Treasure Spot Finance Co Ltd v. Li Chik Ming and Another
Read the full judgment text of HCA 5387/2001 on BabelCite. This High Court CFI judgment was delivered on 7 September 2007.
1. The Plaintiff is a company licensed under the Money Lenders Ordinance Cap. 163 (“the Ordinance”) to carry on business as a money lender. It carries on its business from an office in Tai Po, New Territories.
Cites 1 case
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HCA 5387/2001 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 5387 OF 2001 ____________ BETWEEN
____________ Before: Mr Recorder P Fung, SC in Court Dates of Hearing: 25 – 29 June, 9 – 10 July 2007 Date of Judgment: 7 September 2007 ________________ J U D G M E N T ________________ The Parties 1.The Plaintiff is a company licensed under the Money Lenders Ordinance Cap. 163 (“the Ordinance”) to carry on business as a money lender. It carries on its business from an office in Tai Po, New Territories. 2.The 1st Defendant is an indigenous villager living in Yuen Long, New Territories. 3.The 2nd Defendant was until her apparent disappearance also a resident in Yuen Long and a friend of the 1st Defendant. The Action 4.The Writ of Summons with the Statement of Claim endorsed thereon was issued on 15th December 2001. By it, the Plaintiff claims against both Defendants for repayment of 3 loans made by the Plaintiff to them in 2001 (“the 3 loans”) together with interest thereon and against the 1st Defendant for delivery of vacant possession of 5 properties mortgaged by the 1st Defendant to it as security for the 3 loans. The action was brought as a result of the failure by the Defendants to pay monthly interest on the 3 loans. 5.The 1st Defendant is defending this action vigorously. He is now acting by his guardian ad litem, Ms. Li Lai Yuen (“Ms. Li”), who is his daughter. She was appointed as his guardian ad litem by an Order of Master J. Wong dated 28th March 2002 wherein the 1st Defendant is described as “a person who is by reason of mental disorder incapable of managing and administering his property and affairs”. It is to be noted that that Order of the Master was made on an ex parte application and without argument by any party with an interest to the contrary. It does not mean that the Court is thereafter bound to accept that the 1st Defendant was or is at any given time suffering from mental disorder to the extent that he was or is incapable of managing and administering his property and affairs. Such an issue will have to be decided on the evidence adduced at the trial. 6.The 2nd Defendant has not filed any Notice of Intention to Defend and seems to have disappeared. The Basic Facts 7.It seems that there is no dispute between the parties that it was the 2nd Defendant who arranged with the Plaintiff for the Plaintiff to grant to both Defendants the 3 loans on security to be provided by the 1st Defendant and that the money (after deduction of the sums payable to the prior mortgagee to enable the relevant security to be first released as referred to below and all expenses) all went to the 2nd Defendant but not the 1st Defendant. 8.By an Offer Letter dated 21st June 2001 (“the 1st Offer Letter”), the Plaintiff offered to grant a term loan of $550,000- (“the 1st Loan”) repayable in 12 months on the security of a property registered in the name of the 1st Defendant and described therein as “Agricultural land situate at Lot No. 1892 in D. D. 124, Yuen Long, New Territories together with messuages erections and buildings thereon” (“the 1st Property”). I shall deal with the other relevant terms of the 1st Offer Letter below. Although the letter asks the Defendants to sign and return the duplicate of this letter to the Plaintiff on or before 5th July 2001 to signify their understanding and acceptance of the offer, there was no duplicate signed by either of the Defendants. 9.According to Mr. Yu Chi Keung Danny (“Mr. Yu”), the senior manager of the Plaintiff, who was called to give evidence for it, in the morning of 3rd July 2001, the Defendants attended his office in Tai Po for the purpose of finalising the 1st Loan. He gave an explanation to them of what was involved in the 1st Loan and then sent them over to the office of Messrs. Kenneth Woo & Co. (“KWC”), a firm of solicitors acting for the Plaintiff, nearby for the completion of the rest of the procedure regarding the 1st Loan. 10.According to Mr. Woo Pui Ki Kenneth (“Mr. Woo”), the sole proprietor of KWC, who was called to give evidence for the Plaintiff, he had received instructions from the Plaintiff to prepare the documentation and carry out the necessary procedure to effect the 1st Loan. 11.It transpired that the 1st Property was already the subject-matter of a charge by 1st Defendant to another finance company called Currency Fortune Property and Finance Limited (“Currency Future”) as security for a loan. Mr. Woo therefore had to arrange for the redemption of the 1st Property from Currency Fortune so as to enable the Plaintiff to have a first charge on the 1st Property. 