FAST BILLION HOLDINGS LTD v. SUN PUI YUK

HCA 2984/2015

[2019] HKCFI 886

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2984 OF 2015

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JUDGMENT

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Introduction

1.  This is a money lender’s action pursuant to Order 83A of the Rules of the High Court for recovery of the principal sum of $2,400,000 with interest of a loan (the “Second Loan”) advanced by the plaintiff as a money lender to the defendant as borrower, pursuant to a loan agreement dated 31 July 2015 (the “Second Loan Agreement”).  The drawdown date of the Second Loan was also 31 July 2015.

2.  The Second Loan was applied to pay off two previous loans owed by the defendant as borrower to Goldmax Finance Limited (“Goldmax”), i.e. the two Goldmax loans; the defendant’s previous mortgageover her property pursuant to a mortgage loan agreement with the plaintiff dated 19 March 2015 (the “First Loan”); and a sum in cash to finance the defendant’s on-going litigation over her property.  For that purpose, the defendant executed the “‘Schedule’ of Special Loan Disbursement Arrangement” (the “Disbursement Schedule”) authorising the plaintiff to discharge those loans from the Second Loan.  Thus, when the Second Loanwas drawn down, it was split into three portions: a first portion of $1,650,000 was stake-held as stakeholder money for settling the two Goldmax loans; a second portion of $472,000 as the estimated full settlement amount of the First Loan; and a third portion of $271,000 to be cashed out to the defendant. The major dispute between the parties is over the second portion of the Second Loan.

3.  The Second Loan was obtained for the purpose of financing the defendant’s litigation.  That litigation failed and the defendant defaulted in repaying the monthly instalment under the Second Loan.  In September 2015, the defendant offered to sell her 50% interest in her property as settlement of the outstanding sum under the Second Loan.  That was not accepted by the plaintiff. The plaintiff engaged debt collectors to collect the loan from the defendant.  On 11 December 2015, the defendant complained to the plaintiff about the threatening attitude of its debt collectors.  On 15 December 2015, the plaintiff commenced this action. Despite some discussion and mediation between then and the trial, the parties were unable to come to settlement.  Their dispute revolved around the second portion of the Second Loan in the sum of about $80,000.

The pleadings

4.  The plaintiff pleaded the Second Loan Agreement and some of its terms, the related fees and expenses and the events of default, which are not disputed by the defendant.  The plaintiff claimed the outstanding principal sum of $2,393,382, interest in the sum of $151,471.57 as at 15 December 2015, and further interest on the said principal sum at the contractual rate of 30% per annum until payment.  The amount of claim isdisputed by the defendant as a result of her dispute over the second portion of the Second Loan.

5.  However, in her second and third witness statements, the defendant raised various un-pleaded issues, including breaches of sections18, 19 and 24 of the Money Lenders Ordinance (the “Ordinance”); sections 16A and 19 of the Theft Ordinance; the Trade Descriptions Ordinance; the Misrepresentation Ordinance; misrepresentation; and the wrongful actsof the plaintiff’s debt collectors.  She argued that by reason of these issues the Second Loan Agreement is unenforceable.  In the absence of proper pleading, I would not allow the above arguments other than those relating to breaches of the Money Lenders Ordinance.  If necessary and appropriate, I shall allow amendments to the pleadings to be made by both parties so that all controversy in dispute could be resolved.  The other issues raised in the defendant’s witness statements could not be resolved without an adjournment, properly amended pleadings and filing of further witness statements,at least by the plaintiff.  Those arguments are not allowed.  In making the above ruling, I was exceptionally accommodating to the defendant who was acting in person.

