CHAN v. INSTANT FINANCE LTD

HCSD 27/2024

[2025] HKCFI 301

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 27 OF 2024

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DECISION

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1.  For determination is the Applicant (“Chan”)’s application to set aside the statutory demand dated 8 June 2024 (“the SD”)  pursuant to r. 48(5)(b)  of the Bankruptcy Rules on the basis that the debt is disputed on substantial grounds.

2.  The SD was issued by the Respondent Instant Finance Limited (“IFL”), a licensed money lender, demanding the repayment of HK$350,000, being the outstanding amount under a loan agreement dated 11 January 2024 (“the IFL Loan”).

Applicable principles

3.  The relevant principles are trite and not disputed.

4.  The burden is on an applicant to satisfy the Court that there are valid grounds to set aside a statutory demand.  Where the debtor asserts that there is a bona fide dispute on substantial ground in respect of the debt, relying on Rule 48(5)(b), he has to adduce sufficiently precise factual evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one (Re Leung Cherng Jiunn [2016] 1 HKLRD 850, at §27 per Kwan JA (as the VP then was)).

5.  When considering an application to set aside, the Court is only undertaking a limited exercise and will only be concerned with whether the creditor is able to pursue bankruptcy proceedings founded on the statutory demand (Budge v AF Budge (Contractors)  Ltd [1997] BPIR 366, 372A-D, per Peter Gibson LJ).  The mechanism to set aside a statutory demand is intended to be a filtering process to protect the debtor against a petition being presented based on a statutory demand that is demonstrably unjustified (Re Choy Wai Bor, HCB 8565/2001, 28 May 2002, Kwan J (as the VP then was)  at §22).

The facts according to the parties

6.  Chan referred to the history of an earlier loan said to be related to the IFL Loan.

7.  He said that on 13 July 2023, he entered into a loan agreement with Wisdom Wealth Finance Limited (“WW”), a licensed money lender, whereby he borrowed HK$250,000 at the interest rate of 48% per annum, repayable by 6 monthly instalments, the 1^st to 5^th instalments being repayment of interest at HK$10,000 each and the 6^th instalment being repayment of the principal and the last instalment of interest totalling HK$260,000 (“the WW Loan”).  The WW Loan was apparently secured by a Legal Charge over the Home Ownership Scheme flat in Shatin registered in the name of Chan (respectively “the Legal Charge” and “the Property”).

8.  Chan’s case is that from the WW Loan amount of HK$250,000, WW deducted 25%, ie. HK$62,500 as handling charge and HK$4,000 as fees of the solicitors Messrs ████████ (“K&Co”), and he therefore only received HK$183,500; and from that he also had to pay commission of HK$5,000 to an intermediary.

9.  Chan also said that in 3 instances in October and November 2023, K&Co demanded solicitors fees in the sums of HK$4,000 on each instance and on 8 December 2023, he paid K&Co a sum of HK$12,000.

10.  Mr █████████████ (“K███”), a partner of K&Co, filed an affirmation on behalf of IFL.  He said that on 13 July 2023 WW and Chan instructed K&Co to advise on the WW Loan, and WW collected the solicitors’ fee for the first appointment in July 2023 in the sum of HK$4,000 from Chan on behalf of K&Co.

11.  K███ further said that K&Co also advised Chan “on the relevant matters” in 3 appointments on 17 July 2023, 28 August 2023 and 22 September 2023, the contents of which advice were said to be privileged.  He further said that Chan consented to the engagement of K&Co and was informed that K&Co would collect a fee for each appointment at HK$4,000 each.  He said that Chan paid K&Co the said fee of HK$4,000 after attending each appointment.  His evidence was that “Wisdom Wealth had, from time to time, served as the conduit between  [K&Co]  and the Applicant, reminding the Applicant to attend the scheduled appointments and to pay the relevant fees”[1].  He also said that 3 further such appointments were scheduled by Chan with K&Co to take place respectively on 10 October 2023, 2 November 2023 and 25 November 2023.  However, Chan failed to attend and no legal fees for these 3 scheduled appointments were received by K&Co.

12.  Chan was unable to repay the last instalment of the WW Loan by 13 January 2024.  He discussed with WW about the renewal of the WW Loan, but he was introduced to borrow the IFL Loan from IFL.

13.  K███ also said that around that time K&Co was instructed to register the Legal Charge in the Land Registry by Memorial No. 24011100200015 on 11 January 2024, which registration was then pending. 

14.  On the same day, ie. 11 January 2024, Chan borrowed the IFL Loan in the loan amount of HK$312,500.

15.  It is common ground that the essential terms of the IFL Loan were the same as the WW Loan, namely, interest at 48%, repayable by 6 monthly instalments, with the 1^st to 5^th also being repayment of interest only (HK$12,500 each instalment)  and the 6^th instalment being repayment of the principal of HK$312,500 plus the last instalment of interest totalling to HK$ 325,000.

