WING HANG CREDIT LTD v. CHAN KIT HA AND ANOTHER

HCMP 2586/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2586 OF 2005

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J U D G M E N T

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1.  This is an appeal against the decision of Master S. Kwang dated 24 April 2008.  By that decision, Master Kwang granted the Plaintiff’s application, commenced by way of Originating Summons on 24 November 2005, to recover possession of the property known as Flat G on the 8^th Floor, Block 2 (Belleve Court), Pictorial Garden, Nos. 19-21 On King Street, Shatin, New Territories, Hong Kong (“the Property”).  The Master further ordered the 1^st Defendant to pay a sum of $1,339,750.16, together with interest on the sum of $1,144,955.74, being money due to the Plaintiff and secured by a Mortgage dated 15 December 2003 (“the Mortgage”).

Background

2.  The Defendants, Madam Chan and Mr. Yuen, are wife and husband.  They purchased the Property in joint names in November 1998 for $2,650,000.  The purchase was financed by a mortgage loan granted by the Standard Chartered Bank.  They were required to repay that loan by monthly instalments of about $25,000.

3.  Mr. Yuen used to carry on business as a construction contractor.  His business experienced cash flow problems sometime in 2003.  He was sued by some workers for wages which had fallen into arrears.  Mr. Yuen was eventually adjudicated bankrupt on 2 August 2004.

4.  Meanwhile in 2003, because of his financial predicament, Mr. Yuen had difficulty in keeping up with the repayments due under the Standard Chartered Bank mortgage loan.  At that time, according to the Defendants, the outstanding sum due under the Standard Chartered Bank loan was about $1,220,000, that is to say, the equivalent of approximately another 5 years of monthly repayments.

5.  In his affirmation, Mr. Yuen recounted how he came across some newspaper advertisements offering assistance in loan re-structuring.  He approached the advertised agency who apparently indicated that “Wing Hang Bank” would be able to re-finance his existing loan by way of a new mortgage loan with terms that would effectively extend the repayment period to 15 years with a reduction of his monthly instalments to some $9,000.

6.  Mr. Yuen said that the staff at the agency told him that “Wing Hang Bank” offered 2 different plans to those who desired to borrow sums of less than 70% of the value of the property offered for security.  Such borrowers would be able to opt either for a plan with interest rate at prime rate minus 1.5% to 1.75% p.a., or for a plan with a fixed interest rate at the then prevailing prime rate of 5% .

7.  According to Mr. Yuen, the market value of the Property at the time was around $1.9 to $2 million.  Since the loan he required would only be about $1,225,000, he was eligible to choose between the 2 plans on offer.  He decided on the fixed-interest loan and asked the agency to help process his application with the lender.  About 3 weeks later, he was notified by the agency that he and Madam Chan should proceed to sign the relevant documents at a firm of solicitors designated by the lenders.

8.  There is no evidence that before the Defendants attended the office of the solicitors, there had been any direct contact between the Defendants and staff of the lender (as opposed to the agency).  I should mention that a facility letter issued by the lender dated 19 November 2003 (“the Facility Letter”) has been produced in evidence.  It contains the signatures of both Defendants.  But, as I will discuss in more detail later, there is an issue as to when the Facility Letter was actually signed.

9.  At the solicitors’ office, the Defendants were received by a legal executive of the firm.  Although the Defendants are now unable to recall her identity, it seems clear that the person attending the Defendants was Miss Tsoi Lai Wah, whose name appears as the person witnessing the Defendants’ execution of the Mortgage on that occasion.

10.  It is the Plaintiff’s case that before this meeting, the Facility Letter was already signed by the Defendants, and hence only the Mortgage was dealt with at the solicitors’ office.  The Defendants, on the other hand, contended that at the meeting, they were explained both the Mortgage as well as the terms of the Facility Letter, and they signed both documents at the solicitors’ office.  As will be seen, the question whether the Facility Letter was signed on this occasion is highly relevant to the Defendants’ account of what took place at the meeting with Miss Tsoi.

