CHINA SUN FINANCE COMPANY LTD v. MORALITY INTERNATIONAL TRADING LTD AND OTHERS

HCMP 2131/2016

[2025] HKCFI 344

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2131 OF 2016

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JUDGMENT

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Background

1.  The factual background of the present case has been set out by Lisa Wong J in her decision dated 18 August 2023[1] which I gratefully adopt:

“6. The plaintiff is a licensed money lender under the MLO.

7. The 1^st defendant is a company incorporated in Hong Kong. Its sole shareholder is one Dubai Finance Group Limited, which is in turn wholly owned by the 3^rd defendant. The 1^st defendant is at all material times the registered owner of the Property.

8. The 2^nd defendant is the father of the 3^rd defendant and the manager of the 1^st defendant.

9. In early 2015, the 1^st defendant was in need of funds to refinance a short-term loan (“LSH Loan”) owed to one Lei Shing Hong Limited. The 1^st defendant eventually approached the plaintiff to obtain the Loan.

10. By a facility letter dated 6 May 2015 and countersigned by each of the defendants (“Facility Letter”) to signify their acceptance, the plaintiff agreed to extend the Loan to the 1^st defendant on the basis that repayment would be secured by the Legal Charge and the Guarantees. Materially:

(1) The Facility Letter specifies the plaintiff as lender, the 1^st defendant as borrower, and the 2^nd and 3^rd defendants as guarantors.

(2) The principal amount of the Loan is stated to be $48 million, which shall be repaid within 12 months from the date of drawdown of the Loan.

(3) The interest on the Loan is agreed at 12% per annum.

(4) The plaintiff is entitled to charge default interest at the monthly rate of 24% (which can be translated into an annual rate of 288%) as follows:

‘(a) Time shall be the essence of any payment to be made by the [1^st defendant].

(b) [The plaintiff] reserves the right to charge default interest on a day to day basis on any sum which is not paid when due. Default interest is chargeable at the interest rate of 24% per month on such sum which is not paid when due.

(c) For the avoidance of doubt, interests chargeable under this default interests clause shall not be calculated in any way as to contravene [s 22].’

(“Default Interest Provision”).

(5) The Facility Letter also sets out the condition precedents which must be satisfied for the Loan to be granted. These include the execution of the Loan Agreement and the Legal Charge by the 1^st defendant and the Guarantees by the 2^nd and 3^rd defendants.

11. Against such background, on about 27 May 2015, the defendants executed the following documents at LWT’s Office:

(1) the Loan Agreement by the 1^st defendant;

(2) the Legal Charge by the 1^st defendant;

(3) the D2 Guarantee by the 2^nd defendant; and

(4) the D3 Guarantee by the 3^rd defendant.

12. The Loan Agreement contains substantially similar terms as the Facility Letter. For present purposes, it suffices to note:

(1) clause 2 which provides for the advancement of the Loan by the plaintiff to the 1^st defendant;

(2) clause 3 which fixes interest at 12% per annum calculated on a daily basis and accrued at the end of each calendar month;

(3) clause 4 which requires interest to be repaid on a monthly basis, while the principal sum should be repaid by the maturity date which is 12 months from the date of drawdown of the Loan.

13. It is worthy of note that the Loan Agreement does not contain any Default Interest Provision.

14. By the Legal Charge, the 1^st defendant mortgaged the Property to the plaintiff to secure its indebtedness to the plaintiff. For present purposes, it suffices to note that:

(1) Clause 1.01(h) defines “Secured Indebtedness” to mean all sums of money which the 1^st defendant covenants, or becomes liable, to pay the plaintiff under the terms of the Legal Charge.

(2) Clause 2.01(viii) requires the 1^st defendant to, on demand, make good and discharge to the plaintiff all sums of money, obligations and liabilities now or at any time due, owing or incurred to the plaintiff by the 1^st defendant, including:

‘all principal interest and any other monies which are or may from time to time become due and payable by the [1^st defendant] to the [plaintiff] in respect of any loan facility advanced by the [plaintiff] to the [1^st defendant] pursuant to the terms and conditions of any facility letter or any agreement between the [plaintiff] and the [1^st defendant] relating to such loan facility, as amended or supplemented from time to time’ (emphasis added)

(3) By clause 3.01, with the object and intent of affording the plaintiff security for the “Secured Indebtedness”, and the due fulfilment by the 1^st defendant of the agreements, covenants and conditions imposed in the Legal Charge, the 1^st defendant mortgaged the Property to the plaintiff.

