GOOD HARVEST FINANCE LTD v. LEUNG LAI CHING MARGARET AND ANOTHER

DCCJ001972/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1972 OF 2005

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D E C I S I O N

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The summons  

1. This is the plaintiff’s application for summary judgment against the 1^st and the 2^nd defendants (“the defendants”) for the outstanding principal and interest of a loan made to the defendants.

I shall refer to, say, page no. 1 of the Bundle of Court Documents as  “[A1]” and, say, page no. 2 of the Bundle of Exhibits as “[B2]”.  

The plaintiff’s case  

2. The plaintiff was licensed as a money lender under the Money Lenders Ordinance, Cap. 163 (“the Ordinance”).  Pursuant to a loan agreement (“the Agreement”), it made a loan of HK$2,000,000.00 to 2 companies (“the Borrowers”).  The defendants signed an official receipt (“the Receipt”).  The defendants also signed a Deed of Guarantee and Indemnity (“the Guarantee”) as co-guarantors of the loan.  Various parts of the loan amounting to HK$1,100,849.00 were repaid.  The Borrowers were then wound up by the Court.  After the winding-up, the 1^st defendant drew various cheques in favour of the plaintiff as repayment on divers dates.  When the defendants defaulted in repayment, the plaintiff demanded for repayment.  The 1^st defendant requested for an extended schedule.  The plaintiff agreed to it.  However, the defendants still failed to repay.  The plaintiff took out a Writ of Summons to claim the outstanding balance of principal and interest. 

The defendants’ case

3. The defendant alleges that no money had been advanced to the Borrowers.  Besides, the Guarantee was executed by the defendants under the plaintiff’s misrepresentation and undue influence.  In any event, the plaintiff failed to comply with sections 18(1) and 20(1) of the Ordinance and it would be inequitable to enforce the Agreement or the Guarantee.

The issues raised by the defendants

4. I have to determine the following:

(1)  whether the plaintiff had made a loan to the Borrowers, who would be liable as the primary party;

(2)  if so liable, whether the defendants would be liable as the guarantors;

(3)  whether the plaintiff or its agent had made any misrepresentation to them;

(4)  whether the plaintiff or its agent had exercised any undue influence over them. 

The plaintiff’s evidence

5. Yeung Siu Tong was a director and shareholder of the plaintiff.  He made 2 affirmations, dated 3 November 2005 [A28 – 37] and 2 August 2006 [A55 – 60] respectively. 

6. On 19 June 2000, the plaintiff entered into the Agreement [B18 – 23] with the Borrowers.  The Borrowers were running the business of 2 nightclubs.  The loan was HK$2,000,000.00 with a fixed interest of HK$50,000.00. 

7. Clause 2 provided that the loan was for the payment of wages in arrears owed to the Borrowers’ employees. 

8. Clause 3(i) provided for daily instalment by an amount equivalent to half of the total gross income received by the Borrowers for the preceding date.

9. Clause 4 provided that in the event of a winding-up order against the Borrowers, the plaintiff might terminate the Agreement and demand immediate repayment of all outstanding amounts. 

10. On the same date, the defendants signed the Guarantee [B62 – 66] to repay all outstanding amounts in the event of the Borrowers defaulting in repayment.  They signed the Receipt [B67] stated to be for a “loan” in the sum of HK$2,000,000.00 from the plaintiff. 

11. On 20 June 2001 [B68 – 70] and 1 February 2002 [B73 – 74], the Court ordered for the winding-up of the Borrowers. 

12. On 13 October 2000, the plaintiff’s solicitors wrote [B109] to demand repayment for the outstanding amounts of HK$1,484,151.00 from the defendants. 

13. On 10 July 2002, the plaintiff’s solicitors wrote [B110] to demand repayment for the outstanding amounts of HK$1,284,151.00 from the defendants. 

14. On 5 May 2003, the plaintiff’s solicitors wrote [B111] to demand repayment for the outstanding amounts of HK$1,224,151.00 from the defendants. 

15. On 17 May 2003, the 1^st defendant made a repayment in the sum of HK$10,000.00 by cheque [B77]. 

16. On 29 May 2003, the 1^st defendant made a repayment [B76] in the sum of HK$100,000.00 by cheque [B76]. 

17. On 15 May 2004, the 1^st defendant drew a cheque in the sum of HK$15,000.00 in purported repayment of the loan.  The cheque was dishonoured upon presentment for payment [B80].     

18. On 15 June 2004, the 1^st defendant drew a cheque in the sum of HK$15,000.00 in purported repayment of the loan.  The cheque was dishonoured upon presentment for payment [B79].