16.  It is common ground that of the IFL Loan amount of $312,000, HK$250,000 was used to pay off the principal of the WW Loan on 11 January 2024.  IFL’s case was that the whole loan amount of HK$312,000 was paid to and received by Chan in cash.  Chan disputed that and said that HK$250,000 was deducted from the IFL Loan for IFL to pay off the principal of the WW Loan, while the balance of HK$62,500 (HK$312,000 – HK$250,000)  was charged by IFL as handling fee.  He therefore has not received any money from the IFL Loan.

17.  On 13 January 2024, Chan repaid WW the last instalment of interest of the WW Loan in the sum of HK$10,000 which was due on that day.  He so paid by banking in the sum of HK$10,000 to WW’s bank account.

18.  According to the affirmation evidence of Mr ████████ (“JSC”), the director of IFL, Ms ████████ (“JCL”), the sole director and shareholder of WW, is his sister.  JCL has filed an affirmation herein on behalf of IFL to resist this application.

19.  WW and IFL emphasized that they were separate legal entities.  However, according to JSC and JCL, WW and IFL shared the same telephone number for Whatsapp to communicate with clients (including Chan), and the same employees handled the businesses of WW and IFL, and they would refer businesses to each other.

20.  Both JCL and JSC denied receiving or deducting the alleged respective handling fee of HK$62,500 from the WW Loan and the IFL Loan.  They denied involvement of any payment by Chan to others, including payment of the solicitors’ fees.  It is the evidence of JSC that the whole IFL Loan amount was paid to Chan in cash.  Both WW and IFL relied heavily on 2 respective acknowledgments of receipt signed by Chan acknowledging that he had received the respective full amount of the WW Loan and the IFL Loan.

21.  On 21 February 2024, K&Co wrote to the Land Registry cancelling the registration of the Legal Charge.

22.  On 29 January 2024, K&Co on behalf of IFL registered the IFL Loan agreement in the Land Registry by Memorial No. 24012900170019.

Grounds of dispute

23.  Mr Brian Lo, counsel for Chan, submitted that there are bona fide disputes on the IFL Loan on the following grounds :

(a)  The IFL Loan contravened s.24 of the Money Lenders Ordinance Cap 163 (“the MLO”)  and was illegal and unenforceable because having taken into account the handling fee of HK$62,500, the IFL Loan has an effective rate of interest well over the statutory limit of 48% stipulated by s.24(1)  (“Ground 1”).

(b)  The WW Loan was illegal and unenforceable for the same reason that it contravened s.24 of the MLO as it charged an effective rate of interest well over 48% after having taken into account the handling fee of HK$62,500 charged and received by WW.  The IFL Loan was entered for the purpose of repaying, and thus giving effect to, the illegal WW Loan, and thus the IFL Loan was tainted with the same illegality and was unenforceable (“Ground 2”).

(c)  The IFL Loan was an extortionate transaction within the meaning of s.25 of the MLO, and under that section the Court may reopen the transaction and make such orders in respect of the terms of the transaction or the rights of the parties thereunder as the Court may think fit.  In the present circumstances, the Court would not enforce the IFL Loan at all or would only enforce it on such terms that would be favourable to Chan (“Ground 3”).

Discussion

24.  I will deal first with Ground 3 and along the way also give my view on Ground 2.

25.  The relevant part of s.25 of the MLO reads:

“ 25. Reopening of certain transactions

(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.

(3)  Any agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds 36 per cent per annum shall, having regard to that fact alone, be presumed for the purposes of this section to be a transaction which is extortionate; but except where such rate exceeds the rate specified in section 24(1), the court may declare that any such agreement is not extortionate for the purposes of this section if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair.”

26.  As the IFL Loan charged interest at 48% per annum, it is presumed to be an extortionate transaction under s.25(3)  of the MLO.  As such, the Court may reopen the IFL Loan so as to do justice between the parties having regard to all the circumstances.

27.  On the materials before me, I am satisfied that the following matters are supported by sufficiently precise evidence, which is believable, such that Chan would have a substantial case to rely on them to reopen the IFL Loan under s.25(1)  of the MLO and contend that the IFL Loan should only be enforced in terms substantially in favour of him and against IFL, so as to do justice between them.

28.  First, IFL is not entitled to register the IFL Loan agreement in the Land Registry against the Property, but yet it did. The memorandum of the IFL Loan made pursuant to s.18 of the MLO dated 11 January 2024[2] stated in no uncertain term that there was “nil” security for the IFL Loan.  The IFL Loan agreement[3] itself does not contain any term affecting or encumbering the interest in the Property.  Notwithstanding that those were unmistakably clear, the title of the IFL Loan agreement was printed in larger fonts and read “Mortgage Loan Agreement 樓按貸款合約”, which is a misleading misnomer and IFL registered it in the Land Registry against the Property.  K&Co was said by K███ to have advised on the transaction and has on behalf of IFL registered the IFL Loan agreement in the Land Registry.  I find it difficult to accept that (a)  K&Co would not have known that the title of the IFL Loan agreement was a misleading misnomer, (b)  the firm did not know that the IFL Loan agreement was not a registrable instrument, and (c)  the firm has not advised IFL of the same.  I find there is substance in Chan’s complaint that he was thereby unjustly and wrongly hampered from utilizing the Property to secure finance to repay the IFL Loan.  In the circumstance, Chan should be entitled to investigate and ventilate at trial as to whether there was sharp and improper practice and collusion involved so that the Court could have regard to them when making its determination on the orders to be made regarding the IFL Loan under s.25 of the MLO.

