Oriental Fa Ltd v. China East Development Ltd and Others

HCA 1420/2025

[2026] HKCFI 5277

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1420 OF 2025

________________________

BETWEEN

________________________

________________________

REASONS FOR DECISION

________________________

1.This appeal is brought by Chung Chi Wai Frankie and Chung Tsi Kuen, respectively the 2^nd and 3^rd defendants (“D2” and “D3”) against the order dated 27 May 2026 made by Master YW Hew (the “Order”) that (i) final judgment be entered for the Plaintiff (“P”) against D2 and D3 for $64,480,000[1]; and (ii) interest on the sum of $64,480,000 at the rate of 9% per annum from 18 May 2025 until the date of full payment.

2.The Master made the Order at the substantive hearing of the P’s summons dated 5 February 2026 (the “Summons”) for summary judgment against D2 and D3, the guarantors for the principal and interest under an agreement for a mortgage loan dated 17 May 2018 (“Original Agreement”) made between P and China East Development Ltd (“D1”).

Relevant background

3.P is a licensed moneylender.

4.D1 is the borrower of a loan of $70 million from P and the mortgagor of properties it owned known as the ground floor and mezzanine floor of Nos 135 and 137 Prince Edward Rd West, Kowloon (“Mortgaged Properties”).

5.D2 and D3 were and are shareholders and directors of D1 and the guarantors of the Loan under their respective guarantees.

6.On 17 May 2018, P and D1 entered into the Original Agreement and on 18 May 2018, P advanced a loan of $70 million to D1 (the “Loan”) for one year, the Final Maturity Date being 18 May 2019.

7.The tenure of the Loan was extended 6 times by the 1^st to 6^th Supplemental Agreements, respectively dated 17.5.2019, 18.5.2020, 18.5.2021, 17.5.2022, 17.5.2023, and 17.5.2024 (collectively, with the Original Agreement, “Loan Agreement”).

8.Each Supplemental Agreement extended the tenure of the Loan by one year and, save for the 4^th, increased the interest rate of the Loan as quid pro quo for the extension.

9.The 6^th Supplemental Agreement was the last agreement between the parties under which the Loan was due on 18 May 2025. As D1 had made a payment of $6 million on 18 May 2024, the outstanding amount stood at $64 million.

10.D1 duly paid interest on the Loan for 71 months from June 2018 and only defaulted on the final instalment of monthly interest of $480,000 (“Outstanding Interest”) under the 6^th Supplemental Agreement.

11.That led P to declare an event of default on 9 June 2025 whereupon the entire Loan became due.

12.P commenced these proceedings on 31 July 2025. Ng & Co represented Ds and obtained multiple extensions of time for Ds to file their defences. An unless order was made on 5 November 2025 requiring defences to be filed and served by 4 pm on 3 December 2025.

13.Surprisingly[2], Ng & Co ceased to act for Ds on 27 November 2025[3].

14.5 days later, each of D2 and D3 (then acting in person) filed a brief written Defence on 2 December 2025 which merely objected to P’s calculation of interest and the rate of 9%.

15.D1 failed to file its defence in breach of the unless order, resulting in a default judgment against D1 which is not under appeal.

16.In this mortgage action there is no challenge as regards (i) the validity of the Loan and Mortgage; (ii) the fact that there had been default in repayment, or (iii) liability under the Loan except for the alleged “illegality” concerning the interest arrangement under the Loan Agreement.

17.P took out the Summons on 5 February 2026. Its skeleton submissions served on D2-D3 made clear its intention to seek summary judgment at the first call-over hearing scheduled for 9 March 2026.

18.To P’s surprise, minutes before the actual hearing, its legal representatives were provided with D2 and D3’s affirmations dated 7 March 2026, their skeleton submissions settled by Counsel and Ng & Co’s notice to act both dated 9 March 2026, the date of the scheduled hearing itself. This resulted in the hearing having to be adjourned to 27 May 2026 when the Order was made.

The illegality defence

A. Unpleaded defence

19.The defences D2 and D3 filed merely objected to (i) P’s calculation of interest payable, (ii) the applicable interest rate of 9%, and (iii) the application of that rate to the outstanding interest of $480,000.

20.While denying P’s claims, they do not contain particulars as to the alleged errors in P’s calculation of interest nor state what interest ought to be owed instead.

21.The issue is whether P is correct in submitting that Kaefer AG v Winfield Marine Services Co., Ltd [2022] HKCA 807 laid down a general rule that a defendant cannot rely on an unpleaded defence which had not been pleaded when opposing an Order 14 application.

