YEUNG SO LAI v. ART EXCEL LTD

CACV 413/2024, [2025] HKCA 957

On Appeal From [2024] HKCFI 2302

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 413 OF 2024

(ON CIVIL APPEAL FROM HCSD NO. 21 OF 2024)

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JUDGMENT

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Hon Cheung JA (giving the judgment of the Court) :

1.  This is an appeal by the Respondent against the judgment of Deputy High Court Judge Yuen (‘the Judge’) who set aside the statutory demand issued by the Respondent against the Applicant.

I.  Background

2.  The background of the case is succinctly outlined by the Judge which we will gratefully adopt.

1)  Loan Agreement

3.  On 21 December 2022, a Loan Agreement was signed between the Respondent (‘the Lender’), a company as borrower (‘Borrower’), and the Applicant together with another individual as guarantors.

4.  Under the Loan Agreement, the Lender agreed to lend $120 million to the Borrower for a period of 24 months at 17.5% per annum interest, guaranteed by the two guarantors.

5.  The loan was also secured by Second Mortgages on three properties owned by companies (‘mortgagor companies’) which were not parties to the Loan Agreement (‘Third party-owned security’). The mortgagor companies are wholly legally and beneficially owned by a company named RR Co Ltd (‘RR’) which is in turn wholly legally and beneficially owned by the Applicant.

2)  Fee Letter

6.  On the same day as the Loan Agreement, a Fee Letter was signed between the Borrower and a company named KK Ltd as introducer (‘Introducer’). Under the Fee Letter, the Borrower agreed to pay the Introducer an introducer fee in an amount equals to 9% of $120 million ($10.8 million) upon drawdown of the loan under the Loan Agreement.

7.  It was provided in the Fee Letter that :

(1)  any amount due and payable under the terms of the Fee Letter shall be an amount payable under the Loan Agreement (Clause 2.4).

(2)  if the Borrower fails to pay any sum payable under the Fee Letter on the drawdown date in accordance with the Loan Agreement, interest equivalent to 35% per annum shall accrue on the overdue sum from the due date to the date of receipt (Clause 6.1).

8.  The Fee Letter was signed on behalf of the Introducer by a person named PP, who was described as its executive director.

9.  The sum of $120 million was drawndown on the date of the Loan Agreement.

10.  On the same day, the Borrower paid the sum of $10.8 million to the Introducer by cheque. A copy of the cheque was signed by a person named WW who had also signed the Loan Agreement on behalf of the Lender as ‘the authorized representative for and on behalf of [AC] as sole director and corporate director for and on behalf of’ the Lender.

3)  Letter of demand

11.  On 21 March 2023, the Borrower failed to pay interest of $5,235,616.44. The next day, the Lender’s solicitors demanded this sum as outstanding interest, as well as default interest from that date until the outstanding interest is fully repaid.

4)  Statutory demand

12.  On 18 January 2024, the Lender issued a statutory demand for outstanding principal of $120 million, and outstanding interest pursuant to the Loan Agreement up to 21 December 2023 of $5,235,616.44 (excluding default interest).

13.  On 23 April 2024, the statutory demand was served on the Applicant by advertisement.

5)  Application to set aside statutory demand

14.  On 10 May 2024, the Applicant applied to set aside the statutory demand. She filed an affirmation on the same day. The Lender filed an affirmation of WW in opposition.

II.  Grounds advanced by the Applicant below

15.  The Judge set aside the statutory demand. The Applicant relied on four grounds to set aside the statutory demand. The Judge accepted one of her grounds, namely, the Lender is an unlicensed money lender; consequently, pursuant to section 23 of the Money Lenders Ordinance, Cap. 163 (‘MLO’), the loan is not recoverable (‘Unlicensed money lender ground’).

16.  The Judge rejected the other three grounds relied upon by the Applicant, namely :

1)  the Lender holds the three Second Mortgages as security, the value of which equals or exceeds the debt and the statutory demand should be set aside under Rule 48(5)(d) of the Bankruptcy Rules (Cap. 6A) (‘Security ground’);

2)  the Fee Letter was a sham, and the Introducer was the Lender’s agent; consequently, the Borrower’s payment of $10.8 million to the Introducer constituted partial repayment of the loan; as such, the amount of the debt has been overstated by at least that sum (‘Overstatement of Debt ground’);

3)  alternatively to 2), the sum of $10.8 million should be treated as interest as it satisfies the definition of ‘interest’ under section 2 of the MLO as follow :

‘ amount (by whatever name called) in excess of the principal, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan;’

if this sum of $10.8 million is treated as interest, in addition to $5,235,616.44 demanded as interest as at 21 March 2023, the effective rate of interest would amount to 53.6% [$10,800,000 + $5,235,616.44)/(91/365) x 100%] which under section 25 of MLO would entitle the Court to reopen the transaction (‘Interest ground’).

