EASY FORTUNE PROPERTY LTD v. YUNG CHUN HIM

CACV 182/2016

[2019] HKCA 1055

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 182 OF 2016

(ON APPEAL FROM HCA No. 1484 OF 2014)

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JUDGMENT

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

1.  This is the defendant’s appeal against the judgment of Mr Recorder Pow SC ("the Judge”) of 12 August 2016.

A.   The plaintiff’s claim

2.  The plaintiff is a licensed moneylender. The defendant is the borrower of a loan from the plaintiff. 

3.  The plaintiff’s claim is for repayment of the outstanding principal and interest of a HK$ 5 million loan ("the Loan”) and an order for possession of a residential property known as Flat E, 7^th Floor, Tower 11, No 11 Parc Oasis Road, Parc Oasis, Kowloon, Hong Kong ("the Property”) that was charged as security for the loan.  

4.  The plaintiff relies on a loan agreement ("Loan Agreement”) and a supplemental agreement in Chinese (貸款優惠書, "Supplemental Agreement”), both of which were dated 24 May 2012.  The plaintiff does not dispute that two other Chinese documents (合約附加條款and 貸款金額及供款方法確認書) were also executed by the parties on the same day (see [20] below).

5.  The Loan Agreement provided that the Loan was to be repaid at the end of 12 months, but could be renewed for a further 12 months.  It further provided that the defendant was to make monthly interest payment at the rate of 21.6% per annum (i.e. 1.8% per month).  By the Supplemental Agreement, the plaintiff agreed to charge a preferential interest rate of 9.6% per annum (i.e. 0.8% per month) in the monthly sum of $40,000, provided that the defendant made repayment punctually.

6.  As security for the Loan, a legal charge was executed over the Property ("Legal Charge”).   

7.  It is common ground that the defendant had in total paid $800,000 as interest payment. It is the plaintiff’s case that the defendant has since 24 February 2014 defaulted in his payment obligation.  

8.  Upon his own petition presented on 20 February 2014 (HCB 1233/2014), the defendant was adjudicated bankrupt on 1 April 2014.  With leave of the court, the plaintiff instituted the action below on 1 August 2014.

B.   The defendant’s defence

9.  On 12 November 2014, the defendant filed a Statement of Defence and Counterclaim in which he counterclaimed against the plaintiff and one Forever Property Finance Company Limited ("FPF”) as 2^nd defendant.  The plaintiff filed its Reply and Defence to Counterclaim on 20 January 2015.

10.  The defendant does not dispute he had received the Loan from the plaintiff.  The defendant stated in the affirmation leading to his bankruptcy petition that he owed the plaintiff $5 million together with interest.  The defendant also does not dispute he has not made any interest payment since 24 February 2014. 

11.  The defendant’s defence, in a nutshell, is that the loan agreement he made with the plaintiff and the Legal Charge are void and/or unenforceable due to various contraventions of the Money Lenders Ordinance, Cap. 163 ("MLO”). 

12.  The defendant’s case as summarized by the Judge in [13] of the judgment, is that:

(1)  In April 2012, the defendant orally agreed with a Ms. Winnie Chan of FPF to borrow $5,700,000 by way of two loans in the respective amount of $5,000,000 and $700,000, to be secured by a first legal charge over the Property.  On 4 May 2012, he "concluded the deal in writing” at the office of FPF.  The written documents, provided as follows:

Lender	Plaintiff	FPF
Agreement effective date	1st loan: 24 May 2012	2 nd 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 the Property	4th legal charge on the Property
Set‑up fee	Shared with FPF	HK$40,000

(2)  The terms in the written documents differed from the oral agreement reached with Ms Chan of FPF. Although he had raised strong objections, the defendant felt he had no alternative and had to execute the written agreements.  The written agreements are thus unenforceable in law because the defendant did not have a free choice.   

(3)  The written agreements were structured in such a way that: (a) on the occurrence of a minor default, the defendant would become liable to pay high interest rates on the remaining balance of the loan; and (b) the true cost for the defendant (such as the set-up fee, early repayment penalty, further additional default charge and collection agency fee) was concealed. The written agreements constituted unconscionable contracts within the meaning of section 6 of the Unconscionable Contracts Ordinance, Cap. 458.

(4)  The written agreements were subsequently renewed for another year under the following terms:

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	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)	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)	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 the Property	4th legal charge on the Property
Set‑up fee	Shared with FPF	1st & 2nd loans: HK$40,000 3rd loan: HK$10,500 4th loan: HK$4,000

(5)  On 22 June 2012, the plaintiff unilaterally and without the defendant’s consent sub-charged/sub-mortgaged the Property to a bank.

(6)  The defendant had paid monthly interest to the plaintiff under the 1^st loan ($40,000) and to FPF under the2^nd, 3^rd and 4^th loan (respectively $12,600, $11,000 and $3,300) until February 2014 when he had liquidity problem.  His request for a grace period to pay one of the monthly interest payments was refused.  Upon his default, all the loans were deemed to have been defaulted and higher interest rates applied retrospectively to the inception of the loans, which was not mentioned in the oral agreement between the defendant and Ms Chan.  A 30% agency fee[1] was also payable.

(7)  The total monthly repayment thus rose to $129,800 (from $66,900) together with $38,940 collection fee. After the collection agent telephoned and sent a letter to him demanding repayment, the defendant petitioned for his bankruptcy.

(8)  In summary, the plaintiff, in conjunction with FPF, structured the several loans and the contractual provisions in ways that amounted to contravention of the MLO as follows:

(a)  Charging excessive interest at over 60% per annum when the collection fee was included, in contravention of sections 18(1) and (2)(i), 29(4)(a), 21(1), 22(1)(c), 22(2), 27(1), 24(1) and (2), or 25;

(b)  The set-up fee contravenes section 27(1);

(c)  The early repayment penalty is prohibited by section 21(1);

(d)  The charging of default interest and collection fee contravene section 22(1)(c); and 

(e)  The set-up fee and the collection fee should be taken into account to form the interest element of the loans.

(9)  On the defendant’s calculations, upon the default in one monthly repayment, the respective effective interest rates for the 1^st to 4^th loan would become 65.78%, 94.68%, 94.68% and 366.20% per annum.  The several loan agreements and the legal charges are unenforceable by reason of section 24 of the MLO.     

C.   Proceedings in the Court below

13.  By summons filed on 19 March 2015, the plaintiff applied to enter judgment pursuant to Order 88 of the Rules of the High Court, Cap. 4A, and further to strike out the defendant’s counterclaim.  On 22 June 2015, Master Lai struck out the defendant’s counterclaim as against both the plaintiff and FPF, and adjourned the application for judgment.  The plaintiff subsequently withdrew the adjourned application and in its place issued a summons on 30 September 2015, applying for judgment on the monetary claim and an order for possession of the Property, as well as an order striking out the Statement of Defence.

