XCHRX ORIENTAL PATRON CHINA INVESTMENT LTD. v. WONG CHUN HUNG

HCA9947/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9947 OF 2000

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J U D G M E N T

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1. This is an appeal by the defendant against the decision and order of Master Jones whereby, on the plaintiff's application for summary judgment, he ordered that final judgment be entered against the defendant for the sum of HK$7,125,000.00 with interest thereon at 9% per annum from the date of issue to 1 November 2000 and at 18% per annum from 2 November 2000 to date of judgment and thereafter at judgment rate until payment, that the Counterclaim be dismissed and that costs of the application and of the action including of the Counterclaim be to the plaintiff to be taxed if not agreed with Certificate for Counsel.

2. The plaintiff's claim is based upon the liability of the defendant to pay the sum of HK$7,125,000.00 to the plaintiff under an agreement dated 30 November 1998 ("the Subscription Agreement") entered into between the plaintiff and the defendant and an Exchangeable Note ("the Note") issued in the sum of HK$7,125,000.00 by the defendant to the plaintiff pursuant to the Subscription Agreement issued on the same date.

3. The Note contained the following terms and conditions ("the Conditions") :

Clause 1

"Subject as provided herein, the Issuer shall repay such principal moneys outstanding under the Note to the Noteholder on 31st October 2000 (or any date on or before 31st October 2003 if extended by the Noteholder by notice in writing to the Issuer on or before 31st October 2000) (the 'Maturity Date')."

Clause 3

"...In the case of the occurrence of any event of default set out in Condition 9, the Note will bear interest from the date of issue at the rate of eighteen per cent per annum on the principal amount of the Note outstanding up to the date of full repayment thereof."

Clause 9

"If any of the following events occurs, the Noteholder may give written notice to the Issuer that the Note is, and it shall on the giving of such notice immediately become, due and payable at its principal amount outstanding together with interest calculated at the rate of eighteen per cent per annum up to and including the date of repayment :

(a) the Issuer fails to pay the principal amount on the Note when due..."

4. The defendant, being the Issuer, failed to pay the principal amount due on the Note on the Maturity Date to the plaintiff, the Noteholder and the plaintiff therefore issued proceedings claiming the principal sum and interest at the rate specified in the Note.

5. The defendant having admitted that he had executed the agreements referred to in the Statement of Claim including the Subscription Agreement and the Note, raised in his Defence a number of matters :

(i) that the agreements had no legal effect and were void;

(ii) that the defendant had opened a securities trading account with Oriental Patron Securities Limited ("Securities") in April 1998 on the introduction of one Mr Joseph Chan, a director of Oriental Patron Asia Limited who had told him that these companies were closely connected and were in a group and that upon his oral suggestion, the defendant deposited 19,000,000 shares of Dong-Jun (Holdings) Limited ("the Shares") with Securities, the market price of the shares then being about HK28,310,000.00;

(iii) the defendant had conducted securities trading with Securities between the period from May to October 1998 but the volume of trading was minimal;

(iv) in mid-November 1998, Mr Joseph Chan acting for the plaintiff and Securities told the defendant orally that Securities had certain internal accounting problems which would render it subject to investigation by the regulatory body and suggested an arrangement to alleviate Securities' problems whereby it would appear that the defendant would pay a sum of HK$7,125,000.00 to Securities;

(v) the arrangement would be achieved by a subscription agreement, an exchangeable note and a share mortgage agreement;

(vi) in order to induce the defendant to agreeing to entering into these arrangements, Mr Joseph Chan orally assured the defendant that the Subscription Agreement, the Share Mortgage Agreement and the Note were a paper exercise merely for accounting procedure and that the defendant need not pay any money to the plaintiff under the Note upon maturity;

(vii) relying on this representation, the defendant agreed to the arrangement;

(viii) the entire Subscription Agreement was a paper exercise because in fact the defendant did not owe any debt to Securities;

(ix) the plaintiff provided no consideration for the Subscription Agreement or the Note and the plaintiff was not entitled to enforce the Subscription Agreement or the Note against the defendant; and

(x) if the plaintiff had provided consideration for the Subscription Agreement and the Note (which was denied), these were in substance a money lending agreement between the plaintiff and the defendant that was and is illegal and unenforceable on the grounds that the plaintiff was not a licensed money lender, contrary to section 23 of the Money Lenders Ordinance, Cap.163 and/or the terms and conditions of the Note provide that the rate of interest is to be increased from 9% to 18% per annum by reason of default in the payment of the sums due, contrary to section 22(1)(c) of the Money Lenders Ordinance.