6.  Despite the absence of proper pleading, it was not difficult to understand the defendant’s case from reading her witness statements, the documents produced and her opening submission.  It was also apparent that the plaintiff understood the defence case and properly responded.  The thrust of the defendant’s case was that the Second Loan Agreement and related documents were ambiguous and misleading and concealed the plaintiff’s misappropriation of a sum of about $80,000 from the second portion of the Second Loan as upfront interest.  Therefore, the issues are whether the plaintiff was in breach of any provisions of the Ordinance in failing to provide information about the terms of the Second Loan, particularly the interest rate, the interest charged, and the amount of repayment as to render the Second Loan Agreement unenforceable against the defendant.  This involves a critical analysis of the real and agreed purpose as against the expressed purpose for which the second portion of the Second Loan was to be applied.

The first and third portions of the Second Loan

7.  It is common ground that the first portion of the Second Loan in the sum of $1,650,000 was stake-held as stakeholder’s money for settling the two Goldmax Loans.  By two letters dated 10 August 2015, Goldmax’s solicitors, Messrs K. B. Chau & Co advised the plaintiff’s solicitors, Messrs Darin Leung & Partners (“DLP”) that the outstanding principal and interest due under the two Goldmax loans were $1,446,297 and $125,521 and the costs for preparing a receipt on discharge for each charge was $3,200.  Allowing for a registration fee of $900, the amount required to clear the two loans was $1,579,118.  On 12 August 2015, DLP issued cheques to settle the principal and interest owing to Goldmax and the costs owing to K. B. Chau & Co.  The balance after settling all those sums was $70,882.  There was no dispute that this sum was deposited into the defendant’s account with Hang Seng Bank on 12 August 2015.

8.  There was no dispute that the defendant was given the third portion of the Second Loan in the sum of $271,000.

The second portion of the Second Loan

9.  The second portion of the Second Loan was to settle the outstanding payment under the First Loan.  In accordance with the “Disbursement Schedule” executed bythe defendant, DLP issued a cheque in the sum of $472,000 to the plaintiff on 31 July 2015 as the estimated amount for settling the First Loan.  The principal sum of the First Loan was $400,000.  The defendant paid four instalments.  Thus, the sum of $472,000 paid to the plaintiff was obviously more thanthat required to settle the outstanding principal and interest.  However, the plaintiff never accounted to the defendant for the surplus until the present dispute arose.  This was what gave rise to the defendant’s suspicion of impropriety on the part of the plaintiff.

10.  In his witness statement dated 24 January 2018, the plaintiff’s manager Ho Chun Wan (“Ho”) did not explain why the surplus was not refunded to the defendant.  Instead, he said that the surplus was applied to reduce the principal amount of the Second Loan from $2,400,000 to $2,320,818.04, i.e. by a sum of $79,181.96.  This is about $10,000 short of the amount which the defendant claimed had not been returned to her.  On that computation, there was not much merit in the defendant’s dispute that the surplus had not been accounted for.  But on the other hand, it is clear that computation was an afterthought created after having sight of the defence and the defendant’s complaint that the surplus had never been accounted for and/or as a result of Registrar Lung’s Order made on 6 November 2017 that the parties should hold a meeting to discuss their differences over the outstanding amount.  The defendant argued that the computation was just juggling of figures to conform with the requirements under the Ordinance.  There is a lot of truth in that assertion.

11.  In relation to the second portion of the Second Loan, Ho started off with the outstanding principal of $394,372.46 under the First Loan of $400,000 plus interest of $5,445.58 on that principal sum from 18 July 2015 to 31 July 2015, making up a total outstanding sum of $399,818.04.  He said peculiarly that was the amount as advised by the plaintiff’s solicitors Messrs Cheung & Choy (“C&C”) after commencement of the proceedings. The outstanding principal is a fact.  One wonders why it was not decided or calculated by the lender but “advised” by its solicitors.  There must have been some irregularities in the loan which the solicitors helped to put right or dress up after commencement of this action.  There was no evidence how the outstanding principal was arrived at.  There was no dispute that the defendant had paid four instalments of $12,000 each and thatthe interest rate was 3% per month.  On the basis of these data, the amountof principal repaid would be negligible, and the outstanding principal wouldremain at about $400,000.  A provision of 17% over and above that amountsuggests there was some other hidden payments which the plaintiff wished to secure.  Indeed, as the evidence unfolds, there was.

