WEALTH LEE FINANCE LTD v. NG FUN LUNG AND ANOTHER

DCCJ 2060/2013

[2019] HKDC 68

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2060 OF 2013

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JUDGMENT

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Background

1.  The plaintiff is a registered and licensed money lender (the Lender) under the Money Lenders Ordinance (Cap 163) (the “MLO”).

2.  The 2^nd defendant (the “Mother”) is the mother of the 1^st defendant (the “Son”). It is not in dispute that the Mother has altogether 5 children, only the Son is of normal mental capacity.  The Mother is currently 83 years old.  The Mother claims to be illiterate although she can write and sign her own name in Chinese.

3.  The Mother and the Son are the registered and beneficial owners of two properties (together, the Two Properties):-

(a)  Flat 1E, Kam Wah House, Nos 181, 181A, 183, 183A & 185 Sai Yeung Choi Street North, Nos 38L, 38M & 38N Boundary Street, Kowloon (the Kam Wah property);

(b)  Flat 10C, Lai Ying Building, Nos 780/782 Nathan Road, Kowloon (the Lai Ying property).

4.  By a power of attorney dated 13 April 2012 (the “POA”), the Mother appointed the Son as her attorney to do various matters, and amongst them, to sell, mortgage, charge, pledge or otherwise dispose of the Two Properties.

5.  The Son entered into a loan agreement dated 31 August 2012 (the “Loan Agreement”) with the Lender for a loan of HK$450,000 at a rate of 46.8% (the “Loan”).  HK$450,000 was advanced to the Son.

6.  By a collateral mortgage dated 31 August 2012 (the “Legal Charge”), the Son and the Mother (the Son purportedly acting on her behalf as her attorney) charged the Two Properties in favour of the Lender as security for all moneys payable to the Lender.  Under the Legal Charge, both the Son and the Mother agreed to repay upon written demand sums from time to time advanced by the Lender.

7.  The Son and the Mother had failed to make repayments to the Lender since 31 October 2012.

8.  The Lender thus claims payment of all monies due and delivery of vacant possession of the Two Properties as security under the Legal Charge.

9.  The Son and the Mother were not first time borrowers when they obtained the Loan from the Lender. From a loan agreement dated 26 April 2012 between Winland Finance Limited as lender and the Son and the Mother (the Son acting as her attorney) as borrowers, a loan in the amount of HK$3,200,000 was granted for repayment of 7 different loans or mortgages with 5 different financial institutions or lenders.  It is apparent from other documentation that there were other further loans taken out by the Son with various financial institutions.

10.  The Son is now nowhere to be found.  A money judgment was entered against him on 7 May 2014 upon his default of filing an acknowledgement of service and service of a defence.  As such, the present trial only concerns the Mother.

Defence

11.  In her defence, the Mother originally claims that:-

(a)  she had not executed the POA;

(b)  she had not executed the Legal Charge nor had she authorized the Son to execute the Legal Charge on her behalf; and

(c)  she was not a party to the Loan Agreement.

12.  Further, even if the POA was executed by her, the Mother claims that

(a)  the POA did not confer authority on the Son to execute the Legal Charge on her behalf to secure a loan which was advanced to the Son solely;

(b)  The Son was in breach of the fiduciary duty owed to the Mother as her attorney in making use of the POA for his own benefit to the detriment of the Mother;

(c)  The Legal Charge is unenforceable as the Lender has failed to give the Mother copies of the note/ memorandum in writing under s 18(1) of the MLO, a copy of the Legal Charge, a statement showing the total sum due and the dates they come due.

13.  The Mother also counterclaims for a declaration that the Legal Charge is null and void and unenforceable as against her.

14.  The Lender denies the Mother’s allegations and avers that the Mother knew about the Loan Agreement and the Legal Charge and the purpose of the loan advanced to the Son.  The Lender also claims that the Mother had been independently advised by her own solicitor, Mr Tang Sik Ho of Messrs Peter W K Lo & Co in relation to the POA.

Issues

15.  Despite the parties’ respective cases on pleadings, by the end of the trial, certain concessions were made and the issues to be determined were narrowed down to:-

(a)  Did the Son validly execute the Legal Charge as the Mother’s attorney by relying on the POA?

(i) Despite Clause 20 of the POA, did the Mother orally agree to expand the Son’s power to enter into the Legal Charge on her behalf despite the moneys not being paid to her (factual issue)?

(ii) Legally, could the Mother orally amend the Son’s power under the POA which was a deed (legal issue)?

(b)  Even if the Son validly executed the Legal Charge as the Mother’s attorney, should the Court hold the Legal Charge as unenforceable if there was a breach of s 18 (1) of the MLO, or alternatively should the Legal Charge be set aside based on section 25 of the MLO?

(c)  Can the Lender nonetheless claim against the Mother for unjust enrichment?

Procedural History - Order 14A (“O 14A”) Application

16.  The Mother made an O 14A application on 17 February 2015, arguing that she was not liable under the Legal Charge on the true construction of the POA.  Clause 20 of the POA imposes a restriction on the Son’s power to deal with the Two Properties on the Mother’s behalf.  It is stated that:-

“From time to time if and when the Attorney shall think fit to … mortgage, charge … the said premises or any part thereof for such consideration and upon such terms and conditions as the Attorney shall in his absolute discretion think fit, to receive the consideration or other monies for the same … provided always that such consideration or other monies to which the Donor is entitled shall be made payable to the Donor’s name only by cashier order(s) or solicitors’ cheque(s).” (Emphasis added)

The Mother argued that the pursuant to Clause 20 of the POA, the POA did not authorise the Son to execute the Legal Charge as her attorney, as it was not for the Mother’s benefit.  Up until that point, there was no evidence as to how the Loan was actually paid.  The Mother argued that the Legal Charge was not for her benefit on the basis that the Loan was paid by cheques (stated to be Bank of East Asia cheques 000667 and 000668) in the Son’s name only.

