CENTRAL SOUTHWOOD LTD v. MA WAI KIN AND ANOTHER

DCCJ 3343/2016

[2019] HKDC 457

LA/MLT/01179/2016(M86)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3343 OF 2016

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D E C I S I O N

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1.  This is the hearing of 1^st Defendant’s summons dated 4 August 2017 to set aside the judgment entered against him in default of notice of intention to defend on 27 September 2016 on the ground he has a meritorious defence. By the said summons the 1^st Defendant also seeks to set aside any execution now being issued on the said judgment.

2.  The 1^st Defendant by his affirmation of 3^rd August 2017 adopting the affirmation of his brother, i.e. the 2^nd Defendant made on the same date, confirmed that the Writ issued herein were received by the Defendants on 9 July 2016[1]. Since the 1^st Defendant is now not contending he is a mentally incapacitated person (see elaboration in [6] & [7] below), the service was regarded good. Thus the 1^st Defendant is seeking to set aside a regular judgment.

3.  By the said default judgment, the 1^st Defendant is required to pay the Plaintiff:

i)   RMB300,425 (or the Hong Kong Dollar equivalent at the time of payment);

ii)   interest on RMB238,517.06 (or the Hong Kong Dollar equivalent at the time of payment) at the rate of 30% from 17 June 2016 until payment; and

iii)   fixed costs of HK$6,500.

4.  With a view to enforcing the said default judgment, the Plaintiff obtained a Charging Order Nisi on 6 October 2016 against the interest of 1^st Defendant in the Property[2] (see [8] below).

Brief Background

5.  The 1^st Defendant, aged about 56, is the elder brother of the 2^nd Defendant. The 2^nd Defendant has been a secondary school teacher.

6.  It is most unfortunate that the 1^st Defendant suffered from meningitis at the age of 3, and had since suffered from low average intellectual functioning. According to a psychological report dated 17 January 2017 filed by the 2^nd Defendant, the 1^st Defendant was assessed to have an IQ score of 85 according to the Wechsler Adult Intelligence Scale – Fourth Edition (WAIS-IV) Hong Kong Version. His independent living abilities are estimated to be equivalent to someone of age around 8 years and 9 months[3].

7.  The Mental Health Ordinance, Cap 136 (“MHO”) provides that mental handicap is to mean “sub-average general intellectual functioning” with deficiencies in adaptive behaviour. Sub-average general intellectual functioning is further defined to mean an IQ of 70 or below according to the Wechsler Intelligence Scales for Childrenor an equivalent scale in a standardized intelligence test. The IQ of the 1^st Defendant is 85. Even though the 1^st Defendant appears to have suffered from some problems, and apparently emphasis has been placed on these aspects of the 1^st Defendant in affirmations, he simply does not objectively fit in the description of a mentally incapacitated person under Order 80 of the Rules of District Court (“RDC”). Neither has Mr Lin sought to argue the 1^st Defendant is mentally incapacitated as such.

8.  The 1^st Defendant and his late mother had since 1987 been joint tenant s of a property, namely, Flat D, 4^th Floor, Block 6, Chevalier Garden, No. 2 Hang Shun Street, Shatin, New Territories Hong Kong (“Property”). It is a housing unit under the Government’s Home Ownership Scheme (“HOS”). The Defendants’ mother passed away on 13 April 2014. The 1^st Defendant has since become the Property’s sole owner[4].

9.  The 2^nd Defendant happens to be a habitual gambler. He always encounters financial hardship despite his decent income derived from being a secondary school teacher in Hong Kong. He turns to his brother, i.e. the 1^st Defendant, for help by raising fund with the Property. The present case relates to one of these loans. The 2^nd Defendant was eventually made bankrupt in June 2016 upon a self-petition.

The Plaintiff’s Case

10.  The Plaintiff sued the 1^st Defendant on a contract of indemnity for losses suffered by it as a guarantor for a loan advanced by the lender to the 1^st Defendant. As can be seen below, the Defendants contended that between 2013 to end of 2014, the 1^st Defendant had obtained 4 loans. At least the 1^st, the 2^nd and the 4^th loans were borrowed from a moneylender called Intell Finance and Mortgage Company (“Intell”). The loan which is the subject matter of the present proceedings is the first of these loans.

11.  The parties and documentation for the first loan as pleaded appear complicated and the transaction convoluted. It may perhaps be useful to set out the names of parties involved and their respective roles in the transaction in order to understand the Plaintiff’s pleaded case. They are:

i)   The 1^st Defendant: he is the borrower of RMB300,200 (“1^st Loan”) under a loan agreement entitled “個人貸款合同 (Individual Loan Agreement)” dated 13 May 2013 drawn up in simplified Chinese (referred to as “Principal Loan Agreement” herein). The Lender (see (ii) below), the 1^st Defendant, 2^nd Defendant and the Plaintiff are parties to this Principal Loan Agreement;

ii)   Madam 王娟 (transliteration: Wang Juan, “Lender”): she is the lender of the 1^st Loan under the Principal Loan Agreement;

iii)   China Everbright Bank: a bank operating in the Mainland at Shen Nan Road East, Luohu District, Shenzhen Sub-branch (“Everbright”). It is said to be appointed by the Lender to more effectively manage and release her fund as 1^st Loan to the 1^st Defendant pursuant to an agreement in Chinese entitled “個人委托貸款合同 (Personal Loan Entrustment Agreement)” dated 14 May 2013 (referred to as “Entrustment Agreement”[5] herein). The 1^st Defendant, the Lender and the Everbright are parties to this Entrustment Agreement;

iv)   The Plaintiff acts as a guarantor of the 1^st Loan advanced to the 1^st Defendant by the Lender released through the Everbright. A Deed of Indemnity (in English) dated 13 May 2013 was signed by the 1^st Defendant in favour of the Plaintiff (“1^st Deed of Indemnity”)[6]; and

v)   The 2^nd Defendant is also another guarantor of the 1^st Loan under a Deed of Indemnity dated 13 May 2013 (“2^nd Deed of Indemnity”). This 2^nd Deed of indemnity has not been exhibited by the parties.