11.  According to the Facility Letter, the lender was to grant a loan to the Defendants in the sum of $1,225,000.  Clause (3) expressly stated that the loan together with interest was to be repayable by 180 monthly instalments of $9,688 each, which, as Mr. Yuen pointed out, was calculated on the basis of interest at 5% p.a.  Clause (3) was, however, subject to clause (2) which provided that interest was to be charged on the outstanding balance of the loan “at [the Plaintiff’s] Best Lending rate or such other rate as [the Plaintiff] may from time to time in [its] absolute discretion determine” and that the Plaintiff reserved its right “to adjust such rate from time to time as [it thinks] fit”.

12.  According to the Defendants, it was not until Miss Tsoi had explained the documentation to them did they realize, for the first time, that the lender was not in fact Wing Hang Bank but one of its subsidiaries instead.  According to Mr. Yuen, Miss Tsoi explained that the Plaintiff and Wing Hang Bank was really the same entity (一體的).

13.  Furthermore, when the Facility Letter was explained to them, they noticed that the terms regarding interest rate differed materially from their understanding that a fixed rate of interest at 5% p.a. was to apply to the loan.  They sought clarification immediately from Miss Tsoi.  On their evidence, Miss Tsoi’s explanation was that the Facility Letter and the Mortgage were standard documents and could not be modified, and that if there was indeed prior agreement between them and the lender that the loan was to carry a fixed rate of interest, the lender would have a record of such agreement and they need not be concerned about any variation in the interest rate.  The lender would abide by any such agreement.

14.  The Defendants’ case is that they had singed the Facility Letter and the Mortgage only because of the explanations given by Miss Tsoi.

15.  Miss Tsoi, on the other hand, has given her account of the meeting.  Her Affirmation was relied upon as part of the Plaintiff’s evidence.  In her Affirmation, Miss Tsoi stated that she had explained the main terms of the Mortgage to the Defendants.  She could not recall whether she had told the Defendants that the Plaintiff and Wing Hang Bank were the same bank or company, but if she had been asked the question, she would have answered that they were two separate legal entities.  Neither was she able to recall whether she had told the Defendants that the Mortgage was in standard form and could not be varied.  She said if she had been asked about the possibility of varying the terms, she would have answered that the document was in a pre-approved form and could not be varied usually.  She said the Facility Letter was not signed in her presence although she was not able to say when it was signed.  According to Miss Tsoi, as far as she could recall, she had never dealt with a mortgage transaction of the Plaintiff which offered a fixed rate of interest.

16.  Apart from the issues arising from the parties’ different account of the meeting at the solicitors’ office, Madam Chan further alleged (in her 4^th Affirmation dated 30 March 2007) that she had been pressurized by Mr. Yuen into signing the Mortgage and the Facility Letter.  Madam Chan asserted that she did not have prior knowledge of Mr. Yuen’s application for re-financing, and that she was simply asked to attend the solicitors’ office on the day without being allowed much time to consider her own position.  At the solicitors’ office, there was no explanation regarding the transaction’s practical implications on her, and she had not been advised to seek independent legal advice.

17.  What is not disputed is that after the Defendants’ execution of the Mortgage, the loan was drawn down and the bulk of the money (over 90%) was applied to discharge the Defendants’ Standard Chartered Bank loan.  The practical effect of the refinancing was an immediate reduction in the amount of the Defendants’ monthly instalments with an extended period for repayment.  The transaction also released some equity from the Property in the sum of just over $100,000, less than 10% of the loan.

18.  In about September 2004, that is, 9 months after the advancement, the Plaintiff notified the Defendants of a revision of the interest rate to 5.125% p.a.  The Defendants’ evidence is that they had immediately called one Mr. Wai of the Plaintiff because the variation did not accord with their agreement with the Plaintiff.  According to them, as a result of the complaint the interest rate reverted to 5% p.a. in November 2004.

19.  In the meantime, Mr. Yuen’s financial situation did not improve despite the refinancing.  He was declared bankrupt in August 2004.  However, the couple continued to make repayments for a few months before they went into default in June 2005.  As at the date of the last repayment, the outstanding principal stood at $1,144,955.74.

