CHOW KIN MING v. ALWAYS FORTUNE LTD AND OTHERS

HCA 906/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 906 OF 2003

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J U D G M E N T

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I. Introduction

1. By a Summons dated 11 August 2003 the Plaintiff applied for summary judgment in the amount of $1,648,000 against the Defendants. By Order dated 31 October 2003 ("the Order") Master Kenneth Wong entered final judgment in the Plaintiff's favour against the 1st Defendant for the sum of $1,600,000:-

"with interest at Judgment Rate from the date hereof until payment and for the period before the date of judgment to be assessed by the trial judge at the trial of the Plaintiff's claim against the 2nd and 3rd Defendants".

The Master gave the 2nd and 3rd Defendants unconditional leave to defend.

2. By a Notice of Appeal ("the Notice") dated 10 November 2003 the Plaintiff appealed to this Court against Master Wong's grant of unconditional leave to the 2nd and 3rd Defendants and the Master's refusal to enter final judgment against the 1st Defendant for pre-judgment interest of $48,000. The Notice thus seeks judgment in the sum of $1,648,000 against all the Defendants with interest at such rate and for such period as the Court deems fit.

II. Factual Background

3. By a letter ("the Facility Letter") dated 20 December 2001 the Plaintiff wrote:-

"Always Fortune Limited
Unit 2205, St. George's Building
2 Ice House Street,
Central, Hong Kong,
Hong Kong

Attn.:

Mr Wu Ming Fat Director

Credit Facility (the 'Facility')

I refer to my recent discussions with you regarding the cash advance requirements of Always Fortune Limited ('AFL') and are pleased to advise that I am willing to make available the cash advance to you by means of a cash cheque (after deducting the necessary charges/expenses) under the following conditions:

1.	Principal:	HK$1,600,000
2.	Maturity Date:	January 19, 2002
3.	Interest:	$48,000
4.	Guarantor:	(a)	Personal guarantor:
			The loan will be guaranteed by an individual acceptable by the lender for all money. In this case: Mr Wu Ming Fat, Simon (Hong Kong Identity Card No. XXXXXXX(X); Mr Chan Wai Shing, Richard (Hong Kong Identity Card No. XXXXXXX(X) and
		(b)	Corporate guarantee:
			The loan will be guaranteed by AFL.
5.	Security:	AFL is required to deliver with myself a cheque dated January 19, 2002 in the amount of HK$1,600,000 in favour of Chow Kin Ming.
6.	Other Security:	Any other securities agreeable with myself if necessary.
7.	Other Expenses:	AFL will bear all legal costs, fee and expenses incurred in the arrangement of the Facility and in the preparation for the necessary document (if any) and such expenses will be deducted from the principal before advance to AFL.
8.	Documentation and Securities:	The drawn down of the Facility is subject to completion of all documentation and securities to the satisfactory of myself.

This letter summarizes the principal terms of the facility offered by myself and if the foregoing terms and conditions are acceptable to you, please indicate your acceptance by signing and returning the enclosed copy of this letter on or before December 21, 2002, after which date this offer shall at my discretion lapse.

Yours sincerely,

Chow Kin Ming [signed]"

4. The 1st Defendant (by its director the 2nd Defendant) signed the Facility Letter, accepting its terms. The 2nd and 3rd Defendants also signed the Facility Letter, each respectively signing immediately below statements ("the Statements") drafted as follows: "I confirm to act as guarantor to Always Fortune Limited to the terms and conditions of the facility set out in a letter to us from Mr Chow King Ming of which this is a copy".

5. By letter dated 20 December 2001 the 1st Defendant asked the Plaintiff "to issue a cash cheque of HK$1,440,000, being the amount after deducting the fees, costs and expenses incurred in the arrangement of the said Loan by the third parties on our behalf". The Plaintiff delivered a cash cheque for $1,440,000 on the same day.

6. The 1st Defendant having failed to repay the loan thus advanced, by a Statement of Claim dated 11 March 2003 the Plaintiff claimed $1,648,000, comprising principal of $1,600,000 and interest of $48,000 as mentioned in the Facility Letter.

