CHAN PING CHE v. GAO GUNTER

CACV 253/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 253 OF 2014

(ON APPEAL FROM HCA 2134 OF 2013)

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REASONS FOR JUDGMENT
AND DECISION ON COSTS

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Hon Barma JA (giving the Judgment and Decision on Costs of the Court):

1. This was an appeal by the defendant, Gao Gunter, against two decisions of Deputy High Court Judge Seagroatt, dated 17 October 2014 and 17 November 2014 respectively, leave to appeal having been given by this court on 11 December 2014. The underlying claim was brought by the plaintiff in respect of loans made by him to the defendant, and certain cheques issued to him by the defendant which had been dishonoured. The cheques had been provided as security for the loans, which the plaintiff had made to the defendant in 2010 and 2011.

2. The first decision appealed from related to the plaintiff’s application for summary judgment.  The judge granted conditional leave to the defendant to defend the proceedings brought against him, the condition being that the defendant should, within 28 days, pay into court HK$124,471,243 (essentially the amount of the outstanding debt after giving credit for repayments that had been made).  The second decision consisted of a refusal by the judge to vary his earlier order, together with a refusal of grant leave to appeal or a stay of execution pending appeal.

3. Leave to appeal was, as mentioned above, granted by this court.  It was granted subject to a condition requiring the defendant to pay into court the amount of HK$30 million (representing slightly less than 25% of the amount ordered by the judge to be paid into court), this being the amount which the defendant said he would be capable of raising from borrowings or other sources.  This condition was met by the defendant within the time allowed to him.

4. On appeal, Mr Aiken SC, appearing for the defendant, contended that the defendant should be given unconditional leave to defend, as he had genuine and well arguable defences available to him.  Alternatively, Mr Aiken contended that, if any condition were to be imposed on the grant of leave to defend, the condition should be varied so that the amount to be paid in should be HK$30 million (the amount paid in to satisfy the condition imposed on the stay of execution which we granted) as that was the most that the defendant could provide at this stage, so that to require him to make a more substantial payment in would be effectively to deny him leave to defend, which would be wrong in principle.

5. At the end of the hearing, we allowed the appeal to the extent of varying the condition on which leave to defend would be given to a condition requiring the defendant to pay into court the amount of HK$30 million. As the defendant had already paid this amount into court, there was nothing further he needed to do, and he would be able to defend the claim against him. We indicated that we would hand down the reasons for our judgment at a later date.  So far as costs were concerned, having heard submissions from both parties as to the appropriate costs orders for the appeal and the hearing below, we indicated that we would give our decision on costs at the same time as we handed down our reasons for our judgment.  These are our reasons for judgment and decision on costs.

6. Although the plaintiff’s claim was founded on dishonoured cheques, it is necessary to refer to the underlying loans between the plaintiff and the defendant in settlement of which the cheques were provided, as the defences which the defendant wishes to advance relate to those underlying loans, the contention being that the invalidity of those loans renders the cheques given in repayment of them unenforceable.

7. In December 2010 and January 2011, the plaintiff made three loans to the defendant, each of which was the subject of a detailed loan agreement between them:

(1)  A loan of HK$40 million, made pursuant to a loan agreement dated 16 December 2010 (“Loan A”).  The loan agreement provided (so far as relevant for present purposes):

   (a)  that the loan period would be three months (clauses 1.1 and 5.1);

   (b)  that the interest rate would be 15% per annum and that the interest on the loan should be paid on the maturity date (clause 4.2);

   (c)  that default interest would be payable at the rate of 5% per month on any sum not paid when due (clause 13.1);

   (d)  that default interest would be compounded at the end of each successive funding period considered appropriate by the plaintiff (clause 13.2).

(2)  A further loan of HK$40 million, made pursuant to a loan agreement also dated 16 December 2010 (“Loan B”).  The loan agreement provided (so far as relevant for present purposes):

   (a)  that the loan period would be six months (clauses 1.1 and 5.1);

   (b)  that the interest rate would be 15% per annum and that the interest on the loan should be paid on the maturity date (clause 4.2);

   (c)  that default interest would be payable at the rate of 3% per month on any sum not paid when due (clause 13.1);

   (d)  that default interest would be compounded at the end of each successive funding period considered appropriate by the plaintiff (clause 13.2).

(3)  A loan of HK$45 million and RMB 30 million (then equivalent to about HK$35 million), made pursuant to a loan agreement dated 27 January 2011 (“Loan C”).  The loan agreement provided (so far as relevant for present purposes):

   (a)  that the loan period would be three months (clauses 1.1 and 5.1);

   (b)  that the interest rate would be 30% per annum and that the interest on the loan should be paid on the maturity date (clause 4.2);

   (c)  that default interest would be payable at the rate of 5% per month on any sum not paid when due (clause 13.1);

   (d)  that default interest would be compounded at the end of each successive funding period considered appropriate by the plaintiff (clause 13.2).

8. None of the loans were repaid on their due date.  Apart from some relatively small amounts paid by way of interest, no repayment was made by the defendant for some considerable time.  Eventually, apparently after some pressure being brought to bear, the defendant eventually provided the plaintiff with two cheques totalling HK$270 million (the cheques were both dated 24 April 2012, and were for HK$170 million and HK$100 million respectively).  When no further repayment was made, these cheques were presented for payment on 24 October 2012, but were dishonoured.  Notice of dishonour was given shortly afterwards, and a writ was eventually issued on 7 November 2013.  Prior to the issue of the writ, two partial repayments were made – HK$15 million was paid on 16 November 2012, and a further RMB 16 million was paid on 16 February 2013.  By the writ and the statement of claim endorsed on it, the plaintiff made a claim for the outstanding balance of the loans (with interest) (according to the plaintiff, this amounted to HK$244.9 million and RMB 78.7 million odd, and also made a further or alternative claim for HK$270 million plus interest on the basis of the dishonoured cheques.