17.  It was in resisting the O 14A application that the Lender alleged for the first time that there was a telephone conversation between Mr Pang Leung (previously named Tang Yan Leung) of the Lender (“Mr Pang”) and the Mother.  It was alleged that the Mother gave oral consent to the Loan Agreement and the charging of the Two Properties pursuant to the Legal Charge.

18.  Her Honour Judge Levy dismissed the O 14A application because of the Lender’s concession given before her, that, if the Loan Agreement and Legal Charge were executed for the Son’s sole benefit, the Lender’s claim against the Mother would stand dismissed: see Judgment at §13.  Based on the affidavit evidence put before her, Judge Levy was not satisfied that the Loan Agreement and Legal Charge were not, and could never have been, for the Mother’s benefit.

19.  Subsequent to the dismissal of the O 14A application, the Lender amended the Reply on 11 August 2015 by adding §4(3) claiming that the Loan “was not only advanced to the Son solely”. There is no positive assertion as to whom the Loan was advanced to in addition to the Son, and whether it means that those person(s) was also party to the Loan Agreement.

20.  In answer to the Mother’s request, the Lender gave further and better particulars on 28 August 2015 by stating that the Loan was advanced to both the Son and the Mother, on the strength of the alleged telephone conversation between Mr Pang and the Mother on 31 August 2012. 

21.  Mr Cheng, counsel for the Mother relied on this passive late change of case on the Lender’s part as an attack on the existence of the alleged telephone conversation between Mr Pang and the Mother.

Did the Son validly execute the Legal Charge on behalf of the Mother?

22.  There is no dispute that the Lender advanced the Loan to the Son by issuing 2 cheques in his name solely on 31 August 2012.  Mr Pang accepted he was the person signing off the cheques on that day.

23.  On the same day, the Son presented the 2 cheques (at different times) for payment.  The endorsement at the back of the 2 cheques clearly suggested that they were cashed over the counter. 

24.  It is thus indisputable that Clause 20 was not complied with when the Son executed the Legal Charge on behalf of the Mother, because the Loan was not paid in the Mother’s name by any cashier order or solicitors’ cheque. 

25.  Mr Cheng submitted that the Son did not have any authority to execute the Legal Charge as the Mother’s attorney in the way he did.  Mr Cheng submitted that the Lender must be bound by the consequence of the Son’s lack of authority under the POA.  As stated in Article 73 of Bowstead & Reynolds on Agency (21^st ed, 2017) at §8-047:-

“No act done by an agent in excess of his actual authority is binding on the principal with respect to persons having notice that in doing the act the agent is exceeding his authority.”

26.  Mr Cheung, counsel for the Lender submitted that by reason of the alleged telephone conversation between Mr Pang and the Mother, the POA has been varied and extended orally by the Mother, in that the Son was authorized to enter into the Legal Charge on her behalf despite the fact that monies were not paid to her name.

The alleged telephone conversation

27.  Mr Pang said that he had called the Mother on 31 August 2012 around 2-4 pm. He said he first confirmed with the Mother her ID card number and name.  He then confirmed if the Mother had authorized the Son to charge the Two Properties.  Upon the Mother’s confirmation, Mr Pang said he informed the Mother about the Son using the Two Properties as security to obtain a loan of HK$450,000 from the Lender.

28.  Mr Pang said the Mother’s response was along the following lines: “我4個仔都弱智架，得阿歡龍正常，佢好叻仔架，識搵好多錢，而家我地借錢係大陸搞豬場，我地歡龍識裝修又識養豬，搵到好多錢，放心啦我地一定還錢架，我得歡龍識搵錢，所以你地放心，我地一定還錢架，我都授權左佢借錢，有授權信架，之前個d公司都係咁借俾我啦，阿哥哥我身體唔好，所以行唔到黎阿，我都授左權架啦，你俾d錢我地歡龍得架喇。”.  In other words, Mr Pang said that the Mother had authorized the Son in executing the Legal Charge on her behalf despite the Loan was only paid to the Son in his name.

The legal issue

29.  Leaving aside for the moment whether or not the court finds on the evidence that the alleged telephone conversation took place (which will be dealt with separately below), Mr Cheng submitted that the true legal position is that where an agent is authorized to execute a deed on behalf of his principal, his authority must be given in a deed (Article 10 of Bowstead & Reynolds on Agency (at §2-040)).

30.  In the present case the Legal Charge was executed by the Son as a deed.  As such, Mr Cheng submitted that the Son could only have been properly authorised as the Mother’s attorney by a deed.  Apart from the POA, there is no other deed which validated the execution of the Legal Charge by the Son on the Mother’s behalf.  In short, Mr Cheng’s position is that legally, the Mother could not extend her powers orally by way of the alleged telephone conversation, even if it did happen. 