III.  The Judge’s reasons

1)  Unlicensed money lender ground

17.  The Judge noted that it is common ground that the Lender is not licensed under the MLO and the Applicant therefore submitted that under section 23 of the MLO, the loan is not recoverable. The Judge went on to consider the Lender’s submission that the loan is an exempted loan under paragraph 2(a) of Part 2 of Schedule 1 of the MLO and the entity making such a loan is excluded from the definition of ‘money lender’ in section 2 of the MLO.

18.  Under section 2(1) of the MLO,

‘ money lender (放債人) means every person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business, but does not include –

(a) -

(b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such loan;’

Part 2 of Schedule 1 which bears the heading Exempted Loans, provides, amongst others,

‘ 2. A loan made to a company secured by a mortgage, charge, lien or other encumbrance

(a) registered, or to be registered, under the Companies Ordinance (Cap. 622);’

[We will refer to this as the Exemption.]

19.  The Lender’s case is that the Exemption applies because a loan has been made to a company who was the Borrower and the mortgagor companies have registered the Second Mortgages at the Companies Registry.

20.  The Judge rejected the Lender’s argument and held that the Exemption only applies to a mortgage provided by the Borrower itself :

‘ 19.1. In my view, on an ordinary and natural reading of para. 2(a), the legislature must have intended to refer to one and the same company to whom the loan is made and which has provided security for that loan, which security is duly registered at the Companies Registry.

19.2. Purposively, the following scenarios may be considered:

(a) a loan is made to an individual, for which a company provides security;

(b) a loan is made to a company, for whom an individual provides security;

(c) a loan is made to a company, for whom another company provides security.

In the context of money lending legislation, I cannot see any reason why the legislature would have intended that the loans at (a) and (b) would not be exempt, and yet, according to the Lender’s submission, the loan at (c) would be exempt. Counsel for the Lender has not referred me to any materials on the passing of this piece of legislation in support of his submission.’

2)  Security ground

21.  The Judge held that there is no injustice justifying the residual discretion to be exercised under Rule 48(5)(d).

‘ 17. The mere fact that third party-owned security is available to the Lender does not change the Applicant’s inability to pay into her ability to pay. And when the Lender is doing what the law entitles it to do (i.e. pursuing the guarantor rather than resort to third party-owned security), there is no injustice to the Applicant which the court should prevent in the exercise of its residual discretion under rule 48(5)(d).’

3)  Overstatement of Debt ground and Interest ground

22.  The Judge stated that the Applicant’s case was that she was informed by the Borrower that the Loan Agreement was brokered by the Introducer, which was ‘related to the Lender if not sharing the same ultimate beneficial owner’; the Loan Agreement was not facilitated by the Introducer but by WW and the receipt for the cheque for the Introduction Fee was signed by WW. The Judge held that no affirmations were filed by the Borrower to support the Applicant’s allegations, and the burden is on an applicant to satisfy the Court that there are substantial grounds for disputing the debt. The Judge held that :

‘ 26.1 .... In relation to the overstatement of debt, it is well-established that:

“... deficiencies in the form and content of a statutory demand, including errors involving the over-statement of the debtor’s indebtedness, would not automatically entitle the debtor to have the demand set aside. The relevant question is whether injustice would be caused to the debtor by allowing the particular demand to stand. See Re a Debtor (No.1 of 1987)”.

26.2 In the present case, the documentary evidence shows that the sum of $120 million was paid to the Borrower. Even assuming there has been overstatement of the debt by $10.8 million, the Applicant has not suggested that she is able to repay the balance which is substantial.’