12.  The Plaintiff’s pleadings contain a lot of provisions extracted from the above documents. Its case against the 1^st Defendant, so far as can be discerned, is this. At the request of the 1^st Defendant and in consideration of the 2^nd Defendant and the Plaintiff agreeing to be the guarantors for the 1^st Loan, the Lender advanced the said loan to the 1^st Defendant through Everbright.

13.  Pursuant to this agreement, the 1^st Loan was deposited into 1^st Defendant’s account opened with Everbright in Shenzhen through the same bank on 15 May 2013.

14.  It was provided in the Principal Loan Agreement that the 1^st Loan was repayable by 120 equal monthly instalments of RMB 3,938.13 starting from 15 June 2013 and thereafter on the 15^th day of each and every succeeding month until full repayment. Interest was charged at 50% over benchmark interest rate announced by the People’s Bank of China (then at 6.55% p.a.), and the annual interest rate of the first instalment payment was 9.825%. It is a term of the Principal Loan Agreement that the Entrustment Agreement should be signed. It was signed on 14 May 2013

15.  It was provided in Clause 11 of the Principal Loan Agreement that in case of breach by the 1^st Defendant, the Lender is entitled to issue a notice to the guarantors, i.e. the Plaintiff and the 2^nd Defendant, to demand fulfilment of the guarantors’ obligations.

16.  The Entrustment Agreement provides, inter alia, that in the event of default on the part of the 1^st Defendant to repay the principal and/or interest thereunder, the 1^st Defendant was liable to pay overdue interest at a rate of 30% over the contractual interest rate.

17.  It was also provided in this Entrustment Agreement that the Plaintiff’s agreement to act as guarantor of the 1^st Loan was subject to the 1^st and 2^nd Defendants’ undertaking to indemnify the Plaintiff against all losses, expenses and costs in respect of its liabilities that may arise from the Defendants’ default in their repayment of the Loan.

18.  The 1^st Deed of Indemnity was dated 13 May 2013 and was signed at the solicitors’ firm of Philip T.F. Wong & Co (“TF Wong”) in Hong Kong. Under the terms of this deed, the 1^st Defendant agrees to, inter alia, provide the indemnity as agreed aforesaid. He also agreed to pay interest at 30% p.a. from the date on which the guaranteed sum was paid by the Plaintiff to the Lender until reimbursement. It is essential to note that by the 1^st Deed of Indemnity, the 1^st Defendant purported to irrevocably appoint the Plaintiff as his attorney to, inter alia, sell the Property.

19.  It was pleaded that the 1^st Defendant had defaulted under the Principal Loan Agreement. All the remaining instalments had thus become immediately repayable upon Everbright’s declaration to that effect. The Lender made a demand to the Plaintiff for repayment. On 17 June 2016, the Plaintiff repaid to the Lender through Everbright a total of RMB300,425, comprising the followings:

i)   RMB238,517.06 being balance of the principal;

ii)   RMB2,148.14 being interest up to 17 June 2016;

iii)   RMB130.53 being certain default interest; and

iv)   RMB59,629.27 being default charges[7].

20.  The Plaintiff is entitled, as pleaded, to be indemnified by the Defendants for the aforesaid sum paid to the Lender relying on the various documents, and in particular, the 1^st Deed of Indemnity against the 1^st Defendant.

21.  The Plaintiff relied on, inter alia, clause 7 of the 1^st Deed of Indemnity to charge interest at a rate of 30% p.a. on the balance of the 1^st Loan from the date of its repayment, i.e. 17 June 2016 until full reimbursement by the 1^st and/or 2^nd Defendant.

The 1^st Defendant’s Case

22.  The 2^nd Defendant had made a very detailed affirmation on 3 August 2017 comprising 115 paragraphs setting out the circumstances under which 4 loans were advanced to the 1^st Defendant. The 1^st Defendant adopts the same in its entirety in support of the setting aside application.

23.  Mr Lin has, in his written submission, summarized the salient features of the 1^st Defendant’s case. His submission, in gist, is that although the loan documents were signed in the PRC and apparently, is beyond the reach of Hong Kong law, taking into consideration the overall circumstances, it was a sham arrangement used to circumvent the strict requirements of the Money Lenders Ordinance, Cap 163 (“MLO”). It is in fact a loan advanced in Hong Kong by a Hong Kong money lender, Intell, in disguise of a PRC loan, and should be rendered void or unenforceable by reason of the MLO. Further and alternatively, the money lender made use of the low intelligence of the 1^st Defendant. The 1^st Loan should be unenforceable under the Unconscionable Contracts Ordinance, Cap.458 (“UCO”). He referred to a similar case of this Court in DCCJ 398/2014 & DCMP1474/2015 involving the same Plaintiff and 2 other defendants. Intell was also involved and alleged to be the lender behind. The judgment obtained in default was set aside and the charging order discharged[8].

24.  In a nutshell, Mr Lin’s case is that it was the 2^nd Defendant who encountered financial hardship. He approached his brother (i.e. the 1^st Defendant) for help. They went to a money lender Intell with a view to obtaining a loan from it. However, the 1^st Defendant ended up borrowing money in the PRC from the Lender who they did never know and had never met. The parties dealing with them misled them using Everbright as a so-called intermediary. On the other hand, Intell, who they approached for money, was out of picture. Now they were being chased after yet by another party unknown to them.

25.  As said, subsequent to the 1^st Loan, the 1^st Defendant, upon request of the 2^nd Defendant, obtained 3 more loans on 3 different occasions. In respect of the 4^th Loan the Defendants received almost exactly the same treatment. They initially approached Intell but ended up signing documents with lender and parties to whom they had been introduced and who they did not expect to deal with in the ordinary course of borrowing. In each of these 2 loans, substantial handling fees, which were strictly prohibited by the MLO, were charged.