31.  Mr Cheung on the other hand contended for the Lender that whilst at common law, a deed could not be varied or rescinded by another deed, equity now permits variation of a deed without any formality.  He quoted various cases in support of such proposition: Nash v Armstrong (1861) 142 ER 451 at 454 (Willes J), Berry v Berry (1929) 2 KB 316 at 319 (Swift J), AG v Fulton Corp Ltd & Ors (1963) HKLR 176 at 188; Ho & Hall’s Hong Kong Contract Law (2017) 4^th ed, p 665, 16-62, Chitty on Contracts 32^nd ed, Vol 1, p 116, 1-143.

32.  Mr Cheung’s proposition is extracted from a section in Ho & Hall’s Hong Kong Contract Law (2017) 4^th ed, p 665, 16-62 and Chitty on Contracts 32^nd ed, Vol 1, p 116, 1-143.  The learned authors rely on two cases for the proposition.  However, I do not think that the proposition (as derived from the two cases) applies to the situation in the present case.  Berry v Berry is a matrimonial case where the parties agreed to vary monthly maintenance provided in a deed of separation.  The decision of the case only goes so far as to suggest that equity allows variation of a contract under seal by preventing the party who has agreed to the variation suing under the deed.  The facts of the case were that the husband agreed with the wife to lower monthly maintenance from 18l. per month to 9l. per month with the advantage of receiving 30% of the husband’s earnings if they exceed 350l. per year.  It was held that having acted under the agreement it was inequitable to allow to wife to repudiate it.

33.  AG v Fulton concerns variation of a land covenant and there is little similarity between the present case and the facts therein.  I am thus unable to accept the proposition being applicable to the present case. 

34.  Although a principal may ratify an unauthorized act, the execution of a deed can only be ratified by deed.  (Article 17 of Bowstead & Reynolds on Agency (at §2-074)).  I thus reject Mr Cheung’s submission that the Mother could legally vary the POA and ratify the Legal Charge orally.

35.  In Bryant Powis and Bryant Limited v La Banque Peuple  (1893 AC 170), it was held that: “Whenever the very act of the agent is authorized by the terms of the power, that is, whenever by comparing the act done by the agent with the words of the power, the act is in itself warranted by the terms used, such act is binding on the constituent, as to all persons dealing in good faith with the agent, such persons are not bound to inquire into facts aliunde.  The apparent authority is the real authority.”  Mr Cheung seeks to rely on the last sentence to argue that due to the Mother’s alleged oral consent, her apparent authority was shown and could override the strict wording of the POA.  With respect, I do not agree that the Bryant Powis case supports that proposition.  In fact the ratio decidendi of the case is against Mr Cheung (as the terms of the present POA clearly did not authorize the Son’s act).  Simply relying on one isolated sentence without regard to the facts of the case is taking the sentence out of context.

36.  Mr Cheung further relied on Reckitt v Barnett ((1929) AC 176) to suggest that the scope of the actual authority is defined by the power of attorney and that it can be extended by the donor by a direct communication from him to a third party.  In Reckitt v Barnett, the appellant gave a power of attorney in favour of T to manage his affairs. The power of attorney did not authorize T to draw cheques.  However, the appellant subsequently wrote to the bank stating that he wished the power of attorney to cover the drawing of cheques upon the bank by T without restriction.  T subsequently drew a cheque as the appellant’s attorney to pay for his own debt.  It was held that the power of attorney conferred no authority on T to use the appellant’s money to pay his own private debts.  The authority to draw cheques was limited to the management of the appellant’s affairs.  In the absence of actual authority, the respondents, who knew the appellant’s money was used to pay T’s private debts, were not entitled to the proceeds of the cheque.  As such, the proposition by Mr Cheung is not the ratio decidendi of the case and is taken out of the context of the case.

37.  Mr Cheung further relied on K&L Gates v Melco Crown Gaming (Macau) Ltd (unrep) HCA 349/2012, 20 May 2016, §16-17 to assert that the Son had apparent authority to act as he did for the Mother:-

“16. Apparent authority results from a manifestation of assent that the agent should represent or act for the principal expressly or impliedly made by the principal to third parties: Bowstead & Reynolds on Agency (12^th ed, 2014), §3-001.

17. The key element to apparent authority is a “holding out” or representation made by the principal to the third parties that the agent has the authority to act on its behalf. In Yip Lai Fong & anor v Sin Tung Hng & ors [2004] 3 HKC 153 at 159, §17, Lam J (as he then was).”

38.  Leaving aside whether evidentially the Lender can prove the existence of the alleged telephone conversation, Mr Cheung has omitted to mention paragraph 18 of the K&L Judgment:-

“18.   The plaintiff has to make it clear whether it is pleading a case of actual, ostensible or apparent authority, and if apparent authority is relied on, it is essential to plead facts which show a “holding out” by the principal that the agent has the authority to enter into the agreement on its behalf: Polima Toys Manufacturing Co Ltd v Super Art Toys Co Ltd, HCA 948/2012, 6 February 2014, DHCJ B Chu (as she then was), §54; Yip Lai Fong, at §17.”

39.  There is no mention in the Re-Amended Statement of Claim whether the Lender’s case is based on actual, ostensible or apparent authority.  Even though there is mention of the alleged telephone conversation in the Lender’s answer to a request for further and better particulars, there is no pleading that the alleged telephone conversation is the fact relied upon by the lender to suggest the Son has apparent authority.  I am of the view that without having properly pleaded a case of apparent authority, the Lender should not be allowed to run such an argument at the trial.