23.  As to the excessive interest ground, the Applicant’s submission was that the $10.8 million may be treated as interest payable (and paid) on the day of the drawdown. The Judge held that if it is regarded as interest on the loan (which was for 2 years), then the amount of interest per annum would be $5.4 million, not $10.8 million and the calculation would be as follows :

Principal	$120,000,000
Contractual interest @ 17.5% p.a.		$21,000,000
Introducer fee (1 year)		$5,400,000
Total interest p.a.		$26,400,000

The effective rate of interest would then be $26.4m/$120m x 100% = 22% per annum, which would not exceed the statutory threshold.

IV.  The parties’ position

24.  The Lender now appeals against the decision on the Unlicensed money lender ground. The Applicant in her Respondent’s Notice seeks to support the judgment on the ground that 1) the debt was overstated as the Introduction Fee amounts to partial repayment i.e. the Overstatement of Debt ground; 2) alternatively, if the Introduction Fee was not partial repayment, it was interest and would render the loan extortionate by reason of the excessive interest rate i.e. the Interest ground; and 3) the net value of the properties mortgaged exceeds the indebtedness and the Court should exercise its discretion under Rule 48(5)(d) of the Bankruptcy Rules i.e. the Security ground.

V.  Principles

25.  Under Rule 48(5), the Court may set aside the statutory demand on the following grounds :

1)  the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand;

2)  the debt is disputed on grounds which appear to the Court to be substantial;

3)  it appears that the creditor holds some security in respect of the debt claimed by the demand, and either Rule 44(5) is not complied with in respect of it, or the Court is satisfied that the value of the security equals or exceeds the full amount of the debt; or

4)  the Court is satisfied, on other grounds, that the demand ought to be set aside.

26.  There is no dispute that a statutory demand is part of a two‑ stage process in the bankruptcy regime. As Lloyd LJ explained in White v Davenham Trust Ltd [2011] EWCA Civ 747 at p.127 [12] :

‘ ... It allows the question to be determined at a preliminary stage whether the creditor is entitled to invoke bankruptcy proceedings, before the presentation of the bankruptcy petition itself, with the extensive consequences of that event.’

27.  At the statutory demand stage, the Court simply considers if there is a debt and inability to pay it. Carnwath LJ in Owo - Samson v Barclays Bank Plc & Boyden (No 1) [2003] BPIR 1373, at [16] explained :

‘ The ordinary procedure, involving the ‘two-stage process’ of a statutory demand followed by a bankruptcy petition, is well known (see the description in Re a Debtor (No 415-SD-1993) [1994] 1 WLR 917, per Jacob J). The service of a “statutory demand” in the prescribed form is simply one means of establishing “inability to pay”: see s268(1)(a) of the 1986 Act. Jacob J said of this stage (at 920):

“The procedure prescribed is intended to be brief. In my view it is aimed at establishing an inability to pay and no more. It is not a general coarse sieve where the court considers generally whether the petition will succeed or fail.” ’

28.  The leading authority on the Court’s approach in an application to set aside a statutory demand is the judgment of Nicholls LJ in In Re a Debtor (No. 1 of 1987) [1989] 1 WLR 271. He first discussed the Court’s approach under the United Kingdom equivalent of Rule 48(5)(d). The crucial point is that the circumstances for the Court to exercise the residual discretion under Rule 48(5)(d) to set aside the statutory demand are circumstances which would make it unjust for the statutory demand to give rise to the consequences that the debtor is to be regarded as being unable to pay the debt which founds the ability of the creditor to present a bankruptcy petition.

‘ The question arising on this appeal concerns the exercise by the court of its power to set aside a statutory demand “on other grounds” within sub‑para (d). Under the Act, a statutory demand which is not complied with founds the consequence that the debtor is regarded as being unable to pay the debt in question or, if the debt is not immediately payable, as having no reasonable prospect of being able to pay the debt when it becomes due. That consequence, in turn, founds the ability of the creditor to present a bankruptcy petition because, under section 268(1) [equivalent to section 6A(1)(a) of the Bankruptcy Ordinance], in the absence of an unsatisfied return to execution or other process, a debtor’s inability to pay the debt in question is established if, but only if, the appropriate statutory demand has been served and not complied with.

When therefore the rules provide, as does rule 6.5(4)(d) [equivalent to our rule 48(5)(d)], for the court to have a residual discretion to set aside the statutory demand, the circumstances which normally will be required before a court can be satisfied that the demand “ought” to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court’s intervention is called for to prevent that injustice.’