15. By the D2 Guarantee and the D3 Guarantee, the 2^nd and 3^rd defendants respectively guarantee the 1^st defendant’s liabilities to the plaintiff under the Legal Charge.

16. On the same date (i.e. 27 May 2015), the 1^st defendant drew down the Loan.

17. The 1^st defendant had apparently paid interests on the Loan to the plaintiff in accordance with the terms of the Loan Agreement up and including 26 June 2016.

18. However, the 1^st defendant failed to repay the plaintiff the principal of the Loan or any part thereof whether on 26 May 2016 (being the agreed maturity date under the Loan Agreement) or at all. Nor did the 1^st defendant continue to make any more interest payment to the plaintiff, whether at the agreed contractual rate at 12% per annum or the default interest rate at 288% per annum.

19. By letters dated 30 June 2016 from LWT as the plaintiff’s solicitors to the defendants, the plaintiff demanded the defendants for repayment of the principal and interest (from 27 June 2016) of the Loan. The plaintiff did not demand default interest from any of the defendants.

20. Notwithstanding the demand letters, the defendants have not repaid any further part of the principal or interest of the Loan.

21. On 16 August 2016, the plaintiff issued the OS against all 3 defendants.

22. The 1^st and 2^nd defendants do not dispute the factual background set out above. Instead, they contend in their affidavit evidence that the Loan was extended in breach of various provisions of the MLO. Among other things, they allege that:

(1) Sometime in 2015, when the 1^st defendant needed to refinance the LSH Loan, the 2^nd defendant was introduced to a man whose first name is “Philip” (“Philip”). Philip in turn introduced the 2^nd defendant to another man with the first name “Ray” (“Ray”).

(2) Philip and Ray made arrangements for the 1^st defendant to apply for and obtain the Loan from the plaintiff. They were the contact persons who liaised with the defendants on behalf of the plaintiff. In particular, the 2^nd defendant recalls having met Ray in the Plaintiff’s Office.

(3) Although the Facility Letter stated its place of execution as the Plaintiff’s Office, in reality, all the documents relating to the Loan, including the Facility Letter, were executed at LWT’s Office.

(4) Before the loan documents were executed, 2 solicitors of LWT had explained their contents to the defendants and specifically drew their attention to the fact that default interest would be chargeable under the Facility Letter at the rate of 24% per month in the event of default. This gave the defendants the impression that the Default Interest Provision was lawful and binding on them.

(5) Whilst the 1^st defendant did draw down the Loan, it did not receive the full amount of the principal of $48 million for its use because the 1^st defendant had reached a “side-deal” with the plaintiff, under which the 1^st defendant was required to ‘pay money to the [plaintiff] or [its] related parties as part of the real deal which is not officially recorded in any document’. In this connection, the 1^st defendant paid various sums of monies into the bank accounts of different individuals pursuant to the instructions of Philip and Ray who, the defendants contend, were acting as the plaintiff’s agents in giving such instructions to the 1^st defendant.”

2.  Bankruptcy orders had been issued against the 2^nd defendant and the 3^rd defendant in 2020 and 2017 respectively. On the first day of the trial, Mr Sunny Chan, counsel for the plaintiff, confirmed that the plaintiff would only continue to pursue the action against the 1^st defendant in this action.

3.  Parties agreed that the list of issues are as follows:

(1)  The “Default Interest Issue”: Whether, by reason of the Default Interest Provision in the Facility Letter, the extension of the Loan contravened section 22(2) of the Money Lenders Ordinance (Cap 163) (the “MLO”);

(2)  The “Discretion Issue”: If so, whether the court ought to exercise its discretion to allow the plaintiff to recover from the defendants the principal, as well as the agreed contractual interest, of the Loan; and

(3)  The “Collusion Issue”: Whether the plaintiff had, in contravention of section 27 of the MLO, colluded with others to obtain any unlawful payment from the defendants for advancing the Loan that should be set off pursuant to section 27(4) from the 1^st defendant’s liability to the plaintiff.