40.  Mr Cheung also relied on the case of Akai Holdings Ltd (In Liq) v Kasikornbank PCL [2011] 1 HKC 357 for the proposition that “In a commercial context, absent dishonesty or irrationality, a person [sic P] should be entitled to rely on what he is told: this may occasionally produce harsh results, but it enables people engaged in business to know where they stand.  As to principle, apparent authority is essentially a species of estoppel by representation.” per Lord Neuberger NPJ.

41.  Again as the case of apparent authority was not pleaded, I do not think Mr Cheung can extract from the judgment of Akai Holdings (which is a case where apparent authority was pleaded and was the central issue) and apply it to the present case.

42.  As Mr Cheung informed the court, he had only taken up the case shortly before the trial, by which time the evidence filed already restricted certain arguments to be raised and run.  Be that as it may, the Lender cannot rely on the change of legal representation as an excuse to change its case and run new arguments as the trial develops.  This is not only unfair to the defendant Mother but also to the court, which had to be on constant look-out to see whether the case or argument run is a new case or argument not previously pleaded.

43.  To conclude, I am of the view that:-

(a)  based on the strict construction of the wording of Clause 20 the POA, the Son did not have authority to execute the Legal Charge as the Mother’s attorney in the way that he did.

(b)  The Lender, having had the chance to read the POA and being well aware that the two cheques were only made out to the name of the Son, ought to be aware that the Son was acting outside of his authority under the POA when he executed the Legal Charge on behalf of the Mother.

(c)  The Lender has not pleaded a case of apparent authority.

(d)  Legally, the Mother could not vary the POA and ratify the Legal Charge orally.

Was there a telephone conversation between Mr Pang and the Mother

44.  Based on the conclusion I reached on the legal issue, it is not necessary for the court to decide whether factually the alleged telephone conversation took place.  However, for completeness, and as parties had spent considerable time making submissions thereon, I will deal with the issue as follows.

45.  On the issue of whether the telephone conversation existed, the court assessed the respective credibility of Mr Pang for the Lender and the Mother when they gave evidence in the witness box.  Mr Tang Sek Ho, the solicitor who witnessed the execution of the POA, gave evidence for and on behalf of the Lender.  His evidence is also of relevance.

46.  When assessing the credibility and reliability of the parties involved, the court should focus on the inherent probabilities of their respective cases, the internal consistency of their evidence and their demeanor when testifying at trial.  This is aided by contemporaneous documents, circumstantial evidence tending to support one account rather than the other, and overall impression of the character/ motivation of the witnesses. Re B (Children) [2009] 1 AC11.

47.  In assessing witnesses’ credibility, the court should bear in mind not only the demeanor of the witnesses in court, but also the long history of events, in particular the contemporaneous documents and the inherent probabilities of the witnesses’ account.  Esquire (Electronics) Ltd v The Hong Kong and Shanghai Banking Corp Ltd [2007] 3 HKLRD 439 at 494C.

48.  I adopt the above approach when assessing credibility of the witnesses.

49.  It is Mr Tang Sek Ho’s evidence that at the material time, he received the instruction of Winland Finance Limited (“Winland”) to prepare the POA and a will (the “Will”) for the Mother to execute.  He also subsequently witnessed the execution of a legal charge dated 26 April 2012 between Winland, the Mother and the Son.  It was Mr Tang’s evidence that at the time he explained the POA to the Mother, he already knew that the Mother was not willing to part with the title deeds to the Two Properties.  He said that it was the Son who told Winland that the Mother was not willing to part with the title deeds.  It was also Mr Tang’s evidence that Winland knew about the risk of not obtaining the title deeds from the Mother.

50.  Mr Tang said in his witness statement dated 7 July 2017 that originally the Mother refused to sign on the POA as she was worried about the power to be conferred upon the Son.  However, after Mr Tang went back to the room and explained to the Mother again the content of the POA, the Mother then indicated to Mr Tang that she decided to sign the POA.  Partly it was because the Two Properties would be left to the Son sooner or later (as he was the only one out of all her children having normal mental capacity).  Also, the Mother said as the title deeds were kept by her and she was living in one of the Two Properties, it would be difficult for the Son to sell the Two Properties.  Mr Tang said he accepted and understood her explanation and proceeded with the witnessing and execution of the POA.

51.  It is thus clear that the Mother was under a misconception that even though she signed the POA, there would be difficulty for the Son to sell the Two Properties without the title deeds which were held by her.  Mr Tang did not correct the Mother’s understanding nor did he warn her that under the POA, the Son could charge her shares of the interests in the Two Properties and a lender could enforce and ask for possession of the Two Properties without using the title deeds.

52.  It was Mr Tang’s evidence that Winland was the one who instructed him to prepare the POA and the Will for the Mother to sign.  The purpose of these documents were for Winland to consider whether or not to approve the loan.

53.  Although Mr Tang did not deal with the present Legal Charge, it can be seen that as at April 2012, the Mother was concerned about her shares of the interests in the Two Properties, so much so that she refused to execute the POA originally.

54.  It only transpired towards the end of Mr Tang’s evidence that Mr Tang had been a consultant of the Winland Group of companies, including Winland, since 2004 and remains so at present.  This matter, Mr Tang accepted that he had not informed the Mother about, when he explained the POA to her.