29.  Nicholls LJ then discussed how this approach is in line with sub‑paragraphs (a), (b) and (c) of Rule 48(5).

‘ This approach to subpara (d) is in line with the particular grounds specified in subparas (a) to (c) of r 6.5(4). Normally it would be unjust that an individual should be regarded as unable to pay a debt if the debt is disputed on substantial grounds: subpara (b). Likewise if the debtor has a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt: subpara (a). Again if the creditor is fully secured: subpara (c).’

30.  At page 279, Nicholls LJ gave some examples of whether the statutory demand should be set aside or not having regard to all the circumstances.

‘ .... The court will exercise its discretion on whether or not to set aside a statutory demand, having regard to all the circumstances. That must require the court to have regard to all the circumstances as they are at the time of the hearing before the court. There may be cases where the terms of the statutory demand are so confusing or misleading that, having regard to all the circumstances, justice requires that the demand should not be allowed to stand. There will be other cases where, despite such defects in the contents of the statutory demand, those defects have not prejudiced and will not prejudice the debtor in any way, and .to set aside the demand in such a case would serve no useful purpose. For example, a debtor may be wholly unable to pay a debt which is immediately payable, either out of his own resources, or with financial assistance from others. In such a case the only practical consequence of setting aside a statutory demand would be that the creditor would promptly serve a revised statutory demand, which also and inevitably would not be complied with. In such a case the need for a further statutory demand would serve only to increase costs. Such a course would not be in the interests of anyone.’

31.  It should be emphasised that a limited exercise is involved in an application to set aside a statutory demand. Peter Gibson LJ stated in Budge v A.F. Budge (Contractors) Ltd [1997] BPIR 366 at 372A ‑D :

‘ Miss Heilbron has submitted that the whole matter should be looked at, in her words, ‘in the round’. I think that this may be a misunderstanding of the limited exercise that is involved when one is considering an application to set aside a statutory demand. All that the court is concerned with is whether the creditor is able to pursue bankruptcy proceedings founded on the statutory demand. The creditor must establish a debt. It is for the debtor to establish why he cannot do so, at any rate by the route of a statutory demand...’

VI.  Unlicensed money lender and the Exemption

1)  The Lender’s argument

32.  The first argument of Mr Man SC (together with Mr Chen and Mr Yu) for the Lender is that the Judge had not addressed whether the Lender was a money lender under the MLO, and the Applicant had failed to discharge her burden to establish by sufficiently precise evidence that the Lender was a money lender.

33.  Mr Man’s second argument is that the Exemption is applicable. He submitted that this is clear from the natural and ordinary meaning of paragraph 2(a) of Part 2 of Schedule 1 of the MLO, which contains no requirement that the security must come from the borrower company. He further argued that the statutory intent, which is to exclude legitimate and commercial transactions from the MLO, does not support reading such a requirement into the Exemption.

2)  The Applicant’s argument

34.  In response, Mr Ng (and Ms Chui) for the Applicant argued that the Judge had made a finding that the Lender is a money lender by reference to the circumstances of the transaction and we should not disturb this finding unless it is plainly wrong. He submitted that the Loan Agreement bears all the hallmarks of a money lending business and the transaction was negotiated in arm’s length and for profit.

35.  As to the Exemption, Mr Ng relied on the Judge’s interpretation that the Exemption only covers a mortgage provided by the Borrower and not a third party owned security. The Exemption is silent as to who is to provide for the mortgage. He argued that the intent of the Exemption is to protect the Borrower. The legislature recognises that only certain corporate borrowers are well able to protect themselves. There is no general exemption for loans made to corporate borrowers. Instead, the MLO exemptions apply to loans made to corporate borrowers with characteristics showing that they are ‘large’ or related to ‘large’ companies (e.g. with more than $1 million paid up share capital ([12] of Schedule 1 Part 2 of MLO), publicly listed on the Hong Kong or other approved stock exchanges ([14] of Schedule 1 Part 2 of MLO) or subsidiaries of such listed companies ([15] of Schedule 1 Part 2 of MLO); certain corporate borrowers borrowing within the same corporate group ([10] of Schedule 1 Part 2 of MLO); or corporate borrowers engaging in loans for import and export financing ([11] of Schedule 1 Part 2 of MLO). The focus of this exemption appears to be on the purpose of the loan: Official Report of Proceedings of the amendment of the MLO (22 June 1988) at [1661]‑ [1662]. Since specific exemptions have been carved out for corporate borrowers, it is clear that the corporate nature of the borrower is insufficient to bring a loan outside the ambit of the MLO. That a loan is 1) made to a company and 2) secured a registrable/registered instrument may be indicators of legitimacy and commerciality, but, they say nothing about the borrower’s ability to protect itself. By contrast, the ability of a corporate borrower (particularly in the case of a company with no apparent financial strength) to provide security by itself, goes a long way to show that it is not a vulnerable counterparty to the loan which needs the regulatory protection of the MLO. Thus, the Applicant’s construction is consistent with, and promotes, the purpose of the MLO.

