WA LEE FINANCE CO LTD v. STARYORK INVESTMENT LTD AND OTHERS

HCMP 2242/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2242 OF 2000

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J U D G M E N T

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INTRODUCTION

1. This is a mortgage action by the Plaintiff, Wa Lee Finance Company Limited ("Wa Lee"), against the 1st Defendant, Staryork Investment Limited ("Staryork"), as mortgagor and the 2nd to 4th Defendants as occupiers for possession of property mortgaged to the Plaintiff (hereinafter referred to as the "1st and 2nd Sets of Property") and damages. The 2nd Defendant, Golan Limited ("Golan") has since been wound up and the 4th Defendant has absconded. The action is being contested by the 1st and 3rd Defendants only.

Dramatis Personae

2. The 1st Defendant is an investment company engaged in developing small village houses or "Ting houses" and property investment in Yuen Long. Until 31 December 1998, Kan Choi Ming ("Kan") was the majority shareholder and director holding 9,999 shares and 1 share was held by a co-director and employee, Chan Kwong Man ("Chan"). Then on that day, Kan transferred 6,000 shares to Lam Cheung Yin, a trade creditor and 3,999 shares to Chan, who in turn transferred 1,150 shares to Lam Wai Cheung, who is Kan's uncle. Probably Kan effected the transfers in anticipation of bankruptcy proceedings against himself. At all material times in relation to the present proceedings, Kan was the person in control of the 1st Defendant and Chan acted at his direction. Kan was the owner of a number of other companies, including Kan Ming Construction Investments Limited and Golan which operated the Emperor Seafood Restaurant. Apart from that restaurant, he also operated a number of other Chinese restaurants and sushi restaurants.

3. The 2nd Defendant, Golan, was a company controlled by Kan. Kan's wife and Chan were directors, but not Kan. Golan operated the Emperor Seafood Restaurant on the ground floor of Fortune Centre which formed the 1st Set of Property. Kan had the management and control of the Emperor Seafood Restaurant.

4. Kan Shi Leung is the 3rd Defendant. He operated the Leung Kee Store at Shop 71 on the ground floor of Fortune Centre, which formed part of the 1st Set of Property.

5. The Plaintiff, Wa Lee, is a company incorporated in Hong Kong. It is owned and controlled by Cheung Siu Fung ("Cheung") and her younger brother, Cheung Tak Fai. It was a $2 company until 29 October 1999, when the issued capital was increased to $10,000. It was further increased to $999,000 on 6 July 2000. Cheung was the majority shareholder throughout. In May 1998, one of the Plaintiff's source of working capital was banking facilities of $7.7 million from Union Bank secured on three properties belonging to Wong Kwok Ming ("Wong"), a Taiwanese otherwise known as Huang Kuo Ming and on a joint several guarantee from Wong and Cheung for an unlimited amount. The facilities were increased by First Pacific Bank to $13.5 million in September 2000 on the security of additional properties provided by Well Chest (Guanzhou) Real Estate Company Limited and Fulland Industries Limited. Then Cheung Tak Fai substituted Wong as guarantor. Cheung is also in control of a number of companies, namely, Well Chest (Guanzhou) Real Estate Company Limited, Well Chest Trading Limited and Chinko Limited. These companies all share the same premises with the Plaintiff in Emperor Group Centre in Hennessy Road. The transaction in question was handled by Tam Ming Tat ("Tam") who is a consultant employed by the Plaintiff. Tam does not work full time with the Plaintiff.

6. Snyder Holdings Limited ("Snyder") is a company incorporated in the British Virgin Islands. It is not registered under Part XI of the Companies Ordinance. It has no office, no telephone number and no fax number in Hong Kong. Nothing is known about this company, except that, according to Tam, it is owned and controlled by Wong. Wong was connected with the Plaintiff in that he provided properties as security for the Plaintiff's banking facilities.

7. A large number of solicitors firms were involved in these transactions. For ease of reference, they are abbreviated as follows:

JSM	Messrs Johnson Stokes & Master
WF	Messrs William W L Fan & Co
C&T	Messrs Chan & Tsu
YTS	Messrs Y.T. Szeto & Co
NTKC	Messrs Ng, Tam, Ko & Chan
LP	Messrs Laurence Pang & Co
HF	Messrs Henry Fok & Co
EW	Messrs Edward Wong & Co

WF and C&T are the solicitors respectively acting for the Plaintiff and the 1st Defendant in this litigation. According to Kan, YTS and NTKC were arranged by Tam to represent the 1st Defendant in the Snyder Agreement and Snyder Action described below.

Background

8. In December 1996, the 1st Defendant purchased some shop units on the ground floor of Fortune Centre in Yuen Long for $48 million. It paid two down payments of $4.8 million each and sold some of the units as confirmor at a substantial profit. Thus, effectively, the 1st Defendant acquired the unsold units (the "1st Set of Property") for $6.432 million only, the purchase price of which had been fully paid at the time of completion on 30 April 1997. Subsequently, the 1st Set of Property was assessed by the Commissioner of Inland Revenue to be worth $21 million for stamp duty purpose as at 23 December 1996.

9. In August 1997, the 1st Defendant contracted to purchase the whole of the first floor and shop units 72 and 74 of the ground floor of Fortune Centre (the "2nd Set of Property") for $35 million. It paid two deposits of $3.5 million each. The sale and purchase was to complete in November 1997. The 1st Defendant was short of funds to complete the purchase. It obtained an extension to 6 February 1998 and then a second extension to 20 February 1998 upon payment of $7 million as additional part payment.

10. In the meantime, the 1st Defendant obtained banking facilities of $10 million from the Hong Kong and Shanghai Banking Corporation ("Hong Kong Bank") secured by a mortgage of what Kan thought to be the 2nd Set of Property only (the "Hong Kong Bank Mortgage"); but according to the mortgage documents both the 1st and 2nd Sets of Property were mortgaged. Kan did not wish to mortgage the 1st Set of Property as security as he had incurred a lot of money in renovation of the 1st Set of Property so as to use it as a restaurant and he did not wish to put those renovation costs at risk in case the bank should realise the security if he fell into arrears. In view of his very firm conviction not to put the 1st Set of Property and the renovation costs at risk, he turned to the Snyder Agreement as described below to finance the purchase. That unfortunately landed him in this litigation.

11. According to Kan, his need for finance became known to the Plaintiff through a business friend, Chai Chai. Then Tam, on behalf of the Plaintiff, approached him and offered the 1st Defendant facilities of $10 million at 100% interest per annum for a term of one year, using what Kan thought to be the 2nd Set of Property as security (the "Snyder Loan"). As the 2nd Set of Property had been mortgaged to Hong Kong Bank, a sale and purchase agreement in respect of the property between Snyder and the 1st Defendant for completion after one year would be used as security. He agreed and was paid $6 million on 14 February 1998, with which he completed the purchase of the 2nd Set of Property on 20 February 1998. On the following day, i.e. 21 February 1998, he executed the formal sale and purchase agreement of both Sets of Property with Snyder. This is "the Snyder Agreement" mentioned above. On 2 and 7 April 1998, the Plaintiff paid Kan two sums of $2 million, making up the $10 million loan. The Plaintiff denied to have any involvement in the Snyder Agreement and Mr Chan, counsel for the Plaintiff, submitted that this agreement is irrelevant.

12. A year went by. On 20 February 1999, Snyder issued a writ in High Court Action No. 2940 of 1999 against the 1st Defendant demanding specific performance of the sale and purchase of the two Sets of Property by the 1st Defendant (the "Snyder Action").

13. On 12 March 1999, Kan on behalf of the 1st Defendant entered into a loan agreement with the Plaintiff in the amount of $29 million. That agreement was then replaced by one for $29.5 million (the "Wa Lee Loan Agreement") on 22 March 1999, entered into in the office of a firm of solicitors, Messrs Laurence Pang & Co ("LP") when Kan and Chan on behalf of the 1st Defendant executed a deed of mortgage in respect of the two Sets of Property in favour of the Plaintiff ("the Mortgage"). On the same occasion, at the office of LP, Kan signed an agreement with Snyder (the "Cancellation Agreement") cancelling the Snyder Agreement upon the terms that the 1st Defendant would pay Snyder $20 million. The 1st Defendant's solicitor, Clive Chan of Messrs Ng Tam Ko & Chan ("NTKC"), signed a consent summons bringing the Snyder Action to an end. The Plaintiff paid the 1st Defendant $29.5 million by a number of cheques, including a cheque for $20 million to Snyder for cancellation of the Snyder Agreement, a cheque for $9.05 million to discharge the Hong Kong Bank Mortgage, cheques to pay legal fees to the solicitors and a cheque for the balance of $371,650 to the 1st Defendant.

14. The 1st Defendant defaulted in payment of instalments due under the Wa Lee Loan Agreement. Pursuant to the notice of assignment of rental signed by the 1st Defendant, Wa Lee attempted to collect rent from the Oi Tak Old People's Home ("Oi Tak") and the 2nd Defendant, which were respectively the tenant of the first floor shops and the ground floor shops. Oi Tak paid some of the rent to Wa Lee. Then it paid to its solicitors as stake money pending resolution of the present dispute between the Plaintiff and the 1st Defendant. The 2nd Defendant refused to pay rent alleging that it had paid a whole year's rental to the 1st Defendant in exchange for a further lease. The Plaintiff instituted action and obtained judgment against the 2nd Defendant, which was then wound up. The Plaintiff also instituted the present action against the 1st Defendant.

The issues

15. The 1st Defendant's defence is, firstly, that the Snyder Agreement was not a genuine sale and purchase agreement but was a sham to cover up the illegal Snyder Loan of $10 million from the Plaintiff to the 1st Defendant at an interest of 102% per annum, and that the Wa Lee Loan Agreement was void because it was the means by which payment of the illegal interest under the Snyder Loan was effected. Secondly, the Wa Lee Loan Agreement was signed under duress and is unenforceable.

16. The Plaintiff denies that it has entered into any illegal loan agreement with the 1st Defendant for $10 million as alleged, that the Snyder Agreement was a genuine sale and purchase agreement and in any event had no relevance to the Wa Lee Loan Agreement now in dispute. The Plaintiff also denies that the Wa Lee Loan Agreement was entered into by duress. If it was, the agreement has been affirmed by the 1st Defendant's offer of partial redemption of the mortgaged property, by the 1st Defendant's inaction after having been notified that the Plaintiff was going to exercise its power of sale under the mortgage, by the 1st Defendant directing or causing Oi Tak to pay rent to the Plaintiff and by acquiescence when the Plaintiff took action against Golan for assigned rental.