26.  The following is a summary of what has been deposed to in the 2^nd Defendant’s affirmation of 3 August 2017.

   The 1^st Loan, i.e. the Subject Matter of the Proceedings

27.  On or about 12 May 2013, the 1^st Defendant, attracted by a pull-up banner in Mongkok advertising availability of loans from Intell, went to its office to enquire obtaining a loan. The office he went up was on the 8^th floor of Ginza Plaza on Sai Yeung Choi Street (“8/F Ginza”). He met one Ms Lau who told him he could only obtain loan if he had a guarantor and property. 1^st Defendant then told the 2^nd Defendant of this visit. The 2^nd Defendant was willing to be the guarantor because the 1^st Defendant was obtaining the loan for him.

28.  On 13 May 2013, i.e. the next day, both Defendants went up 8/F Ginza and met Ms Lau and the assistant manager, one Mr Kei Ka Lok. They were given a name card of Mr Kei bearing the name and marks of Intell[9]. Mr Kei said they could advance the Defendants a loan of HK$300,000. However, they were told that Intell had an agreement with Everbright whereby they would act as the Everbright’s intermediary arranging lending money to the Defendants. They had to go to Everbright’s branch in Shenzhen to complete the formality for granting of the loan. Mr Kei said Intell would charge no administration fee but Everbright would charge HK$80,000 as handling fee. The handling fee would form part of the loan to be advanced and repayable in 10 years of about HK$1,000 odd per month.

29.  Since the 2^nd Defendant was in financial hardship, he had no alternative but to agree to the arrangement. Apart from the handling fee, the Defendants’ case was that Mr Kei had never told them of any other terms and conditions regarding the proposed loan. They were then told by Ms Lau (i) to attend the office of Everbright in Shenzhen the next day at 10 am to meet one Ms Wu. A name card of Ms Wu with address printed was given; and (ii) to attend the office of the law firm TF Wong in Mongkok afterward, say, 2 pm the same date to handle further formalities before they could obtain the loan from Intell. Ms Wu’s card shows an address purportedly be that of Everbright[10].  However, the said card bears neither logo nor marks of the said bank.

30.  On the following day, i.e. 14 May 2013, at about 10 am, they went to the purported address of Everbright in Shenzhen and met Ms Wu who told them:

i)   the 1^st Defendant needed not charge the Property to     them for the 1^st Loan as they did not accept Hong    Kong property as security;

ii)   however, the 1^st Defendant had to sign a document saying the money was used to buy some jewelleries;    and

iii)   a mainland resident would be the guarantor for the loan.

31.  The 1^st Defendant did sign the jewelleries purchase statement drafted by the 2^nd Defendant as asked. Ms Wu also took photocopy of the 1^st Defendant’s Home Return Permit. They were also asked by Ms Wu to sign, and did sign the (i) the Principal Loan Agreement (see [11(i)] above); (ii) the Entrustment Agreement (see [11(iii)] above)[11]. They knew neither Madam Wang nor the Plaintiff when signed on these documents drafted in simplified Chinese text. They only signed as requested in order to get the 1^st Loan. They asked for a copy of the signed documents, but were refused and requested to ask from Intell.

32.  Ms Wu asked the 1^st Defendant to open an account with Everbright with ATM card, and he did as told. He set his ATM card password but Ms Wu took away his ATM card and asked for the password. They were told to go back to Intell for the money.

33.  They left Shenzhen and arrived at TF Wong’s office at about 2 pm the same date. They were presented with some documents in English. They were told by a female staff that the loan amount was HK$380,000 and the amount of monthly instalment they needed to pay. They signed these documents as requested.

34.  They then went back to the office of Intell at about 4:30 pm. The same Ms Lau gave them several cheques in the total sum of HKS300,000. Those cheques were drawn in favour of the 2^nd Defendant’s creditors except one cheque for HK$100,000 odd which was drawn in favour of the 1^st Defendant.

35.  They did ask Ms Lau again for documents they had signed but was declined. They were told they should ask Everbright for them. They did not insist. Nevertheless, Ms Lau gave them a repayment schedule[12]. They were asked to repay one “The Brightness Management Company” a monthly instalment of HK$4,937 by depositing the money into a bank account of this company at the end of each month.

36.  Between 14 May 2013 and May 2016, the 2^nd Defendant repaid the monthly instalment as scheduled. Some relevant pay-in slips were exhibited[13].

The 2^nd Loan

37.  Some time in November 2013, the same Ms Lau of Intell called the 1^st Defendant to tell that he was eligible for another personal loan of HK$100,000 if the 2^nd Defendant would be his guarantor. The 1^st Defendant told the 2^nd Defendant who agreed as he required the money to ease his financial problem.

38.  On 27 November 2013, the Defendants went up Intell’s office to meet Ms Lau. After some discussion, they were told to attend a law firm[14] to sign some documents before they could get the loan. Ms Lau wrote down the addresses of the law firm and the address where they could get the cheque after signing of documents.

39.  They did sign the documents for the loan of HK$100,000 (“2^nd Loan”) at the office of the said law firm. They then went to another office according to what Ms Lau had told them. Though the office they attended was without any sign board, they were received there by another lady wearing the same uniform as Ms Lau and was given a cheque of HK$90,000. They were told the legal costs for preparing the documents were deducted from the 2^nd Loan. Thereafter, the 2^nd Defendant repaid a monthly instalment of HK$3,960 for the 2^nd Loan.

40.  The Defendants later managed to obtain documents they have signed on this occasion which include a Memorandum of Loan Agreement dated 27 November 2013. It was stated that one Rise Honest International Limited (“Rise Honest”) was the lender; the 1^st Defendant was the borrower, the same Plaintiff herein and the 2^nd Defendant were the sureties. The document was purported to be a memorandum pursuant to s.18(1) of the MLO. The address of the Plaintiff was at the same 8/F Ginza. It was stated that the 2^nd Loan was repayable by 48 equal monthly instalments and interest accrued thereon at 3% per month.