36.  Mr Ng also referred to Clause 24 of Explanatory Memorandum of the Legislative Council Brief 14 June 1988 for the amendment of the MLO (‘the Legislative Council Brief’) which stated :

‘ 24. ... It is considered that, in particular, the new loans specified will reduce much of the ambiguity that has existed as to whether the principal Ordinance extends to what are otherwise normal commercial transactions engaged in by persons well able to “protect” themselves (for example, companies referred to in paragraph 12 in Part 2 of the new Schedule 1).’

3)  Our view

37.  The Lender’s evidence below is that it does not run any money lending business: see Judgment at [21]. The Applicant has to establish that the Lender is a money lender within the meaning of the MLO. We do not accept Mr Ng’s submission that the Judge had made a finding on this issue. It is clear that the focus of the judgment below was on the issue of the Exemption and the Judge did not make any finding that the Lender was engaged in the business of money lending. It is for the Applicant to adduce ‘sufficiently precise’ evidence to establish the Lender is a ‘money lender’ under the MLO : Re Lau Kam Sing Dickie [2023] HKCA 506 [17] and LB v F Ltd [2023] 2 HKLRD 157 [33]. We agree with Mr Man that the evidence does not support any such finding. There is nothing extraordinary about the Loan Agreement, that the purpose of the loan was to provide working capital for the Borrower and that it was obliged to discharge some other business loans do not logically point to a money lending business. Further, these matters have nothing to do with the Lender’s business.

38.  Turning to the Exemption, this Court had previously examined its application. In Universe Link Industries Ltd & Another v Liggars Ltd [1999] 2 HKLRD 383, Godfrey JA at page 387 held :

‘ ....It seems to me quite plain that the definition is designed to take out of the ambit of the provisions of the [Money Lenders] Ordinance a person or a loan who or which would otherwise be caught by those provisions. Here, we have a loan by a lender who, but for the fact that that loan is specified in Pt.2 of Sched.1 would be a money lender and therefore unable to recover the loan. The exclusion is plainly designed to protect a lender.’

39.  Leong JA on the same page held :

‘ 24. I agree. For my part, I would add this. Section 2(1)(b) of the Money Lenders Ordinance (Cap. 163) means a person who makes an exempted loan specified in Pt.2 of Sched.1 will not be considered as a money lender as regards that loan, whether or not he carries on a business of making loans, etc.’

40.  The Court’s task in interpreting the words of a statute like the MLO is to ascertain the intention of the legislature. This involves examining both the text in respect of the natural and ordinary meaning of words used and also the context and purpose of the statute : HKSAR v Chen Keen (alias Jack Chen) (2023) 26 HKCFAR 157, [10]‑ [12]. In terms of the text of the Exemption, simple and straightforward words are used. It covers the situation of a loan being made to a company secured by a mortgage which is registered (or to be registered) under the Companies Ordinance. They do not say that the mortgage is restricted to a mortgage given by the borrower company and not a mortgage provided by a third party. The Applicant does not argue otherwise in respect of the text of the Exemption.

41.  We then look at the context and purpose of the MLO, to see if a different interpretation should be adopted. The Legislative Council Brief at [2] and [13] explained that the MLO was enacted in 1980 essentially to curb loansharking. At the same time, the provisions of the MLO are necessarily restrictive. To allow legitimate business to be conducted without undue hindrance, the MLO allows for general as well as specific exemptions from its provisions. Section 3 of the MLO gives a general exemption to certain classes of person or loan specified in the First Schedule (Annex C) from Part II (licensing of money lenders) and Part III (money lender’s transactions) of the MLO.

