TOP TRENDY ENTERPRISE LTD v. HO YUK CHING

DCCJ 2985, 3127 & 3128/2021

(Heard together)

[2023] HKDC 1491

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2985 OF 2021

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BETWEEN

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3127 OF 2021

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BETWEEN

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3128 OF 2021

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BETWEEN

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DECISION

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INTRODUCTION

1.  This is the respective plaintiff’s appeal from the Order of Master Matthew Ho made on 21 February 2023 (“the Order”), whereby he refused the respective plaintiff’s application for summary judgment and granted unconditional leave to the defendant to defend in each of the three captioned actions.

2.  Pursuant to the Registrar’s order dated 12 August 2022, the summonses for summary judgment in the three captioned actions were ordered to be heard together.

3.  In this Decision, I shall refer to the plaintiff in each of the captioned actions as “the plaintiff” or “the plaintiffs” interchangeably. As the plaintiffs’ cases are almost identical, it is no doubt that, unless specifically stated, what applies to the plaintiff in one action would equally apply to the plaintiff in the other actions.

BACKGROUND OF THE DEFENDANT’S CASE

4.  The defendant (Madam Ho) is a 75 year old lady. She has only received a lower secondary education. She and her family had no financial need to borrow any money.

5.  In mid-2019, Madam Ho came to know the third party (Tong) as a contractor engaged to renovate her home. As Tong had shown “an amicable demeanor” and “responsible working attitude” during the renovation, Madam Ho, being a devoted Christian, found that Tong was a “good person” and got acquainted with him.

6.  Since then, Tong had been borrowing money from Madam Ho on various occasions. He began to call Madam Ho his “godmother” (契媽).

7.  There were numerous occasions in which Tong (mis)represented Madam Ho that he was in urgent need of money for his family. Madam Ho believed him and had full trust in him. Out of her leniency and the trust and confidence reposed upon Tong, Madam Ho began to lend money to Tong, including but not limited to, in the following ways as instructed by Tong and, on each and every occasion, Tong would accompany her to get the money:

(1) Withdrawal of cash (including bank transfers) from her own savings and/or cheques issued at Tong’s request;

(2) Selling the shares/stocks held in her bank accounts to generate further cash for withdrawal;

(3) Selling her own jewelry for cash;

(4) Allowing Tong to use her credit cards to purchase jewelry and iPhones (and Apple Cards) for resale for cash;

(5) Borrowing from friends and relatives;

(6) Charging her own properties (including her own residential flat) to the finance companies by way of mortgages for loans; and

(7) When all means being exhausted, Tong asked her to take personal loans from finance companies, ie borrowing from money lenders (including the plaintiffs in the three captioned actions).

8.  In total, Madam Ho has lost approximately HK$16 million in more than 180 transactions.

THE PLAINTIFFS’ CASES

DCCJ 2985/2021

9.  In this action, the plaintiff (“Top Trendy”) claims under a loan agreement dated 2 June 2021 and entered into between Top Trendy as lender and the defendant as borrower with the following terms:

(1) Date of the agreement: 2 June 2021

(2) The loan amount: HK$400,000

(3) Interest: at 46% per annum

(4) Repayment terms: by 3 instalments of HK$138,477 payable on 17 June 2021, 2 July 2021, and 17 July 2021

10.  It is alleged that the defendant had failed to make repayment.

11.  On 21 June 2021, Top Trendy issued a demand letter to the defendant setting out the particulars of the outstanding principal and the accrued interest:

	Outstanding Principal & Interest	Amount (HK$)
(1)	Principal	400,000.00
(2)	Accrued interest from 2 June 2021 to 21 June 2021 (20 days) at 46% per annum	10,082.19
	Total:	HK$410,082.19

12.  On 24 June 2021, a Writ endorsed with a Statement of Claim was issued by Top Trendy.

DCCJ 3127/2021

13.  In this action, the plaintiff (“Win One”) claims under a loan agreement dated 1 June 2021 and entered into between Win One as lender and the defendant as borrower with the following terms:

(1) Date of the agreement: 1 June 2021

(2) The loan amount: HK$300,000

(3) Interest: at 46% per annum

(4) Repayment terms: by 3 instalments of HK$103,858 payable on 16 June 2021, 1 July 2021, and 16 July 2021