12.According to Mr. Woo, by 3rd July 2001, he had prepared all the necessary documentation when the Defendants went to his office that morning. On that occasion, he explained to the Defendants the gist of the 1st Loan, the incidental matters and the documents which they were supposed to sign. Both Defendants indicated their understanding of the same. 13.The following documents were then signed or executed in the office of KWC: -
I shall deal with the terms of these documents as may be relevant below. 14.KWC had been put in funds by the Plaintiffs. The Defendants or either of them then instructed Mr. Woo to have the cheque representing the net proceeds of the 1st Loan after the necessary deductions drawn in favour of the 2nd Defendant solely. A letter dated 3rd July 2001 giving such instructions by the 1st Defendant to KWC was prepared and signed by the 1st Defendant. 15.After that, a cheque for the net proceeds of the 1st Loan in the sum of $128,416- was drawn by KWC in favour of the 2nd Defendant and given to her. KWC also issued a cheque in the sum of $410,084- in favour of Currency Fortune for the redemption of the mortgaged property. 16.Subsequently, another application was made to the Plaintiff for a second loan in the sum of $1,100,000- or a bit more and 3 properties with the 1st Defendant as the registered owner thereof were offered as security. 17.Again, the Plaintiff issued another offer letter dated 12th July 2001 (“the 2nd Offer Letter”) offering to lend to the Defendants a term loan of $1,100,000- (“the 2nd Loan”) repayable in 12 months upon the security of 3 properties to be mortgaged by the 1st Defendant. They are described therein as : -
18.Again, the 2nd Offer Letter was not signed by the Defendants. 19.According to Mr. Yu, the Defendants went to his office in the morning of 23rd July 2001 and more or less the same things happened as on the occasion of the granting of the 1st Loan. 20.Again KWC had been instructed by the Plaintiff to prepare the documentation for the 2nd Loan. 21.The Defendants were sent by Mr. Yu to go to see Mr. Woo who again gave an explanation to them of what was involved. 22.Prior to the Defendants attending his office on that occasion, Mr. Woo had discovered that one of the 3 properties offered as security on this occasion, namely, the 2nd Property, had already been mortgaged to Currency Fortune as security for a loan. He had to arrange for a redemption of the same to enable a first charge to be created in favour of the Plaintiff. 23.Mr. Woo had also discovered that, in relation to the 3rd Property, in order to perfect the title, an application would have to be made to court for the clearing off of a trusteeship. 24.Further in relation to the 4th Property, in order to secure good title, Mr. Woo realised that the 1st Defendant would have to make a statutory declaration and to make an application for a vesting order. 25.When the Defendants saw Mr. Woo, Mr. Woo explained to them what had to be done and the Defendants agreed. Consequently, the following documents were signed or executed : -
I shall again refer to the terms of these documents as may be relevant below. 26.Again, KWC had been put in funds by the Plaintiff. The 1st Defendant signed a letter dated 23rd July 2001 instructing KWC to issue a cheque for the net proceeds of the 2nd Loan in favour of the 2nd Defendant alone. KWC then duly drew such a cheque in the sum of $322,400- in favour of the 2nd Defendant and gave it to her. KWC also issued a cheque in the sum of $702,960- in favour of Currency Fortune for the redemption of the mortgaged property. 27.Subsequently, a third loan was applied for from the Plaintiff. 28.By an offer letter dated 16th August 2001 (“the 3rd Offer Letter”), the Plaintiff offered to grant a term loan of $150,000- (“the 3rd Loan”) to the Defendants repayable in 12 months on the security of another property registered in the name of the 1st Defendant and described therein as
This was again not signed by the Defendants. 29.Eventually, more or less the same things happened by the Defendants going to see Mr. Yu and then Mr. Woo on 22nd August 2001. The following documents were signed or executed : -
