CATHAY PORT LTD v. ZHU MING

HCA 2707/2008 and
HCA 1096/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 2707 OF 2008 AND 1096 of 2009

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(Heard Together)

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J U D G M E N T

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1.  I am seized of 3 applications.  There is an appeal and cross appeal in HCA 2707/2008 in relation to an application heard by Master Roy Yu when he entered a partial judgment in favour of the Plaintiff.

2.  The second application is a strike out application issued by the Plaintiff in the same action and the third is an application by the Plaintiff for summary judgment in HCA 1096/2009.

3.  The parties agreed that the most satisfactory way of proceeding with these applications was to hear them all together and then work out how my findings would impact upon each of the separate summonses.

4.  The Plaintiff is a private equity investment fund.

5.  The Defendant was the owner of China Group Logistics Investment Limited (“CGLI”) which owns Nantong Xinda Harbour Investment Limited (“BVI Nantong”) a BVI company.

6.  There are also a number of other companies within the Group.

7.  The business of BVI Nantong is the operation of a port in China.

8.  By a subscription and shareholder agreement dated 23 September 2005, the Plaintiff subscribed to 45% of BVI Nantong’s shares.  Thus the Defendant became a 55% shareholder.

9.  By a subscription agreement dated 22 December 2005 between the Plaintiff and CGLI the later agreed to issue to the Plaintiff a convertible note for US$10 million redeemable by the Plaintiff on demand.  The note is constituted by an instrument executed by CGLI and the Defendant dated the same day.  CGLI was the principal debtor and the Defendant was a Guarantor.

10.  Simple interest was payable to the Plaintiff at the rate of 25% per annum.  The interest accrued on a daily basis and was payable in arrear at the end of the year.

11.  Mortgages were also entered into by CGLI, DVI Nantong and China Group Logistics Company (“HKCGL”), one of the group of companies earlier referred to.  The mortgages were secured on the shares of the respective companies.

12.  The interest for the year 2006 was duly paid.  However, there was default in respect of the US$2.5 million payable for the year 2007.  A sum of just over US$1 million was repaid on 1 July 2008.

13.  On 1 December 2008 the Plaintiff, CGLI and the Defendant entered into two Deeds.

14.  The first was a Deed of Forbearance to sue and the second was a Deed of Modification.

15.  Under the first Deed, the Plaintiff agreed to withhold taking legal action against the Defendant in respect of the outstanding interest payable under the instrument which at the time of executing the Deed amounted to US$2,026,522.40.

16.  The Defendant was required to pay US$1.5 million by 8 December 2008 and the balance of US$526,522.40 was payable on 31 December 2008.

17.  The Defendant did not make the payments payable under the Deed of Forbearance.

18.  The Plaintiff issued a writ on 22 December.

19.  The claims made in the statement of claim were:

(1)     US$2,025,373.56 as outstanding interest under the instrument for the year 2007; and

(2)     US$2,854,022.75 being penalty interest payable under the Deed.

20.  A default judgment was entered against the Defendant on 18 March 2009.

21.  The Defendant applied to the court is set aside this default judgment.

22.  The application in question is the one referred to at the commencement of this judgment.

23.  The Master ordered that the judgment in respect of the interest payable under the instrument would stand and that unconditional leave was granted to the Defendant to defend the claim for the penalty interest payable under the Deed.

24.  The Defendant appeals against the order for the partial judgment and the Plaintiff cross appeals against the order for unconditional leave being granted to the Defendant to defend the second claim.

25.  The strike out summons issued by the Plaintiff relates to the drafting of the defence consequential upon the Master’s order and it should be a simple matter to make an appropriate order dependent upon my decision on the main issues.

26.  The order 14 summons relates to the claim for the principal moneys and again my decision on the main issues will have an impact on this.

27.  It may be helpful to consider the main grounds upon which Mr Jat Sew Tong, SC relies upon to support his contention that his client the Defendant should be granted unconditional leave to defend these proceedings.

28.  Mr Jat calls in aid the provisions contained in the Money Lenders Ordinance Cap. 163.

29.  While it appears now to be accepted that the Plaintiff is not a money lender as defined in that ordinance, Mr Jat contends that by virtue of the definition of a “loan” in section 2 of the ordinance the transactions entered into between the parties bring them within the ambit of the legislation.