17. The important factual issue in this case is whether the Snyder Agreement was a genuine sale and purchase agreement or a security for the illegal Snyder Loan from the Plaintiff to 1st Defendant for $10 million at an illegal rate of interest. If it was the former, i.e. the Snyder Agreement was a genuine sale and purchase agreement, the issues are (1) whether the Wa Lee Loan Agreement was obtained by duress; (2) if it was, whether the agreement was void or voidable; (3) whether the agreement has been affirmed by the 1st Defendant and (4) whether the Plaintiff has acquired any subrogation rights over both Sets of Property to the extent of the amount it paid to discharge the Hong Kong Bank Mortgage.

18. On the other hand, if the Snyder Agreement was a security for the illegal Snyder Loan, then the issues that follow are (1) whether the Wa Lee Loan Agreement was void as being tainted with illegality and, if yes, (2) whether the Plaintiff has acquired any subrogation rights over both Sets of Property to the extent of the amount it paid to discharge the Hong Kong Bank Mortgage.

CREDIBILITY OF WITNESSES

19. What appeared to be a straight forward mortgage action has tuned complicated when the Snyder Agreement was introduced and the defence of duress pleaded. Serious allegations have been made against the Plaintiff and solicitors involved in the various transactions. There are substantial financial and non-financial interests involved. The credibility of Tam, Kan and Clive Chan is crucial. These witnesses had been cross-examined to tremendous depths by counsel. Tam and Clive Chan did not impress me as telling the whole truth. They were selective in telling the truth and have something to hide. On the other hand, Kan was more forthcoming. His answers in cross-examination were spontaneous. He impressed me as an honest and credible witness.

20. While I may appear to have compartmentalised the evidence of each witness or event in the analysis that follows, this is only done for clarity of presentation. In making my finding of facts, I am more guided by the totality of the evidence, documents and inherent credibility of the witness' accounts than by their demeanour. In here, I shall set out the background of these witnesses and give my overall view of their credibility. I shall fortify those views as I proceed with the evidence.

Tam Ming Tat

21. Tam was a well prepared witness and appeared to have a lot up his sleeves. He said his wife is a very successful business woman working in the private banking section of a prestigious bank. Hence, he had to look after the children at home and could only work as a part time consultant with the Plaintiff. However, as he progressed with his evidence, he portrayed himself as a man of substance. He had worked on property development projects belonging to rich and important people in the New Territories. He had lawyers and architects at his finger tips. He was involved in development projects in China, spending two days in Donguang and one day in Zhuhai every week. He acted as agent for sale and purchase of substantial properties, including the Ritz Carlton. He took part in Government contracts which caused him loss of $10 million. He handled multi-million dollar loans working under very tight time schedule. The loan agreement now in issue was for $29.5 million. He said he was educated up to Form 5 but he was able to draft fairly complicated and long agreements. He is a man with tremendous business experience and exposure and high degree of sophistication.

22. Tam was very evasive when he was cross-examined on sensitive topics, such as the relationship between Snyder and the Plaintiff and the relationship between Wong and Cheung. He had a very close relationship with Wong as Wong had offered his property as a security to raise a loan of $6 million for Tam. Cheung was the client of Tam's wife while she was working in a prestigious bank. Through that relationship, Tam was employed by Cheung in the Plaintiff company. Thus, Tam and his wife had a close relationship with Cheung. Though a part time consultant of the Plaintiff, he is an important and trusted employee as he was the mentor of Cheung's brother, Cheung Tak Fai, a director of the Plaintiff and he processed loans in the magnitude of tens of millions of dollars. Yet, under those circumstances and despite the close relationship among him, Cheung and Wong, Tam could not say if Cheung and Wong were cohabiting together.

23. On the other hand, during the few visits Kan had to the Plaintiff's office and the few encounters he had with Cheung and Wong, Kan was able to say that Cheung was introduced to him as Mrs Wong. There was no reason why Kan would have made up such a fine point. Wong is not a shareholder of the Plaintiff company, yet he provided very substantial property as security for the Plaintiff to obtain banking facilities to fund the Plaintiff's business. He also offered himself as a guarantor for unlimited amount for the Plaintiff's debt. At the time, the Plaintiff was a $2 company. Thus, in effect, Wong was the man providing working capital for the Plaintiff. In view of the intricate relationship between Wong and the Plaintiff, which is a company own by Cheung, there must be some truth in Kan's evidence that Cheung was introduced to him as Mrs Wong. For Tam to say that he did not know whether Wong and Cheung were cohabiting together is in defiance of common sense. The inference is that Tam was evasive and insincere in his evidence.

24. Tam tried to distant himself and the Plaintiff from Snyder. If Kan's evidence is accepted, Tam was the executive arm of Snyder. On the objective and incontrovertible evidence, Tam was deeply involved in the affairs of Snyder: the writ issued by Snyder's solicitors was faxed to him and he arranged a solicitor to act for Kan in cancelling the Snyder Agreement.

25. Tam was an opportunist. He changed his evidence to suit the circumstances. When faced with the suggestion by defence counsel that the price of $20 million for the sale of both Sets of Property under the Snyder Agreement was low, he replied he had reservation about the price and attacked the value of the properties as being inside the shopping arcade and not street facing. However, despite a falling market, he granted a loan of $29.5 million on the security of the same property a year later.

26. In my view, Tam was trying to hide the true relationship between Wong and Cheung and the relationship between Snyder and the Plaintiff. This latter relationship is a crucial issue in this dispute. I do not find Tam an honest or credible witness. He was evasive and had much to hide. He is a very smart and sophisticated witness and is capable of doing the things which Kan alleged him of having done.

Kan Choi Ming

27. Kan is an indigenous villager of the New Territories with primary school education. He began his career as a manual labourer, a steel binder, a foreman and then a subcontractor. After that he contracted with indigenous villagers to build "Ting houses". His business grew and he subcontracted building works from developers. Then he began his own "Ting house" projects alone or in partnership with others. He had the luck of riding with the tide of escalating property price prior to 1998. He built about 150 blocks of "Ting houses", making a profit of about $400,000 to $1 million per block, either wholly for himself or in partnership with others. He started a number of companies and diversified into property investment and restaurant business. As his purchase of the ground floor shops in Fortune Centre showed, his luck, rather his foresight, brought him a great fortune. His purchase and sub-sale effectively resulted in his acquiring substantial number of shops there worth $21 million for only $6.4 million. He owned a number of Chinese restaurants and sushi restaurants. However, his luck did not last forever. He tumbled much faster than he climbed, when the present government engineered a free fall in property price. He became insolvent with his untimely purchase of the 2nd Set of Property, which landed him in the present litigation. His restaurants closed down one after another. On another front, his "Ting house" projects were suspended. He said that was due to the fall in property price as a result of which purchasers of his "Ting houses" failed to complete their purchases and hence he ran out of funds. He was being investigated by the police for fraud in respect of the "Ting house" projects he failed to complete. He may or may not be culpable. That is not an issue in the present action. So far as his purchase of the 2nd Set of Property is concerned, as his various other loans from the Plaintiff show, Kan had really run out of funds.

28. Kan had regular business with a number of solicitors firms. But presumably, he was more acquainted with solicitor's clerks than with solicitors as the transactions of the 1st and 2nd Sets of Property followed the solicitors' clerk as he moved from one firm of solicitors to another and he had no idea who was the handling solicitor. On the contrary, Tam had a number of solicitors providing him services, including free advice on the draft loan agreement with the 1st Defendant.

29. By nature, Kan is a simple person with little education. He had been extremely fortunate until his luck deserted him in August 1997 when he purchased the 2nd Set of Property. He signed many legal documents, deeds and assignments in English. He had no knowledge of the English language and trusted his solicitors or other persons who explained the documents to him. He borrowed heavily from the Plaintiff, including the Snyder Loan, if his evidence is believed. He was prepared to pay exorbitant amount of interest, from 30% to over 100% per annum. He did not find those agreements offending in terms of interest rates and was prepared to honour them, even though he knew a loan agreement at an interest rate over 100% per annum was illegal. Given his luck with his purchase of the 1st Set of Property, such excessive interest did not worry him. His return from that acquisition was manifolds. What he then thought was that the economic crisis would be over in a year or two when the market would improve and he would be pouring in with money from his "Ting house" projects and property investment. Of course, at the time, no one ever thought the end to the fall in property price was never in sight. Bearing in mind his background, the luck he had hitherto with him and the surrounding circumstances, his evidence about the Snyder Loan and duress is credible.

30. When reaching my conclusion on his credibility, I have borne in mind other factors weighing strongly against him. Some of these are as follows. He absconded from Hong Kong to Vietnam and then evaded the authorities by smuggling himself back via China. That is understandable in the context of the circumstances he was in. He was being "hunted", rightly or wrongly, by purchasers, creditors and the Police and on my finding his fear for the Plaintiff was genuine. He acted dishonesty in transferring his shares in the 1st Defendant to his uncle, his co-director and friend for the purpose of defeating his creditors in bankruptcy. He also acted dishonestly in the Plaintiff's action against the 2nd Defendant for assigned rental. Without going into details, he was the person in control of the 2nd Defendant, though he was not registered as its director. He made up a defence that the rent had been prepaid and applied to off-set against debt owed by the 1st Defendant to its contractor. That defence was rejected by Yeung J as he then was. Were I in Yeung J's position, I, too, would have found against Kan because he was fabricating evidence. He was trying to salvage what he could from the bite of a loan shark. Having had the benefit of hearing live evidence from both sides, I do not consider what he did in that other action damage his credibility in this action. I find him an honest and credible witness and accept his evidence.

Clive Chan

31. Clive Chan was a solicitor in the firm of NTKC, which on record was the solicitors acting for the 1st Defendant in the Snyder Action. It is the 1st Defendant's case that he was a solicitor arranged by Tam to "surrender" in the Synder Action by preparing the Cancellation Agreement agreeing to pay $20 million to Snyder. This "surrender", according to the 1st Defendant's case, gave effect to the illegal Snyder Loan between the Plaintiff and the 1st Defendant which was dressed up as a sale and purchase agreement between Snyder and the 1st Defendant. Since Clive Chan's evidence is quite self-contained, it would be convenient to analyse his evidence here.

32. Clive Chan was called by the Plaintiff to give evidence to contradict Kan's evidence that the Wa Lee Loan Agreement and likewise the Cancellation Agreement were entered into by duress. Kan's evidence could be viewed as evidence of professional impropriety against him. But on the other hand, the 1st Defendant was his client in the Snyder Action. In that situation, he was in a very difficult position and he had his own interest to serve. He refused the Plaintiff's request to give a witness statement and refused to attend court to give evidence unless served with a subpoena. He had agreed to be interviewed by the Plaintiff's solicitors before testifying, but retracted from that agreement. I assume he was acting out of excessive caution for fear of breach of his duty of confidentiality. I draw no adverse inference against him for that.

33. Clive Chan's evidence is that he has known Kan since 1990 as a business partner of his uncle. He had come across Kan on many casual occasions having tea with Kan when Kan sought legal advice from him.

