YANG LONG SHAN v. CHAN HAU KONG AND OTHERS

HCA 1265/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1265 OF 2011

_________________________

BETWEEN

_________________________

_____________

D E C I S I O N

_____________

THE APPLICATIONS

1.  There are two summonses before the Court for determination, namely:

(a) The plaintiff’s summons dated 21 May 2015 for amendments to the Statement of Claim (“Amendment Summons”); and

(b) The Summons taken out by the 1^st and the 2^nd defendants (“the defendants”) to strike out the plaintiff’s claims against the defendants (“Striking Out Summons”)  on the grounds, inter alia, that the Statement of Claim discloses no reasonable cause of action against the defendants.

2.  The applications are contested and the parties are legally represented.[1]

THE FACTUAL BACKGROUND

3.  The plaintiff claims against the defendants for damages for breach of contracts, the return of $15,361,256 based upon the 2^nd Agreement, Assignment, Guarantee and also for conspiracy.[2]

4.  Stripped to the bare bone of the facts of the matter, the plaintiff agreed to lend money to the defendants for the purchase of 400 million shares of Asia Resources Holdings Limited (“Asia Resources”).  After several rounds of discussion, including the Revised Loan Agreement and the 2^nd Agreement, which will be discussed below, they came to agreement, whereby the plaintiff lent HK$37,400,000 to the defendants by way of a cashier order payable, at the request of the defendants, to Mr Chim for the said purchase of shares.  It was agreed that the loan would be repaid to the plaintiff within one month and the plaintiff would be given shares of Asia Resources with the same amount of the loan as reward within three months and also, 400 million shares of Asia Resources would be registered in the plaintiff’s name as security for the loan.  The defendants failed to honour the Revised Loan Agreement and the 2^nd Agreement.  Upon further negotiation, the 1^st defendant assigned promissory notes worth $40 million in favour of the plaintiff and also signed a personal guarantee for the same amount if the promissory notes were not honoured.[3]  The promissory notes were not honoured upon presentation because the money had been paid to the 3^rd defendant and the 1^st defendant did not honour the guarantee.  The plaintiff had only received $22,038,754 from the defendants and he claimed the balance of $15,361,256 from the defendants.  He claimed damages against the 3^rd defendant, the 4^th defendant and the 5^th defendant for conspiracy with the other parties.

5.  It is unnecessary to set out the defences of the defendants for the present applications.

THE DEFENDANTS’ SUBMISSIONS

6.  The defendants submit that the Revised Loan Agreement and the 2^nd Agreement are illegal and unenforceable in that they have contravened s.24 of the Money Lenders Ordinance, Cap. 163 (“the Ordinance”) and the claims based on the Assignment of the Promissory Notes, the Promissory Notes and the Guarantee are all derived from the Revised Loan Agreement and the 2^nd Agreement. So the claim for conspiracy pleaded in § 36(e) which is said to be a conspiracy to prevent the plaintiff from obtaining any payment from the 4^th defendant under the promissory notes is not sustainable as the Revised Loan Agreement and the 2^nd Agreement are unenforceable.[4]

7.  They also say that the plea of conspiracy has failed to meet the requirement of pleading a case of conspiracy as stated in Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537and ought to be struck out.

8.  As to the plaintiff’s application for amendments of the Statement of Claim, the defendants submit that those proposed amendments fail to redress the deficiency in the pleadings for conspiracy mentioned above.  The plea of conspiracy cannot survive when the Revised Loan Agreement, the 2^nd Agreement, and other related instruments are unenforceable.  They should not be allowed.

DISCUSSION

The relevant legal principles

9.  The following legal principles are relevant for the striking out application:

a. “The claim must be obviously unsustainable, the pleadings unarguably bad and that it be impossible, not just improbable, for the case to succeed before a court will strike out.  If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out.” as was said by the Court of Appeal in Ha Francesca v Tsai Kut Kan (No.1) [1982] 1 HKC 382 at 392.

b. Fok JA (as he then was) in The New China Hong Kong Group Ltd (In creditors’ voluntary liquidation) & Another v Ng Kwai Kai, Kenneth & Others (unrep. HCA 519/2010, Fok JA (as he then was), sitting as an additional judge of the CFI in chambers, 11 February 2011) said at §40: “Although that case (Ha Francesca case) was decided before the implementation of the Civil Justice Reform, in my view, the passage cited remains fully applicable to an application to strike out after the CJR.”

c. The Court of Appeal in Patriarch Partners Media Holdings LLC v Wong Siu Wa Sammy & Another (unrep. CACV 248/2014, Poon J. 22 May 2015 with others concurred) held that if the defective Amended Statement of Claim could be amended to savage the deficiency, the Amended Statement of Claim should not be struck out and the claim should not be dismissed. [16-17]

The plaintiff’s application for amendment of the Statement of Claim

10.  Under those circumstances, it will be logical to first consider the plaintiff’s proposed amendments to the Statement of Claim.