Witnesses

4.  The plaintiff tendered two witnesses:

(1)  Wang Xiu Hua (“Wang”) – a director of the plaintiff; and

(2)  Wong Lai Kwan Andy (“Wong”) – an administrative officer of the plaintiff at the material time, and currently the personal assistant to the managing director of the plaintiff.

5.  The 2^nd defendant and the 3^rd defendant gave evidence for the 1^st defendant.

6.  In assessing credibility of the witness, I adopt the often cited principles in Hui Cheung Fai and Other v Daiwa Development Limited and Others[2] by Deputy Judge Eugene Fung SC at §§76-82:

“76. In making my findings of fact in this case, I am guided by a number of general principles which judges apply as to fact finding and the assessment of credibility.

77. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431 (Lord Pearce)…

78. In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events: eg Lam Rogerio Sou Fung v Tan Soon Gin George (unreported, HCA 2576/2005, 5 May 2011) §39 (Chu J).

79. In determining a witness’ credibility, I have also attached importance to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence. The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

80. I have cautioned myself against the dangers of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses (Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §§36-37 (Bokhary PJ)), or from the assessment of the witnesses’ character (Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at §135 (Stock JA)).” [emphasis added]

7.  In Star Glory Investment Limited v Kai Tuo (H.K.) Technology Company Limited & Ors[3], Chung J adopted the following test:

“There are two objective tests for assessing a witness’s credibility regarding a matter to which he has testified: -

(a) Whether that part of his testimony is inherently plausible or implausible;

(b) Whether that part of his testimony is, in a material way, contradicted by other evidence which is undisputed or indisputable (an example often given of such evidence is contemporaneous documents).

Further, where it is shown that a witness has been discredited over one or more matters to which he has testified (using the above tests), this fact is relevant to the assessment of his overall credibility. Likewise, regard may be had to a witness’s motive for deliberately not giving truthful testimony. For example, telling the truth may prejudice his interest, or a just determination of the litigation may affect his interest.”

8.  In summary:

(1)  I find Wang, being a director of the plaintiff, to be an overall straightforward witness except for her evasiveness on the issue of why was the Default Interest Provision inserted into the Facility Letter.

(2)  I find Wong, an employee of the plaintiff to be an honest witness overall. He gave evidence in a straightforward manner even when the evidence might be seen as contrary to the plaintiff’s case (such as his having explained the Default Interest Provision despite its illegality) and I accept his evidence in full.

(3)  I find the 2^nd defendant to be selective in giving his evidence. He was keen to portray himself as a fair businessman and appeared to be honest on issues that were non-controversial and not in dispute. However, he was clearly evasive when giving evidence which concerned the key issues in dispute, such as where the Facility Letter was executed and why the 1^st defendant should be allowed to take the benefit of the Loan without any obligation to make repayment.

(4)  I find the 3^rd defendant to be an overall honest witness. He candidly admitted that he was a mere puppet of his father (the 2^nd defendant) and as such, little weight can be attached to his evidence, except for the oral evidence during cross-examination which were contrary to the 1^st defendant’s case.

The Default Interest Issue

9.  Mr Peter Chung, counsel for the 1^st defendant, submitted that the Default Interest Provision in the Facility Letter contravenes section 22(1)(c) of the MLO and is illegal. As the Loan Agreement and the Legal Charge were conditions precedent to the Facility Letter, the Loan Agreement and the Legal Charge will also be unenforceable, subject to the court’s discretion under section 22(2).

10.  Section 22 of the MLO provides:

“(1) Any agreement made for the loan of money by a money lender shall be illegal if it provides directly or indirectly for—

(a) the payment of compound interest;

(b) prohibiting the repayment of the loan by instalments; or

(c) the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement:

Provided that provision may be made by any such agreement that if default is made in the payment upon the due date of any sum payable to the money lender under the agreement, whether in respect of principal or interest, the money lender shall be entitled, subject to Part IV, to charge simple interest on that sum from the date of the default until the sum is paid at an effective rate not exceeding the effective rate payable in respect of the principal apart from any default, and any interest so charged shall not be reckoned for the purposes of this Ordinance as part of the interest charged in respect of the loan.

(2) Notwithstanding subsection (1), if the court before which the legality of any agreement comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement which does not comply with this section should be held to be unenforceable, the court may order that such agreement is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.”