34. He did not know Tam and had never met him until 22 March 1999 at the office of LP when the Cancellation Agreement was signed. Tam was introduced to him over the phone by a friend. Tam telephoned him and offered to introduce him to be retained by the 1st Defendant. He agreed. Then Kan attended his office on 17 March 1999 and signed a letter to instruct him "to deal with" the Snyder Action "and other ancillary matters thereof in place of C&T."

35. Clive Chan's evidence that he took instruction from Kan is contradicted by Kan's evidence and is inconsistent with the compelling inference to be drawn from the documents found in the files of NTKC. This is a litigation file and not a conveyancing file. There are no attendance notes showing the instructions given by Kan at any time. The instructions signed by Kan were brief and imprecise. The documents that Clive Chan worked on were received from Tam and not Kan. Even more surprisingly is that when WF sent terms of settlement to Clive Chan on 18 March 1999, he forwarded them to Tam but not to Kan and invited Tam for "perusal and comment". Clive Chan explained that as the Plaintiff was the financier for the transaction, he had to seek Tam's comment. That is a very strained explanation as the Plaintiff was legally represented by LP. Clive Chan should have sent the documents to LP so that LP could give the Plaintiff legal advice.

36. Clive Chan said he did not think the Snyder Agreement unusual and did not give Kan any legal advice as to the propriety of settling the Snyder Action on the terms of the Cancellation Agreement. In my view, the Snyder Agreement is highly suspicious and would have raised many a question in the mind of a conveyancing or litigation solicitor. Delayed completion of one year is unusual. Payment of 50% as deposit and/or part payment is unusual. Provision of the option that the 1st Defendant may by notice cancel the agreement by return of double deposit is a pin in the eye. Any conveyancing solicitor must have known that the usual or conventional deposit is 10% of the purchase price or in exceptional cases 15% but any term providing for forfeiture of deposit or for payment of liquidated damages beyond those levels are likely to be held unenforceable as a penalty and not a genuine pre-estimate of loss: see Polyset v. Panhandat Ltd [2002] 3 HKLRD 319 and China Pride Ltd v. Silverpole Ltd [1995] HKLRD 48. The China Pride Ltd case is particularly relevant as it was the governing authority at the time of these transactions. Any reasonably competent solicitor must have entertained no small doubt that the agreement could be a sham or a security document for a loan at an illegal rate of interest. A prudent solicitor would have enquired from his client as to the nature of the agreement and advised him on the issue of illegality and the existence of a valid defence. Even if satisfied that the client voluntarily agreed to settle an action on the basis that the agreement was valid, a prudent solicitor would have asked his client to sign a written acknowledgment that he had been advised to seek independent legal advice and/or an indemnity that would absolve the solicitor of liability. If in doubt, a prudent solicitor would have ceased to act altogether.

37. Clive Chan is a solicitor of some years standing and was a partner in NTKC at the material time. He was well prepared and gave evidence in a well guarded manner. He impressed me as an intelligent solicitor and would not have been unaware of the suspicious circumstances I referred to above. Given his experience, I find his evidence that he saw nothing wrong with the Snyder Agreement and that he did not consider the option to terminate as a device to provide for interest at 100% per annum incredible. He said as Kan did not ask for advice, he did not feel it necessary to advise Kan as it was Kan's commercial decision. That surprises me as Kan was his lay client. It is for the solicitor to identify the issues and advise his client of the law and legal consequence and not for the lay client to identify the issues and seek legal opinion. I think Clive Chan was being evasive.

38. In his evidence in chief, he mentioned nothing about his relationship with Kan. He said he had no business relationship with the 1st Defendant before or after this incident. Then in cross-examination, when pressed about his obligation to advice Kan about the illegality of the Snyder Agreement, he said he had known Kan since 1990 and if Kan had any grievance, Kan would consult him. During re-examination, he produced two minutes of a meeting of a company attended by Kan and his uncle as evidence that he had known Kan as a business partner of his uncle, that he had come across Kan on many occasions having tea and that Kan had consulted him on legal matters and volunteered his opinion that Kan was a very sophisticated person. Mr Mumford SC, counsel for the 1st and 3rd Defendants, submitted this indicated Clive Chan's bias against Kan.

39. Kan did not deny that he had come across Clive Chan on a couple of occasions as the son of his former business partner, but said he almost had no recollection of this man. He denied having had tea with Clive Chan on a number of occasions and denied having sought legal advice from him. He said he had a sudden recollection of Clive Chan when he saw him at the office of LP.

40. As for sophistication, Kan is not Clive Chan's equal. Clive Chan's evidence that he had known Kan well since 1990 betrayed Tam and himself. Tam said that Kan requested him to introduce Kan a solicitor as Kan did not want his usual solicitors to know about the loan. If that was true, Kan would have refused to be referred to Clive Chan as he is the son of his former business partner and the loan would become known to his circle of friends and business associates. Furthermore, if Clive Chan and Kan were so familiar with one another, it is not very credible that Kan would seek legal advice from him and he would give legal advice without the parties ever having any business relationship for all those years of acquaintance.

41. Whether looked at in isolation or in the totality of the evidence, Clive Chan's evidence is inherently incredible. He was turning a blind eye to what was happening. Indeed all the evidence shows that he was a puppet dancing to the tune of Tam and happy to generate the legal documents Tam required of him. I do not believe in his evidence.

Lo Yat Lun

42. Lo Yat Lun was a legal executive with LP. He attended the execution of the mortgage documents in a conference room of LP on 22 March 1999. He had gone out of the conference room on various occasions attending to other matters, including preparation of the Plaintiff's cheques for payment to the 1st Defendant. He interpreted the mortgage documents to Kan and Chan. There were long pauses in his evidence. It is clear that he had no independent recollection of the events, except to assume what would have occurred in the ordinary course of events. Little weight could be placed on his evidence and little really turned on his evidence.

THE SNYDER AGREEMENT

43. I now turn to the important factual issues. It would be useful to set out the surrounding circumstances at the time the Snyder Agreement was entered into such as Kan's belief as to what formed the subject matter of the Hong Kong Bank Mortgage, the Snyder Agreement and the Wa Lee Loan Agreement, the various loans which the Plaintiff had advanced to the 1st Defendant and the relationship between Snyder and the Plaintiff.

Kan's belief of subject matter of the mortgage and loan

44. Kan's belief and his reason for not wanting to subject the 1st Set of Property to mortgage might appear to be irrelevant, but if accepted, explains at least in part his reason for entering into the Snyder Agreement and the nature of that agreement. Thus, Kan's belief of the subject matter of the mortgage is an important factual issue which has to be resolved.

45. In April 1997, the 1st Defendant completed the purchase of the 1st Set of Property. With the two down payments of $4.8 million each and the sub-sale, the 1st Defendant had acquired the 1st Set of Property free from encumbrance. The title deeds were with his then solicitors. When applying to Hong Kong Bank for facilities for the purpose of completing the purchase of the 2nd Set of Property, Kan thought only the 2nd Set of Property would be subject to mortgage and not the 1st Set of Property as well. Kan said he did not wish to mortgage the 1st Set of Property as security as he had incurred millions of dollars in renovation of the 1st Set of Property so as to use it as a restaurant and he did not wish to put those renovation costs at risk should the bank realise the security upon his falling into arrears. However, all the documents, including the 1st Defendant's resolution authorising the mortgage, show that both Sets of Property were to be mortgaged. Kan attributed that to a mistake by the solicitors' clerk acting for him who had moved from one solicitors firm to another and the matter escaped the attention of his new solicitors and himself.

46. On the facts, the 1st Set of Property was worth $21 million as at December 1996 on the valuation of the Inland Revenue Department. It was free from encumbrance. The purchase price of the 2nd Set of Property was $35 million in August 1997. As the property market was still on the rise between December 1996 and August 1997, the two Sets of Property together would be worth much more than $56 million in August 1997. Even assuming a significant fall in market value between August 1997 and January 1998, a very conservative valuation by Hong Kong Bank and a very cautious lending policy, I do not think Hong Kong Bank would have required both Sets of Property as security for a loan of only $10 million. I therefore accept Kan's evidence that it was not his intention that both Sets of Property should form the subject matter of the Hong Kong Bank Mortgage. I find that the mistake was created as a result of the happy assumption of his solicitors and the bank officer who handled the loan application and carelessness on the part of Kan.

47. Both Sets of Property also formed the subject matter of the Snyder Agreement, whether it be a genuine sale and purchase agreement or a sham security document. Despite the fall in the property market, it would be repugnant to common sense that Kan would have bought the 2nd Set of Property in August 1997 at $35 million for completion on 20 February 1998 and sold it one day later at about half of the price for $20 million together with the 1st Set of Property valued at $21 million as at 23 December 1996. There is no evidence from Snyder as to the negotiation and intention. Probably the mistake was carried over from the Hong Kong Bank Mortgage into the Snyder Agreement. So I find as a fact, whatever the nature of the Snyder Agreement, when Kan signed the Snyder Agreement, he did so under an honest mistake that it referred only to the 2nd Set of Property. In here, I make no adverse finding of dishonesty against Tam for including both Sets of Property in the Snyder Agreement.

48. I also accept that it was Kan's firm conviction not to risk the renovation costs incurred on the 1st Set of Property. Because of that firm conviction in his mind, it never occurred to Kan that he might negotiate with Hong Kong Bank for additional facilities using the 2nd Set of Property, and hence he resorted to short term expensive loans from the Plaintiff. Despite the much higher rate of interest, Kan preferred such short term loans from finance companies to bank loans. This was because bank loans were long term loans which had to be repaid by monthly instalments and there were provision for penalty for early redemption. He anticipated that the economic crisis would be over in a year or two. By then the property market would improve and he would be pouring in with money from his "Ting house" projects. But at the time, he had cash flow problem and could not afford the monthly instalments under a bank loan. So he preferred a short term loan because the loan would not be repayable until the end of the term, four months or a year, whatever the term of the loan. His thinking is understandable in view of the fact that hitherto he was riding with the tide of ever rising property price which turned him into a very wealthy man. He did not mind paying high interest to the Plaintiff as he thought the reward from his property investment would be much higher.

Other loans from the Plaintiff

49. On 20 January 1998, Kan and his wife obtained a loan of $1 million in their personal capacities from a finance company in North Point by way of a third legal charge over the office occupied by the 1st Defendant. When Kan was given the cheque in payment of the loan, he came to realise that the lender was the Plaintiff. That was the first transaction he had with the Plaintiff. This loan was for a term of four months at an effective interest rate of 42% per annum. As we all know, the property market never recovered. Kan was unable to repay and the loan was renewed for four terms until August 1999. Kan eventually had to sell the property to pay off the loan.

50. The next loan, according to Kan, was the one under the Snyder Agreement. But before analysing the evidence relating to that transaction, I shall set out Kan's various other loans from the Plaintiff.

