OCEAN ALLIED FINANCE LTD v. SZE, LILY

DCCJ 2977/2021

[2024] HKDC 1214

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2977 OF 2021

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DECISION

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1.  On 15 January 2024, judgment was granted in favour of the plaintiff, a licensed money lender, to recover from the defendant a loan in the principal amount of $1,100,000 plus interest accrued from 21 April 2021 at the rate of 30% p.a. until payment (“Judgment”).

2.  On 9 February 2024, the defendant filed a summons (“Summons”) to apply for:

(a)  Leave to appeal against the Judgment on the grounds as set out in a draft notice of appeal (to be detailed below);

(b)  A stay of execution of the Judgment; and

(c)  Costs of the trial as well as the appeal.

Leave to appeal

3.  The defendant has advanced several proposed grounds of appeal, all of which are based on the Retained Sum as defined at §3 of the reasons for the Judgment, i.e. the sum of $165,000 which was retained by the plaintiff from the principal of the Loan when the same was drawn down for the purpose of paying the first 6 monthly instalments of interest of $27,500 each.

4.  The proposed grounds of appeal can be summarised as follows:

(a)  It was an error of law to reject the defence that the Retained Sum was an illegal payment pursuant to section 27(1) of the Money Lenders Ordinance, Cap. 163 (“Ordinance”);

(b)  It was an error of law to exclude the Retained Sum from the deemed interest for the purpose of calculating the effective interest rate; and

(c)  Based on (a) and/or (b) above, the effective interest rate should have been 52.94%, and pursuant to the version of section 25 of the Ordinance which was effective at the material times, the defendant should be allowed to reopen the Loan and be put back to the position she would have been in before she obtained the Loan from the plaintiff by being required to repay $300,000 only.

i.  The Retained Sum and Section 27(1) of the Ordinance

5.  In support of his arguments, Mr. BK Ho, counsel for the defendant, principally relies on three case authorities, namely (i) the judgment of the Court of First Instance and the subsequent judgment of the Court of Appeal in Skyline Credit Limited v Leung Hing Chung [2019] HKCFI 169; [2022] HKCA 1241, and (ii) a judgment of this Court in Actually Financial Limited v Wong Pui Miu [2022] HKDC 82.

6.  It is contended for the defendant that those three case authorities are in support of the argument that any sums retained by the money lender as an advance payments for interest shall be held as illegal payments under section 27(1) of the Ordinance.

7.  In Skyline Credit Limited v Leung Hing Chung (supra), neither the Court of First Instance nor the Court of Appeal had held that sums retained by the money lender as genuine interest payments (i.e. with corresponding deductions of payable interest) would amount to “costs, charges or expenses (other than stamp duties or similar duties) incidental to or relating to the negotiations for or the granting of the loan or proposed loan or the guaranteeing or securing of the repayment thereof” under section 27(1) of the Ordinance. There were simply no findings as such in both judgments.

8.  As to Actually Financial Limited v Wong Pui Miu (supra), it was held by this Court that a part of the loan proceeds equivalent to 6 monthly instalments of interest payment being retained by a fraudulent intermediary who was acting in collusion with the money lender should be categorised as “costs” or “charges” for or in connection with the obtaining of the loan from the lender under section 27(3): see §§148-150 therein. It was so categorised notwithstanding the fact that such sum was indeed applied towards the repayment of the relevant interest instalments.

9.  I, however, do not find that Actually Financial Limited v Wong Pui Miu (supra) alone could demonstrate that the first proposed ground has a reasonable prospect of success:

(a)  The learned Judge made clear at §139 of the said judgment that the relevant ruling in respect of section 27(3) of the Ordinance was simply obiter. It was because he had already held that the effective interest rate of the subject loan was over 60%, which was therefore illegal and unenforceable. Whether the retained sum amounted to “costs” or “charges” under section 27(3), such that the same could be set off against the loan principal pursuant to section 27(4), did not affect the outcome of the case.

(b)  The learned Judge only gave a very brief reason, namely the said sum “was taken away from the defendant right after the Loan was granted”: at §149. There was no reference to any case authorities to support the categorisation as such.

(c)  The fact that the said sum was in fact applied to discharge the relevant instalments for interest, such that it was not simply “taken away from the defendant” permanently, was not analysed.

(d)  The consequence of categorising a sum as “costs” or “charges” under section 27(3) is that the borrower would be able to invoke the remedies under section 27(4). The borrower can:-

i.  Set off the amount or value thereof against the amount actually lent;

ii.  Recover the amount or value thereof from the party who received the sum; or

iii.  Recover the amount of value thereof from the money lender if the receiving party is the money lender or a partner, employer, employee, principal or agent of the money lender, or is in any way acting for or in collusion with him.

(e)  Sections 27(3)&(4) should be considered together with section 2(3).

