HKSAR v. GOOD TIME FINANCE LTD

HCMA 835/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO 835 OF 2009

(ON APPEAL FROM TWS 2070 OF 2009)

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J U D G M E N T

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1.  The Appellant was convicted after trial of one count of lending money at an effective rate of interest which exceeds 60% per annum, contrary to section 24 of the Money Lenders Ordinance, Cap 163.

Facts of the case

2.  As the grounds of appeal relate solely to the law, I need only briefly deal with the facts in this case.  PW1 had borrowed from the Appellant a principal sum of $160,000 to be repaid with interest by 60 equal monthly instalments of $7,086 each.   The Loan Contract was exhibited (Exhibit P1) which stated that the actual annual rate of interest was 33.15%.  PW1 paid 3 instalments of $7,086 each, after which he defaulted.

3.  PW2, Ms Lai, a treasury accountant, applying the provisions of Schedule 2 of Cap 163, had calculated the effective annual rate of interest (also known as true annual rate of interest) was 65.2%, which is in excess of the statutory limit of 60% per annum.  Her calculations were exhibited as Exhibit P5.

4.  The case for the defence was that since the actual annual rate of interest, namely 33.15%, had been specified in the Loan Contract, Schedule 2 had no application.  However, it was admitted by the Appellant that the interest of 33.15% was calculated with reference only to the total interests of $265,160 on the loan of $160,000 payable over the 60‑month duration of the Loan Contract, and had not taken into account the repayment of the principal.  This admission tally with PW2’s observation that the rate of 33.15% had not taken into account the fact that with each instalment payment the principal was steadily reducing.

5.  The defence, alternatively, relied on the Loan Repayment Table for PW1’s loan (Exhibit D1) which purportedly showed the actual rate of interest was 48%.  However, PW1’s evidence was that he had never seen the Loan Repayment Table and had never agreed to the appropriation of the instalment payments suggested there.  PW2 giving evidence about that Loan Repayment Table, said that the effective or true annual rate of interest was not 48% but 60.29% because the rate of 48% had not taken into account the multiple compounding of the monthly outstanding interests and the annualization of the monthly interest rate for each instalment payment.

6.  The only defence witness, Ms Yan, explained the normal procedure of the Appellant company in handling loan applications and also produced an internal computer record showing that the Appellant had paid the first 3 instalment payments and that those payments had been appropriated between principal and interest in accordance with the Loan Repayment Table.

Magistrate’s finding

7.  The Learned Magistrate considered the case of Kwok Ying Lung v Ko Chi Hung & Anor [2001] 3 HKC 480 and in particular the judgment of Yuen J (Yuen JA as she then was) at p492B :

“ The ‘actual rate’ there referred to is the first means in s18(2)(i) of formulating interest payable, ie ‘the rate of interest charged on the loan expressed as a rate per cent per annum’. That rate must by definition be a single, constant rate charged on the entire loan. The language does not admit of a rate varying from time to time.

Therefore, it cannot apply to agreements where repayments comprise elements of both principal and interest. In those agreements, with each (say, monthly) repayment the principal is steadily reduced. Even though the borrower is making the same monthly repayment at ostensibly the same rate of interest, the truth is that (since the principal is steadily reducing) there is a hidden increase in the interest rate. There is no single constant rate of interest and the ‘actual rate’ formulation does not apply.

In those situations, the second formulation in s18(2)(i), ie the statutory calculations, is applied by s2(2).  According to Schedule 2, the repayments have to be appropriated between principal and interest, to arrive at a ‘statutorily averaged’ true rate of interest for that agreement.”

8.  Therefore, the Learned Magistrate found that the Appellant was lending money to PW1 at an excessive rate and that the true rate was 65.2% and therefore convicted the Appellant.

Appeal

9.  Though the trial was heard in Chinese, on the application of the Appellant, the appeal was heard in English.  Mr McCoy, on behalf of the Appellant, submitted several Grounds of Appeal Against Conviction, but at the hearing, he relied basically on the first 4 Grounds of Appeal Against Conviction :

(1)     The Learned Trial Magistrate erred in law in finding an “actual rate” of interest at 65.2%, calculated in accordance with the Schedule 2 (“the Schedule”) of the Money Lenders Ordinance, Cap 163 (“the Ordinance”) was to apply in the present case and rejected the actual rate, ie, the rate of interest per annum at a flat rate of 33.15%, provided in accordance with s 18(2)(i) of the Ordinance in P1, when it was held in Kwok Ying Lung v Ko Chi Hung [2001] 3 HKC 480 that the Schedule has no application when an actual rate was specified.

