HORACE YAO YEE CHEONG AND ANOTHER v. KEVIN MARK BRADSHAW

HCA 2136/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2136 OF 2009

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REASONS FOR DECISION

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The decision

1. On 26 June 2014, I heard Mr Bradshaw’s application, by way of an appeal against the decision of the Master, to set aside a Tomlin order made on 11 January 2013.  Having heard counsel, I set aside the order with reasons to follow.  These are my reasons.

The factual background

2. By a Shareholders Agreement made in September 2007, (subsequently varied by two Supplemental Shareholders Agreements[1]) the plaintiffs, (collectively, “the Investors”), agreed to invest in a BVI company named Tech Group Global Ltd (“the company”).

3. The investment by the Investors was to be in two forms.  First, the Investors would each subscribe, through company structures they owned, for 2,500 shares in the company at a cost of US$2,500 each.  Mr Bradshaw for his part subscribed, in his own name, for 5,000 shares in the company for a consideration of US$5,000.  Second, the Investors would make a cash injection into the company and arrange for the company to obtain credit financing of US$1 million through a bank in favour of the company.  The requirement of the cash injection was described in a schedule to the Shareholders Agreement in the following terms:

“Subject to due diligence investigation being satisfactory to the Investors, £375,000 by way of cash injection into the Company for repayment of existing bank loans and debts owing to other creditors by Tech UK and Tech USA. Such a cash injection by way of a loan shall be made as and when the fund is required and shall carry interests at the rate of 5% per annum payable quarterly in arrears and reviewable annually.” [sic]

4. Between September and November 2007, the Investors made loan advances to the company, pursuant to the Shareholders Agreement, in the sum of £333,339.

5. The cooperation between the parties was unsuccessful, and on 9 November 2007, they entered into an agreement described as a Shareholders Buyout Agreement.  In that agreement Mr Bradshaw offered to purchase the shares held by the Investors upon terms contained in the Buyout Agreement and to repay the Investor’s loan to the company.  The amount due under the Buyout Agreement (using the expressions in the Buyout Agreement) may be stated as follows[2]:

Loan advances		£333,339
5% surcharge	£16,666
Relocation expenses	£2,184
Consultancy Fees	£28,708
JV setup costs	£1,567
Subtotal		£49,125
	Total due	£382,464 =======

6. Pursuant to the Buyout Agreement, the sum described as “Loan advances” was due for repayment on or before 7 December 2007, and the consultancy fee, 5% surcharge and other sums were due by 31 March 2008.

7. Between April and October 2008, Mr Bradshaw paid to the Investors some £331,018, apparently leaving just £2,320 of the loan advances outstanding, together with the subtotal of £49,125, a grand total of £51,445.

8. In October 2009, the Investors issued a writ against Mr Bradshaw alleging principal and interest due of £132,947, together with accruing interest on a sum described in the statement of claim as “alleged principal” of £89,051, the consultancy fees and the JV setup costs.  By 23 December 2001, a re‑re‑amended statement of claim asserted that the total amount due was £350,005.

9. Defences were filed by Mr Bradshaw to the various re-amendments the statement of claim.  At no stage was it ever asserted by Mr Bradshaw that either the Shareholders Agreement or the Buyout Agreement offended against the provisions of the Money Lenders Ordinance, Cap 163 (MLO).

10. On 11 January 2013, the proceedings were compromised, and a Tomlin order[3] was made staying the proceedings except for the purpose of carrying out the order and the terms contained in the schedule.  Under the compromise, Mr Bradshaw admitted liability to the Investors for sums of £132,947, HK$25,000, US$60,000 plus interest on that sum, and interest on a sum of £89,051. Collectively these sums were described as “the Outstanding Sum”.  It appears that the parties agreed that the Outstanding Sum was equivalent to a total of HK$1.8 million.

11. The schedule to the Tomlin order set out a timetable for the payment of the total of HK$1.8 million.  In default of payment of any instalment the Investors were entitled to charge simple interest at the monthly rate of 2%.  In the event that Mr Bradshaw failed to remedy any default within 21 days, the balance outstanding became immediately due and payable and the Investors were at liberty to enter judgment for the amount due with interest and costs.

12. The Tomlin order contained the following paragraph dealing with Mr Bradshaw’s admission of liability:

“ADMISSION OF LIABILITY

(Mr Bradshaw) admits that (Mr Bradshaw) is liable to the (Investors) in the amount claimed in the respective sums of (1). £132,947.24, (2). HK$25,500 and US$60,000 together with interests thereon and (3). £89,051.46 (‘the Outstanding Sum’).”

