CHAN PING CHE v. GAO GUNTER

HCA 2134/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2134 OF 2013

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1.  The plaintiff is a merchant. He owns or controls as the major or sole shareholder a number of companies. He is suing the defendant on two dishonoured cheques totalling in value HK$270 million. Those dishonoured cheques were purportedly in repayment of loans and interest pursuant to loan agreements made with the plaintiff in December 2010 and January 2011. The plaintiff having commenced proceedings and served his Statement of Claim to which the defendant has served a defence, seeks summary judgment essentially on the strength of the cheques being dishonoured. A cheque, it is trite to say, is an unconditional promise, in writing, by the signer to pay the payee.

2.  In the pleadings and the skeleton argument on his behalf, the defendant, has sought to resurrect as part of the basis of his defence, an earlier loan agreement when he had his initial contact with the plaintiff, or the plaintiff’s companies.  The second plank of his defence is that the plaintiff is an unlicensed moneylender and the loans made by him are in breach of the Moneylenders Ordinance, Cap 163 in particular sections 18, 22, 23 and 24.

The Dadra Loan Agreement of September 2009

3.  The defendant is a mature businessman of some experience and himself owns and/or controls a number of companies, e.g. Nine Dragon, Sunbase, Billion Trend, Harvest Superior.  The amount of money involved in all these various loans is considerable.  Whilst the term “a man of sophistication” is open to a range of definitions according to the nature of his business activity, and way of life and may well be applicable to this defendant in some respect, it may be more precise to describe him as a businessman who knows his way around the world of business and knows what “he is about” and is accustomed to dealing with large sums of money, and obtaining substantial credit. 

4.  I do not propose to consider the Dadra Loan Agreement, as he describes it, in great detail because in my judgment it is of no real relevance and is more of a diversionary tactic in his defence.  It is also the subject of other proceedings in which he is also a defendant and has been given leave to defend [see HCCL 11/2013 per Godfrey Lam J, 11 October 2013]. It arose out of the defendant’s intention to purchase a building known as Neich Tower for HK$668 million.  One of his sources of funding was the Hang Seng Bank in the sum of      HK$448 million.  It was clear that the bank regarded him as both creditworthy and far from being a novice in the financial scene.  Two of his companies, Billion Trend Holdings Ltd and Harvest Superior Limited, both grandiose sounding corporations incorporated in the British Virgin Islands, were involved.

5.  On 25 September 2009 a loan agreement in the sum of HK$190 million was signed with Dadra Incorporated, another BVI company but under the control of the plaintiff.  The actual funds for the loan may well have come from another company under the control or direction of the plaintiff, Fidelity Insurance Company Limited.  The funds were advanced in two tranches, the second including about half of the arrangement fee payable to a middle man (Ivy Chan’s consultant company).

6.  The duration of the loan was to be 40 days.  The defendant sought to raise an allegation of dubious involvement on the part of the “arranger” and his own solicitor in the transaction.

7.  The loan was extended by an agreement dated 27 October 2009.  By the end of 2009 the defendant (Mr Gao) had still not been able to find a purchaser for Neich Tower and his indebtedness was mounting.  As a result he entered into a further loan agreement this time with the arranger of the original loans, Ivy Chan, or more accurately a company owned or controlled by her Dutfield International Group.  The amount involved in the agreement was HK$57 million or its equivalent.  An element of this arrangement was the payment of an earlier arrangement fee of HK$15.2 million, allegedly due to her.  Recovery by Dutfield of the loan was at the core of its action, and the points of dispute in the hearing before Godfrey Lam J were:

(1) the nature of the loan agreement of January 2010 between Nine Dragon (Gao’s company) and Dutfield (owned by Ivy Chan);

(2) whether the loan money was ever paid over or advanced;

(3) the position of Mr. Gao’s solicitor who happened to be Ivy Chan’s husband;

(4) whether the loan was, in any event and all the circumstances, in the interests of Mr. Gao and/or Nine Dragon;

(5) the odd accounting exercise in relation to the arrangement fee; and

(6) the interest provision in respect of the arrangement fee for which there was no documentary support.

