SILVER BOUND CAPITAL LTD. v. HO'S HOLDINGS CO. LTD. & OTHERS

HCA 9682/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9682 OF 2000

____________

____________

_______________

J U D G M E N T

_______________

Introduction

1. This is an action by the Plaintiff, a finance company, for recovery of a loan ("the Loan") against the 1st Defendant as borrower, the 2nd to 4th Defendants as guarantors and the 5th and 6th Defendants as mortgagors of properties offered as security for the Loan. In addition, as against the 5th and 6th Defendants, the Plaintiff seeks vacant possession of the mortgaged properties. The action is discontinued as against the 2nd Defendant who has since been declared a bankrupt. At the commencement of the trial, the 3rd and 5th Defendants appeared in person, but the 3rd Defendant absented himself before the close of the Plaintiff's case. Thus, effectively, except for the 5th Defendant, the hearing was conducted in the absence of the Defendants.

2. The defence of the 1st Defendant are that firstly the Loan was not a loan made to the 1st Defendant, but was a loan made to the 2nd Defendant for his personal business use. It entered into the loan agreement ("the Loan Agreement") on the Plaintiff's representation that the Plaintiff being a licensed money lender would not enter into any loan agreement with the 2nd Defendant direct but would only enter into a loan agreement with the 1st Defendant. Secondly, the 1st Defendant pleaded that the Loan was illegal by virtue of sections 18 and 22(1)(b) and 22(1)(c) of the Money Lenders Ordinance, Cap. 163 of the Laws of Hong Kong. The defence of the 3rd to 6th Defendants are that they signed the guarantees ("the Guarantees") or the mortgage documents ("the Mortgage Documents"), as appropriate, in reliance on the Plaintiff's representation to the 2nd Defendant which had been repeated to them by the 2nd Defendant and they signed the documents under the belief that the documents were directors' consents to the Loan in the case of the 3rd and 4th Defendants and loan applications in the case of the 5th and 6th Defendants.

3. The issues in this case are:

(1) Whether the Plaintiff was carrying on business as a money lender without a valid money lenders licence, so that the Loan Agreement and securities given in relation thereto would be rendered unenforceable by virtue of section 23 of the Money Lenders Ordinance;

(2) Whether the Loan, the Loan Agreement signed by the 1st Defendant, the Guarantees signed by the 3rd and 4th Defendants and the Mortgage Documents signed by the 5th and 6th Defendants are rendered illegal and/or unenforceable by virtue of sections 18, 20 and/or 22 of the Money Lenders Ordinance;

(3) Whether the above Loan Agreement, the Guarantees and the Mortgage Documents were entered into as a result of misrepresentation; and

(4) Whether the 3rd to 6th Defendants may rely on the plea of non est factum.

The Facts

4. The 2nd Defendant was a director of the 1st Defendant. In mid 1996, he applied to the Plaintiff for a loan of $1.3 million. The loan was approved but was not drawn down. In January 1997, the 1st Defendant reapplied, this time for a loan of $1.9 million. It offered two properties as securities, namely, Flat 6A on 15th Floor of New Fortune House ("the New Fortune Premises") and Flat 4 on 11th Floor of Block B of Pearl Court ("the Pearl Court Premises"). The Plaintiff's director, Miss Ching ("Ching") visited the two premises for a valuation inspection. She met the 2nd and 5th Defendants at the New Fortune Premises and had a conversation with the 5th Defendant. The 5th Defendant told her that he was a friend of the 2nd Defendant. She told the 5th Defendant that the premises would be used as a security for a mortgage. She recalled that they conversed in Punti and there were no language difficulties.

5. A loan of $1.9 million for a term of 12 months was approved on the basis of the following securities: (a) a first legal charge on the Pearl Court Premises, (b) a first legal charge on the New Fortune Premises, (c) a debenture on the assets of the 1st Defendant; and (d) personal guarantees from the 2nd to 4th Defendants. A commitment letter dated 22 January 1997 was sent to the 1st Defendant. The 1st Defendant then requested for the loan to be increased to $2 million. That was also approved. Ching sent a copy of the commitment letter with the amendment to Mr Ricky Yiu ("Yiu"), a solicitor of Messrs Baker & McKenzie for processing the legal documentation.