“Loan” (貸款) includes advance, discount, money paid for or on account of or on behalf of or at the request of any person, or the forbearance to require payment of money owing on any account whatsoever, and every agreement (whatever its terms or form may be) which is in substance or effect a loan of money, and also an agreement to secure the repayment of any such loan, and “lend” (貸出) and “lender” (貸款人) shall be construed accordingly.”

30.  This being the case there must be compliance with the provisions contained in sections 24 and 25 of the ordinance.

24      “EXCESSIVE INTEREST RATES

(1)     Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 60 per cent per annum commits an offence.

(2)     No agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds the rate specified in subsection (1).

(3)     The Legislative Council may by resolution alter the rate specified in subsection (1): Provided that in relation to any agreement for the repayment of any loan or for the payment of interest on any loan 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.

(4)     Any person who commits an offence under this section shall be liable-

(a)     on summary conviction to a fine of $500000 and to imprisonment for 2 years;

(b)     on conviction on indictment to a fine of $5000000 and to imprisonment for 10 years. (Amended 82 of 1994 s. 33)

(5)          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. (Replaced 69 of 1988 s. 20)

25      Reopening of certain transactions

(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” (債務人) means any person primarily liable for the repayment of a loan or for the payment of interest in respect of a loan.”

31.  Put simply if the amount of the interest as defined exceeds 60%, the agreement is unenforceable and any amount outstanding cannot be recovered.

32.  If the amount of interest exceeds 48%, the transaction can be reopened and section 25 sets out in some detail, the matters which have to be considered by the court.

33.  To ascertain whether the sections can be invoked, it is necessary to consider the terms contained in the relevant documentation.

34.  Mr Jat submitted that the starting point should be the said Deed of Forbearance.

35.  Paragraph 2 of the Deed reads:

“Conditional Forbearance To Sue

In consideration of Cathay entering into this Deed and agreeing to conditionally withhold legal proceedings against the Guarantor for payment of all outstanding accrued interest, both the Guarantor and the Company agree to fully settle the Uncontested Accrued Interests on or before 31 December 2008 in the manner set out in sub-clause (a) below and undertake with Cathay that:

(a)          the Guarantor shall pay to Cathay US$1,500,000 (“1^st Instalment”) in clear fund no later than 8 December 2008 (“1^st Payment Deadline”) and the remainder in the sum of US$536,522.4 (“2^nd Instalment”) in clear fund no later than 31 December 2008 (“2^nd Payment Deadline”).

(b)          if the Guarantor shall fail to punctually and fully settle the 1^st Instalment and/or the 2^nd Instalment in accordance with Clause 2(a) hereof, penalty interest shall become immediately payable in the following manner:

[i]      if the 1^st Instalment or the 2^nd Instalment shall not be fully settled before the respective Payment Deadlines set out in Clause 2(a) (but such failure shall not be more than 60 Days from the respective Payment Deadlines), a penalty interest (“Penalty Interest”) calculated at the rate of 12% per annum shall become immediately payable.  The Penalty Interest shall accrue daily for the actual number of days elapsed on the basis of a 360-day year charged on the principal amount of the Note together with any outstanding sums payable under the Note/Instrument or this Deed (including but not limited to the 1^st Instalment and the 2^nd Instalment) with retrospective effect from 1 January 2007 until the date of full payment of all such outstanding interests; and

[ii]     if the 1^st Instalment or the 2^nd Instalment Payment shall not be fully settled after expiration of 60 days from the respective Payment Deadlines, then all additional penalty interest at the rate of 12% per annum (“Additional Penalty Interest”) shall be charged on the principal amount of the Note together with any outstanding sums payable under the Note/Instalment or this Deed (including but not limited to the 1^st Instalment, the 2^nd Instalment and the Penalty Interest) with effect from 1^st Payment Deadline and the 2^nd Payment Deadline (as the case may be) until the date of full payment of the 1^st Instalment, the 2^nd Instalment, the Penalty Interest and the Additional Penalty Interest.  For the avoidance of doubt, the Additional Penalty Interest is payable in addition to and not in substitution with the Penalty Interest as contained in Clause 2(b) [i] hereof but where the Additional Penalty Interest shall become payable as a result of delay in full settlement of the 1^st Instalment and the 2^nd Instalment for more than 60 days, the Penalty Interest shall be charged for the period from 1 January 2007 to the respective day(s) immediately before the 1^st Payment Deadline and/or the 2^nd Payment Deadline (as the case may be) and that the Additional Penalty Interest shall be charged for the period from 1^st Payment Deadline and/or the 2^nd Payment Deadline (as the case may be) until the date of full settlement of the 1^st Instalment, the 2^nd Instalment, the Penalty Interest and the Additional Penalty Interest.