14.  On 14 January 2016, pursuant to the plaintiff’s 30 September 2015 summons, Master J Wong struck out the defence save that leave was given to the defendant to defend the claim for interest over and above the monthly repayment of $40,000 as from 27 January 2014.  He ordered the defendant to pay the plaintiff the principal sum of $5,000,000 and monthly interest of $40,000 from February 2014 to January 2016, making a total sum of $5,960,000, and interest on the principal sum of $5,000,000 at statutory rate from 1 August 2014 to 14 January 2016 and thereafter at judgment rate.  Master Wong further ordered the defendant to deliver up vacant possession of the Property and to pay costs to the plaintiff assessed at $104,000.

15.  The defendant appealed against Master Wong’s order.  He also applied for leave to amend the Statement of Defence and Counterclaim by substituting it with a document entitled "Defence and Further Defence”. 

16.  By his judgment handed down on 12 August 2016, the Judge allowed the appeal in part. He set aside Master Wong’s order and made the following order in its place:

(1) Judgment be entered for the plaintiff in the sum of $4.16 million with interest at judgment rate from the date of the order until payment;

(2) The defendant’s defence be struck out to the extent that it seeks to resist payment of the sum of $4.16 million;

(3) Leave to the defendant to defend the plaintiff’s claim over and above the sum of $4.16 million; and

(4) The defendant shall within 28 days deliver up vacant possession of the Property to the plaintiff.

17.  By his notice of appeal filed on 8 September 2016, the defendant appeals against the Judge’s order.  On 6 April 2016, G Lam J ordered a stay of the order for possession pending the determination of this appeal.

D.  The Judge’s decision

18.  In the appeal before the Judge, the defendant advanced five main arguments as follows (see [22] of the judgment):

(1)  The 1^st and 2^nd loan documents did not reflect the oral agreement between the defendant and Ms Chan of FPF.  The terms in the three Chinese documents, which were executed at the same time as the Loan Agreement, were not properly reflected in the memorandum of the Loan Agreement.  This contravened section 18 of MLO rendering the Loan Agreement and the Legal Charge unenforceable.

(2)  The Loan should be considered together with the $700,000 loan lent by FPF (which does not form part of the plaintiff’s claim).  The set-up fee of $40,000 charged under the loan made with FPF contravened section 27 of the MLO, and it should be considered as being jointly charged by the plaintiff and FPF. 

(3)  The early repayment clause contained in one of the three Chinese documents (合約附加條款) contravened section 21 of the MLO.

(4)  The collection fee payable on default contravened section 29(10) of the MLO.  Further, with the charging of the collection fee, which is 30% of the total outstanding balance, the effective interest rate becomes in excess of 60% per annum.  This contravened section 24 of the MLO and rendered the loan agreement unenforceable.

(5)  The interest rate stated in the Loan Agreement (21.6% per annum) and the preferential interest rate stated in the Supplemental Agreement (0.8% per month, 9.6% per annum) were to hide the fact that interest would be 9.6% per annum if monthly repayments were made punctually, but a default interest at the rate of 21.6% per annum would be charged on default.  The charging of the default interest contravened section 22 of the MLO.

19.  The Judge considered that the part of the Master’s order ordering the defendant to pay interest on the principal sum of $5,000,000 at statutory rate from 1 August 2014 until 14 January 2016 and thereafter at judgment rate amounted to a double award of interest for the period from the date of the writ to the date of judgment (14 January 2016).  Counsel for the plaintiff accepted this must be a mistake, pointing out that this part of the order was not contained in the draft order submitted by the plaintiff’s solicitors to the court for approval.

20.  As to the defendant’s grounds of appeal, on ground (1), the plaintiff did not dispute there was a breach of section 18(1) of the MLO in that the provisions in the two other Chinese documents (合約附加條款and 貸款金額及供款方法確認書) that were executed at the same time as the Loan Agreement and the Supplemental Agreement were not reflected in the written memorandum. The plaintiff, however, relied on section 18(3) of the MLO and argued that it would be inequitable not to enforce the Loan Agreement to the extent of requiring the defendant to repay the principal sum of $5 million and the monthly interest of $40,000 from the date of default to judgment.  The Judge dealt with this argument together with the plaintiff’s argument on section 22(1) in opposing ground (5) (see [26] to [28] below).

21.  On ground (2) which concerns the set-up fee, the Judge considered that this may involve a breach of section 27(3) of the MLO.  The consequence, as provided by section 27(4), is that the borrower may recover the set-up fee from the lender and may set it off against the amount actually lent.  The Judge therefore held that, if the defendant’s case that the plaintiff acted in collusion with FPF and shared the set-up fee with FPF was accepted, the defendant at the most would have an arguable case that the set-up fee of $40,000 paid to FPF should be deducted from the loan from the plaintiff, reducing it to $4,960,000.[2]  

22.  On ground (3) which concerns the early repayment clause and section 21 of the MLO, the Judge accepted the plaintiff’s arguments that the clause, which was contained in clause (1) of the Chinese document entitled "合約附加條款”, could be severed from the Loan Agreement, and that this ground is, in any event, academic since the plaintiff has not sought to invoke this clause.  The Judge also accepted that section 21 only gives a borrower the right to make early repayment, but does not impact on the legality or enforceability of the loan transaction and the related security.[3]

23.  As to ground (4) which concerns the collection fee stipulated under clause (3) of the Chinese document entitled "合約附加條款”, the Judge rejected the defendant’s argument that the 30% collection fee was to be calculated on the total outstanding indebtedness, namely, the unpaid principal of $5 million together with all overdue repayment instalments.  The Judge held that clause (3) should be construed to mean that the collection fee was to be calculated by reference to just the amount of the overdue repayment instalment(s).  The Judge therefore did not accept the defendant’s case that after taking into account the collection rate, the effective interest rate was in excess of 60% per annum and contravened section 24 of the MLO.[4]

24.  The Judge also did not accept that the levying of collection fee contravened section 27(3) or section 29(10) of the MLO.  The Judge was of the view that the two sections only prohibited the charging of fees for procuring a loan or the security thereunder, and the prohibition did not extend to the imposition of collection charges in the event of default.[5]

25.  On ground (5), the Judge accepted, and the plaintiff did not seek to argue otherwise, that the defendant had an arguable case that the execution of the Supplemental Agreement alongside with the Loan Agreement was a disguise for charging a default interest.  The Judge also accepted that it was arguable that the charging of a higher interest rate retrospectively upon default would result in an effective interest rate in excess of 60% per annum, thereby contravening section 22(1)(c) of the MLO.[6] The Judge, however, pointed out that it was not a case of contravention of section 24 of the MLO in view of the defendant’s confirmation that under normal circumstances when there was no default, the interest rate (taking the first and second loans and even including the set-up fee as an interest element) would not result in an effective interest rate of over 60% per annum.[7]  

26.  With regard to the arguable breach of section 22(1), the plaintiff relied on the court’s discretion under section 22(2).  As section 22(2) is in almost identical terms as section 18(3), the Judge dealt with them together. 