41.  Both Defendants stated that they did not know Rise Honest and why the Plaintiff was the surety for the 2^nd Loan.

The 3^rd Loan

42.  In or about January or February 2014, the 2^nd Defendant was approached by one Mr Wong of a company called Hong Kong Property Mortgage Management Centre Limited (“HKPMMC”) advising that the Defendants could apply for a second mortgage from the Housing Authority (“HA”). After some discussion, the said Mr Wong told him he could borrow HK$1 million to clear all existing debts, and the new loan could be repaid in 30 years by monthly instalment of about HK$20,000.

43.  There were repeated contacts between 2^nd Defendant and Mr Wong. The 2^nd Defendant eventually met Mr Wong again at the latter’s office in Fullwin Commercial Centre in Mongkok (“HKPMMC’s office”). Eventually, the 2^nd Defendant was advised by Mr Wong that he should first of all obtain a loan of HK$600,000 to pay off some of his existing debts, and applied for the second mortgage later.

44.  After discussion between the 2 brothers, the 2 Defendants went up the HKPMMC’s office one or 2 weeks later. They were assured by Mr Wong that the administration fee would only be charged until they had successfully obtained consent to a second mortgage from HA[15]. They then left the office without making up their mind.

45.  Later and during Easter holidays[16] when the 2^nd Defendant and his family were in Macau, he received a phone call from Mr Wong who said the loan documentation was ready. If they did not sign shortly, the loan of HK$600,000 might not be approved. The 2^nd Defendant said he then immediately made application for the loan.

46.  The 2^nd Defendant also immediately called the 1^st Defendant. As the 2^nd Defendant was then in Macau, arrangement was then made for Mr Wong to take the 1^st Defendant to a law firm in Central to execute the documents for the purported loan of HK$600,000 the next day. The One Property Credit Express Limited (“The One”) was the lender. The 1^st Defendant did sign some documents, but he was not sure whether or not he was signing at a law office as he did not see any name of the firm. He also did not understand what he had signed though someone had made some explanation to him.

47.  The 1^st Defendant was told by a staff of The One after signing the documents that the loan approved was in fact HK$400,000 (“3^rd Loan”), not HK$600,000. The 1^st Defendant thought it was what might have been agreed between Mr Wong and the 2^nd Defendant and did not inquire further. The 1^st Defendant, however, was given a cash cheque of about HK$300,000 with deduction of HK$100,000 odd for repayment of the 2^nd Loan.

48.  What is said to be most unacceptable to the Defendants, according to their evidence, is that Mr Wong immediately took the 1^st Defendant to a bank to cash in the cheque. Mr Wong immediately took away HK$250,000[17] from the 1^st Defendant as administrative fee[18]. The balance of about HK$50,000 was deposited by the 1^st Defendant into the 2^nd Defendant’s bank account.

49.  Upon his return from Macau 2 days later, the 2^nd Defendant called Mr Wong to protest. He was told by Mr Wong he needed money to make arrangement for the second mortgage. Mr Wong assured him he would follow up the matter closely. Thereafter the 2^nd Defendant kept chasing but there was no progress. Some 6 months later he went up the HKPMMC’s office, and found it has moved. They believed they had been cheated.

The 4^th Loan

50.  Realizing hopeless for a second mortgage from HA and with a debt of about HK$1.6 million then, the 2 Defendants went to Intell again. Mr Kei said they could borrow HK$1 million but the administrative fee would be HK$250,000. Deposit of title documents of the Property was required this time.

51.  Ms Lau then told them the amount of loan and the monthly instalment required to be paid. The procedure was also explained. This part of the interview was video recorded. They were then asked to go to attend the office of Everbright again in Shenzhen to meet Ms Wu to handle all procedure the next day, which they did on 18 December 2014.

52.  They were asked to, and did sign similar documents entitled (i) Personal Loan Agreement and (ii) Individual Loan Agreement for a loan of RMB920,000 (“4^th Loan”). In these documents, the 1^st Defendant was borrower, one 陳美華 (transliteration Chan Mei Wah (“Madam Chan”)) was the lender this time, one Everwell Profit Limited (“Everwell”) and the 2^nd Defendant were guarantors. It is their case that they did not know both Madam Chan and Everwell. Further, the 1^st Defendant also, as requested by Ms Wu, signed a document stating the money was for purchase of jewelleries. She refused to provide copy of documents they had signed despite request.

53.  Ms Wu asked the 1^st Defendant to open an account with Everbright with ATM card. He did as told. The 1^st Defendant set his ATM card password but Ms Wu took away his ATM card and asked for the password. They were told to go back to Intell for the money.

54.  In the afternoon the same date[19], they went to TF Wong’s office where they deposited the Property’s title deeds. The 2^nd Defendant was asked to sign a deed of indemnity. It was the Defendants’ case that the staff of solicitors’ firm did not mention the name of Everwell at all. They were then provided with several cheques totalling HK$915,850 drawn in favour of various creditors. The 1^st Defendant signed an acknowledgement of receipt of the cheque. It was noted that in the heading of this acknowledgement, the amount of loan was stated to be RMB920,000 (equivalent to about HK$1,160,126.45 according to the 2^nd Defendant). It was said that the difference represented administrative fee charged by the Everbright. It was about HK$250,000.

55.  They were provided with a repayment schedule for the 4^th Loan, which was stated as HK$1,150,000. The said loan was repayable in 120 equal monthly repayment of HK$15,102[20]. It is noted the repayment schedule was the same as that for the 1^st Loan in terms of format, font size and layout and event basic reference no.

56.  Despite the first instalment was stated to be due on 29 January, 2015, they did not start to repay until March as they were told by Ms Lau that they were entitled to a promotion benefit whereby they could start to repay in March 2015. This part of the conversation, according to the Defendants, was not video recorded.

57.  On or about 24 February 2015, the 1^st Defendant received a writ issued against him under HCA391/2015 by TF Wong on behalf of Everwell. Since he made no default, the 2^nd Defendant immediately made enquiry with TF Wong. He was told this was part of the procedure for the 4^th Loan, and the 1^st Defendant needed not take heed of the writ and any subsequent documents. In late April the 1^st Defendant received a final judgement and later, a charging order absolute. It was noted that the amount sought to charge against the Property was HK$2.7 million.