7. By a Defence dated 15 May 2003 and Further and Better Particulars of the same filed on 19 July 2003, the Defendants raised 3 defences to the Plaintiff's claim:-

(1) The 2nd and 3rd Defendants never entered into a contract of guarantee in respect of the loan with the Plaintiff. Insofar as they signed the Statements, the 2nd and 3rd Defendants were merely indicating to the 1st Defendant that they were prepared to guarantee repayment of the Plaintiff's loan. In any event, the wording of the Statements was "unclear and/ or ambiguous to the extent that, within its context, it failed to establish and/or distinctly define or set out the scope and object of any form of contract".

(2) The loan was illegal under Money Lenders Ordinance (Cap. 163) ("MLO") s. 24. The $160,000 deducted from the principal of $1,600,000 mentioned in the Facility Letter in fact represented interest. The loan being for 1 month and $160,000 being 10% of $1,600,000, the annual interest on the loan exceeded 60% contrary to MLO s. 24. Consequently, the Facility Letter was unenforceable as a loan agreement and no guarantees of the loan could be effective.

(3) The 3rd Defendant signed the Statement under the undue influence of Mr Ronald Lau Man Tak ("Mr Lau"), who is alleged to have been the Plaintiff's agent. Mr Lau told the 3rd Defendant that, unless he signed the Statement, the Plaintiff would not lend money to the 1st Defendant. Neither the Plaintiff nor Mr Lau gave the 3rd Defendant the chance to seek independent legal advice before signing the Statement. "Mr Lau further represented to the 3rd Defendant that the Plaintiff asked him to indicate to the 3rd Defendant that signature of the 3rd Defendant on the Facility Letter served only as a means of comfort to the Plaintiff, and therefore it should not be risky for the 3rd Defendant to sign on the Facility Letter."

8. In his Affirmation the Plaintiff says that he deducted $160,000 from the $1,600,000 principal and paid the $160,000 to Interasia Ventures Limited ("Interasia"). The Plaintiff claims that the $160,000 was paid to Interasia on the 1st Defendant's behalf as an "arrangement fee" for the loan. Interasia is Mr Lau's company. The Plaintiff exhibits a letter of receipt signed by Mr Lau for Interasia, acknowledging receipt of the $160,000 as arrangement fee.

9. The Plaintiff also relies on affirmation evidence from Mr Lau. Mr Lau says that the 1st Defendant asked Interasia to arrange short-term finance of $1,600,000 for the acquisition by the 1st and 2nd Defendants of a listed company on the Hong Kong Stock Exchange main board. Interasia consequently introduced the 1st and 2nd Defendants to the Plaintiff. Mr Lau denies having induced the 3rd Defendant to sign the Statement in the manner alleged by the Defendants.

10. In his 1st Affirmation the 2nd Defendant says that he asked the 3rd Defendant to help him find some short-term financing. The 3rd Defendant introduced the 2nd Defendant to the Plaintiff and Mr Lau at a meeting in the Marriott Hotel in late 2001. It was there agreed that the Plaintiff would lend $1,600,000 to the 1st Defendant for 1 month at an interest of $160,000. The 2nd and 3rd Defendants later attended at Mr Lau's office in Kowloon Bay on 20 December 2001¹ to sign the Facility Letter. The Plaintiff was not then present. According to the 1st Defendant, at this later meeting, Mr Lau said that:-

"the Plaintiff had realized that charging a one-month interest payment of HK$1,600,000 on the Loan (i.e. 10% interest for one month) would perhaps be breaching certain laws of Hong Kong. In order to get round this situation, ... the Plaintiff would, notwithstanding the fact that the 1st Defendant would still be required to honour the payment of interest in the sum of $160,000 as had previously been agreed at the meeting in the Marriott Hotel, construct the terms of the facility letter in such a way as to signify that interest was to be payable at 3% only for one month."

The 1st Defendant could therefore disregard "the sham interest payment of $48,000" stated in the Facility Letter.

11. In his affirmation evidence the 3rd Defendant states that it was only on 20 December 2001², while the 2nd and 3rd Defendant were on their way to Mr Lau's office, that Mr Lau suddenly told the 3rd Defendant over the telephone that he would have to guarantee the loan with the 2nd Defendant. It was at this stage and at Mr Lau's office that Mr Lau is alleged to have exerted undue influence on the 3rd Defendant as pleaded in the Defence. Mr Lau (the 3rd Defendant claims) also observed that "there would be little chance that I [the 3rd Defendant] would be dragged into any trouble". The 2nd Defendant himself encouraged the 3rd Defendant to sign the Statement by saying that the 2nd Defendant "was going to have about HK$4 million available in January and there should be no worry".