51. On 30 April 1998, Kan and his friend Lo Shing Tim ("Lo") obtained a loan of $1.5 million from the Plaintiff secured by a first charge over some lots of land in Yuen Long. The term of the loan was for a period of ten months and at an effective rate of interest of 48% per annum. Kan said that the real borrower was Lo. Lo had purchased the lots of land and requested him to recommend a solicitor to handle the conveyancing. Kan introduced his familiar solicitor to Lo. Due to a mistake on the part of the solicitor, the lots were conveyed to Kan Ming Construction Investments Limited, a company owned by Kan. Then Kan introduced Lo to the Plaintiff for providing the finance. It was then that the mistake was discovered. As Lo was in urgent need for the loan, the loan was processed under their joint names with Kan Ming Construction Investments Limited as guarantor. The loan was in fact paid to Lo. Eventually Lo was unable to repay and the Plaintiff sold the lots of land by public auction in October 1999. Despite he was a joint borrower and guarantor along with Kan Ming Construction Investments Limited, the Plaintiff did not pursue him or Kan Ming Construction Investments Limited for the deficit. All these support Kan's evidence that this was not his loan.

52. On 6 May 1998, Kan and his son borrowed $2.5 million from the Plaintiff on a second legal charge over a property in Royal Palms. The loan was for a term of 48 weeks at an effective interest rate of 58.14% per annum, just 1.86% short of the limit of legality. He and his son were unable to repay the Plaintiff. They also defaulted in payment under the first legal charge to Hong Kong Bank. The property was sold by Hong Kong Bank. The proceeds of sale were insufficient to cover the loan under the first legal charge. The Plaintiff sued Kan in December 1999 and obtained a bankruptcy order against him in respect of the unpaid loan. It was probably for that reason, Kan transferred his shares in the 1st Defendant to Chan, his trade creditor and his uncle to take it out of his estate.

53. Mr Chan portraited the Plaintiff as a very reasonable money lender in not enforcing Lo's loan against Kan, in granting Kan renewals of his various other loans and discounts. On the other hand, Kan defaulted in payments and dishonestly transferred his shares in the 1st Defendant to Chan and his uncle. He submitted that Tam's evidence was to be preferred to Kan's. Little is known about the discounts and whether they were in fact adjustments for sums paid in but not updated in the record. If Kan was made a party to Lo's loan as a matter of convenience for the Plaintiff, it was only right that the Plaintiff should not enforce the loan against Kan. Furthermore, Kan was the Plaintiff's big client at the time, and he introduced Lo the Plaintiff. It made good business sense to honour the true spirit of the agreement than to enforce it according to its written terms made as a matter of convenience for the benefit of the Plaintiff and Lo. In any event, the interest charged and the proceeds of sale of the property were sufficient to cover the loan advanced. As for the renewal of Kan's other two loans, they were renewed with payment of exorbitant amount of interest. The renewals were just commercial decisions and the loans were secured. As for Kan's and his son's loan, the Plaintiff did not forgo that loan even after Kan was made a bankrupt. It exerted pressure on the 1st Defendant (through Kan) to repay Kan's and his son's loan by refusing to consent to partial redemption of the 2nd Set of Property by the 1st Defendant. On the above consideration and on a consideration of the totality of the evidence, I do not think the Plaintiff could be described as a reasonable money lender.

Snyder Agreement: Kan's evidence v. Tam's evidence

54. I shall deal with the evidence about the Snyder Agreement under three heads: firstly, the evidence of Kan as against Tam's, secondly, the inference to be drawn from the surrounding circumstances at the time of the agreement and thirdly, the inference to be drawn from the behaviour of the Plaintiff in seeking to enforce the Snyder Agreement a year later, i.e. the duress. The inference to be drawn from the second and third heads of evidence supports the evidence of Kan. Indeed, my conclusion on the first head of evidence, by itself, would be sufficient to determine the true nature of the Snyder Agreement.

55. The 1st Defendant sold four "Ting house" licences to a business associate called Chai Chai for $2.4 million. He expected to receive in due course substantial payments of deposits from his "Ting house" projects from his solicitors, Messrs Leung Kin & Co. Kan estimated that he was about $6 million short for completion of the purchase of the 2nd Set of Property. At the time, Kan had raised a loan of $1 million from the Plaintiff on 20 January 1998. Tam learned about the 1st Defendant's cash flow problem from Chai Chai and approached Kan. Kan and Tam had a meeting in the Plaintiff's office. According to Tam, it was Kan who telephoned him requesting for a loan of $10 million, but he refused as Kan could offer no security. Who initiated the discussion is unimportant as there was no dispute that a meeting took place between Kan and Tam. However, what happened during that meeting was in serious dispute. Having found Kan a more credible witness, I accept his evidence that Tam initiated the discussion.

56. According to Kan, Tam offered to lend the 1st Defendant $10 million on condition that double, i.e. $20 million, was to be repaid after one year and that Kan had to sign a sale and purchase agreement of what he thought to be the 2nd Set of Property as a security. On that assumption, Kan agreed. The Plaintiff gave him $6 million on 14 February 1998. On 21 February 1998, Kan signed a sale and purchase agreement of both Sets of Property, the Snyder Agreement, at the office of YTS, which was a solicitors firm arranged by Tam to act for the 1st Defendant.

57. According to Tam, he refused to lend because the 1st Defendant was unable to offer any security as both Sets of Property would be subject to mortgage to Hong Kong Bank. So Tam introduced Kan to Wong of Snyder. Neither Tam nor the Plaintiff was involved in the negotiations between Kan and Wong. Wong was not called by the Plaintiff to contradict Kan's evidence or to testify about the negotiation leading to the conclusion of the Snyder Agreement.

58. There is no dispute that on 14 February 1998, at the Plaintiff's office, Tam gave Kan a cheque of $6 million drawn on the Plaintiff's account. Tam explained that on the same day, Snyder obtained an interest free loan of $6 million from the Plaintiff and authorised the Plaintiff to release the money to the 1st Defendant as partial deposit to the 1st Defendant under the Snyder Agreement.

59. Tam produced the Wa Lee/Snyder loan document and authorisation for payment in support of his evidence. He said the interest free loan was given in consideration for Wong providing his properties as security for the Plaintiff's banking facilities from Union Bank and upon Wong's offer of his personal guarantee of $10 million to the bank. Tam justified this interest free loan on the basis that with the security provided by Wong to Union Bank, the Plaintiff obtained a source of cheap money which it could lend out at exorbitant rate of interest thereby making a profit.

60. There is no doubt that Wong was involved in a close business relationship with Cheung and the Plaintiff. According to a facilities letter from Union Bank dated 20 May 1998 (superseding an earlier letter dated 13 May 1998) produced by the Plaintiff, Wong offered three properties and his personal guarantee to Union Bank as security for overdraft facilities of $7.7 million to be granted to the Plaintiff. But that was three months after the Snyder Agreement was signed that Wong provided his properties as security for the Plaintiff's overdraft facilities from Union Bank. So, before the Plaintiff had the benefit of the use of the security offered by Wong and before it had obtained the facilities worth $7.7 million from Union Bank, it had allegedly advanced $10 million to Snyder ($6 million on 14 February 1998 and two sums of $2 million on 2 and 7 April 1998). This suggests that the security offered by Wong was totally independent from the Snyder Agreement. It was a business arrangement between Wong and the Plaintiff, which was conveniently used by the Plaintiff as an explanation for the cheque it drew out of its account to pay the 1st Defendant for what Kan alleged was an illegal loan granted by the Plaintiff. This destroys completely the basis of the interest free loans as suggested by Tam. I find that the Wa Lee/Snyder loan documents and authorisations were mere sham documents, which the Plaintiff conveniently fabricated.

61. Kan said that towards the end of March 1998, Tam suggested to him to draw down another $2 million from the Snyder Loan and demanded $100,000 as handling fee. Kan agreed. On 2 April 1998, he obtained a cheque of $2 million drawn on the Plaintiff's account and he gave Tam a cheque of $100,000 as handling fee. Similarly, on 7 April 1998, he obtained another cheque of $2 million from Tam by drawing down the balance of the Snyder Loan and gave Tam a cheque of $100,000 as handling fee. The two cheques of $100,000 were eventually paid into the bank accounts of Well Chest Trading Limited and Chinko Limited.

62. Tam offered a similar explanation in respect of the two cheques of $2 million drawn on the Plaintiff's account and paid to the 1st Defendant, i.e. they were interest free loans given to Snyder to finance the Snyder Agreement. Tam produced two similar sets of Wa Lee/Snyder loan agreements and payment authorisations dated 2 April 1998 and 7 April 1998 respectively. These alleged interest free loans were advanced before the Plaintiff had obtained the banking facilities from Union Bank using Wong's property. For similar reason, I reject Tam's evidence.

63. As for the two cheques in the amount of $100,000 each handed to him by Kan, Tam said that they were reward for having introduced the sale to Kan. In my view, if they were, they should have been paid at a time referable to the execution of the Snyder Agreement. They were not. They were paid at the time of drawing down of the two sums of $2 million, which pursuant to the Snyder Agreement should have been deposits to be paid by Snyder. I do not find Tam's explanation convincing. It is more likely than not that they were as Kan alleged handling fees for the draw down of the two loans of $2 million each.

64. For the above reasons, I accept Kan's evidence and reject Tam's and find that the Snyder Agreement was just a security for a loan of $10 million at an interest rate of 100% per annum repayable after a year. This would be sufficient to dispose of this issue. However, I shall also turn to the irresistible inference that could be drawn from the documents and incontrovertible evidence. The inference, as I have said, also supports Kan's evidence.

Snyder Agreement: Inference from the surrounding circumstances

65. Kan's account is supported by the irresistible inference that could be drawn from incontrovertible and objective evidence which also render Tam's account of events inherently incredible. These are firstly, the absence of a provisional sale and purchase agreement for a transaction of this magnitude, secondly its purchase price and thirdly, the terms of the Snyder Agreement itself.

66. Though a provisional sale and purchase agreement is not a must in every property transaction, its absence before a very substantial amount of the deposit of $6 million was paid before the formal sale and purchase agreement was entered into is so peculiar as to suggest there was no genuine sale and purchase agreement underlying the Snyder Agreement. The initial deposit of $6 million, i.e. 30% of the purchase price, was by itself exceptional. The usual or conventional amount of deposit as recognised by the authorities is 10% of the purchase price. In the absence of a formal or provisional sale and purchase agreement, the purchaser was wholly unprotected. Not only was Snyder's purchase unsecured, the very substantial amount of deposit it paid could become unrecoverable.

