LEI SHING HONG CREDIT LTD v. SAN TONG LEE CO LTED AND OTHERS

HCMP 2525/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2525 OF 2013

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JUDGMENT

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1.  By a summons dated 20 October 2016 (“the summons”) the plaintiff (“P”) applied to amend the statement of claim in the manner as shown in red in the copy annexed to the summons.

2.  By para (1) of the order of Master K Lo made on 6 February 2017 (“the master’s order”) it was ordered that P do have leave to amend its statement of claim in the manner as shown in red in the copy annexed to the summons.  The master also made consequential orders for the filing of amended pleadings by the defendants.

3.  By para (5) of the master’s order it was ordered that the costs of and incidental to the amendment, save the costs of the application, be to the 1^st and 3^rd defendants (“D1” and “D3”), the 2^nd defendant (“D2”) and the 4^th defendant (“D4”) in any event. 

4.  As regards the costs of the application by the summons, it was ordered by para (6) of the master’s order that the costs of the application be to D4, and by para (7), it was ordered that D2 do pay P the costs of the application with certificate for counsel agreed at HK$45,000.  By para (8) it was ordered that there be no order as to costs of the application as for D1 and D3.

5.  By a notice of appeal dated 17 February 2017 D2 gave notice to appeal against the master’s order which came before me. 

6.  P, a company incorporated in Hong Kong, is and was at all material times a licensed money lender.

7.  D1 is a company incorporated in Hong Kong.  D3 is and was at all material times a director of D1. 

8.  As pleaded in the statement of claim, by a facility letter dated 13 December 2010 issued by P to D2 and duly accepted and signed by D2 and counter-signed by D1 and D3 (“the facility agreement”) P granted to D2 a mortgage loan of HK$18 million on the terms and conditions contained therein.

9.  Pursuant to the facility agreement a total sum of HK$18 million was lent and/or advanced by P to D2 on 4 January 2011.

10.  By a legal charge dated 4 January 2011 (“the legal charge”) executed by D1 as mortgagor, D2 as borrower, and P as lender, the properties particularised therein namely, Lot Nos 1314, 1316, 1317, 1318, 1841, 1842, 1843, 1844, 1845, 1846, 1847, 1848, 1849, 1850, 1857 and 1858 in Demarcation District No 116, Yuen Long, New Territories (“the properties”) were charged to P by D1 to secure the monies, obligations and liabilities owing or incurred to P by D2.

11.  By a deed of guarantee dated 14 December 2010 (“the guarantee”) entered into by P and D3 on the terms and conditions contained therein, D3 guaranteed to P the due and prompt performance and discharge by D1 under the facility agreement and the due, punctual and full payment of all payment obligations of D1 upon demand made by P.

12.  P’s pleaded case is that in breach of the facility agreement and the legal charge D1 and D2 defaulted in repaying interest to P since on or about 6 May 2013.  By reason thereof, P claims to be entitled to demand from D1 and D2 the full repayment of the principal sum of the loan and outstanding interest.  P also claims to be entitled to delivery of vacant possession of the properties.

13.  P also claims to be entitled to claim against D3 for the full repayment of the principal sum of the loan and the outstanding interest pursuant to the guarantee.

14.  P commenced these proceedings against D1, D2 and D3 by way of an originating summons on 30 September 2013.

15.  D4 claims to be entitled to a possessory title to some of the Lots in the properties, namely, Lot Nos 1841, 1842, 1843, 1844, 1845, 1846, 1847, 1849, 1850, 1857 and 1858 (“the said Lots”) by reason of adverse possession of the said Lots for a continuous period of not less than 20 years.

16.  D4 applied to be added as a defendant in these proceedings.  By the order of Master M Wong dated 10 November 2014, it was ordered that D4 be added as a defendant.

17.  By his order dated 20 October 2015, DHCJ Kent Yee ordered that these proceedings proceed as if begun by writ.  He also gave directions, inter alia, for pleadings to be filed and served by the parties.  Pursuant thereto, the parties filed and served their pleadings.

18.  P’s statement of claim was filed on 18 November 2015.  D1 and D3’s defence was filed on 16 December 2015.  D2’s defence was filed on 2 December 2015.  D4’s defence and counterclaim was filed on 20 January 2016.

19.  In answer to P’s claims against him, D2 by para 5 of his defence avers that the facility agreement was illegal as it contravened section 22 of the Money Lenders Ordinance, Cap 163 (“the Ordinance”).

20.  D2 avers that the facility agreement was illegal and unenforceable as pleaded and particularised at paras 5 and 6 of his defence.

21.  D2 also relies on section 25 of the Ordinance.  He avers that the facility agreement is an extortionate transaction as defined in section 25 and is unenforceable as pleaded and particularised in paras 7 and 8 of his defence.

The proposed amendments

22.  By the summons P applied to amend the statement of claim. Apart from some minor amendments to which no objection has been taken, D2 opposes the application to amend the statement of claim by including a cause of action against him for money had and received.