8.  In late 2010 the property Neich Tower was sold at a profit of about HK$160 million.  The exact figure is immaterial.  I have taken this from the defence.  The original loan of HK$190 million was repaid to Dadra together with over HK$148 million in interest or other fees.

9.  The defendant has put forward some convoluted story about further discussions with a certain Jimmy Zhu and constructed an arrangement which he designated a “Rolling‑over arrangement”, in order to provide some link between the original loan from Dadra to purchase the Neich Tower, and the loans which are the subject of this action, the first of which was made in December 2010.  This devious web of complex exchanges I do not find at all credible.  It has no relevance to the claim by the plaintiff against the defendant.  I do not need to deal with any argument about the rates of interest applicable to the Dadra loan.  Suffice it to say that the defendant on his own story was well aware of the impact of the rates of interest on the debt he had incurred in relation to the purchase of Neich Tower.  His eyes then were wide open when it came to arranging the subsequent loans.  However I think it prudent to have regard to certain considerations expressed by Godfrey Lam J in paragraph 36 of his judgment.  I quote:

[In the context of the first two loans by Dadra for the purchase of Neich Tower.]

“The first Dadra loan was therefore arguably illegal under the Money Lenders Ordinance (especially s.24) since the effective rate of interest exceeded 60%. The second loan of Dadra, being in substance an extension of the first loan, was therefore arguably illegal.”

10.  I have considered how this may affect the matter before me and will review the background.

The loans in question in this action

11.  The defendant accepts that the following loans were in fact made:

(1) HK$40 million on 16 December 2010 for three months at an interest rate of 15% per annum (and a default rate of interest of 5% per month);

(2) HK$40 million on 16 December 2010 for six months at an interest rate of 15% per annum (and a default rate of interest of 3% per month); and

(3) HK$45 million – RMB 30 million on 27 January 2011 for three months at an interest rate of 30% per annum (and a default rate of interest of 5% per month).

12.  There were initially identical loan agreements in writing in respect of all these loans.  They comply, in the main, with section 18 of the Money Lenders Ordinance.  But they include a provision for payment of compound interest (in respect of the default interest) which falls foul of section 22(a) and (c).

13.  The first two loans were made by one cheque of HK$80 million from Fidelity Insurance.  The defendant has sought to argue that this was a single loan of HK$80 million.  I do not consider that argument is tenable.  There are two discrete agreements which although providing for payment of identical loans of HK$40 million have different provisions in relation to the time for repayment as set out earlier – viz. the first in time is for 6 months or 3 months whichever is regarded as first in time, both being of the same date.  No repayment was made within any of the periods save that HK$3,328,757 was paid in respect of interest on 27 April 2011.

14.  In view of the arrears of payment the plaintiff asked for a cheque for HK$80 million as a security for the arrears.  This cheque was replaced by a cheque for HK$170 million. Again no further payment was actually made.  By 24 April 2012 the arrears of principal plus interest totalled HK$257,909,159.

15.  As a consequence of pressure brought to bear the defendant issued two cheques, for HK$170 million and HK$100 million respectively, both dated 24 April 2012, payable to the plaintiff.  It was agreed between the parties that the plaintiff would withhold presentation of the cheques for a period of time to allow the defendant further opportunity to settle the total of the outstanding debt.

16.  However despite the forbearance the defendant failed to make payment and the plaintiff presented both cheques on or about 24 October 2012 shortly before their period of validity expired.  Both were dishonoured on presentation. 

17.  Notice of dishonour was given by the plaintiff’s solicitor in a letter before action dated 30 October 2012.  Further sums were paid by the defendant, HK$15 million on 16 November 2012 and RMB16 million on 16 February 2013 which were honoured.