Series of Court Claims

58.  Apart from the present proceedings (concerning the 1^st Loan), the aforementioned HCA391/2015 (concerning the 4^th Loan), the Defendants were also sued in the District Court in DCCJ3343/2016 (concerning the 3^rd Loan). In the last set of proceedings, judgment in the sum of RMB300,427 together with interest on RMB238,517.06 at the rate of 30% p.a. from 17 June 2016 until payment was also entered on 27 September 2016. Everell later issued HCMP2613/2016 to enforce the charging order absolute by asking an order for sale of the Property.

The Plaintiff’s Reply and Subsequent Exchanges

59.  The material parts of the affirmations of Miss Yeung Suet Ying, the sole director of the Plaintiff for the purpose of this summons are:

i)   the advancement of the 1^st Loan and its receipt were    not disputed by the 1^st Defendant. It was evidenced by     a receipt dated 15 May 2013 duly signed by him[21];

ii)   the 2^nd to 4^th Loans were unrelated to the present    proceedings;

iii)   the 1^st Defendant had acknowledged in the 1^st Deed of    Indemnity that he fully understood its content; and TF    Wong only represented the Plaintiff. In addition, he had been advised to seek independent legal advice but he considered it unnecessary to do so[22];

iv)   the Entrustment Agreement (see [11(iii)] above) was    signed pursuant to the Principal Loan Agreement (see [11(i)] above);

v)   the 1^st Loan was properly documented and PRC    law is stated as the applicable law. According to a PRC legal opinion obtained, the loan transaction is    legal and enforceable according to PRC law;

vi)   the signing of the jewelleries purchase statement, the    disclosure of the 1^st Defendant’s password and taking   away of his ATM card were denied;

vi)   The company to which the Defendants made     payment (i.e. The Brightness Management Co) had no    relationship with the Plaintiff;

vii)   the Plaintiff will suffer prejudice if the judgment is set    aside because the Plaintiff has paid the Lender the     debt on the 1^st Defendant’s behalf. Further, long time    has elapsed between judgment and the setting aside    application;

viii)   the 2^nd Defendant is a secondary school teacher and    could not have been ignorant as to there was in fact a guarantee signed and who the Plaintiff was;

ix)   Intell was only a consultant/referral agent and an    intermediary through whom a lender in the PRC made    the loan to the Defendants[23]. It was Intell who   appointed the Plaintiff to act as guarantor for the 1^st     Loan at a consideration of HK$28,000 paid by Intell.   An agreement dated 9 May 2013 was signed between    Intell and the Plaintiff in this regard [24];

x)   Intell was the sole agent of Everbright in Hong Kong    for procuring and handling RMB property mortgages.    A certificate dated 11 May 2011 purporting be the     appointing document was exhibited[25]; and

xi)   they have got a PRC legal opinion to the effect that     the Principal Loan Agreement and the Entrustment Agreement and the interest provisions are all legal and enforceable according to PRC law.

60.  It is worth noting from the reply affirmations filed by the 2^nd Defendant that they stressed they only attended Everbright in Shenzhen once on 14 May, not 15 May 2013. Therefore 1^st Defendant could not have signed the Principal Loan Agreement on 13 May 2013 and the receipt exhibited by the Plaintiff on 15 May 2013. They received the money from Ms Lau of Intell in Hong Kong on 14 May 2013.

61.  Further, the Defendants complained that their solicitors were harassed by people suspected to be related to Intell on at least 3 occasions, on 24 October, 1 and 27 November 2017 respectively. They came to this view because the same men appeared on each occasion and in a pamphlet they left behind, the organization they purported to represent was called “International Boundless Fellow Alliance of Economic Development and Aid”. Its address is at 8/F Ginza, the same as Intell: see [27]. It was denied by the Plaintiff who said 8/F Ginza comprised several units[26]. For the purpose of this summons, it is not necessary to recite the facts here. Suffice it to say that it will be a serious matter for a party to intimidate solicitors acting for his opponent with a view to stopping the solicitors from acting. It amounts to interfering with the administration of justice. The Defendants should report the matter to the Police.

Discussion

62.  The principles applicable to setting aside a regular judgment are settled. An arguable defence is insufficient. It is for the defendant to establish a defence which has a real prospect of success, that is to say, the defence should carry some degree of conviction.

63.  If this Court cannot form any provisional view from the defence and/or affidavit evidence of the probable outcome of the action without a trial because it depends on whether the evidence of the Defendants is to be believed, the proper test, according to the Court of Appeal in O Mark Polyethylene Products Fty Ltd v Reap Star Ltd[27] and L & M Specialist Construction Co Ltd v Wo Hing Construction Co Ltd[28] applied by Kwan J (as Kwan VP then was) in El Vince Ltd v Wu Wen Sheng[29], is to ask whether the defence “could well be established” at trial. If the defendant’s evidence “could well be believed” at trial, it would mean the defence has a “real prospect of success”.

64.  It does not mean a defendant will then enjoy an automatic entitlement to have the default judgment set aside. It has been suggested the court (and this Court accepts) still retains a residual power to weigh all relevant factors against the dominant factor of the merits in order to see where justice of the case lay, see: Young Bing Ching (deceased) v Chow Yung Fong & Another[30]. Consideration that may be taken on board includes why the default occurred; the defendant’s conduct after the notice of proceedings; an explanation of the delay; and prejudice, if any, done to the defendant and related third party.