12.  The defendant’s evidence is that she was told by the plaintiff’s staff that it was the practice of the money lending business that an upfront interest had to be paid.  She understood that as pre-paid interestbefore the interest actually accrued at the end of the month.  She agreed to pay upfront interest in respect of both the First Loan and the Second Loan.  Though that condition was not stated in the First Loan agreement or the Second Loan Agreement, her assertion was not seriously disputed by Ho.  In respect of the First Loan, it was even conceded by C&C in their letter dated 23 November 2017 following the meeting and discussion ordered by Registrar Lung.  In respect of the Second Loan, it was expressly stated in C&C’s letter dated 24 March 2017 that there was an upfront interest of $60,000.  In reply to the defendant’s query about the surplus from the second portion of the Second Loan, i.e. the sum of $472,000, C&C wrote:

“ We write hereby to confirm that the actual amount received by you on or around 31 July [2015] (i.e. the date of the Loan Agreement) shall be as follows: -

	Principal	$2,400,000.00
Less:	Solicitor’s fee	($7,000.00)
	Upfront interest	($60,000.00)
	Reserved amount for the redemption of outstanding amounts owed to Goldmax Finance Limited	($1,650,000.00)
	Redemption of outstanding amounts owed to Fast Billion	($412,000.00)
		$271,000.00 ”

13.  From this letter, it was the plaintiff’s case that the upfront interest and the redemption sum for the First Loan made up the total sum of $472,000 which was what the second portion of the Second Loan was set aside for.  The amount outstanding under the First Loan was expressly stated as $412,000, which simply was the sum total of the principal of $400,000 (which could not have been significantly reduced by the four instalments), plus one month’s interest as penalty for early redemption.  In other words,it is the plaintiff’s stance that an additional upfront interest of $60,000 was charged under the Second Loan.  It was not, as the defendant was led to believe, interest paid in advance, but an additional interest payment.  This upfront interest was not provided for in the Second Loan Agreement or in any related documents.  It was irregular for the plaintiff to charge this upfront interest without stating it in the loan documents.  This letter also showed that it never was the plaintiff’s stance that there would be any or any significant surplus left from the second portion of the Second Loan.  That was the plaintiff’s stance in March 2017.

14.  Then, pursuant to the Order of Registrar Lung made on 6 November 2017, the parties had a discussion with a view to agree on theoutstanding loan.  The plaintiff changed its stance.  It mentioned nothing about upfront interest of $60,000 for the Second Loan and conceded an upfront interest of $12,000 for the First Loan.  It worked out the surplus under the second portion of the Second Loan and applied it to reduce the principal of the Second Loan from $2,400,000 to $2,312,830.69 as set out in C&C’s letter dated 23 November 2017.  Obviously, it was on the basis of this letter that Ho made his witness statement dated 24 January 2018, a fewmonths later, saying that the plaintiff was “advised” by its solicitor that theoutstanding principal for the First Loan was $399,818.04.  Ho’s evidence isobviously an afterthought, figure juggling or whitewash to conform withthe Ordinance, as alleged by the defendant.  I give no weight to his evidence.  I prefer the defendant’s evidence, but I do not accept her computation, which I consider was deliberately distorting the true consequence. 