29.  Second, JCL affirmed that the whole WW Loan amount was paid in cash to Chan and relied on the acknowledgment of receipt to that effect and that WW was not involved in the payment of the solicitors’ fees by Chan.  JCL’s such evidence was directly contradicted by (a)  the Whatsapp message sent by the staff of WW to Chan on 14 July 2023 saying “律師樓不用付費用，轉頭會去放款幫你扣除”, and (b)  K███’s own evidence that WW “collected the fees for the first appointment in July 2023 on behalf of [K&Co] for HK$4,000”[4].

30.  Thirdly, in relation to the WW Loan, Chan has paid “solicitors’ fees” in 4 monthly instances totalling HK$16,000, the receipt of which by K&Co are not disputed and over which, as said by K███, WW “served as conduit between [K&Co] and the Applicant, reminding the Applicant to attend the scheduled appointments and to pay the relevant fees”[5].  This Court finds it difficult to understand why Chan would engage and pay K&Co about once every month to “advise” him on the WW Loan and why such monthly appointments to attend K&Co for “advice”, as said by K███, were and could be scheduled beforehand months ago.  I find there is a substantial dispute as to whether Chan did independently and voluntarily engage K&Co as his solicitors and voluntarily agreed to pay the fees or whether there might have been collusion such that the payment of such “solicitors’ fees” might contravene s.27(3)  of the MLO.

31.  If they did so contravene, one of the consequences could be that the principal of WW Loan would be correspondingly reduced by them, making the effective rate of interest of the WW Loan well exceeded the statutory limit of 48% per annum, and the loan thereby became illegal and unenforceable by having contravened s.24.

32.  In view of the fact that it was the arrangement and all the parties intention that the IFL Loan was obtained to repay the WW Loan and in view of the factual circumstances as narrated in the preceding section, I am of the view that Chan’s contention – that the IFL Loan was tainted by the illegality of the WW Loan – is an arguable contention and a dispute of substance.

33.  Fourthly, I have commented above that there is believable evidence showing that the acknowledgment of receipt related to the WW Loan did not reflect the true factual situation.  Likewise, I think there is also a ring of truth in Chan’s allegation that he did not receive the whole IFL Loan in cash as the corresponding acknowledgement of receipt seeks to show.  If the IFL Loan amount was given to Chan in cash on 11 January 2024, it would have meant that he repaid the principal of the WW Loan by either bringing the cash that day to the office of WW or banking that amount into WW’s bank account.  In either case, and especially the first scenario, one would expect Chan to ask for, and WW would issue, a receipt or acknowledgment evidencing that the principal has been completely repaid.  In the latter scenario, there would have been banking slip or bank statement of WW’s bank account showing such bank-in.  Moreover, there is a modus operandi that Chan would from time to time attach the documentary evidence of payment to the staff of WW in the Whatsapp messages to show that payments were made.  Yet, in the materials before me, none of the above documentary evidence was able to be proffered by any party.  JCL merely exhibited some internal records noting that the principal of the WW Loan has been repaid.

34.  For these reasons, I come to a view that there are disputes on the debt on substantial grounds in respect of Grounds 1 and 2.  As such is sufficient to dispose of this application, I do not propose to further deal with Ground 1.

Disposal

35.  In the premises, I accede to Chan’s application and set aside the SD with a costs order nisi that IFL pays Chan his costs of this application, to be made absolute within 14 days unless any party applies to vary within that time.  Unless there is an application to vary, Chan do lodge and serve his Statement of Costs within 7 days after the costs order becomes absolute, IFL to lodge and serve its List of Objections 7 days thereafter and Chan his Reply, if any, within the next 5 days.  I will summarily assess such costs on papers.

36.  I thank Mr Lo and Mr Tam for their assistance.

Publishing this Decision

37.  This is not the first occasion this Court encounters a licensed money lender registering in the Land Registry a loan agreement which is not a registrable instrument against the property owned by the borrower, and the money lender did so even though it has engaged solicitors and presumably ought to have been properly advised.  As said, such conduct would improperly and unfairly hamper the borrower’s ability to utilize the property to obtain finance.  If a moneylender requires a security to secure the loan, it should do so formally, properly and openly.  Such conduct reeks of sharp practice on the part of the money lender, and in this case, a misleading misnomer was given to the loan agreement giving it an appearance that it was registrable.  As I have indicated at the hearing, I am very much minded, subject to first having heard the parties on it, to publish and make open this Decision, hopefully to discourage the future repetition of such conduct.