EASY FORTUNE PROPERTY LTD v. YUNG CHUN HIM

HCA 1484/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1484 of 2014

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JUDGMENT

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Procedural history

1.  This is the defendant’s appeal against the Order of Master J Wong made on 14 January 2016.  To properly understand the real issues involved, it is necessary to set out the relevant procedural history.

2.  The plaintiff is a licensed moneylender.  Its claims against the defendant are based on a Loan Agreement (dated 24 May 2012); a Supplemental Agreement (dated 24 May 2012) in Chinese; and a Legal Charge over a property owned by the defendant (“the Property”).  The principal sum of the loan was $5,000,000.  Pursuant to the terms of the Loan Agreement, the defendant was obliged to make a monthly repayment of interest at the rate of 21.6% per annum (ie 1.8% per month).  By the Supplemental Agreement, the plaintiff agreed to charge a preferential rate of interest at 9.6% per annum (ie 0.8% per month) provided that the defendant would make punctual repayments.  The monthly interest repayment became $40,000.  The principal would be repayable in a lump sum at the end of 12 months (renewable for another 12 months).  As a security for the loan, the defendant executed the Legal Charge in favour of the plaintiff.  It is not disputed that the principal sum of $5,000,000 was in fact received by the defendant.  It is also not in dispute that the defendant made a total of $800,000 as interest repayment and had since 24 February 2014 defaulted in making any further payment.  The plaintiff instituted this action on 1 August 2014 to claim for outstanding principal and interests and an order of delivery of possession of the Property.  This was pursuant to leave granted by Master Lo under HCB 1233/2014 on 24 July 2014.

3.  The defendant petitioned for his own bankruptcy and was declared bankrupt by an order of the court on 1 April 2014.  In the affirmation filed in support of his petition, the defendant stated that he owed the plaintiff $5,000,000 together with interests.

4.  In this action, the defendant acts in person.  On 12 November 2014, he filed a “Statement of Defence and Counterclaim”.  By the Counterclaim, he sued the plaintiff as “1^st defendant by Counterclaim” and Forever Property Finance Company Limited (“FPF”) as “2^nd defendant by Counterclaim”.

5.  By a summons filed 30 December 2014, the defendant applied for default judgment on his Counterclaim against FPF.  Since the defendant was a bankrupt, Master Lai adjourned the hearing to 23 March 2015 and required the Trustee in Bankruptcy to attend on the next hearing.

6.  In the meantime, by a summons filed 19 March 2015, the plaintiff applied for leave to enter judgment against the defendant for delivery of possession of the Property pursuant to Order 88, rule 1 of the Rules of the High Court, Cap 4A.  It also applied to strike out the Counterclaim against it (as “1^st defendant of the Counterclaim”) pursuant to Order 18, rule 19.

7.  By an Order dated 22 June 2015 (filed 5 August 2015), Master Lai struck out the Counterclaim against the “1^st and 2^nd defendants by Counterclaim”.  Hearing of the plaintiff’s summons filed 19 March 2015 was adjourned to 24 July 2015.

8.  On 30 September 2015, the plaintiff issued a summons replacing and withdrawing the 19 March 2015 summons.  The plaintiff applied for leave to enter judgment against the defendant for its monetary claims and for the delivery of possession of the Property.  It also applied for the striking out of the Defence filed 12 November 2014 pursuant to Order 18, rule 19 and the inherent jurisdiction of the court.

9.  The hearing of the 30 September 2015 summons took place before Master J Wong on 14 January 2016.  After the hearing, he ordered that:

(1)   the Defence be struck out except that leave be allowed to the defendant to continue defending for interest claimed by the plaintiff over $40,000 per month from 27 January 2014 until today;

(2)   the defendant do pay the plaintiff the sum of $5,960,000 together with interest on the sum of $5,000,000 at statutory rate from 1 August 2014 until 14 January 2016 and thereafter at judgment rate until payment;

(3)   the defendant do within 28 days from the date of service of this Order deliver up to the plaintiff vacant possession of the Property; and

(4)   the defendant do pay costs to the plaintiff in the assessed sum of $104,000.

10.  By a Notice of Appeal dated 19 January 2016, the defendant appealed against the Order of Master J Wong.  The defendant seemed to be under the erroneous impression that Master J Wong had struck out his Defence in its entirety.  Master J Wong did not.  The defendant is perfectly entitled to defend any claim for interest over and above the monthly sum of $40,000.  In other words, Master J Wong decided that the defendant is obliged to repay the principal of $5,000,000 and to repay monthly interest at 0.8% per month, ie $40,000 per month.  He thus ordered the total sum of $5,960,000 representing the principal plus 24 months’ interest, ie from the date of default in February 2014 to the date of his Order in January 2016.  However, Master J Wong had further granted “interest on the sum of $5,000,000 at statutory rate from 1 August 2014 until 14 January 2016 at statutory rate and thereafter at judgment rate until payment”.  This calls for closer examination hereunder.