15.  The evidence showed that the parties acted on the basis that there was an agreement for upfront interest of $12,000 under the First Loan and $60,000 under the Second Loan.  I therefore find that it was the parties’ agreement that the defendant shall pay upfront interest of $60,000 in addition to the interest as stated in the Second Loan Agreement and that the second portion of the Second Loan was a sum very close to a full and final settlement of the amount outstanding under the First Loan.  The sum was so close that the plaintiff did not find it necessary to account for it.  That was the inference to be drawn from C&C’s letter of 24 March 2017.  That was the actual agreement of the parties.  But in breach of section 18 of the Ordinance, this upfront interest was not stated in the Second Loan Agreement or associated documents.  It was a deliberate attempt to circumvent the Ordinance by not mentioning this upfront interest in the Second Loan Agreement.  Realising the breach and as a result of RegistrarLung’s Order, the plaintiff was compelled to drop its claim for upfront interest and prepared a computation showing that the surplus under the second portion of the Second Loan had been applied to reduce the principal under the Second Loan.  It was all an afterthought, figure juggling, or whitewash to conform with the Ordinance.

16.  On the basis of the evidence, what the defendant was advanced under the First Loan was not $400,000 but $388,000 [1].  Using that as the initial principal and the interest rate of 3% per month, the outstanding principal as at 18 April 2015 would be $387,640 [2] and that as at 18 July 2015 would be $386,493.90 [3].  Pursuant to the meeting and discussion ordered by Registrar Lung, C&C also conceded in a without prejudice letterdated 23 November 2017, that the outstanding principal as at 18 July 2017 was $386,493.89 and the total outstanding sum under the First Loan was $391,830.69.  C&C’s concession tallies with the above calculation.  As the plaintiff failed to show how the sum of $399,818.04 was arrived at andas the defendant’s evidence of payment of upfront interest appeared credible,I find that the outstanding sum under the First Loan was $391,830.69 as conceded in C&C’s letter dated 23 November 2017.  Accordingly, I find there was a surplus of $80,169.31 from the second portion of the Second Loan which should have been refunded to the defendant on or around 31 July 2017.  As a result of Registrar Lung’s Order, the plaintiff concocteda case that this surplus had been applied to reduce the principal sum under the Second Loan.  That, as I found, was a concoction and not what was agreed between the plaintiff and the defendant.  That concoction or change of mind could not change the fact that that sum had been misappropriated by the plaintiff.  It could only be regarded as concealed or undisclosed interest.  The principal of the Second Loan was $2,400,000 as stated in the Second Loan Agreement.

17.  The defendant paid two instalments in the sum of $63,700 and $62,836 in August and September 2015.  After adding the interest accrued during these two months at the rate of 30% per annum based on the outstanding principal of $2,400,000 on a reducing balance basis and deducting these instalments, the amount outstanding as at 30 September 2017 was $2,393,729.90 [4].  The additional interest for the period of 76 daysfrom 1 October to 15 December 2017 on the above outstanding sum at the rate of 30% per annum was $149,526.14 [5].  The amount outstanding as at 15 December 2017 is therefore $2,543,256.04 [6].  This is about $1,600 less than that pleaded in the statement of claim.

Breach of section 18 of Money Lenders Ordinance

18.  Section 18 requires any loan agreement with a money lender should comply with certain requirement as to form and content, otherwise it shall not be enforceable.  However, if in all the circumstances it would be inequitable not to allow such agreement or security to be enforced, the court has absolute discretion to order enforcement to such extent, and subject to such modifications or exceptions, as the court considers equitable.  The section provides as follows:

“ 18. Form of agreement

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

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

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

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

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

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

(b) the name and address of the borrower;

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

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

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

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

(g) the terms of repayment of the loan;

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

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

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

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

19.  The Second Loan Agreement was in writing.  Except for the omission of the upfront interest of $60,000 as admitted in C&C’s letter of 23 March 2017 or $80,169.31 as I have found, the agreement and related documentation apparently contain all the information required by section 18.  The defendant complained that the plaintiff “has made his documents as ambiguous and misleading as possible for the purpose of their compliance to the Money Lenders Ordinance, Part III Section 18.”  She alleged the plaintiff of “[misleading] her to omit [the plaintiff’s] underpayment of HK$80,169.31”.  The ambiguity she was relying on was a representation,presumably in the Disbursement Schedule, that the outstanding balance of the First Loan was $472,000.  This is all tied up with the upfront interest as a result of which the interest rate stated in the Second Loan Agreement was substantially understated.