65.  The Defendants’ case is that the scheme of arrangement is a sham with a view to avoiding the strict provisions of the MLO imposed on Intell. After reading the submissions of Mr Alvin Tsang of counsel for the Plaintiff, this Court considers all his grounds boil down to this: it is legitimate for anyone to avoid any law in a lawful way. The MLO is inapplicable as the loan documents, which are all governed by the PRC law, are legal and enforceable. The indemnity of a valid and enforceable principal loan is enforceable. The Plaintiff’s pleading and Miss Yeung’s evidence all centre on this theme - documents signed in Shenzhen and the PRC law applies. Mr Tsang relies on Hong Kong Shanghai (Shipping) Ltd v The Owners of the ships “Cavalry”[31] and China Merchants Bank v Minvest International Ltd[32].

66.  In Hong Kong Shanghai (Shipping) Ltd (supra), Hunter J was invited to decide whether the agreements in question covering loan of about USD100 million were within the ambit of the Money Lenders Ordinance 1911 (“MLO 1911”) then in force when the agreements were signed. If the answer was in the negative, the agreements were illegal and tainted with illegality. Even repayment already made thereunder could be recoverable. After considering the English counterpart and reviewing a number of authorities, the learned judge concluded the agreements outside the scope of the MLO 1911. In the Court’s judgment, the current MLO retains the same objectives as the MLO 1911[33]. The following, which was applicable to the said MLO 1911, is also apposite to the MLO:

i)   the MLO is primarily directed to domestic transactions with a social purpose to prevent the    exploitation of Hong Kong citizens by Hong Kong loan sharks. Its applies to lenders carrying on the business of a money lender in Hong Kong only;

ii)   in considering whether every transaction entered into everywhere by a man who is in fact in business in Hong Kong as a money lender falling within the MLO, the proper law test applied. His Lordship had this to say in relation to the geographical test:

“… I share the views of those critics of this decision [geographical test] who say that it is too rigid and narrow, and that location should not be decisive. I cannot for example accept that a contract signing ceremony in Macau would be effective to exclude the Ordinance [i.e. MLO 1911] in an otherwise wholly domestic situation.”[34]

iii)   if the proper law of the contract by objective standards, i.e. by asking “what is the system of law with which the transaction has its closest and most real connection” so ascertained is foreign, MLO has no application. If it is domestic, then the court has a base from which to judge the validity of the challenge to the bona fides of any choice of law provision in the agreement. The advantage of this approach is to avoid    the rigidity of the location test which makes location a decisive weight; supply the best test of bona fides; and    the best answer to avoidance[35];

iv)   in order to ascertain whether MLO is applicable, 2 questions are asked. After modifying the same to fit the facts of the present case, they are:

a)   at the material time of the 1^st Loan, whether the person in question (Intell or any other person such as the Lender/Everbright) was carrying on business as a money lender in Hong Kong or advertising, announcing or holding itself out as so conducting itself (“business test”); and

b)   whether objectively assessed, the proper law of the contract is the Hong Kong law (‘proper law    test”);

v)   in relation to the business test, factors such as whether binding decision of the lender and profit were made locally, whether the events of lending the money and the repayment of money take place in Hong Kong are relevant[36];

vi)   in relation to the proper law test, it was stated that 2 of the factors crucial to any objective determination of the proper law are the place of the lender’s business and the place where the money is lent and repayable. It is also mostly connected with its location chosen by the parties[37].

67.  Apparently, the choice of governing laws which, according to the above formulation, has a material influence on the outcome of the proper law test. Mr Lin has helpfully referred this Court to the Australian decision of Golden Acres Ltd v Queensland Estates Pty. Ltd[38] in support of his proposition that there should also be a public policy consideration. That case was also relied on in Hong Kong Shanghai (Shipping) Ltd (supra) in support of, inter alia, the proper law test which supply the best test of bona fides and the best answer to the problem of avoidance[39].

68.  Golden Acres (supra) concerned an unlicensed estate agent, which was a Hong Kong company, claiming against the vendor for commission in Queensway of Australia for sale of land in that state. It was Queensland’s law that an estate agent could not sue for remuneration unless he was licensed. However, the choice of law of the agreement on which the estate agent sued on for commission was the Hong Kong law. It was stated by Hoare J that the proper law of the agreement selected by the parties would be the proper law provided the selection is bona fide and there is no infringement of public policy (my emphasis). Further the learned judge was of the opinion that to say the parties’ intention could be conclusively ascertained from their choice of law provision in the contract was too sweeping: see p.384. Hoare J also had this to say at 384G – 385E:

“… I am satisfied that the selection of a law other than that of Queensland was made for the specific purpose of avoiding the consequences of illegality which would or might have followed if Queensland law applied.

   The Queensland legislature has seen fit to enact legislation closely regulating the operation of real estate agents in Queensland. While it may be that some of the evils to be avoided by the enactment would only apply to acts performed in Queensland, one can see that it certainly could be contrary to the public interest if the operation of the statute as a whole could be circumvented by the simple device of agreeing that some other law will apply to a contract which would otherwise be subject to the restrictions imposed by the Act. While appreciating that public policy can be an unclear concept, generally speaking it would be contrary to public policy for the legislative intention to be stultified by parties to a contract, of which the proper law would be Queensland, selecting some other law for the purpose of avoiding the application of Queensland law. The facts of each case are different and in some circumstances a bona fide selection by the parties of some other law would not be contrary to public policy even though some advantage would also accrue from avoidance of Queensland law…. I am satisfied that the attempted selection of this law was for no other purpose than to avoid the operation of the Queensland law. Under all the circumstances, I conclude that the purported selection of the Hong Kong law was not a bona fide selection.”

69.  This Court fully endorses the above approach of Golden Acres (supra) when considering whether the MLO is applicable to the 1^st Loan.

70.  I must say the circumstances leading to the advancement of the 1^st Loan outlined by the Defendants’ affirmation and the documentation extremely dubious. It is not in dispute that at the material times of the 1^st Loan, Intell was a money lender in Hong Kong. It advertised its business locally. The 1^st Defendant was attracted by its advertisement that loans were available and went up its office to obtain a loan: see [27 & 28] above. The loan amount was negotiated and agreed at its office: see [28]. Despite the fact that they did sign some documents in Shenzhen stating expressly the governing law being that of the PRC, money was actually given to them in Hong Kong: see [34] above. The loan principal, according to the repayment schedule given the Defendants, was recorded in Hong Kong dollars instead of Reminbi as stated in the loan documentation, and was given the 1^st Defendant in Hong Kong: see B/30. The repayment was made in Hong Kong by depositing into a bank in Hong Kong, and in Hong Kong currency: see [35 & 36] above. They intended to obtain loan from Intell but ended up dealing with the Plaintiff and Madam Wang which they did never know before. It is also unusual for someone like the Plaintiff willing to act as guarantor for a total stranger: see [59(ix)] above.