19. On 15 July 2004, the 1^st defendant drew a cheque in the sum of HK$100,000.00 in purported repayment of the loan.  The cheque was dishonoured upon presentment for payment [B81]. 

20. On 15 August 2004, the 1^st defendant drew a cheque in the sum of HK$15,000.00 in purported repayment of the loan.  The cheque was dishonoured upon presentment for payment [B78].     

21. On 11 September 2004, the 1^st defendant wrote [B112] to the plaintiff to request for an extended schedule for repayment. 

22. On 1 December 2004, the plaintiff’s solicitors wrote [B116] to demand repayment for the outstanding amounts of HK$899,151.00 from the defendants.  The defendants undertook to repay in full by 5 instalments to commence from 16 December 2004. 

23. On 30 December 2004, pursuant to the said undertaking, the 1^st defendant drew a cheque in the sum of HK$55,000.00 in purported repayment of the loan.  The cheque was dishonoured upon presentment for payment [B113].     

24. On 29 April 2005, the plaintiff filed a Writ of Summons [A1 – 10] to claim the sum of HK$949,151.00 as outstanding principal and interest. 

25. On 16 May 2006, the plaintiff filed the present summons [A25 – 27]. 

The defendants’ evidence

26. The 1^st defendant made 2 affirmations dated 3 July 2006 [A45 – 54] and 4 September 2006 respectively.  The 2^nd defendant made an affirmation dated 3 July 2006 [A38 – 44]. 

27. At around the time of the Agreement, the 1^st defendant was the administration manager of 2 nightclubs in question (“the Night Clubs”).   One of the shareholders of the Night Clubs was Mr. Lee Ho Chuen.  He told her that he would team up with the landlord of the premises, Mr. Yeung, to take over and run the Night Clubs in the name of the Borrowers.  He said Yeung had a finance company, which could provide funds to clear debts owed by the Night Clubs.  She was to sign documents on behalf of the Borrowers in the take-over as and when requested by him.  As a reward she could keep her job and also have 10% of the shares in the Borrowers. 

28. On about 12 June 2000, Lee and Yeung told her that if wages were not paid to the employees, the Night Clubs would have to close down immediately.  Yeung told her that his finance company (“the Finance Company”) could provide HK$2,000,000.00 to the Night Clubs to pay the wages.  However, it was difficult to ask other shareholders of the Night Clubs to sign documents.  Lee and she, being the directors of the Borrower, would be the co-guarantors to comply with the Finance Company’s requirements.  Yeung said that on second thought, Lee’s credit was not good because Lee still owed 9 months’ rental to the Landlord.  Yeung asked her to get somebody else to be a co-guarantor for repayment of the loan.  The take-over would be in place after payment of the wages.  She thus nominated the 2^nd defendant to be a co-guarantor.            

29. On 19 June 2000, she and the 2^nd defendant attended the plaintiff’s office.  A person who identified himself to be the clerk of a solicitors’ firm told them to sign some documents on behalf of the Borrowers for a loan of HK$2,000,000.00.  That person did not explain to them the contents of the documents or their right to obtain independent legal advice. 

30. Prior to the signing, Yeung pulled him aside and reassured her that:

(1)   the loan would subsequently be a capital contribution by him  (Yeung) to the Borrowers;

(2)   after the payment/partial payment of the wages, the Borrowers would be able to take over the Night Clubs;

(3)   although she and the 2^nd defendant had to sign the Guarantee, they would not be required to repay the loan. 

Relying on Yeung’s assurance for and on behalf of the plaintiff, they signed the Guarantee.  They did not receive the signed Agreement or the Guarantee that date or until 3 years later, on about 25 June 2005.   

31. At the end of June 2000, the Night Clubs closed down.  The Borrowers did not take over the business. 

32. In breach of Yeung’s promise, the plaintiff forced her and the 2^nd defendant to repay the loan.  They were even warned of legal proceedings. 

The law

Summary judgment

33. The defendant has to demonstrate that there is a triable issue or for some reason there ought to be a trial.  If the defendant’s evidence is not reasonably capable of belief, leave should be refused [14/4/9 – 12 HKCP 2006]. 

Misrepresentation

34. Mr. Wong refers to the case of Edgington v Fitzmaurice (1885) 29 Ch D 459.  It is well-settled that before entering into a contract, if there was a representation given by a party regarding its intention of something or his action to be taken in future but in fact the party had no such intention, and that representation induced the other party into the contract, the contract will be said to be entered under a misrepresentation.  Such contract will be set aside.  I accept it as apposite.  