11.  In support of his appeal, the defendant also applied for adducing new documentary evidence by a summons issued on 23 February 2016.  By an Order from G Lam J dated 6 April 2016 (filed 28 April 2016), it was ordered that:

(1)   the application of the defendant by summons dated 23 February 2016 to adduce further documentary evidence shall as far as Exhibit YCH–1 is concerned be treated as the defendant’s application for leave to amend the Defence in the form of the pleading substantially set out in YCH–1;

(2)   the defendant do have leave to withdraw his application to adduce further evidence so far as YCH–2 and YCH–10 to 12 are concerned;

(3)   the defendant’s application and his appeal against Master J Wong’s decision by Notice of Appeal dated 19 January 2016 be adjourned for hearing to an early day to be fixed with the estimate of three hours;

(4)   the order of stay of execution granted by Master Lo on 18 March 2016 be extended to the hearing of the defendant’s appeal; and

(5)   costs reserved.

12.  YCH–1 is entitled “Statement of Defence and Further Defence”.  It was in fact adopted from the earlier “Statement of Defence and Counterclaim” file on 12 November 2014.  What the defendant did was to delete the word “Counterclaim” and substituted it with the words “Further Defence”.  Similarly, the paragraphs that originally formed the Counterclaim against the plaintiff and FPF were merely changed into part of the “Further Defence” raised against the plaintiff.  There was otherwise no change to the contents.  The case of the defendant in opposition to the plaintiff’s claims is now to be considered with reference to all the paragraphs pleaded in the proposed re-named “Defence and Further Defence”.

13.  The following main points can be filtered from the proposed re-named “Defence and Further Defence”:

(1)   The defendant was approached by a Ms Winnie Chan (“Chan”) in April 2012 through cold call by telephone. Chan was representing Forever Property Finance Co Ltd (“FPF”) in touting for mortgage refinance business.

(2)   It was orally offered to the defendant a mortgage loan of $5,700,000 at an interest rate lower than what the defendant had then been paying.  The defendant accepted the said offer.  It constituted a verbal agreement in the following terms:

Lender	FPF
Agreement effective date	24 May 2012
Total loan amount	HK$5,700,000
Loan structure	1st loan HK$5,000,000 2nd loan HK$700,000
Interest rates	1st loan: 9.6% per annum (0.8% per month) 2nd loan: 21.6% per annum (1.8% per month)
Term & tenor	12 months interest payments and lump sum principal repayment after 12 months.  (Renewable option for another year) 5% early repayment charge LVR at 85% max.
Security	1st legal charge on defendant’s home property (7/F, Flat E, Tower 11, Parc Oasis Kowloon)
Set-up fee	HK$40,000

(3)   On 4 May 2012, pursuant to the verbal agreement, the defendant attended Chan at the office of FPF and “concluded the deal in writing”.  The documents in writing however deviated from the verbal agreement in that:

Lender	Plaintiff	FPF
Agreement effective date	1st loan: 24 May 2012	2nd loan: 24 May 2012
Total loan amount	HK$5,000,000	HK$700,000
Loan structure	2 sets of agreement (one in English and one in Chinese)	2 sets of agreement (one in English and one in Chinese)
Agreed interest rates (disguised as preferential rate)	9.6% per annum (0.8% per month)	21.6% per annum (1.8% per month)
Default interest rates (disguised as standard rates)	21.6% per annum (1.8% per month)	36% per annum (3% per month)
Term & tenor	12 monthly interest payments & lump sum principal repayment after 12 months.  (Renewable option for another year.) 5% early repayment charge “5 days” grace period for default. LVR at 85% max.	12 monthly interest payments & lump sum principal repayment after 12 months.  (Renewable option for another year.) 5% early repayment charge “5 days” grace period for default. LVR at 85% max.
Security	3rd legal charge on defendant’s home property	4th legal charge on defendant’s home property
Set-up fee	Shared with FPF	HK$40,000

(4)   Despite having raised strong objection to the deviations from the verbal agreement, the defendant was faced with no alternative but entered into the written agreements.  There was no free choice on the part of the defendant.  The written agreements are thus unenforceable in law.