13. Between January and July 2013, Mr Bradshaw made payments totalling HK$152,400.  The Investors assert that HK$150,000 was paid, but nothing turns on the difference.  No further payments have been made, and it is not in dispute that Mr Bradshaw is in default on the timetable for payment contained in the schedule to the Tomlin order.

Enforcement of the terms of compromise:

14. With Mr Bradshaw in default, on 10 October 2013, the Investors took out a summons pursuant to Order 27, rule 3 and Order 42, rule 5A of the Rules of the High Court seeking judgment for the sums of sums of £132,947, HK$25,000, US$60,000 plus interest on that sum, and interest on the sum of £89,051.

15. The summons came before the Master on 29 April 2014, and judgment was entered in favour of the Investors.  It is against that order that Mr Bradshaw now appeals.

The grounds of appeal

16. Before the Master it was contended for Mr Bradshaw that the Tomlin order should be set aside because it was arguable that the effective rate of interest charged under the Buyout Agreement exceeded 60% per annum, in breach of section 24 of the MLO, or at least, 48%, which, pursuant to section 25 of the MLO, would enable Mr Bradshaw to have the transaction reopened as being extortionate.  The Master rejected the argument holding that there was no basis upon which the Tomlin order should be set aside.  Instead, the Master, relying upon the principle that a compromise agreement entered into between parties should be enforced, declined to take into account the MLO argument.  The MLO argument has been renewed by Mr Alder (who did not appear below) before me.

Discussion

17. Two authorities must be considered.  They are Mills Conduit Investment Ltd v Leslie & Anor [1931] 1 KB 233 CA and Binder v Auchouzos [1972] 2 QB 151.  Those authorities make it clear that when an application is made to set aside a Tomlin order the court must look carefully at the precise terms of the compromise that has been made between the parties.  The principle that a compromise agreement entered into between the parties should be enforced must be weighed against the court being asked to enforce a transaction which arguably offends against the MLO.

18. In Mills Conduit, money lenders brought an action against two joint and several makers of a promissory note in which interest on part of the principal sum was at the rate of 200% per annum, plainly in breach of the Moneylenders Act 1927 (UK) (MA).  Against one of the defendants, the plaintiffs obtained an order that unless he paid £40 within a specified time, they should be at liberty to sign judgment against him for that amount, and that as to the balance of claim, the defendant should be at liberty to defend on certain conditions.  Afterward, the defendant agreed to submit to judgment for the whole sum, on certain conditions.  No defence had been filed, and consequently no plea had been made prior to the compromise that the terms of the loan offended against the provisions of the MA.

19. The Master refused the plaintiffs leave to sign judgment on the ground that there was no proof that the interest was not harsh and unconscionable.  The plaintiff appealed and the full court of the Court of Appeal held that the defendant’s consent to judgment did not relieve the court of its duty to presume that the interest charged of 200%, and plainly in excess of the 60% limit in the MA, was excessive, and the transaction was harsh and unconscionable unless the contrary was proved.  Lord Hanworth MR, in whose judgment the other five members of the court[4] agreed, said, at p 239:

“It has been argued that (the fact that the interest was not excessive nor was the transaction harsh and unconscionable) has been proved, and the presumption rebutted by reason of the consent given by (the defendant) that judgment should be signed against him; that it was the duty of the Master to give effect to that consent and give the (moneylenders) leave to sign judgment subject only to the condition of a stay of execution until May 4. We do not take that view. The consent of the parties cannot relax the duty or lessen the powers of the Court.”

20. The justification for the position adopted was that a judge’s order obtained by consent, staying proceedings upon payment of the debt and costs, could and ought to be set aside if the act (of entering judgment) was inconsistent with justice.  It was held that the duty of the court was to observe, respect, and carry out the direction in the Moneylenders Act, and to presume that the interest was excessive and transaction harsh and unconscionable until the contrary was proved.  To act otherwise would be inconsistent with justice.

21. Mills Conduit was relied upon by a debtor in Binder, who, having failed to keep to the terms of a compromise, contended that the compromise agreement was unenforceable and illegal by virtue of the MA.  The Court of Appeal declined to reopen the matter, holding that the courts should enforce compromises agreed in good faith between lender and borrower: see pp 158A‑B, 159E, H, and 160C.

22. In that case, the compromise agreement contained the following provisions:

“(5) The plaintiffs and the defendant and Helmville Ltd having each respectively been advised by solicitors and counsel to the matters herein dealt with have agreed to resolve their differences as hereinafter set out.

(6)  The defendant and Helmville Ltd admit and recognise that the transactions the subject of the said actions were not transactions to which any provision of the Moneylenders Acts applied and that none of the plaintiffs was any material time carrying on business as a money lender.”