18.  Part of the plaintiff’s claim is based on the dishonoured cheques.  His contention is that the total, HK$270 million, includes the principal debt plus some interest.  There is no defence to such a claim on the facts of this case and but for other considerations which follow he would be entitled to judgment on this basis at least, subject to any reduction for matters which I will set out shortly.

19.  I am satisfied that the defendant defaulted in payment of the loans.  The agreements were unequivocal in form and subject to the matter of the Money Lenders Ordinance, were unobjectionable.  They were free‑standing and had no link with any previous loan/debt arrangement between the defendant and any of the plaintiff’s companies.  There is in any event no reference in any of the three agreements to any earlier arrangement or contract.

20.  There is no other documentary evidence which raises what obviously the defendant regarded as the unhappy spectre of the Nadra loan which he had paid off, albeit at a significant cost. 

21.  It is not unimportant to have regard to the contents of the defendant’s letter of 31 October 2012 to the plaintiff (almost two years after the initial two loans of December 2010):

“Regarding repayment of the loan and interest to your side, as my Shenzhen Century Epitech Co. Ltd requires more time on the arrangement of the project and disposal of land, please understand and further extend the repayment date. I hereby deliver my greatest thanks. Now arrangements have been made to pay HK$10 million first as interest before 10 November. The repayment of the balance and interest has to be by instalments and extended till before the end of December of this year [2012]. I hereby write to earnestly request your grant of extension with understanding.”

This was in fact followed by a payment of HK$15 million on 16 November 2012.

22.  In passing, and with some sense of its importance in another context, I referred to the heading of the notepaper used by the defendant.  It set out his various positions in certain institutions: committee member of the National Committee of the CPPCC of the People’s Republic of China; Committee member of the Election Committee of the Chief Executive of the HKSAR, and of the Election Committee of the Legislative Council of the HKSAR to name but three of those concerned with the political union of China and Hong Kong.  Others show his standing with general trading and commercial organisations in Hong Kong.  To cap the picture, he is a Justice of the Peace.  He sets himself out as a businessman of some standing with experience in a variety of areas. 

23.  The Nadra/Neich Tower transaction and the transaction involving these three loans shows the defendant being involved in “big business” perhaps of a speculative nature with projects on the mainland as well.  Difficulties arose for him in relation to the Neich Tower transaction because he could not sell it as soon as he had hoped.  When he did sell it his profit was substantially reduced to take account of the cost of borrowing the large sums to finance perhaps another speculative deal described by him in his letter of 31 October 2012 when he was expressing his gratitude for the plaintiff’s forbearance and promising a further payment. At no stage did he mention anything which indicated financial difficulty consequent upon the Nadra loan, or that his need for loans was related to his net loss on the Neich Tower transaction.  These loans were clearly for another business venture or ventures.

Conclusions

24.  I regard the defence advanced in relation to these loans as being a sham.  Prior to the litigation there existed no evidence or contention to suggest the “roll‑over” link with the Nadra loan.  In fact everything points against this notion.

25.  He is a man of some maturity, standing and business experience on a substantial scale in monetary terms.  If I were to adopt the term “sophistication” it fits him. 

26.  However, I have no difficulty in concluding for present purposes that the plaintiff was operating a money‑lending business and was unlicensed. Furthermore the default provision relating to the rate of interest clearly falls foul of section 22(a) and (c) of the Money Lenders Ordinance.

27.  Whether the overall provision for the payment of interest on any one or more of the three loans falls foul of the provisions of section 24, with particular relevance to part 2 of Schedule 1 of the Ordinance, is subject to future argument in view of my decision which follows.  The plaintiff cannot rely upon the waiver and severability provisions in clause 15. 

28.  In relation to all other aspects of the loans I would have no hesitation in applying the discretionary provisions on the basis of equity in sections 22(2) and 23.  These loan transactions were at arms length.  The defendant was at all times experienced, competent and wholly “au fait” with all the circumstances.  He gave cheques, firstly to try and induce in the plaintiff a degree of confidence in his ability and intention to repay, and ultimately as unconditional promises to pay which were dishonoured.  Thereafter he made some effective payments which he himself designated as partly in respect of the principal due, and partly for interest. He has had the benefit of these considerable loans.  At no stage, until he was faced with proceedings did he raise expressly or by implication any opposition on any basis to the legitimacy of these agreements, or any tenuous link with their earlier business agreement [i.e. the Nadra loan].