(5)   Chan represented both the plaintiff and FPF.  She took the defendant to and fro between the offices of the plaintiff and FPF as well as the office of Messrs Wong Fung & Co executing the legal charge and four sets of English and Chinese agreements.  The authorized signatory of the plaintiff (Mr Anthony Wong) and that of FPF (Ms Vien Ng) joined the meeting only for a few minutes merely for execution of documents.

(6)   The written agreements were structured with the effect that even in the event of a minor default, the defendant will be bound to pay higher rates of interest for the remaining balance of the loan.

(7)   The written agreements were structured so as to conceal the true cost for the defendant (eg the set-up fee; early repayment penalty; further additional default charge; and collection agency fee).

(8)   The written agreements constituted unconscionable contracts within the meaning of section 6 of the Unconscionable Contracts Ordinance, Cap 458.

(9)   The written agreements (dated 24 May 2012) were renewed for another year and the terms became:

Lender	Plaintiff	FPF
Agreement effective date	1st loan: 24 May 2012 (renewed on 22 April 2013)	2nd loan: 24 May 2012 (renewed on 22 April 2013) 3rd loan: 22 April 2013 4th loan: 3 December 2013
Total loan amount	1st loan: HK$5,000,000	2nd loan: HK$700,000 3rd loan: HK$500,000 4th loan: HK$100,000
Loan structure	2 sets of agreement (one in English and one in Chinese)	6 sets of agreement (three in English and three in Chinese)
Agreed interest rates (disguised as preferential rate)	1st loan: 9.6% per annum (0.8% per month)	2nd loan: 21.6% per annum (1.8% per month) 3rd loan: 26.4% per annum (2.2% per month) 4th loan: 39.6% per annum (3.3 % per month)
Default interest rates (disguised as standard rates)	1st loan: 21.6% per annum (1.8% per month)	2nd loan: 36% per annum (3% per month) 3rd loan: 36% per annum (3% per month) 4th loan: 45.6% per annum (3.8% per month)
Term & tenor	12 monthly interest payments & lump sum principal repayment after 12 months.  (Renewable option for another year.) 5% early repayment charge “2 days” grace period for default. LVR at 85% max.	12 monthly interest payments & lump sum principal repayment after 12 months.  (Renewable option for another year.) 5% early repayment charge “2 days” grace period for default. LVR at 85% max.
Security	3rd legal charge on defendant’s home property	4th legal charge on defendant’s home property
Set-up fee	Shared with FPF	1st & 2nd loans: HK$40,000 3rd loan: HK$10,500 4th loan: HK$4,000

(10)   The defendant had been making punctual monthly interest payments ($40,000 for the 1^st loan; $12,600 for the 2^nd loan, $11,000 for the 3^rd loan; and $3,300 for the 4^th loan) until February 2014.

(11)   The plaintiff unilaterally sub-charged / sub-mortgaged the Property to Bank of East Asia on 22 June 2012 without the defendant’s consent.

(12)   The defendant suffered liquidity problem in February 2014 and requested Ms Kathy Chan (representative for both the plaintiff and FPF) for a grace period of 3 – 4 days in one of the monthly payments.  The defendant’s request was disapproved and he was informed that once default occurs, all loans in the portfolio are deemed defaulted with consequences of higher interest rates and a retrospective charging of higher interest rates dating back to the inception of the loans.

(13)   The application of default interest rates on all loans upon default in only one single loan and their retrospective application have not been incorporated into the verbal agreement.  Furthermore, a 30% collection agency fee kicked in.

(14)   The original total monthly repayment was increased from $66,900 to $129,800.  There was also $38,940 collection agency fee.  The defendant was forced into cancelling all his loan obligations leading to the bankruptcy of the defendant on 1 April 2014.

(15)   The defendant also received several phone calls and demand letter from an authorized collection agency Ngan Fung Management Ltd which is an associated company of the plaintiff and FPF.  The defendant engaged Messrs Yip Tse & Tang to handle his bankruptcy matters.

(16)   In the circumstances, the plaintiff acted in conjunction with FPF to structure the loans and their contractual provisions in contravention of the Money Lenders Ordinance, Cap 163, Laws of Hong Kong:

(i)   excessive interest rates above 60% per annum when the collection agency fee is included.  This contravenes sections 18(1) and (2)(i); 29(4)(a); 21(1); 22(1)(c); 22(2), 27(1); 24(1) and (2); or 25;

(ii)   the set-up fee is illegal and contrary to section 27(1);

(iii)   the “early repayment penalty” is prohibited by section 21(1);

(iv)   the charging of “default interest” and “collection agency fee” are illegal and contrary to section 22(1)(c); and

(v)   “set-up fees” and “collection agency fees” should be taken into account as “interest element”.