14.  It is alleged that the defendant had failed to make repayment.

15.  On 2 July 2021, Win One issued a demand letter to the defendant setting out the particulars of the outstanding principal and the accrued interest:

	Outstanding Principal & Interest	Amount (HK$)
(1)	Principal	202,947.48
(2)	Accrued interest from 19 June 2021 to 2 July 2021 (14 days) at 46% per annum	3,580.77
	Total:	HK$206,528.25

16.  On 5 July 2021, a Writ endorsed with a Statement of Claim was issued by Win One.

DCCJ 3128/2021

17.  In this action, the plaintiff (“Chak Hoi”) claims under a loan agreement dated 1 June 2021 and entered into between Chak Hoi as lender and the defendant as borrower with the following terms:

(1) Date of the agreement: 1 June 2021

(2) The loan amount: HK$600,000

(3) Interest: at 45% per annum

(4) Repayment terms: by 3 instalments of HK$207,546.44 payable on 16 June 2021, 1 July 2021, and 16 July 2021

18.  It is alleged that the defendant had failed to make repayment.

19.  On 2 July 2021, Chak Hoi issued a demand letter to the defendant setting out the particulars of the outstanding principal and the accrued interest:

	Outstanding Principal & Interest	Amount (HK$)
(1)	Principal	405,768.63
(2)	Accrued interest from 19 June 2021 to 2 July 2021 (14 days) at 45% per annum	7,003.68
	Total:	HK$412,772.31

20.  On 5 July 2021, a Writ endorsed with a Statement of Claim was issued by Chak Hoi.

21.  All the captioned actions are money lenders’ actions under Order 83A of the Rules of the District Court.

THE DEFENDANT’S CASE

22.  The defendant’s defence is one of undue influence exerted on her by Tong (the third party), where she claims fraudulent misrepresentation against Tong. It is also pleaded that the loan agreement entered into (which is denied) was for the sole benefit of Tong. By a third party notice filed on the same day of the Defence,[1] the defendant brought third party proceedings against Tong for indemnity against the plaintiff’s claim.

23.  In the Defence, the defendant pleaded the following material facts:

(1) The loan agreement was not entered into of her own free will;

(2) There were misrepresentations made by Tong that he or his family was in urgent need of money;

(3) Due to her old age, she had trusted and continued to have trusted all the misrepresentations and believed that Tong would eventually repay her;

(4) Tong always accompanied her to the money lenders throughout the entire borrowing process:

(a) She had no previous experience of borrowing from money lenders. Tong did most of the talking, and she only had to speak, write, and sign as instructed by Tong;

(b) The money lenders did not suggest that she should seek independent legal advice, nor was she given any advice or explanation about the loan;

(c) The whole borrowing process was completed very quickly;

(d) Tong would keep all the documents she signed, and she did not have access to the same;

(e) All the money borrowed, if in cash, would be taken away by Tong immediately at the money lender’s premises; if by bank transfer to her bank account, it would be transferred to Tong immediately afterwards;

(f) On occasion of borrowing from money lenders which involved cash borrowing (as in the three captioned actions), Tong would always pay back some of the money of an unknown amount to the staff of the money lender in front of her, out of the money just borrowed; and

(g) She had never used or spent any amount of the borrowed money;

(5) Due to her old age, she could not recall all the details of each and every borrowing or transaction, and she reserved the right to amend the pleadings upon further investigation and discovery; and

(6) At the time of filing the Defence, there were a total of 11 (19 as of this hearing) similar actions (including the three captioned actions) commenced by various money lenders against her in the District Court.

24.  By her Affirmation filed in opposition, the defendant has confirmed the above material facts in evidence. She further provided three police witness statements which gave more details of the transactions and explained how Tong had made misrepresentations and exerted undue influence over her.

PRELIMINARY MATTER

25.  By summons dated 18 July 2023 filed in each of the captioned actions, the defendant sought leave to file and serve her police witness statement dated 5 June 2023 with Annexure attached.