42.  We disagree with Mr Ng’s submission on the interpretation of the Exemption. Schedule 1 of the MLO consists of two parts, Part 1 deals with exempted persons and Part 2 deals with exempted loans. In respect of Part 2, the exemption does not only cover loans to a company but also to other types of loans, for example, a loan made bona fide by an employer to his employee ([1]) and also a loan made bona fide for the purchase of immovable property on the security of a mortgage of that property and a loan made bona fide to refinance such a mortgage ([4]). Hence, Mr Ng’s argument based on the Borrower’s ability to protect itself does not advance the Applicant’s case on interpretation. In any event, it does not follow that a company that manages to secure a third party owned security for its borrowing is in any way less able to protect itself than a company that secured a loan by a mortgage of its own assets.

43.  In our view, the contents of the legislative background documents do not shed any light on the interpretation of the Exemption. As a matter of fact, the proposed changes to the MLO as discussed by these documents did not involve the Exemption which was already in existence.

44.  In our view, there is nothing ambiguous about the wording of the Exemption. The natural and ordinary meaning is clear and there is no place to graft into it a further requirement that the mortgage is confined to a mortgage of the borrower’s own assets. Having found that the Exemption applies, then it follows that the Lender is not a money lender under the MLO in respect of the loan in question such that the issues of unlicensed money lender and the loan being unrecoverable simply do not arise.

VII.  Respondent’s Notice

1)  Security ground

(1)  The Applicant’s argument

45.  The Applicant’s case is that the Court should exercise its discretion under Rule 48(3)(d) to set aside the statutory demand. Mr Ng argued that the net value of the mortgaged land at $300 million exceeds the full amount of the alleged debt stated in the statutory demand of $125,235,616.44. He accepted that the Applicant is not able to rely on Rule 48(3)(c). He argued that there are circumstances which would make it unjust for the statutory demand to give rise to insolvency consequences in the particular case. It is quite impossible to foresee all the circumstances which may arise and may justify the proper application of this rule : see In Re a Debtor (No. 1 of 1987) [1989] 1 WLR 271 at page 276B‑F and Budge v A.F. Budge (Contractors) Ltd [1997] BPIR 366 at page 370B‑ F; Remblance v Octagon Assets Ltd [2010] 2 All ER 688 at [33], [57]‑ [58]; and White v Davenham Trust Ltd [2012] 1 BCLC 123 at [12].

46.  Mr Ng submitted that the Lender is not obliged to take any steps before enforcing its rights against the Applicant. However, if the Exemption is applicable, the Applicant would be unable to avail herself of the protection afforded by the MLO. Yet, by the mere fact that the Applicant is the indirect (and not the direct) owner of the mortgaged land, the Applicant is artificially disallowed from using Rule 48(5)(c) to set aside the statutory demand.

47.  Mr Ng accepted that as the statutory demand is part of the two - stage process and the Court’s concern about whether a debt is sufficiently secured or compounded for or whether the Respondent acted reasonably in refusing to accept a debtor’s offer is a ground for opposing a petition (section 6D of the Bankruptcy Ordinance). However, this does not preclude consideration of these matters at the statutory demand stage (e.g. In Re a Debtor (No. 51‑SD‑1991) [1992] 1 WLR 1294 at page 1301B‑C). There is no point in refusing to set aside a statutory demand and requiring a debtor to proceed to the petition stage to ventilate these arguments. Reliance is placed on Nicholls LJ’s remarks in In Re a Debtor (No. 1 of 1987) at page 279, albeit made in relation to a creditor re‑serving a statutory demand rather than a debtor having to proceed to the petition stage.

48.  Mr Ng submitted that justice lies in setting aside the statutory demand because the present case is an extreme one like that referred to in X v Y [2019] HKCFI 2880 (31 October 2019 at [46]) [X v Y (2019)], where, though the security was provided by a third party (the Applicant’s indirectly owned subsidiary), no reasonable creditor would proceed to bankrupt the Applicant than realise the security. Further, exercising the discretion under Rule 48(5)(d) would not intrude into the rule in China and South Sea Bank v Tan [1990] 1 AC 536. Instead, recognising that the bankruptcy regime engages in class remedies, and the more draconian consequences that flow from bankruptcy, the Court is entitled to consider the practical realities in any case : X v Y (2019) at [46].

(2)  Our view

49.  It is common ground that the Applicant cannot rely on Rule 48(5)(c) because it only applies where the debtor is the direct owner of the mortgage land : Cheng Wai Kei v Commerzbank Aktiengesellschaft [2002] 2 HKC 340 at page 345F‑346D, 347H‑I and Re a Debtor (No. 310 of 1988) [1989] 1 WLR 452 at pages 454D‑456B.

