LEI SHING HONG CREDIT LTD v. KINGSFINE INTERNATIONAL LTD AND ANOTHER

HCMP 1169/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1169 OF 2016

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DECISION

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A. Introduction

1.  This is the hearing of a mortgagee action commenced by originating summons pursuant to Order 88, Rules of the High Court (“RHC”).

2.  The plaintiff is a licensed money lender.  By a First Legal Charge dated 12 August 2015 (“the Legal Charge”), the 1^st defendant charged the property known as Flat A, 24^th floor, Block 11, Wonderland Villa (“the Property”) to the plaintiff to secure repayment of all sums owed by the 1^st defendant to the plaintiff.  In addition, by a Deed of Guarantee dated 11 August 2015 (“the Guarantee”), the 2^nd defendant guaranteed payment of the 1^st defendant’s debts owed to the plaintiff.

3.  By letters dated 11 April 2016, the plaintiff’s solicitors demanded the defendants for repayment.  There was no reply.  Hence, the plaintiff commenced these proceedings on 10 May 2016.

4.  By a summons dated 12 December 2016, the plaintiff also applied for interim payment in the sum of $8,700,000 pursuant to Order 29, rule 10, RHC.  However, Mr Hon confirmed that the plaintiff had decided not to pursue this summons.

5.  In principle, it is not in dispute that, although the matter is litigated by way of Order 88 procedure, the court can give judgment summarily in favour of the plaintiff if there is no triable issue on the evidence (Bank of China (Hong Kong) Ltd v China Hong Kong Textile Co Ltd [2011] 4 HKLRD 457 at 459, §5).

B.   The defendants’ defence

6.  Pursuant to a facility letter dated 6 August 2015 (“the Facilities Letter”), the plaintiff granted to the 1^st defendant a loan of $8.7 million (“the Loan”).  The Loan was divided into 2 parts: (a) $3 million as Instalment Loan and (b) $5.7 million as Revolving Loan.  In respect of the Instalment Loan, it was for a period of 10 years at the interest rate of 10% per annum; it should be repaid by 120 equal monthly installments of $39,645.22 each.  In respect of the Revolving Loan, it was for a period of 1 year at the interest rate of 10% per annum; the interest shall be repaid on a monthly basis whereas the principal shall be repaid in full one year after the advance.  In addition, for the Loan, the 1^st defendant shall pay service charge for any outstanding amount due but not paid from the due date at 4% per month on a daily basis.  The Legal Charge and the Guarantee are the security provided by the defendants to secure the Loan.

7.  In short, on the grounds to be set out in more detail below, the defendants raise two defences:

(a) He was procured by misrepresentations made by an agent of the plaintiff to sign the Facilities Letter.  The Facilities Letter should be set aside.  That being the case, the Legal Charge and the Guarantee should also become invalid and be set aside.

(b) The service charge under the Facilities Letter is a penalty under the common law, and is therefore unenforceable.

8.  The 2^nd defendant is the only director and shareholder of the 1^st defendant. He received education up to primary 3 only, and does not know English.

9.  He said that in late June or early July 2015, he received in his letter box a pamphlet issued by one GIFC, with the contact details of one Lann Chu (“Chu”).  At that time, the Property was already subject to a mortgage but he intended to refinance the mortgage in order to save interests.  Hence, he contacted Chu. In fact, at that time, he knew Chu already. On Chu’s name card, he was described as a Senior Financial Specialists. The 2^nd defendant believes that Chu’s employer acted as agent for money lenders.

10.  In response to the 2^nd defendant’s inquiries, Chu recommended the plaintiff.  The 2^nd defendant said that in the afternoon on 28 July 2015, he met Chu at the Starbucks coffee shop in the shopping mall known as Elements.  Chu represented that the plaintiff offered to lend $8.7 million with the interest rate of 10% per annum; the loan shall be repaid within 36 months; for the 1^st to 35^th month, only interest would need to be paid whereas the principal in full plus interest shall be repaid in the 36^th month; in addition, the defendants shall execute the Legal Charge and the Guarantee as security for such loan (“the 1^st Representation”).

11.  The 2^nd defendant accepted the offer. In early August 2015, Chu made an appointment to meet him at a solicitors’ office.  On 11 or 12 August 2015, he attended the solicitors’ office Eric Yu & Co to sign the legal documents.  He and Chu was attended by a legal clerk, one Mr Kong Chi Leung (“Kong”).  The 2^nd defendant signed the Facilities Letter, the Legal Charge and the Guarantee. Kong did not explain the documents to him before he signed on them.  As he does not know English, he asked Chu whether the terms of the Loan were the same as those contained in the 1^st Representation; Chu answered in the affirmative (“the 2^nd Representation”).

12.  The 1^st defendant repaid the Loan by direct debit through an account at Hang Seng Bank.  Upon receiving the bank statement in early October 2015 for the month of September 2015, he discovered that a sum of $91,179.47 had been deducted as repayment whereas, according to the 1^st and 2^nd Representations, it should be $72,500 only ie the monthly interest at 10% per annum for the principal of $8.7 million.  In reply to his inquiries, Chu said that there were some miscellaneous charges.  However, as he was busy, he did not follow up with Chu on what those charges in fact were.  In early November 2015, he received the bank statement for the month of October 2015.  He noted that a sum of $83,371.25 had been deducted, which was again more than $72,500.  He decided to stop his authorization regarding the direct debit until Chu had clarified the position.