22.In Kaefer, the Court of Appeal (at §§30-32) rejected the defendant’s argument that it was entitled to raise a new defence, namely, that of a bona fide purchaser based on uncontradicted evidence and the pleaded facts, separate and distinct from the defence of change of position it ran below. Otherwise, the other party and the Court would be taken by surprise which would go against the purpose of the rules of pleadings as stated in Lo Yuk Sui v Fubon Bank [2020] HKCFA 6 at §§ 9-12.

23.In Wang Shuai v Zhang Qiaohui [2024] HKCA 304 (at §46), the Court of Appeal agreed with the Judge that where a defendant has already filed a Defence, it cannot, in opposition to a summary judgment application, rely on a case not pleaded in the Defence, citing Hong Kong Topkey Ltd v Wintac (Hong Kong) Ltd [2023] HKCFI 1711 at §§14-16, applying §§30-32 of Chu JA’s judgment in Kaefer.

24.More recently, those authorities were applied by H Au-Yeung J in Link Properties Limited v 1968 Ltd [2025] 5 HKC 705 at §§11-26.

25.Mr Raymond Lau, counsel for D2 and D3, submits that there are conflicting judicial views as to whether Kaefer is specific to the facts of that case and does not lay down any general rule, such that the Court has a discretion to permit the unpleaded facts and defences to be raised.

26.His reasons are that

(i) in Kaefer, the new unpleaded defence was raised for the first time before the judge on the day of the hearing;

(ii) the rule is inconsistent with RHC O.14, r. 4(1) which provides that the defendant may show cause against an application under O.14, r.4(1)[4] “by affidavit or otherwise” as is suggested in Hong Kong Civil Procedure 2026 at §14/4/3A[5];

(iii) the decisions in CCMD Overseas Limited v Sinom Investments Limited and Anor, [2023] HKCFI 2912[6] at §39(2), Gao Xin Jian Group (Hong Kong) Holding Company Limited v Kin Lee Precast Concrete Products Company Limited [2024] HKCFI 1058 at §34, Wu Yuan Hong v China Zenith Chemical Group Limited [2025] 1 HKLRD 1191 at §§24-27 doubted the existence of the rule;

(iv) in Wang Shuai, there was no serious debate or interpretation of the approach in Kaefer. The CA did not conduct a sufficient analysis of the reasoning in Kaefer[7].

27.Mr Danny Tang, counsel for P, disagrees, citing passages in Link in response to the matters set out in §26(i) to (iv) above:

(i) §§16-20[8]:

In Kaefer, the Judge had refused to entertain the unpleaded defence for 2 separate reasons: that it was unpleaded[9], and that it was raised too late[10], both of which were upheld by the Court of Appeal. That a defendant cannot rely on an unpleaded defence in the pleading when opposing an Order 14 application forms part of its ratio.

(ii) §§21-23:

The general principle was established and made clear by the subsequent CA decision in Wang Shuai which had not been decided when Gao Xin Jian was argued on 16 January 2024. Wang Shuai was also not cited to the Court in Wu Yuan Hong (where Au-Yeung J agreed with the interpretations of Kaefer adopted in CCMD Overseas and Gao Xin Jian).

In the recent case of Chiyu Banking Corporation Limited v Garswell Limited [2026] HKCFI 4339, Au-Yeung J found H Au-Yeung J’s reasoning in Link convincing and declined to follow her previous approach in Wu Yuan Hong[11].

(iii) §§23-26:

The suggestion in HKCP 2026 at §14/4/3A that the defendant may rely on an unpleaded defence pursuant to O.14, r.4(1) is wrong because once a defence has been filed, the issues would have been defined by such a pleading and it would defeat the purpose of pleadings if defendants are allowed to rely on any unpleaded defence freely so long as such new evidence is included in their affidavit evidence.

(iv) §11:

A defendant who is sparing of the particulars of his defence cannot then complain that the resulting obscurity must await trial for illumination.

28.A defendant who fails to provide a satisfactory explanation for its lateness is bound to fail in its application to show cause “by affidavit or otherwise”. Hence the CA in Chugai Pharma USA, Inc v Cheng Yan [2026] HKCA 221 found it unnecessary to enter into a debate on the issue. It follows from the fact that Chugai did not express any view that Kaefer and Wang Shuai were wrong, that those authorities remain binding on first instance courts[12].

29.Having considered the parties’ respective submissions, I agree that Wang Shuai is authority for the proposition that a defendant who has filed a defence cannot rely on an unpleaded case to oppose an O.14 application.