55.  Further, Mr Tang accepted that the Mother was in good health when she signed the POA on 13 April 2012.  Yet Mr Tang never questioned why the Son executed the legal charge in favour of Winland on 26 April 2012 when the Mother would have been able to execute the document herself.  Mr Tang also did not confirm with the Mother that she was willing to have the Son execute the said legal charge, despite knowing full well her worries about her interest in the Two Properties.

56.  Mr Tang’s explanation is that he did not bother getting consent or confirmation from the Mother as he knew Winland was unable to procure the Mother to sign the legal charge and they knew about the risk of only having the Son’s half shares of interests in the Two Properties.  That is to say, he was aware that the Mother could well dispute the effect of the legal charge as against her half shares of interests in the Two Properties.

57.  Mr Tang even agreed that he knew the Son charged the Mother’s interest to Winland behind her back without her knowledge. 

58.  As this trial is not about the charge or loan agreement between Winland and the Mother, I say no more about the apparent conflict of interest and the propriety of Mr Tang’s advice (or the lack of it) to the Mother prior to her signing of the POA.  What the Court can gather from Mr Tang’s evidence however, is the fact that as at April 2012 (4 months before the execution of the present Legal Charge), the Mother clearly was concerned and was wary of losing her half shares of interests in the Two Properties.  The Court will take into account this background when considering the relevant issues.

Loan Application Form

59.  One of the documents heavily relied upon by the Lender in support of the telephone conversation between Mr Pang and the Mother is the loan application form dated 31 August 2012 (the “Application Form”).

60.  On the Application Form, the majority of the information were filled out in ballpoint pen.  The information filled in pencil were the information Mr Pang said he filled in subsequent to a telephone conversation with the Mother on 31 August 2012.  Mr Pang said that he called the Mother as he needed to seek confirmation from the Mother due to the size of the loan.

61.  The information filled out in pencil included the following phrases: “母對嘴正【證】實授權”, “梁桂仲 B946103(0)”, “母75歲”.

62.  Mr Cheng for the Mother invited the Court to find that the information written in pencil were not contemporaneously made on 31 August 2012, but were inserted after the commencement of action.

63.  Mr Cheng placed strong emphasis on the evolution of the preparation of the Lender’s case to suggest that the court should disbelieve Mr Pang’s evidence on the existence of the alleged telephone conversation and the information written in pencil mark:-

(a)  As early as her 1^st Affirmation dated 19 October 2013, the Mother stated in no uncertain terms that she did not know about the Loan Agreement prior to February 2013.  Mr Pang of the Lender replied to the Mother’s 1^st Affirmation by his 2^nd Affirmation dated 21 November 2013, stating that he believed that the Son and the Mother colluded to escape liability, and the Mother was aware of the Son using the POA to obtain the Loan.

(b)  Mr Cheng said if the alleged telephone conversation did exist, it would have been the best evidence to show the Mother’s knowledge about the Loan.  But Mr Pang chose not to mention the telephone conversation in his 2^nd Affirmation.  Upon cross-examination, he confirmed that he had checked the Lender’s records before making his 2^nd Affirmation.  As such, it is difficult to see why he would not tell the Lender’s solicitors about the existence of the telephone conversation; or that if he did tell them, the Lender’s solicitors would not have specifically raised it for him; or that he would have noted the absence of reference before he signed his 2^nd Affirmation.  Mr Pang’s answer under cross-examination was simply to blame to the Lender’s solicitors.

(c)  Mr Pang only referred to the telephone conversation in his 3^rd Affirmation, 1.5 years after his 2^nd Affirmation, in response to Mr Tam Wai Choi’s 1^st Affirmation in support of the Mother’s O.14A Summons.  By then, Mr Pang still did not refer to the Lender’s records allegedly showing the existence of the telephone conversation.

64.  The court agrees that if the alleged telephone conversation did exist and if the Lender’s record in support of the conversation were genuine, it would have been the best evidence to rebut the Mother’s assertion that she did not know about the Son entering into the Legal Charge on her behalf.

65.  Mr Pang explained that he failed to mention the telephone conversation earlier because “he was angry that his opponent was lying”.  Mr Pang’s explanation in the witness box lacked conviction and was unbelievable.  It is simply illogical to suggest that one would fail to mention a piece of important information just because one was upset or angry.

66.  I find Mr Pang to be an unreliable and less than honest witness throughout his testimony.  I reject Mr Pang’s evidence that the information written in pencil markings were made contemporaneously or shortly after the Son filled in the Application Form.

67.  On the other hand, the Mother’s evidence was simple, consistent and straightforward, namely, no one called her to inform her about the Legal Charge or the Loan Agreement on or about 31 August 2012.  I accept the Mother’s evidence on this issue.

68.  To conclude, taking into account the witnesses’ credibility, the evolution of the preparation of the case, the inherent probabilities of the respective cases, the court finds that the Lender has failed to prove that on a balance of probabilities, the information in the Application Form subsequently filled in were made contemporaneously or that the alleged telephone conversation took place.

The Lender’s Concerns

69.  Towards the end of his testimony, Mr Pang said that part of the purpose of the Loan was to help the Son (and the Mother) clear off the HK$240,000 loan (at 42% p.a.) from Wing Wui Finance Ltd (“Wing Wui”) and the HK$50,000 (at 51.6% p.a.) loan from Easy Fortune Property Limited (“Easy Fortune”). 

