Mr Lau’s submissions on the legislative intent of curbing unscrupulous money lenders such that double counting is permissible.

45.For the above reasons, we reject the defendants’ contention in Ground 1.  The judge’s ruling on this is upheld.

Ground 2: if $333,417 should be deducted from the principal for calculating the ERI

46.As we have canvassed with the parties at the hearing, there would appear to be 2 alternative routes by which the amount of $333,417 charged by Jone’s may be deducted from the principal for calculating the ERI.  The first is via sections 27(3)  and (4).  The second is via sections 2(1)  and (3).  The judge rejected the first.  As for the second, it has not been clearly raised in the defendants’ pleadings[32]. It is not entirely clear if this was squarely raised in the written submissions of the defendants at the trial[33]. What is clear is that the judge did not make a finding if the amount of $333,417 was not “actually lent” or “not shown to have been lent” under sections 2(1)  and (3), as we have mentioned earlier.

47.We will first deal with the route via sections 27(3)  and (4).

48.As mentioned, the judge found on the evidence that Mr Siu was not a credible or reliable witness.  She rejected his claim not to have known that Jone’s charged Mr So a fee as incredible.  His evidence as to how the plaintiff came to lend $900,000 to the defendants was not credible. She found that Mr Siu knew Mr Franky Lee and that the latter was facilitating the loan transaction, providing documents to the plaintiff, accompanying the defendants to the plaintiff’s office and then arranging for them to go to KB Chau.  The judge placed no credence on Mr Siu’s denial that the purpose of arranging for part of the loan to be disbursed by way of the cash cheque of $500,000 was to accommodate the making of payments to third parties such as Mr Franky Lee.  The transcript of the meeting on 10 November 2014 records Mr Siu telling Mr So that the law firm had called him (Mr Siu)  to say that it could issue a cash cheque for up to $600,000, that the balance would be by way of a bank cheque, that Mr So would be told how to handle the cheques when he got to the law firm, and that $180,000 would be deducted as prepayments of interest[34].

49.The judge therefore found Jone’s and its employee Mr Franky Lee were acting in collusion with the plaintiff within the meaning of section 27.  They were co-operating with each other with a view to facilitating the loan transaction and playing the same game.  As Jone’s received the $333,417 in contravention of section 27(3), the judge applied section 27(4)  and set off this sum against “the amount actually lent” so the amount actually lent was reduced accordingly and this would in turn affect the amount due by way of interest under the loan[35].

50.Neither the plaintiff nor the defendants sought to challenge the above findings and holding of the judge on appeal.

51.The defendants’ former counsel did submit at the trial that by reason of section 27(4), if the $333,417 was set off against the amount actually lent so that the principal would be reduced, the principal as reduced should then be used for calculating the ERI for the purpose of section 24[36].

52.The judge rejected this for the reasons given in §46 of the Judgment:

“However, as Mr Lee submitted, the Court of Appeal has held that the setting off relief under s.27(4)  MLO provides remedies to the borrower which are additional and alternative to the ones under (inter alia)  s.24. See Gain Wealth Global Credit & Investment Ltd at [54] and Skyline Credit Ltd at [51] to [52]. In both cases, the Court of Appeal held that s.27(4)  could not be used to expand the meaning of ‘interest’ in s.2(1). It seems to me that the same applies in respect of the meaning of ‘principal’. Section 27(4)  entitles a borrower to recover amounts paid in contravention of s.27 from the recipient, or, where the recipient is the money lender (or associated with the money lender in the specified ways)  to set off the amounts against the amount actually lent.”

53.Mr Lee repeated the same argument before us.  He submitted that section 27(4)  cannot be employed to expand or alter the statutory definitions of “interest” or “principal” in section 2(1).  The logical corollary derived from Gain Wealth and Skyline Credit is that if section 27(4)  cannot alter the concept of “interest” for ERI calculation, similarly this provision cannot alter “principal”.  He emphasised that the ERI computation is governed by the definitions of “principal” and “interest” in section 2(1), whereas section 27(4)  establishes distinct remedial consequences available to a borrower in addition to or as an alternative to the relief under sections 24 and 25.  Section 27(4)  cannot be invoked to alter the ERI arithmetic.