27.  In considering what would be inequitable under sections 18(3) and 22(2), the Judge had regard to the principles set out in Brother’s Company (a firm) v Ah Puk Transportation (a firm) [1986] HKLR 821 and Emperor Finance v La Belle Fashions (2003) 6 HKCFAR 402 at [119].  The Judge took into account the objective facts relied on by the plaintiff to support its argument (at [46] of the judgment).  The Judge concluded that it would be inequitable not to require the defendant to repay the sum of $4,160,000, which is the principal sum less the $40,000 set-up fee (see [20] above) and the $800,000 interest that the defendant had paid to the plaintiff (see [7] above).  He further held that it would be inequitable not to allow the plaintiff to enforce the security to the extent of $4,160,000. 

28.  The Judge accordingly set aside the Master’s order, and entered judgment for the plaintiff in the sum of $4.16 million with interest at judgment rate from the date of the order until payment.  He gave leave to the defendant to defend the plaintiff’s claim for any amount over and above $4.16 million. 

29.  The Judge made no order as to the costs of the appeal as the defendant only succeeded partially in the appeal.  As to the costs below, the Judge ordered that each party bore his own costs of the application and the hearing before Master Wong since neither party fully won, and subject to this, the costs of the action be in the cause with liberty to apply.[8]

E.  Grounds of appeal

30.  In this appeal, the defendant advanced the following grounds of appeal in his notice of appeal and supplementary notice of appeal:

(1)  The Judge was wrong in holding that:

(a)  when deciding whether there is a contravention of section 24 of the MLO, one should be looking at the rate of interest agreed to be charged and not by reference to a default situation.

(b)  Section 2 of the MLO and the case of Kwok Ying Lung v Ko Chi Hung & Anor (unreported) CACV 635/2000 and CACV 142/2001 have decisive implications on the meaning of "effective interest rate” and the application of Schedule 2 to the MLO.

(c)  Section 22 of the MLO permits the charging of simple interest on overdue interest so long as it does not render the effective interest rate to exceed 60% per annum payable in respect of the principal apart from any default.[9]

(2)  The Judge was wrong to exercise the discretion under sections 18(3) and 22(2) of the MLO in favour of enforcing the loan and ought to have held the loan agreement to be illegal and unenforceable by reason of contravention of sections 18 and 22.[10]

(3)  The Judge erred in his conclusion that the amount of the collection fee was to be calculated by reference to the overdue interest instalment, excluding the principal sum.[11]  The Judge should have held that the plaintiff has contravened sections 24, 22(1)(c) and/or 22(1)(a) of the MLO.

(4)  The Judge’s conclusion that sections 27(3) and 29 do not extend to imposition of collection fee should be reconsidered by the Court of Appeal.[12]

(5)  The Judge should have held the loan to be illegal and unenforceable by reason of extortionate conduct prohibited by section 25 of the MLO.[13]

(6)  The Judge failed to consider whether the security generated by the transaction which, on the Judge’s findings, was in contravention of the MLO, should or should not extend to the repayment obligation.[14]

F.  Discussion

F.1  Ground (1): Section 24 of MLO

31.  Ground (1) is directed at [38] to [43] of the Judgment where the Judge pointed out that the defendant’s argument and calculations in connection with the defence of contravention of section 24 of MLO were made under a misconception as to what constituted effective rate of interest for the purpose of the section.  The Judge explained:

"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, i.e. 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.”

32.  The defendant put forward three main arguments. First, he argued that the true intention of MLO is to prohibit excessive interest rate, irrespective of the circumstances giving rise to the interest, and does not differentiate between default interest and non-default interest. It was said that section 24 is the cardinal backbone of the ordinance as it features in several other sections in the ordinance (sections 18(1)(b), 22(1) and 25(1) and (3)).  Second, it was contended that section 2 and Schedule 2 of MLO and Kwok Ying Lung v Ko Chi Hung & Anor [2001] 3 HKC 480 had no application, relying on Good Time Finance Limited v HKSAR (2013) 16 HKCFAR 795. The defendant argued that the total amount of interest, including default interest, should be taken into account in determining whether the effective rate exceeds the rate prescribed in section 24.  Reliance was placed on Broad Mark Ltd v Lin Zhen Zhong & Ors [2012] 5 HKLRD 359, Treasure Spot Finance Co Ltd v Li Chik Ming & Anor (unreported) HCA 5387/2001, 7 September 2007 and Yu Tai Hing Co Ltd v Teresa Cheung (unreported) HCA 5453/2001, 27 August 2002.  Third, it was argued that the Judge had misinterpreted section 22 when he said that in deciding whether section 24 had been contravened, one should not analyse on the basis of a situation of default.

33.  The first argument can be dealt with shortly. The long title of the MLO provides that the ordinance is to, inter alia, provide protection and relief against excessive interest rates and extortionate stipulations in respect of loans, to provide for offences and for connected and incidental matters.  This is achieved through different provisions in Parts III, IV and V of the ordinance, including sections 18, 22, 24, 25, 27 and 29, which relate to different aspects and provisions of loan transactions.  The fact that references are made to Part IV of the ordinance (in sections 18(1)(b) and 22(1)) and to section 24 (in section 25(1) and (3)) does not lead to the conclusion that section 24 provides "the overriding guiding principle”, or assumes "considerable weight or pre-emptive role”[15].

34.  This brings us to the defendant’s complaint in Ground (1)(c) that the Judge’s interpretation of section 22 of MLO was erroneous.  Section 22(1), which applies to loans made by money lenders, provides:

"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.”

35.  The effect of section 22(1)(c) is to prohibit the charging of default interest that is at a rate higher than the contractual interest rate.  The proviso, however, permits the charging of simple interest on overdue payment, whether it is principal or interest, at an effective rate that does not exceed the effective rate payable in respect of the principal apart from any default, and provided that the effective rate does not exceed 60% per annum[16]. Contrary to the defendant’s argument, the Judge did not err in his understanding of the effect of section 22 as set out at [40] of the judgment.

36.  We turn next to the thrust of defendant’s argument under this ground of appeal, namely, what is the "effective rate of interest” of a loan for the purpose of section 24 of MLO.  Section 24, which prohibits excessive interest rates, provides in subsections (1) and (2) that:

"(1)  Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 60 per cent per annum commits an offence.

(2)  No agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds the rate specified in subsection (1).”

37.  The relevant part of section 2(1) and (2) of MLO provides that:

"(1)  In this Ordinance, unless the context otherwise requires —

          effective rate (實際利率), in relation to interest, means the true annual percentage rate of interest calculated in accordance with Schedule 2;”

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

38.  The interpretation of "effective rate of interest” in section 24(2) and how it interacts with the definition of "effective rate” in section 2 were considered by this Court in Kwok Ying Lung v Ko Chi Hung & Anor, supra. It is a case in which the defendant opposed the plaintiff’s Order 88 application for payment of money and interest owing under a second legal charge and for delivery of vacant possession of the secured property on the ground, inter alia, that extortionate interest had been charged on the loan.  The issue in the appeal was whether the effective rate of interest under the legal charge exceeded 60% such that the loan was irrecoverable by reason of section 24(2) of MLO.  