20.  Against the foregoing background, the following issues arise on this appeal:

(i)  Whether the impugned Mortgage should be held to be ineffective as against Madam Chan on the ground that Mr. Yuen had exercised undue influence on her;

(ii)  Whether the Plaintiff should be held to any agreement to charge only a fixed rate of interest at 5% p.a. on the loan;

(iii)  Whether the impugned Mortgage should be held to be ineffective as against the Defendants by reason that they had been induced into the transaction by misrepresentations of Miss Tsoi as agent for the Plaintiff?

21.  In addition, counsel have also referred me to clause (4) of the Facility Letter which provided for interest to be charged at the rate of 4.5% per month on overdue monthly instalments.  The Defendants contended that the overdue interest offends the Money Lenders Ordinance and is unenforceable.

22.  Before I deal with the issues, I should mention that despite Mr. Yuen’s bankruptcy, leave has been granted to the Plaintiff to pursue its claim to recover possession of the Property against him.  I was told at the hearing that Mr. Yuen’s bankruptcy was due to be discharged on 2 August 2008.  But it would appear that neither his bankruptcy nor his discharge has any bearing on the issues I have to deal with on this appeal.

Summary Disposal of the Originating Summons

23.  It is common ground that the procedure laid down in Order 28 for originating summonses is applicable to mortgage actions commenced under Order 88.  Under Order 28, rule 4, the Court has the power to dispose of the claim summarily by giving judgment in favour of a plaintiff when it is satisfied that the liability of the defendant is established.

24.  As it was said by Yeung J. (as he then was) when giving the judgment of the Court of Appeal in Bank of China (Hong Kong) Limited v. Keen Lloyd Resources Limited, unrep. CACV 1787 of 2001, 26.2.2002:

“18.   …..a plaintiff must prove its case to the required standard whether it is a case under Order 14, Order 86 or Order 88 and if the case involves disputes as to facts which disputes need to be resolved before the case can be properly adjudicated upon, then such disputes must be resolved, if necessary by way of a trial.

19.  On the other hand, Order 28, rule 4 gives the court a wide discretion to ‘make such order in favour of the plaintiff as the nature of the case may require …..’  If the case can be dealt with summarily and the nature of the case requires, there is no reason not to grant summary judgment in favour of the plaintiff.  This is the approach adopted in Kincheng Banking Corporation v. Centresign Company Limited HCMP 7239/2999 (unreported).  This is the approach we adopt.”

25.  I would follow the same approach. 

26.  In the present case, it is not disputed that the Defendants had signed the Mortgage.  Their signatures on the Mortgage are prima facie evidence of their consent to be bound by its terms.  Upon the Defendants’ default in repayment, the Plaintiff would have been entitled to judgment on its claim summarily, unless of course, the ostensible agreement of the parties is vitiated by misrepresentation, undue influence, or some such defence.

27.  It is, therefore, incumbent upon the Defendants to demonstrate a bona fide defence.  In this sense, the approach can be said to be akin to an application for summary judgment under Order 14.

28.  In view of the nature of the defences disclosed in the affirmations, I have invited counsel to give consideration whether it might be appropriate for directions to be given under Order 28, r.3 for at least some part of the evidence to be taken orally, if necessary with cross-examination of some of the deponents, so as to enable a final determination of the matter to be made on this appeal.  However, neither party was attracted to such a course, and counsel indicated that I should simply approach the appeal at this stage as if the Plaintiff were applying for summary judgment by way of Order 14.

Undue Influence

29.  For the reasons given below, I am clearly of the view that Madam Chan’s defence of undue influence must be rejected.

30.  Mr. Bedford, representing Madam Chan, argued that the transaction was disadvantageous to Madam Chan and not explicable by ordinary motive.  She had only reluctantly signed the Mortgage because her husband had pressurized her into doing so.  Mr. Bedford stressed that the loan from the Plaintiff was not simply to replace the Standard Chartered Bank mortgage.  The cash sum released on this transaction was used solely for Mr. Yuen’s business with which Madam Chan was not involved and she had derived no benefit from the use of such sum.  In the circumstances, Mr. Bedford argued, the Plaintiff was “put on inquiry” and should be required to take various steps to eliminate the risk of Madam Chan having entering into the transaction under the undue or improper influence of her husband.  No such steps had been taken by the Plaintiff, acting through Miss Tsoi.

