THE NEW CHINA HONG KONG FINANCE LTD (In Liquidation) v. SHIMADA LTD

HCA11030/1999, HCA5350/2000
& HCA565/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11030 OF 1999

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(HEARD TOGETHER)

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REASONS FOR JUDGMENT

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A.  Introduction

1.  On 4 November 2008, I entered judgment for The New China Hong Kong Finance Limited (in liquidation) (“NCHK Finance”) against :

(1)  Shimada Limited (“Shimada”) in HCA11030/1999 for HK$117,967,951.84 with interest on the principal sum of HK$49,163,574.69 at the judgment rate from the date of judgment until payment;

(2)  Mr Martin Kwok Ying Chuen (“Mr Kwok”) in HCA565/2005 for HK$117,967,951.84 with interest on the principal sum of HK$49,163,574.69 at the judgment rate from the date of judgment until payment; and

(3)  Mr Wong Tin Shu (now known as Wong Tin Tsui, “Mr Wong”) in HCA5350/2000 for HK$6,034,921.76 with interest on the principal sum of HK$2,562,337.66 at the judgment rate from the date of judgment until payment.

2.  I also ordered that NCHK Finance do have the costs of the three actions including all costs reserved, to be taxed if not agreed.

3.  These are my reasons.

B.  Loans and defaults

4.  Before its liquidation in or about March 1999, NCHK Finance was a licensed money lender under the Money Lenders Ordinance, Cap. 163 (“MO”) and provided margin lending to its clients for securities trading.

5.  Shimada is a BVI company with Mr Kwok as its sole beneficial owner and director.  Mr Kwok is an experienced businessman.  He was the chairman and controlling shareholder of Chung Hwa Development Holdings Limited (“Chung Hwa”), a Hong Kong listed company, and director and shareholder of some other companies.

6.  Shimada was a client of NCHK Finance’s.  Between 1995 and 1999, it engaged in securities dealings of Chung Hwa’s shares through its securities and future accounts held with NCHK Finance by making use of the loan facilities provided by NCHK Finance.  Provision of the margin loans was governed by a General Commercial Agreement and Memorandum of Deposit dated 24 April 1995 signed by Mr Kwok for and on behalf of Shimada (“the Shimada Agreement”).

7.  On 26 February 1998, Mr Kwok executed a personal guarantee to guarantee all Shimada’s indebtedness due to NCHK Finance.

8.  As at 1 February 1999, Shimada owed NCHK Finance a principal sum of HK$49,163,574.69 with interest accruing.

9.  Despite repeated demands, Shimada failed to make any repayment, which led to HCA11030/1999.  When Mr Kwok also defaulted, HCA565/2005 was commenced.

10.  Mr Wong was also a client of NCHK Finance’s.  He also engaged in margin trading of Chung Hwa’s shares through the securities and finance accounts held with NCHK Finance by making use of margin loans provided by the latter.  He executed a General Commercial Agreement and Memorandum of Deposit dated 10 May 1995 (“the Wong Agreement”) for the provision of the margin loans.  As at 30 May 2000, the principal outstanding was HK$2,562,337.66 with interest accruing.

11.  Upon Mr Wong’s default, NCHK Finance commenced HCA5350/2000.

C.  Defence

12.  The fact that NCHK Finance had actually advanced the margin loans to Shimada and Mr Wong can hardly be disputed.  It is well supported by the documentary evidence.  Nor is there any dispute that no repayment had been made by Shimada, Mr Kwok and Mr Wong.  In short, subject to the defence raised by them, NCHK Finance’s claims must succeed.

13.  In disputing liability, Shimada raised a three-fold defence.

14.  First, NCHK Finance did not explain the contents of the Shimada Agreement to Mr Kwok, who signed it for and on behalf of Shimada.  This effectively amounts to a plea of non est factum.

15.  Second, NCHK Finance failed to fully comply with the statutory requirements of the MO when making the loans to Shimada.

16.  Third, Mr Wong was at all material times operating the securities and future accounts held in his name with NCHK Finance as Shimada’s nominee.  Shimada is thus entitled to set off the loss allegedly suffered by Mr Wong at the hands of NCHK Finance in relation to two share option contracts involving Chung Hwa’s shares.