I shall again refer to the terms of these documents as may be relevant below. 30.Same as on the two previous occasions, KWC had been put in funds by the Plaintiff and the 1st Defendant signed a letter dated 22nd August 2001 instructing KWC to issue a cheque for the net proceeds of the 3rd Loan in favour of the 2nd Defendant solely. This KWC did in the sum of $140,710-. 31.According to Mr. Woo, prior to the meeting on 22nd August 2001, he telephoned the 1st Defendant to ask him whether he was in possession of the original title deeds and documents to the 5th Property. The 1st Defendant replied that he had lost the same and therefore Mr. Woo had to prepare a statutory declaration for the 1st Defendant to make in order to rectify the situation. On this occasion, Mr. Woo also discussed with the 1st Defendant about the title problems relating to the 3rd Property and the 4th Property referred to above and the problem of the lost title deeds regarding the 5th Property. Eventually, Mr. Woo instructed an assistant solicitor of KWC, namely, Mr. Fu Mau Ping (“Mr. Fu”) to deal with the 1st Defendant regarding the documentation for rectifying the title problems referred to above. 32.Despite the fact that the interest under each of the 3 loans was payable by the Defendants to the Plaintiff at the end of one month from the date of the granting of the respective loans and at monthly intervals thereafter, no payment was ever made. 33.By letters dated 9th and 16th October 2001 which were sent by registered post to the Defendants, the Plaintiff made demands for the payment of interest and then repayment of the loans. 34.As a result of the receipt of some of the letters of demand, on or about 15th October 2001, the 1st Defendant went with members of his family to the office of the Plaintiff to inquire about details of the loans and the circumstances surrounding them. Certain information was there given by Mr. Yu to the 1st Defendant or his family members. I shall deal with this in greater detail below. 35.Eventually, the 1st Defendant and his family members made a report to the police on the basis that he had been defrauded by the 2nd Defendant. 36.Letters before action were subsequently issued by KWC to the Defendants on 6th December 2001. The same led to the issue of the Writ of Summons herein on 15th December 2001. The Plaintiff’s Case As Originally Pleaded 37.In paragraph 2 of the Statement of Claim endorsed on the Writ of Summons, the Plaintiff referred to the 1st Offer Letter, the 1st Memorandum and the 1st Mortgage. It then goes on to plead as follows : -
The reference to “the 1st Defendant” alone was obviously a typographical error because in the Amended Statement of Claim (which I will deal with below) that expression was amended to read “the Defendants”. 38.In the subsequent paragraphs, the Plaintiff gave the 2nd Loan and the 3rd Loan the same treatment. In other words, it was made quite clear that, for each of the 3 loans, the loan agreement consisted of the relevant Offer Letter, Memorandum and Mortgage. 39.In paragraph 12 of the Statement of Claim, it was pleaded as follows : -
40.Under the heading “Particulars of interest under the 1st, 2nd and 3rd loans”, paragraphs 15 and 17 of the Statement of Claim appeared. They read as follows : -
The 1st Defendant’s Case As Pleaded 41.The defence of the 1st Defendant is contained in the Amended Defence and Counterclaim of the 1st Defendant filed on 13th April 2005 (“the Defence”). The main points made therein can be summarised as follows : -
42.It is to be noted that the 1st Defendant has not pleaded any defence of illegality whether under the Ordinance or otherwise. Further Developments In The Course Of The Trial 43.The first part of the trial lasted for five days between 25th and 29th June 2007 inclusive when all the evidence and submissions by Counsel had been completed without either side having based any argument on provisions in the Ordinance. 44.After I had reserved judgment, I invited the parties to address me further on three matters : -
45.The parties re-appeared before me on 9th July 2007 when Mr. Ng S. C. appearing for the Plaintiff made an application for leave to adduce in evidence the Supplemental Witness Statement of Mr. Woo dealing with the supply of a copy of the note or memorandum under the 3 loans to each of the Defendants in compliance with section 18 of the Ordinance, should Miss Lee for the 1st Defendant decide to take the illegality point under that section on the basis that no note or memorandum was supplied to the 1st Defendant as required under that section and be allowed by the Court to do so. Miss Lee then confirmed that she was indeed taking an illegality point on such basis. Mr. Ng submitted that Miss Lee should not be allowed to take such a point. 46.On 10th July 2007, I made a ruling to the following effect : -
47.What followed was that Mr. Woo, the 1st Defendant and Ms. Li were all recalled and cross-examined. 48.Counsel for the parties then made further closing submissions. 49.On the part of Miss Lee, she took further illegality points based on the interest rates actually charged and on other provisions in the Ordinance. I shall refer to these below. Mental Capacity Of The 1st Defendant 50.I deal first with the question of the mental capacity of the 1st Defendant at the time of the 3 loans. 51.There is no dispute that the 1st Defendant has a history as a mental patient. According to a psychiatric report dated 10th November 2001 (“Dr. Cheung’s Report”) written by Dr. Cheung Hung Kin (“Dr. Cheung”), Consultant Psychiatrist at the Castle Peak Hospital in response to a request by Messrs. Wong, Kwan & Co., the solicitors instructed by the family of the 1st Defendant, the history and diagnosis of his mental illness were stated as follows : -