26.  Essentially, the purpose of that witness statement was to provide the police with an updated transaction record or summary (ie the Annexure) in order to clarify the total loss suffered by the defendant and deceived by the third party (Tong). Currently, the total sum has been updated and revised to HK$14,787,061.

27.  I consider it just for the defendant to update the court with the current information. I would allow the application and grant leave to file and serve the further affirmation, as evidence occurred after the date on which the Order was made, under RDC Order 58 rule 1(4).

28.  Although the plaintiff opposed the application but failed, I consider it appropriate that the costs of the summons should be in the cause of the appeal.

APPLICABLE LEGAL PRINCIPLES FOR THE APPEAL

29.  An appeal from a master to a judge in chambers will be dealt with by way of an actual rehearing (Hong Kong Civil Procedure 2023, para 58/1/2).

30.  The relevant principles for summary judgment are well settled. The defendant must show that there are triable issues. He has to satisfy the court that he has a “real or bona fide defence” (supra, para 14/4/9).

31.  The test is not whether the defendant’s assertions are to be believed, but whether those assertions are believable in the light of the evidence placed before the court (Mass International Ltd v Hills Industries Ltd & Another [1996] 1 HKC 434).

32.  Order 14 is for clear cases only, that is cases in which there is no serious material factual dispute and no serious dispute of legal questions involved. And the court must not embark on a mini-trial on affidavit evidence (Hong Kong Civil Procedure 2023, paras 14/4/9-9A).

DISCUSSION

33.  Mr Chan (and Ms Ip), counsel for the plaintiffs, submit that the court should set aside the learned Master’s Order and grant summary judgment to the plaintiffs in all the captioned actions, or alternatively, the plaintiffs are at least entitled to interim payment of the unrepaid principals of the loans.

34.  Mr Chan seized on the defendant’s pleading (paragraph 8 of the Amended Defence) that:

“8. The Loan Agreement is voidable by the Third Party’s undue influence on the Defendant and the Defendant now rescinds the Loan Agreement. Further or alternatively, the Third Party is liable to the Plaintiff through the Defendant by indemnification.”

35.  Mr Chan submits that although rescission is not named in the prayer in the Defence (which only asked for indemnification against the third party), it is to be understood that the defendant is asking for recission of the loan agreement as one of the reliefs.

36.  The arguments run by Mr Chan are that:

(1) Since the relief sought by the defendant is rescission of the loan agreement, and basic contract law states that “rescission” means “returning the parties to the original position before the contract was formed” as if the principal had never been loaned out to the defendant, the defendant must repay to the plaintiff the principal she received;

(2) Even if the defendant succeeds at trial in proving undue influence and misrepresentation, the best the defendant can get is rescission, which means the creditor (the plaintiff) gets back the principal without interest, which also means the repayment of the principal (by the defendant) in any event;

(3) Although it is a sad case and the defendant may be a victim of the fraud, it was a commercial transaction between the plaintiff and the defendant and it was not pleaded in the Defence that the plaintiff was part of the fraud. Therefore, the plaintiff must be able to recover at least the principal amount, not including interest (as no interest clause would be binding when the loan agreement is rescinded). The plaintiff must be entitled to an interim judgment for the amount of the principal;

(4) The defendant can get the whole money back from the third party by way of third party proceedings for indemnification, but whether it would be an empty judgment or not is not of the plaintiff’s concerns;

(5) Insofar as this case is concerned, the claim that the defendant is entitled to be indemnified by the third party is no answer to the plaintiff’s claim, unless the third party has discharged the plaintiff’s claim. He relied upon the Bank of China (Hong Kong) Ltd v Ng Ai Kheng Jasmine (HCA 741/2004, unrep., 11 November 2005); and

(6) At trial, the court would make two separate findings regarding the relationship between the plaintiff and the defendant and then the relationship between the defendant and the third party. The court should not make the third party to be directly responsible to the plaintiff. There is no legal relationship whatsoever between the plaintiff and the third party.

37.  Pausing here, I have to say that I cannot accept Mr Chan’s submissions, and I will give my reasons below.

38.  Mr Lai, counsel for the defendant, submits that the test for undue influence is whether the plaintiff was put on inquiry, especially for financial institutions. I agree.