31.  I do not accept the argument.  As noted earlier, the loan from the Plaintiff was procured to alleviate Mr. Yuen’s financial difficulty at the end of 2003.  The immediate effect was a substantial reduction in the amount of monthly instalments as the repayment of the Plaintiff’s loan was spread over another 15 years.  It was essentially a re-financing with the bulk of the new loan being applied to discharge the previous mortgage under which, as Mr. Suen (representing the Plaintiff) has pointed out, Madam Chan and Mr. Yuen were jointly liable.  Clearly from that point of view, it would not be right to say that the transaction conferred no benefit on Madam Chan when her liability under the previous mortgage was to be discharged.

32.  I would in fact go further.  In considering the effect of the transaction, one should not lose sight of the reality of the situation.  Madam Chan’s own interest was so bound up with Mr. Yuen’s that any alleviation of his financial predicament must clearly be beneficial also to the family, and to each of them individually.  This applies also in relation to the cash sum released from the equity of the Property.  It cannot be said that just because the sum was applied to Mr. Yuen’s business (even assuming that to be the case) Madam Chan derived no benefit from it.  When one considers the effect and purpose of the transaction, it is wholly artificial to regard Madam Chan as having an interest distinct and separate from that of her husband, or that the transaction was only beneficial to Mr. Yuen and not Madam Chan.  I am not persuaded that the transaction was financially disadvantageous to Madam Chan in any real sense.

33.  More importantly, I am far from convinced that the circumstances surrounding the transaction were such that the Plaintiff should be “put on inquiry”.  From the available evidence, there is nothing from the features of the transaction as then known to the Plaintiff to raise any concern that the transaction was anything other than a normal refinancing arrangement (see C.I.B.C. Mortgage Plc. v. Pitt [1994] 1 AC 200, esp. at 211D).  Even the cash sum generated from the transaction was paid into the Defendants’ joint bank account.  Indeed, as is apparent from Messrs. Cheung Fung & Hui’s letter to the Plaintiff dated 12 December 2003, the Plaintiff was specifically informed that

“….. the Mortgagor/Borrower intend to utilize the available credit facilities towards payment of the outstanding loan balance with the existing mortgage, Standard Chartered Bank for the Property.”

34.  There is really nothing to indicate to the Plaintiff that the transaction might have been procured by means of improper pressure or undue influence by the husband on Madam Chan.

35.  In any event, I have considerable misgivings about the bona fides of this undue influence defence.  As Mr. Suen has submitted, Madam Chan’s allegation that she was pressurized into signing the Mortgage only emerged for the first time in her 4^th Affirmation.  Even giving due allowance for the fact that the initial two “defences” were filed by Madam Chan without the benefit of legal advice, it remains inexplicable why no reference to any allegation of undue influence was made in her 3^rd Affirmation which was filed on her behalf by her legal advisers.  Indeed, the whole tenor of her 3^rd Affirmation was that she was quite willing to enter into the transaction with a view to mitigating Mr. Yuen’s financial problem.  Her complaint was confined only to the alleged representation by Miss Tsoi that the lender would abide by any agreement as to charging a fixed rate of interest on the loan.  There is no explanation whatsoever why any matter relevant to an undue influence defence could have been omitted completely from her previous Affirmations.  I am unable to accept that the allegation in her last affirmation that she was pressured into executing the Mortgage by her husband is either believable or bona fide.

Agreement to Charge Fixed Rate of Interest

36.  According to the Defendants, the suggestion that the lender was to offer two plans with different rates of interest was related to them by the staff of certain finance agency.  The agency in question was described as a debt-restructuring company (債務重組公司), but little else is known about it.  There is no evidence as to its connection with Wing Hang Bank or the Plaintiff, if any.  Other than the fact that the agency had referred “Wing Hang Bank” to the Defendant as the prospective lender, there is really nothing in the evidence from which one can attribute any statements uttered by staff of the agency as statements made for and on the Plaintiff’s behalf or in the capacity as agent of the Plaintiff.