71.  The Plaintiff seeks to explain that Intell was the sole agent in Hong Kong of Everbright in advancing RMB mortgage loan: see [59(x)]. However, the loan now advanced to the 1^st Defendant was not advanced by Everbright but by Madam Wang. According to the Entrustment Agreement to which Everbright was a party, Everbright was only described as an agent of Madam Wang for whom the 1^st Loan was released, and in respect of such loan Everbright created no mortgage. Further, according to the Principal Loan Agreement, it was stated that the loan would be “released through (經…發放)” Everbright. According to the Entrustment Agreement, a service charge of 0.1% of the loan amount was charged by Everbright for such service. In the 1^st Deed of Indemnity, it was stated that the 1^st Defendant wanted to borrow money “through Everbright”: see recital (A)[40]. Despite the mentioning of name of Everbright, the name of Madam Wang, who was the Lender and a principal party to the loan transaction from which the indemnity arose, was not even specified. The absence of such reference is surprising for an indemnity professionally drafted by lawyers. Either it is a gross oversight, or a deliberate omission. The choice of holding out Everbright, who is only an agent of a disclosed agent, but playing down the lender’s identity is telling and suspicious.

72.  Accordingly, the Plaintiff’s allegation of Intell being an intermediary agent of Everbright and for whom Intell was “procuring and handling RMB property mortgages”[41] does not sit in well with the facts of this case, and is, in the Court’s judgment, misleading. The explanation by Mr Kei that Intell was only arranging loans for Everbright; and that by Ms Yeung that Intell was Everbright’s Hong Kong sole agent for RMB loans, should be viewed with skepticism.

73.  Further, as confirmed by Ms Yeung, the Plaintiff occupied the same office of another finance company on a unit next to Intell on 8/F Ginza, and had charged a fee to act as guarantor of a borrower who Everbright/lender deals only as a customer. This appears unusual and there must be a purpose for this apparently risky business model. It is also not sure what benefit Intell has gained in the transaction. However, it is beyond doubt Intell must have benefit otherwise it would not have paid the Plaintiff a fee. On the face and by reason of the documents executed, the Plaintiff, being a paid Hong Kong party, has in effect assumed the Lender’s rights under the Principal Loan Agreement to sue the Defendants in Hong Kong according to Hong Kong law. This is at least what the documents purport to achieve. The documentation serves the purpose of transforming an apparent PRC loan actionable in Hong Kong. It is obvious to the eyes that the consequence of illegality (see comparison in the following paragraph) which would follow if the Hong Kong law is applicable can be avoided by this scheme of arrangement. Its design is to avoid what the MLO considers exploitation and seeks to redress. The scheme of arrangement aims at doing business with local borrowers[42], gaining the benefits in terms of enforcement and taking of security as customers and their assets are normally within the jurisdiction, but on the other hand avoids all the prohibition of the MLO. The purpose of avoiding the domestic protective MLO is so patently obvious.

74.  If the MLO is to apply, the 1^st Loan offends the ordinance at least in the following areas. One can readily see the money lender and persons acting in concert can gain a lot of benefits over the borrower to the extent of exploitation if the MLO is ousted. They are, in the Court’s judgment, serious breaches of the Ordinance.

i)   MLO: sections 18(1) & (2) provide no agreement for repayment of money and interest and no security given will be enforceable if the form of agreement fails to comply with prescribed formality which includes setting out the specified essential information (e.g. form of security) and terms of the loan transaction clearly in the form of agreement or a memorandum. Further, upon request of the borrower, the lender is under a duty to provide the requested particulars to the borrower.

    The present case: the form of agreement does not comply with the above. There is neither a s.18 memorandum nor any single memorandum spelling out all essential terms. At least a security in the cross-indemnity by the 1^st Defendant to the Plaintiff, which is a party related to Intell, were not spelt out. It is essential to note that according to clause 4 of the 1^st Deed of Indemnity, as a security for repayment, the 1^st Defendant irrevocably appointed the Plaintiff as his attorney to sell the Property, and in that connection, to execute the assignment for the conveyance of the Property[43]. This perhaps explain why the Plaintiff has attempted to have the document registered against the Property. Further, no document was provided to the 1^st Defendant when requested: see [31 & 35] above;

ii)   MLO: Section 22(1)(c) states that a loan agreement providing for interest being increased by reason of any    default in the repayment of the loan, either directly or indirectly, shall be illegal.

The present case: although the interest rate of the loan    was 9.825% p.a., the Entrustment Agreement provides that in the event of default, the 1^st Defendant is liable    to pay overdue interest at a rate of 30% p.a. over the    contractual interest rate, and the Plaintiff is now suing    on this inflated interest: see [14 & 16] above;

iii)   MLO: section 27 of the MLO stipulates that:

a)   any agreement between the money lender and a borrower for payment by the borrower of money for or on account of costs, charges or expenses incidental or relating to the granting of loan or the guaranteeing or securing of the repayment shall be illegal;

b)   it shall be unlawful for the money lender or its employee, agent or any person acting for or in    collusion with the money lender to charge, recover, receive money for or on account of any such costs, charges or expenses or to demand or receive any remuneration or reward whatsoever from a borrower in connection with any loan made or guaranteeing or securing the repayment thereof, and by virtue of section 29(10) any such person(s) who contradicts section 27(3) commits an offence;

The present case: HK$80,000 were deducted by Intell in respect of the 1^st Loan (HK$250,000 was even deducted for the 4^th Loan). It is clearly in contravention of sections 27 & 29 if the transaction is covered by the MLO. Although Intell said the money was received by Everbright as handling fee (see [28] above), as pointed out by Mr Lin, and this Court fully agrees, neither the Entrustment Agreement nor the Principal Loan Agreement contain provisions entitling Everbright to charge the said administration fee. HK$80,000 represents an upfront deduction of about 21% off a loan of HK$380,000, and cannot be said to be insubstantial.