6. On 7 April 1997, the 2nd, 3rd, 5th and 6th Defendants attended Yiu's office. In the presence of his clerk, Yiu explained to them the Loan Agreement, the Guarantees and the two Mortgage Documents in respect of the Pearl Court Premises and New Fortune Premises. He witnessed the 2nd and 3rd Defendants execute the Loan Agreement and the debenture made by the 1st Defendant in favour of the Plaintiff in their capacities as directors of the 1st Defendant. He explained that as guarantors they would be liable to repay all the indebtedness of the 1st Defendant in case of default. He told them that he acted for the Plaintiff and did not represent them and that they should seek independent legal advice about the execution of the Guarantees. He witnessed the 2nd and 3rd Defendants execute their personal Guarantees. The 2nd Defendant also signed a notice of drawing from the 1st Defendant to the Plaintiff.

7. Yiu said he explained to the 5th and 6th Defendants that the Mortgage Documents were to create a first legal charge over the respective properties owned by them in favour of the Plaintiff, the two legal charges were to secure all monies owed by the 1st Defendant to the Plaintiff and in their respective capacities as mortgagors they would also be liable for the full indebtedness owed by the 1st Defendant to the Plaintiff. He explained the questionnaires to be completed by mortgagors to the 5th and 6th Defendants. They confirmed that there were no occupiers in the premises. He told them that he represented the Plaintiff and did not represent them and that they should seek independent legal advice about the execution of the documents. He witnessed the 5th and 6th Defendants execute the respective Mortgage Documents and questionnaires.

8. The 4th Defendant had not turned up at Yiu's office on 7 April 1997, but attended his office on 22 April 1997 to execute the Guarantee in his presence. He executed the Guarantee after Yiu had explained the document to him in a similar manner.

9. Upon receipt of the Loan from the Plaintiff, Yiu discharged the then existing mortgages over the Pearl Court Premises and New Fortune Premises created by the 5th and 6th Defendants respectively in favour of Edward Wong Finance Company Limited through Messrs Fairbairn Catley Low & Kong. The balance of $247,286.94 was released to the 1st Defendant on 8 April 1997. The debenture was duly registered with the Companies Registry, pursuant to section 80 of the Companies Ordinance, Cap 32. The 1st Defendant was unable to repay and was given two extensions of time until 7 April 1999 to repay. However, the Loan was not repaid.

10. The 5th Defendant said he was educated up to middle school in China. He could not read and write English. He communicated in Fujian and was not fluent in Cantonese. He wished to mortgage the New Fortune Premises so as to obtain a loan of $600,000 to lend to the 2nd Defendant. On 8 April 1997, he attended Yiu's office. There, he was given two sets of documents to sign. The documents were in English. Yiu explained the documents to him in Punti but in a very perfunctory manner. Hence, he only understood part of the explanation. He knew it was about a mortgage and thought that his flat was to be mortgaged for raising a loan to him and for him to lend to the 1st Defendant. He did not ask for a full explanation. He was not given a copy of the Loan Agreement.

11. I find the 5th Defendant incredible. His evidence about his inadequacy in Punti is contradicted by Ching's evidence in which I have no doubt. His demeanour in court showed that he could speak and understand Punti. It is incredible that despite the alleged perfunctory explanation and his inadequacy in Punti, he did not ask for a full explanation of the documents. His evidence differed significantly from his witness statement in which he alleged that he was asked to sign on a piece of paper taken out from a bundle of documents, the documents had never been explained to him and he thought the documents were in respect of a loan application. In his evidence, he adopted a half way position saying that the documents had been explained but in a perfunctory manner and he did not understand fully. He was substantially changing his defence.

12. The New Fortune Premises had been mortgaged to the Standard Chartered Bank before and was then mortgaged to Edward Wong Finance Company Limited to raise a loan of $200,000 for the 1st Defendant. The 5th Defendant said he knew roughly he was signing a mortgage document in Yiu's office to obtain a loan to himself for lending to the 2nd Defendant. Despite having signed the documents but not having received any loan, he never made any enquiry about the loan and simply thought the loan was cancelled. His case is without any conviction at all.

13. Yiu denied the suggestion that he explained the documents to the Defendants in a hasty and perfunctory manner. I accept his evidence and reject the 5th Defendant's evidence. I am satisfied that Yiu had adequately explained the documents to be executed by the Defendants and advised them to seek independent legal advice if they considered necessary and that the explanation had been clearly understood by all the Defendants.

Issue (1) - Money lenders licence

14. According to the documents discovered and produced by the Plaintiff, the Plaintiff was at all material times a licensed money lender. Hence, the defence that the Loan is irrecoverable and the Loan Agreement, Guarantees and Mortgage Documents are unenforceable by virtue of section 23 of the Money Lenders Ordinance as the Plaintiff was not a licensed money lender must fail.

Issue (2) - Unenforceability by virtue of sections 18, 20 and/or 22

15. On the evidence, the Loan was made to the 1st Defendant. The commitment letter, the notice of drawing, the Guarantees signed by the 2nd to 4th Defendants and the Mortgage Documents signed by the 5th and 6th Defendants consistently indicate that the borrower was the 1st Defendant and not its director, the 2nd Defendant.