Undue influence

35. Mr. Wong refers to the case of Bank of Credit & Commercial International SA v Aboody [1990] 1 QB 923.  To establish a plea of actual undue influence, a claimant would have to show:

(1)  the party alleged to have brought about the transaction had the capacity to influence the claimant;

(2)  the exercise of undue influence;

(3)  its exercise brought about the transaction; and

(4)  the transaction was to his disadvantages.

I accept it as apposite. 

Money Lenders Ordinance

36. Section 18 of the Ordinance provides as follows:

(1)  No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be enforceable unless –

(a)    within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing;

(b)   there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,

and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.

(2)  The note or memorandum shall contain all the terms of the agreement and in particular shall set out –

(a)    the name and address of the money lender;

(b)    the name and address of the borrower;

(c)    the name and address of the surety, if any;

(d)    the amount of the principal of the loan in words and figures;

(e)    the date of the making of the agreement;

(f)      the date of the making of the loan;

(g)    the terms of repayment of the loan;

(h)    the form of security for the loan, if any;

(i)      the rate of interest charged on the loan expressed as a per cent per annum …;

(j)      a declaration as to the place of negotiation and completion of the agreement for the loan.

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

37. Section 20 of the Ordinance provides, among others, as follows:

20.	(1)	A money lender who makes any agreement for the loan of money in relation to which security is provided shall within 7 days after the making of the agreement give to the surety (if a different person from the borrower) –
	(a)	a copy of the note or memorandum in writing made under section 18(1);
	(b)	a copy of the security instrument, if any; and
	(c)	a statement in writing signed by or on behalf of the money lender showing –
		(i)  the total sum payable under the agreement by the borrower;
		(ii) the various amounts comprised in that total sum with the date, or the mode of determining the date, when each becomes due.
	…
	(3)	If a money lender fails to comply with subsection (1) or a request to which subsection (2) applies he shall not be entitled, while the default continues, to enforce the security so far as provided in relation to the agreement.

My findings

On the defendants’ evidence

38. The defendants signed the Receipt for HK$2,000,000.00 only because Lee and/or Yeung had so requested of them.  The 1^st defendant was promised her present job plus a 10% share in the Borrowers.  When she signed, she did not even know whether the money was actually in existence or so applied.  Mr. Wong submits that they were the victim of Lee and/or Yeung’s misrepresentation and undue influence. 

39. I disagree with this submission.  By June 2000, she had already known that the Night Clubs had been about 9 months in arrears of rent and wages to the employees including herself [para 8 A47].  On about 12 June 2000, Lee and Yeung even told her that if wages were not paid to the employees, the Night Clubs would have to close down immediately [para 9(a) A47 – 48].  She was trying her best firstly to save her job in the Night Clubs and secondly get a 10% share in the Borrowers.  I come to analyze these.  Firstly, Her own wages had been outstanding for some time.  Secondly, whilst there is no evidence of the value of valuation for the 10% share in the Borrowers, the business of the Night Clubs was no doubt critically bad.  She had no reason to stick her neck out to be personally liable for having received this huge sum of money by signing the Receipt. 

40. The defendants alleged that they were told by Yeung that the Guarantee was signed only to satisfy his partner of the Finance Company.  It would not be enforced.  This means that both Yeung and his partner had a say in the running of the Finance Company.  However, Yeung told the defendants that he would use the Finance Company’s money obtained by a sham guarantee, part of which belonged to his partner, for his personal capital contribution to the Borrowers.  The defendants were willing to perpetrate in this clear fraud upon Yeung’s partner, who would not know firstly, that the money was siphoned off this way, and secondly, that there would be no recourse because the guarantors were promised of immunity from enforcement.  Yeung was not in any close personal or business relationship with the defendants.  Nor was there much to gain on the part of the defendants.  This alleged offer by Yeung, and acceptance by the defendants, to commit a serious crime is outrageous and fanciful. 

41. Yeung told the 1^st defendant to get another person (later transpired to be the 2^nd defendant) to sign the Guarantee in place of Lee because Lee’s credit was not good as reflected in the arrears of rent and wages by the Night Clubs.  I do not see why Lee’s credit was regarded as not good.  Lee was not personally liable for the rent or wages. 

42. As requested by Lee and/or Yeung, the defendants signed the Receipt in their personal capacity.  Lee and/or Yeung, who were the major shareholders of the Borrowers having the use of the money, would not be personally liable.  Putting aside their role as the guarantors, if the plaintiff somehow sought to recover the money from them, such as on the basis of money had and received, they would be personally liable.  The 1^st defendant would have only 10% share in the Borrowers whereas the 2^nd defendant would not even have any benefit. 