(2)     Further or alternatively, the Learned Trial Magistrate erred in law in that he failed to give any or any sufficient consideration to the fact that 33.15% was a simple and constant rate of interest.

(3)     Further or alternatively, the Learned Trial Magistrate erred in law and in fact that he failed to give any or any sufficient consideration to the fact that the interest payable under P1 was capable of being expressed in terms of an actual rate per annum, although the instalment payment of $7,086 was not purely a payment of interest and could not be used as the basis to work out the simple rate of interest or the actual rate.

(4)     Further or alternatively, the Learned Trial Magistrate erred in law in that he failed to give any or any sufficient consideration to Exhibit D1 which showed that the rate of interest payable under P1 was a simple actual rate of at 48% per annum.

10.  At the beginning of the hearing of this appeal, Mr McCoy applied to this court to transfer the appeal to the Court of Appeal on the ground that an important and complicated point of law is involved.  However, it is not a point which I consider to be so complicated as to have to trouble the Court of Appeal at this stage, so I refused the invitation from Mr McCoy.

11.  Mr McCoy argued that the Contract between PW1 and the Appellant stated clearly that the loan will be repaid in 60 instalments of $7,086 each and that the interest rate is 33.15% per annum and this was in compliance with the Money Lenders Ordinance.  In the case of Kwok Ying Lung v Ko Chi Hung [2001] 3 HKC 480, Le Pichon JA held that where an actual rate is specified in the note or memorandum, the Schedule 2 of the Money Lenders Ordinance for calculating interest rate would have no application as the calculations in the Schedule are only relevant to produce a deemed rate, therefore in this case, where the rate of interest is specified in the Contract, then Schedule 2 has no application.

12.  It is therefore of assistance to set out the words of Le Pichon JA in her leading judgment at p489D‑I:

“ s18(2) of the Ordinance specifies the matters that have to be set out in the note or memorandum relating to a loan by a moneylender and includes, amongst others, the following :

“(i) the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2 … .”

It contemplates that the rate of interest charged could be stated in one of two ways. There is a parallel provision in the 1927 Act, namely, s6(2), the effect of which has been considered by the English Court of Appeal. In Askinex Ltd v Green [1969] 1 QB 272, Lord Denning MR, held (at 281F‑282A) :

“… s6(2) … gives the moneylender a choice between two alternatives, which I would call Alternative (A) and (B). The choice is between stating an actual rate and a deemed rate. The first alternative (A) applies when the interest charged on the loan (ie, the total amount payable in money over the full period) is capable of being expressed in terms of a simple actual rate per cent per annum over that period. In such a case the moneylender satisfied the statute by stating that rate in the memorandum. The second alternative (B) applies when the total sum of interest is not capable of being expressed in terms of a single actual rate per cent per annum, with the result that resort must be had to a deemed rate. In this second alternative the moneylender has to ascertain the deemed rate by making the calculation prescribed in the First Schedule and he must state in the memorandum that it is ‘calculated in accordance with the provisions in the First Schedule’ to the Act.

So where an actual rate is specified in the note or memorandum, the schedule has no application. The calculations in the schedule are only relevant to produce a deemed rate only where the total sum of interest is not capable of being expressed in terms of an actual rate per cent per annum, for example, where a loan is repayable by a number of instalments, each instalment comprising principal as well as interest.

I would respectfully adopt the same construction for s18(2)(i) of the Ordinance … .”