11.  Mr Chan on the other hand submitted that:

(1)  the Default Interest Provision is only provided in the Facility Letter and not in the Loan Agreement. The interest provision in the Loan Agreement simply contains a simple interest clause at 12% per annum.

(2)  the plaintiff has merely reserved the right to charge default interest and had not actually so charged.

12.  Despite the submissions of Mr Chan, I am of the view that section 22 of the MLO has been breached by reason of the Default Interest Provision in the Facility Letter for the following reasons:

(1)  It is accepted by Mr Chan that by reason of the Default Interest Provision, the Facility Letter is prima facie illegal and section 22(1)(c) of the MLO is triggered.

(2)  It is also not disputed that the Facility Letter provides for essential elements of the plaintiff’s claim, such as: the requirement for the Loan Agreement, the Legal Charge, the D2 Guarantee and the D3 Guarantee to be executed by the parties.

(3)  The Loan Agreement is therefore not a free-standing legal document by which the plaintiff can enforce its rights to make the present claims against the defendants without reliance on the Facility Letter. The Facility Letter and the Loan Agreement (as well as the Legal Charge) are part of the essential set of loan documentation that are required for the plaintiff to assert its rights. It therefore cannot be said that section 22 is not engaged as the plaintiff is only relying on Clause 3 of the Loan Agreement.

(4)  Wang, in her oral evidence, was at pains to emphasise that the plaintiff had always insisted on carrying out business in a legal manner. Her evidence was that she knew that default interest was not allowed under Hong Kong law. She had told Wong to rectify the mistake of having included the Default Interest Provision in the Facility Letter and to ensure that the Loan Agreement would not include such a clause.

(5)  In her affirmation filed on 12 October 2023, the explanation given for the inclusion of the Default Interest Provision was that it was “an honest mistake. The Facility letter is a standard form prepared years ago and the plaintiff has not updated the content” and that “the plaintiff has never intended to charge the Default Interest.

(6)  However, it is not the case that section 22 of the MLO only came into force shortly before 2015. It became effective in 1988 (more than 26 years before the execution of the Facility Letter) and since then, the charging of default interest had been prohibited.

(7)  Wang was evasive during cross-examination as to when she had realised that the Default Interest Provision would be illegal under the MLO. She could not provide any reasonable explanation as to why the Default Interest Provision was included in the Facility Letter despite knowing that it was illegal. All she could say was to refer the question to her solicitors.

(8)  Wong likewise gave evidence to the effect that he knew charging default interest was illegal, and that he had told Wang the same. However, despite such knowledge, he had gone on to explain the Default Interest Provision to the 2^nd defendant and the 3^rd defendant. There was equally no reasonable explanation for him having done so.

(9)  Given that both Wang and Wong were aware that the Default Interest Provision was illegal, there was no discernible reason why it was included in the Facility Letter, except that the plaintiff had wished to include it to somehow “reserve the right” to charge such default interest.

(10)  Chu JA (as Chu VP then was) set out in Easy Fortune Property Limited v Yung Chun Him [4] that the intent of section 22(1)(c) is to prohibit the charging of default interest that is at a rate higher than the contractual interest rate at which a loan is extended. It is therefore irrelevant whether a lender ultimately decides to exercise that right, if it was a right that can or may be exercised as provided for in the relevant agreement.

(11)  As the Default Interest Provision was included in the Facility Letter and the right to charge such default interest was expressly reserved, I am of the view that this is the kind of situation referred to in Easy Fortune Property Limited v Yung Chun Him, and it is irrelevant that the plaintiff has never exercised that right. The Facility Letter is caught by section 22 of the MLO.

The Discretion Issue

13.  Mr Chan submitted that even if section 22(1)(c) is engaged, the court should nonetheless exercise its discretion under section 22(2) to permit the plaintiff to recover the principal amount of the Loan as well as the interest thereon (from 27 June 2016) at the contractual rate of 12% per annum.

14.  Mr Chan relies on Strong Offer Investment Ltd v Nyeu Ting Chuang[5], where Chan PJ set out the effect of section 22(2) of the MLO:

“Although the wording is similar to that in s.18(3), [section 22(2) of the MLO] discretion serves a different function and provides a different protection to borrowers, namely, from a contractual requirement to pay compound interest. … In my view, the object of the discretion is to allow the money lender to recover the loan together with any amount or rate of interest which is permitted under the provisions of the Ordinance, where the court considers it equitable to make such an order.”