67. Though no expert evidence as to the value of the two Sets of Property as at February 1998 has been adduced, some assistance could be derived from the valuation of the 1st Set of Property by the Inland Revenue Department for stamp duty purpose and the purchase price of the 2nd Set of Property. The 1st Set of Property was assessed by the Inland Revenue Department to be $21 million as at 23 December 1996. The property market was still on the rise for the majority of the period between then and late 1997, though it declined thereafter. Its value in February 1998 would certainly be more, if not very much more than what it was in December 1996. Thus the value of the two Sets of Property together would not be less than $56 million as at the time of purchase of the 2nd Set of Property in August 1997. Even assuming a very significant fall in market value between August 1997 and February 1998 and the further discount of a forced sale, the purchase price of $20 million for both Sets of Property is ridiculously low. As we all know, the property market had been falling since the end of 1997. The fact that a year after the Snyder Agreement, Tam was prepared to lend $29.5 million on the security of the same property amply demonstrates that the two Sets of Property worth much more than $20 million at the time of the Snyder Agreement a year ago. The price is so unrealistic as to render the suggestion that it was a genuine sale and purchase of the two Sets of Property impossible of belief.

68. Furthermore, the Snyder Agreement is devoid of business sense and repugnant to common sense. According to the Plaintiff's account, by an oral agreement of 14 February 1998 (which preceded the Snyder Agreement of 20 February 1998), Kan contracted to sell both Sets of Property for $20 million on 14 February 1998, which included the 1st Set of Property which was free from encumbrance and the 2nd Set of Property for which he would have to pay another $21 million six days later on 20 February 1998 (i.e. purchase price of $35 million less three deposit and part payments of $14 million altogether). The net effect of the Snyder Agreement is therefore that Kan was to give away the 1st Set of Property and $1 million for nothing but to release himself of his obligation to complete the purchase of the 2nd Set of Property. That does not make any sense at all. He would certainly be better off not to complete the purchase of the 2nd Set of Property. The two deposits of $7 million and part payment of $7 million would probably be more than sufficient to pay off any damages for his breach of the sale and purchase agreement. And he would not have to give away the 1st Set of Property for nothing. The Snyder Agreement is nothing but a sham.

69. Next, I turn to the terms of the Snyder Agreement itself. There are three striking features in the Snyder Agreement. These are firstly, completion in a year, secondly, the 50% deposit or part payment and thirdly, the vendor's option under Clause 31 of the agreement to pull out of the sale and purchase agreement by giving 14 days' notice in writing before completion and payment of $10 million and return of the deposit of $10 million.

70. The conventional amount of deposit in a sale and purchase agreement is 10% of the purchase price or 15% in very exceptional circumstances, such as delayed completion. Provisions for forfeiture of deposit in excess of these amounts have consistently been held by the Court as penalty clauses and are illegal and unenforceable. Hence, the payment of 50% deposit and part payment together with the option to pull out of the agreement operates as a mechanism to give effect to such illegality. By itself, the one-year completion may not be very unusual at a time when sale and purchase by confirmor was not uncommon. However, considered together with the other two striking features, there is a real doubt it was not a genuine sale and purchase agreement as it purported to be. In view of the ridiculously low price for the two Sets of Property, the irresistible inference to be drawn is that the sale and purchase was not intended to take place and that the parties intended that the 1st Defendant would exercise the option and pay $20 million to cancel the sale and purchase agreement at the end of the one year term, thereby giving effect to an illegal loan agreement at the interest rate of 100% per annum. The fact that Snyder's solicitors and the 1st Defendant's solicitors who were arranged by Tam did not initiate steps to prove title until three weeks before completion date lends support to the inference that the sale and purchase agreement was a sham. These three striking features in the Snyder Agreement itself supports the evidence of Kan.

71. A year later, Tam followed up with the Snyder Agreement, pressing Kan for repayment or completion of the sale of the two Sets of Property. When the 1st Defendant's solicitors, C&T, raised the defence of illegality, Tam coerced Kan by duress into signing the Wa Lee Loan Agreement to finance the settlement of the Snyder Action and the discharge of the Hong Kong Bank Mortgage (see Paragraphs 74 to 110). If Kan was not desirous of refinancing, why should the Plaintiff force him to? The reason and motive are obvious. With the help of C&T, Kan was not honouring the Snyder Agreement and was contesting the Snyder Action. Not only would the Plaintiff be unable to earn the interest of $10 million, the loan of $10 million advanced would also be irrecoverable. Hence, there was every incentive for the Plaintiff to force Kan into the refinancing arrangement so as to convert the illegal Snyder Loan into a lawful loan agreement with an enforceable security. The inference is that Tam wanted to get C&T out of the way and to rush the mortgage through. Thus the duress, the substitution of C&T by Clive Chan as the 1st Defendant's solicitors in the Snyder Action, the Cancellation Agreement and the Wa Lee Loan Agreement all add weight to the inference that the Snyder Agreement was a sham, the Snyder Loan was illegal and that the Plaintiff was a party to that illegal loan and agreement.

True nature of and the parties to the Snyder Agreement

72. For the above reasons, I accept Kan's evidence and reject Tam's. I find that the Snyder Agreement was, as Kan alleged, a security document for the alleged Snyder Loan of $10 million. The purchase price of $20 million stated in the Snyder Agreement is meaningless but a figure that represented the loan and interest at 100% per annum repayable in a year. The two sums of $100,000 paid to the Plaintiff were not handling fees for the Snyder Agreement, but interest. Taking those payments into account, the effective interest rate was almost 102% per annum, well exceeded the maximum of 60% per annum permissible under section 24 of the Money Lenders Ordinance. The option to cancel the Snyder Agreement by payment of $20 million was to assure the 1st Defendant of its right to recover the security upon payment of interest. The Snyder Loan was an illegal loan.

73. I reject Tam's evidence that the Plaintiff advanced three loans totalling $10 million to Snyder to finance the payment of deposit by Snyder under the Snyder Agreement. I find that the $10 million paid under this agreement was paid by the Plaintiff and not Snyder. It did not even go through Snyder's bank account. Snyder has no real existence. It was not registered under Part XI of the Companies Ordinance. It has no office, no telephone number, no fax number and no staff in Hong Kong. The loan was arranged by the Plaintiff's consultant, Tam. Tam followed up with the loan and pressed for repayment or completion of the Snyder Agreement. The writ in the Snyder Action was faxed to the Plaintiff's office. Cheung took some part in the negotiation with Kan when the dispute arose a year later as to whether the 1st Set of Property formed the subject matter of the Snyder Agreement. Tam arranged Clive Chan to act for the 1st Defendant in the Cancellation Agreement and in the Snyder Action in place of C&T. All those acts done in the name of Snyder were carried out by Tam or the Plaintiff. Snyder was just an empty shell. It was a just shelf company picked by the Plaintiff to enter into the Snyder Agreement so as to distance the Plaintiff from the illegality. I find that the real parties to this illegal loan agreement were the Plaintiff and the 1st Defendant. The evidence is overwhelming and the inferences to be drawn are compelling.

THE WA LEE LOAN AGREEMENT

74. The property market continued its decline. Kan and his son borrowed $2.5 million from the Plaintiff for a term of 48 weeks on 6 May 1998 secured by a third charge on a property in the Royal Palms. Kan was unable to repay the first loan of $1 million which he and his wife borrowed from the Plaintiff due on 20 May 1998. He obtained an extension to September 1998 and then a second extension until January 1999 for repayment. At the time, Kan's "Ting house" developments were not performing well. Work in some projects was suspended. Some buyers turned up in his office demanding completion of their houses which were not yet built, while other buyers were behind in their instalments. Kan was facing serious cash flow problems. By then, the time he has bought with the Snyder Agreement also came to a close. In that setting, I now turn to the events leading to the signing of the Wa Lee Loan Agreement.

Surrounding circumstances: December 1998 to 20 January 1999

75. According to Kan, since early December 1998, Tam had been visiting Kan's office and the Emperor Seafood Restaurant in Yuen Long reminding him of repayment of the $10 million loan. When Kan told him that he had difficulties repaying, Tam demanded him to honour the Snyder Agreement. Thinking that only the 1st Set of Property formed the subject matter of the Snyder Agreement, Kan was willing to complete the sale and asked Tam to fax him the relevant documents. Upon receipt of the documents, he came to realise that he had to sell both Sets of Property. He called Tam but Tam replied that as both Sets of Property formed the subject matter of the Hong Kong Bank Mortgage, both Sets of Property had to be sold. Kan went to the office of the Plaintiff to reason with Tam and Cheung, but to no avail. So Kan refused to complete the sale.

76. On an occasion between the end of December 1998 and early January 1999, a group of males attended the home of Kan's mother who was living near to Kan's home in the same village. They looked for Kan and threatened that if they failed to find him, her family would be in trouble. She informed Kan's wife. On the following morning, Kan's secretary, Ms Chow (Chow) found the keyhole of the lock of the Plaintiff's office door had been filled with glue. Being worried about the safety of his family, Kan and his family moved out of their home on 5 January 1999.

77. Mr Chan, for the Plaintiff, did not challenge the evidence about the threat and the damage to the lock. He was both right and proper as it was his client's case that those events had nothing to do with the Plaintiff. He suggested that those acts were committed by dissatisfied buyers of "Ting houses" under Kan's projects. That, in my view, is a remote possibility as it is very unlikely that those people could have known of the address of Kan, let alone, that of his mother. Though the evidence is not challenged, I still had to consider the credibility of Kan's wife and his mother. They may have an interest in boosting Kan's evidence. I reject that possibility and accept their evidence. But I draw no adverse inference against the Plaintiff or Tam and make no finding as to who was responsible for those activities.

78. Mr Chan referred to Kan's and his wife's $1 million loan which was due for repayment on 20 January 1999. That loan was renewed for a term of 7 months. Mr Chan submitted that Tam was on friendly terms with Kan and there was nothing to fear or evade. I think differently. The loan was secured with the property where the office of the 1st Defendant was situated. If the loan was not renewed or repaid, the Plaintiff could institute mortgage action against the property and effect a forced sale. Kan had no alternative but to surface himself and renew the loan. Afterall, there was still a month before the Snyder Agreement was due to be completed. I do not find that the renewal of that loan affect my assessment of Kan's credibility.

79. Thus I accept the evidence of the 1st Defendant about the visit by the males to the home of Kan's mother, the damage to the lock of the 1st Defendant's office as part of the circumstances in which Kan reacted. He was put in fear, moved out of his home and stayed out of the office to avoid Tam.