11.  In essence, the plaintiff’s proposed amendment will do away with his reliance upon the Revised Loan Agreement or the 2^nd Agreement.  The issues in dispute will become money had and received, conspiracy, return of the money, damages for conspiracy by the 1^st defendant, return of money by the 2^nd defendant, and interest.[5]

12.  The defendants argue that the plaintiff’s application for amendments to the Statement of Claim should be refused for the following reasons:

a. Delay and the substance of the claim remains the claim under the 2^nd Agreement and the Revised Loan Agreement;

b. “P has no answer to the contravention of s. 24 of the MLO in his claim based on or derived from the Revised Loan Agreement and the 2^nd Agreement.  A consequence of a contravention of s. 24 of the MLO is the loss of civil remedy.  It matters not whether the claim is based on the illegal loan agreement or dressed up as a claim for restitution.  Since the Revised Loan Agreement and the 2^nd Agreement are unenforceable by virtue of s.24 of the MLO, P is not entitled to claim for the return of $15,361,256 for money had and received.  To allow P to do so would be to enforce an illegal and unenforceable agreement under s.24 of the MLO.”; and

c. The proposed new pleas are doomed to fail because the pleaded conspiracy has not complied with the requirements for pleading conspiracy as set out in Pido v Compass Technology Co Ltd [2010] 2 HKLRD 537, Ma CJHC (as he then was) and more importantly, if the Revised Loan Agreement and the 2^nd Agreement are unenforceable, there cannot be any question of any conspiracy arising from the default in paying the said outstanding sum of $15,361,256 or honouring the Promissory Notes.[6]

13.  The plaintiff has not, in the written submissions, given answer to the issues raised in 12(a) and (b).

14.  In the circumstances, the plaintiff agrees that the application is late and the claims remain to be based upon the Revised Loan Agreement and the 2^nd Agreement.

15.  It will be of assistance to set out s.24 (1) & (2) of the Ordinance below:

(1) Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 60 per cent per annum commits an offence.

(2) No agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds the rate specified in subsection (1).

16.  The plaintiff has stated it clearly in the written submissions that the purpose of the amendments is to avoid section 24 of the Ordinance, Cap. 163.  See §50 of the written submissions.  However, upon enquiry by this Court this morning, the plaintiff agrees that he is still relying upon the Revised Loan Agreement and the 2^nd Agreement to lay this claim for restitution for his money given to the defendants.

17.  It will be apparent that if the plaintiff’s application is allowed, s.24 (2) of the Ordinance will be rendered otiose because any money lender who had lent money in contravention of s.24(1) will be able to circumvent the sanction of subsection 2 by claiming restitution of the money lent.  The defendants refer me to the UK authority of Patience Kasumu v Gbadamosi Baba-Egbe [1956] A.C. 539, which held that the lender who had contravened the statutory provisions of the Money Lenders Ordinance in Nigeria rendering non-recoverable of the principal from the borrower, should not be allowed “to call for imposition of terms of repayment, for by so doing he would be enforcing directly or indirectly, a claim in respect of the transaction.”  See page 550-551 of the judgment.  The application for amendment is therefore misconceived and ought to be rejected.  This is analogous to the reasoning of the Court of Final Appeal in Kayden Ltd v Securities and Futures Commission (2010) 13 HKCFAR696 per Ribeiro PJ at §§30-31 where the application for amendment was for the purpose of gaining the procedural advantage of making application for service outside the jurisdiction under O.11 RHC where the Court had no jurisdiction to order another party outside Hong Kong to transfer funds into Hong Kong so that the plaintiff might levy execution on the funds.  Another Court had also held that it should not be used as an instrument of fraud.  See §15 of Wong Sai Bong v Wong Kim Por (unrep. HCA 390/2006, per Fok J. (as he then was) 26 October 2010)  In this case, the court was dissatisfied with the delay of the defendant, who applied for leave to amend the Defence and was quite ready to dismiss the application.  However, the court took into consideration that the proposed amendment was to add in the defence of illegality.  To disallow the application would be rendering the court to be used unwittingly as an instrument of fraud, and for that reason, which the court held to be exceptional circumstance, had allowed the application.  The same reasoning would apply if the Court were to be used to allow the plaintiff to circumvent the statutory provision of s.24 of the Ordinance.

18.  It is therefore clear that the plaintiff’s application should be dismissed and so I order.

Striking-out application

19.  This Court will now consider the defendants’ application to strike out the plaintiff’s claims and dismiss his action upon the original Statement of Claim without the proposed amendments.

20.  It appears that the plaintiff has no dispute that the Revised Loan Agreement and the 2^nd Agreement, if they are found to be loan agreements, are caught by section 24 of the Ordinance as the effective rate of interest charged for the loan is over 60% per annum.  The plaintiff now argues that the transactions are not loans within the meaning of section 2 of the Ordinance.

21.  The plaintiff argues “It is not unarguable that P in substance (via the Revised Loan Agreement) made an investment of HK$37.4 million with an expected return of 200% --- 100% return in cash within a month, plus 100% return as shares of Asia Resources (within 3 months).  The 400 million shares of Asia Resources could be regarded as the minimal guarantee number of shares that P would get.”  See §45 of the written submissions.  He therefore says at paragraph 47 of the written submissions: “Seen in this light, the transaction should be considered a genuine commercial arrangement rather than “loansharking” activities, and thus not within the scope of the MLO.”