Rescission

39.  First of all, the law cannot be applied in a vacuum without first considering the background of the defendant’s case. I do not agree with Mr Chan that the defendant’s assertion of rescission here must mean the repayment of the principal by the defendant. The defendant has raised the defence of undue influence by a third party. She claims to be the victim. However, the plaintiff is essentially trying to suggest that the victim must first come up with an equal amount of the proceeds of fraud to satisfy the plaintiff’s summary judgment before she can claim reimbursement from the wrongdoer later on at trial. I have received no authorities on this proposition from Mr Chan and I do not believe there is any. Mr Chan has failed to appreciate the fact that if the defendant was indeed a victim, she had never benefited in the first place. It is therefore wrong to say that even if the defendant can prove undue influence and misrepresentation, the defendant has to repay the principal to the plaintiff.

40.  In Chitty on Contracts, 34th Ed (2021), at para 40-02, the learned authors stated:

“The term ‘rescission’ can be used to describe the termination of a contract with prospective effect, by reason of a contracting party’s non-performance or defective performance of his obligation. Nowadays the term ‘rescission’ is more commonly used in a different sense, to mean the termination of a contract or other transaction with retrospective effect, on the ground that a party’s intention to enter the transaction was vitiated from the start by fraud, mistake, duress, undue influence or some other factors.”

41.  In equity, the court may order repayment by the wrongdoer (ie the third party in the proceedings) to the original owner (the plaintiff) if such equitable relief is properly instituted and pleaded.

Undue influence by a third party

42.  In Dao Heng Bank Ltd v Ho Yin Yuk & Another [2003] 1 HKLRD 28, the court held that where a victim entered into a transaction voluntarily and willingly but did so on the basis of lies and misinformation about the transaction given to him by the wrongdoer which he believed to be true because he reposed trust and confidence in the wrongdoer, it was open to the victim to plead undue influence based upon the misrepresentation. In the judgment, Deputy High Court Judge A Cheung (as he then was) said, at 45E-G, that:

“On the other hand, a victim may have entered into a transaction voluntarily and willingly. But he or she did so because of lies or wrong information supplied to him or her by the wrongdoer relating to, say, the nature of the transaction, the consequences of the transaction, or the reasons for needing to enter into the transaction, which lies or information he or she believed to be true. Normally, this would only be a case of misrepresentation. However, if there was a relationship of trust and confidence between the victim and the wrongdoer so that this relationship adversely affected the judgment of the victim in relation to the lies or misinformation supplied to him or her by the wrongdoer, so much so that he or she failed to realise the falsity of the lies or misinformation when, but for the trust and confidence relationship, he or she would have realised the same, then in my judgment, a case of undue influence (on top of a case of misrepresentation) would be open to the victim to plead.”

43.  Further, the bank would be “put on inquiry” if there was a tri-parte non-commercial relationship. See 50E-G:

“… in my judgment, once the concept of constructive notice has been legitimately imported to this area of law concerning a tri-parte relationship, there is nothing to stop a victim of undue influence from arguing that the bank should be fixed with constructive notice of all that a reasonably prudent bank would have discovered (ie in the classic sense of constructive notice), and if those discoveries (if made) would have been sufficient to inform the bank that there was present undue influence in the transaction, the bank would be affected.”

And at 52E-F:

“Thus far, I have discussed the circumstances under which a bank would be ‘affected’ by the undue influence. I have used the word ‘affected’ deliberately, because the other alternative, namely, ‘put on inquiry’, is not an attractive one, as was recognised by the House of Lords in Royal Bank of Scotland Plc v Etridge (No 2) [2001] 3 WLR 1021 at pp.1036H–1037A (para.41). The ‘inquiries’ that the bank should have done, in order to sustain the transaction, were steps taken by the bank which would reduce, or even eliminate, the risk of the potential victim entering into the transaction under any misapprehension or as a result of undue influence by the intending wrongdoer.”

44.  Thus, there will be a triable issue of whether the plaintiff was affected (by undue influence), ie had been put on inquiry.