20.  The outstanding balance, according to C&C’s letter dated 23 November 2017, was only $391,830.69.  The Disbursement Schedule was prepared by the plaintiff.  In the schedule, the defendant acknowledgedagreement to settle, inter alia, the First Loan.  The “settled amount” statedin the schedule was $472,000, but was expressly stated to be “approximates”. At the bottom of the schedule was a note stating:

“ The exact settled amount may vary from the above and is subject to final disbursement arrangement.”

That may well explain why a surplus of 17% was reserved in the second portion of the Second Loan.  But the schedule must be viewed against the backdrop that even in March 2017 it was the plaintiff’s case that the second portion of the Second Loan included a sum set aside for payment of upfront interest under the parties’ actual agreement.  The Disbursement Schedule was just a whitewash to cover up the hidden interest. The alleged application of the surplus to reduce the principal of the Second Loan was an afterthought occasioned by Registrar Lung’s Order. It never was the plaintiff’s intention to return this surplus to the defendant as it wasintended to be an additional upfront interest charged under the parties’ actualagreement plus some over-calculated interest as a result.  The Second Loan Agreement was therefore deficient in that it failed to disclose this upfront interest of $60,000 or $80,169.31. The plaintiff was in clear breach of section 18. This breach could not be rectified by an afterthought and a re-computation turning what was misappropriated as upfront interest into a surplus applied to reduce the principal of the Second Loan.

21.  Mr Cheng, counsel for the plaintiff, submitted that despite breach of section 18(1) the court has discretion under section 18(3) to orderenforcement to such extent, and subject to such modifications or exceptions,as the court considers equitable.  He referred me to Brother’s Company (a firm) v Ah Puk Transportation (a firm) [7]. In that case, a money lender lent two sums of $40,000 and $60,000 to a borrower at an interest rate of 46.8% per annum. The borrower issued two cheques as security.  The transaction was conducted with a large measure of informality.  No memorandum containing the information required by section 18 was issued to the borrower. The borrower defaulted after about a year.  The money lender presented the cheques for payment which bounced and the money lender sued on the cheques. Mayo J (as he then was) adopted the approach of Woodhouse J in Adams v Paul’s Properties Ltd [8] in applying similar New Zealand money lending legislations.  Woodhouse J said at p 171 lines 33 – 45:

“ I think that in order to estimate ‘the nature, extent and effect’ of the original default the Court would need to take into account the way in which the transaction had developed. Attempts by a moneylender during the course of the contract to make use of some objectionable feature of it could well have significance, in my opinion, just as the size of the principal sum still outstandingand its proportion to the original loan could influence a decision as to the equities, not only as between the parties but also in relation to the regulatory purposes of the Act as a whole. I think that the circumstances to be taken into account should include such matters as the relative status of the parties, the nature and extent of the default, the way in which it arose, the implications for the borrower, and the attitude of the lender and the general appearance of the contract throughout.”

Mayo J then rejected the money lender’s argument that the borrower had received substantial loans, had clearly fully understood all of the salient features of the transaction and had been willing to go along with the arrangements.  Mayo J considered the very high interest rate and blatant disregard of the provisions of the Ordinance as two important factors in the exercise of his discretion under section 18(3).  He also thought it necessary to consider the wider implications if the discretionwere exercised in favour of the money lender.  He regarded the case asa flagrant and obvious case of breach and refused to exercise the discretion.He said:

“ I think that it is also necessary for me to consider the wider implications of this case. What are the implications if I exercise this discretion in favour of the plaintiffs. As I have already indicated they have chosen to disregard the provisions containedin Section 18 of the Ordinance. If in a flagrant and obvious case such as the present one I exercise the discretion in favour of the plaintiffs there would surely be very few cases where it would be proper to withhold the exercise of the discretion. This would mean that money lenders could disregard the operation of the lawwith virtual impunity. I do not think that this is what was intendedby Section 18(3). Undoubtedly there are excellent reasons why the legislature chose to lay down the requirements contained in Section 18. One of the reasons surely would be to help prospective borrowers from acting against their own best interests. It is also clearly the intention that borrowers should be made fully conversant with their rights. I can think that there would be few occasions when a court would be prepared to exercise this discretion in favour of a money lender who had made little or no attempt to comply with the requirements of the law. It is perhaps worth observing in passing that the legislature appears to take a serious view of contraventions of the requirements of the [Money Lenders Ordinance]. Serious criminal sanctions are included in the Ordinance for non-compliance.”

22.  I agree with Mayo J that Woodhouse J’s approach was very sensible.  In an earlier decision in Ross Cole Investment Corpn v New Fashions Ltd [9]and a later decision in Marac Finance Ltd v Virtue [10], both from New Zealand, the courts held that the most important consideration to be borne in mind was whether the borrower had suffered any prejudice as a result of the non-compliance with the statutory requirement.  The focus of these decisions is on the effect of the breach whereas the focus in Adams was on the seriousness of the breach.

23.  In my view, the circumstances in which such breach arose are innumerable.  There is no single approach to determine how the discretion under section 18(3) is to be exercised.  Presumably because of the high rate ofinterest money lenders charge and the means most of them engage in collecting the debts and in conducting their business, people do not have a positive impression about money lenders.  But money lenders who conduct their business properly are not to be equated as “loan sharks”.  They have a purpose to serve in the society.  There was a good reason for the legislaturenot to ban their existence but to regulate their activities.  They provide the much needed finance for people who are unable to offer quality security required by banks and other financial institutions.  These people are high risk borrowers.  There is a high risk that their debts might become irrecoverable and the borrowers might go bankrupt.  It is therefore permissible for money lenders to lend to those people at a higher interest rate to cover their risks.  The traditional pawnbrokers, for example, used to charge $1 upfront interest and $3 interest a year for every $10 lent, charging interest at the rate of 44.44%.  The maximum interest rate permitted under the Money Lenders Ordinance is 60%.  To my understanding, the usual rate is 30%.  This rate is about ten times that charged by banks and financial institutions, but is by no means exorbitant or unconscionable in the circumstances.  For the borrower who is unable to offer quality security for the purpose of obtaining a bank loan, borrowing at such a high interest may be the only choice and a better evil than immediate financial collapse or bankruptcy.  The law recognizes the principle of freedom of contract and strikes a balance by regulating money lending activities than prohibiting them.  The purpose of the Ordinance is to regulate the activities for the purpose of protecting the borrower rather than to punish the money lender.

24.  Section 18(3) gives the court a very wide spectrum of discretion.  It ranges from annulling the loan agreement in one end to enforcing the agreement in its entirety in the other if it would be inequitablenot to enforce the agreement.  In between the two ends of the spectrum, thecourt has discretion to re-write the loan agreement in such terms as the court considers equitable.  For the purpose of doing justice between the parties,the court may enforce the loan agreement on such terms as it thinks equitable. The primary test is whether it would be inequitable not to enforce the agreement and what part of the agreement would be equitable to enforce. 

25.  I think in exercising its discretion under section 18(3), the court should adopt a two stage process.  It should first consider whether it would be inequitable not to enforce the loan agreement or security.  If it would be inequitable not to, then it should next consider to what extent, and subject to what modifications or exceptions, it would be equitable to enforce the loan agreement or the security.  For the purpose of the first stage of the process, the following factors are relevant:

(1)   whether there is any vitiating conduct on the part of the money lender in the making of the loan agreement and in its enforcement; such conduct includes any oppression, coercion or inducement in the making of the loan agreement which is short of that required to avoid the agreement; and any objectionable features, such as the status of the parties, terms and conditions prejudicial to the borrower, and the money lender’s conduct in in enforcing the agreement;

(2)   the nature and consequence of and to a lesser degree the reason for the breach: whether it was a deliberate breach committed for the purpose of circumventing the Ordinance or an inadvertent, technical or innocent breach; and

(3)   whether there were any attempts by the moneylender during the course of the contract to make use of some objectionable features of the loan agreement.