39.  Le Pichon JA, with whom other members of the Court agreed, pointed out that the issue was purely one of statutory interpretation.  At [28], reference was made to section 18(2) of MLO and Askinex Ltd v Green [1969] 1 QB 272, which considered the effect of section 6(2) of the Moneylenders Act 1927, a parallel provision of section 18(2).  Lord Denning M.R. held (at 281F-282A):

"... section 6(2) ... gives the moneylender a choice between two alternatives, which I will call alternatives (A) and (B). The choice is between stating an actual rate and a deemed rate. The first alternative (A) applies when the interest charged on the loan (i.e., the total amount payable in money over the full period) is capable of being expressed in terms of a simple actual rate per cent per annum over that period. In such a case the moneylender satisfies the statute by stating that rate in the memorandum. The second alternative (B) applies when the total sum of interest is not capable of being expressed in terms of a single actual rate per cent per annum, with the result that resort must be had to a deemed rate. In this second alternative the moneylender has to ascertain the deemed rate by making the calculation prescribed in the First Schedule and he must state in the memorandum that it is ‘calculated in accordance with the provisions in the First Schedule’ to the Act.”

40.  At [29], [30], [32] and [34], Le Pichon JA held as follows:

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

30.  I would respectfully adopt the same construction for section 18(2)(i) of the Ordinance. It is a construction that accords with the provisions of section 2(2): the calculations set out in Schedule 2 produce a deemed rate of interest and resort to Schedule 2 is only necessary where the interest charged ‘is not expressed in terms of a rate’. ... Nor, in my view, is it really possible to perform the calculations set out in Schedule 2 where an actual rate has been specified. In such a case, the calculations cannot readily be performed because they are not meaningful and cannot be meaningfully applied to produce a deemed rate where interest is charged at an actual rate.”

"32.  In my judgment, Schedule 2 to the Ordinance has no application unless the interest payable under a loan is not capable of being expressed in terms of an actual rate per cent per annum. In such a case, the calculations set out in Schedule 2 yield a deemed rate.”

"34.  The question of statutory interpretation is the meaning to be given to ‘the effective rate of interest’ in section 24 and, for that matter, section 25 of the Ordinance. Those sections are meant to strike down excessive interest rates. Given my view of the construction of Schedule 2, the expression ‘effective rate’ when read literally by reference to its statutory definition, only agreements with a deemed rate calculated in accordance with Schedule 2 would come within the purview of these sections. This clearly could not have been the intention of the legislature. Plainly, section 24 is meant to render unenforceable cases where the actual interest is stated and that exceeds 60%, for example, where simple interest is charged at 65% per annum. That being so, the context requires that ‘effective rate’ used in section 24 (and section 25) be given a different meaning in cases where Schedule 2 can have no application, i.e., where the interest charged is capable of being expressed in terms of a rate. In such cases, ‘effective rate’ must mean the actual rate of interest per centum per annum.”

41.  Yuen J (as Yuen JA then was) further explained at [42] to [45] that:

"42. The "actual rate" there referred to is the first means in s.18(2)(i) of formulating interest payable, i.e. "the rate of interest charged on the loan expressed as a rate per cent per annum". That rate must by definition be a single, constant rate charged on the entire loan. The language does not admit of a rate varying from time to time.

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

44. In those situations, the second formulation in s.18(2)(i), i.e. the statutory calculations, is applied by s.2(2). According to Schedule 2, the repayments have to be appropriated between principal and interest, to arrive at a "statutorily averaged" true rate of interest for that agreement.

45. As for the argument that the words "effective rate of interest" in s.24 and s.25 mean only the rate according to the statutory calculations, that could not have been the legislature's intention when s.24 and s.25 are read in the context of s.18(2)(i).”

42.  It is clear from the above passages that the Judge did not err on the law when he stated in [39] that 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.  As observed by the Judge, in the present case, the loan was to be repaid in a lump sum at the end of 12 months, and until then, monthly interest payments were payable at the rate of 1.8% per month (or 21.6% per annum), as stated in the memorandum.  Schedule 2 therefore has no application.  

43.  We do not accept the defendant’s argument that the above principle set out in Kwok Ying Lung v Ko Chi Hung & Anor does not apply to the present case.  The defendant sought to draw support from Good Time Finance Limited v HKSAR, supra, which was an application for leave to appeal to the Court of Final Appeal by a defendant convicted of the offence of lending money at an effective rate of interest which exceeds 60% per annum, contrary to section 24(1).  The applicant had entered into a loan agreement to lend $160,000 to the borrower to be repaid together with interest by 60 equal monthly instalments of $7,086.  The interest rate stated in the loan agreement was 2.76% per month (33.15% per annum).  However, the interest for the loan would become 65.2% per annum if the method of calculation under Schedule 2 of MLO was used.  In refusing to give leave to the applicant to appeal, the Appeal Committee rejected the argument that the interest rate stated in the loan agreement should be taken as the effective rate of interest.  This was because the monthly repayments consisted of principal and interest over time, so that the interest rate stated in the loan agreement was only a true statement of the actual interest rate for the first instalment of the loan, and the amount of interest on the gradually diminishing outstanding principal would continually rise over the period of the loan (see [8]).  

44.  The decision does not lend support to the defendant’s arguments.  First, the Appeal Committee approved of Kwok Ying Lung v Ko Chi Hung & Anor.  Its decision was premised on the principle set out in Kwok Ying Lung v Ko Chi Hung & Anor, namely, if a true actual rate of interest is stated in the loan agreement, there is no room to resort to Schedule 2 to calculate the effective rate of interest (see [7] to [9]).  Second, the reason why the Appeal Committee, in considering whether there was contravention of section 24, did not use the interest rate contained in the loan agreement and instead adopted the method of calculating the effective rate in Schedule 2 is because the repayment instalments consisted of both principal and interest.  In the present case, the principal was to be repaid at the end of 12 months (which was subsequently extended for another 12 months); hence the monthly payments are only interest payments.  Accordingly, the interest rate stated in the memorandum is a true actual rate of interest under the first limb of section 18(2)(i).  As such, Schedule 2 has no application.  

45.  The defendant also argued that for the purpose of determining whether the effective rate of interest exceeds 60% per annum, the total amount of interest, including default interest, must be taken into account.  He relied on three cases to support his argument. 