15.  Although section 18(3) and section 22(2) cater for different scenarios, the wording is nearly identical. The court will consider the question of what is equitable under the same principles.

16.  In summary, the court has to look at “all the circumstances”.

17.  In Emperor Finance Limited v La Belle Fashions Limited[6], Ribeiro PJ held that:

“119. In exercising its discretion the court should examine the breach or breaches in question, their consequences for the parties to the transactions and any other circumstances which may make it inequitable to hold the agreements unenforceable…”

18.  In Brother’s Company (a firm) v Ah Puk Transportation (a firm)[7], the court held that the factors to be taken into account include (i) relative status of the parties; (ii) the nature and extent and effect of the default; (iii) the way in which the default arose; (iv) the implications for the borrower; (v) the attitude of the lender (whether there was a blatant disregard of the MLO); and (vi) the general appearance of the contract throughout.

19.  In Treasure Spot Finance Company Limtied v Li Chik Ming[8], the learned Recorder distilled the principles as follows:

“28. …	(i) The discretion given by sections 18(3) and 22(2) to the court is extremely wide and empowers it to look at all the circumstances in a particular case in arriving at an equitable result between the moneylender and the borrower. (See the Judgment of Ribeiro PJ in the Emperor case at para. 119 and the Judgment of Chan PJ in the Strong Offer case at para. 20.)
	(ii) There is no single circumstance or set of circumstances which is decisive as to how the court should exercise its discretion in a particular case. Each case must be decided on its own facts.
	(iii) The court will have to go through a balancing exercise in arriving at a decision. (See the Judgment of Chan PJ in the Strong Offer case at para. 33.)
	(iv) The fact that an act or omission by a moneylender constitutes an offence (as provided under section 29(4)) or is specified to be illegal (as provided under section 22(1)) is not a factor which is decisive against the moneylender in the exercise of the court’s discretion, otherwise sections 18(3) and 22(2) would be meaningless and even self-contradictory.

20.  The factors that I have taken into account when considering if the court’s discretion under section 22(2) should be exercised includes the following:

(1)  Although I find the plaintiff to have put in the Default Interest Provision (whilst knowing full well that it was illegal) and the rate of default interest is exorbitant, the plaintiff had never in fact charged or even demanded default interest from the 1^st defendant. In the 1^st demand letter issued by the plaintiff on 30 June 2016, no default interest was charged. The interest payment demanded was all along based on the contractual rate of 12% per annum (which is not disputed).

(2)  There is no dispute that the 1^st defendant did draw down HK$48 million on the same day the Loan Agreement was executed. There is also no dispute that it had only repaid the interest when the repayment of the loan fell due on 30 June 2016.

(3)  It is the evidence of the 2^nd defendant that there was a real need for the 1^st defendant to obtain a loan as it needed to repay its indebtedness owed to Lei Shing Hong Limited. As the 1^st defendant was under tremendous financial pressure, they were prepared to accept any loan deal that they came across. This means that the precise terms of the Loan Agreement or the Facility Letter played very little part in affecting the defendants whether they would enter into the loan arrangement. There was certainly no coercing on the part of the plaintiff for the 1^st defendant to enter into the Loan Agreement.

(4)  This is not a case where the plaintiff as the lender has abused its superior position as lender whilst dealing with the 1^st defendant. The 2^nd defendant, who negotiated the loan arrangement for and on behalf of the 1^st defendant was clearly a sophisticated businessman who well understood the terms of the Loan Agreement.

(5)  The 2^nd defendant, in his oral evidence agreed that but for the Default Interest Provision, he would agree that there is no reason why the 1^st defendant would not need to repay the HK$48 million principal plus interest at 12% per annum.

(6)  The only justification that the 2^nd defendant could point to was that the Default Interest Provision is illegal and should not have been included in the Facility Letter. However, I fail to see how the inclusion of such provision had affected the decision of the 1^st defendant to enter into the Loan Agreement, or the 1^st defendant’s repayment obligations as demanded by the plaintiff. The actual repayment obligation of the 1^st defendant as demanded by the plaintiff had remained the same with or without the Default Interest Provision.