12. In his 1st Affirmation, the 2nd Defendant categorically states:-

"Both the 1st Defendant and I have never appointed Interasia Ventures Limited or Mr Lau to be an agent or arranger of any kind and in any manner to provide services for the 1st Defendant in respect of the application or arrangement of the Loan. It is therefore beyond belief that Mr Lau or his company should all of a sudden hold out to be the arranger for the 1st Defendant. Conversely, it has always been my knowledge and belief that Mr Lau was the agent of the Plaintiff in respect of the Loan..."

13. In his 1st Affirmation, the 3rd Defendant is equally adamant about Interasia and Mr Lau. Echoing the 2nd Defendant's words, the 3rd Defendant states:-

"I have absolutely no knowledge that the 1st Defendant or the 2nd Defendant has appointed Interasia Ventures Limited or Mr Lau to be an agent or arranger of any kind and in any manner to provide services for the 1st Defendant in respect of the application of arrangement of the Loan. I find it rather strange that Mr Lau or his company should all of sudden hold out to be the arranger for the 1st defendant Conversely, it has always been my knowledge and belief that Mr Lau was the agent of the Plaintiff in respect of the Loan..."

14. But in his 2nd Affirmation, filed shortly before the appeal hearing, the 3rd Defendant qualifies his account. He says: "Mr Lau was an executive director of a listed company whom I had known for about 6 months..." The 3rd Defendant refers to having been approached by the 2nd Defendant to assist in locating a source of short-term finance. The 3rd Defendant then says:-

"I then called one Ms Lau, who suggested I approach Mr Lau for sources. Thereafter we had the meeting at the Marriott Hotel, at which I, the 2nd Defendant, the Plaintiff and Mr Lau were present. Terms were discussed, But I was never required to sign any document let alone a guarantee. After the loan was agreed the Plaintiff left first. Afterwards we discussed commission. It was agreed that the 2nd Defendant would pay three of us (i.e. Mr Lau, the said Ms Lau and myself) HK$100,000 as commission shared equally."

According to the 3rd Defendant, the loan having been made, the 2nd Defendant paid some but not all of the agreed commission. The 3rd Defendant says:-

"Afterwards the 2nd Defendant only handed me HK$85,000 commission to be shared between us. After paying a portion of it into my bank account I met Mr Lau and Ms Lau in a restaurant in Wanchai for lunch and gave a cheque of HK$34,000 to Mr Lau. The balance sum of HK$51,000 was shared between me and Ms Lau."

By a 2nd Affirmation, also filed just before the appeal hearing, the 2nd Defendant confirmed that he only paid $85,000 commission to Mr Lau, Ms Lau and the 3rd Defendant.

15. By way of security for the Plaintiff's advance, the 1st Defendant provided a Letter of Irrevocable Undertaking dated 20 December 2001, whereby it pledged 48,000,000 shares of Vision Tech International Holdings Limited to the Plaintiff and a company called Linfair Engineering (HK) Limited. As further security, the 1st Defendant gave the Plaintiff a cheque post-dated 19 January 2002 for $1,600,000. On 21 December 2001 (the day after drawdown of the loan) the 3rd Defendant handed to Mr Lau the 3rd Defendant's own cheque (post-dated to 19 January 2002) made out in the Plaintiff's favour for the amount of $1,600,000. The 3rd Defendant says that:-

"At Mr Lau's office, he [Mr Lau] also said that the Plaintiff needed my cheque for the amount of the Loan for very much the same reason as the Plaintiff needed my signature on the Facility Letter i.e. as a means of comfort and peace of mind.... [B]y virtue of such representation of the Plaintiff and Mr Lau, I was of the firm understanding that the said cheque was not given as security for the Loan".

The 3rd Defendant thus denies that his cheque was intended as any enforceable security.