46.  The first is Broad Mark Ltd v Lin Zhen Zhong & Ors, supra, in which the plaintiff claimed against the defendants the principal sum of US$8.9 million, together with interest, pursuant to a Subscription and Investment Agreement.  Bharwaney J upheld the master’s decision to set aside the default judgment entered against the 1^st defendant principally on the ground that there was real prospect of success in his defence that, if he was adjudged liable, his liability was less than the US$8.9 million claimed (see [13]).  At [14] of the judgment, the judge further said:

"In addition to the claim for the principal sum, there is a very substantial claim for interest in excess of the sum of US$13m. I have heard submissions that the effective rate of interest claimed, after taking into account the compounding effect of adding interest to the overdue amount on the last business day of every calendar month that it was outstanding, was to raise the rate of 35% per annum, which was the rate set out at Clause 8.4 of the bond conditions under the Further Supplemental Deed, to an effective rate of over 70%, a rate which was illegal by virtue of section 24 of the Money Lenders Ordinance, Cap 163. Mr Hart answered that submission by asserting that the amount claimed as interest was calculated by taking the rate of 35% per annum and that the provision regarding monthly compounding had not been followed. However, he rightly conceded that, if a reasonable defence had been demonstrated in relation to the principal amount claimed, then it must follow that a reasonable defence would likewise be demonstrated in respect of the amount of interest claimed. For these reasons, I am prepared to set aside the default judgment obtained against the 1^st defendant without going on to consider the further defence that had been raised which was based on the Deed of Compromise. ...” (emphasis added)

47.  The defendant relied on the underlined part to support his argument that default interest should also be taken into account in ascertaining whether there was a breach of section 24(2).  However, Bharwaney J was only recounting the submission made by the defendant.  He then went on to mention the reply submission of Mr Hart, who appeared for the plaintiff, before pointing out that, since there was a reasonable defence in respect of the amount of the principal sum, it followed there would be a reasonable defence on the amount of the interest.  Evidently, Bharwaney J had not endorsed the 1^st defendant’s submission.  Nor had he held that default interest should also be included when ascertaining the effective rate of interest for the purpose of section 24(2).   

48.  The second case relied on by the defendant is Treasure Spot Finance Co Ltd v Li Chik Ming & Anor, supra, in which the plaintiff sought to enforce three loans against the defendants.  At the trial after all the evidence was completed, the 1^st defendant raised the defence of illegality, contending that the interest charged on the loans contravened the provisions in the MLO, including sections 24 and 25.  The part of the judgment relied on by the defendant appeared in [114] to [116] of the judgment as follows (especially the part underlined):

"114.  Theoretically, all that the Court has to do is to see what sums (by whatever name called) other than principal are charged against the Defendants by the Plaintiff and such sums constitute the interest element. The effective or true rate of interest can then be worked out based on the amount of the principal in respect of each of the 3 loans.

115.  Thus, in the demand notes, all the items ‘Loan Interest’, ‘Overdue Amount’, ‘Overdue Interest’ and ‘Prepayment Charges’ would be regarded as part and parcel of the interest element for the purpose of calculating the effective or true rate of interest in respect of each of the 3 loans.

116.  My understanding is that, in such circumstances, Ms. Lee is asking the Court to draw the inference that the Plaintiff was charging interest on the 3 loans at effective rates between 48% – 60% per annum and even above 60% per annum in contravention of sections 24 and/or 25 of the Ordinance.” (Emphasis added)

49.  It is, however, clear from a proper reading of the judgment that from [103] to [116], Mr Recorder Patrick Fung SC, who was the trial judge, was only setting out the arguments of the 1^st defendant on the effective rate of interest.  The part relied on the defendant was not the holding of the court.  On the contrary, Mr Recorder Fung rejected the calculations put forward by the 1^st defendant’s counsel and further rejected the defence that the three loans had contravened sections 24 and 25 (at [122] and [123]):

"122.  I find that the present case falls into the third category in the passage cited above. In other words, I am not satisfied that the whole of the relevant circumstances are before the Court so as to enable the Court to come to the conclusion that the rates of interest set out in Ms. Lee’s 2 tables were or would have been the true rates of interest charged by the Plaintiff in relation to the 3 loans on a per annum basis. If the point had been pleaded and if the Plaintiff’s witnesses had been questioned on the 5 demand notes, an explanation might well have been offered to refute Ms. Lee’s suggestion.

123.  In the circumstances, I do not think that I am in a position to find that the Plaintiff had contravened section 24 or section 25 of the Ordinance.”

50.  The third case relied on by the defendant is Yu Tai Hing Co Ltd v Teresa Cheung, supra, which was an appeal against the Master’s decision to enter summary judgment against the defendant on five loans lent by the plaintiff.  The claim was disputed on the ground that the loans were unenforceable by reason of sections 24 and 25 of MLO.  At [6] of the judgment, Deputy High Court Judge Saunders said:

"Mr. Mok put before me a series of calculations of interest on each loan, based upon the terms of the Facility Letter's signed by the defendant and her husband. The terms of each letter are the same, except for the specific rate of interest. The provision for default interest is in the following terms:

‘we also agree to pay default interest upon maturity and expiration of the said Loan at the rate of 3% per month on the said Loan or any outstanding part thereof and overdue interest thereon (if any) provided that such interest payable to you shall not be more than an effective rate of interest which exceed 60 per cent per annum as provided under part IV of the Money Lender's Ordinance.’ (sic)

It will be noted that this provision allows the plaintiff to charge interest on outstanding interest. Mr. Mok put in a calculation in relation to each loan demonstrating the accumulation of interest and capital to show the total amount of interest payable in respect of each loan. He then applied the figures to the terms of Schedule 2 of the Ordinance to calculate the effective interest rate. Thus, it was contended that the effective interest rates of the loans were, as to the first loan, 88.36%, as to the second loan, 50.71%, as to the third loan, 64.68%, as to the fourth loan, 67%, and as to the fifth loan, 56.87%. Consequently the argument is open to the defendant that three of loans are unenforceable as being contrary to s 24, and all five loans are extortionate having interest rates exceeding the presumed extortionate rate of 48%. No doubt at trial an appropriately qualified accountant or actuary will be called to establish the calculations. But for the purpose of these proceedings Mr. Mok has satisfied me that his calculations are arguably correct.”

51.  Although the Deputy Judge said that the calculations of interest put forward by the defendant’s counsel, which included interest on overdue interest (which was permitted by the Facility Letter), was arguably correct, this was said in the context of a summary judgment application, where the defendant was only required to demonstrate there were triable issues in the case.  In allowing the appeal and giving the defendant leave to defend the claim, the Deputy Judge did not come to a definitive view that the defendant’s calculations were correct and were to be accepted.  Instead, it was pointed out that "[n]o doubt at trial an appropriately qualified accountant or actuary will be called to establish the calculations.”  

52.  The three cases relied on by the defendant therefore do not support his contention that in determining whether there is a breach of section 24(2), the default interest must also be included in ascertaining the effective rate of interest of the loan.

53.  Further by reason of the above analysis, the Judge did not err at [40] and [41] of the judgment where he pointed out that in analysing whether section 24 has been contravened, this should not be done on a scenario of default, and if a higher rate of interest is payable on default, this should be considered under section 22.