50.  We do not agree with Mr Ng that the residual discretion in Rule 48(5)(d) should be exercised. First of all, as Mr Ng recognized, the Lender has the right not to seek recourse against the security. This is under the terms of the loan and also by law. First, Clause 7.3 of the Loan Agreement expressly provides that the Lender is under no obligation to resort to securities before taking steps against the Applicant :

‘ 7.3(b) The Lender shall not be obliged, before taking any steps to enforce any of its respective rights and remedies under this Guarantee and Indemnity, to make, demand, enforce or seek to enforce any claim, right or remedy against, or to take any action, commence any proceedings or make or file any claim or enforce any security against the Borrower or any other person.’

51.  Second, the law is clear that a creditor owes no duty to the surety to exercise its power of sale over mortgaged properties and it could decide for itself what remedies to pursue. As Lord Templeman of the the Privy Council held in China and South Sea Bank Ltd at 545C‑ F :

‘ ... The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all. If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety.

... The creditor was not under a duty to exercise his power of sale over the mortgaged securities at any particular time or at all.’

See also Indian Overseas Bank v Seabulk Systems Inc. & Ors [2024] HKCA 522 at [37] where this Court adopted the same view.

52.  As the Judge pointed out, China and South Sea Bank is concerned with a civil action, not bankruptcy, but the principle is applied in the bankruptcy regime in White where Lloyd LJ explained the difference where full security had been given over the assets of the person receiving the statutory demand and where the security is provided by a third party :

‘ 40. As against a given debtor, if a creditor has security over that debtor’s assets which is more than sufficient, there is no reason to allow the creditor to pursue bankruptcy proceedings because the existence of the security means that the creditor has no interest in that debtor’s estate. He would not be able to prove for his debt, and there is no reason for him to be able to invoke the collective realisation of assets which is the point of insolvency proceedings, unless he is willing to give up his security. By virtue of s.267 of the 1986 Act he is not even entitled to present a bankruptcy petition. It follows that there is every reason why he should not be entitled to take the preliminary step of serving a statutory demand. If, however, the security given to the creditor is over the assets of a different person, then the existence of that security does not constitute any reason why the particular creditor should not proceed against this other debtor, who has given no security over his assets, for an undoubted debt by way of a personal claim or by way of insolvency proceedings. There is no bar to the creditor presenting a bankruptcy petition in relation to such a debtor and there is therefore no reason why the creditor should not serve a statutory demand as a preliminary to the presentation of a petition if the demand is not satisfied.’

53.  Mr Ng relied on Deputy High Court Judge Maurellet SC’s view in X v Y ([2019] HKCFI 2880) on the exercise of the residual discretion under Rule 45(5)(d) in respect of third party owned security :

‘ 46. It however seems to me that in an extreme case where the security, albeit one provided by a third party, would be of such an amount and of such liquidity (say cash or cash equivalent) that it could be said that no reasonable creditor would have proceeded to bankrupt the Debtor rather than realise the security, then perhaps the residual discretion could be relied upon. (Emphasis added)

47. This, in my view, should not be considered as an intrusion in the rule in China and South Sea Bank v Tan which provides that the lender clearly has the legal right to sue the guarantor or the borrower as he sees fit. But rather this would be recognising that as the bankruptcy regime engages class remedies, as well as the more draconian consequences which flow from the bankruptcy, the court is entitled to consider the practical realities in any given case. Given the latest developments in the present case it would not be appropriate to say more about the rule.’

54.  It is clear that the statement is academic as Judge Maurellet recognized in [45] that the issue is academic. In another case also called X v Y ([2020] HKCFI 3178) [X v Y (2020)], the Debtors advanced similar arguments before Linda Chan J that the Court should exercise the residual discretion under Rule 48(5)(d) :

‘ 29. Mr Hui acknowledges that the Debtors cannot rely on the ground under rule 48(5)( c), given that the Share Charge was provided by a third party. Nevertheless, he argues that the Court should exercise its discretion under rule 48(5)(d) to set aside the SDs on the basis that it is “unjust” for the Respondent to rely on the SDs to invoke the bankruptcy regime in circumstances where:

(1) the value of the Shares (as secured by the Share Charge) “would be of such an amount and of such liquidity that it could be said that no reasonable creditor would have proceeded to bankrupt” the Debtors, rather than to realise the security; and

(2) the Respondent’s “unjustified enforcement actions and/or tactics” have caused considerable unfairness and/or injustice to the Debtors, and the Court should not condone the same.’