37.  In this connection, I note that among the documents produced by Mr. Yuen was a photocopy of the name cards of 2 employees of the Plaintiff.  However there is no explanation as to the relevance of anything said or done by these employees in relation to any of the issues in the present case.

38.  It was then said that a material promise was made to the Defendants when Miss Tsoi assured them that if they had reached prior agreement with the lender for a fixed rate of interest to be charged on the loan, the Plaintiff would abide by such agreement.  As I understand it, the essence of the Defendants’ case amounts to this: that Miss Tsoi’s representation that the Plaintiff would honour any prior agreement to charge only a fixed rate of interest was a representation made by her as agent for the Plaintiff; and being a material representation which had induced the Defendants to enter into the transaction, amounted to a term of the contract binding on the Plaintiff.  Thus, implicitly, it is also the Defendants’ case that the Plaintiff would not be entitled to insist on its power to adjust the interest rate conferred by clause (2) of the Facility Letter.

39.  I have no doubt that such an argument cannot be of any assistance to the Defendants.  Even taking the Defendants’ case at its highest and assuming Miss Tsoi did make the representation as alleged, it was not a representation or promise that the Plaintiff would charge a fixed interest rate at 5% p.a.  Even on the Defendants’ own evidence, Miss Tsoi’s statement was nothing more than an assurance that the Plaintiff would abide by agreement, if there ever was one made between the parties regarding the applicable interest rate.  As the Defendants’ evidence makes no reference to any previous agreement having been reached between the parties, I am unable to see how Miss Tsoi’s statement could have the effect of constituting an agreement that binds the Plaintiff to charge a fixed rate of interest at 5% p.a. in respect of the loan.

40.  I have not overlooked the fact that the repayment terms set out in the Facility Letter (that is, 180 monthly instalments of $9,688 each) were indeed consistent with a calculation of interest rate at 5% p.a. on the principal.  However, as pointed out in the Plaintiff’s evidence (which is not disputed), the 5% p.a. interest rate was in fact the prevailing Best Lending Rate at the time.  The rate of interest is therefore not a sufficient basis to advance the Defendants’ case that there was a binding agreement that the loan would attract a fixed rate of interest.

41.  In the course of the argument, Mr. Suen also urged upon me to have regard to a number of other factors which he said would show that the Defendants’ evidence on the alleged agreement as to fixed interest rate was unworthy of belief.  Mr. Bedford (whose arguments were adopted by Mr. Yuen) responded by saying that such matters went only to credibility of the deponents which cannot be resolved at this stage of the proceedings on affidavit evidence.  However, as I have come to the view that the Defendants’ evidence on this issue is not sufficient even to get their case off the ground, it is unnecessary to express any further opinion on those matters.

Misrepresentation

42.  The Defendants rely on the following two aspects of the evidence to mount a case that they had been induced into signing the Facility Letter as well as the Mortgage by reason of Miss Tsoi’s misrepresentations:

(i)  that the Plaintiff and Wing Hang Bank were the same entity (一體的);

(ii)  that if there was a prior agreement between the parties that a fixed rate of interest at 5% would be charged, the lender would have internal record of it and would abide by such agreement.

For convenience, I would refer to them as “the 1^st Representation” and “the 2^nd Representation”.

43.  Regarding the 1^st Representation, the versions given by Madam Chan in her 3^rd and 4^th Affirmations are in fact different.  What Madam Chan said in her 3^rd Affirmation is this: that during their meeting at the solicitors’ office, Miss Tsoi informed Mr. Yuen and herself that the mortgage loan would be provided by the Plaintiff which was a subsidiary of Wing Hang Bank, and the same service would be provided.  There was no suggestion in the 3^rd Affirmation that Miss Tsoi had ever said that the two entities were the same – an allegation that emerged only in the 4^th Affirmation.