54.It is best to consider what should be the correct legal position by construing the statutory provisions, leaving aside what was said in the authorities for the time.  The authorities cited do not deal directly with the question that we are concerned with.  They may be a source of distraction if they are not read properly and in context. 

55.Section 27(4)  provides inter alia that where an amount is “directly or indirectly paid or allowed to or received by any person” in contravention of section 27, such amount “may be set off against the amount actually lent (and that amount shall be deemed to be reduced accordingly).”  In this instance, as the judge has found that the amount paid to Jone’s was in contravention of section 27(3), that sum is to be “set off against the amount actually lent”, and the amount actually lent is “deemed to be reduced accordingly” by the amount paid to Jone’s.

56.Giving effect to the words in parenthesis in section 27(4)  (“(and that amount shall be deemed to be reduced accordingly)”), when one comes to consider what is the amount “actually lent” for the purpose of calculating interest, the amount actually lent is “deemed to be reduced” by the amount set off pursuant to section 27(4).  The judge recognised that the principal as reduced will affect the amount due by way of interest under the loan and she has ordered that interest should be payable on the amount “actually lent”, which is $371,583.  For the purpose of calculating the ERI, we see no reason why the amount actually lent, which is deemed to be the principal as reduced, should not be the same figure of $371,583. 

57.We do not agree with the suggestion that this is altering or expanding the statutory definitions of “principal” in sections 2(1)  and (3).  Rather, this is applying the facts as found to the statutory definitions.  The determination of the amount “actually lent” and the amount “not shown to have been lent” in sections 2(1)  and (3)  is a question of fact.  Nor do we think a “logical corollary” should follow in light of the rejection in the cases that an amount paid in contravention of section 27 should be treated as “interest” within the definition in section 2(1).  Section 27(4)  makes no provision as regards the treatment of interest in the event of a set off, whereas the words in parenthesis specifically provide that the amount actually lent “shall be deemed to be reduced accordingly”.  The fact that section 27(4)  provides an alternative and additional remedy to the borrower to those under sections 24 and 25 should not affect the proper interpretation of this provision.  The provisions in the MLO should be read consistently to produce a coherent and harmonious scheme, unless it appears there is contrary indication that to do so may give rise to apparent conflict.  We do not think there is such an indication.

58.We turn to those paragraphs of Gain Wealth and Skyline Credit relied on by Mr Lee in support of his argument and cited in §46 of the Judgment.

59.In §54 of Gain Wealth, the appeal court was discussing “interest” as analysed in the first instance judgment in Skyline Credit[2019] HKCFI 169, in which it was said at §137 that as the money lender can be made directly and personally liable under section 27(4)  for payments collected by intermediaries acting in collusion with the lender, “the law treats any such sum received by intermediaries as if it was received or charged by the money lender”.  It was in this context that the appeal court expressed disagreement that the effect of section 27(4)  could be invoked to expand the meaning of interest in section 2(1), where the legislature has given a range of additional and/or alternative remedies to the borrower in sections 24, 25 and 27.

60.The appeal court further explained at §55 that to qualify as interest under section 2(1), the amount is not required to be paid or payable to the lender or its agent and could be paid to someone else, so long as it is “paid or payable in consideration of or otherwise in respect of a loan”.  It was pointed out where there is no evidence of any involvement of the lender regarding the monies defrauded by the intermediary and nothing to link the payment by the borrower with the loan, that could be difficult to establish.  On the facts in Gain Wealth, the appeal court held that of the amounts defrauded (totalling $289,500; made up of $100,000, $110,000, $42,500 and $37,000), only the upfront fee of $37,000 should be included in the total amount of interest for calculating the ERI, as there was no evidence the other defrauded amounts were sought or received on behalf of the lender and there was no specific finding as to any involvement of the lender regarding the monies the borrower was tricked into paying the fraudster (at §§47 to 49, 55 to 56).

61.In §§51 to 52 of Skyline Credit, the appeal court was considering whether the trial judge was correct in including 4 sums defrauded (totalling $838,000; made up of $8,000, $18,000, $49,680 and $762,320)  as deemed “interest” in section 2(1).  As in Gain Wealth, it was held there is no justification to expand the definition in the way the judge did at §137.  On the facts as found, the appeal court included that only the sums of $8,000 (legal fee deducted at source), $18,000 (handling fee charged by intermediary)  and $49,680 (said to be 3 months’ interest which did not go to the borrower but went back to the lender)  as monies paid in consideration of or otherwise in respect of the loan and should be deemed interest for calculating the ERI (at §§53 and 55).