13.  After the plaintiff commenced this action in May 2016, he sought legal advice in late October 2016.  After the solicitors explained to him the terms of the Loan as set out in the Facilities Letter, he noted that they were different from the 1^st and 2^nd Representations including the period of the loan and the monthly repayment amount.  Had he known the terms of the Facilities Letter, he would not have agreed to sign the said loan documents.

C.  Analysis

C1. The defence of misrepresentation

14.  Mr Hon made essentially 4 points to support his submissions that the defence of misrepresentation is unbelievable and unarguable.

15.  First, he submitted that it is unbelievable that Chu made the 1^st or 2^nd Representations; he said there was no conceivable motive on the part of Chu to do so.  I do not agree that this is a factual issue that can be resolved summarily:

(a) First, the plaintiff describes GIFC as a “mortgage loan broker”. It may be in the interest of Chu to offer terms which the 2^nd defendant found to be acceptable in order to close a deal.

(b) In any event, motive is only one of the relevant considerations. An unusual feature of this case is that there was never any direct contact between the 2^nd defendant and the plaintiff’s staff.  All relevant communications were conducted between Chu and the 2^nd defendant.  And there is no written record of such communications.  Nevertheless, apparently, the only person who could have offered terms of the loan to the 2^nd defendant was Chu.

(c) The Facilities Letter was apparently a standard document which contains the following statement at the end:

“The place of negotiation and completion of the agreement for the loan is at the office of LEI SHING HONG CREDIT LIMITED at 8^th Floor, New World Tower 1, 18 Queen’s Road Central, Hong Kong.”

This is clearly an untrue statement.

(d) Chan Yee Han, the Credit Operations Manager of the plaintiff, said in her affirmation that Chu denied making the 1^st or 2^nd Representations.  However, Chu was unwilling to make any affirmation to confirm what he said on oath.

16.  Second, Mr Hon submitted that GIFC (Chu’s employer) was acting as the defendants’ agent and hence, the plaintiff shall not be liable for any misrepresentation made by Chu.  Again, I am not satisfied that this issue cannot be resolved summarily:

(a) As mentioned, the plaintiff describes GIFC as a mortgage loan broker, and its principal business is to source the relevant finance companies and/or banks offering the favourite terms on behalf of the clients/ borrowers; GIFC has business connections with different finance companies and banks.

(b) It is unclear whether there is a universally accepted profession known as “mortgage loan broker”.  In any event, there does not appear to be any judicial authority which decided on the legal status or capacity of such broker.

(c) It appears to me whether any representation made by such broker should be considered to be made on behalf of the lender or the borrower would depend on the facts of each case, in particular, the content and purpose of the representation.  When the representation is concerned with the terms of a loan that the lender is prepared to offer, it seems arguable that it is made on behalf of the lender.

(d) Further, in this case, the 2^nd defendant said he had not paid any fee to GIFC. Hence, it can be inferred that the plaintiff must have paid some broker’s fee or service charge to GIFC.  This will be a factor supporting that GIFC was acting as the plaintiff’s agent.

17.  Third, Mr Hon submitted that, the 2^nd defendant is a seasoned businessman and used to be the chairman of the listed company, and he had previous experience of signing similar legal documents; hence, it is unbelievable that he had relied on the 1^st or 2^nd Representations (assuming that there were such representations).  Again, I do not think this is a factual issue that can be resolved summarily:

(a) The important point in the present context is that all relevant documents were in English.  The fact that the 2^nd defendant is an experienced businessman is of secondary importance.  In addition, the previous dealings between the defendants and the plaintiff do not appear to me to be of any real significance; each transaction ought to be considered on its own facts; the fact that there is no suggestion that the defendants were induced by misrepresentations to enter into the previous dealings does not logically support any inference that there was no misrepresentation on this particular occasion.

(b) Although Chan Yee Han claimed that Kong had explained the terms of the legal documents to the 2^nd defendant, Kong has not given any affirmation evidence.  Moreover, as mentioned, the Facilities Letter contains at least one untrue statement.  Had all documents been explained in detail as claimed by the plaintiff, I would have thought that the untrue statement would have been discovered and deleted.

(c) While the 2^nd defendant had signed on a number of documents at the solicitors’ office acknowledging that he had been advised to seek independent legal advice, etc., most of these documents were in English. More importantly, none of them contained any admission that the 2^nd defendant knew and understood the terms of the Facilities Letter.

(d) The 2^nd defendant may well be careless in not seeking independent legal advice or taking other steps to acquaint himself with the content of the relevant legal documents.  However, it is trite that carelessness on the part of the representee does not, by itself, defeat the defence of misrepresentation.