45.  The party guilty of undue influence does not need to be a party to the transaction. In Chitty on Contracts, supra, the learned authors stated, at para 10-155, that:

“It is clear, however, that it makes no difference that the husband is not a party to the charge:

‘The transferor wife is seeking to resile the very transaction she entered into with the bank, on the ground that her apparent consent was procured by the undue influence or other misconduct, such as misrepresentation, of a third party (her husband) (Royal Bank of Scotland v Etridge (No 2) [2001] 2 UKHL 44).”

46.  See also undue influence by a third party – Chitty on Contracts, supra, para 10-139:

“Where one party seeks to avoid a contract on the ground of undue influence by a third person, it must appear either that the third person was acting as the other party’s agent, or that the other party had actual or constructive notice of the undue influence.”

Put on inquiry

47.  Mr Chan has failed to recognize that rescission was an assertion made by the defendant in her Defence, and that the defendant had not made any counterclaim for rescission. The defendant only put forward undue influence by a third party as her defence, and she has a claim based on misrepresentation against the third party for indemnification.

48.  It is important to note that before addressing the question of whether the defendant can validly rescind the loan agreement, the court would first examine whether the plaintiff has a valid claim against the defendant. The cause of action relied on by the plaintiff is breach of contract. However, as can be seen in the case of Dao Heng Bank Ltd above (at 50E-G), there is nothing to stop a victim of undue influence from arguing that the bank should be fixed with constructive notice, and if there was present undue influence in the transaction, the bank would be affected. In other words, if the court finds that the plaintiff was “affected” or “put on inquiry”, then the plaintiff will not be able to enforce the loan agreement against the defendant, and the loan agreement will be set aside.

Interim judgment

49.  In my view, Mr Chan’s insistence on summary judgment or interim judgment is misconceived.

50.  Once the defendant has commenced a third party proceedings, the original action and the third party proceedings are to be tried together (after the main action). And the defendant has pleaded undue influence by a third party as her defence. It will be a triable issue to be determined at trial and the finding of which would be determinative as to the validity of the loan agreement.

51.  On the other hand, the third party should be at liberty to appear at the trial of the action and to oppose the plaintiff’s claim so far as he may be affected thereby, and for this purpose to put in oral and documentary evidence, and cross-examine the plaintiff’s witnesses (Hong Kong Civil Procedure 2023, para 16/4/8).

52.  Therefore, I see no basis for the plaintiff to insist on having an early judgment before the trial of that main issue (undue influence).

Third party proceedings for indemnity

53.  The authority Bank of China (Hong Kong) Ltd v Ng Ai Kheng Jasmine relied on by Mr Chan is distinguishable on facts. In that case, where the defendant had no defence to the plaintiff’s claim, the court found that the defendant could not rely on an unrelated purported indemnity as a defence, unless such third party had already discharged the plaintiff’s claim. Whereas in our present case, the defence is one of undue influence by the third party. It is related to both the main action and the third party action and is going to be a live issue at trial if the court finds it credible here today.

Whether the defendant’s defence is believable

54.  I asked the plaintiffs why they had used the same solicitors firm for representation. Mr Chan replied, after obtaining information from his instructing solicitors, that the plaintiffs had been all along using the same solicitors firm (them) for legal services before the commencement of these actions, and nowadays, social media is popular, and money lenders do chat about defaulted cases.

55.  I am afraid that I cannot accept their explanation. Assuming there were no previous dealings between Tong and the plaintiffs, and if the plaintiffs’ affirmations were true that the defendant came to visit them alone (ie without the company of Tong), then the chances of the defendant, a then 73 year old lady, would have gone to three different money lenders (the plaintiffs) and all of them had used the same solicitors firm for usual legal services, in a row within two consecutive days, and all of whom did not ask her for proof of income or assets and allowed her to walk away with a large chunk of cash by way of a personal loan with more or less the same repayment terms would be close to zero.

56.  Having considered the background of the defendant’s case and all the evidence adduced by the defendant, including all the police statements and the fact that there are a total of 18 (now 19) similar actions against the defendant in relation to the same course of borrowings, I am of the view that the defendant’s defence is believable.