22.  However, the plaintiff did not plead his case as such in the Statement of Claim.  The arguments can be easily dismissed as the Court will only consider the merits of the plaintiff’s case on his own pleadings and no further.  See Tempra Virgina Pido v Compass Technology Co Ltd & Another §§24-25, per Ma CJHC (as he then was) [2010] 2 HKLRD 537.  The plaintiff then argues that this can be made good by further amendments to the pleadings.  I have to consider whether there is any evidence before me today that will lead to further amendment to the pleadings as proposed.  The plaintiff is aware of the defendants’ defence from the commencement of the legal proceedings.  He has now proposed the amendments to the pleadings. But he has not thought fit to add this ground into the proposed amendment.  I can see no material, let alone evidence, to show the fact of investment by the plaintiff as suggested.  It will be wrong to work on speculation and the matter can never be concluded if this approach is adopted.  I decline to accept the plaintiff’s suggestion.  I shall make a determination today on the materials before me.

23.  On the issue of illegality, the plaintiff argues that this Court has to consider the principle of pari delicto, i.e., provided that they were equally to blame for engaging in the transaction.  This Court should not strike out the plaintiff’s Statement of Claim without hearing evidence from both parties on this issue.  The plaintiff cites the authority of Tiu Sum Fat v Shun Sing Development Ltd. [2010] 1 HKLRD 553, 568 para. 32 by Deputy Judge Horace Wong SC.

24.  It has to bear in mind that in Tiu Sum Fat case, the learned Deputy Judge was considering the situation under the common law whereas in our present case, section 24 of the Ordinance takes precedence for the court’s consideration.  The statutory provision has not provided for the principle of pari delicto, which does not offer a defence to the contract in contravention of section 24(1) of the Ordinance.

25.  The plaintiff also argues that under section 25(1) of the Ordinance, the principal and interest are allowed under certain circumstances even though the statutory provisions might have been breached subject to the discretion of the Court.  It is not unarguable that the plaintiff is entitled to recover the principal of the loan. 

26.  Section 25 of the Ordinance provides:

(1) Subject to section 24(2), where-

(a) proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan; and

(b) subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate,

the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit.

27.  Section 25 deals with the situation of extortionate transaction, which is defined under s.25(3) to be “ agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds 48 per cent per annum”.  It does not apply to the loan with an effective rate of interest of 60% per annum or above.

28.  The plaintiff then reminds me that the areas of law the Court is asked to decide in this striking out application are inherently complex and developing.  He refers me to the comments by G Lam J in Chan Yau v Chan Calvin [2014] 5 HKLRD 304, 323 para. 60: “The common law on the effect of illegality on contracts is a large and evolving subject.  The uncertainty and complexity of the existing law has been pointed out in Part 3 of the UK Law Commission’s Consultation Paper No.189 (2009) “The Illegality Defence — A Consultative Report”.

29.  The learned Judge was referring to the effect of illegality of a contract under common law whereas we are dealing with the effect of illegality of a contract under the Ordinance, a statute.  The comments simply do not apply to statutory law situation.

30.  The plaintiff has no answer to the defendant’s argument that if the Revised Loan Agreement and the 2^nd Agreement are unenforceable, there cannot be any question of any conspiracy arising from the default in paying the said outstanding sum of $15,361,256 or honouring the Promissory Notes.  See paragraph 12(c) supra.

31.  Finally, the plaintiff asks me to consider that it will be unfair to strike out his claim if the defendants are allowed to proceed with their counterclaim for the return of the $22 million odd paid by the defendants to the plaintiff.  I agree with Mr. Lin, counsel for the defendants that this is a separate issue to be dealt with when the defendants proceed with their counterclaim, in which event the plaintiff will be entitled to rely upon the agreements between them. Section 24 of the Ordinance only prohibits repayment of the loan by enforcement of it in court.  It will be a different consideration for the court if the defendants counterclaim against the plaintiff for the money paid already.  I do not consider that this factor should prohibit this Court to make the decision for striking out of the plaintiff’s claim.

32.  In the event, the defendants succeed to show that the plaintiff has no reasonable cause of action and his claims should be struck out under O.18, r.19.

33.  As to the costs of these applications, including the costs reserved should follow the event (with counsel’s certificate for the defendants for today), to be assessed summarily under O.62, r.9A RHC to be $200,000 for the defendants and $12,000 for the 4^th defendant, to be paid by the plaintiff within 14 days from the date hereof.  The costs of the action will be dealt with by the trial judge for the counterclaim.

34.  The Court shall now make an order in terms as follows:

a. The plaintiff’s Amendment Summons be dismissed;

b. The plaintiff’s claims be struck out;

c. The costs of the applications as per paragraph 33;

d. The Case Management Conference is, by consent, to be adjourned to a date to be fixed and the defendants shall within 2 months from the date hereof inform the Registrar in writing as to how the matter should proceed and fix the next Case Management Conference accordingly and the costs of the Case Management Conference be in the cause. (10 min.)