6. In his affirmation in answer to the plaintiff's evidence relating to the circumstances leading to the Subscription Agreement and the Note, the defendant reiterated that Mr Joseph Chan of the plaintiff had made the representations pleaded in the Defence. While not denying indebtedness to Securities, he stated that if there was any such debt, it was a matter for Securities to prove in a separate action. His affirmation could fairly be described as evasive and lacking in any particularity.

7. At the hearing before me, the defendant through his Counsel, Mr Jeremy Cheung, abandoned the denial of any indebtedness to Securities immediately prior to the execution of the Subscription Agreement and the Note. This allegation, he said, could not possibly stand at all. Indeed, unless the defendant was to allege that every single page of the exhibited accounts showing the dealings between the defendant and Securities were incorrect or false, Counsel was merely accepting the obvious.

8. Thereafter, Mr Cheung did not address any argument on the representations allegedly made to the 1st defendant as raising a triable issue nor on the alleged absence of consideration for the Subscription Agreement and the Note. Nor did he demur when I stated that it was my understanding that these matters were no longer relied upon by the defendant.

9. Instead, Mr Cheung raised a number of points which he argued "called for some explanation" and which suggested that the Subscription Agreement and the Note might be a paper exercise, thus requiring a trial of the action. Chief among these points was the "discrepancy" or "inconsistency" between the amount of the defendant's indebtedness to Securities immediately prior to the execution of the instruments relied on by the plaintiff and the amount of the Note. There is absolutely no merit whatsoever in this or any of the other points which were intended to suggest that there was more to the transaction between the plaintiff and the defendant than was apparent from the face of the documents.

10. Mr Szeto for the plaintiff pointed out that the Subscription Agreement was by way of deed, that the plaintiff bound itself to subscribe for the Note for cash at par at the total subscription price of HK$7,125,000.00 and to pay the price to Securities (which was also a party to the Subscription Agreement) which was to be applied firstly for settlement of the debt owed to Securities by the defendant, secondly for payment of a placing fee of HK$5,000.00 and reimbursement of all reasonable expenses incurred by Securities in connection with the Subscription Agreement and following such payments, the remaining balance to be paid to the defendant or to his direction. He also pointed to the account between the defendant and Securities which showed that on 30 November 1998, the plaintiff had paid to Securities the sum of HK$7,117,180.67 which cleared the defendant's indebtedness to Securities. The defendant does not advance any case that the plaintiff has failed to comply with the terms of the Subscription Agreement. None of the points raise any triable issue or show a scintilla of a defence or any reason why the plaintiff's case should go to trial.

11. The only matter which could conceivably give rise to a triable issue is the defendant's contentions based upon the provisions of the Money Lenders Ordinance.

12. The material parts of the Defence (paragraph 13) read as follows :

"... the Defendant avers that the Subscription Agreement and/or the Exchangeable Note are in substance a money lending agreement between the Plaintiff and the Defendant that was and is illegal and unenforceable whether as alleged or at all, on the grounds that (i) the Plaintiff was not a licenced money lender, contrary to section 23 of the Money Lenders Ordinance, Cap. 163 and/or (ii) the terms and conditions of the Exchangeable Note provide the rate of interest being increased from 9% to 18% per annum by reason of default in the payment of sums due thereunder, contrary to section 22(1)(c) of the Money Lenders Ordinance, Cap. 163."

13. Mr Szeto contends that there must be a material averment that the plaintiff was a money lender and that the Defence contains no such averment. Mr Cheung says that the clear meaning of the pleading is that the plaintiff was a money lender but an unlicensed one.

14. Mr Szeto is correct in his contention that the defendant must aver and establish that the plaintiff was an unlicensed money lender at the time of these transactions since section 23 only prevents recovery (subject to the operation of the proviso) if the loan was made by a money lender. Similarly, the defendant must aver and establish that the plaintiff was a money lender under section 22(1)(c); otherwise, the fact that the agreement provides for the rate or amount of interest to be increased by reason of any default in the payment of sums due under the agreement does not render the agreement illegal. However, I consider that the pleading does if not expressly then impliedly aver that the plaintiff was an unlicensed money lender at the material time.

15. The defendant argues that notwithstanding there was provision in the Note for the plaintiff at its option to convert HK$3,367,500.00 of the principal amount of the Note in whole or in part into shares of Dong-Jun (Holdings) Ltd, the transaction between the plaintiff and the defendant was in fact a loan. Mr Cheung invites me to look at the substance of the transaction and not just the form of the documents. I accept that for the purposes of this appeal, there is at least an arguable case on the basis of the plaintiff's own evidence that the transaction was in substance a loan by the plaintiff to the defendant.