62.For the reasons explained above, we do not think the passages in these cases cited in §46 of the Judgment would provide support for the proposition that the amount actually lent, which is deemed to be the reduced principal after set off, should not be used for the calculation of the ERI.  The judge has made an error of law in holding that the principal reduced by reason of section 27(4)  should not be regarded as the amount actually lent in calculating the ERI.  The figure of $371,583 should be used as the amount actually lent, and not $705,000.

63.We turn to the second route by which the deduction of $333,417 may be made and the same outcome achieved.

64.Mr Lee took a Flywin[37] objection that the defendants should be barred from raising this new point on appeal, unless there is no reasonable possibility that the state of the evidence relevant to this point would have been materially more favourable to the plaintiff if the point had been taken at the trial.

65.In light of the evidence and findings of the judge, we are inclined to think that the defendants have overcome the “state of the evidence” bar.  Mr Siu was the only witness for the plaintiff.  His meeting with the defendants was recorded on video tape and a full transcript was produced.  Mr Siu could not remember how he met Mr Franky Lee or the details of any discussions about the loan.  He was unable to explain why a loan of $900,000 was granted.  He could not say what he actually discussed in the present case.  He acknowledged he did not have any recollection how the loan came to be approved or what was discussed.  He could only talk about his general practice[38]. We are satisfied there would be no unfairness to the plaintiff in allowing the defendants to run this new point on appeal.

66.To recap, the relevant evidence and findings are as follows.

67.Jone’s acted as the intermediary and facilitated the loan of $900,000 from the plaintiff to the defendants, who, as Mr Siu knew, had no need for a loan as large as $900,000 and no ability to repay monthly interests of $22,500 let alone the principal in 12 months’ time.  The sums of $15,000 (legal fees and upfront fee)  and $180,000 (for subsequent repayment of 8 months’ interest)  were never paid to the defendants.  The remaining $705,000 was disbursed by 2 cheques issued by KB Chau with Mr So as payee, one was a cash cheque of $500,000 and the other was marked “Account Payee Only”.  The sum of $333,417, charged by Jone’s as administrative and intermediary fees, came out of the cash cheque of $500,000[39].

68.Mr Siu admitted he knew that Mr Franky Lee was facilitating the loan transaction.  His claim not to have known that Jone’s charged a fee was held incredible.  The judge placed no credence on his denial that the purpose of arranging for part of the loan to be disbursed by way of a cash cheque was to accommodate the making of payments to third parties such as Mr Franky Lee.  The transcript of the meeting records Mr Siu stating that KB Chau could issue a cash cheque for up to $600,000, and the balance would be by way of a bank cheque[40]. In the end a cash cheque of $500,000 was issued by KB Chau.

69.On the above evidence and findings, we are of the view that a cogent inference may be drawn the plaintiff knew that the intermediary would charge a fee for facilitating the transaction and implicitly gave its approval and consent that any amount up to the limit of the cash cheque may be used for this purpose.  We do not think it matters there is no evidence the plaintiff knew of the exact amount of the intermediary fee that would be paid from the amount disbursed and would never go to the borrowers.  We do not agree with Mr Lee it must be established that the lender expected or envisaged that the “specific sum” would be paid to the intermediary rather than going to the borrowers.  Whether the plaintiff expected or envisaged that Jone’s would extract an “exorbitant” sum of $333,417 (approximately 37% of the contractual principal)  is beside the point, given that Mr Siu agreed to the arrangement that a cash cheque for up to $600,000 could be issued and his knowledge that this was done to accommodate the making of payments to third parties such as Mr Franky Lee.  Nor do we agree with Mr Lee this is tantamount to imposing “strict liability” on the lender for a fraud they did not envisage.  On the facts of the present case, Mr Siu did envisage that the intermediary would charge a fee, and that the fee could be up to the extent of the cash cheque which he authorised to be issued.

70.Mr Lau submitted this is similar to the amount of $100,000 in Gain Wealth which was paid to the fraudster by a cash cheque and the appeal court drew a compelling inference that the cash cheque was issued to facilitate payment of its proceeds to the intermediary at the earliest opportunity and it was not envisaged that such proceeds would go to the borrower who was issued a crossed cheque of $113,000 marked “account payee only”.  The amount of the cash cheque was deducted from the contractual principal to arrive at the amount “actually lent” for calculating the ERI (at §§60, 66 and 67).