With respect to Mayo J, I do not think it necessary to put in the weighing pan the wider implication the exercise of the discretion in favour of the money lender may have.  If it would be inequitable not to allow the enforcement, the agreement should be enforced regardless of the implication.  That is what section 18(3) provides.  In fact, I could not see how any adverse implication could arise by the court ordering to be done what would be inequitable if it is not done.

26.  As for burden of proof, I think the borrower bears the evidential burden of proving the vitiating elements.  Once that is proved, the money lender has to discharge the legal burden of proving it would be inequitable not to allow the loan agreement to be enforced.  Given the paramount purpose of the Ordinance is to regulate such money lending activities and to protect the borrower, once a vitiating element is proved, no discretion should be exercised in favour of the money lender.  There is no need to proceed to the second stage of the consideration process.  But absent any such vitiating elements, the discretion should be exercised to give effect to the agreement.  If the parties freely and voluntarily entered into a loan agreement with full knowledge of its terms and conditions, including the high interest rate, there is no reason why he should not be held to the contract merely because there was an inadvertent breach of section 18(1) committed by the money lender.  It is not open to him to argue that by reason of the high interest rate or his own impecuniosity or other personal circumstances, he should be released of his liability under the loan agreement.  I am not aware of any common law principle which would allow a party to be discharged from his obligations under a contract on that basis.  If the legislature has allowed the existence of such loan agreements, there is also no public policy reason not to allow the agreement to be enforced and thereby occasioning loss to the money lender for an inadvertent breach.  Under the circumstances, it would be inequitable not to enforce the loan agreement.

27.  If it would be inequitable not to enforce the loan agreement, the next stage is to consider to what extent and subject to what modifications or exceptions the loan agreement should be enforced.  At this stage of the consideration, the court should focus on the prejudice occasioned to the borrower as a result of the breach and the equities as between the parties and in relation to the regulatory purposes of the Ordinance as a whole.  The following factors are relevant:

(1)   the prejudice occasioned by the borrower as a result of the breach;

(2)   the equities as between the parties, including the interest rate, the interest paid and the amount of outstanding principal; and

(3)   of lesser importance and depending on the individual case,the way in which the default arose, the implications for the borrower and the attitude of the lender and the general appearance of the contract throughout.

If prejudice is suffered by the borrower, the discretion should be exercised in such a way as to restore the borrower to the position he would be in had there been no breach.  The court has wide discretion in ordering enforcement subject to such modifications and exceptions as is equitable in the circumstances after taking into account the equities as between the parties.  If no prejudice is suffered, the breach was immaterial.  The loan agreement should be allowed to be enforced substantially in accordance with its terms, subject, perhaps, to some minor modifications or exceptions to reflect the court’s disapproval for the money lender’s breach.

28.  In the present case, the breach is the failure to mention the upfront interest and/or surplus of $80,169.31 in the Second Loan Agreement.  It was a significant sum equivalent to more than one month’s interest.  It was a flagrant breach committed in aggravating circumstances for the purpose of concealing the additional interest charged.  The effect was to increase the effective interest rate from the stated contractual rate of 30% to 41.38%.  The Disbursement Schedule was prepared representing that the second portion of the Second Loan was set aside for the purpose of settling the First Loan with the surplus to be returned to the defendant, when there was no intention to ever return the surplus of a significant sum of $80,169.31.  The schedule was to cover up the misappropriation of this sum of concealed interest.  All along, the defendant was under a misapprehension created by the plaintiff that the upfront interest was just interest paid in advance and that she would be returned this surplus.  Had she known that she would not, she might not have entered into the Second Loan Agreement.  When that was discovered, the plaintiff tried to dress up the fraud by making a computation converting the said sum which it had misappropriated as having been applied to reduce the principal.  It was further aggravated by the plaintiff’s attempt to enforce the loan agreement as if it were a loan agreement at the interest rate of 30%.  That was an attempt to deceive the court.  The breach was deliberately committed for the purpose of circumventing the Ordinance and to cover up an almost 50% increase in the already high interest rate.  I am not satisfied that in all the circumstances it would be inequitable that the Second Loan Agreement should be held not to be enforceable.  In the circumstances, there is no needto proceed to the second stage, though the equities as between the plaintiff and the defendant lie in favour of the plaintiff because only a very small portion of the loan advanced has been paid.