(17)   According to defendant’s calculations based on a scenario of a default in making one monthly repayment [1], the effective interest rates for the 1^st loan was 65.78% per annum; for the 2^nd loan was 94.68% per annum; for the 3^rd loan was 94.68% per annum; and for the 4^th loan was 366.20% per annum.

(18)   The defendant seeks a declaration that the loans agreements and the legal charge are illegal and unenforceable pursuant to section 24.

(19)   The defendant relies on section 71A of the Bankruptcy Ordinance, Cap 6, Laws of Hong Kong.

This appeal

14.  With the Order of Master J Wong properly understood, the defendant is at liberty to argue all his points in so far as the plaintiff seeks to recover interests over and above $40,000 per month. What Master J Wong determined was that the defendant is obliged to repay the principal sum of $5,000,000 which he no doubt had received and used.  Master J Wong also determined that the defendant should pay for interest in the sum of $40,000 per month (ie 9.6% per annum) from the date of default to date of Judgment.  He therefore ordered the sum of $960,000.00 (ie 24 months of $40,000) as interest for the period between 24 February 2014 and 14 January 2016.

15.  I have difficulties in understanding why Master J Wong further ordered that “interest on the sum of $5,000,000 at statutory rate from 1 August 2014 until 14 January 2016 and thereafter at judgment rate until payment”.  This seems to be a double award of interest covering at least the period from the date of Writ to date of Judgment.  I asked Mr Kenneth Wong, Counsel for the plaintiff, for assistance at the hearing.  Mr Wong fairly accepted that it must have been a mistake.  In fact he pointed out that the draft order submitted by his instructing solicitors did not contain such a prayer.  He confirmed that the plaintiff is contended with merely the judgment of $5,960,000 as having included interest up to the date of judgment.

16.  Mr Wong also accepted that this being an application for striking out, the factual allegations of the defendant shall be assumed in his favour.  Furthermore, he accepted that as a result of the Order of G Lam J, I have to consider the “Defence and Further Defence” as if it is now the pleaded case of the defendant.  Hence, the real issues in this appeal are: (i) putting the defendant’s case to the highest, is it correct that he should at least be ordered to repay the principal sum plus the contractually agreed interest rate of 9.6% per annum (ie $40,000 per month); and (ii) whether the plaintiff should be allowed to enforce the security and to what extent.

Locus standi

17.  Mr Wong raised a preliminary objection.  He submitted that the defendant, being a bankrupt, has no locus standi to bring this appeal.  He pointed out that by a letter dated 20 January 2016, the plaintiff’s solicitors wrote to the Trustee in Bankruptcy asking whether consent was given to the defendant to lodge the present appeal.  In its reply letter dated 21 January 2016, the Trustee in Bankruptcy stated that they had not given consent.

18.  Yet by another letter dated 7 March 2016, the Trustee in Bankruptcy added the following clarification:

“However, we wish to point out that although we have not given our specific consent to the Bankrupt to appeal against the order made by Master J Wong on 14 January 2016 and to take out the two Summons dated 27 January 2016 and 23 February 2016, we have given our consent for the Bankrupt to defend his case in HCA 1484 at the hearing on 22 June 2015.

In the circumstances, it is not expected that our specific consent would be required for the Bankrupt to take a particular step in the course of defending his case so far it is within the scope of the general consent we have already given.”

19.  In my judgment, the lodging of this appeal against the Order of Master J Wong cannot be said to be outside the scope of generally defending against the plaintiff’s claims.  The general consent given by the Trustee in Bankruptcy is wide enough to encompass the present appeal.  This is also the view of the Trustee in Bankruptcy.  It is implicit in the above quoted reply that the Trustee in Bankruptcy did not consider it necessary for a specific consent to be given.

20.  The case of Wan Po Jun Mary Pauline v Au Yeung Yee Man (unreported, HCA 1478/2009, 17 May 2016) relied on by Mr Wong is distinguishable.  In that case, the plaintiff was at the material time a bankrupt and faced a counterclaim by the defendant seeking an order of possession against the plaintiff in relation to a property.  It was the defendant’s case that the plaintiff resided at the property as a licencee and the licence had been revoked.  In defending the counterclaim, the plaintiff asserted beneficial ownership of the property.  The trustee in bankruptcy wrote:

“... However, for various reasons and as we have repeatedly mentioned, we have decided not to take up the main claim of the present proceedings as we do not agree to release or assign the relevant right of action regarding [the property] to the Bankrupt.”