44.  More importantly, even assuming that Miss Tsoi did tell the couple that the Plaintiff and Wing Hang Bank were the same entity, I do not accept that such a representation had had any influence on Mr. Yuen’s or Madam Chan’s decision to enter into the transaction.  Although Mr. Yuen was at pains to stress the distinction between a licensed bank and a finance company and how a licensed bank would be more accommodating to its customers and would refrain from resorting to unlawful means to press defaulting debtors for repayment, in my view such distinction was merely put forward to divert attention from the reality of the situation facing Mr. Yuen at the time.  The reality was that he was in a predicament and required help from any financial institution who would be prepared to restructure his financial commitments.  It is wholly artificial to suggest that the question whether or not the Plaintiff and Wing Hang Bank were the same entity had had any bearing on his decision (and Madam Chan’s for that matter) whether to procure the loan from the Plaintiff.  I do not find it credible or believable that Mr. Yuen’s emphasis on the distinction between the entities had made any difference to his decision to enter into contract with the Plaintiff.

45.  As regards the 2^nd Representation, it has not been clearly identified in what way the statement was said to be false, and hence a misrepresentation.  It is not disputed that a misrepresentation must be a false statement of fact, past or present, as distinct from a statement of opinion or of intention: Chitty on Contracts, 30^th Edition, Vol. 1, §6-006.  The 2^nd Representation, properly understood, is at best a promise that the lender would abide by any prior agreement.  In that sense, it is not a representation of a fact.  Alternatively, it is a statement by Miss Tsoi of her opinion that the lender would honour any prior agreement.  Again a statement of opinion does not give rise to a cause of action in misrepresentation.  (I am not dealing here with an argument, and there is no suggestion, that the falsity lies in the fact that Miss Tsoi did not actually believe what she said.)  I am of the view that the Defendants have not set out any arguable defence based on misrepresentation.

46.  For completeness, I am also of the view that even if the Defendants’ signature on the Mortgage and the Facility Letter were induced by any misrepresentation (whether as to identity of the lender or as to the rate of the interest on the loan), at no time before the commencement of the present proceedings had they sought to rescind the contract.  Any right of rescission would have been lost.  Furthermore, as Mr. Suen has submitted, both Defendants had taken the benefit of the loan advanced by the Plaintiff under the Mortgage.  Any rescission of the Mortgage would require the Defendants to effect restitution of the loan they had received, which neither of the Defendants is prepared or able to do.

Money Lenders Ordinance

47.  The material term in question is clause (4) of the Facility Letter in relation to the calculation of default interest, which provides as follows:

“Any monthly instalment which is not paid on its due date will attract …. an overdue interest at the rate of 4.5% per month on such overdue monthly instalment from its due date until payment in full on daily basis with a minimum amount of HK$50.00.  The rate may be determined from time to time in our absolute discretion.”

48.  Mr. Bedford argued (whose argument was adopted by Mr. Yuen) that the prescribed rate of default interest amounted to 54% p.a. on the monthly instalment and, being in excess of 48% p.a., was deemed extortionate under section 25(3) of the Money Lenders’ Ordinance.

49.  Section 25(3) of the Ordinance is concerned with “the effective rate of interest” in relation to any agreement “for the payment of interest on a loan”.    The “effective rate” is defined in section 2 to mean “the true annual percentage rate of interest calculated in accordance with Schedule 2”.  Schedule 2 makes provision for apportioning principal and interest in calculating the true annual percentage rate by making reference to the total amount of outstanding principal and total amount of interest.

50.  Having regard to section 25(3) and Schedule 2, I am of the view that when one considers the effective rate of interest in relation to “the loan”, it is wrong to regard only the individual overdue monthly instalment as “the loan” for the purpose of calculation.  In the context of the present case, the total amount of any outstanding principal (and total amount of interest, including any default interest) must be taken into account in determining whether the effective rate exceeds the rate prescribed in section 25(3).  I am told (and there is no suggestion to the contrary) that the effective rate thus calculated would be in the region of 12 to 13% p.a.  In my view, section 25 of the Money Lenders’ Ordinance has no application.

Conclusion

51.  For the foregoing reasons, I do not consider either of the Defendants has a bona fide defence to the Plaintiff’s claim herein.  The Plaintiff is entitled to judgment as set out in the Master’s Order.

52.  The appeal is therefore dismissed with costs against both Defendants, to be taxed if not agreed.