54.  For the above reasons, this ground of appeal cannot stand.

F.2 Ground (2) and (6): Exercise of discretion under sections 18(3)

and 22(2) and enforceability of the security

55.  Ground (2) complains that the Judge erred in exercising the discretion under sections 18(3) and 22(2) in favour of enforcement of the loan, albeit to a reduced extent (i.e. $4,160,000, after deducting the $40,000 set-up fee and the $800,000 interest that the defendant had already paid to the plaintiff, see [27] above).  Ground (6) further complains that the Judge failed to separately consider whether the security should be enforced in light of the multiple breaches of the MLO. 

56.  Under section 18(3), the burden falls on the money lender to satisfy the court that in all the circumstances it would be inequitable to refuse enforcement notwithstanding non-compliance of section 18(1) and (2).  The principles on the exercise of discretion have been set out by the Court of Final Appeal in Emperor Finance Ltd v La Belle Fashions Ltd & Ors (2003) 6 HKCFAR 402 and Strong Offer Investment Ltd v Nyeu Ting Chuang (2007) 10 HKCFAR 529.  In short, in exercising its discretion the court examines the 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: Emperor Finance Ltd at [119] and Strong Offer Investment Ltd at [29] and [61].  In Emperor Finance Ltd at [102], Ribeiro PJ pointed out that:

"... The policy of section 18 is to ensure that potentially unsophisticated borrowers are left in no doubt as to how much money exactly they are borrowing by way of principal and what interest they will have to pay on that loan, to which end, such information has to be set out and expressed in the prescribed manner in the memorandum to be signed by the borrower.”

57.  It was additionally pointed out in Strong Offer Investment Ltd that section 18 offers one of the key protections to uneducated, ignorant and unsophisticated borrowers who may not be aware of all the terms and conditions under which the loans are made to them (at [18]), and that the court has to bear in mind the parties’ respective rights and obligations under the statute as well as the agreement made by them (at [20]). 

58.  As for the discretion under section 22(2), Chan PJ observed obiter in Strong Offer Investment Ltd at [42] that:

"Although the wording is similar to that in s.18(3), this 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.”

59.  In the present case, the plaintiff does not dispute there was a breach of section 18(1) in that the memorandum did not contain the early repayment clause and the collection fee clause (respectively clauses (1) and (3) of 合約附加條款), and arguably the set-up fee arrangement on the defendant’s case that the plaintiff acted in collusion with FPF and shared the set-up fee collected by FPF.  The plaintiff also accepts that the defendant has an arguable case that the execution of the Loan Agreement and the Supplemental Agreement was to disguise the charge of default interest, hence arguably a contravention of section 22(1)(c).  The Judge further considered the provision on collection fee arguably involved a breach of section 22(1)(c) of the MLO. 

60.  The Judge dealt with the exercise of discretion under both sections together.  At [46] to [49] of the judgment, he said:

"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 the 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, i.e. 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, i.e. $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. ...

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. ...”

61.  The defendant’s arguments under this ground of appeal boil down to two broad points.  First, he argued that the Judge had overlooked the implications of the contraventions for the borrower.  It was said that he was prejudiced by the breaches in that (i) he was not provided with documents referred to in section 18 showing he would be liable for default interest retrospectively; and (ii) he was forced to go bankrupt due to demands from the collection agent.  Second, the defendant argued that there had been a blatant disregard of the provisions by the plaintiff.  He made a number of strong-worded criticisms against the plaintiff, its solicitors and FPF in the skeleton argument[17], which we will not repeat here.  The defendant also referred to passages in Treasure Spot Finance Co Ltd v Li Chik Ming & Anor, supra, 7 September 2007 at [129] to [134], 3 December 2007 at [36] & [37]; and Brother’s Company (a firm) v Ah Puk Transportation (a firm) (unreported) HCA 3418/1985, 7 March 1986 at [12] to [14].    

62.  While we accept that the particular circumstances of the borrower are highly important, and that a key consideration in the exercise of the discretion is whether any prejudice flows from the statutory breaches established: see Strong Offer Investment Ltd at [62], we do not agree that the Judge had overlooked this aspect.  The plaintiff had alluded to the personal circumstances of the defendant and the issue of whether there was any prejudice to him occasioned by the breach of sections 18 and 22, and this was set out in the judgment (at [46(3)] and [46(5)]).  In our view, the Judge must have considered the issue of whether there was, and the extent of, any prejudice to the defendant by reason of the breach of section 18 and arguably section 22(1)(c).  

63.  We also do not accept that the prejudice put forward by the defendant in the notice of appeal and his arguments has the effect of vitiating the Judge’s exercise of the discretion.  Importantly, as pointed out by the plaintiff, the defendant was not an unsophisticated borrower.  Quite the contrary, he was an experienced banker.  Further, he had been given copies of the documents executed.  It is unlikely that he was ignorant of, or misled as to, the material terms of the loan transaction he made with the plaintiff as a result of the breach of section 18 and/or the arguable breaches of section 22(1)(c).  This is a material consideration in light of the policy and purpose underlying section 18, an aspect highlighted by the Court of Final Appeal[18]. 

64.  Similarly, it is clear from the judgment that the Judge was keenly aware of the concessions made by the plaintiff and the several admitted or arguable breaches of the provisions in the MLO.  He had taken them into account when deciding on the exercise of the discretion.  This is reflected by the deductions he made to the principal sum.        

65.  The two cases cited by the defendant, Treasure Spot Finance Co Ltd v Li Chik Ming & Anor, and Brother’s Company (a firm) v Ah Puk Transportation (a firm), do not add weight to the defendant’s case.  Firstly, the principles relating to the exercise of the discretion have been clearly set out by the Court of Final Appeal in Emperor Finance Ltd and Strong Offer Investment Ltd. Secondly, given the wide discretion and the matters to be examined by the Court[19], each case will have to be decided on its own facts.  How the discretion was exercised in other cases and the passages on the judges’ evaluations of the circumstances in those cases cannot lend support to the defendant’s contention that the Judge was wrong in exercising the discretion to enforce the loan. 

66.  In our view, the defendant has failed to demonstrate that the Judge was wrong in taking the view that it would be inequitable to allow the defendant to keep the loan received from the plaintiff, subject to deducting the set-up fee and the interest payments he had paid.  There is no basis for this Court to interfere with the Judge’s decision to exercise the discretion in favour of allowing the plaintiff to recover the reduced principal amount of the loan in the sum of $4,160,000.  Ground (2) therefore fails.