The trustee also later wrote:

“... However, we can confirm that we have not assigned or released any property including those mentioned in the pleadings of the present proceedings ... to the Bankrupt.”

The court observed that in order to defend the counterclaim successfully, the plaintiff must establish that she has a beneficial interest in the property.  Yet she cannot establish that because any such interest would have been vested in the trustee.  The trustee had pointed out that no interest in any property has been assigned or released to the plaintiff.  The court accordingly held that the plaintiff had no defence to the claim of possession.  In the present case, the defence raised by the defendant does not depend on the existence of any property right that is vested in the Trustee in Bankruptcy.  Furthermore, paragraph 37 of the Judgment of the learned Deputy High Court Judge in Wan Po Jun Mary Pauline v Au Yeung Yee Man stated clearly that it was not a case on locus standi.  If it were, the question of whether the trustee in bankruptcy had given the plaintiff consent to defend the counterclaim would have been relevant.

21.  In the circumstances, I am of the view that the consent given by the Trustee in Bankruptcy is wide enough to cover the lodging of this appeal and the defendant does have locus standi to bring this appeal.

Breaches of the provisions in the Money Lenders Ordinance (“MLO”)

22.  I must first commend the defendant for behaving civically at the hearing and presenting his arguments with considerable skill and intelligence.  Despite his rather lengthy “Defence and Further Defence”, his arguments were eventually condensed into the following points:

(1)   Due to the factual circumstances leading to the verbal agreement and the execution of the loan documents, the eventually executed 1^st and 2^nd loan documents did not reflect the true agreement.  Furthermore, the terms set out in the three Chinese Supplemental Agreements [2] (all executed on the same date as the Loan Agreement) were not properly reflected in the Memorandum of Loan Agreement [3].  There was thus a breach of section 18 of the MLO which rendered the Loan Agreement and its security unenforceable.

(2)   The 1^st loan (of $5,000,000 granted by the plaintiff under the Loan Agreement now sued upon) and 2^nd loan (of $700,000 granted by FPF under another set of loan documents which form no part of plaintiff’s claim herein) should be considered together.  The “set-up charge” of $40,000 charged under the 2^nd loan should be considered as having been charged jointly by the plaintiff and FPF.  This contravened section 27 of the MLO.

(3)   The early repayment clause contained in the “合約附加條款” contravened section 21 of the MLO.  The collection charges contained in the same document contravened section section 29(10) of the MLO.

(4)   The plaintiff charged “default interest” thus contravened section 22 of the MLO which rendered the Loan Agreement and its security unenforceable.  The defendant argued that the stated interest rate in the Loan Agreement (ie 21.6% per annum) and the “preferential rate of 1.8% pa” stated in the “貸款優惠書” were parts of a devise to hide the true agreement that interest will be charge at 1.8% per annum so long as monthly repayments are punctually made.  The so-called reverting to 21.6% per annum upon incident of default really meant that the rate of 21.6% was in reality a “default interest rate”.

(5)   Although under normal situation, the interest rate (taking the 1^st and 2^nd loans together, and including the set-up charge as if it were an interest element) would not result in an effective interest rate of over 60% per annum, the situation was different upon an instance of default.  Upon default, not only default interest would be charged, collection charge of 30% of the total outstanding sum would be levied and this would have the effect of pushing the effective interest rate to be in excess of 60% per annum which rendered the Loan Agreement and the security unenforceable as a result of contravening section 24 of the MLO.

Section 18

23.  First of all, Mr Wong accepted that in the Statement of Claim and the Reply, only the English Loan Agreement and the Chinese “貸款優惠書” were mentioned.  He however accepted that in fact, the two other Chinese documents “合約附加條款” and the “貸款金額及供款方法確認書” were executed on 24 May 2012 simultaneously with the Loan Agreement.  Mr Wong thus effectively accepted that there was a breach of section 18.  He however relied on section 18(3).

24.  I shall return to this issue in due course.

Early repayment clause

25.  Mr Wong accepted that the loan documents executed by the defendant included a clause that imposes an administrative charge of 5% of the loan amount upon early repayment of the loan.  Section 21 of the MLO is thus engaged.  Mr Wong however argued that:

(i)   this clause is contained in the “合約附加條款” which is severable from the Loan Agreement. In any event, the defendant has never sought to invoke this clause which renders this argument unreal and academic; and

(ii)   in any event, section 21 merely gives a right to borrower to tender early repayment to discharge his indebtedness.  It has no effect on the legality or enforceability of the loan agreement and the related security.