III. Discussion

A. Existence of guarantees by the 2nd and 3rd Defendants

16. Master Wong rejected the defence that the 2nd and 3rd Defendants had not entered into contracts of guarantee with the Plaintiff. I think that the Master was right to do so. Read with clause 4(a) of the Facility Letter, the Statements are clear. By signing the Statements, the 2nd and 3rd Defendants signified to the Plaintiff that they agreed to guarantee payment by the 1st Defendant of monies due under the Facility Letter.

B. MLO s. 24

17. MLO s. 24 provides as follows:-

" (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).

...

(5) Nothing in this section shall apply to:-

(a) a loan specified in paragraph 12 in Part 2 of Schedule 1; or

(b) as respects such loan, any person who makes such loan."

MLO Schedule 1, Part 2, §12 (mentioned in MLO s. 24(5)(a)) refers to:-

(a) A loan made to a company that has a paid up share capital of not less than $1,000,000 or an equivalent amount in any other approved currency."

18. The 1st Defendant has a paid up share capital of $2,000,000. Loans to the 1st Defendant, including the monies advanced by the Plaintiff to the 1st Defendant, are thus exempt from the application of MLO s. 24(2) by reason of MLO s. 24(5)(a) and Schedule 1, Part 2, §12. The 1st Defendant's defence being dependent on the operation of MLO s. 24(1), Master Wong concluded that the 1st Defendant could not resist the Plaintiff's claim. Master Wong accordingly gave judgment for the principal of $1,600,000 against the 1st Defendant. The 1st Defendant has not appealed against that part of Master Wong's Order.

19. But the Master did not believe that he could enter judgment against the 2nd and 3rd Defendants. This was because the Master considered himself bound by Grantwin Co. Inc v. Chang So Luis [1989] 2 HKC 530.

20. In Grantwin P lent $4,700,000 to S on the security of D's guarantee. S having defaulted, P obtained a prohibition order restraining D from leaving Hong Kong. D applied to discharge the order on the basis that he had an arguable case. D submitted that the loan to S was at an excessive interest contrary to MLO s. 24(2). Although MLO s. 24(2) did not apply to S since it had a paid up capital of $49,950,000, D argued that MLO s. 24(5) only excluded certain loans and not securities for such loans from the operation of MLO s. 24(2). Even if the loan between P and S was enforceable, P could not enforce D's guarantee as MLO s. 24(5) did not cover related or subordinate transactions between a lender and a 3rd party by way of guarantee.

21. Jones J agreed, stating (at 532B-F):-

"Mr Faulkner, counsel for the plaintiff, argued that the absence of words such as 'guarantee', 'security' or interest from sub-s. (5)(a) does not detract from the fact that the guarantee is fundamental to the basis of the claim which is in respect of a loan to a company.

Having construed the legislation, I do not accept that interpretation which I consider would defeat the intention of the legislature. Indeed, as was submitted by Mr Thomas, the legislation could be rendered nugatory if Mr Faulkner is right, for a tame company with the necessary paid-up share capital could always be interposed as the borrower with a guarantee given by an individual who is recognized as the actual beneficiary and regarded by the parties as primarily liable under the agreement. The words of the section are, in my opinion, quite clear. In order to come within the exception, the loan must be made to a specified company. The guarantee given by the defendant for the loan does not, therefore, lose the protection conferred by s. 24(2) with the result that it is unenforceable. Even if I had expressed any doubt as to the true meaning of the legislation, I would have held that the defendant had established that he has a substantial defence to the plaintiff's claim. Accordingly, the prohibition order granted by Duffy J will be discharged."

22. Mr Kwok (appearing for the Defendants) relies on Jones J's dictum for the submission that, regardless of whether the terms of the Facility Letter are effective against the 1st Defendant, any guarantees given by the 2nd and 3rd Defendants are unenforceable by MLO s. 24(2). On the other hand, Mr Man (appearing for the Plaintiff) says that Grantwin was wrongly decided. Even if one accepts the Defendants' version of events (namely, that the $160,000 deducted constituted 1 month's interest on a principal of $1,600,000), Mr Man argues that MLO s. 24(2) provides no defence for the 2nd and 3rd Defendants. He points out that, while Grantwin may have been binding on Master Wong, it is not on me. Further, although a judge may be reluctant to resolve a difficult question of law in a summary proceeding, Mr Man suggests that the construction of MLO s. 24(5) is a straightforward matter.