52.At the trial, the 1st Defendant called a Dr. Benjamin Lai (“Dr. Lai”), a psychiatrist, to give evidence. Dr. Lai has written 2 psychiatric reports on the 1st Defendant : -
53.In Dr. Lai’s 1st Report, he says that he examined the 1st Defendant and interviewed his family members for about 3 hours. He also referred to Dr. Cheung’s Report. In his oral evidence, Dr. Lai agreed that Dr. Cheung was a very experienced and highly respected psychiatrist. Dr. Lai made the following points in Dr. Lai’s 1st Report : -
54.Dr. Lai’s 1st Report on the whole certainly does not give me the impression that as at November 2001 (which was 3 or 4 months after July and August 2001 when the 3 loans were made) that the 1st Defendant was suffering from such mental disability that he was incapable of understanding the nature and effect of the 3 loans or of managing his own affairs. 55.The Plaintiff called a Dr. Peter W. T. Yu (“Dr. Yu”), another psychiatrist, to give evidence. Dr. Yu had examined the 1st Defendant for 1- hours and interviewed Ms. Li for half-an-hour on 14th July 2005. Dr. Yu wrote his first report dated 16th August 2005 (“Dr. Yu’s 1st Report”) in which he said the following : -
56.Dr. Yu wrote another report dated 8th August 2006 (“Dr. Yu’s 2nd Report”) after he had been shown Dr. Cheung’s Report and an earlier memo written by Dr. Cheung to the police both of which were obtained by the Plaintiff in the process of discovery by the 1st Defendant. He said that Dr. Cheung’s Report and the said memo suggested that his opinion expressed in Dr. Yu’s 1st Report was valid and that no revision of the same was necessary. 57.Dr. Lai then produced Dr. Lai’s 2nd Report in order to deal with Dr. Yu’s 1st Report and Dr. Yu’s 2nd Report. Dr. Lai disagreed with a number of the points made by Dr. Yu. It is to be noted that before writing Dr. Lai’s 2nd Report, Dr. Lai had not examined the 1st Defendant again. 58.Dr. Yu then wrote yet another report dated 15th December 2006 (“Dr. Yu’s 3rd Report”) in which he dealt with the points made in Dr. Lai’s 2nd Report. 59.It is not necessary for me to deal with the detailed contents of all the medical reports other than what I have done above. 60.Having considered all the evidence and all the medical reports, I have come to the conclusion that the opinion of Dr. Yu is to be preferred to that of Dr. Lai. 61.I find as a fact that as at July 2001, the 1st Defendant was not suffering from mental disability to the extent that he was unable to understand the nature and effect of the 3 loans and all that they entailed, including the security given by him to the Plaintiff. 62.I base my finding on the following matters : -
63.If the members of the 1st Defendant’s family had not been convinced that he was not suffering from mental incapacity, it would be highly unlikely that they would have allowed him to take charge of his grandchild. 64.I further do not accept the allegation that the 1st Defendant would not take a bath for a year or change his clothes regularly or that he was always smelly. His family members would be unlikely to allow that to happen. In any event, he showed none of such unattractive features when he appeared in Court both in the witness box and in the public gallery. I also do not find anything unusual in his facial expression considering his age and background. 65.The law on this subject is well summarised in Chitty on Contracts (29th ed.) vol. 1 p. 608 para. 8 – 670 as follows : -
66.The case of Imperial Loan Co. Ltd. V. Stone [1892] 1 Q. B. 599 was approved and applied by the Privy Council in the case of Hart V. O’Connor [1985] 1 A. C. 1000. 67.Even if I were wrong in finding that the 1st Defendant did have the mental capacity to enter into the 3 loans, I find as a fact that the Plaintiff and its representatives did not know about the lack of mental capacity on the part of the 1st Defendant. In this regard, I accept the evidence of Mr. Yu, Mr. Woo and Mr. Fu all of whom said in evidence that there was nothing unusual in the 1st Defendant’s facial expression, appearance, attire or body odour. 68.The 1st Defendant therefore fails in his defence based on his alleged lack of mental capacity to enter into the 3 loans. Undue Influence 69.I now deal with the defence of undue influence. The allegation of the 1st Defendant is that he entered into the 3 loans as a result of undue influence exerted by the 2nd Defendant over him and that the Plaintiff had constructive notice of such undue influence. Hence, the 3 loans are void or voidable. 70.The equitable doctrine of undue influence is neatly summarised in Chitty on Contracts (29th ed.) vol. 1 p. 534 para. 7 – 047 as follows : -