70.  At first, Mr Pang said that the purpose of the Loan was to lessen the Son’s burden in his monthly repayment obligations.  This does not make commercial sense: the interest of the Loan was at 46.8% p.a., whilst it is lower than the 51% p.a. rate of Easy Fortune (with a relatively small loan amount), it is higher than that of Wing Wui (at 42%) with a much larger loan amount.

71.  Once the Court pointed out the above, Mr Pang admitted that in reality, in order to take the business away from Wing Wui and Easy Fortune, he had asked the Son to transfer over the two loans from Easy Fortune and Wing Wui, otherwise he would not have approved the Loan.  In other words, if the Son refused to transfer the two loans over, the Lender would not have granted the Loan.  Mr Pang ultimately admitted that the Loan had nothing to do with lowering the monthly repayment burden of the Son.

72.  Mr Pang admitted that despite the fact that more than half the amount of the Loan was for the repayment of the two loans from Easy Fortune and Wing Wui, there was no mention of it in the record in the Lender’s finance management system nor the Application Form.  His explanation was that he was careless (大意) on both occasions. 

73.  I do not accept the explanation. Given more than half the amount of the Loan was to be used for the repayment of the previous two loans, and the fact that the Lender clearly viewed it as important, it is inconceivable that Mr Pang would have omitted to put in such important information if he had wanted to do so.

74.  Ultimately, Mr Pang accepted that any person (including the Mother) looking at all the relevant loan documents would not have known that half of the Loan was to be used for repayment of previous loans, not least on terms that are not better than the previous loans. Even on his own evidence Mr Pang accepted that he did not mention to the Mother that half the Loan was going to be used for repayment of previous loans in the alleged telephone conversation.  Mr Pang could not provide a satisfactory explanation as to why he did not inform the Mother of this important fact.

75.  Mr Pang also explained that part of the reason for not mentioning the purpose of the Loan was to avoid competitors from finding out that they had taken away their business.  In the end he admitted that he had deliberately left out references of repayment of previous loans due to commercial concerns.

76.  The above again shows Mr Pang as an evasive and less than honest witness and the court cannot rely on his evidence.

Unjust enrichment

77.  At the beginning of the trial, Mr Cheung alluded that even if the Lender fails on the POA, they would still argue that the Mother is obliged to repay the Loan due to unjust enrichment.  It was argued that the Son had used the Loan to repay the Wing Wui loan and the Easy Fortune loan, which benefitted the Mother. 

78.  Mr Cheung sought to amend its pleadings on the 1st day of the trial as originally in the Re-Amended Statement of Claim, the Lender did not admit that the Loan was used to repay the Wing Wui loan and the Easy Fortune loan.  I allowed the amendment.

79.  However, evidentially the Lender did not come close to proving the Son had used the money obtained from Loan to repay the Wing Wui loan and the Easy Fortune loan.  No evidence whatsoever was available to support there being a causal link between the Loan and repayment of the Wing Wui loan and the Easy Fortune loan.  In fact Mr Pang himself admitted that he had never informed the Mother that the Loan was for repayment of the previous loans; nor is it apparent from all of the loan documentation.  At one point Mr Cheung said that if the court required evidence in this regard the court would be applying the criminal standard of proof.

80.  With respect the criticism is unfounded.  The court needs some evidential basis before it can draw the inference that the Son had used money obtained from the Loan for repayment of the Wing Wui loan and Easy Fortune loan.  It is not disputed that the Son had obtained various loans from various financial institutions.  In the circumstances it would be wrong for the court to draw the inference that the Wing Wui loan and the Easy Fortune loan were repaid using money from the Loan simply because the Wing Wui loan and the Easy Fortune loan were paid off.

81.  Accordingly I reject the unjust enrichment argument.

S 18, S 20 of the MLO

82.  As the court already finds that the Legal Charge was not properly executed by the Mother, it is unnecessary to go into the Mother’s submissions on sections 18 and 20 of the MLO.  However, for completeness I will deal with the issue as follows.

83.  A money lender must comply with the formal requirements for documentation set out in section 18(1) and (2) of the MLO.  If he does not do so, subject to section 18(3) of the MLO, the loan is unenforceable so that the money lender will be unable to take legal proceedings for the recovery of the debt.  Annotated Ordinances of Hong Kong, MLO [18.01] 

84.  The purpose of the legislation is to protect the borrower from unconscionable transactions and to ensure that he receives a complete and accurate record of the transaction so he knows the extent of his liability from time to time.  Annotated Ordinances of Hong Kong, MLO [18.02]

85.  The terms of this section must be strictly complied with because the legislation sets out the manner in which a money lending business must be conducted.  In case of non-compliance with section 18 (1) and (2) of the MLO, the nature of the mistake or its severity are not matters for the court because strict observance of the terms of the section is required. Annotated Ordinances of Hong Kong, MLO [18.04]

86.  The Mother contended that as the Legal Charge and a statement showing the total sum due were never provided to her, the Lender did not comply with section 18 and section 20 of the MLO. 

87.  Under s 20(1) of the MLO, a money lender must give the surety of a loan the following documents within 7 days of entering into the loan agreement:-

(a)  A copy of the note or memorandum in writing made under s 18(1);

(b)  A copy of the security instrument, if any; and

(c)  A statement in writing signed by or on behalf of the money lender showing (i) the total sum payable by the borrower; and (ii) the details of the instalments.