(c)          Both the Company and the Guarantor agree and undertake that with effect from the date hereof:-

[i]      a default interest (“Default Interest”) shall be payable by the Company and/or the Guarantor if either the Company or the Guarantor shall fail to pay any interests payable (“Unpaid Interest”) under the Note and/or the Instrument.  If the delay for payment shall not be more than 60 days, the Default Interest shall be calculated at a rate of 12% per annum and shall accrue daily for the actual number of days elapsed on the basis of a 360-day year charged on the principal amount of the Note with retrospective effect from 1^st January of the relevant year in which such interests begin to accrue (“Default Interest Commencement Date”) up to the date of full payment of all sums payable under the Note and/or the Instrument and/or this Deed; and

[ii]     if the delay for payment shall be more than 60 days, an additional default interest (“Additional Default Interest”) shall become payable at the rate of 12% per annum and shall accrue daily for the actual number of days elapsed on the basis of a 360-day year charged on the principal amount of the Note together with any unpaid interests under the Note/Instrument and/or this Deed from the date when payment of the Unpaid Interest becomes due (“Interest Due Date”) up to the date of full payment of all sums payable under the Note and/or the Instrument and/or this Deed.  For the avoidance of doubt, the Additional Default Interest is payable in addition to and not substitution with the Default Interest as contained in Clause 2(c) [i] hereof but where the Additional Default Interest shall become payable as a result of delay in payment of the Unpaid Interest for more than 60 days, the Default Interest shall be charged for the period from the Default Interest Commencement Date till the day immediately before the Interest Due Date and that the Additional Default Interest shall be charged for the period from the Interest Due Date till the date of full settlement of all outstanding interests (including but not limited to the regular interests payable under the Note, the Unpaid Interest, the Default Interest and the Additional Default Interest).

The Default Interest and the Further Default Interest shall be in addition to the applicable interest on the Notes at the rate of 25% per annum on the principal amount of the Notes.

Both the Company and the Guarantor agree to execute any amendment documents to the Note and/or the Instrument which Cathay may consider appropriate for the purpose of re-confirming and acknowledging the Default Interest.  The Company and the Guarantor shall execute such amendment documents in such time and manner as per Cathay’s request.”

36.  He went on to contend that the amount upon which interest should be calculated was US$2,036,522.40 being the amount referred to in paragraph 1(b) of the Deed.

37.  So far as the calculation of interest was concerned, it was necessary to have regard to the 25% interest payable under the principal instrument, the 12% penalty interest if there was default and the further 12% additional penalty interest in the event of default beyond 60 days.

38.  In this connection, it should be borne in mind that where there are provisions in an agreement for the rate of interest to be increased in the event of default, it may operate with retrospective effect and the increase which may be payable could be exponentially large.  Lordsvale Finance Plc v Bank of Zambia (1996) QB 752 at 763.

“It is clear that, if a loan agreement were to provide that upon the happening of a defaulting in payment by the borrower the rate of interest were to increased with retrospective effect, that which would be payable on default would be a sum in addition to the amount of principal and interest outstanding which would be calculated by reference to a period of time during which the borrower was entitled to the use of the principal and which might vary in length depending upon when the default in payment occurred in relation to the period of borrowing.  Moreover, the amount of interest which would be payable would be unrelated to the extent of default.  If therefore default in payment triggered a retrospective increase in the rate of interest, it would be impossible to say in advance how much extra interest would become payable and what arithmetical relationship it would have to the amount of time during which the principal was outstanding.  Moreover, assuming that any increase in the rate of interest was to continue into the future, the period of time during which the default was continuing would be compensated by the continuing increased rate, but also by the accumulated increase in the interest derived from the period before default.  Such a provision would therefore have all the indicia of a penalty.”

39.  It will be appreciated that the aggregate effect of these provisions takes the interest payable well within the scope of section 24.