67.  The issue of whether it is inequitable not to enforce the security, however, merits further considerations.  It would appear from [48] and [49] of the judgment (see [60] above) that because it was inequitable not to allow the plaintiff to recover from the defendant the reduced principal amount of the loan, it followed that it would be inequitable not to enforce the security to the same limited extent.  No separate consideration has been given to whether the plaintiff should be allowed to enforce the security in light of the admitted breach of section 18, the arguable contraventions of sections 22(1)(c) and 27(3) and the arguable attempt to disguise the charging of default interest.  In our view, in the present context of a striking out application, given the multiple admitted or arguable breaches of the MLO and the Judge’s finding that there was arguably a deliberate and sophisticated attempt to evade the statutory controls, it is arguable that it would not be inequitable to disallow the plaintiff to enforce the security generated from the transaction.  Ground (6) should therefore be upheld.    

F.3   Grounds (3) and (4): Collection fee

68.  Grounds (3) and (4) both relate to the charging of collection fee.  This was provided in clause (3) of the Chinese document entitled "合約附加條款”, which read:

"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。”

69.  Ground (3) concerns the interpretation of clause (3) as to how the 30% collection fee is to be calculated.  Before the Judge, the plaintiff’s case is that, on a true construction of this clause, the collection fee means 30% of the particular instalment that has been overdue for over 30 days.  The defendant, on the other hand, argued that the collection fee is 30% of the principal of $5,000,000 plus the amount of overdue interest payment, with the resulting rate of interest exceeding 60% per annum.  The defendant based his argument on clause (2) of the same document (合約附加條款), under which the plaintiff was entitled, upon the defendant’s default, to demand repayment of the entire principal together with the outstanding interest payment(s).  Clause (2) reads:

"借款人如不準時按月繳還款項，全數之本金、利息及欠款亦當作到期償還論，貸款人有權立刻追討所有尚欠的款項包括本金及利息。”

70.  The Judge upheld the plaintiff’s interpretation of clause (3) and rejected the defendant’s interpretation. He gave his reason at [30] of the judgment:

"... 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.”

71.  The Judge consequently rejected the defendant’s argument that, when the collection fee was taken into account, the effective interest rate would exceed the 60% per annum statutory maximum. 

72.  The defendant’s primary argument in this appeal is that when all the clauses in the Loan Agreement and the Chinese document are read together, there is bound to be a situation that, upon the occurrence of default, the plaintiff can impose 30% collection fee on the whole amount that is due, including the principal.  In addition to clause (2) of 合約附加條款 (see [69] above), he also relied on clauses 3.2, 6.1 and 6.2 of the Loan Agreement, which read:

"3.2  If the Principal and interest aforesaid are not paid in full on Redemption date or the Borrower defaults in payment of any interest/installments (as the case may be) on the due date, then the whole sum of the Principal and interest shall become immediately due. ...”

"6.1  The Lender is entitled to appoint and employ any debt collection agency or institution to collect any outstanding Principal and interest thereon or any part thereof in default of payment by the Borrower.”

"6.2  The Borrower hereby authorize the Lender to appoint and employ any debt collection agency for the purposes aforesaid and the Borrower further indemnify the Lender for all losses, damages and expenses incurred by the Lender for the appointment and employment of such collection agency or institution or its nominated agency. ...”

73.  Properly read, the effect of clause (2) of 合約附加條款 and/or clause 3.2 of the Loan Agreement is simply that in the event the defendant fails to pay the monthly interest payment on the due date, the plaintiff may demand immediate repayment of the principal together with the interest due.  As for clauses 6.1 and 6.2, they acknowledge that the plaintiff is entitled to appoint collection agent to collect any outstanding principal and interest thereon, and the defendant shall indemnify the plaintiff for all losses, damages and expenses incurred for the appointment and employment of the collection agent.  These clauses do not deal with how the collection fee is to be calculated.  Whether read individually or collectively, they do not have the effect contended by the defendant.

74.  As held by the judge, the language of clause (3) of 合約附加條款is clear.  The clause begins by providing that if the borrower fails to pay each of the monthly instalment as it falls due (每一期到期供款) and it is overdue by more than 30 days, the lender will appoint collection agent to demand from the borrower the amount due under the instalment in question (該期欠款).  It goes on to state that the borrower shall be responsible for the fees and expenses incurred by the lender for demanding payment of the amount due under the instalment in question (追討該期欠款之費用支出), and shall pay a collection fee equivalent to 30% of the amount payable under the instalment in question (該期應邀款項之30%).  On a plain reading of the clause, there can be no doubt that it stipulates that the collection fee is a sum equivalent to 30% of the amount of the instalment that has fallen due for more than 30 days.

75.  The defendant drew assistance from the letter of demand from the plaintiff dated 17 March 2014, which demanded the defendant to repay the principal together with interest accrued up to 16 March 2014, making a total sum of $6,158,794.52.  He argued that this showed the plaintiff was not only demanding repayment of $40,000, being the monthly payment that was due.  However, it is evident from the letter that it was not a demand for collection fee, but was an exercise of the right to demand immediate payment of the entire principal plus interest accrued.  This is a right provided under clause 3.2 of the Loan Agreement, and the mirror provision in clause (2) of合約附加條款.  This letter is no support for the defendant’s argument that the collection fee is 30% of the principal together with interest.    

76.  The defendant further referred to another case involving the plaintiff, Yip Yuk Chee Juspine v Easy Fortune Property Limited & Ors (unreported) HCMP 460/2014, 16 July 2014. The facts and issue in the case are very different from the present case.  For ease of reference, in discussing that case I will refer to the plaintiff in the case as "Yip” and the present plaintiff as "Easy Fortune”.  In that case, Easy Fortune, in exercise of its power as the first mortgagee and the charger under a charging order, sold the property put up by the 3^rd defendant as security for two loans lent by Easy Fortune.  Yip was an equitable mortgagee in respect of the property.  After repaying the indebtedness owed to Easy Fortune, there was a surplus.  Easy Fortune had rendered a statement of account.  The issue before the court was what was the amount of the surplus; in particular, whether four items in the statement of account should be adjusted.  One of them was the debt collection agent’s fees, which Easy Fortune had paid (see [11] of the judgment).  The judge, while not being prepared to hold that the engagement of debt collection agent was a sham arrangement, disallowed the item on the basis that the amount was disproportionately high and it was not shown to be reasonably incurred (see [14] to [17] of the judgment).  In that case, the collection fees claimed were not quantified by reference to provisions in the loan agreements, but were based on the amount invoiced by the collection agent.  The case cannot shed light on the issue involved in Ground (3). Neither can the fact that the collection agent fees were disallowed in the case lend support to the defendant’s argument under Ground (3).     

77.  The defendant also referred to two cases and argued that they show that "the plaintiff is capable of imposing 30% collection agency fee on both loan principal plus interest.”[20]  The two cases are Dah Sing Bank Ltd v Chan Fung Nga & Ors (unreported) HCMP 482/2009, 9 December 2009 at [22] to [32], and Hang Seng Credit Card Ltd v Tsang Nga Lee [2000] 3 HKLRD 33 at [15].

