KONEW FINANCE LTD v. TAM CHUEN ON AND ANOTHER

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 17916 OF 2000

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JUDGMENT

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The Facts

1. All of these cases involved common issues of enforceability of money lending agreements and were heard together. I therefore deal with them in one judgment. The Plaintiff was a licensed money lender at the relevant times when the loans in question were granted to the respective Defendants. All the written Loan Agreements had the following features in common:

2. The Defendants had defaulted in repayment. None of them had turned up at the hearing. Except for the Defendants in case no 17916 of 2000 who had not filed an Acknowledgement of Service, all the other Defendants have stated that they had no intention to defend. Pursuant to Order 83A, Rules of the District Court, the Plaintiff sought leave to enter judgment for recovery of the amount of the loans with interest at the contractual rates until payment.

3. I raised the requisition at the first hearing as to:

4. Subsequent to the first hearing, further Affirmations were filed. Mr. Lui deposed to the fact that the instructions he received were that the loans were "to be secured by the deposit of title deeds and documents" of the respective Defendants' properties. The Defendants signed the respective Loan Agreements at the Plaintiff's office. They then went to see Mr. Lui at Unit 3606, The Center, No. 99 Queen's Road Central. Having confirmed the signatures of the Defendants on the Loan Agreements, Mr. Lui signed "as witness". Mr. Lui had never asked any of the Defendants to sign, in his presence, anymore on the Loan Agreements. Mr. Lui had explained to the Defendants that the loan "was to be secured by the deposit of title deeds and documents of the Defendants' [properties] with the Plaintiff despite the fact that they might have the impression that the loan was to be secured by their [properties] as mentioned in the said Deed." Mr. Lui also informed the Defendants of the possible infringement of the Housing Ordinance were any mortgage or charge created. Cheques for the loan/balance of the loan (after retention of monies for discharging liabilities) were issued by Messrs. Hermes W.K. Lui & Co to the respective Defendants.

5. As at the dates of the respective loans, only the Defendants' properties in case no. DCCJ 978 of 2001 and 1288 of 2001 were charged to banks. Other properties were not subject to a charge. All the Defendants (save those in case no. 1288 of 2001) had deposited the title deeds with Messrs. Hermes Lui & Co. as agreed.

6. Having considered the evidence, I am satisfied that the loan monies had been advanced. Applying the formula in Lord Denning's judgment in Askinex Ltd. v. Green [1969] 1 QB 272, the interest rates charged were not excessive. However, I am of the view that the Loan Agreements were void under the Housing Ordinance. In addition, there has not been full compliance with s.18 of MLO for failing to set out or set out in full all terms of the agreement between the parties.

Infringement of the Housing Ordinance

7. Under s.17B of the Housing Ordinance, Cap.283,

          "Where the person to whom the land is sold purports to mortgage or otherwise charge the land or to assign or otherwise alienate it; and that person acts in breach of any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to the land; or in the case of such a mortgage or other charge, any term authorized under paragraph 4(a) of the Schedule as regards the mortgage or other charge, the purported mortgage, other charge, assignment or other alienation, together with any agreement so to mortgage, charge, assign or otherwise alienate, shall be void." [emphasis added]

8. Under paragraph 1 of the Schedule to the Housing Ordinance, "Subject to paragraph 4 of this Schedule (which has no application to the present case) the purchaser shall not at any time ... purport to ... charge ... or enter into any agreement to ... charge ... the land sold other than to the Authority, or such person as the Authority may nominate" unless certain conditions which have no application to the present case are complied with. [emphasis added]

9. Mr. Lui accepted that the properties were subject to the control under the Housing Ordinance and hence charges could not be created without consent of the Housing Authority. However, he submitted that the deposit of title deeds could not create a charge. To create a charge, the contract must confer on the charge some "right" of enforcing his security. He relied on the case of National Provincial and Union Bank of England v. Charnley [1924] 1 KB 431 for the proposition that, "Where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the Court. If those conditions exist there is a charge."