16. However, the real issue is whether the defendant has shown enough to raise the inference that the plaintiff is a money lender as defined in section 2(1) of the Ordinance which provides :

"In this Ordinance, unless the context otherwise requires...

'money lender' means every person whose business (whether he carries on any other business) is that of making loans or who advertises or who announces himself or holds himself out in any way as carrying on that business, but does not include -

(a) a person specified in Part 1 of Schedule 1; or

(b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such loan."

17. Mr Cheung referred me to paragraph 5 of Part 2 of Schedule 1 of the Ordinance, Part 2 being headed "EXEMPTED LOANS" and to particular passages in the judgments of Lord Denning and Lord Justice Diplock in Premor Ltd v. Shaw Brothers (a firm) [1964] 1 WLR 978 in order to show that the loan was not an exempted loan. The short answer to his argument is that the latter case was dealing with a different statutory provision which is not in similar terms to the relevant definition provisions in the Ordinance.

18. In any event, as Mr Szeto pointed out, Mr Cheung had totally misconceived the effect of the definition section. One does not start by asking whether the loan is an exempted loan under Part 2 of Schedule 1. If the business of the person in question is not the making of loans and the person does not advertise or announce himself or hold himself out in any way as carrying on the business of making loans, then that person is not a money lender and it is then unnecessary to consider the provisions in Part 2 of Schedule 1. That submission is plainly right.

19. The only question therefore is whether a defendant to whom a loan is made can simply aver without the slightest evidence whatsoever that the lender is a money lender so as to raise a triable issue on an application for summary judgment. It is not suggested by the defendant that he has any evidence whatsoever that the plaintiff is in the business of making loans; no advertisement, announcement or holding out has been alleged by the defendant and none is in evidence. Indeed, Mr Cheung based a good deal of his misconceived argument on the effect of paragraph 5 of Part 2 of Schedule 1 on the fact that the plaintiff in its evidence stated that these transactions were not the normal business of the plaintiff and was a single odd investment and therefore exempted. There was ample evidence, none of which the defendant denied that without this special arrangement, the defendant would have been at risk of having his substantial shareholding in Dong-Jun (Holdings) Ltd diluted by the sale of the shares given as security for the short term margin loan extended by Securities.

20. Mr Cheung referred me to two cases in support of his argument that such a course was permissible. The first case is Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155 where an appeal against the granting of unconditional leave to defend to enable a defendant to establish a defence under the provisions of the Money Lenders Ordinance precluding the plaintiff from enforcing an apparent agreement for sale and purchase of the defendant's property was dismissed. Since the majority of the Court considered there was something in the nature of the loan to suggest that the plaintiff might be a moneylender, the defendant was given leave to advance that defence at the trial. The astonishing features of that transaction causing the eyebrows of Godfrey JA to rise into the stratosphere are fully set out in his judgment at p. 156 E-G. I consider this case to be distinguishable as there are no such features in these transactions even to raise a single eyebrow.

21. Although Godfrey JA did refer to the case of Nash v. Layton [1911] 2 Ch. 71, the second of the cases on which the defendant relies on this issue, considering it to be good law, it is by no means clear to me that on this point, he was in the majority. Mortimer JA left open the question whether a defendant could raise a defence under the Money Lenders Ordinance in the hope of obtaining some evidence which supported the defence by the administration of interrogatories.

22. I see no reason to apply the case of Nash in this jurisdiction and to give defendants a general licence to fish in the hope that something may turn up on discovery which provides a defendant with some support for a bare allegation that the plaintiff is a money lender. This would be completely at odds with the principles governing applications for summary judgment where the fact that the defendant wishes to obtain discovery in the hope that something turns up to afford him a defence would not be a sufficient ground for allowing a case to go to trial.

23. This case is not one where the nature of the transaction itself is so surprising as to raise any inference that the plaintiff is a money lender. Nor is there any evidence that the defendant was introduced to the plaintiff as a known money lender. The defendant does not bring forward any evidence to suggest that the plaintiff is a money lender.

24. The defendant has not raised any triable issue nor shown any arguable defence and there is no fair or reasonable probability of the defendant having a real or bona fide defence. The bare averment that the plaintiff is a money lender is not credible. The defendant's appeal is therefore dismissed.

25. I make an order "nisi" that the defendant do pay the plaintiff's costs of this appeal.