18.  Fourth, Mr Hon submitted that, in any event, the defendants have affirmed the Legal Charge and the Guarantee as well as the Facilities Letter by continuing to make random repayments even after discovering that the alleged 1^st and 2^nd Representations were untrue.  Mr Hon, however, fairly accepted Mr Fong’s submission that, in law, there cannot be a valid affirmation unless and until the person in question has knowledge of his right to elect ie to rescind or affirm the agreements in issue (Large Land Investments Ltd v Cheung Siu Kwai Pansy [2002] 4 HKC 652 at [15]). According to the 2^nd defendant, he only became aware of his legal rights in late October 2016.  Mr Hon submitted that this is a point that goes to whether it is believable that Chu made the alleged misrepresentations. While I agree that the 2^nd defendant’s conduct and reaction must be a relevant factor in considering the overall credibility of his case, for reasons already stated, I am not convinced that the 2^nd defendant’s assertions can be regarded as unbelievable even if this additional factor is taken into account.

19.  For the above reasons and without expressing any view on the merits of the defendants’ case, I am satisfied that there is a triable issue, or arguable case, of misrepresentation.  If the 2^nd defendant signed the Facilities Letter as a result of the alleged misrepresentations, in the absence of any suggestion that there is any bar to the remedy of rescission, the 2^nd defendant would be entitled to elect to rescind the loan agreement as evidenced by the Facilities Letter. As mentioned, the Legal Charge and the Guarantee were executed as security to secure the repayment of the loan under such loan agreement. If the loan agreement is set aside, no loan or interest would be repayable pursuant to such agreement as a matter of law.  It would follow that the plaintiff would not be entitled to enforce the Legal Charge or the Guarantee.  Mr Fong accepted that, if the Facilities Letter is rescinded, the 1^st defendant would still be liable to repay the outstanding principal sum that the plaintiff has actually advanced to the 1^st defendant. However, the plaintiff cannot claim any contractual interest; and the 2^nd defendant would not be personally liable for the amount advanced.

C2.   The defence of penalty

20.  As mentioned, in the Facilities Letter, there is a provision providing that the 1^st defendant shall pay “service charges” at 4% per month on a day to day basis for any outstanding amount due and not paid from the due date to the date of payment.

21.  Mr Fong confirmed that the only point that he is taking in this respect is that such provision amounts to a penalty under the common law; there is no suggestion that it contravenes any statutory provision in the Money Lenders Ordinance.

22.  Mr Ho submitted that whether such “service charge” is a penalty can and should be determined by me summarily.  Among other things, he submitted that the payment of such service charge is prospective and proportionate and can be justified because of the higher credit risk once there is default in repayment; it is not for the entire period of the loan; and the court should not set too stringent a standard to upset a commercial agreement reached at arm’s length.

23.  While I agree that all these are pertinent factors in considering whether the service charge is a penalty, I am not convinced that this is an issue that I can and should determine summarily:

(a) It is interesting to note that, in the plaintiff’s accounting records, the service charge was described as “penalty”.  Although the label cannot be conclusive, this is arguably a factor supporting that such charge was indeed intended by the plaintiff to be a penalty in law.

(b) More importantly, in Lei Shing Hong Credit Ltd v Accufast Ltd HCMP1749/2014 (23 March 2016, unreported), which involved the same plaintiff, A Chan J held that the same provision is arguably a penalty instead of a genuine estimate of loss.  The learned judge observed that there was no evidence justifying the very high service charge; and that the loan was already secured by a legal charge over a property which was worth more than the outstanding loan.  Similar observations may be made in this case.

24.  Although the amount of service charges appears to be very modest, the plaintiff has not abandoned its claim in this respect.  Had this been the only arguable issue, I would have been tempted to consider whether there is any way to deal with this issue separately from the other claims made by the plaintiff.  However, as I have already concluded that there is an arguable case on the defence of misrepresentation, all the plaintiff’s claims must go to trial.

D.  Conclusion and orders

25.  As mentioned at the outset, the plaintiff has abandoned its application for interim payment. Hence, Mr Hon accepted that the plaintiff’s summons dated 12 December 2016 should be dismissed with costs to be taxed if not agreed.

26.  As to the originating summons herein, I shall order that the matter be continued as if begun by writ.

27.  While the matter needs to go to trial, I take the view that the matter ought to be resolved as soon as practicable without any undue delay.  To achieve this objective, at the hearing, I invited parties to agree on a timetable in case I conclude that the matter cannot be resolved summarily. In the light of the agreed proposed timetable, I give the following directions:

(a) the plaintiff to file and serve its statement of claim within 14 days of the date of handing down of this Decision;

(b) the defendants to file and serve their defence and counterclaim (if any) within 28 days thereafter;

(c) the plaintiff to file its reply and defence to counterclaim (if any) within 14 days thereafter;

(d) the parties to file and exchange their lists of documents within 28 days after close of pleadings with inspection of documents to take place within 14 days thereafter;

(e) the parties to file and exchange witness statements should be exchanged within 28 days after inspection of documents, and affirmations already filed may stand as witness statements if the parties so wish; and

(f) Liberty to apply.

28.  As to costs of this hearing, I take the view that such costs should be in the cause.