10. With the greatest respect, that case was dealing with an interpleader issue involving chattels. The Court was concerned with the Companies and Bills of Sales Acts. It did not deal specifically with the issue now before me.

11. Mr. Lui further submitted that all dispositions under the Conveyancing and Property Ordinance, Cap. 219 ("CPO") have to be in writing. The deposit of title deeds was not such a disposition and hence could not be enforced. Hence, no valid charge was or could be created. In any event, the parties did not have the intention to create a charge.

12. With respect to Mr. Lui, he was referring to the position since implementation of s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 ("LPMPA") of the U.K. Under that Act, a disposition of land not made under writing was void. A mortgage was expressly defined as a kind of disposition. The case of United Bank of Kuwait Plc. v. Sahib [1996] WLR 372 put it beyond doubt that since that Act, mere deposit of title deeds could not create a valid mortgage or charge. However, CPO has never been amended in line with LPMPA. Although s.44 of CPO requires mortgages to be created by charge by deed, the position as regards deposit of title deeds has been preserved by section 3 of CPO which provides as follows:

13. Deposit of title deeds amounts to part performance of an agreement to enable equity to render assistance and hold that an equitable charge exists: Russell v. Russell (1783) 1 Bro. C.C. 269; Maddison v. Alderson (1883) 8 App.Cas.467; Re Wallis & Simmonds [1974] 1 WLR 391. The position has been summarised in Halsbury's Laws of Hong Kong, Volume 16, paragraph 230.0650 and 230.0651:

14. In the light of the above analysis, the parties' agreements in the present cases were in my view at least a "purport" to charge the property. The charge and the agreement to create it were void under s.17B of the Housing Ordinance and not just voidable as Mr. Lui suggested.

15. Mr. Lui submitted that the parties had no intention to create a charge. That, he said, could be seen from his explanation to the Defendants that no charge would be created for fear of violating the Housing Ordinance. Assuming that Mr. Lui was right, that explanation was given after the Loan Agreements were signed at the money lender's office. How could the subsequent explanation water down their legal effect?

16. Further, Mr. Lui's evidence was self-contradictory. The Plaintiff was keen to obtain some form of security. The Loan Agreements were on standard forms which contained blanks for filling in particulars of properties to be mortgaged. The Plaintiff had specifically instructed solicitors that the loans were "to be secured by deposit of title deeds and documents". [See paragraph 2 of Mr. Lui's Affirmation.] The Defendants, through the written terms of the Loan Agreement, thought they were providing mortgages. On the same days as the loans, Mr. Lui confirmed with the Defendants their willingness to deposit the title deeds which the Defendants did. There could be no doubt at all that the parties intended that some form of security had to be provided to the Plaintiff. The evidence was overwhelming in supporting Mr. Lui's submission, "You let us (the Plaintiff) have the deposit of title deeds and we let you (the borrowers) have the money." I reject Mr. Lui's contention that there was no intention to create a charge.

17. Both the fact of charge and intention to create a charge being present, section 17B of the Housing Ordinance makes the Loan Agreements void. On this ground alone, the Loan Agreements were not enforceable.

18. Mr. Lui submitted that the Plaintiff was not seeking to enforce the securities but only repayment of the loans with interest. Be that as it may, the loans (save that in case no. 1288 of 2001) were closely tied up with and dependent on the deposit of title deeds. It would be wholly wrong to consider the enforceability of the loans on the one hand while ignoring the securities on the other.

Failure to Set Out or Set Out Adequately All the Terms of the Agreement in the Memorandum

19. If I am wrong in the above analysis, I have to consider s.18 of the Money Lenders Ordinance, Cap. 163 ("MLO") which provides as follows:

20. The Court must be careful to ensure that there has been full compliance with this section. This is so even where the Defendants do not defend. The Court is not obliged to take evidence at its face value. When in doubt, the Court may raise requisitions and may refuse to grant judgment when they are not answered satisfactorily.