23.  Para 22A (“para 22A”) of the proposed amended statement of claim pleads:

“ Further or in the alternative, [P] is entitled to recover the monies in the amount of HK$18,000,000 paid to [D2] as money had and received.”

24.  The proposed para 22B is a claim against D3 for money had and received pursuant to the guarantee.

25.  Para 22C (“para 22C”) of the proposed amended statement of claim pleads:

“ [P] repeats paragraphs 16 and 17 of its Amended Statement of Claim hereof and that [D2] and [D3] have failed and/or refused to pay and still fail and/or refuse to pay to [P] the amount of HK$18,000,000.00 or at all.”

26.  By para (3A) (“prayer (3A)”) of the prayer for relief in the proposed amended statement of claim against D2, P claims against D2 for:

“ (3A) In the alternative to (2) and (3) hereinabove, the amount of HK$18,000,000.00 as money had and received;”

27.  Prayer (2) in the statement of claim was a claim for:

“ The Outstanding Amount of HK$18,953,392.54 as pleaded in paragraph 21 hereinabove;”

28.  Prayer (3) in the statement of claim was for:

“ Interest on the Principal Amount and the Outstanding Interest at 4% per month as pleaded in paragraph 22 hereinabove”

29.  By para 6 of P’s reply to D2’s defence, P avers that the facility agreement was not contrary to section 22 of the Ordinance and further that, even if it were, it would be inequitable that it should be held to be unenforceable.

30.  By para 7 of P’s said reply, P avers that the facility agreement is not a transaction which is extortionate having regard to all the circumstances and that the rate of interest is not unreasonable or unfair.  By para 9 of the said reply, P pleads that even if the facility agreement is a transaction which is extortionate pursuant to section 25(3) of the Ordinance, the court may reopen the transaction so as not to do injustice between the parties having regard to all the circumstances.

31.  Para 22A seeks to introduce a new cause of action against D2 for money had and received. 

32.  Mr Hon, for P, made it plain in his oral submissions that although it is pleaded in para 22A as being “Further or in the alternative”, what P was seeking to do was to introduce an alternative claim for money had and received.

33.  I would observe that no new facts are pleaded in support of this new alternative claim.  P relies on the same facts pleaded in the statement of claim in support of the new alternative claim for money had and received which have been verified by a statement of truth signed by a director of P.  Furthermore, the facts on which P relies in support of its claims have also been affirmed by Lam Kam Leung, the general manager of P, in his affirmation in support of P’s claims filed on 11 November 2013.

The applicable principles on leave to amend

34.  It is plain that by Order 20, rule 8(1) of the Rules of the High Court (“RHC”) the court may at any stage of the proceedings order a pleading to be amended for the purpose of determining the real question in controversy between the parties.

35.  Order 20, rule 8(1A) of the RHC, however, clearly provides that:

“ The Court shall not under paragraph (1) order a pleading to be amended unless it is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

36.  The note at para 20/8/28 Hong Kong Civil Procedure 2017 states:

“ Since the introduction under r.8(1A) by the Civil Justice Reform, the court will only allow an amendment to a pleading to introduce a new case under exceptional circumstances, when it is satisfied that such proposed amendment is necessary either to dispose fairly of the cause or matter or for saving costs.”

37.  Mr Cheng, for D2, submitted that P has failed to satisfy the court that the amendment to introduce the new cause of action for money had and received is necessary and that the application should be dismissed.

The Ordinance

38.  As is set out in the long title, the Ordinance was enacted:

“ To provide for the control and regulation of money lenders and money-lending transactions, … and the licensing of persons carrying on business as money lenders; to provide protection and relief against excessive interest rates and extortionate stipulations in respect of loans; to provide for offences and for matters connected with or incidental to the foregoing; …”

39.  There can be no doubt that P is a licensed money lender within the meaning of the Ordinance.  There can also be no doubt that the loan of HK$18 million granted by P to D2 under the facility agreement was a money‑lending transaction within the meaning of the Ordinance.

40.  Section 22(1) of the Ordinance provides that:

“ Any agreement made for the loan of money by a money lender shall be illegal if it provides directly or indirectly for-

(a) the payment of compound interest;

(b) prohibiting the repayment of the loan by instalments; or

(c) the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement:

Provided ….”

41.  And by section 22(2) it is provided that:

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

42.  D2 has averred in his defence that the facility agreement is illegal and unenforceable under section 22.  There is an issue as to this.

43.  The legality of the facility agreement will come before the court at trial.  If the court is satisfied that in all the circumstances that it would be inequitable that the facility agreement should be held to be unenforceable if it does not comply with section 22(1), the court may order that the facility agreement is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.

44.  Section 25(1) of the Ordinance provides that:

“ 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.”

45.  Subsection (3) of section 25 provides that:

“ Any 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 shall, having regard to that fact alone, be presumed for the purposes of this section to be a transaction which is extortionate; but except where such rate exceeds the rate specified in section 24(1), the court may declare that any such agreement is not extortionate for the purposes of this section if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair.”