B. Exercise of discretion

30.If, contrary to my view, the Court does have a discretion to grant leave to D2-D3 to rely on an unpleaded defence, the question then arises as to whether the discretion should be exercised in D2 and D3’s favour.

31.P submits that the Court should refuse to exercise the discretion because

(i) the illegality defence was sprung on P by affirmation shortly before the call-over hearing; D2 and D3 have never even attempted to provide any satisfactory explanation for the lateness in raising the illegality defence despite having had legal representation from inception until 5 days[13] before they filed their respective defences on 2 December 2025;

(ii) nothing less than a satisfactory explanation on oath is required having regard to the matters raised in §§13-14 above;

(iii) in any event, lateness (without adequate explanation) is an independent ground for the Court’s refusal to allow the defendant to run the unpleaded defence: see Kaefer at §33;

(iv) even the authorities on which D2 and D3 rely (Gao Xin Jian and Wu Yuan Hong) recognise that one way of showing cause is to exhibit a draft defence. Indeed, in Wu Yuan Hong,[14] the defendant had produced a draft amended defence and a new affirmation;

(v) D2 and D3 have not filed any evidence to explain why they were unrepresented when they filed their defences. In those circumstances, the fact that they were unrepresented carries little weight and should be disregarded: see Ping Kai Engineering Co Ltd v Hong Kong Teakwood Works Ltd, unrep., HCCT 2/2001, 6 February 2022 at §22;

(vi) further, in Spokesman Enterprises Ltd v Cheung Yuk Shing t/a Kam Shing Motor Trading Co, unrep., CACV 398/2004, 1 June 2005, Rogers VP held (at §3) it to be “undesirable that any party should be given leave to amend its pleading without the draft pleading being produced”.

32.In the circumstances, it is inconceivable that the Court would exercise its discretion to allow unpleaded facts and defences to be raised.

C. Whether illegality defence is arguable

33.D2 and D3’s case is as follows:

(i) The 6 Supplemental Agreements were entered into for an illegal purpose: to enable P to charge a higher interest rate upon default of payments. As a result, P has effectively increased the interest rate from 0.59% to 0.75% per month, thereby contravening s. 22(1)(c) of the Money Lenders Ordinance, Cap 163 (“MLO”).

(ii) Only interest of 0.59% per month (the rate under the Original Agreement) should have been payable for the entire tenure of the Loan and the excess interest paid should be set off against the principal.

(iii) As the 6 Supplemental Agreements are illegal, it is inequitable for P to rely on them, and D2 and D3 as guarantors should only pay the balance of the sums claimed after deducting the net sale proceeds of the Mortgaged Properties.

34.A useful starting point when considering “illegality” is the statement of Ching PJ in Sun Wai Chun v Fairview Park Property Management Ltd (FAMV 1/2000, 17 March 2000) (at pp 2-3):

“No illegality was pleaded but it is asserted that when an illegality appears the court is bound not to enforce illegal obligations. The argument misses the point. Pleadings are necessary to put the plaintiff on notice as to the defence it will need to meet. Illegality is a conclusion to be drawn from proven facts to which the law is applied.”

35.The “illegality” on which D2 and D3 rely has never been pleaded. It is thus impossible to fathom what actually constitutes the alleged “illegality”.

36.As regards D2 and D3’s factual case, it is based on the matters set out in §§6-20 of D2’s affirmation dated 7 March 2026. In summary, in early May 2019, D2 and D3 found that the Company would not be able to repay the Loan on the Final Maturity Date of 18 May 2019. Negotiations were therefore conducted between the Company and P.

37.§§6-8 of D2’s affirmation then made the following assertions:

(i) “representative(s) of the Plaintiff intimated that they wanted to charge a higher interest rate for any default of payments”: §6

(ii) D2 and D3 were “given to understand” the consequences if the Company did not agree to pay a higher interest rate: §7

(iii) D2 “was told by representative(s) of the Plaintiff that this could be done by entering another agreement”: §8

38.No particulars have been provided. Their assertions do not identify the relevant representative(s), the words used nor the date or place of the oral agreement. Although there were such negotiations in each of the 6 successive years, each said to have been initiated by P for an unlawful end, there is not a single written record such as an email, written entry, note or letter recording such discussions. Given the commercial context of the transactions in issue, that there should be no documentary trace of the discussions alleged stretches one’s credulity that such discussions had actually taken place.

39.That aside, there was never any hint of the alleged negotiations/intimations until the call-over hearing on 9 March 2026. In response to P’s demand letter of 9 June 2025 for repayment of the Loan and Outstanding Interest, D1’s reply of 16 June 2025 never mentioned the alleged discussions and, instead, made a repayment proposal, referring to D1’s “good relationship” with P and P’s “continued support”.