29.  Mr Nigel Aiken SC, for the defendant, has urged that the provision in the loan agreements for the payment of legal costs etc., in the negotiation for a preparation of the documents (clauses 8.1 and 8.2), is also objectionable but in my view that contention is not valid.  In contrast to the Nadra loans (as I understand them) these costs and expenses were not deducted from the loan. 

30.  The third loan agreement of 24 January 2011 provided for payment of HK$45 million and RMB30 million.  Both these sums were paid in their entirety to the defendant’s company via its or his Shenzhen Bank account.  The amount of costs etc. provided for in clause 8.1 were paid by the defendant to the plaintiff’s solicitors.  Clause 7.1 in each of the agreements stipulated that the loans would be paid “free and clear of any deductions or withholdings of any nature” None of the loans included any sum, specified or otherwise, for the items of costs and charges identified in clause 8.1, which was therefore of no effect and overridden by clause 7.1.

31.  Mr Aiken SC also raised an argument that the interest provisions in the Share Mortgages of 16 December 2010 both signed by the defendant to secure the two loans totalling HK$80 million were part of the loan provisions themselves.  This is a misunderstanding of clause 10.2 of the mortgage ‑‑‑ it relates to a default interest of 2% if the security (the shares) do not realize the amount secured. 

32.  I have been referred to a number of authorities the principles behind which are clear but as they all indicate, expressly or by implication, that it is essential that the circumstances of each case are considered.  (Strong Offer Investment v Nyen Ting Chuang; Orix Asia Limited v Gant Forward; Celestial (International) Securities v William Henry Woo; Newton v Pyke (1988) 25 TLR 127 amongst others.) 

33.  Applying the time‑honoured criteria in relation to Order 14 proceedings, if the alleged Nadra “Roll-over” link was the only argued defence I would enter judgment for the plaintiff.  I regard that defence as a sham and have already indicated my reasons.

34.  But the enforceability of the agreements under the Money Lenders Ordinance (Cap 163) provides a different scenario.  In spite of the defendant’s own attitude to the agreement before he made the belated ‘volte‑face’ I think he should have the opportunity of advancing those arguments at trial when a number of aspects can be ventilated fully.  Although I have made it clear that on the present picture I would exercise my discretion in the plaintiff’s favour in order to do equity, it is possible that the situation could change.  Accordingly I give leave but on the condition that the defendant pays into court the principal amount of the three loans less the payments he has made since.  He has had the benefit of those loans for almost four years, and used his standing and promises in order to gain extra time.  Moreover his two cheques were dishonoured.  It is only equitable in my judgment that he pay into court, the sums he has received on the strength of his promises and representations, and his conduct in relation to these loans. 

35.  There is one other point I should add.  Although I have poured scorn on the “roll-over” defence, as I call it, trying to link it to the Nadra loans, I noted in the judgment of Godfrey Lam J in HCCL 11/2013 that he found those loans as arguably illegal and possibly tainting the arrangement fee in those transactions which was the subject of the Order 14 proceedings before him.  In these circumstances I have therefore left it open to the defendant to try and convince the trial judge that there is some substance or material element in this defence which I have overlooked.

36.  Following delivery of the above judgment and having already indicated that I would allow a period of 28 days to the defendant to make the payment in, both counsel agreed that there should be liberty to apply if either party wanted to raise some alternative to payment in of the sum of HK$270 million (less the payments already made) though the initiative for that and for any other variation of my order would have to come from the defendant.

37.  Having indicated that I was minded to make an order that costs be in the cause, the parties’ respective counsel did not disagree.  Those are my orders consequent upon today’s hearing.