40.  Mr Wou who was representing the Plaintiff did not accept that this was the way in which the Deed should be interpreted.

41.  He argued that the amount upon which calculations should be based should include the whole of the principal amount owing to his client.

42.  This was notwithstanding the fact that a substantial amount of the principal was not yet payable.

43.  In addition to this, he claimed that it could be seen from a proper interpretation of the clauses that the relevant payments were payable in the alternative and not in the aggregate as contended for by Mr Jat.

44.  If his interpretation of the clauses was accepted by the court, the rate of interest payable would only amount to 37%.

45.  While this is only an interlocutory application I would have no hesitation in accepting the submissions of Mr Jat and rejecting those of Mr Wou.

46.  This then brings us to what appears to be the attempts made by the Plaintiff to add a clause to the Deed of Forbearance which would have the effect of capping the amount of interest payable thus avoiding the terms contained in sections 24 and 25.

47.  The addition which was drafted was intended to follow clause 2(c) cited about and reads as follows:

“Whether interests shall become payable by the Company and/or Guarantor in the form of the regular interest on the Notes at the rate of 25% per annum, Penalty Interest, Additional Penalty Interest, Default Interest or Additional Default Interest, it is agreed that all interests payable under the Note/Instrument shall not exceed an effective interest rate of 48% per annum of the principal sum of the Note/Instrument (or such higher rate if an amendment shall be made to the Money Lenders Ordinance whereby any agreement for payment of interest on a loan in respect of which the effective interest rate at that higher rate shall not be presumed to be a transaction which is extortionate).”

48.  The photostat copy of the clause available to me contains what appears to be either the initials or signature of one or two of the parties to the Deed.

49.  Before me, Mr Wou contended that the addition was intended to be for the benefit of both the Plaintiff and the Defendant.

50.  Having regard to the fact that the Money Lenders Ordinance is referred to in the addition this contention would seem to be slightly disingenuous.

51.  What appears to be much more likely is that the draftsman of the Deed suddenly realized that the penalty interest would contravene sections 24 and 25 and set about attempting to rectify the situation.

52.  Be that as it may, it is necessary to consider the evidence which was before me concerning the events taking place on the 1 December 2008 and the following days.

53.  It is common ground that on 1 December, the Defendant was in Shanghai and was being pressed to execute the Deed of Forbearance and a Deed of Modification which I will be referring to later in this judgment.

54.  The extent to which the Defendant had access to legal advice is controversial.  It is not appropriate for me to attempt to resolve this on affidavit evidence.

55.  However what is clear is that the Deeds were received in their original form on 1 December and executed by the Defendant and sent back to Hong Kong for execution by the Plaintiff.

56.  There was evidence that copies of the executed Deeds were faxed to the Plaintiff’s solicitors on 1 December and the originals were received by them on 3 December.

57.  The original had been sent to the Defendant by the Plaintiff’s solicitors and copied to the Defendant’s solicitors in Hong Kong.

58.  It also appears to be clear that the Plaintiffs were insisting that the Deeds be executed and returned to their solicitors on 1 December failing which they would institute legal proceedings which would have severe consequences for the Defendant.

59.  On 3 December, the Plaintiff sent the proposed modification contained in clause 2(d) to the Defendant and requested him to initial it or sign it and return it immediately to them.

60.  The Defendant complied with the request.

61.  There is evidence that the Plaintiff executed their parts of the amended Deeds on 8 December.

62.  There was an issue between the parties as to whether clause 2(d) had validly been incorporated into the Deeds.

63.  It was Mr Jat’s case that on the evidence I have referred to there had been on 1 December unconditional delivery of the Deeds to the Plaintiff.  His authority for this proposition was contained in paragraph 31 and volume 13 of the 4^th edition of Halsbury’s Laws of England 2007, Butterworths.

“31.   Delivery of deed.  In order to be effective a deed must be delivered as the act and deed of the party expressed to be bound by it, as well as sealed¹.  No special form or observance is necessary for the delivery of a deed, and it may be made in words or by conduct².  The traditional form of delivering a deed by words was for the executing party to say, while putting his finger on the seal, ‘I deliver this as my act and deed’³.  It was not necessary, however, to follow this form of execution⁴, and it fell into disuse; nor is it necessary that the deed should actually be delivered over into the possession or custody either of the person intended to take the benefit of the deed, or to a third person to the use of the party taking the benefit of the deed⁵; though if the party to be bound so hands over the deed, that is sufficient delivery without any words⁶.