(7)  I therefore agree with Mr Chan’s submission that there was no real prejudice caused to the 1^st defendant by reason of the Default Interest Provision.

(8)  On the other hand, the 1^st defendant would clearly be unjustly enriched if it does not have to repay the HK$48 million loan plus interest at 12% per annum.

(9)  The 1^st defendant would also be unjustly enriched insofar as the plaintiff had already discharged previous charging orders for the 1^st defendant using its own funds.

(10)  Section 24 of the MLO prohibits the charging of interest on a loan at an effective interest rate which exceeds 60% per annum. The interest rate charged pursuant to the Loan Agreement was 12% per annum. There was therefore no contravention of section 24 of the MLO.

21.  Based on the above factors, I am of the view that it would, in the present circumstances of the case, be inequitable if the plaintiff were unable to enforce its rights under the Loan Agreement. I am of the view that the court should exercise its discretion to order the Loan Agreement to be enforceable, despite the Default Interest Provision having been inserted in the Facility Letter.

22.  As a result, the principal loan amount of HK$48 million plus interest at 12% per annum remains enforceable and payable by the 1^st defendant to the plaintiff under the Loan Agreement.

The Collusion Issue

23.  The collusion issue, as submitted by Mr Chung is as follows: section 27(3) & (4) of the MLO provides:

“(3) … it shall not be lawful for any money lender or his partner, employer, employee, principal or agent or any person acting for or in collusion with any money lender to charge, recover or receive any sum as for or on account of any such costs, charges or expenses (other than stamp duties or similar charges) or to demand or receive any remuneration or reward whatsoever from a borrower or intending borrower for or in connection with or preliminary to procuring, negotiating or obtaining any loan made or guaranteeing or securing the repayment thereof.

(4)  If any money or money’s worth is directly or indirectly paid or allowed to or received by any person in contravention of this section, the amount or value thereof, to the extent of such contravention and notwithstanding any agreement to the contrary, may be recovered by the borrower from such person or, if such person is the money lender or a partner, employer, employee, principal or agent of the money lender or is in any way acting for or in collusion with him, may be set off against the amount actually lent (and that amount shall be deemed to be reduced accordingly) or may be recovered by the borrower from such person or from the money lender.”

24.  It is the 1^st defendant’s case that two individuals, by the name of Ray and Philip, were the plaintiff’s representatives in arranging for the 1^st defendant to borrow from the plaintiff. In return, the 1^st defendant paid HK$982,000 and HK$3,800,000 as per the instruction of Ray and Philip.

25.  The 2^nd defendant gave evidence to the effect that, some time in 2015, due to a need to repay the LSH Loan, he was introduced to a man named “Philip” who later introduced him to another man called “Ray”. Philip and Ray made arrangements for the 1^st defendant to apply for a loan from the plaintiff. The 2^nd defendant had met with Ray in the plaintiff’s office at that time at Flat 2002, Allways Centre, 468 Jaffe Road, Wanchai, Hong Kong.

26.  Ray and Philip then instructed the 3^rd defendant to transfer the following sums to unknown parties:

On 28 May 2015

(1)  HK$50,000 to a “Lo Kwok Wai”.

(2)  HK$500,000 was withdrawn as cash and handed over to Ray and Philip.

(3)  HK$432,000 by way of a cashier’s order was issued in favour of a “Lau Siu Kei”. The cashier order was handed to Ray and Philip.

On 29 May 2015

(1)  HK$3,800,000 by way of a cashier’s order was issued by the 3^rd defendant and deposited into the 2^nd defendant’s account.

27.  In Mr Chung’s closing submissions, the following were relied upon in support of such alleged collusion:

(1)  HK$48 million is a large sum of money for a loan and it is inconceivable that it was concluded by only one phone call with the 2^nd defendant, without the assistance of some agent or third party.

(2)  Wong was unable to give the name of the 3^rd party who informed him that the 1^st defendant would be applying for a loan, even though the loan was defaulted only one year after it was extended.

(3)  Wong’s evidence contradicts with the evidence of the 2^nd defendant and the 3^rd defendant.