The abortive attempt to complete the Snyder Agreement: 20 January to 19 February 1999

80. On 22 January 1999, YTS wrote to Hong Kong Bank to enquire about the outstanding balance under the Hong Kong Bank Mortgage to be paid for redeeming both Sets of Property and requested for the title deeds of the properties. Mr Mumford SC for the 1st Defendant submitted that this was a neutral event as Kan might have had mortgaging plans with others. I dismiss this suggestion as it is not supported by Kan's evidence. Obviously, YTS's request was made for the purpose of completing the Snyder Agreement. Accepting Kan's evidence as I do, that Kan thought the Snyder Agreement only applied to the 2nd Set of Property and was resisting the completion of the sale of both Sets of Property and that YTS was a firm of solicitors arranged by Tam for the 1st Defendant, I have no difficulties to infer that this letter was initiated by Snyder or the Plaintiff for the purpose of enforcing the security as Kan had indicated that he was unable to repay the loan. The fact that Kan instructed C&T to write to YTS on 2 February 1999 informing YTS that they had instructions to act for the 1st Defendant in the place of YTS supports the inference that Kan did not want YTS to proceed with the sale and purchase and hence would not have instructed YTS to write to Hong Kong Bank about redeeming the Hong Kong Bank Mortgage. YTS's letter must have been issued at the instruction of Tam or the Plaintiff.

81. Then a series of correspondence was exchanged among C&T, JSM and HF acting for Snyder demanding for the title deeds. I need not go into the details of these correspondence. What happened was that JSM sent the title deeds to YTS. On 5 February 1999, YTS handed over the title deeds to C&T. In the end, despite repeated and strong demands from HF, C&T sent the title deeds back to JSM on 26 February 1999.

82. Two correspondence are pertinent. On 9 February 1999, C&T replied to HF as follows:

"Upon perusal of the Agreement for Sale and Purchase dated 21st February, 1998 entered into between our respective clients ('the said Agreement') and after taking our client's instructions accordingly, as your client is well aware that the subject transaction was not a genuine sale. Instead, the said Agreement was in fact a document in security for repayment of a loan of HK$10,000,000.00 given by your client to ours with the effective rate of interest charged on it in exceeding 115% per annum ('the said interest rate')."

On 11 February 1999, C&T wrote:

"Asking taking our client's instructions thereto, we are instructed to re-iterate the full contents of our early letter dated 9th February, 1999 and deny each and every allegations as stated in your said letter dated 10th February, 1999."

83. I have no doubt that on both occasions these two letters were written by C&T after taking Kan's instruction. These letters lend support to Kan's evidence that even up to 11 February 1999, he was acting on legal advice and was strongly resisting Snyder's demand for completion of the Snyder Agreement and dispels Tam's evidence that Kan requested for a loan from the Plaintiff to enable him to pull out of the Snyder Agreement. I accept Kan's evidence. This is an important finding as it goes on to unravel the intricate events that followed.

84. On the evidence, according to Kan, Tam visited him in the Emperor Seafood Restaurant on 10 February 1999 and had a long discussion with him demanding repayment or completion of the Snyder Agreement. At that time, not only was Kan alerted of his mistake that both Sets of Property were included in the Snyder Agreement, he had actually had legal advice from C&T that the Snyder Agreement was illegal and a nullity. However, he was prepared to honour it according to his original intention so far as it related only to the 2nd Set of Property. To rid himself of the pressure from Tam, Kan agreed to sell the first floor of New Fortune Centre, i.e. the majority of the 2nd Set of Property as a settlement of the loan under the Snyder Agreement. Tam said he would bring him some documents to sign on the following day. The 2nd Set of Property, including two ground floor units, were purchased one and half year ago at $35 million. Even assuming a significant fall in property value and excluding the two ground floor units from the 2nd Set of Property, the property would probably worth $20 million. Whatever the value, it would in any event be a very reasonable settlement for a loan of $10 million for a term of one year. It included a very substantial amount of interest. I accept this was what was in Kan's mind and what he and Tam agreed.

85. On the following day, 11 February 1999, Tam met Kan at the Emperor Seafood Restaurant after 5 p.m. But just before that HF's letter demanding title deeds and completion of the Snyder Agreement arrived at the office of C&T, and as the time chop shows, at 4:30 p.m. C&T refuted that in their letter of the same day received by HF, and again as the time chop shows, at 5:15 p.m. All these must have occurred before Tam arrived. This must mean that Kan's instruction re-asserting the illegality of the loan must have been given over the telephone. It may be strange that the agreement he reached with Tam the day before was not reflected in C&T's letter. This suggests that Kan's evidence about what he had agreed with Tam may be a recent concoction. As HF demanded sale of both Sets of Property, it may well be convenient for Kan and C&T simply to repeat their position instead of mentioning the agreement of 10 February 1999. However, as Kan's recollection of the dates was based on the dates as shown on the document, it is also possible that the documents he signed was ante-dated. Whatever may have been the date when he saw Tam and signed the documents, I accept Kan's evidence about the meeting with Tam on 10 February 1999.

86. Returning to the evidence, Tam arrived after 5 p.m. and gave Kan some documents to sign, which Kan did. In court, he identified these documents to include (1) the minute of a board meeting held on 11 February 1999 authorising him to obtain a loan of $29 million from the Plaintiff and to execute the necessary documents, and (2) an instruction letter to C&T to release the title deeds to LP.

87. Kan's evidence is that he thought the documents related to the sale of the 2nd Set of Property and not a mortgage. He was busy attending to other matters then and trusted Tam. Later, he came to realise that the documents related to both Sets of Property and was informed by C&T that they related to a mortgage and not a sale and purchase. Upon realising that, Kan refused to proceed with the mortgage. Kan's evidence is somewhat of a suspect. Though he could not read English, the figure of "HK$29,000,000.00-" could not have escaped his eyes and he would have asked why. On the other hand, Tam's evidence is that Kan requested for a loan of $29 million using both Sets of Property as security. He denied Kan's allegation that he set Kan up to sign the documents. Who is telling the truth?

88. The instruction letter to C&T was certainly not prepared by Kan as he could not write English. It must have been prepared by Tam for Kan to sign along with other documents. It reads:

"This is to inform you that we have applied Mortgage with Wa Lee Finance Company Limited in respect of the above property. We hereby instruct you to release all relevant title deeds and documents in respect thereof to their Solicitors, Messrs. Laurence Pang & Co. without delay, failing which we will hold you fully liable for whatever damages suffered by us I this matter." (My emphasis).

89. As I have high lighted, this is a very rude letter. All along C&T have been protecting Kan's interest in resisting a sale of both Sets of Property. There was no reason why he should be so offensive towards C&T even though he changed his mind. On the other hand, C&T have been obstructive to Tam, Snyder or the Plaintiff. There was motive for Tam to give pressure to C&T to hand over the title deeds as soon as possible so that he can push forward the mortgage, thereby converting the illegal Snyder Loan to a lawful mortgage in favour of the Plaintiff.

90. Tam has shown himself, as I have found, to be a very sophisticated person. He is capable of designing lawful transactions to circumvent the law. For example, to circumvent the provision under section 17B of the Housing Ordinance, Cap 283, restricting mortgage of home ownership scheme units without first paying the premium to the Housing Authority, he engaged schemes to obtain default judgments against the borrowers and then obtain charging orders against their home ownership scheme units as a security. Accepting as I do that the Snyder Agreement was a cloak to cover up an illegal loan at excessive interest rate, designed and arranged by Tam, I have no doubt that he set Kan up to sign the documents. I accept Kan's evidence.

91. On 12 February 1999, the Plaintiff paid $29 million into the account of LP for the purpose of completing the mortgage. Tam said he paid in this very substantial sum as he thought such payment has to be paid through solicitors. There was no such practice. On the contrary, Tam himself paid Kan $6 million under the Snyder Agreement direct without going through solicitors and before the Snyder Agreement was executed. I find the deposit was just a piece of self concocted evidence to support his case that Kan had agreed to the mortgage. In any event, this piece of evidence is not of much significance.

92. As Kan refused to comply with Tam's wishes, on 13 and 15 February 1999, WF took over from HF and wrote to C&T demanding completion of the Snyder Agreement and threatening legal action. On 19 February 1999, C&T replied and confirmed that they have instruction to accept service. Of course, C&T would not do so, unless authorised by Kan. This letter supports Kan's determination to resist the Snyder Action upon legal advice and is also consistent with his evidence that he was willing to sell only the first floor units of the 1st Set of Property in settlement of the Snyder Agreement but was set up to sign the documents dated 11 February 1999.

The Snyder Action: 20 February to 22 March 1999

93. On 20 February 1999, WF issued a writ with an endorsement of claim for Snyder against the 1st Defendant for specific performance (the "Snyder Action"). WF also faxed a copy of the writ to the Plaintiff. This must suggest that the Plaintiff or Tam has much to do with the instruction to issue the writ. On 22 February 1999, LP faxed the rude letter signed by Kan instructing C&T to hand over the title deeds to LP, which I have referred to above. All these acts must have been done in concert to give pressure to Kan to submit either to the Snyder Agreement or to a new mortgage converting the Snyder Agreement into a legal mortgage.

94. In response, the 1st Defendant wrote a Chinese letter to C&T on 26 February 1999 instructing them not to release the title deeds and reiterating that it had not obtained any loan from anybody. On the same day, C&T returned the title deeds they obtained from YTS to JSM. All these show the consistency in Kan's conduct and that Kan was determined not to borrow any money from the Plaintiff and supports Kan's evidence that on 10 February 1999 he had only agreed to sell the first floor units of the 2nd Set of Property in settlement of the Snyder Agreement but not to mortgage both Sets of Property to finance the cancellation of the Snyder Agreement.

95. The parties were at deadlock. Between 4 and 5 March 1999, Tam faxed a draft loan agreement to LP, HF and EW for advice. He introduced various amendments favourable to the borrower for comments by those solicitors. If the parties were at deadlock and Snyder was suing for specific performance, one wonders what was the point in Tam seeking legal opinion on a loan agreement which Kan has consistently refused to enter into. It was just another piece of his self serving evidence generated by Tam. I prefer Kan's evidence and reject Tam's evidence that at the time the parties were still negotiating the terms of the loan.

96. On 8 March 1999, Tam faxed the final version of his draft to the 1st Defendant. Kan faxed it to C&T for advice. At the same time, LP wrote to JSM and requested for the title deeds. Obviously, Tam was anxious to push through the loan agreement because he knew there was a risk that the Snyder Agreement would be unenforceable and that C&T was determined to defend the 1st Defendant on the basis of illegality.

97. On 10 March 1999, JSM informed LP that their client, i.e. the 1st Defendant, did not agree to dispose of the property or refinance and they were instructed not to release the title deeds. This is another piece of evidence from yet an independent and credible source that Kan was insistent not to proceed with the loan agreement with the Plaintiff. It further supports the inference that the draft loan agreement Tam had been circulating for advice was just another of his concoction. The reply from JSM put Tam beyond doubt that Kan was determined to contest the Snyder Action and he could not have his way. Mr Mumford SC submitted that this event precipitated Kan's abduction on 12 March 1999.

The abduction, duress: 12 March 1999

98. On 12 March 1999, Kan signed a loan agreement with the Plaintiff for a loan $29 million. Tam said he had an appointment to meet Kan to sign the agreement but Kan said he was abducted by four men including Tam to an associated company of the Plaintiff and forced to sign the agreement. Who is to be believed?