71.Mr Lee argued to the contrary and submitted that this is similar to the amount of $762,320 in Skyline Credit which was said to be “insurance premium” but went to the fraudster out of the proceeds of a cheque of $872,000 payable to the borrower marked “account payee only”.  The borrower withdrew the entire proceeds of the cheque in cash, of which he was defrauded the 4 sums ($8,000, $18,000, $49,680 and $762,320).  The appeal court held that only the first 3 should be deducted from the contractual principal to arrive at the amount “actually lent” but not the “insurance money” of $762,320. The court found on the facts that the first 3 sums were not money actually lent, either because they were deducted at source and were never paid to the borrower but went back to the lender or because a compelling inference could be drawn that the lender would expect the intermediary to charge a handling fee or be remunerated out of the funds made available to the borrower.  The court declined to draw such an inference in respect of the “insurance money”, noting that there was no specific finding by the judge of any involvement of the lender regarding the monies which the borrower was tricked into paying the intermediary.  Although the judge found there was collusion between the lender and the intermediary, the facts as found were insufficient to establish that this sum was sought or received by the intermediary as agent on behalf of the lender (at §§46 to 49).

72.The appeal court went on to hold at §§62 to 64 that sections 27(3)  and (4)  were engaged as regards the “insurance money” of $762,320, as this was some form of “remuneration or reward” demanded or received by the fraudster and the court ordered this sum be set off against the amount “actually lent” to the borrower (being $1,800,000 minus the first 3 sums).  There is no conflict with the holding at §48 where the court declined to infer on the evidence that this sum was “actually lent” notwithstanding collusion of the lender and the intermediary was established.  Further, as noted by the appeal court at §28, the judge at first instance had taken the view that in calculating the ERI, section 27 and the set off in section 27(4)  were not engaged.  It did not appear to have been argued on appeal that the “insurance money” set off under section 27(4)  should go to reduce the principal by the words in parenthesis and the principal deemed to be reduced should be used to calculate the ERI (ie the first route argued in this case).

73.Each case must be considered on its own facts and the holdings understood in light of the evidence and arguments actually raised before the court.  We do not find it particularly helpful to refer to past decisions in which the factual situation might not be on all fours with the case at hand.  We do not find the factual situation in Skyline Credit as regards the “insurance money” indistinguishable from the present situation in respect of the $333,417 charged by the intermediary.

74.For the above reasons, we find on the facts that the $333,417 was not “actually lent” or “not shown to have been lent” within the meaning of sections 2(1)  and (3)  and should be deducted from the contractual principal.

Conclusion and costs

75.When $333,417 is deducted from the contractual principal, along with other deductions which are not in dispute, the amount “actually lent” for the purpose of sections 2(1)  and (3)  is $371,583, which is the figure held by the judge as “actually lent” at the end of the Judgment.

76.Applying the correct figures of principal and interest, the ERI should be: $285,000/$371,583 x 100% = 76.69%.  As this exceeds the rate of 60% per annum provided in section 24, the Loan Agreement is not enforceable and the plaintiff’s claim fails.

77.We therefore allow the defendants’ appeal, set aside the Judgment and costs order in the plaintiff’s favour being 50% of the costs of the action and dismiss the plaintiff’s claim in this action.

78.We make these costs orders on a nisi basis.

79.For the costs below, we would award costs of the action to the defendants but reduce this by one-third, to take into account the defendants failed in respect of the argument on including $180,000 in the interest for calculating the ERI.  Costs would be assessed on the District Court scale, and there is no dispute on this before the judge[41]. 

80.For the costs on appeal, we would award costs to the defendants but reduce this by one-third, for the same reason as above.

81.We further order the defendants’ own costs on appeal and below are to be taxed in accordance with the Legal Aid Regulations.

Mr Kenneth Lee and Mr Jack Hui, instructed by K T Lo & Co, for the Plaintiff (Respondent)

Mr Lucas Lau (assigned by the Director of Legal Aid)  and Mr Ulysses Chow (on a pro bono basis), instructed by Lau & Chan, for the 1^st and 2^nd Defendants (Appellants)