28.  I reject Mr Chung’s submission that collusion has been proven by the 1^st defendant:

(1)  There is simply no evidence to suggest that the plaintiff is in any way connected to Ray and Philip. The 2^nd defendant and the 3^rd defendant both affirmed that they only suspected that Ray and Philip were connected to the plaintiff but were unsure of any relationship between the plaintiff, Ray and Philip.

(2)  Despite the allegation that the 2^nd and 3^rd defendants had been in contact with Philip and Ray by phone, no information on these two individuals had been put forward, such as their full name or phone numbers.

(3)  Other than the assertion of the 2^nd defendant and the 3^rd defendant, there is no evidence as to the existence of Ray and Philip.

(4)  The 2^nd defendant and the 3^rd defendant could not provide any reasonable explanation on why they did not attempt to contact Ray and Philip to give evidence. I reject the 2^nd defendant’s explanation that he was too pre-occupied with the various litigation to remember to do so, when such evidence from Ray and Philip is a central part to the collusion allegation.

(5)  There is no particular given on how the payments of HK$982,000 and HK$3,800,000 could be traced back to Ray or Philip. The 1^st defendant had not provided any bank statements to demonstrate the tracing of such funds back to Ray and Philip. The 2^nd defendant’s last minute evidence during cross-examination of him having agreed to pay Ray and Philip 10% of the loan principal as a reward for arranging the loan for the 1^st defendant was never mentioned in the 8 years since the commencement of the present action and is rejected.

(6)  Contrary to the suggestion of Mr Chung, Wong did not admit that the plaintiff had used a third party to arrange the loan between the plaintiff and the 1^st defendant. All Wong said in his affirmation was that: “I remember that the Defendants applied for the loan with the Plaintiff through the introduction of a third party, but I cannot remember who the third party was. I can confirm, however, that the third party was not acting for the Plaintiff.”  Wong’s evidence was that the 2^nd defendant had told him that he was introduced by a friend to approach the plaintiff for a loan. In such circumstances, there is nothing peculiar about Wong being unable to recall the name of the said third party when his evidence was that such third party did not act for the plaintiff.

(7)  I accept Wong’s evidence that as the Property (HK$150 million at the time) was worth a lot more than the Loan (HK$48 million), the plaintiff had little hesitation in extending the Loan to the 1^st defendant and the loan negotiation was concluded within a short time.

29.  In his oral evidence, the 2^nd defendant clarified his case of collusion against the plaintiff as follows: as he had paid for the legal fees of Messrs Lo Wong & Tsui (“LWT”), he had expected LWT to advise him that the Default Interest Provision was illegal. In failing to do so, the Loan Agreement should be voided. This seems to suggest that a firm of solicitors had colluded with the plaintiff to somehow mislead the 1^st defendant into thinking that the Default Interest Provision was legal and proper.

30.  The 2^nd defendant believed that the plaintiff, Ray, Philip and Johnny Wong and Alice Tam (on behalf of LWT) participated in a fraudulent scheme whereby the precarious financial position of the defendants was taken advantage of. It was said that as part of the funds obtained from a second mortgage loan was used by the 1^st defendant to pay the interest on the Loan, the plaintiff had benefitted from the fraudulent scheme whilst remaining as the 1^st mortgagee of the Property. LWT on the other hand benefitted by reason of the legal fees. Ray and Philip benefitted by receiving a commission from the defendants for getting a mortgage from the plaintiff. Philip further benefitted from getting a commission for getting a second mortgage loan.

31.  In support of such an allegation, the 2^nd defendant’s evidence was that contrary to the execution clause of the Facility Letter, which provided that it was executed at the plaintiff’s offices, the Facility Letter was in fact executed at the offices of LWT. The significance of this issue seems to be that: if the Facility Letter was executed at the plaintiff’s offices, it would be unlikely that the solicitors of LWT had advised the 2^nd defendant and the 3^rd defendant as alleged.

32.  To allege such collusion in a fraudulent scheme against a firm of solicitors is of course a serious allegation which would require sufficient evidence.

33.  For the following reasons, I also reject this version of the collusion allegation:

(1)  It is not clear how the scheme of collusion works: insofar as it was suggested that the goal of the alleged collusion is to enable the plaintiff to charge default interest when it was not legally allowed to do so, it is difficult to reconcile this with the fact that the plaintiff had never even attempted to charge such default interest.