Breach of section 19 of the Money Lenders Ordinance

29.  The defendant accused the plaintiff of breach of section 19(1)‌(a) and (b) and argued that by reason of section 19(4) the plaintiff is not entitled to recover any sum under the Second Loan Agreement.  She said she had written to C&C on 15 January 2017 requesting for information about the date on which the Second Loan Agreement was made and the amount of payment received but C&C only responded on 24 March 2017. These provisions are as follows:

“ 19. Duty of money lender to give information to borrower

(1) In respect of every agreement, whether made before or after the commencement of this Ordinance, for the repayment of money lent by a money lender, the money lender shall, on demand in writing being made by the borrower at any time during the continuance of the agreement and on tender by the borrower of the prescribed fee for expenses, supply to the borrower or, if the borrower so requires, to any person specified in that behalf in the demand, a statement (consistingof the original and a copy) signed by the money lender or his agent showing—

(a) the date on which the loan was made, the amount of theprincipal of the loan and the rate per cent per annum of interest charged;

(b) the amount of any payment already received by the money lender in respect of the loan and the date on which it was made;

…

(4)   If a money lender to whom a demand has been made under this section fails without reasonable excuse to comply therewith within 1 month after the demand has been made, he shall not, so long as the default continues, be entitled to sue for or recover any sum due under the agreement on account either of principal or interest, and interest shall not be chargeable in respect of the period of default.” 
       (My emphasis added)

30.  With respect, her argument was badly misconceived.  Section 19(1) operates during the continuance of the loan agreement.  The defendant’s request for information via her letter dated 15 January 2017 was made after commencement of this action.  That was long after the agreement was terminated upon her default in payment.  There was no evidence from the defendant of making any request for information before the default.  The sanction under section 19(1) does not apply.

Breach of section 24

31.  By lumping the upfront interest of $60,000 and the first month interest of $63,268 together, the defendant argued that the effective interest rate for the first month was 61.63% [11] which just exceeded the prescribed maximum of 60% permitted under section 24(1) [12].  Hence, she argued that pursuant to section 24(2) the Second Loan Agreement shall be unenforceable.  I am unable to agree with her computation.  Under Schedule 2 to the Money Lenders Ordinance, effective interest rate shall be calculated on the basis of the total interest accrued during the entire period of loan.  Mr Cheng produced a computation in accordance with Schedule 2 on the basis of a principal of $2,400,000 and an upfront payment of $79,181.96, instead of $80,169.31 and arrived at an effective interest rate of 43.18%.  Using an upfront interest payment of $80,169.31,as he should have, the effective interest rate would be marginally but not significantly higher.  Section 24(2) is therefore not engaged.

Conclusion

32.  For reasons as explained in paragraphs 18 to 28, the Second Loan Agreement was in breach of section 18 of the Money Lenders Ordinance and I am not satisfied that in all the circumstances it would be inequitable that the Second Loan Agreement should be held not to be enforceable.  I therefore hold that the Second Loan Agreement is unenforceable against the defendant.  The plaintiff’s action is accordingly dismissed with a costs order nisi that it shall pay the defendant’s costs.  The costs are to be taxed on party and party basis, if not agreed.