71.Thus, where there exists between the complainant and the person alleged to have exerted undue influence a special relationship, e.g. parent and child, guardian and ward and solicitor and client, there is a presumption of undue influence which may be rebutted. See Chitty (supra) pp. 544 – 548. 72.On the other hand, where no such special relationship exists between the two relevant parties, the burden is on the complainant to prove that there was actually undue influence exerted on him. 73.In the case of Li Sau Ying V. Bank of China (Hong Kong) Ltd. [2005] 1 HKLRD 106, Lord Scott NPJ delivering the judgment of the Court of Final Appeal first reviewed all the relevant authorities including the leading cases decided by the House of Lords. In that case the complainant and the person alleged to have exerted undue influence on her were merely friends for a few years. At page 118H, Lord Scott said : -
At page 121A – D, the learned Judge said : -
74.In the present case, the undisputed evidence is that the 1st Defendant and the 2nd Defendant were friends for many years. In the witness statement of the 1st Defendant, he says he had been acquainted with her for more than 30 years. In his oral evidence, he says that he had known her for 10 odd years. The discrepancy is of no great significance. What is important is that on the evidence there existed no special relationship between the two Defendants. Thus, no presumption of undue influence has arisen and the burden is on the 1st Defendant to prove, first, that the 2nd Defendant did exert undue influence on him and, secondly, that the Plaintiff had constructive notice of such undue influence. 75.It is to be remembered that not all the proceeds of the 3 loans went to the 2nd Defendant. A substantial part of the 1st Loan and the 2nd Loan was paid over to Currency Fortune to redeem the prior mortgages and to discharge the liability of the 1st Defendant thereunder. There is no clear evidence as to how and why the prior mortgages arose. 76.The 1st Defendant gave an account in paragraphs 7 – 14 of his witness statement of signing documents in solicitors’ offices in Central. He gave no specifics about the time and he said he had no idea of going to a solicitors’ firm in Tai Po. He said he did all that at the behest of the 2nd Defendant and that nobody ever gave any explanation to him as to what he was signing. He was adamant that he only borrowed 3 sums of $150,000- each without specifying from which financial institution. In oral evidence, the 1st Defendant said that the 2nd Defendant told him that her factory on the Mainland was losing money and asked him to help her borrow money from financial institutions by providing security. He agreed to help her because of their friendship. He said that she cheated him. 77.In my judgment, such evidence by the 1st Defendant falls far short of proving on a balance of probabilities that the 2nd Defendant had exerted undue influence on him in order to cause him to enter into the 3 loans. 78.In such circumstances, the question of whether the Plaintiff had constructive notice or was put on inquiry about any undue influence simply does not arise. 79.Even if I am wrong and the 2nd Defendant did exert undue influence over the 1st Defendant in arranging for him to enter the 3 loans, in my judgment, the Plaintiff was not put on inquiry at least as regards the 1st Loan and the 2nd Loan because a substantial part of each of those two loans was used to repay Currency Fortune. There is no evidence that the Plaintiff was aware of the circumstances under which the mortgages in favour of Currency Fortune were created. The repayment to Currency Fortune was to discharge the liability of the 1st Defendant. 80.Furthermore, even if the Plaintiff had been put on inquiry, I find that the Plaintiff has discharged its duty through Mr. Woo. I accept the evidence of Mr. Woo to the effect that he did explain clearly to the Defendants the nature and effect of all the loan documents signed and that he did advise the Defendants that they should consider getting independent legal advice, after which they signed the 1st ILA Certificate, the 2nd ILA Certificate and the 3rd ILA Certificate on the relevant occasions. I further accept the evidence of Mr. Woo that, when instructed to issue a cheque in favour of the 2nd Defendant solely on each occasion, he did explain to the 1st Defendant what he was doing and asked him whether that was really what he wanted and that the 1st Defendant affirmed it. 81.In all the circumstances, in my judgment, the 1st Defendant also fails in his defence based on the alleged evidence influence exerted on him by the 2nd Defendant. Section 18(1) Of The Ordinance 82.I now deal with the point based on section 18(1) of the Ordinance. 83.Section 18(1) of the Ordinance provides as follows : -