23. I agree with Mr Man. In my view, Grantwin cannot be right. Three reasons compel me to this conclusion.

24. First, I do not think that the construction of MLO s. 24 suggested in Grantwin makes sense linguistically.

25. MLO s. 24(5)(a) states that nothing in s. 24(2) shall apply to a loan ("an exempt loan") made by a lender to a company ("an exempt company") having a paid up share capital of at least $1,000,000. Therefore, whenever an exempt loan is involved, the expression "no security given in respect of any such ... loan shall be enforceable" in MLO .24(2) cannot apply. Otherwise, the words "such loan" would refer to the exempt loan in question and giving effect to s. 24(2) would make something in s. 24 applicable in relation to an exempt loan contrary to s. 24(5)(a). MLO s. 24 cannot have anything to do with exempt loans. Whenever the section refers to a loan, it cannot be read as a reference to an exempt loan on pain of contradicting MLO s. 24(5). It is therefore impossible to construe MLO s. 24(2) as striking down a security provided in respect of an exempt loan.

26. Second, I do not think that Grantwin is sound in principle.

27. O'Donovan and Phillips, The Modern Contract of Guarantee (3rd ed.) expresses the normal rule as follows:-

At p. 9:-

"A contract of guarantee is predicated upon the existence of a valid principal obligation owed by the principal debtor. If there is no such principal obligation, generally the guarantee fails. Consequently, a valid guarantee depends upon th existence of a promise made to a person to whom a debtor is already answerable or is to become answerable...

In terms of general principle, not only must the principal obligation exist, but it must also remain unchanged throughout the life of the guarantee. Even slight unauthorised changes in the primary obligation may discharge the guarantor. Moreover, if the principal obligation determines, so does the guarantee."

At p. 263:-

"The general principle applicable to contracts of guarantee is that the guarantor's liability should be co-extensive with that of the principal. It follows that, if no principal contract is concluded, the guarantor's liability never arises. As Lord Selborne said in Lakeman v. Mountstephen [(1874) LR 7 HL 17], 'until there is a principal debtor there can be no suretyship. Nor can a man guarantee anyone else's debt unless there is a debt of some other person to be guaranteed'. The difficulty is that the parties to the principal contract may purport to conclude the principal contract, but for various reasons that contract is void, voidable or unenforceable."

28. If Grantwin were right, one would have here an enforceable principal obligation, but an unenforceable guarantee even though the principal obligation has remained unchanged over the life of the guarantee. That would be at odds with the conventional rule that a guarantor's liability is coextensive with that of the principal debtor. While derogations from a general rule are possible, there must be some good reason for such exception. I can think of none in the present situation. I do not understood why the legislature should intend to protect the guarantor of a loan which is expressly made enforceable by MLO s. 24(5)(a) and Schedule 1, Part 2, §12. I invited Mr Kwok to suggest any rationale for the deviation from general principle. He suggested that the legislature may have wanted to protect people who sign guarantees against loan documents which they have had no part in negotiating or agreeing. However, that does not seem to be right. Nothing in MLO s. 24 refers to guarantees signed in respect of loan agreements in which the would-be guarantors have not played a part. Nothing in MLO s. 24 therefore indicates that the legislature had in mind the protection of such guarantors.

29. Indeed, if Grantwin were rightly decided, one would end up with paradoxical situations. Consider, for example, the situation where a creditor lends money to an exempt company A and the loan is guaranteed by an exempt company B. If Grantwin is read at face value, the loan to A would be enforceable but B's guarantee would not. Why not? Take another example. Exempt company C borrows money on the security of a mortgage on its own property. On Grantwin, the loan against C would be enforceable but the mortgage would not. Again why not?

30. Third, the sole reason which Grantwin explicitly gives in its support (namely, the possible interposition of a "tame" company) is unconvincing.

31. Grantwin suggests that, if guarantees of exempt loans are outside the scope of MLO s. 24(2), a subtle usurer could ostensibly lend monies to friendly exempt companies, while requiring the loans to be paid by the apparent guarantors. That, it is said, would circumvent the purpose of the MLO.