17.  Mr Wong’s defence is just the same as Shimada’s.  He first raised the plea of non est factum by alleging that NCHK Finance did not explain the contents of the Wong Agreement to him at the time of execution.  He next alleged that NCHK Finance had not satisfied the statutory requirements of the MO when advancing loans to him.  Finally, he was relied on the defence of set off arising from the loss in relation to the share option contracts.

18.  Mr Kwok denied liability under the personal guarantee based on the defence raised by Shimada in HCA11030/1999.  He had raised no other separate ground to dispute the claim.

D.  Defence not established

19.  The burden rests squarely on Shimada, Mr Kwok and Mr Wong to prove the pleas of non est factum and set off.  They have adduced no documentary evidence whatsoever in support.  And none of them appeared at the trial.  So there is simply no oral evidence in support either.  In the absence of the requisite evidence, those pleas must fail.

20.  The defence that NCHK Finance had breached the statutory requirements of the MO can be disposed of briefly.

21.  Section 18 of the MO provides :

“(1)  No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be enforceable unless—

(a)  within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and

(b)  there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,

and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.

(2)  The note or memorandum shall contain all the terms of the agreement and in particular shall set out—

(a)  the name and address of the money lender;

(b)  the name and address of the borrower;

(c)  the name and address of the surety, if any;

(d)  the amount of the principal of the loan in words and figures;

(e)  the date of the making of the agreement;

(f)  the date of the making of the loan;

(g)  the terms of repayment of the loan;

(h)  the form of security for the loan, if any;

(i)  the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2;

(j)  a declaration as to the place of negotiation and completion of the agreement for the loan.

(3)  Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.”

22.  The only significant non-compliance on the part of NCHK Finance lies in section 18(2)(i).  For the interest rate was not stipulated in either the Shimada Agreement or the Wong Agreement.  The question is should the court exercise its discretion under section 18(3) to enforce the two Agreements.

23.  In Emperor Finance Ltd v. La Belle Fashions Ltd & Others (2003) 6HKCFAR 402, Ribeiro PJ had this to say at para. 119 at p. 442J on the approach to section 18(3) :

“In exercising its discretion, the court should examine the breach or 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 ...”

24.  That approach was followed in Strong Offer Investment Ltd (in liquidation) v. Nyeu Ting Chuang [2007] 3 HKC 234 when the Court of Final Appeal looked at, among other breaches, the failure to stipulate the interest rate in the loan agreement.  Ribeiro PJ said at para. 62 :

“62.   In this context, the particular circumstances of the borrower are highly important.  A key consideration is whether any prejudice flows from the statutory breaches established.  Plainly, breaches of the documentary requirements for specifying the amount borrowed, the interest rate, and so forth, are likely to prejudice a borrower who, not having a proper note or memorandum, may fail fully to appreciate the terms of the transaction entered into.  The absence of a proper note or memorandum would make it difficult to verify the extent of his liabilities, with or without help from others.  In such cases the money lender would be most unlikely to satisfy the court that a refusal to enforce the agreement would be inequitable.  On the other hand, a sophisticated speculator who has authorised and is kept fully informed of all the trades done on his behalf and all borrowings incurred to effect those trades is in a different situation.  A person who has chosen with eyes wide open to take the risks of highly leveraged trading on credit, may suffer no prejudice at all from deficiencies in the original documentation.  The court may be satisfied in such a case that the equities favour enforcement.”

25.  Here, in each of the monthly statements sent to Shimada and Mr Wong by NCHK Finance, details of each transactions made during the month, the sums involved and the actual interest charged were set out.  They had never made a single complaint about the correctness of the statements throughout the years.  Shimada (through Mr Kwok) and Mr Wong were no doubt sophisticated and active speculators, who had chosen with eyes wide open to take the risks of highly leverage trading on credit.  I can see no prejudice they would suffer from the deficiency in failing to set out the interest rate in the respective Agreement at all.

26.  The other instances of non-compliance complained of, even if proved, were technical and could not possibly cause any prejudice to Shimada or Mr Wong.

27.  It is an appropriate case to exercise my discretion under section 18(3) to enforce both the Shimada Agreement and the Wong Agreement.  That being my conclusion, it is not necessary to consider NCHK Finance’s contention that the loans it advanced to Shimada were exempted loans within the meaning of the MO.

28.  For the above reasons, none of the defence raised is established.

E.      Conclusion

29.  Having proved its claims against each of Shimada, Mr Kwok and Mr Wong, NCHK Finance is entitled to judgment.  I therefore entered judgment in its favour as set out in para. 1 above.