84.It is alleged that the Defendants were not supplied with copies of the 1st Memorandum, the 2nd Memorandum and the 3rd Memorandum at the time of signing them. 85.When the 1st Defendant was recalled to give evidence on this point, all he said was that he could not remember anything about what took place in Mr. Woo’s office. 86.On the other hand, Mr. Woo was clear in his evidence that he did supply copies of the 1st Memorandum, the 2nd Memorandum and the 3rd Memorandum to the Defendants on each occasion. Mr. Woo started practising as a solicitor in 1991 and started his own firm, KWC, in October 1993. He would often deal with money lenders transactions in his practice. By 2001, he would have had such experience for over 7 years. He clearly recognised the duty of a money lender under section 18(1) of the Ordinance. Indeed, annexed to each of the 1st Memorandum, the 2nd Memorandum and the 3rd Memorandum was a summary of the relevant provisions of the Ordinance including the words : -
87.I accept the evidence of Mr. Woo to the effect that he did give copies of the 1st Memorandum, the 2nd Memorandum and the 3rd Memorandum to the Defendants at the time of signing on each occasion. 88.The 1st Defendant therefore fails in his defence based on the alleged contravention of section 18(1) of the Ordinance by the Plaintiff. The Interest Rates Points 89.Whilst it is possible for money lenders to charge very high interest rates, the Ordinance does impose stringent restrictions and conditions against lenders of money (whether money lenders within the meaning of the Ordinance or not) regarding, inter alia, the question of interest rates charged against borrowers as can be seen from the provisions set out below. 90.Section 24(1) and (2) of the Ordinance provide as follows : -
It is to be noted that there is no provision for relief by the courts in favour of a lender of money who has committed a breach of section 24(1). 91.Section 25(1), (2) and (3) of the Ordinance provide as follows :-
(emphasis added) 92.Thus, the scheme of the Ordinance insofar as interest rates are concerned is that no person (whether a money lender or not) is allowed to charge an “effective rate of interest” exceeding 60% per annum. In the case of a person (whether a money lender or not) who lends money and charges interest at an “effective rate” exceeding 48% per annum but not exceeding 60% per annum, the Court may re-open the transaction so as to do justice between the parties having regard to all the circumstances set out under section 25 of the Ordinance. 93.Section 22(1) of the Ordinance provides as follows : -
This applies only to a loan made by a money lender. It prohibits the charging of compound interest (sub-section (1)(a)) and the charging of interest the rate or amount of which may be increased by reason of any default in the payment of sums due under the loan agreement (sub-section (1)(c)). On the other hand, there is power on the part of the Court to grant relief to the money lender who has contravened section 22(1). Thus, sub-section (2) of that section provides as follows : -
94.Section 18 of the Ordinance which relates to the form of a loan agreement and the note or memorandum in writing required thereunder has been partly dealt with in paragraphs 82 – 88 above. Section 18(2) provides as follows : -
This sub-section is in imperative terms and one of the terms of the loan agreement which must be set out is the rate of interest charged on the loan (sub-paragraph (i)). 95.Although there is also power under sub-section (3) of section 18 of the Ordinance (which is similar to that under section 22(2) referred to in paragraph 93 above) on the part of the Court to give relief to a money lender who has contravened subsection (1) by, for example, not making out a note or memorandum containing all the particulars required under subsection (2), nevertheless such contravention still amounts to an offence under that Ordinance. Thus, section 29(4) provides as follows : -
96.I shall deal with the definitions of “interest”, “effective rate” or “effective rate of interest” and Schedule 2 to the Ordinance below. 97.Leaving aside the statutory provisions for the moment, I now turn to how the case of the Plaintiff regarding interest rates has developed on the pleadings and in argument. 98.I have already dealt with the way in which the Plaintiff pleaded its case in the original Statement of Claim in paragraphs 37 – 40 above. 99.At the commencement of the trial, the Plaintiff sought and was granted leave to file the Amended Statement of Claim. It can be seen from paragraphs 15, 17, 19 and 20 thereof that it was still claiming interest at 40% per annum and default interest at 45% per annum. 100.In the Closing Submissions of Counsel for the Plaintiff dated 29th June 2007, it was said in paragraph 7 as follows : -