32. But the proposed stratagem to get around the MLO would require the usurer to set up a friendly company with a paid up capital of at least $1,000,000. That may not be an insurmountable obstacle, but it should cause many to think carefully whether the exercise of circumvention is worth the effort.

33. More fundamentally, it is a well-known maxim that equity will not permit a statute to be used as an instrument of fraud. MLO s. 24(5)(a) must only apply to exclude bona fide loans to exempt companies. If it were actually the case that a usurer was using MLO s. 24(5) to evade s. 24(2), the Court can readily apply the equitable maxim so that a fraudulent guarantee (which was really a usurious loan in disguise) would not be saved by s. 24(5)(a). I do not think that the counterexample mentioned by Jones J falsifies the construction for which Mr Man contends before me. I am not persuaded by Mr Kwok's argument based on the absence of words "bona fide" in MLO Schedule 1, Part 2, § 12.

34. From the report of Grantwin, it does not appear that the existence of the equitable maxim was brought to Jones J's attention. Had it been, I have little doubt that the judge would not have been as exercised as he seems to have been by the counterexample which he mentioned. Had the judge been reminded of the maxim, I am confident that Grantwin may well have had a different outcome.

35. I consider that the legal question of law posed is a straightforward one which can be decided in summary proceedings. For the foregoing reasons, I do not think that I can follow Grantwin. On the facts as advocated by the 2nd and 3rd Defendants, their guarantees would be enforceable notwithstanding MLO s. 24(2).

C. Undue influence

36. Mr Kwok submits the following:-

(1) The 3rd Defendant reposed confidence and trust in the 2nd Defendant and Mr Lau.

(2) The 2nd Defendant and Mr Lau abused that trust by:-

(a) inducing the 3rd Defendant to sign the Statement without the benefit of legal advice;

(b) by telling the 3rd Defendant that there was little risk that his guarantee would be enforced and the Statement was purely sought as a comfort to the Plaintiff; and,

(c) (in the case of the 2nd Defendant) by telling the 3rd Defendant that the 2nd Defendant was expecting to receive $4,000,000 shortly.

(3) In making representations about the Statement and its enforceability to the 3rd Defendant, Mr Lau and the 2nd Defendant were either acting as agents of the Plaintiff or the Plaintiff knew or ought to have known that the 3rd Defendant was prevailed upon by undue influence from Mr Lau and the 2nd Defendant to give his guarantee.

(4) The 2nd Defendant, who himself reposed trust and confidence in Mr Lau, was likewise prevailed upon by the undue influence of Mr Lau (acting for the Plaintiff) to sign the Statement.

I note that the allegations that the 2nd Defendant exerted undue influence on the 3rd Defendant and that the 2nd Defendant was himself the victim of Mr Lau's undue influence have not been pleaded in the Defence.

37. In my view the evidence filed by the 2nd and 3rd Defendant fails to make out any case of undue influence.

38. First, I do not think that the evidence makes out a case of actual undue influence. The 3rd Defendant is a professionally qualified accountant. He appears to be in the business of helping others to find capital to fund their businesses. He is not a "babe in the woods". If he feels that he requires legal advice and someone tells him that legal advice is unnecessary, the 3rd Defendant should be perfectly capable of making up his mind whether to proceed with a deal or walk out of negotiations.

39. The 3rd Defendant asserts that he had nothing to gain from signing the Statement and effecting a guarantee. That cannot be right. By the 3rd Defendant's own admission, he stood to gain commission of at least $33,000 (one-third of $100,000) for putting the 1st Defendant in touch with the Plaintiff and brokering a loan. If there were no loan, there would be no commission. It was for the 3rd Defendant to decide whether he wished to stand as guarantee for a loan to his friend's company in order to increase the chances of earning his commission.

40. Second, I do not think that there is a case of presumed undue influence. There is just no evidence that either the 2nd or 3rd Defendant reposed confidence and trust in Mr Lau. There is not even a statement to that effect in the affirmations of either. What evidence there is, is to contrary effect. I have mentioned how in their 1st Affirmations the 2nd and 3rd Defendants were at pains to distance themselves from Mr Lau and characterise him merely as a third party acting as the Plaintiff's agent. In their 2nd Affirmations, although the 2nd and 3rd Defendants acknowledge that Mr Lau was acting as the 2nd Defendant's middleman and was paid some commission by him, the impression conveyed is one of mere nodding acquaintanceship with Mr Lau.