88.  Although the Lender denies the Mother is a surety, there can be no dispute that the Legal Charge was executed as a security for the Loan Agreement.  The Lender tried to argue that the Mother was a borrower, but her name did not appear on the Loan Agreement – not even the fact that the Son was signing the Loan Agreement on the Mother’s behalf by relying on the POA.  Hence, despite denial by the Lender, the Mother must be viewed as a surety under the Loan Agreement and the Legal Charge.

89.  In order for a note or memorandum to be compliant with s 18(1):-

(a)  It must be made within 7 days after the making of the loan agreement;

(b)  It must comply with s 18(2), in that it shall set out, amongst others the name and address of the money lender, the name and address of the borrower and the name and address of the surety, if any;

(c)  It must be signed personally by the borrower, who is given a copy of the note or memorandum at the time of signing.

90.  Further, s 20(4) of the MLO provides that, if a money lender fails to comply with s 20(1), it shall not be entitled, while the default continues, to enforce the security so far as provided in relation to the loan agreement.

91.  In the present case:-

(a)  There is no dispute that the Loan Agreement is the only s 18 note or memorandum.  The Lender did not provide this to the Mother.

(b)  The Lender did not provide a copy of the Legal Charge to the Mother.

(c)  The Lender did not provide a statement in writing showing the total sum payable under the Loan Agreement and when the sums are due.

92.  Hence the Lender did not comply with s 18 of the MLO.  The fact that the Lender was in breach of section 18(1) and section 18(2) does not seem to be heavily disputed by Mr Cheung.  Mr Cheung however tried to argue that the court ought to exercise its discretion under section 18(3) of the MLO to grant relief to the Lender.

93.  The basis for the exercise of the court’s discretion was considered in the case of Brother’s Co v Ah Puk Transportation [1986] HKLR 821 at 825B-H where the moneylender did not provide a written memorandum to the borrower.  The court held that in deciding whether to exercise its discretion to enforce a claim, the court should consider all the circumstances including “the relative status of the parties, the nature and extent of the default, the way in which it arose, the implications for the borrower, and the attitude of the lender and the general appearance of the contract throughout”.  In CA Pacific Finance Ltd v Tsui Yun Bun Barry (HCA 632/2005, (Unreported), 20 July 2009) at §29, the knowledge and experience of the borrower were also considered.

94.  The Court of Appeal held that in exercising the discretion available to it, the courts should be slow to relieve moneylenders who have not complied with the MLO.  Cheung Chow v Cheung Ng Sheong Steven (CACV 119/1993 (unreported) 24 November 1993) at §4.

95.  In the present case, the general appearance of the contract throughout was such that the Lender was only concerned with earning the interest under the Loan Agreement, and that the loan amount as well as the interest would be covered by the value of the Two Properties should there be default.  Further, the Lender clearly knew, or should have known that the Son was acting outside his authority under the POA when he executed the Legal Charge on the Mother’s behalf (as the cheques were only issued in the Son’s sole name).  Yet no steps were taken to ask the Mother to properly authorize the Son in the circumstances.  The relative status of the parties were such that the Mother was clearly at a disadvantaged position, being an illiterate and unsophisticated elderly woman who was manipulated by her son.  There was no evidence to show that the Mother benefitted from the Loan.  The Lender has already obtained judgment against the Son and can seek enforcement of the Son’s half shares in the Two Properties.

96.  As such, the court sees no basis to exercise its discretion to relieve the Lender for the breaches of section 18 of the MLO.  The court thus finds that the Legal Charge is unenforceable as against the Mother.

Extortionate transaction

97.  Given the conclusions above, it is unnecessary for the court to rule on whether the transaction is extortionate. However, for completeness, I will deal with it below.

98.  The Mother contended that the court is empowered to reopen any transaction under section 25 of the MLO so as to do justice to parties, having regard to all circumstances, if it is satisfied that the transaction is extortionate.

99.  Section 25 of the MLO provides:-

“(1) Subject to section 24(2), where-

(a) proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan; and

(b) subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate,

the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit.

(2)  For the purposes of this section, a transaction is extortionate if- 

(a)  it requires the debtor or a relative of his to make payments (whether unconditionally or on certain contingencies) which are grossly exorbitant; or 

(b)  it otherwise grossly contravenes ordinary principles of fair-dealing. 

(3)  Any agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds 48 per cent per annum shall, having regard to that fact alone, be presumed for the purposes of this section to be a transaction which is extortionate; but except where such rate exceeds the rate specified in section 24(1), the court may declare that any such agreement is not extortionate for the purposes of this section if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair. 

(4)  In determining whether a transaction is extortionate for the purposes of this section, regard shall be had to such evidence as is adduced concerning- 

(a)  interest rate prevailing at the time it was made; 

(b)  the factors mentioned in subsections (5) and (6); and 

(c)  any other relevant considerations. 

(5)  Factors applicable under subsection (4)(b) in relation to the debtor include- 

(a)  his age, experience, business capacity and state of health; and 

(b)  the degree to which, at the time of entering into the transaction, he was under financial pressure, and the nature of that pressure. 

(6)  Factors applicable under subsection (4)(b) in relation to the lender or other person by whom the proceedings are taken include- 

(a)  the degree of risk accepted by the lender, having regard to the nature and value of any security provided; 

(b)  his relationship to the debtor; 

(c)  whether or not a specious cash price was quoted for any goods or services included in the transaction; and 

(d)  where one or more other transactions are to be taken into account, the question how far any such other transaction was reasonably required for the protection of the debtor or the lender, or was in the interest of the debtor. 