99. According to Kan, when he left his office for lunch that day, he was stopped at Kau Yuk Road by Tam and three others, one of them was a known triad nicknamed "Tsang Pao Chai (贊爆仔)". They took him to the office of Wa Shut Finance Limited ("Wa Shut") which is another finance company owned by Cheung. Tam told him that as the 1st Defendant owed Hong Kong Bank $9 million, the Plaintiff would redeem the mortgage if the 1st Defendant would enter into a loan agreement for $29 million with the Plaintiff. He then took out some prepared documents and told Kan that if he did not sign he would not be allowed to leave. Kan was afraid and signed. As Kan did not have the company chop with him, one of the males took the documents to Kan's office to have the company chop affixed. When his secretary called him on the mobile phone, Kan instructed her to affix the company chop on the documents. Before he was released, Tam told him that he and his co-director would have to attend a solicitors office to sign other documents and that he would station two men in his office to keep an eye on him.

100. According to Tam, Kan did not want to discuss the matter in his office. Hence Tam suggested to meet in the office of Wa Shut which was conveniently located nearby. After signing the agreement, as Kan was not returning to his office, Tam took the agreement to Kan's office for affixing the stamp and obtained some bank statements from Kan's secretary. Mr Chan submitted that Kan's account was incredible and that the evidence of Tam should be preferred. Mr Chan said that the terms of the draft agreement had been agreed and faxed to Kan before hand and the final agreement bore a date printed on it. He submitted that Tam's account that he and Kan had agreed to meet on 12 March 1999 is credible and it could not have been sheer luck that Tam found Kan on the date as printed on the document. Kan gave some possible explanations, which I do not think I need to go into. Mr Chan submitted that it was Tam who took the documents to Kan's office and that Chow gave some bank statements of the 1st Defendant to him on that occasion. But Chow's evidence is that it was a stranger who delivered the document to her and not Tam whom she knew. She had no recollection about the bank statements. Indeed there could be many possible explanations why those documents came to the hands of the Plaintiff.

101. On the other hand, Mr Mumford SC submitted that Tam's evidence was too simple to be believed. He raised queries why the parties should meet in the office of Wa Shut and not in Kan's office or the Emperor Seafood Restaurant and why Kan did not bring along the company chop with him if it was a pre-arranged meeting to sign a loan agreement.

102. I note that on the same day, JSM forwarded the title deeds to LP. This supports Tam's evidence that Kan sought his help for refinancing and voluntarily instruct JSM or Hong Kong Bank to release the title deed. Alternatively, this could be the result of the threat. In view of the very persistent refusal, including JSM's letter just two days ago, I prefer the latter view.

103. Mr Chan queried why Kan did not report to the police, or seek assistance from C&T or his police cousin. In view of what happened at his mother's home, his office, the abduction, the two men stationed in his office, Kan said he was afraid. Kan also explained that this cousin was also a victim of the Plaintiff. He said the best C&T could do was to report the matter to the police. He thought that would make the situation worse. He said that would be no consolation to his worry as the police could not provide his wife and his two young children with round the clock protection indefinitely. In my view, fear is best felt than described. I accept that Kan was really put under fear and that explained why he did not report the incident on 12 March 1999 either to C&T or to the police.

104. I find Kan's account credible. His business failed badly. He was short of funds to complete his building projects. Unsatisfied purchasers were at his door. The police were after him. Purchasers were defaulting in their payments. He could have no means to pay the monthly instalments for a loan of $29 million. He had been advised by C&T that the Snyder Agreement was void and unenforceable. To contest the Snyder Action was his best hope and he could get away without having to pay $20 million. There was no reason why he should acknowledge that debt and subject himself to a $29 million mortgage which he knew he had no means to repay a monthly instalment of $580,000. That monthly instalment far exceeded the total rental income from both Sets of Property and his restaurants. His offer to sell the first floor units of the 2nd Set of Property was also a reasonable offer for settlement. Tam's evidence that Kan wanted the $29 million to refinance is absurd when considered in the setting Kan was in, the legal advice he received and the determination he and C&T have shown in contesting the Snyder Action. I reject Tam's evidence and accept Kan's. I find that Kan signed the agreement under duress.

The Wa Lee Loan Agreement, the Cancellation Agreement: 13 to 22 March 1999

105. After signing the agreement on 12 March 1999, Kan considered his fate sealed. Starting from 13 March 1999 until 22 March 1999, two men were stationed in his office from 9:30 a.m. until 6:00 p.m. every day. His staff became afraid. Chow asked to resign, which she did after about a week.

106. In the meantime, Tam arranged Clive Chan of NTKC to act for the 1st Defendant in the Snyder Action in place of C&T. On 17 March 1999, NTKC filed a Notice of Change of Solicitors. Kan did not inform C&T what had happened. To C&T, no news was good news.

107. On 22 March 1999, as instructed by Tam, Kan attended the office of LP with Chan together with the company chop and seal. There, Tam told him that the loan had to be increased to $29.5 million to allow for solicitors' fees and that the surplus will be returned to him. He and Chan executed the Wa Lee Loan Agreement, a deed of mortgage in respect of both Sets of Property, a rental assignment, a rental assignment notice, and a personal guarantee for the loan. Kan also signed a Cancellation Agreement in respect of the Snyder Action. Then Clive Chan arrived and signed the Cancellation Agreement and the Consent Summons terminating the Snyder Action. Kan was given a cheque for the balance of $371,650.

108. There is no need for me to go into details about what happened in the office of LP. There are also some dispute about whether Clive Chan had explained the Cancellation Agreement to Kan, whether Clive Chan was late and everything was signed pending his arrival and signature and whether Clive Chan arrived empty handed without bringing any document with him. There was also the unexplained chop of the 1st Defendant affixed on a piece of draft paper in the file of NTKC. These are minor issues and not crucial to the dispute between Kan and Tam. Given the unfavourable view I formed of Clive Chan's credibility, I resolve the differences in favour of Kan.

109. Mr Chan criticised Kan for not asking for a breakdown of the additional $0.5 million borrowed. Kan explained that he was in no position to argue about the solicitor's fees as he was still under duress. Kan impressed me that he was like a lamb being led to the slaughter house. It mattered the least to him how much his master was selling him for.

110. The fact that Tam arranged NTKC to replace C&T as the solicitors for the 1st Defendant speaks for itself. C&T had been protecting Kan's interest very well. There could be no reason other than the fear he was subjected to on 12 March 1999 that would have caused him to change his solicitors. The duress exerted on Kan on 12 March 1999 and renewed everyday with the two men stationed in his office thereafter remained operative in Kan's mind. I am satisfied that the Wa Lee Loan Agreement and the Cancellation Agreement were entered into by Kan on behalf of the 1st Defendant as a result of the duress.

WHETHER THE WA LEE LOAN AGREEMENT WAS VOID

111. By itself, there was nothing illegal about the Wa Lee Loan Agreement. It is not a loan agreement at an excessive rate of interest. However, quite apart from the issue of duress, the Wa Lee Loan Agreement was entered into for the purpose of repaying the illegal Snyder Loan and illegal interest. In my view, the Snyder Agreement, the Snyder Action and the Cancellation Agreement were all part of a sham, a charade to give effect to the earlier illegal Snyder Loan agreement so that the illegal loan and illegal interest would become secured under the Wa Lee Loan Agreement which is clothed with legality. The Money Lenders Ordinance protects borrowers from unscrupulous money lenders. Section 24 protects borrowers against loan sharks charging an unconscionable rate of interest. If the purpose of an agreement is to give effect to such unscrupulous and unconscionable agreement prevented by law, it must be illegal as being contrary to public policy. The Wa Lee Loan Agreement must be tainted with illegality. The agreement was illegal at its inception. If the Court were to turn a blind eye to the true nature of the Wa Lee Loan Agreement, it is allowing it to be used as the teeth of the loan shark, injuring the public instead of protecting it. It would be singular if the law were otherwise.

112. The Wa Lee Loan Agreement, being illegal at its inception, was void ab initio. The general principle of ex turpi causa non oritur actio is applicable. Based on public policy, any transaction that is tainted by illegality in which both parties are equally involved is beyond the pale of the law. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. No person can claim any right or remedy whatsoever under an illegal transaction in which he has participated: see Gordon v. Metropolitan Commissioner [1910] 2 K B 1080 at 1098, per Buckley LJ. Thus the Wa Lee Loan Agreement and the deed of mortgage are unenforceable.

113. Mr Chan submitted that a contract entered into by duress is voidable andnot void. But that principle has no application to a contract which in itself was void ab initio. So, in view of my finding that the Wa Lee Loan Agreement was void ab initio, it becomes unnecessary for me to consider the effect of duress on the Wa Lee Loan Agreement and the issue of affirmation. If my finding of duress is of any relevance, it goes to strengthen my finding that the Plaintiff was the real party to the illegal Snyder Loan and Snyder Agreement (see paragraph 111 above).

SUBROGATION

114. Probably in recognition of the strength of the 1st Defendant's defence, Mr Chan sought a last minute amendment of the statement of claim to salvage part of the loan by pleading subrogation. He submitted that by discharging the outstanding loan under the Hong Kong Bank Mortgage, the Plaintiff acquired by subrogation the same right Hong Kong Bank had over the two Sets of Property to the extent of the amount paid by the Plaintiff to discharge the Hong Kong Bank Mortgage, say $9.05 million. Mr Mumford SC submitted that as the Plaintiff relied on a contractual right of subrogation, which has not been included in the Wa Lee Loan agreement, such a right is not enforceable by virtue of section 18 of the Money Lenders Ordinance. He cited Orakpo v. Manson Investments Ltd [1978] AC 95. That was a House of Lords decision which turned on the equivalent provision of section 18 of the Money Lenders Ordinance. The House of Lords held that the right of subrogation could only have arisen if it was the common intention of the parties that the money borrowed was to be used to pay the unpaid vendors and the holders of existing charges, and if such was the intention it was a term of the contract which should have been included in the memoranda; and that accordingly the defects in the memoranda had the effect of rendering unenforceable by virtue of the equivalent of our section 18, not only the legal mortgages taken by the defendants, but also the security rights to which they claimed to be subrogated. Mr Mumford SC said that under cross-examination, Tam claimed that there was an agreement for subrogation. Hence, Mr Mumford SC submitted that, as in Orakpo, even if there was such a term, it was unenforceable by virtue of section 18 because it was not included in the Wa Lee Loan Agreement.