43. The defendants actually repaid part of the loan.  The 2^nd defendant explained that they were “forced” to do so [para 6 A40].  The 2^nd defendant explained that she was misled by the plaintiff into thinking that as she had signed the Guarantee she had to repay the loan whatever the circumstances might be.  I can readily see that these are contradictory statements.  Besides, if the defendants had been promised of immunity from enforcement, the 1^st defendant would have raised it as a defence in refusing to repay.  Instead, she only requested for an extended schedule to repay [B112].  

44. I find the defendants’ evidence not reasonably capable of belief. 

Whether the plaintiff had made a loan to the Borrowers, who would be liable as the primary party

45. Upon rejecting the defendants’ evidence, I find that they had signed the Receipt to evidence that the Borrowers had actually received the money.  There is no triable issue here. 

46. The plaintiff concedes its failure to provide the Borrowers with a summary of the loan and that the memorandum lacked the details as required by section 18(2) as follows:

(c), (d), (f), (h), (i), and (j).

(c)   the name and address of the surety, if any;

(d)   the amount of the principal of the loan in words and figures;

(f)     the date of the making of the loan;

(h)    the form of security for the loan, if any;

(i)      the rate of interest charged on the loan expressed as a per cent per annum …;

(j)     a declaration as to the place of negotiation and completion of the agreement for the loan.

47. In Emperor Finance Ltd. V La Belle Fashions Ltd & Others [2003] 3 HKLRD 995, Ribeiro PJ said, at 1033:

117.     The question which therefore arises is whether the Court should exercise its discretion under s. 18(3) to permit [the finance company] to enforce its claims wholly or in part, and with or without modification, against [the borrower] and under the guarantees, against [the guarantors].  This discretion can only be exercised if the court is “satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable.”

…

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. 

48. In our present case, the Agreement [B18 – 23] was signed by the 1^st defendant, albeit for and on behalf of the Borrowers.  However, she was also the surety or guarantor.  She said that upon her request, the 2^nd defendant had joined her as a co-guarantor.  I do not find that this breach of s. 18(2)(c) would cause any adverse consequences to the Borrowers. 

49. The amount of the principal of the loan, HK$2,000,000.00 was only expressed in figures.  However, the defendants had signed the Receipt [B67], which confirmed the sum and stated that to be a “loan”.  I do not find that this breach of s. 18(2)(d) would cause any adverse consequences to the Borrowers. 

50. The date of the making of the loan was not stated.  However, the Receipt confirmed that the sum was received.  I do not find that this breach of s. 18(2)(f) would cause any adverse consequences to the Borrowers. 

51. The Agreement did not refer to the Guarantee as the security for the loan.  However, she was also the surety or guarantor.  Upon her request, the 2^nd defendant had joined her as a co-guarantor.  I do not find that this breach of s. 18(2)(h) would cause any adverse consequences to the Borrowers. 

52. The rate of interest was not expressed as a per cent per annum.  The interest charged was a lump sum of HK$50,000.00.  I do not find that this breach of s. 18(2)(i) would cause any adverse consequences to the Borrowers. 

53. The Agreement did not contain a declaration as to the place of negotiation and completion of the agreement for the loan. I do not find that this breach of s. 18(2)(j) would cause any adverse consequences to the Borrowers. 

54. I think it is equitable to hold the Agreement enforceable. 

Whether the defendants would be liable as the guarantors

55. I accept the Mr. Ho’s submission that compliance with s. 20(1)(a) is in turn dependent upon compliance with s. 18(1). Likewise, the finance company may be able to convince the court that it would not be inequitable to enforce the security (Emperor Finance Ltd (op cit) at 1031; Celestial Finance Ltd v Yu Man Hon & Others [2005] 1 HKLRD 747, CFA).  I repeat my findings regarding the breach of s. 18(2)(c), (d), (f), (h), (i), and (j) hereinabove.  I find it equitable to hold the Guarantee enforceable. 

Whether the plaintiff or its agent had made any misrepresentation to them

56. Upon rejecting the defendants’ evidence, I find that the plaintiff or its agent had not made any misrepresentation to the defendants.  There is no triable issue here. 

Whether the plaintiff or its agent had exercised any undue influence over them

57. Upon rejecting the defendants’ evidence, I find that the plaintiff or its agent had not exercised any undue influence over the defendants.  There is no triable issue here. 

The conclusion

58. I do not find any triable issue or that for some reason there ought to be a trial.  I give judgment for the plaintiff in this summons.  I order costs nisi to the plaintiff with certificate for counsel.  This order will become absolute 14 days from today.    

Dated 12 September 2006