(7)  Any court in which proceedings might be taken for the recovery of any loan or security in respect of a loan shall have and may at the instance of the debtor or any surety exercise the like powers as may be exercised under this section where proceedings are taken for the recovery of a loan; and the court may entertain any application under this subsection by the debtor or surety notwithstanding that the time for repayment of the loan or any instalment thereof has not arrived. 

(8)  On any application relating to the admission or amount of a proof by a money lender in any bankruptcy proceedings, the court may exercise the like powers as may be exercised under this section where proceedings are taken for the recovery of money. 

(9)  The Legislative Council may by resolution alter the rate specified in subsection (3) but, in relation to any agreement referred to in that subsection which is in force at the date when such rate is so altered, the rate so specified as at the coming into force of such agreement shall continue to apply. 

(9A)  Nothing in this section shall apply to- 

(a)  a loan specified in paragraph 12 in Part 2 of Schedule 1; or 

(b)  as respects such loan, any person who makes such loan. (Added 69 of 1988 s. 21)

(10)  In this section "debtor" means any person primarily liable for the repayment of a loan or for the payment of interest in respect of a loan.”

100.  In the case of Celerity Special Situations Fund I, LP v China Linkage International Ltd (unrep. HCA 2993/2016), Deputy Judge LePichon said:-

“22. In any event, as regards the new MLO point (the construction point), the plaintiff's position is that the court does not have jurisdiction to re-open a transaction where the interest rate does not exceed 48%. Mr Chong cited three authorities in support: Swiss Finance Mortgage Services Ltd v Wong Kam Fan & Another HCA 1244/2015 , 22 December 2016 at §59(vii); Freeway Finance Co Limited v Lai Sau Kei & Others HCA 561/2014 , 28 June 2016 at §§111 - 112; and Uplink Finance Limited v Lee Sze Tai & Others DCMP 794/2016 , 16 March 2017 at §14. Suffice it to say that there is no reported case of a court re-opening a transaction where the interest rate did not exceed 48%.

23. While an interest rate in excess of 48% but is below 60% (a category (ii) situation) raises a presumption, that presumption is rebuttable and in determining whether or not the rate of interest is “extortionate”, the court has regard to the relevant factors. That much is clear. The issue is whether section 25(3) gives the court jurisdiction to reopen a transaction at large and “rewrite” the terms of a contract where the rate does not exceed 48%.

24. The court was referred to the statement as well as an explanation by the Attorney General at the time the bill was introduced as to how the rates of interest were chosen (see Hansard, 28 May 1980 at pp 35 - 36) and to a summary given by an unofficial member during the second reading of the Bill from which the Attorney General did not demur (see Hansard, 25 June 1980, p 933).

25. Significantly, the following passage from the Attorney General’s explanation (at p 36) throws considerable light on the construction issue:

“Obviously in the circumstances it is critical that rates of interest are chosen which are high enough not to inhibit ordinary reputable commercial transactions by decent company operating in the personal loan field, and the question of the level at which interest rates become unacceptable was decided by reference to reputable commercial practice in Hong Kong as well as the attitudes taken in other jurisdictions. Most reputable institutions in the personal loan field in Hong Kong charge effective rates of interest between 34% and 44% per annum depending upon the circumstances of the borrower. … 48% per annum has been chosen as the interest rate rendering a transaction prima facie extorionate and thus giving the court the power to reopen the transaction and adjust the terms. But it is of course envisaged that there may well be circumstances in which interest rates between 48% and 60% fairly and justly may be charged and where accordingly the court will not interfere with that rate.” (Emphasis added)

26.   In view of the conclusion reached in §21 above, it becomes unnecessary to express any view on the proper construction of section 25(3).  Nevertheless, were it necessary to do so (in the event that the defendant should be allowed to raise the new MLO defence), I would find in favour of the plaintiff and hold that the court does not have jurisdiction to re-open a transaction under section 25(3) in cases where the interest rate does not exceed 48%.”

101.  There is no dispute that the interest rate of the present case is 46.8%, which is just short of 48%.  I am of the view that the court has no jurisdiction to re-open the present transaction under section 25(3) of the MLO.

Disposition

102.  In conclusion, I find that the Lender was not entitled to enforce the Legal Charge against the Mother, the 2^nd defendant as the Son was acting outside of his authority under the POA.

103.  In view of the Lender’s breaches of section 18 and/or section 20 of the MLO, I am of the further view that in any event the Legal Charge is unenforceable against the Mother, the 2^nd defendant.

104.  Accordingly, I make the following Orders:-

(1)  The plaintiff’s claims against the 2^nd defendant are dismissed. 

(2)  There be a declaration that the Legal Charge registered in the Land Registry in respect of (i) Flat C, 10^th Floor, Lai Ying Building, Nos 780/782 Nathan Road, Kowloon and (ii) Flat E, 1^st Floor, Kam Wah House, Nos 181, 181A, 183, 183A & 185 Sai Yeung Choi Street North, Nos 38L, 38M & 38N Boundary Street, Kowloon by Memorial No 12092500910024 is null and void against Madam Leung Kwai Chung, the 2^nd defendant herein and is not enforceable against her shares in the Two Properties.

(3)  a costs order nisi that the plaintiff pays the 2^nd defendant’s costs, to be taxed if not agreed. 

(4)  The 2^nd defendant’s own costs to be taxed in accordance with the Legal Aid Regulations.