(2)  The 2^nd defendant’s suggestion that the Facility Letter was executed at the offices of LWT and its solicitors is rejected for the following reasons:

(a)  The execution clause of the Facility Letter clearly set out that it was executed at the plaintiff’s offices.

(b)  This is corroborated by the evidence of Wang, Wong and even the 3^rd defendant (who agreed during cross-examination that the Facility Letter was executed at the plaintiff’s offices).

(c)  Wong gave evidence to the effect that the Facility Letter was signed at the plaintiff’s offices without anyone from LWT present, and he was the one who witnessed the execution of the Facility Letter. Wong’s evidence was that the Facility Letter was drafted in-house by the plaintiff and not by LWT. Wong also admitted that despite its illegality, he had explained the Default Interest Provision to the 2^nd defendant and the 3^rd defendant. In such circumstances, there is little reason for Wong to lie on the issue of where the Facility Letter was executed.

(d)  I therefore accept the plaintiff’s evidence that LWT was only retained for the drafting of the Loan Agreement, the Legal Charge, the D2 Guarantee and the D3 Guarantee. There was thus simply no reason for either Johnny Wong or Alice Tam to refer to the Default Interest Provision as there is no such provision in the said documentation.

(e)  There is simply nothing to be gained by such collusion by the plaintiff and even less so, for LWT.

(f)  Mr Chung, in his closing submissions confirmed that the issue of where the Facility Letter was executed was no longer important, as Wong had admitted that he had explained the Default Interest Provision to the 2^nd defendant and the 3^rd defendant.

(g)  Insofar as necessary, I find that there is no evidence to support of the allegation that LWT had explained the terms of the Default Interest Provision to the 1^st defendant, the 2^nd defendant, or the 3^rd defendant.

(3)  With or without the Default Interest Provision, the plaintiff would be entitled to receive interest at 12% per annum from the 1^st defendant under the Loan Agreement. I see no benefit gained by the plaintiff inducing the 1^st defendant to accept the Default Interest Provision or to enter into a second mortgage.

(4)  There is no evidence on what extra benefit or legal fees LWT gained by inducing the defendants to accept the Default Interest Provision.

(5)  Even if Ray and Philip gained a commission from the defendants for arranging the Loan, there is no evidence to suggest that the plaintiff was part of the arrangement.

(6)  There is no evidence that Philip received extra commission from procuring a second mortgage from the 1^st defendant.

34.  The collusion allegation is thus rejected.

Withholding of HK$1 million as stakeheld money

35.  As a side issue, the 1^st defendant suggested that the plaintiff is not entitled to recover the entirety of the HK$48 million Loan as the plaintiff had not used the entirety of the HK$1 million which was withheld by the plaintiff out of the HK$48 million loan for the discharge of previous charges against the Property.

36.  This suggestion is purely speculative and is not substantiated by any evidence. The plaintiff had provided a statement of account on 27 May 2015 whereby it was shown that HK$600,000 and HK$400,000 of the money stakeheld had been used to discharge the Charging Orders under DCTC 4141/2012, DCTC 1416/2013 and DCTC 2277/2014 respectively.

37.  The 2^nd defendant’s challenge that the discharge could not have been in such round numbers was devoid of merit, as it would be entirely up to the creditor and the plaintiff to agree on what would be a commercially acceptable sum to discharge the said charges. There is nothing that prohibits parties from agreeing on a round-figure for such discharge.

Conclusion

38.  I will grant the following orders in favour of the plaintiff:

(1)  Judgment against the 1^st defendant in the sum of HK$48,000,000 together with interest at 12% per annum from 27 June 2016 until Judgment, and thereafter at judgment rate until payment.

(2)  In default of payment, delivery of vacant possession of No. 23 Plantation Road, Hong Kong (“the Building”) together with the sole and exclusive right and privilege to hold use occupy and enjoy all that the entire Ground Floor of the Building and The Garden appurtenant thereto and also together with the sole and exclusive right and privilege to hold use occupy and enjoy all that Garage Space “A” on the Ground Floor of the Building.

(3)  Costs of the Originating Summons (including all costs reserved) be payable by the 1^st defendant to the plaintiff, to be taxed, if not agreed, with certificate for counsel.