What is essential to delivery of the document as a deed is that the party whose deed the document is expressed to be (having first sealed it⁷) must by words or conduct expressly or impliedly acknowledge his intention to be immediately and unconditionally bound by the provisions contained in it⁸.  Thus where a deed has been executed by an attorney in excess of his power, a subsequent acknowledgment by the principal, whether oral or in writing, that the deed expresses his intentions amounts to a delivery or redelivery of the deed⁹.

If the sealing of a deed is proved, its delivery as a deed may be inferred, provided there is nothing to show that it was only delivered as an escrow¹⁰.”

64.  He went on to argue that in the absence of a valid and binding agreement, a variation to a validly executed Deed must itself be signed, sealed and delivered.  See Berry v Berry (1929) 2 KB 316 at 319.

65.  There is a further problem in the present case.  At best the addition was only signed by the Defendant.  If it was intended to have contractual effect there had to be consideration.  Clearly it was arguable that there was no consideration here.

66.  This could be tested in this way.  If the Defendant had refused to comply with the request being made by the Plaintiff’s solicitors on 3 December could he have relied upon the terms of the Deed of Forbearance ?  It would appear that he could.

67.  At least it would appear to be arguable that clause 2(d) did not form part of the Forbearance Deed and that sections 24 and 25 do take effect.

68.  Earlier in this judgment, I made reference to the Deed of Modification executed on 1 December 2008.

69.  What this Deed was intended to do was to incorporate the new interest provisions contained in the Deed of Forbearance into the Instrument thus making them applicable to the principal outstanding.

70.  Clearly the observations which have been made in relation to the Deed of Forbearance are equally applicable to the instrument thus providing an arguable defence to the claims being made in HCA 1096/2009.

71.  This then leads to the final matter raised in this application.

72.  As stated earlier in this judgment various mortgages were entered into secured on the shares of various companies in the CGLI group of companies.

73.  What seems clear is that there is a paucity of reliable information concerning the steps taken by the Plaintiff to protect their interests under the mortgages.

74.  It was stated in an affirmation made by Mr Leung for the Plaintiff that they had enforced the HKCGL mortgage and that they had become the sole beneficial owner of the company.

75.  It is not denied that the Plaintiffs are taking steps to enforce the mortgages.

76.  In this connection, it would appear that they are involved in the operation of the Port.  Also it is apparent that they have not been forthcoming in giving details of the action they have taken or in attempting to obtain a valuation of the underlying assets of the various companies.  Indeed, when a joint valuation was proposed by the Defendant the idea was rejected.

77.  However, it is established by Lloyds Scottish Trust Limited v Britten (1982) 44 P & CR 249 that the burden is placed upon the Plaintiff of clarifying the position.

“It therefore seems established that a mortgagee cannot sue his mortgagor on any express or implied covenant after he, the mortgagee, has foreclosed and then sold the foreclosed property to a third party. The plaintiffs therefore cannot sue Impact for the balance of the original debt which remains owing.  Since the plaintiffs cannot sue Impact, I do not see how they can sue the defendants as guarantors for part of the sum owing by Impact, in that the defendants guaranteed the obligations of Impact to the plaintiffs and such obligations at the date of the writ did not include an obligation to pay the debt part of which the plaintiffs now claim from the guarantors.

Mr. Christie, for the plaintiffs, pointed out that none of the cases mentioned above was concerned with the effect of foreclosure on a guarantee.  That may be so.  But, as I see it, if the money is not recoverable from Impact, the principal debtor, it cannot be recovered from the defendants as guarantors.”

78.  Until that is done, it would be premature to enter summary judgment against the Defendant.

79.  The result of all of this is that on the appeal from Master Yu’s decision, the Defendant’s appeal is allowed and the Plaintiff’s cross appeal is dismissed.

80.  The strike out summons is dismissed as also is the order 14 summons in HCA 1096/2009.

81.  I make an order nisi that the Defendant will have his costs on the appeal and that the order in favour of the Plaintiff below will be set aside and costs will be to the Defendant.

82.  The Defendant will also have their costs on the strike out summons and the order 14 summons.

83.  There will be a certificate for two counsels.