55.  Linda Chan J rejected the arguments. She held :

‘ 30. I do not think that these allegations, even if established (which they have not) are valid grounds to set aside the SDs.

(1) As discussed in Section B above, in considering the applications, the Court is only concerned with whether the Respondent should be allowed to rely on the SDs to prove the Debtors’ inability to pay the Debt. The fact that the Respondent’s only means of getting paid would be to exercise its rights to sell the Shares, far from being a ground to set aside the SDs, confirms the Debtors’ inability to pay the Debt.

(2) The Court is not concerned with other matters, such as whether the Debt has been sufficiently secured or compounded for or whether the Respondent acted reasonably in refusing to accept any offer made by the Debtors. These are matters which fall to be considered at the petition stage. (See: section 6D(1), (3) of the Bankruptcy Ordinance (Cap 6) (“BO”); Owo, [17], citing Jacob J’s observation in Re a Debtor (No 415 – SD - 1993)).

(3) Mr Hui cites X v Y [2019] HKCFI 2880 where DHCJ Maurellet SC observed (at [45] - [47]) that “in an extreme case where the security, albeit one provided by a third party, would be of such an amount and of such liquidity (say cash or cash equivalent) that it could be said that no reasonable creditor would have proceeded to bankrupt the Debtor rather than realise the security, then perhaps the residual discretion could be relied upon”. I do not think this passage assists the Debtors. As can be seen from the Judgment, the learned Judge’s attention was not drawn to section 6D of the BO or the authorities discussed in Section B above.’

56.  We will respectfully adopt the view of In Re a Debtor (No. 1 of 1987) that for the Court to exercise its residual discretion to set aside the statutory demand under Rule 48(5)(d) it would require circumstances which would make it unjust for the statutory demand to give rise to the consequences of the debtor being regarded as unable to pay such debt and for a petition to be founded on that basis. There are no such circumstances in the present case : the Lender is not required to resort to the securities before pursuing the Applicant and the Applicant’s failure to comply with the statutory demand founded the consequence that the Applicant is being unable to pay the debt. There is no injustice for the residual discretion to be exercised. The decision in X v Y (2020) is correct. The cases of Budge, Remblance, White and In Re a Debtor (No. 51‑SD‑1991) referred to by Mr Ng did not advocate a test wider than what Nicholls LJ held in In Re a Debtor (No. 1 of 1987). In fact, all these cases relied on the view of Nicolls LJ.

2)  Overstatement of Debt ground/Interest ground

(1)  The Applicant’s case

57.  Mr Ng submitted that on either the Overstatement of Debt ground or the Interest ground, the statutory demand should be set aside on the basis that the debt is disputed on grounds which appear to the Court to be substantial under Rule 48(5)(b).

(2)  Our view

58.  The Applicant is basically relying on the same arguments that she had advanced before the Judge. We agree with the views of the Judge which we have set out in [22] ‑ [23] above. As Au JA in Chan WS v CC Bank [2022] 3 HKLRD 529 stated :

‘ 23. It is well‑settled that an over-statement of the indebtedness in the statutory demand will not automatically entitle the debtor to have the demand set aside. The relevant question is whether injustice would be caused to the debtor by allowing the particular demand to stand: see Re Kwok Chok Yee (supra) at 548G‑H per Le Pichon J, citing Re a Debtor (No 1 of 1987) [1989] 1 WLR 271 at 276 and 279.’

59.  No prejudice to the debtor has been shown as there is no evidence that she would be able to pay the substantial balance in any event.

60.  As for the Interest ground, although the Respondent’s Notice relied on the excessive interest point, this was not pursued by Mr Ng in his submissions. In any event, the Judge’s calculations are evidently correct.

VIII.  Conclusion

61.  Accordingly, the appeal is allowed. The Respondent’s Notice is dismissed. The Judge’s order is set aside. There is leave to the Respondent to present a bankruptcy petition after 21 days.

IX.  Costs

62.  We will make an order nisi that the Respondent is to have the costs of the appeal and below with a certificate for two counsel.