78.  In the Dah Sing Bank Ltd case, the issue before the Court is whether the effective rate under two loan agreements exceeds 60%, which in turn called into question whether the collection agent fee demanded in a demand letter should be included when calculating the effective rate of interest.  It is in this context that Master Levy said in [22],

"It is not in dispute that when the collection agency fees as demanded in the Demand Letter are taken into account for calculating interest, the effective interest rates in respect of the 1^st and 2^nd Agreements would be respectively at the rates of 68% and 227% per annum, which would therefore be (as Mr. Chai has contended) contravening s. 24(2) of the MLO.”

Master Levy went on to hold that the mere request for collection agency fee in a Demand Letter, even when it was written by solicitors, could not make collection agent fee a term of the two agreements (see [27] to [30]), and that the collection agency fee should not be included in the calculation of the effective rate of interest, hence there was no contravention of section 24(2).

79.  As for the Hang Seng Credit Card Ltd case, it concerns whether the costs provision in the loan agreement was unreasonable and contravenes the Unconscionable Contracts Ordinance, Cap. 458.  In discussing whether a duty to act reasonably could be implied into the agreement made with the bank, Yam J said at [14],

"According to a study published by the Consumer Council, in the 234th issue of the Choice Magazine, the debt collection charges can amount to 25% to 30% of the indebtedness.”

80.  It is evident from a reading of the two cases that the defendant’s reliance on them and the passages set out above is misplaced.  They cannot shed light on the issue to be determined under this ground of appeal, which is the proper interpretation of clause (3) of 合約附加條款.  For the analysis and reasons set out in the preceding paragraphs, the defendant’s contention on how the 30% collection fee is to be calculated cannot stand.  It also follows that his argument that the provision on collection fee contravened section 24 also cannot stand. 

81.  In respect of the defendant’s argument that the collection fee provision (i.e. clause (3) of 合約附加條款) contravened section 22(1), the Judge accepted that the provision was arguably a breach of section 22(1)(c), but considered he should exercise the discretion under section 22(2) to enforce the loan to the extent of $4,160,000 (see [37] and [48] of the judgment, and [59] and [60] above).  We have, when addressing Ground (2) of the grounds of appeal, upheld the Judge’s exercise of discretion in this regard.  In the circumstances, Ground (3) fails.  

82.  As to Ground (4), it concerns whether the charging of collection fee contravenes sections 27(3) and 29(10) of the MLO.  At [32] of the judgment, the Judge held that, both sections are directed at the charging of fee for the procurement of a loan or a security thereunder, and does not extend to the charging of collection charge in the event of default.

83.  Sections 27(3) and 29(10) provide as follows:

Section 27(3)

"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.”

Section 29(10)

"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.”

84.  The defendant submitted that this Court should reconsider and determine whether the collection fee provision infringed the two sections.  We are of the view that the Judge’s holding on the scope of the two sections is correct.  The thrust of both sections is the prohibition of "costs, charges or expenses ... remuneration or reward ... for or in connection with or preliminary to procuring, negotiating or obtaining any loan made or guaranteeing or securing the repayment thereof” (emphasis added).  It is clear from clause (3) of 合約附加條款that the collection fee is the fee and expenses incurred by the plaintiff in demanding payment of the amount due under a particular instalment.  The collection fee is not for procuring, negotiating or obtaining the loan in question.  Nor is it imposed for guaranteeing or securing the repayment of the loan, as the defendant sought to argue.  There is, in short, no contravention of either section 27(3) or section 29(10). 

85.  We also do not see how the reference to the Unconscionable Contracts Ordinance, Cap. 458 and Hang Seng Credit Card Ltd v Tsang Nga Lee, supra, and the argument that the MLO and the Unconscionable Contracts Ordinance share a common purpose, namely, to protect borrowers against collusion with collection agent, serve to advance this ground of appeal. 

86.  For the above reasons, Ground (4) fails.

F.4 Ground (5): Section 25 of MLO

87.  The defendant’s argument under this ground of appeal is that the Judge ought to have held that the loan transaction is extortionate under section 25(2) of the MLO.  He rested his argument on what the Judge said in [47(1)] of the judgment:

"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.”

88.  Section 25(1) and (2) of the MLO provide:

"(1)  Subject to section 24(2), where—

(a)  proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan; and

(b)  subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate,

the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit.

(2)  For the purposes of this section, a transaction is extortionate if—

(a)  it requires the debtor or a relative of his to make payments (whether unconditionally or on certain contingencies) which are grossly exorbitant; or

(b)  it otherwise grossly contravenes ordinary principles of fair-dealing.”

89.  Section 25(3) further provides that a loan agreement is presumed to be extortionate if the effective rate of interest exceeds 48% per annum, but the court may declare the agreement is not extortionate if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair. Section 25(4) also provides that in determining whether a transaction is extortionate, it shall have regard to the prevailing interest rate and the factors in subsections (5) and (6). The former concerns the debtor’s age, experience, business capacity, state of health and the degree and nature of financial pressure he was under at the time of the transaction.  The latter relates to the degree of risks accepted by the lender, his relationship to the borrower, whether or not a specious cash price was quoted for any goods or services included in the transaction, and where there are other transactions, how far any such other transaction was reasonably required for the protection of the debtor or the lender, or was in the interest of the debtor.

90.  It has to be recognised that the Judge was dealing with an appeal from a striking out application. Hence, he was assuming all factors in the defendant’s favour (see [48] of the judgment), and considered that the defendant could raise the arguments in [47(1)] of the judgment.  He was, however, not making a finding to that effect.  More importantly, even if there were finding to the effect of what was said in [47(1)], it will not, without more, lead to the conclusion that the loan in question is an extortionate transaction that should be re-opened, given the Judge’s rejection of the defendant’s case on the effective rate of interest and having regard to the matters to be taken into consideration as provided in section 25(2) to (6).  There is no merit in this ground of appeal.

F.5 Conclusion

91.  For the reasons set out above, we will allow the defendant’s appeal but limited to:

(1)  Setting aside the Judge’s order that the defendant shall deliver up to the plaintiff vacant possession of the Property; and

(2)  Granting leave to the defendant to defend the plaintiff’s claim for an order for possession of the Property, in addition to the leave given by the Judge to defend any further claim by the plaintiff over and above the sum of $4,160,000.

92.  The rest of the defendant’s appeal is dismissed.

G.Costs

93.  As the defendant succeeds on one aspect of the appeal but fails on other parts of the appeal, we consider it fair and appropriate to make no order as to the costs of the appeal.   

H.  Disposition

94.  We make the following order:

(1)  The appeal is allowed to the extent that:

(a)  Paragraph 3 of the Judge’s order is varied to the extent that the defendant shall also have leave to defend the plaintiff’s claim for an order for possession of the Property; and

(b)  Paragraph 4 of the Judge’s order that the defendant shall deliver up to the plaintiff vacant possession of the Property is set aside.

(2)  The rest of the appeal is dismissed.

(3)  There is no order as to the costs of the appeal.