75.  As stated in Hong Kong Shanghai (Shipping) Ltd (supra) (see [66(i)] above), the MLO is enacted to prevent exploitation of Hong Kong citizens by Hong Kong loan sharks. This Court shares the views expressed by Hunter J in Hong Kong Shanghai (Shipping) Ltd (supra)[44] that a court should not exclude the MLO simply because the documents were executed outside the territory, e.g. in Macau, in an otherwise wholly domestic situation. As analysed above, taking into consideration all the circumstances and the artificial arrangement, the bona fide of those choices of law in the documents are in serious doubt.

76.  Applying the 2 tests postulated in Hong Kong Shanghai (Shipping) Ltd (supra) and also the principles in Golden Acres (supra) to the present case, this Court is of the provisional view that, on the basis the Defendants’ evidence could well be believed, firstly, the 1^st Loan is a domestic loan and the local law, i.e. the MLO applies. Intell was apparently behind the scene doing money lending business. Secondly, the choice of PRC law for the 1^st Loan is not bona fide. This Court’s assessment is that the sham arrangement said by the Defendants could well be believed at trial. The enforceability of the principal loan is in serious doubt and so will be the 1^st Deed of Indemnity now being sued on by the Plaintiff. The 1^st Defendant has a meritorious defence.

77.  This Court is drawn to the attention of the fact that the 1^st Defendant signed on a document dated 15 May 2013 acknowledging receipt of RMB300,200 in Shenzhen[45]. That appears to operate in favour of a conclusion that the money lending business was carried on out of Hong Kong, and MLO inapplicable. But this Court has not lost sight of the 1^st Defendant’s explanation that he, being a person of limited intelligence, was asked to part with his ATM card and password in Shenzhen, and received a lesser sum in Hong Kong. It is not the 1^st Defendant’s evidence that he had authorized anyone to get and move the money to Hong Kong for him. The facts in relation to this has to be ascertained after trial. However, taking into account all the evidence available for the time being, this Court’s assessment is that the Defendant’s explanation could well be accepted at trial. A court will look at the substance of a matter, and not merely what is revealed from the face of documents. If the money remains in control of the money lender or a third party related to it, a borrower cannot be said to have received the loan until he is in a position to freely dispose of it.  

78.  In the Court’s judgment, China Merchants Bank (supra) cannot help the Plaintiff. That case relied on the tests enunciated in Hong Kong Shanghai (Shipping) Ltd (supra). Further in that case the defendant seeking to resist the summary judgment had no dispute that the loan agreement and related transactions had little connections with Hong Kong. That being the case, the court there had no hesitation, after applying the relevant test, to conclude the proper law was the PRC law.

79.  The above being this Court’s conclusion, it will be unnecessary for this Court to consider the argument on UCO.

80.  This Court has considered the explanation for the delay given by the 2^nd Defendant in his affirmation and confirmed by the 1^st Defendant. The 1^st Defendant is a person having intellectual impairment. He has to rely on his brothers to help him applying for Legal Aid and prepare his affirmation. He also has been ill for some times. This Court accepts his explanation for being late in his present application. Given a sham arrangement is apparently involved, this Court does not consider the prejudice alleged by the Plaintiff justified. If there were any, the Plaintiff or the related parties are to be blamed for the situation they are in.

Disposition and Orders

81.  By reason of the above, this Court now makes the following orders:

i)   the judgment entered herein in default of notice of intention to defend on 27September 2016 against the 1^st Defendant and the execution issued thereon be set aside on the ground the 1^st Defendant has a meritorious defence to the action;

ii)   the Charging Order Nisi dated 6 October 2016 against the interest of 1^st Defendant in the Property be    discharged and any registration with the Land Registry be vacated;

iii)   the 1^st Defendant be at liberty to defend this action by giving a notice of intention to defend within 14 days from the date hereof; and

iv)   leave granted to the 1^st Defendant to file and serve his Defence within 35 days from the day hereof.

82.  The editor of The Hong Kong Civil Procedure 2019 at para 13/9/17 states that for costs of setting aside a regular judgment, and where the defendant has been at fault, the usual order is for the plaintiff to be awarded costs. However, costs remain a discretion of the court taking into account all circumstances of the case. For the present case, this Court considers it appropriate to, and now do, make an order nisi that the Plaintiff’s costs of the application with certificate for counsel (including all costs reserved) be in the cause, and the 1^st Defendant’s own costs be taxed in accordance with the Legal Aid Regulations. The costs order nisi will be made absolute in 14 days if no application is made to vary the same.

83.  This Court was asked to rule, and in fact, did rule on 3 summonses on 23 November 2017 and 13 December 2017. For the avoidance of doubt, this Court’s decisions are set out below:

A. Plaintiff’s summons dated 17 November 2017

i)   leave granted to the Plaintiff to file and serve the 3^rd affirmation of Yeung Suet Ying;

ii)   costs of the application be to the 1^st Defendant and be assessed summarily at HK$1,500; and

iii)   the 1^st Defendant’s own costs are to be taxed in accordance with the Legal Aid Regulations.

B. 1^st Defendant’s summons dated 8 December 2017

i)   Leave granted to the 1^st Defendant to file and serve his 3^rd Affirmation.

C. Plaintiff’s summons dated 12 December 2017

i)   Leave granted to the Plaintiff to file and serve the 4^th affirmation of Yeung Suet Ying Affirmation.

84.  For the summonses in (B) and (C) above, costs of each application be in the cause, and the 1^st Defendant’s own costs be taxed in accordance with the Legal Aid Regulations