101.Subsequently, in response to my queries, the parties made further closing submissions (see paragraphs 44 – 49 above). In the Further Submissions of the Plaintiff dated 10th July 2007, it was said in paragraph 8 as follows : -
102.Thus, the approach of Counsel for the Plaintiff appears to be that if the pleaded claim is not supported by the evidence, then the Court should simply make a finding on the face of the contractual documents which have been signed by the Defendants. In other words, Counsel for the Plaintiff submits that the Court should give judgment in favour of the Plaintiff for the principal sums plus interest at 40% per annum. 103.On the other hand, Ms. Lee on behalf of the 1st Defendant has referred the Court to documents which have emanated from the Plaintiff, namely, demand notes issued by the Plaintiff against the Defendants, to show that in fact the Plaintiff has been charging interest at very high rates, notwithstanding what is stated on the face of the loan agreements. Such documents are Exhibits D1, D2 and D3 and pages 302 and 354 in Trial Bundle C. 104.Such demand notes are all itemised in standard form. I shall examine them in turn below. 105.Exhibit D1 is a copy of a demand note dated 10th October 2001 and the calculation is for repayment due on 15th October 2001. The particulars set out are as follows : -
106.Exhibit D2 is likewise a copy of a demand note dated 10th October 2001 and the calculation is for repayment due on 15th October 2001. The particulars set out are as follows : -
107.Exhibit D3 is again a copy of a demand note dated 10th October 2001 and the calculation is for repayment due on 15th October 2001. The particulars set out are as follows : -
108.Page 302 in Trial Bundle C is a copy of a demand note dated 20th September 2001 and the calculation is for repayment due on 1st October 2001. The particulars set out are as follows : -
109.Page 354 in Trial Bundle C is a copy of a demand note also dated 20th September 2001 and the calculation is for repayment due on 1st October 2001. The particulars set out are as follows : -
110.Ms. Lee has made an analysis of the 5 demand notes referred to above. The result is contained in 2 tables compiled by her as follows : -
111.Section 2(1) of the Ordinance contains the following definitions : -
112.Schedule 2 to the Ordinance contains a formula containing 6 paragraphs for “Calculation of True Annual Percentage Rate of Interest”. The formula appears to be based on the assumption that the loan agreement in question provides for repayment of principal as well as interest by instalments. 113.In the present case, since the 3 Loan Agreements provide for repayment of the principal at the end of one year with interest being payable by monthly instalments, the formula in the said Schedule 2 does not appear to be applicable. This is confirmed by paragraph 11 of the Further Submissions of the Plaintiff dated 10th July 2007. 114.Theoretically, all that the Court has to do is to see what sums (by whatever name called) other than principal are charged against the Defendants by the Plaintiff and such sums constitute the interest element. The effective or true rate of interest can then be worked out based on the amount of the principal in respect of each of the 3 loans. 115.Thus, in the demand notes, all the items “Loan Interest”, “Overdue Amount”, “Overdue Interest” and “Prepayment Charges” would be regarded as part and parcel of the interest element for the purpose of calculating the effective or true rate of interest in respect of each of the 3 loans. 116.My understanding is that, in such circumstances, Ms. Lee is asking the Court to draw the inference that the Plaintiff was charging interest on the 3 loans at effective rates between 48% – 60% per annum and even above 60% per annum in contravention of sections 24 and/or 25 of the Ordinance. 117.It is to be noted, however, that the 5 demand notes are calculated for repayment due up to 15th October 2001 at the latest, only 3 or 4 months after the 3 loans were made. Thus, the effective rates set out in the tables compiled by Ms. Lee may not represent the true rates if the calculations had been taken up to 12 months after the dates of the respective loans. One would expect, for instance, that “prepayment charges” were intended to be levied only once. 118.Moreover, there are included in Trial Bundle C at pages 581, 582 and 583, 3 Interest Debit Advices which appear to have the effect of demanding payment of interest at the rate of 40% per annum. 119.Furthermore, included in Trial Bundle C at pages 115, 117 and 119, are 3 letters before action by KWC to the Defendants dated 6th December 2001 demanding repayment of the 3 loans together with contract interest at the rate of 40% per annum and overdue interest at the rate of 45% per annum. 