26.  I agree with Mr Wong’s submissions in this regard.

Collection charges

27.  This clause is also included in the “合約附加條款” and it reads:

「借款人如於每一期到期供款日未能供款，並逾期超過30天，貸款人將會派員、委託收帳公司向借款人追討該期欠款，借款人必須承擔貸款人為追討該期欠款之費用支出，而繳付相當於該期應邀款項之30%作為追收之行政費用。」

28.  Mr Wong submitted that on a true construction of this clause, the 30% collection charge means 30% of the “instalment” that has been overdue for over 30 days.  For instances, the instalment due as of February 2014 was $40,000, the collection charge would be $12,000.  Even assuming the instalment reverted to $90,000 under the 21.6% per annum interest rate stipulated in the Loan Agreement, the collection charge would just be $27,000.

29.  The defendant however argued that the 30% collection charge would be calculated on the denomination of the overdue principal of $5,000,000 plus $90,000 as overdue interest as of February 2014.  His argument was based on Clause 2 of the same “合約附加條款” which gave the lender the right, upon default, to call in the entire loan principal and outstanding interest.  He therefore calculated the 30% collection charge to be $1,527,000.  Basing on this premise, the defendant would further argue that such a charge would push the effective interest rate to be well beyond the 60% per annum statutory maximum.

30.  I agree with the interpretation of Mr Wong and reject the defendant’s argument.  Clause 3 consistently referred to the phrases “每一期到期供款”; “該期欠款”; and “追討該期欠款之費用支出” and “該期應邀款項之30%” (emphasis added).  It does not deal with the specific situation stipulated under Clause 2 when the lender exercises its right to call in the repayment of the entire outstanding principal and interest.

31.  Furthermore, I do not agree with the defendant that levying “collection charge” is in contravention of section 29(10) which reads:

“Any money lender or his partner, employer, employee, principal or agent or any person acting for or in collusion with any money lender who charges, recovers or receives any sum as for or on account of any costs, charges or expenses (other than stamp duties or similar charges) referred to in section 27(3) or demands or receives 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 commits an offence.”

And section 27(3) reads:

“Subject to section 33A(5), 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.”

32.  It is thus clear that both sections 27(3) and 29(10) are directed at the charging of fee (in howsoever form one calls it) for the procurement of a loan or a security thereunder.  Imposition of collection charge in the event of default is in my judgment not covered by these sections.  Rather, the imposition of such collection charge could arguably amount to charging a default interest rate in some form of a disguise.  That may arguably contravene section 22(1)(c) which I will deal with below.

Set-up charge

33.  On the other hand, the defendant’s complaint of the “set-up charge” of $40,000 does seem to fall within the ambit of section 27(3). The effect of section 27(3) is that the charging of $40,000 was unlawful.  The consequence is stipulated under section 27(4) which reads:

“If any money ... is directly or indirectly paid ... 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 ... may be set off against the amount actually lent ... ”

34.  Hence, even if the defendant’s case is accepted, ie although the set-up charge was received by FPF, it was acting in collusion with the plaintiff and hence the plaintiff should be regarded as sharing this set-up charge with FPF, it does not render the Loan Agreement (and its underlying security) unenforceable.  The defendant has at most an arguable case of setting off this sum of $40,000 from the loan principal.  On this basis, Master J Wong’s order of repayment of the loan principal of $5,000,000 should be reduced to $4,960,000.

Default interest

35.  Clause (4) of the Loan Agreement [4] is entitled “Additional interest in Default of Payment” and it reads:

“4.1 In additional, the Borrower is liable to pay the Lender a further interest of the whole sum of the Principal and interest from the date of default until the whole sum being full payment. It is clearly declared and agreed by the parties that the aforesaid additional interest payable by the Borrower shall not be reckoned and deemed as part payment of the Principal Sum and interest aforesaid.

4.2   It is clearly and expressly agreed by the parties that the Lender is entitled to recover the interest after judgment at the same interest rate of 21.6% per annum notwithstanding that there is a prescribed court judgment rate.”