Summary of triable issues

57.  I tried to record the triable issues in the course of counsel submissions:

(1) Whether the defendant was in need of borrowing money;

(2) All the factual background of the relationship between the defendant and the third party from mid-2019 leading up to the borrowings at the plaintiffs’ office;

(3) Whether the third party had accompanied the defendant to visit the money lenders (the plaintiffs);

(4) Whether the plaintiffs had explained the loan agreement to the defendant and asked the defendant to seek independent legal advice if needed;

(5) Whether the plaintiffs received any “kick-back” or commission from the third party (in violation of the Money Lenders Ordinance);

(6) Whether there was any other arrangement made between the plaintiff and the third party;

(7) Whether there was any misrepresentation made to the defendant by the third party;

(8) Whether the defendant entered into the loan agreement with the plaintiff was procured by undue influence of the third party;

(9) Whether the plaintiff was put on inquiry either in terms of constructive notice or actual notice; and

(10) Any other matters that call for explanation.

DISMISSAL OF THE SUMMONS

58.  The relevant principles for dismissal of an Order 14 summons are: although Order 58 contains no provision for a formal notice of cross-appeal, the judge’s discretion on hearing an appeal from a master is in no way hindered by the previous exercise of the master’s discretion; hence where a defendant appeals against a master’s order under Order 14 giving conditional leave to defend, and the judge is satisfied that there is no defence to the action, he may properly give summary judgment for the plaintiff notwithstanding that no formal notice of cross-appeal has been given by the plaintiff (Europa Property & Finance Services Ltd v. Stubbert (1992) 89 (11) L.S.G. 33, CA; applied by Kaplan J in Chinakong Manufactory Ltd v. Uniden Hong Kong [1993] 1 HKLR 28, 30; see Hong Kong Civil Procedure 2023, para 58/1/4).

59.  Applying the above principles and in the exercise of my discretion, I would dismiss the summons for summary judgment for the following reasons:

(1) It is clear that the plaintiff knew, before the issue of the summons, that the defendant was relying upon a contention which would entitle her to unconditional leave to defend, ie an arguable defence (Order 14 rule 7);

(2) The plaintiff knew that the circumstances of the present case was unusual that the defendant is a victim of the fraud and that there were 11 similar actions at the time of the filing of the Defence and the total was revised to 18 actions at the time of the filing of the defendant’s affirmation in opposition;

(3) Mr Chan confirmed to the court that the plaintiff was aware that there was an ongoing police investigation against Tong; and

(4) There is an existing third party proceedings against Tong for the same subject matters of the main action to be tried.

60.  Accordingly, while I will dismiss the plaintiff’s appeal, I would order that the learned Master’s decision in refusing to give summary judgment be affirmed with a modification to the Order that the summons for summary judgment be dismissed with costs to be paid forthwith.

CONCLUSION

61.  For the above reasons, the appeal in each of the captioned actions must be dismissed with costs.

62.  In respect of each of the three captioned actions, namely DCCJ 2985/2021, DCCJ 3127/2021, and DCCJ 3128/2021, I make an order that:

(1) The defendant’s summons dated 18 July 2023 be allowed, and order in terms of the summons with costs be in the cause of the appeal;

(2) The plaintiff’s appeal be dismissed;

(3) The Order of Master Matthew Ho dated 21 February 2023 (“the Order”) be amended and modified as follows:

(a) Paragraph 1 of the Order: the whole paragraph be replaced with “The plaintiff’s summons dated 14 July 2022 for summary judgment be dismissed”; and

(b) Paragraph 2 of the Order be deleted;

(4) On a nisi basis, the plaintiff shall pay the defendant forthwith the costs of the appeal, with certificate for counsel, to be assessed summarily on paper;

(5) On a nisi basis, the plaintiff shall pay the defendant forthwith the costs of the plaintiff’s summons dated 14 July 2022 for summary judgment, with certificate for counsel, to be assessed summarily on paper;

(6) The above costs orders nisi shall become absolute in 14 days from the handing down of this Decision; and

(7) No order as to costs in relation to the third party.

63.  For the purpose of summary assessment, I direct that, if there is no application to vary the above costs orders nisi, the defendant shall lodge and serve her statement of costs within 7 days after the costs orders nisi have been made absolute; the plaintiff shall lodge and serve its statement of objection within 7 days thereafter.

POSTSCRIPT

64.  Mr Lai informed the court that Tong had been arrested by the police one day before the hearing.