16. The Pearl Court Premises and the New Fortune Premises were formerly mortgaged to Edward Wong Finance Company Limited as security for a loan to the 1st Defendant. This fact was recognised in the correspondence between the Plaintiff's solicitors, Messrs Baker & McKenzie and Messrs Fairbairn Catley Low & Kong, solicitors for Edward Wong Finance Company Limited in connection with the discharge of those mortgages. The majority part of the Loan was applied to discharge those mortgages and hence in payment of the debt of the 1st Defendant while the balance was paid to the 1st Defendant. The cheques in partial repayment of the Loan were issued by the 1st Defendant. Thus, it is clear that the Loan was obtained by the 1st Defendant.

17. The suggestion that the Loan was not made to the 1st Defendant was not raised until the filing of the defence, notwithstanding that the Defendants had all along been legally represented. There is no credence that the Loan was made to the 2nd Defendant and not the 1st Defendant.

18. The 1st Defendant is a company incorporated under the Companies Ordinance. The Loan was secured by a mortgage and a debenture registered under section 80 of the Companies Ordinance. It is therefore 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 which specifically excludes, as respects a loan specified in Part 2 of Schedule 1, any person who makes such loan: see Liggars Ltd v DC Finance (Holdings) Ltd 2 HKLRD 227 (CFI) and 2 HKLRD 383 (CA). As the Plaintiff is not a money lender within the meaning of the Money Lenders Ordinance, the Loan Agreement is not caught by sections 18, 20 and 22 of the Money Lenders Ordinance which render the Loan or the security given unenforceable for want of a note or memorandum, or for failure to furnish information to the surety, or for providing payment of compound interest. Accordingly, this defence must fail.

Misrepresentation

19. As the Plaintiff was a licensed money lender at all material time, there is no merit in the defence that the Plaintiff fraudulently represented itself as a licensed money lender. Likewise, there is no merit in the defence that the 3rd to 6th Defendants acted on the misrepresentation repeated to them by the 2nd Defendant.

Non est factum

20. It is well established that the party pleading this defence bears the burden of proving (1) that the element of consent in signing the document is totally lacking, that is the transaction which the document purports to effect is essentially different in substance or in kind from the transaction intended and (2) that he acted carefully in signing the document: see Saunders v Anglia Building Society [1971] AC 1004.

21. In their defence, the 3rd to 6th Defendants alleged that they signed on a single sheet of paper detached from a bundle of documents, which had not been explained to them. Except for the 5th Defendant, none of them offered any evidence in support of their case. While I am entitled to treat the evidence of the 5th Defendant as the evidence of the other Defendants, the evidence of the 5th Defendant was inconsistent with the pleaded case and I reject his evidence as incredible. I accept the evidence of Yiu that he personally attended to the execution of the documents on the two occasions on 7 and 22 April 1997, that he adequately explained the contents of the documents to the Defendants who fully understand the contents before they signed the documents.

22. As for the specific defence of the 3rd and 4th Defendants that they signed the Guarantees under the belief that they were directors' consents required for the Loan to be advanced to the 1st Defendant, there was no evidence of their belief tendered at the trial. As I accept Yiu's evidence that he had adequately explained the documents to them before they signed, their defence must be rejected.

23. As for the specific defence of 5th and 6th Defendants that they signed the Mortgage Documents under the belief that they were loan application documents, there was no evidence tendered by the 6th Defendant and the evidence of the 5th Defendant has been rejected by me as being incredible. Thus, this defence must also fail.

Conclusion

24. I accept the evidence of the Plaintiff and reject the evidence of the 5th Defendant. I reject the Defendants' defence. I am satisfied that the Plaintiff has proved its case. There is no evidence in rebuttal of the amount of outstanding loan and interest claimed by the Plaintiff. Accordingly, I enter judgment in favour of the Plaintiff as follows:

(1) As against the 1st, 3rd, 4th, 5th and 6th Defendants for the sum of $2,656,576.23 with interest on the sum of $2,037,580.93 at the rate of $1,980.98 per day from 27 October 2000 until judgment and thereafter at judgment rate until payment;

(2) As against the 5th and 6th Defendants for vacant possession of the New Fortune Premises and the Pearl Court Premises respectively; and

(3) As against the 1st, 3rd, 4th, 5th and 6th Defendants for an order nisi that they should pay the costs of the Plaintiff on an indemnity basis in accordance with the Loan Agreement, the Guarantees and the Mortgage Documents.