13.  Mr Cheng, for the Respondent, very aptly pointed out that Lord Denning MR in the case of Askinex Ltd v Green [1969] 1 QB 272 had given an example where the total sum of interest is not capable of being expressed in terms of the simple actual rate per cent per annum (ie the second Alternative (B)) at p282E‑G of the judgment :

“ To illustrate the second alternative (B), I would take the case where a moneylender makes a loan of £24,000 repayable with interest over 10 years at £450 a month. Each instalment is payable in a lump sum to include both principal and interest without splitting them up (similar to hire‑purchase transactions where the monthly instalments are not split up). Under such a contract it is impossible to calculate an actual rate of interest : for the simple reason that you do not know how much is paid off the principal each month and how much off the interest. … You cannot express that transaction in terms of a single rate per cent per annum over the whole ten years. Faced with this difficulty, the First Schedule tells the moneylender how to calculate the deemed rate. …”

Thus, Mr Cheng made the point that, in this case, the 60 lump sum instalments of $7,086 each included both principal and interest as stated in Clauses 1 and 7 of the Loan Contract.  Mr Cheng also submitted that the judgment of Yuen J (Yuen JA as she then was), in the case of Kwok Ying Lung cited above, also applies to the Appellant in the present case, as he had admitted, in Exhibit D2, that the purported annual rate of interest of 33.15% was calculated with reference only to the total interests payable and had not taken into account the repayment of the principal which was steadily reducing. Therefore, Mr Cheng pointed out the rate of 33.15% was not the true or effective actual annual rate of interest arrived at by the only other permissible formulation permitted under s18(2)(i) of Cap 163 for the exclusion of Schedule 2.

14.  Mr McCoy argued, however, that the words of Yuen J (Yuen JA as she then was) were obiter and therefore this court should be circumspect in following it as the point had not been fully argued in the Court of Appeal.  Therefore Mr McCoy argues that the ratio of Kwok’s case was that the Schedule had no application if the actual rate had been specified in the Contract.

15.  Mr McCoy also questioned the presence in section 2, the interpretation section, of the word “effective rate” which does not appear in the UK legislation. Section 2 provides as follows :

“(1) In this Ordinance, unless the context otherwise requires –

…

‘effective rate’, in relation to interest, means the true annual percentage rate of interest calculated in accordance with Schedule 2.

(2) For the purposes of this Ordinance, where by an agreement for the loan of money the interest charged on the loan is not expressed in terms of a rate, any amount paid or payable to the lender under the agreement (other than simple interest charged in accordance with the proviso to section 22) shall be appropriated to principal and interest in the proportion that the total amount of principal bears to the total amount of the interest, and the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2 shall be deemed to be the rate of interest charged on the loan.”

16.  Yuen J (Yuen JA as she then was) had astutely made the point at p492E‑G :

“ As for the argument that the words ‘effective rate of interest’ in s24 and s25 mean only the rate according to the statutory calculations, that could not have been the legislature’s intention when s24 and s25 are read in the context of s18(2)(i).

The purpose of enacting s18(2) was to inform the borrower of facts relating to his loan. Those facts must obviously be true facts. So when the legislature provided for the two formulations of interest in s18(2)(i), the legislature was indicating that the true rate of interest may be arrived at by either one or the other formulation (depending on whether there was a single constant rate to enable the first formulation to apply). There is no reason why it would reject that concept in another part of the statute.

The definition in s2(1) of ‘effective rate’ as the ‘true annual percentage rate of interest calculated according to Schedule 2’ is qualified by the words ‘unless the context otherwise requires’. In the context of a single constant rate of interest under the first formulation in s18(20(i), the ‘true annual percentage rate of interest’ is just that.

17.  As pointed out by Mr Cheng in Kwok’s case, a single constant simple actual rate of the interest could be deduced from the clear terms of the loan in that case, although an ‘actual rate’ was not stated in the loan agreement and it is for that reason that Le Pichon JA had said that Schedule 2 had no application and Mr Cheng submitted that the interest charged in this case was not capable of being expressed in terms of a single constant simple ‘actual rate’.

18.  Having reviewed the cases that have been put before me in particular the cases of Kwok Ying Lung and Askinex, I am left in no doubt that the present case falls squarely within the category of cases envisioned by the legislature and which Yuen J (Yuen JA as she then was) very clearly explained, ie the total sum of interest is not capable of being expressed in terms of a single constant simple actual rate because one does not know how much is paid off the principal and how much off the interest each month, so the Learned Magistrate was clearly right in convicting the Appellant of the offence. The appeal is therefore dismissed.