46.  The rate specified in section 24(1) is an effective rate of interest which exceeds 60 per cent per annum.

47.  D2 has averred in his defence that the facility agreement is an extortionate transaction as defined in section 25.  There is also an issue as to this.

48.  By the alternative claim for money had and received P seeks to limit its claim only to the principal sum of the loan of HK$18 million without any claim for interest.  Mr Hon submitted that there was no reason why P could not pursue an alternative claim for money had and received against D2 for only HK$18 million which is less than the amount claimed under the facility agreement.

49.  What are the pleaded facts in support of the new claim for money had and received?  As I have said, no new facts are pleaded in support of the claim for money had and received.  The same facts are relied on. Clearly, on the pleaded facts, the loan of the principal sum of HK$18 million granted to D2 under the facility agreement was a money-‌lending transaction.  As such, it was governed by the Ordinance and the provisions of sections 22 and 25 which were enacted to provide protection and relief to borrowers against excessive interest rates and extortionate stipulations.

50.  In Patience Kasumu and others v Gbadamosi Baba-Egbe [1956] AC 539 the respondent mortgaged property to the appellant licensed moneylender as security for a loan.  The moneylender kept no book recording the transaction as required by section 19 of the Moneylenders Ordinance of Nigeria and the transaction was therefore unenforceable under section 19.  Section 19(4) provided that any moneylender who fails to comply with any of the requirements of the section shall not be entitled to enforce any claim in respect of any transaction in relation to which the default shall have been made and that he shall also be guilty of an offence.

51.  On an appeal from the West African Court of Appeal, the Privy Council held that the Moneylenders Ordinance of Nigeria in enacting that no loan which failed to satisfy the statutory requirements was to be enforced, meant that no court of law was to recognize the lender as having a right at law to get his money back.

52.  At page 551 Lord Radcliffe said:

“ … much of the Moneylenders Act, 1900 and the Moneylenders Act, 1927, is directed to enforcing measures of control that have no concern with the intrinsic nature of the contract made. Such requirements as that the moneylender must be registered or licensed, must use his authorized name, must procure a note or memorandum of the contract signed personally by the borrower, must keep a book in which is entered a contemporary record of the transaction strike indifferently at all moneylender’s loans, however moderate the terms of any particular transaction. When the governing statute enacts that no loan which fails to satisfy any of these requirements is to be enforceable it must be taken to mean what it says, that no court of law is to recognize the lender as having a right at law to get his money back. That is part of the penalty which the statute imposes.”

53.  In Yang Long Shan v Chan Hau Kong (also known as Chan Shun Yuen) and others (HCA 1265/2011, 5 June 2015) Mr Registrar Lung refused an application for leave to amend the statement of claim in that case to include, inter alia, a claim for money had and received.  In considering the application for leave to amend, the Registrar said at para 17:

“ It will be apparent that if the plaintiff’s application 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] AC 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.”

54.  It was pointed out by Mr Hon that in Yang Long Shan the Registrar was dealing with a different section of the Ordinance namely, section 24 which provides in subsection (1) that an offence is committed where a person lends or offers to lend money at an effective rate of interest which exceeds 60%.

55.  Section 24(2) provides that 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).

56.  I accept that the Registrar was dealing with a different section of the Ordinance.  However, it seems to me that what the Registrar said in Yang Long Shan also applies in this case.  The contravention of section 22(1) renders the facility agreement to be illegal and unenforceable.  However, by section 22(2) the court may order the agreement to be enforceable to such extent as the court considers equitable in all the circumstances if the court is satisfied that it would be inequitable that any such agreement which does not comply with subsection (1) should be held to be unenforceable. 

57.  And by section 25(1), where 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 in respect of the terms of the transaction or the rights of the parties as the court may think fit. 

58.  It seems to me that if P wishes to limit his claim to the lesser amount of only the principal sum of HK$18 million without interest, P can do so when asking the court to consider all the circumstances under section 22(2) or when the court reopens the transaction to do justice between the parties under section 25(1).  There is no need for P to amend the statement of claim to add the new cause of action for money had and received in the alternative.  To allow the proposed amendments to be made against D2 would, in my view, be to allow P as the money lender caught by the Ordinance to circumvent the sanctions of the Ordinance.  P should not be permitted to do that.

59.  I am not satisfied that the proposed amendments are necessary either to dispose fairly of the cause or matter, or for saving costs.  In my judgment, the master should have refused P’s application to amend the statement of claim against D2.  

60.  I allow D2’s appeal.  I refuse P’s application against D2 by the summons to add para 22A, part of para 22C as affecting D2 and prayer (3A).  Para (1) of the master’s order is varied to that extent.  Paras (3), (5) and (7) of the master’s order affecting D2 are set aside.

61.  I also make an order nisi that P should pay D2 his costs of the application by the summons before the master, with a certificate for counsel, and his costs of the appeal, all such costs to be taxed, if not agreed.