115. I think Mr Mumford SC's argument based on section 18 can be disposed of briefly. In Orakpo, it was accepted that the borrower was a money lender. However, "money lender" as defined in section 6 of the English Moneylenders Act 1900 is different from the definition under our section 2(1) to the following extent. In the Moneylenders Act 1900, there is no concept of exempted loan which takes a money lender outside operation of our Money Lenders Ordinance. Under the local Ordinance, "money lender" does not include as respect a loan specified in Part 2 of Schedule 1, any person who makes such a loan. A loan made to a company secured by a mortgage and a debenture and registered under section 80 of the Companies Ordinance is an exempted loan within Paragraph 2(a) of Part 2 of Schedule 1 to the Money Lenders Ordinance. As 1st Defendant is a company incorporated under the Companies Ordinance and the loan was secured by a mortgage and a debenture registered under section 80 of the Companies Ordinance, the loan is an exempted loan within Paragraph 2(a) of Part 2 of Schedule 1 to the Money Lenders Ordinance. That takes the Plaintiff outside the definition of "money lender" in section 2(1) of the Money Lenders Ordinance: see Liggars Ltd v DC Finance (Holdings) Ltd 2 HKLRD 227 (CFI) and 2 HKLRD 383 (CA). Hence, for the purpose of this transaction, the Plaintiff was not a money lender within the meaning of the Money Lenders Ordinance. The Wa Lee Loan Agreement was, therefore, not caught by sections 18 of the Money Lenders Ordinance which renders any loan or the security given unenforceable for want of a note or memorandum. The section 18 argument of Mr Mumford SC based on Orakpo, accordingly, has no application to the present case.

116. The next bone of contention between Mr Mumford SC and Mr Chan is whether the availability of subrogation as a restitutionary remedy is dependent on the intention of the parties. Relying on Orakpo, Mr Mumford SC submitted it is. Relying on Banque Financiere De La Cite v. Parc (Battersea) Ltd [1999] 1 AC 221, Mr Chan said it is not. Both authorities are decisions of the House of Lords. In my view, both decisions are not inconsistent with one another. The House of Lords in Orakpo did not exclude subrogation in the absence of intention of the parties. It held that there were different sets of circumstances under which the remedy of subrogation arose, then it went on to consider, as one particular set of circumstances involving the presumed intention of the parties. It is clear that the House of Lords has in mind other sets of circumstances under which the remedy could arise independently of contract or the intention of the parties. Lord Diplock held at 104:

"My Lords, there is no general doctrine of unjust enrichment recognised in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system that is based upon the civil law. There are some circumstances in which the remedy takes the form of "subrogation," but this expression embraces more than a single concept in English law. It is a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances. Some rights by subrogation are contractual in their origin, as in the case of contracts of insurance. Others, such as the right of an innocent lender to recover from a company moneys borrowed ultra vires to the extent that these have been expended on discharging the company's lawful debts, are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment.

This makes particularly perilous any attempt to rely upon analogy to justify applying to one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances."

117. Subrogation is a restitutionary remedy. It could be contractual or non-contractual. In the case of the former, intention forms the basis of the remedy. In the case of the latter, the questions are whether a person is enriched at the expense of another, whether it is unjust and whether there are policy reasons for denying the remedy. Intention does not cease to be a factor for determining these issues but is not the sole determinant factor. I prefer the following dicta of Lord Clyde in Banque Financiere De La Cite at 237:

"My Lords, the basis for the appellants' claim is to be found in the principle of unjust enrichment, a principle more fully expressed in the Latin formulation, nemo debet locupletari aliena juactura. The principle is equitable in the sense that it seeks to secure a fair and just determination of he rights of the parties concerned in the case. But it is not a principle which is entirely discretionary in its application so as to enable a court in any case to withhold a remedy where all necessary elements for its satisfaction have been established, although t here may be circumstances where on grounds which may be described as grounds of public policy a remedy may be refused. Without attempting any comprehensive analysis, it seems to me that the principle requires at least that the plaintiff should have sustained a loss through the provision of something for the benefit of some other person with no intention of making a gift, that the defendant should have received some form of enrichment, and that the enrichment has come about because of the loss. The loss may be an expenditure which has not met with the expected return. The remedy may vary with the circumstances of the case, the object being to effect a fair and just balance between the rights and interests of the parties concerned. The obligation to provide the remedy does not rest on any contractual basis but on the general principle of the common law and it may find its expression in a variety of circumstances."

118. However, in exercising my discretion to grant or to withhold this remedy from the Plaintiff, I cannot turn a blind eye to the illegality surrounding the Wa Lee Loan Agreement. In seeking this equitable remedy, the Plaintiff must come with clean hands. If a person invests clean money in an illegal enterprise, the money is mixed with his illegal investments and becomes tainted with the illegality. The Plaintiff's hands have been badly soiled. The $9.05 million paid to discharge the Hong Kong Bank Mortgage was part of the illegal design to convert the security under the illegal and unenforceable Snyder Agreement into an enforceable mortgage. That payment was badly tainted with illegality. If as a matter of law, because of illegality the Plaintiff may not enforce a security, how can he call upon equity to save him as regards part of that security from the consequence of what he did as part of his illegal design? Even though the 1st Defendant has been enriched and unjustly so if subrogation is withheld from the Plaintiff, public policy is strongly against granting the relief. The maxim ex turpi causa non oritur actio applies. It is better that a loan shark be harshly deterred than to be assured that if the court finds against it, it may still recover part of its investment in its illegal enterprise. As between harshness to the Plaintiff and unjust enrichment to the 1st Defendant, the latter choice is certainly the lesser of the two evils.

119. The same conclusion can be reached as follows. Subrogation is an equitable remedy. The equitable charge created by the Plaintiff discharging the Hong Kong Bank Mortgage has momentary existence only because the intention of the Plaintiff and the 1st Defendant was to create a legal charge over the two Sets of Property. Indeed, as soon as the equitable charge was created, it merged into the legal charge which was unenforceable. Accordingly, the Plaintiff's claim for subrogation must fail.

120. As the Plaintiff has no right over the two Sets of Property, its claim against the 3rd and 4th Defendants as occupiers of the property must also fail.

COUNTERCLAIM

121. I now turn to the 1st Defendant's counterclaim against the Plaintiff. The 1st Defendant claims return of the two sums of $100,000 paid to the Plaintiff as handling fees under the Snyder Agreement. Kan knowingly and willingly entered into this illegal loan agreement. The agreement is unenforceable by either party to the agreement. His claim for return of the two sums must be dismissed.

122. Next, the 1st Defendant claims damages for duress. By reason of my finding of illegality, the 1st Defendant suffered no loss. In fact, it had a lot to gain. At least the outstanding loan of $9.05 million under Hong Kong Bank Mortgage was discharged by the Plaintiff. But in recognition of the violation of his rights, I award the Defendant nominal damages of $1.

123. The 1st Defendant claims money had and received in respect of various sums amounting to $300,000 it paid the Plaintiff through Tam and the rent for the period from 15 July 1999 to 14 August 2000 which it caused its tenant to pay over to the Plaintiff in the total amount of $2,275,000. The claim is based on the lack of knowledge of the illegality of the Snyder Agreement. There is no basis to say that Kan had no knowledge of the illegality because as early as 8 February 1999, C&T had advised him of the illegality of the Snyder Loan and unenforceability of the Snyder Agreement. Kan was forced by duress into signing the loan agreement on 12 March 1999, pursuant to which he signed the Wa Lee Loan Agreement, the deed of mortgage of the two Sets of Property and the rental assignment notice in favour of the Plaintiff. He knew all these agreements were to give effect to the illegal Snyder Loan. Money paid pursuant to the illegality is not recoverable. While I have some sympathy for the 1st Defendant as it was forced into signing the deed of mortgage and rental assignment notice, I do not feel uncomfortable in holding that the money paid are not recoverable as he had already benefited from the illegality. The loss should stay where it lies.

124. As for the other remedies sought, I grant a declaration that the mortgage made between the Plaintiff and the 1st Defendant and registered in the Yuen Long New Territories Land Registry by Memorial No. 856545, the rental assignment and the rent assignment notice and Kan's guarantee, all dated 22 March 1999, are void and of no legal effect. I also make an order that the registration of the mortgage and the assignment of rental by Memorial No. 856545 be vacated if no notice of appeal is filed after one month.

CONCLUSION

125. Accordingly, I find that the Snyder Agreement was not a genuine sale and purchase agreement. It was a security for the Plaintiff's loan of $10 million to the 1st Defendant. It was illegal, being an agreement for a loan at excessive interest rate of 102% contrary to section 24 of the Money Lenders Ordinance. The Wa Lee Loan Agreement was forced on the 1st Defendant by duress. The agreement was entered into for the purpose of paying illegal interest and repaying the illegal Snyder Loan. It was illegal as being contrary to public policy. The effect is that the Wa Lee Loan Agreement was void ab initio, the loan is irrecoverable and the mortgage is unenforceable. Likewise, the restitutionary remedy of subrogation to the extent of the amount the Plaintiff paid to discharge the Hong Kong Bank Mortgage is not available to the Plaintiff. Accordingly, the Plaintiff's claims against the 1st, 3rd and 4th Defendants are dismissed.

126. On the counterclaim, I award the 1st Defendant nominal damages of $1 for duress. I make a declaration that the mortgage, the rent assignment, the rent assignment notice and Kan's guarantee dated 22 March 1999 are void and of no legal effect. I order the registration of the mortgage by Memorial No. 856545 be vacated if no notice of appeal is filed after one month.

127. This is a case where costs must follow the event. The question is at what scale those costs should be awarded. It is a serious wrong and an insult to the Court's notion of justice for the Plaintiff to attempt to make use of the Court for its unworthy cause. Though in the end the Plaintiff suffered loss as a result of the illegality, that is a separate issue from the consideration as to the scale of costs it should be ordered to pay. To reflect the Court's strong disapproval of the Plaintiff's attempt to deceive the Court, I award the 1st and 3rd Defendants with costs against the Plaintiff, to be taxed on an indemnity basis if not agreed.

128. The conclusion in this case is by no means an easy one to reach in view of the very full documentations prepared by the Plaintiff. Some of those documentations were generated by the Plaintiff for a self serving purpose. The Snyder Agreement, the Snyder Action, the Cancellation Agreement and the Wa Lee Loan Agreement demonstrate the ingenuity of those engaged in this sort of illegal activity. The scheme as a whole was well planned and well protected by documentations. When C&T intervened to prevent the Plaintiff from actualizing its profits in the Snyder Agreement, a whole chain of events, including the substitution of C&T by NTKC as the 1st Defendant's solicitors, was initiated leading to the execution of the Wa Lee Loan Agreement for the purpose of converting the illegal loan and security into an enforceable loan agreement and mortgage. If it were not for the very extensive discovery and the persistence of counsel acting for the 1st Defendant, in particular Mr Andy Hung, in the course of preparation of the defence, the Court might have tremendous difficulties in reaching the right conclusion. For example, the two cheques issued by the 1st Defendant in payment of the so called handling charge severely discredited the Plaintiff's case that it had nothing to do with the Snyder Agreement. I record my commendation to the 1st Defendant's legal team for their efforts in protecting their client from the loan sharking activity.