(f)  Section 2(3) provides that: “For the purpose of determining the amount of the principal of a loan, any amount thereof which is not shown to have been lent except for the purpose of treating it as an instalment paid by the borrower in repayment of the loan and which is so treated by the lender shall be disregarded.”

(g)  A sum retained for the payment of instalment(s) would be automatically deducted from the principal under section 2(3). To categorise the same sum as an illegal payment under section 27(1) or section 27(3) would allow the borrower to invoke the remedies under section 27(4), whether to further set-off the same sum with the principal once again, or to recover the same from the receiving party, even though the principal has already been deducted to the same extent pursuant to section 2(3).

(h)  There is no apparent justification for such duplication of remedies. The defendant has not adduced any legislative materials to support the contention that it was indeed the legislative intent behind sections 2(3) and 27 of the Ordinance. In fact, the defendant’s interpretation of section 27(1) would render section 2(3) superfluous.

10.  Therefore, no leave to appeal should be given to paragraph 1 of the proposed grounds of appeal.

ii.  The Retained Sum and the Deemed Interest

11.  In support of this proposed ground of appeal, the defendant mainly relies on the judgments in Skyline Credit Limited v Leung Hing Chung (supra) as an authority for the proposition that, in the calculation of effective interest rate, sums retained by the money lender for repayment of interest instalments should count as deemed interest in addition to the contractual interest.

12.  Skyline Credit Limited v Leung Hing Chung (supra) was a case involving a fraudulent intermediary who colluded with the money lender and deprived the borrower of substantial portion of the loan proceeds by various excuses. Similar to the present case, a sum was retained from the loan proceeds and was applied for repaying interest. The learned trial Judge held at §124 of his judgment that that the question of effective rate of interest under section 2(1) of the Ordinance and the illegal charges under section 27 are two separate matters.

13.  The following parts of the Court of Appeal’s judgment are particularly relevant to the present application:

“46. …The second sum is the three months’ interest of $49,680. The sum did not go to the defendant and had instead went back to the plaintiff. On the plaintiff’s case, the defendant only defaulted from the second payment onwards. The first payment was not paid by the defendant; it came out of the [loan principal of] $1.8 million. Applying section 2(3), this sum should be disregarded when determining the amount of the principal lent. …

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53. Of the Four Sums, we see no difficulty with including the $8,000 legal fee, $49,680 interest for three months and $18,000 handling fee in the deemed interest, as they are or can be regarded as monies paid in consideration of or otherwise in respect of the plaintiff’s loan to the defendant.

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55. …The deemed interest should only comprise the contractual interest of $496,800, plus the legal fee of $8,000, the three months’ interest of $49,680 and the handling fee of $18,000, making a total of $572,480.” (emphasis added)

14.  There was, however, no further discussion as to why both the contractual interest and the three months’ interest should be counted as deemed interest even though the latter had in fact been applied to repay part of the former.

15.  Section 2(1) of the Ordinance provides that “interest”:

“…does not include any sum lawfully agreed to be paid in accordance with this Ordinance on account of stamp duty or other similar duty, but save as aforesaid includes any amount (by whatever name called) in excess of the principal, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan.” (emphasis added)

16.  In the present case, I held that, pursuant to section 2(3) of the Ordinance, the principal of the Loan should exclude the Retained Sum, rendering the actual principal as $965,000.

17.  Given the plaintiff’s retention of the Retained Sum, the defendant became liable to repay (i) only 6 instalments of interest for the 7^th to 12^th months in the total sum of $165,000, and (ii) the principal of $1,100,000, totalling $1,265,000 (as opposed to $1,430,000 under the loan agreement).

18.  Accordingly, the amount that the defendant remained liable to repay the plaintiff in excess of the principal remained to be $330,000 (being $1,265,000 minus $965,000), which was the same amount as the original contractual interest. Therefore, in the reasons for the Judgment, I rejected the inclusion of the Retained Sum into the deemed interest in calculating the effective interest rate, as I regarded that as double-counting.

19.  My ruling is apparently inconsistent with the relevant ruling by the Court of Appeal in Skyline Credit Limited v Leung Hing Chung (supra) as quoted in paragraph 13 above, by which this Court is bound.

20.  The plaintiff attempts to distinguish Skyline Credit Limited v Leung Hing Chung (supra) from the present case based on various differences on facts. With respect, those distinguishing features as relied upon by the plaintiff are not material. The Court of Appeal’s ruling is unequivocal and directly relevant to the issue of what the effective interest rate should include.

21.  Therefore, it is for the Court of Appeal to either apply the same principle behind the relevant ruling in Skyline Credit Limited v Leung Hing Chung (supra) to the Retained Sum, or to clarify the relevant principle(s).

22.  If the Retained Sum is included in the deemed interest, the effective interest rate would become 52.94%, which would be sufficient for triggering the Court’s jurisdiction to reopen the transaction under section 25 of the Ordinance, the threshold for which was 48% at the material times. The outcome of the case might then be substantially different from the Judgment.