21. The Loan Agreements refer to particulars of properties which were subject to "mortgage" without setting out the terms of the mortgage. The evidence and submissions showed that there was no "mortgage" but only "deposit of title deeds", a lesser form of security. These 2 forms of security were completely different in nature. There was a failure to comply with s.18(2)(h) of MLO in that the terms of security was not set out or accurately set out.

Inconsistency in the Terms of the Loan Agreement

22. The Loan Agreements also failed to set out properly the place of completion of the Loan Agreements. The printed words on the Loan Agreements showed that completion was in the office of the solicitors and not at the money lender's. The execution was witnessed by Mr. Lui. Mr. Lui, however, sought to explain otherwise. The clause chopped onto the Loan Agreements seemed to support what he said. However, I have serious doubts as to this piece of evidence although it was on Affidavit. If the place of completion was not at the solicitors' office, why did the Loan Agreements have to state the address of the solicitors - in hand written form and not printed? If Mr. Lui was just to check the title deeds and explain the law to the Defendants, why did he have to sign on the Loan Agreements?

23. Further, the Defendants had expressly declared that at the time of signing, they had already received the loans. If they had only received the solicitors' cheques at the solicitors' office, then the declaration on the Loan Agreements would have been wrong.

24. I am not satisfied on the balance of probabilities that the Loan Agreement had complied with s.18(2)(i) of MLO. These inaccurate/inconsistent statements on the Loan Agreements, in themselves, would not have caused me so much alarm. However, if the Loan Agreements were really completed at the solicitors' office, one could not exclude the possibility of the Defendants having been misled as to the effect of the security before the loans were granted. The Plaintiff might also have violated s.7(1)(b) and (c) of MLO in failing to comply with the terms of the licence to carry on business at their own address. The consistent modus operandi and all the circumstances of these cases, make it unsafe for the Court to ignore the inaccuracies and inconsistencies. I hold that the Loan Agreements are not enforceable under s.18(1) MLO.

Section 18(3) of the MLO

25. If I am wrong, I have considered s.18(3), MLO. Monies had been actually advanced. It appeared inequitable that the Defendants would not have to repay even the capital. On the other hand, I considered that on the face of the transactions the parties did have unequal bargaining power. The Plaintiffs were then represented by solicitors. The Defendants were not and there was nothing to suggest that they had been told to seek legal advice. The Plaintiff had consistently used the deposit of title deeds in order to obtain the security, bypassing the Housing Ordinance. It was not an isolated incident. The common facts of these cases showed a scheme adopted with legal advice. Were the Plaintiff successful in obtaining a judgment and subsequent charging order against the properties, the Plaintiff would then obtain the full registered security which they otherwise would not be entitled to. The Plaintiff's solicitors had at or about the time of the loans purported to explain the law under the Housing Ordinance to the Defendants which I now find to be erroneous. I am not persuaded to exercise my discretion in enforcing the Loan Agreements to any extent pursuant to s.18(3) of MLO.

26. For case no. 1288 of 2001, there was eventually no deposit of title deeds and the loan was unsecured. There was not sufficient part performance to find that an equitable charge was eventually created. It would not be appropriate for me to speculate if any other form of security had been hidden from the court. Nevertheless, the mention of mortgage together with failure to comply with s.18(1) MLO were things which the Court could not ignore. Again, I could not exclude the possibility of the Defendants being influenced by the erroneous advice given in respect of the Housing Ordinance before obtaining the loan. For the same reasons, I am not minded to enforce this Loan Agreement to any extent.

Conclusion

27. Being in breach of s.17B of the Housing Ordinance and the MLO, I hold that the Loan Agreements in all cases are unenforceable. I will not exercise my discretion under s.18(3) of MLO to enforce any part of the Loan Agreements. I dismiss all 5 summonses.