41. Nor is there evidence that the 3rd Defendant reposed trust and confidence in the 2nd Defendant. Mr Kwok suggested that the reposing of trust can be inferred from the mere fact that the 2nd and 3rd Defendants had known each other for 2 years and had got along well with each other during that period. But I do not think that I can draw the inference on that slim basis.

42. Third, even if it were assumed that Mr Lau exerted undue influence on the 2nd and 3rd Defendants, it would still be necessary for the 3rd Defendant to adduce evidence that:-

(1) Mr Lau was acting as the Plaintiff's agent; or,

(2) the Plaintiff had actual or constructive notice that Mr Lau exercised under influence on him.

See, for example, Bank of China (Hong Kong) Ltd v. Wong King Sing [2002] 1 HKLRD 358, at 374-7 (§§58-69).

43. Mr Kwok suggested that I could deduce that Mr Lau was acting as the Plaintiff's agent because at the meeting in his Kowloon Bay office Mr Lau told the 2nd and 3rd Defendant what the Plaintiff had instructed him to say about the proposed loan and the need for appropriate guarantees. I do not see how such evidence can be sufficient. Whatever he was, Mr Lau must have at least been acting as agent for the 1st and 2nd Defendant. That was why there was an agreement (negotiated after the Plaintiff left the Marriott Hotel) that the 2nd Defendant would pay Mr Lau, Mrs Lau and the 3rd Defendant commission. In this light, there is nothing remarkable about Mr Lau reporting to his principals (the 1st and 2nd Defendants) the terms which had been negotiated with the Plaintiff, including the Plaintiff's comments in relation thereto. I do not see how by itself that reporting can substantiate the bald assertion Mr Lau was the Plaintiff's agent.

44. Absent an agency relationship between the Plaintiff and Mr Lau, Mr Kwok must show actual or constructive knowledge on the Plaintiff's part of the alleged undue influence. Again, there is simply no evidence of such knowledge. Nor is there any suggestion as to how precisely the Plaintiff (who was not present at the Kowloon Bay meeting) knew or ought to have known that (among other things):-

(1) Mr Lau told the 3rd Defendant that it was unnecessary to consult a lawyer;

(2) Mr Lau observed that any guarantee was unlikely to be enforced; or,

(3) the 2nd Defendant mentioned that he would soon receive $4,000,000.

45. Finally, the unpleaded suggestion that the 2nd Defendant was both an undue influencer and the object of undue influence during the meeting at Mr Lau's office, strikes me as fanciful. If anything, the 2nd Defendant must have been eager for short-term financing and was prepared to advance the 1st Defendant's interests by suggesting to the 3rd Defendant that the latter need have no real fear as $4,000,000 would soon be available to the 2nd Defendant.

46. Hong Kong Civil Procedure 2004 Note 14/4/4 (p. 160) states that in Order 14 proceedings:-

"[t]he defendant's affidavit must 'condescend upon particulars,' and should, as far as possible, deal specifically with the plaintiff's claim and affidavit, and state clearly and concisely what the defence is, and what the facts relied on to support it."

In my view, the matters raised in the 2nd and 3rd Defendants' affirmation evidence do not make out undue influence. Accordingly, like Master Wong, I believe that there is no substance to the 2nd and 3rd Defendants's allegations here.

IV. Interest on the loan

47. The above disposes of the pleaded defences. There is, however, one obscurity in the case. That concerns the $160,000 deducted at source from the principal of $1,600,000. The Plaintiff says that was commission paid to Interasia or Mr Lau on the 1st Defendant's behalf. The Plaintiff says that $48,000 was the actual agreed interest. In their 1st Affirmations the 2nd and 3rd Defendants contend that the $160,000 constitutes interest on the principal of $1,600,000. In their 2nd Affirmations, the 2nd and 3rd Defendants put forward the unpleaded case that commission of $100,000 was payable by the 2nd Defendant and only $85,000 was paid. By implication, this new allegation suggests that the $160,000 deducted could not have been commission as the Plaintiff claims.

