Flying Mortgage Ltd v. Chan Kuen Kwong and Another

DCCJ 5004/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5004 OF 2006

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BETWEEN

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Coram : His Honour Judge Chow

Date of hearing : 21^st September, 2007

Date of handing down Decision : 21^st November, 2007

DECISION

1.This is the Plaintiff’s appeal against the order of Master Lai in respect of the interest rate to be paid by the Defendants on the loans they borrowed from the Plaintiff.

2.The Plaintiff is a licensed moneylender.  On 1^st June 2005 and 20^th September 2005, the Plaintiff lent money to the Defendants under two Loan Agreements, in the sums of $250,000.00 and $180,000.00 respectively.  The Defendants later defaulted and the Plaintiff sought judgment against them.  On 5^th September 2007, the Plaintiff’s application was heard.  The Plaintiff agreed to waive the default interest, but the learned Master R. Lai held that the provisions of the two Loan Agreements providing for increase of interest rate on default, i.e. paragraph (h) to the First Schedule of the Loan Agreements, are in contravention of section 22(1)(c), of the Money Lenders Ordinance, Cap. 163 (“the Ordinance”).  The learned Master R. Lai only allowed the Plaintiff to charge judgment rate instead of the contractual interest rate on the outstanding principals.  From that particular part of the decision, namely, whether the judgment rate or the contractual interest rate applies on the outstanding principals, the Plaintiff now appeals.

3.The interest rate on the 1^st Loan is 36% per annum, according to Clause (g)of the First Schedule.  Clause (g) reads:-

“

(g)

Interest rate:- 36% per annum (3.0% per month) on the Loan accruing from 1st June 2005 which is the date of making of the Loan.  Interest payable under this Loan Agreement shall be paid notwithstanding that the Lender may have obtained any judgment against the Borrower and shall be paid at the aforesaid annual rate as well before as after and notwithstanding any such judgment.  The Borrower hereby agree and declare that the agreement of calculation of the aforesaid annual rate will be treated as an individual covenant and will not be merged to the judgment of the court.”

The interest rate on the 2^nd Loan is 27% per annum.  Clause (g) of the First Schedule of the 2^nd Loan Agreement is identical to that of the 1^st Loan Agreement, save that the interest rate and the loan accruing date are different.

4.Paragraph (h) under the First Schedule to the two Loan Agreement reads as follows:

“

(h)

Default interest rate :-    48% per annum (4.0% per month) on the outstanding overdue interest from the due date of the actual payment/instalment. The Borrower is hereby agreed to the said rate of interest for calculation of default interest notwithstanding that the Lender may have obtained any judgment against the Borrower and shall be paid at the default interest rate as well before as after and notwithstanding any such judgment.  The Borrower further declare that this agreement of calculation of rate of default interest as aforesaid will be treated as an individual covenant and will not be merged to the judgment of the court”

5.Section 22(1) of the Ordinance provides:-

“	(1)	Any agreement made for the loan of money by a money lender shall be illegal if it provides directly or indirectly for –
		(a)	…….
		(b)	……
		(c)	the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement:
			…………………
	(2)	Notwithstanding subsection (1), if the court before which the legality of any agreement comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement which does not comply with this section should be held to be unenforceable, the court may order that such agreement is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.”

The provision of paragraph (h) violates section 22(1) of the Ordinance, and is therefore unenforceable.

6.The Plaintiff submits that the provision for default interest is severable pursuant to clause 12 of the two Loan Agreements and under the doctrine of severance.  The provision for default interest does not form a main part of the consideration.  Where severance is allowed, the provision for default interest can be simply struck out, the scope and intention of the Loan Agreements will not be affected and the remaining Loan Agreements are still the valid contracts.  As a result, the contractual interest rate should apply.  There is no evidence that the Plaintiff applied to Master Lai to delete paragraph (h).  Likewise it did not apply to me to delete paragraph (h).  The Plaintiff’s Counsel merely informed this Court that Clause (h) might be deleted.  So there is no application to delete that Clause.

7.Section 50 of the District Court Ordinance reads:-

“	(1)	Judge debts are to carry simply interest –
		(a)	at the rate the Court orders; or
		(b)	in the absence of an order, at the rate the Chief Justice determines by order,
		on the total amount of the judgment debt, or on the part that for the time being remains unpaid, from the date of the judgment until payment.”

8.The Plaintiff submits that the Court should consider whether it would be inequitable to keep the Plaintiff from recovering the contractual interest rate accrued.  The Plaintiff does not submit the “inequitable” factors for the Court to consider.  It is wrong for the Plaintiff to say that it is kept away from recovering the contractual rate accrued.  When the Court made an order for judgment, the contract between the Plaintiff and the Defendants came to an end.  Hence the Plaintiff is not entitled to the contractual interest rate because the contract is no longer in existence.

Other reasons

9.The Plaintiff submits that the Plaintiff now received a punishment which is out of proportion to its objectionable conduct.  The increase default interest rate is chargeable on the interest only and not chargeable on the principal.  Therefore, the amount in dispute is minimal.  The Plaintiff never invoked paragraph (h) to the First Schedule of the Loan Agreements.  Accordingly, the punishment inflicted on the Plaintiff should only be the deprivation of its rights to charge any default interest under the proviso to Section 22(1) of the Ordinance.  The Court does not impose any punishment on the Plaintiff.  It is irrelevant whether the amount in dispute is minimal or not.  The issue is whether the learned Master’s decision is correct or not.

10.The Plaintiff has failed to point out why the judgment rate imposed on the outstanding principal sum is wrong.  He has failed to convince me that Master Lai erred in making his decision under section 50 of the District Court Ordinance.

11.For the reasons stated above.  I dismiss the Plaintiff’s application.

Costs

12.I make an order nisis, to be made absolute in 14 days’ time, that the Plaintiff is to pay costs of this application to the Defendants, to be taxed, if not agreed.

The Plaintiff : represented by Mr. Ivan Chan of M/S. Joseph Leung & Associates, Solicitors

The Defendant (Chan Kuen Kwong) : represented by Miss Chan Yuen King, unrepresented

The Defendant (Chan Yuen King) : in person, unrepresented