36.  Clause (4) 4.1 does not set out the rate of such “further interest” chargeable in case of default.  The Loan Agreement purported to set 21.6% per annum as the agreed interest rate.  The interest rate of 21.6% was also stated as the “The Rate of Interest Charged on the Loan” in the Memorandum of the Loan Agreement [5].  Yet, at the same time as the execution of the Loan Agreement, the defendant was also required to execute the “貸款優惠書” [6] which stated that so long as the defendant makes punctual monthly repayment (not exceeding five days), he shall be entitled to a “Preferential interest rate of 0.8% pm”.  That would be 9.6% per annum.  If the defendant shall fail to comply with his obligations under the Loan Agreement, this “preferential agreement” will become void and ineffective.  Interest will then be calculated at 1.8% per month (ie 21.6% per annum).  As a matter of fact, it can be seen from the plaintiff’s demand letter dated 17 March 2014 that a sum of $1,158,794.52 was charged as “interest payable”.  The plaintiff was thus seeking to charge interest retrospectively using the rate of 21.6% by reason of the default.

37.  It must have been the view of Master J Wong that the defendant has an arguable case to demonstrate that the arrangement of executing the Loan Agreement and the “貸款優惠書” was a disguise for charging a default interest and hence a contravention of section 22(1)(c).  I respectfully agree.  Mr Wong in fact fairly accepted that the defendant has such an arguable case.  Furthermore, although the plaintiff has not attempted to charge the defendant for “collection charge”, the inclusion of such a clause in the Loan Agreement is arguably a contravention of section 22(1)(c).  Mr Wong submitted that even if the charging of default interest was illegal, the plaintiff can rely on the discretion of the court under section 22(2).  I will deal with the exercise of discretion under both sections 18(3) and 22(2) below.

Excessive interest rate

38.  In this regard, it is my view that the defendant’s argument and his calculations under his various Tables have been made under a misconception about section 24 and section 22.

39.  Section 24 prohibits the charging of interest on a loan at an effective interest rate of interest which exceeds 60% per annum. Section 2 defines the words “effective rate” to mean the true annual percentage rate of interest calculated in accordance with Schedule 2.  However, the Court of Appeal in Kwok Ying Lung v Ko Chi Hung & anor (CACV 635/2000 and CACV 142/2001) decided that the words “effective rate” in sections 24 and 25 bear a different meaning.  Where the interest charged is capable of being expressed in terms of a rate, Schedule 2 has no application.  In such case, the “effective rate” must mean the actual rate of interest per annum.  In particular, Yuen J (at para 41) said that where an actual rate is specified in the memorandum of loan agreement, Schedule 2 has no application.  In the present case, the principal was to be repaid in a lump sum at the end of 12 months. In the meantime, monthly interest were payable at the contractual rate of 1.8% per month, ie 21.6% per annum.  That is also the rate of interest stated in the memorandum.  Schedule 2 has no application.

40.  Section 22 prohibits the charging of default interest rate which is higher than the contractual rate of interest.  It is subject to a proviso that permits charging of simple interest on overdue interests so long as it does not render the effective rate to exceed 60% per annum payable in respect of the principal apart from any default.

41.  In other words, when one seeks to analyze whether section 24 has been contravened, one does not analyze it on a scenario of default.  One simply looks at the rate of interest agreed to be charged and compare it with the statutory maximum of 60% per annum.  One should not analyze it in the context of a default situation.  If a higher rate of interest is charged by reason of default, it runs into the realm of section 22 and would be illegal / unenforceable but for the proviso therein.

42.  At the hearing, the defendant clearly confirmed that his case is that under normal situation, the interest rate (taking the 1^st and 2^nd loans together, and including the set-up charge as if it were an interest element) would not result in an effective interest rate of over 60%.  There was thus no contravention of section 24.

43.  The defendant’s case is that upon default, a higher interest rate and retrospective interest would be charged resulting in an effective interest charge above 60% per annum.  That would be a contravention of section 22.  In this scenario, Mr Wong accepted that the defendant has an arguable case of contravention of section 22.

Sections 18(3) and 22(2)

44.  Section 18(3) reads:

“Notwithstanding 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.”

The wording of section 22(2) is nearly identical to that of section 18(3).  The court will consider the question of what is equitable under the same principles.  The court has to look at “all the circumstances”.

45.  In Brother’s Company (a firm) v Ah Puk Transportation (a firm) [1986] HKLR 821, the court held that the factors to be taken into account include (i) relative status of the parties; (ii) the nature and extent of the default; (iii) the way in which it arose; (iv) the implications for the borrower; (v) the attitude of the lender; and (vi) the general appearance of the contract throughout.  See also Emperor Finance v La Belle Fashions (2003) 6 HKCFAR 402, at para 119.