120.It is to be borne in mind that none of the witnesses has been questioned on the contents of the 5 demand notes relied on by Ms. Lee. No illegality point has ever been pleaded by the 1st Defendant. In fact, Ms. Lee only placed reliance on the 5 demand notes for the first time in her Further Submissions and produced her 2 tables on the very last day of the trial on which the parties were making their closing submissions to the Court for the second time. 121.It is true that when the Court sees on the evidence that a transaction sought to be enforced involves an illegal element, it will not enforce it, even when the illegality point has not been pleaded, but this is only when certain conditions are satisfied. The position is neatly summarised in Chitty on Contracts (29th ed.) Vol. 1 at page 1055, paragraph 16 – 199 as follows : -
122.I find that the present case falls into the third category in the passage cited above. In other words, I am not satisfied that the whole of the relevant circumstances are before the Court so as to enable the Court to come to the conclusion that the rates of interest set out in Ms. Lee’s 2 tables were or would have been the true rates of interest charged by the Plaintiff in relation to the 3 loans on a per annum basis. If the point had been pleaded and if the Plaintiff’s witnesses had been questioned on the 5 demand notes, an explanation might well have been offered to refute Ms. Lee’s suggestion. 123.In the circumstances, I do not think that I am in a position to find that the Plaintiff had contravened section 24 or section 25 of the Ordinance. 124.In my judgment, however, the Plaintiff has been in breach of sections 18 and 22 of the Ordinance. I shall deal with this below. 125.Each of the 1st Offer Letter, the 2nd Offer Letter and the 3rd Offer Letter contains, inter alia, the following terms : -
126.The Statements of Account issued by KWC in respect of each of the 3 loans bear out the fact that indeed a 1% handling fee had been deducted from the loan amount. The same should be regarded as part of the interest charged against the Defendants. 127.The 5 demand notes also bear out the fact that a prepayment or early redemption charge as well as overdue interest (presumably at the rate of 45% per annum) were levied in respect of each loan. 128.Such provisions for the charging of a handling fee, prepayment or early redemption charges and overdue interest at 45% per annum do not appear in any of the 1st Memorandum, the 2nd Memorandum and the 3rd Memorandum. 129.The Plaintiff has therefore contravened section 18(2) of the Ordinance in that the requisite note or memorandum in respect of each loan has not set out the true rate of interest charged on the loan. 130.The Plaintiff has also contravened section 22(1)(c) of the Ordinance in that the agreement in respect of each loan provides directly or indirectly for “the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement”. 131.In my judgment, it is not open to the Plaintiff to say at this stage that the 1st Offer Letter, the 2nd Offer Letter and the 3rd Offer Letter do not form part of the 1st loan agreement, the 2nd loan agreement and the 3rd loan agreement respectively, because that was not how the Plaintiff’s case was pleaded and originally argued. The original case of the Plaintiff is also in accordance with the documentary evidence, namely, the 5 demand notes. 132.It is not open to the Plaintiff to try to get out of the difficulty it faces by its Counsel simply saying that the Plaintiff would just claim simple interest at 40% per annum and waive the rest of its original claim. 133.One of the mischiefs which section 18 aims to prevent or address is that a money lender should stipulate that it charges interest at a certain rate on the face of the requisite note or memorandum whilst in actual fact he is charging interest at a much higher rate. 134.I therefore hold that the 3 loans have been rendered illegal and unenforceable by reason of sections 18(1) and (2), 29(4)(a) and 22(1)(c) of the Ordinance. 135.The question then arises as to whether and, if so, how the Court should exercise its discretion under section 18(3) and 22(2) of the Ordinance. As there has been no argument at all by Counsel on this point, I have no alternative but to have to ask the parties to appear before me again to make submissions. Subject to representation by the parties, I reckon that the time for the further hearing is one day. 136.I shall deal with the question of costs after I have made my decision on the matters set out in paragraph 135 above.
Mr Peter Ng, SC & Ms Grace Chow, instructed by Messrs Jackie Cheung & Co., for the Plaintiff Miss Eling Lee, instructed by Messrs Woo, Kwan, Lee & Lo, for the 1st Defendant The 2nd Defendant, in person, absent |
Cases cited in this judgment
Further hearings and rulings under HCA 5387/2001