23.  I am therefore of the view that the defendant has a reasonable prospect of success on the second proposed ground of appeal.

24.  The third proposed ground of appeal is simply consequential upon either the first or the second proposed ground of appeal.

iii.  Conclusion on Leave to Appeal

25.  Accordingly:

(a)  The application for leave to appeal based on paragraph 1 of the draft grounds of appeal is refused; and

(b)  Leave is granted to the defendant to appeal based on paragraphs 2 and 3 of the draft grounds of appeal.

Stay of execution

26.  The principles in relation to stay of execution of a judgment pending appeal are well-established:

(a)  Except so far as the Court may otherwise direct, an appeal shall not operate as a stay of the proceedings in which the appeal is brought.

(b)  The Court does not make a practice of depriving a successful litigant of the fruits of his litigation.

(c)  Unless a stay can be justified by good reasons, one will not be ordered.

(d)  The most important consideration in respect of whether a stay of execution should be granted is whether there are strong grounds of the proposed appeal. That hurdle is higher than that of chances of success for considering whether leave to appeal should be granted.

(e)  But the Court is likely to grant a stay where the appeal would otherwise be rendered nugatory or the appellant would suffer loss which could not be compensated in damages.

(see Order 58 rule 3 of the Rules of the District Court, Cap. 336H, and §59/13/1 of Hong Kong Civil Procedure 2024)

27.  Insofar as the merits of the intended appeal is concerned, whilst I take the view that there is a reasonable prospect of success given the Court of Appeal’s ruling in Skyline Credit Limited v Leung Hing Chung (supra), I do not consider the intended appeal to have strong grounds of success. As I have highlighted above, the Court of Appeal did not go into any detailed analysis of the legal basis behind their conclusion that sums retained for interest payment(s) should be included into the deemed interest in addition to the contractual interest, notwithstanding the apparent double-counting.

28.  Nevertheless, I accept the defendant’s other ground in support of the application for stay, namely she will suffer loss that cannot be compensated by damages.

29.  The background of the defendant has been set out in detail in the reasons for the Judgment. In short, she makes a modest income of $14,000 per month. Her only substantial asset is the apartment she has bought under the Home Ownership Scheme (“Apartment”), and it will probably be sold as part of the plaintiff’s enforcement of the Judgment. In fact, in the affirmation in opposition filed on behalf of the plaintiff, the plaintiff’s intention to enforce the Judgment against the Apartment was made obvious (see §12 of the affirmation of Li Wei Kiu John filed on 27 March 2024).

30.  The defendant suggests that once the Apartment is sold, she will be disqualified from repurchasing another apartment under the Home Ownership Scheme or from applying for the Public Rental Housing. She referred to the Information Booklet on General Housing Policies published by the Hong Kong House Authority, section (ix) of Chapter 1 of which explained that an ex-owner of any subsidised home ownership schemes are ineligible to apply for Public Rental Housing, subject to the Housing Authority’s discretion to give special consideration to their applications under special circumstances, including bankruptcy and financial hardship resulting in need for Comprehensive Social Security Assistance. There is no evidence before me to contradict the defendant’s suggestion.

31.  Further, I note that in general, applicants under the Home Ownership Scheme or Public Rental Housing are subject to asset limits. If the Apartment is sold, and the defendant succeeds on her appeal, she may end up holding substantial cash and face further hurdle for reapplying for any kinds of subsidised housing. Such loss is hard to be compensated by damages.

32.  As a result of the above, I grant a stay of the execution of the Judgment pending the disposal of the intended appeal.

33.  The plaintiff has not suggested any terms for the stay. In light of the financial circumstances of the defendant, I do not consider any conditions to be necessary or appropriate.

Costs

34.  In the Summons, the defendant also seeks costs of the trial as well as that of the substantive appeal. Such application is clearly misconceived and dismissed accordingly.

35.  As to the costs of the Summons, in light of my rulings above, the appropriate order for costs should be 40% of the costs be in the cause of the appeal, and 60% of the costs (which I think is the right proportion for the application for stay) be to the defendant.

36.  I have received parties’ respective statements of costs for summary assessment. I summarily assess (i) the defendant’s costs for the Summons as $100,000, and (ii) the plaintiff’s costs for the Summons as $80,000. For avoidance of doubt, in the summary assessment, I have allowed the fee of plaintiff’s counsel in full and 80% of the fee of defendant’s counsel, as assistance by counsel for the Summons is clearly merited.

37.  I therefore make a cost order nisi that:

(a)  The parties’ respective costs of and incidental to the Summons be summarily assessed as $80,000 for the plaintiff, and $100,000 for the defendant;

(b)  40% of the costs of the Summons be in the cause of the appeal;

(c)  60% of the costs of the Summons, in the amount of $60,000, be to the defendant; and

(d)  The defendant’s own costs be taxed in accordance with the Legal Aid Regulations.