46.  Mr Wong accepted that the court has to look at all circumstances.  In the context of a striking out application, the court has to assume the facts pleaded in the defendant’s case are true.  Mr Wong however submitted that it must be inequitable not to enforce the Loan Agreement to the extent of requiring the defendant to repay the principal of $5,000,000 and the monthly interest of $40,000 from the date of default to judgment.  He relied on the following objective facts:

(1)   $5,000,000 was indeed lent to the defendant who had admittedly used the money to repay the then mortgage on the Property.  The defendant’s liability towards the original mortgagee was thus discharged.  As a matter of fact, the defendant has been occupying the Property from the date of default in February 2014 to date without having to pay anyone.

(2)   The defendant had only repaid a total of $800,000 as interest at a rate that he clearly agreed to, ie 9.6% per annum.

(3)   The defendant was an experienced banker and not an unsophisticated person.  He was fully aware of the essential terms of the loan. Although section 18 was arguably contravened, the defendant was provided with all the documentations under the loan.  At the very least, he knew what he was entering into in so far as the obligation to repay the principal and the monthly agreed interest of $40,000.  In other words, the contravention of section 18 created no real prejudice on him.

(4)   There was no contravention of section 24.  Even by reverting to the non-preferential rate of 21.6%, the interest rate charged was not excessive.

(5)   Whilst the defendant may have an arguable case that the arrangement was a disguise to charge default interest at 21.6%, the defendant will not suffer any prejudice if the court grants interest at the rate of 9.6% per annum, ie $40,000 per month which was a rate that he clearly agreed to.

47.  In my judgment, I have also to take into account the following factors particularly in the light that this is after all a striking out application:

(1)   The defendant has an arguable case that there was a deliberate and sophisticated attempt on the part of the plaintiff to evade the various controls imposed by the Ordinance.  He can argue that the plaintiff is a dishonest and unscrupulous moneylender who should be stripped of all commercial benefits under the loan.

(2)   Based on this approach, the defendant’s arguable case on “set-up charge” meant that the principal sum should first be reduced to $4,960,000.

(3)   Furthermore, to deprive the plaintiff of any commercial benefit under the loan, it should not be allowed to charge any interest at all.  Accordingly, the amount of $800,000 received by the plaintiff so far should be appropriated as partial repayment of the principal.  The outstanding principal is further reduced to $4,160,000.

(4)   Moreover, the defendant should be allowed to defend any claim by the plaintiff for interest from the date of default to the final conclusion of these proceedings.

48.  Having assumed all factors in favour of the defendant, I am of the view that it will definitely be inequitable not to require him to repay the amount of $4,160,000 and I am satisfied that the Loan Agreement should at least be enforced to that extent.  If the plaintiff wishes to pursue against the defendant for any amount above $4,160,000, the action will have to proceed and the defendant should be allowed to defend such claims.  Accordingly, the Judgment / Order of Master J Wong should be set aside.

49.  I am also satisfied that it would definitely be inequitable not to allow the plaintiff to enforce the security to the amount of $4,160,000.  Accordingly, I will grant the order of possession and allow the plaintiff to enforce the security to that extent.

50.  On the question of costs, the defendant has succeeded partially in this appeal and I will make an order nisi that there should be no order of costs for the appeal. As for the costs of the application and the hearing before Master J Wong, each party should bear its own costs as neither party fully wins.  Depending on whether the plaintiff would still wish to pursue against the defendant for the rest of its claims, this action may or may not proceed further.  The costs of the action cannot be resolved once and for all at this stage and I will have to make it in the cause.  I will however give general liberty to apply.

51.  In the end, I make the following orders:

(1)   The Judgment / Order of Master J Wong dated 14 January 2016 is set aside.

(2)   Judgment in favour of the plaintiff in the sum of $4,160,000 with judgment rate from the date of this order until payment.

(3)   The Defence and Further Defence should be struck out in so far as it seeks to avoid the obligation to repay to the plaintiff the sum of $4,160,000.  Subject to the aforesaid, leave is granted to the defendant to amend his Defence as per Exhibit YCH–1.  Leave is further granted to the defendant to defend any further claim by the plaintiff over and above the sum of $4,146,000.

(4)   The defendant do within 28 days from the date of service of this Order deliver up to the plaintiff vacant possession of the property known as Flat E on 7^th Floor of Tower 11, No 11 Parc Oasis Road, Parc Oasis, Kowloon, Hong Kong (“the mortgaged property”).

(5)   There shall be an order nisi that each party should pay his / its own costs in respect of the application and hearing before Master J Wong on 14 January 2016.

(6)   Subject to the above, costs of the action be in the cause with liberty to apply.