23. Unlike the situation in Mills Conduit, the parties had specifically compromised the allegation under the provisions of the Moneylenders Acts.  The compromise agreement was held to be a bona fide compromise of a question of fact as to whether the original loans were unlawful moneylending transactions and the principle that courts should enforce compromises agreed in good faith must apply.

24. Lord Denning MR said, at pp157G‑158A:

“There are two competing considerations. On the one hand the Moneylenders Acts are for the protection of borrowers. The judges will therefore, not allow a moneylender to use a compromise as a means of getting round the Act. They will inquire into the circumstances giving rise to the compromise. They will not allow the moneylender to take unfair advantage of the borrower. Even if the borrower consents to judgment being entered against him, the courts will go behind that consent, if the justice of the case so requires. For instance, where the interest charged was so high that it was presumed to be harsh and unconscionable the court refused to enforce a consent to judgment: see Mills Conduit Investments Ltd v Leslie [1932] 1 KB 233.

On the other hand, it is important that the courts should enforce compromises which are agreed in good faith between lender and borrower.  If the court is satisfied that the terms are fair and reasonable, then the compromise should be held binding.  For instance, if there is a genuine difference as to whether the lender is a moneylender or not, then it is open to the parties to enter into a bona fide agreement of compromise.  Otherwise there could never be a compromise of such an action.  Every case would have to go to the court of final determination and decision.  That cannot be right.”

25. The distinction between the two cases is clear. 

26. In Mills Conduit the moneylenders point was never raised and never compromised.  In Binder, the moneylenders point had been raised, and the solicitors had been careful to make it clear in the compromise document that the issue as to whether or not the lenders were moneylenders was compromised with an agreement that they were not.  That factual compromise was honoured by the court.  It is plain from the judgments in Binder that had the compromise document not included a compromise of the moneylenders issue, the justice of the situation would have required that transactions be reopened.

27. In the present case the issue as to whether or not the transactions contained in the Shareholders Agreement and the Buyout Agreement constitute transactions in which the interest rate exceeded either 60%, by which pursuant to section 24 of the MLO, the transaction would be unenforceable, or exceeded 48%, by which, pursuant to section 25 of the MLO is presumed to be extortionate, and would entitle Mr Bradshaw to ask the court to reopen the transaction so as to do justice between the parties, has not been resolved.  It is plain from the terms of the compromise agreement, set out in para 12 above, that there has been no compromise at all of any issue under the MLO. That paragraph constitutes the whole of the compromise as to the facts.  The remainder of the Tomlin order merely sets out the terms of payment and the consequences of failure to pay.

28. I am satisfied from the spreadsheets put before me as part of the evidence in support of the application that there are strong arguments in Mr Bradshaw’s favour to say that there are aspects of the Shareholders Agreement and the Buyout Agreement which potentially offend both sections 24 and 25 of the MLO. 

29. I should make it clear that I have made no decision in that respect.  Whether the argument will succeed is an issue which must be litigated between the parties or be the subject of a compromise by them.  Should the issue be compromised, and it agreed between the parties that both the Shareholders Agreement and the Buyout Agreement do not offend the MLO, it is plain from Binder that the court would uphold that compromise.

Conclusion

30. In those circumstances I was left in no doubt at all that it was my duty to set aside the Tomlin order to allow Mr Bradshaw to raise the moneylenders issues.  I accordingly ordered that the Tomlin order be set aside.  Sensibly, the parties said they were likely to be able to agree upon a timetable for the filing of the appropriate papers to raise the issues squarely before the court.  Leave is reserved to apply should agreement not be reached by 4 pm on Monday on 21 July.

Costs

31. Mr Bradshaw has been successful in his application.  He is entitled to his costs both in this court and below.  Schedules for summary assessment of costs have been presented to me by solicitors.

31.  In making that assessment I have had regard to the fact that the statement of costs deals with the costs below as well as the costs in this court.  I am satisfied that the charge out rates and attendances recorded are, in the circumstances, fair and reasonable.  I note that the charge out rates are in accordance with Circular 08-213 (PA) published by the Law Society.  In approving counsel’s brief fees I have had regard to the fact that both have extensive experience as litigation solicitors prior to their call to the bar.

32. With one exception only, I am satisfied that the costs claimed are fair and reasonable, and they are accordingly approved.  That exception is the claim for the professional fees of certified public accountants engaged in the assessment of the interest rates. It will be an issue in the ultimate trial as to whether or not the moneylenders issue, which appears to be entirely dependent upon the determination of the interest rates, will succeed.  If it does, Mr Bradshaw will be entitled to the cost of the accountants work.  If it fails, he will not be entitled to that sum.  I accordingly do not award that sum at this stage, but record that it will be at large until the conclusion of the proceedings.