40.When D2 and D3 filed their defences 6 months later, there was equally no mention of “illegality” at all, their objection being to P’s calculation of interest, to the rate of 9% interest and to interest on the $480,000.

41.This is to be juxtaposed with the contemporaneous evidence P has produced which shows that P had entered into each of the 6 Supplemental Agreements openly and transparently in writing and pursuant to the relevant statutory requirements under, inter alia, section 18 of the MLO.

42.Each Supplemental Agreement was accompanied by (i) a Memorandum under s.18 of the MLO; (ii) Confirmations in Chinese by D2 and D3 as directors of D1 acknowledging the increased interest rate; and (iii) Deeds of Confirmation by D2 and D3 acknowledging that the Guarantee remains effective notwithstanding the increased interest.

43.The contemporaneous documents P produced clearly show that each Supplemental Agreement would increase the rate of interest in exchange for extending the maturity of the Loan. Moreover, D2 and D3 had the benefit of independent legal advice at the time they entered into each of the Supplemental Agreements.

44.S.22 (1) (c) of the MLO provides as follows:

“22. Illegal agreements

(1) Any agreement made for the loan of money by a money lender shall be illegal if it provides directly or indirectly for—

…

(c) the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement.”

45.The purpose of that provision is to prohibit “the charging of default interest that is at a rate higher than the contractual interest rate”: Easy Fortune Property Ltd v Yung Chun Him [2020] 4 HKC 1 at §35 (per Chu JA).

46.As G Lam JA explained in Sun Entertainment Culture Limited v Inversion Productions Limited [2024] 4 HKLRD 991 at §§ 36-37, 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 … 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.”

47.D1’s contractual obligation was to repay the principal on the maturity date. Its inability to do so would have resulted in a breach of the Original Agreement. Had that occurred, D2 and D3 would have been liable under their guarantees. Those obligations do not concern default interest.

48.P was not under any obligation to extend the maturity date but agreed to do so at an enhanced rate of interest as a quid pro quo for the extension. That is the nub of the 1^st Supplemental Agreement as with the subsequent 5 Supplemental Agreements.

49.Indeed, recital (B) to each of the Supplemental Agreements reads:

“The Borrower has requested for an extension of the tenure of the Loan and the Lender has agreed to accept such request on the terms and subject to the conditions as stipulated in this Supplemental Agreement.”

50.P submits (and I respectfully agree) that a rate agreed as the price of a further year’s loan is the primary obligation itself; it is not engaged by any breach and compensates for no wrongful detention. The rates of interest under the Supplemental Agreements were thus contractual rates.

51.Extensions of the tenure of the loan at an increased rate of interest are commonplace commercial transactions. So long as the enhanced interest is within the maximum prescribed by the MLO, such extensions are unexceptionable. This is borne out by the CFA’s judgment in Totalcorp (Nominees) Limited v Hong Kong Sai Kung Ngong Wo Resort Development Limited (2022) 25 HKCFAR 376.

52.Totalcorp involved a loan agreement that was extended four times (some of which increased the interest payable). Interest was payable on the capital loan together with arrears of interest. The rates of interest did not exceed the parameters set out in the MLO. Although the legality of the loan under the MLO was squarely in issue, no point was taken under s.22(1)(c): see §§8-9 and 11.

53.Where parties agree to vary the terms of the loan, by extending the term or changing the rate of interest, the law gives effect to what, as a matter of construction, appears to have been the intention of the parties evinced by the language they have used: per Lord Hoffmann NPJ (at §22).

54.In my view, on the evidence before the Court, D2 and D3’s illegality defence is plainly not sustainable, both as a matter of law and fact.

Disposition

55.I dismissed the appeal and ordered costs with certificate for counsel in P’s favour.

56.Given the indemnity clauses in the Original Agreement[15] and the Guarantees[16] , D2 and D3 did not object to costs being awarded on an indemnity basis.

57.Accordingly, there is to be an order of costs in P’s favour with certificate for counsel, such costs (on an indemnity basis) be summarily assessed and payable forthwith.

58.I directed that P’s statement of costs be lodged with the Court at the conclusion of the hearing and a copy provided to D2 and D3 whose list of objections (limited to 2 pages) be lodged within 14 days of the hearing. Summary assessment shall take place in Chambers.

Mr Danny Tang, instructed by Messrs. Iu, Lai & Li, for the Plaintiff

Mr Raymond Lau, instructed by Messrs. Ng & Co, for the 2^nd and 3^rd Defendants