48. Mr Kwok submits that, in the event that I rejected all of the Defendants' arguments, it would be unfair to enter judgment for more than $1,440,000 (that is, $1,600,000 less $160,000) since the 1st Defendant arguably never received more than that from the Plaintiff. In the circumstances, until the character of the $160,000 deduction can be ascertained, it would be wrong (Mr Kwok argues) to give final judgment for the whole $1,600,000.

49. I agree with Mr Kwok. I have referred above to contradictions in the 2nd and 3rd Defendant's 1st and 2nd Affirmations as to Mr Lau's role on their behalf. Even taking that into account, I do not think that on affidavit evidence alone I can resolve the question of the proper characterisation to give to the $160,000 deducted and the $48,000 claimed as interest. I am able to say that, even on the assumption that the Defendants' case on the $160,000 is correct, it would not render the loan agreement and guarantees thereof illegal. But it does not logically follow from my rejection of the illegality argument even assuming the Defendants' case on the $160,000, that the Plaintiff's case on the $160,000 is correct.

50. It seems to me that the correct approach is to give interlocutory judgment in the amount of $1,440,000 and remit the limited issues of the Plaintiff's entitlement to an additional $160,000 and to the interest of $48,000 stipulated in the Facility Letter to be determined at trial. Both Mr Kwok and Mr Man agree that, in the event that such is my decision, the matter might be remitted to the District Court since the remaining dispute would be well within that forum's jurisdiction. I also record here that, for the purposes of the Plaintiff's summary judgment application only, Mr Man was prepared to waive the Plaintiff's claim for interest of $48,000. Since the matter will now go to the District Court on the limited issues which I have indicated, Mr Man's concession on the $48,000 ceases to apply.

51. I note that there being no appeal by the 1st Defendant against Master Wong, that part of the Order relating to the 1st Defendant must remain. The sole issue left in relation to the 1st Defendant concerns pre-judgment interest. I understand that primarily to involve the question whether $48,000 is payable to the Plaintiff as agreed interest pursuant to the Facility Letter. Given that remains a live issue in relation to the 1st Defendant, it is convenient that such be determined in the District Court at the same time as the outstanding issues in connection with the 2nd and 3rd Defendants.

52. I am conscious of the possibility that the District Court judge trying the balance of the dispute between the 2nd and 3rd Defendant may find that the $160,000 deducted by the Plaintiff was not interest and was simply a part of the principal that was never advanced. Such finding would be at odds with the Order insofar as that requires the 1st Defendant to pay $1,600,000 (that is, $1,440,000 plus $160,000). The possibility of a contradiction cannot be avoided. It arises because the 1st Defendant (perfectly properly) has opted not to appeal against the Order. There must be finality to litigation. I do not think that it would be right for me now to override the 1st Defendant's decision not to appeal in relation to the $160,000.

IV. Conclusion

53. The Plaintiff's appeal succeeds in part. I order that interlocutory judgment be entered in the Plaintiff's favour against the 2nd and 3rd Defendants for the amount of $1,440,000. Interest is to run from the date of writ to date of judgment at 1% over prime and thereafter at the judgment rate.

54. I make an Order pursuant to District Court Ordinance (Cap. 336) s. 43 that all remaining issues in these proceedings be transferred to the District Court for trial there. To my understanding, the main outstanding issues are as follows:-

(1) Whether the Plaintiff is entitled to judgment for the principal amount of $160,000 against the 2nd and 3rd Defendants.

(2) Whether the Plaintiff is entitled to judgment for the interest amount of $48,000 against the 2nd and 3rd Defendants.

(3) Whether the Plaintiff is entitled to pre- or post-judgment interest (and (if so) what) on any amounts awarded under issues (1) and (2).

(4) Whether the Plaintiff is entitled to pre-judgment interest (and (if so) what) against the 1st Defendant.

55. The Plaintiff has substantially succeeded. I make an Order Nisi that the Plaintiff is to have its costs as against the 2nd and 3rd Defendants both here and before Master Wong in any event, such costs to be taxed if not agreed. As for the Plaintiff's costs against the 1st Defendant, I make an Order Nisi that there be no order in respect of such costs (if any) before me and that Master Wong's Order in respect of the Plaintiff's costs below against the 1st Defendant remain undisturbed.