9. At the hearing below, the defendant contended that he should be given unconditional leave to defend the claims, on the basis that:

(1)  The three loans were in reality a roll-over of an earlier loan made by the plaintiff, referred to by the parties as the “Dadra loan”, which was advanced in connection with a property transaction involving the purchase of a building in Wanchai known as the Neich Tower.  According to the defendant, the Dadra loan was unenforceable by virtue of sections 24(1) and (2) of the Money Lenders Ordinance (Cap 163) (“the MLO”) because the effective rate of interest on the Dadra loan exceeded 60% per annum.

(2)  The three loans were also unenforceable in themselves, as they provided for the charging of compound interest and default interest and so were illegal pursuant to sections 22(1)(a) and (c) of the MLO, and because the plaintiff was an unlicensed money lender, rendering the loans illegal under section 23 of the MLO.

(3)  The three loans were unenforceable for the further reason that the effective interest rate under each of them (or at least in respect of Loans A and C) exceeded 60% per annum, and so fell foul of sections 24(1) and (2) of the MLO.  Calculations said to show this, which took account of the default interest rate and also took account of certain legal and transactions fees borne by the defendant, were put before the judge by the defendant’s counsel.

10. The judge rejected the first of these defences, describing it as a “sham”, pointing out that, prior to these proceedings, no link had ever been suggested between the Dadra loan and the three loans the subject matter of these proceedings.  He also considered that the evidence showed that the purpose of the three loans was different from that of the Dadra loan.

11. As to the second set of arguments, the judge was of the view that having regard to the defendant’s sophistication as a businessman who had dealt with the plaintiff on an arm’s length basis, and had obtained the benefit of the loans, the court would have no hesitation in exercising its discretion (under sections 22(2) and 22(3)) to order that the loans should be enforceable notwithstanding the breaches of sections 22(1) and 23(1).

12. Finally, as to the third line of argument mentioned above, the judge said (at paragraph 27 of his judgment) that “whether the overall provision for the payment of interest on any one or more of these three loans falls foul of the provisions of section 24 … is subject to future argument in view of my decision which follows”.  However, we were unable to identify in the following parts of the judgment any further reference to section 24, or to the calculations of the effective rate of interest on each of the loans which had been put before him by the defendant.

13. At the end of the day, the judge granted the defendant conditional leave to defend the proceedings, imposing a condition that an amount equivalent to the outstanding principal amount of the three loans (treating the two repayments that were made as repayments of principal) should be paid into court.  We think that in so ordering, the judge must have had in mind his view that the section 22 and 23 points would not result in the loans being rendered wholly unenforceable, and that the section 24 point should be dealt with at trial (perhaps because of the complexity of the calculations put before him, and disputes as to whether or not the transaction fees should be taken into account in making those calculations), leading him to the think that the plaintiff would be very likely to recover at least the principal amount of the loans, so that it would be appropriate for payment of such amounts to be made a condition of the grant of leave to defend.

14. After the judge gave his decision on the summary judgment application, the defendant applied to him for a variation of the order to reduce the amount to be paid in as a condition of leave to defend, on the basis that he was unable to raise that amount.  This application was, as we have noted, rejected.

15. As noted above, when the application for leave to appeal came before us, we granted leave to appeal.  We also granted a stay of the order below, on condition that an amount of HK$30 million was paid into court, this being the amount that the defendant said he would be able to raise.

16. At the hearing before us, Mr Aiken relied on the same arguments as he had put forward on behalf of the defendant before the judge.  However, so far as the argument based on section 24 of the MLO was concerned, he placed before us revised calculations, which were simpler than those before the judge as they left out the effect (if any) of the transaction fees (which related in the main to legal costs).  Although Mr Kenneth Chan, appearing for the plaintiff, objected to the introduction of this material, we saw no good reason to exclude such calculations from consideration (if anything, they resulted in a slightly lower effective rate of interest being arrived at), and accordingly permitted Mr Aiken to rely upon them for the purposes of this hearing.  We also specifically asked the parties to address us as to the nature of the condition that should be imposed, if we came to the conclusion that it would be appropriate to grant some form of conditional leave to defend, having regard to the defendant’s stated inability to comply with the condition imposed by the judge.

17. Dealing first with the argument that the three loans constituted a roll-over of the Dadra loan, and so were infected with the same illegality that affected the Dadra loan, Mr Aiken urged that notwithstanding that the three loans were not expressly stated to be roll-overs of the Dadra loan, were for a different amount and were denominated in different currencies, and were not advanced until at least six days after the Dadra loan had been repaid upon the sale by the defendant of the Neich Tower (for the financing of the acquisition of which the Dadra loan had been granted), the three loans should still be regarded as in effect a roll-over of the earlier Dadra loan.  He pointed out that the evidence appeared to suggest that the plaintiff would not have been in a position to advance the three loans without the earlier receipt of the repayment of the Dadra loan.

18. The judge regarded this defence as at best contrived.  Although we would not go so far as to characterise it as a sham, as the judge did, we cannot agree that this defence is one in respect of which unconditional leave to defend should be given.  There are clearly formidable obstacles in its path, as summarised in the previous paragraph.  The three loans would seem to have been for a different purpose (the Dadra loan had been advanced to assist with the acquisition of the Neich Tower, which had, by the time that the three loans were made, been sold).  They were, as noted above, denominated in different currencies.  There was a six day gap between the repayment of the Dadra loan and the advancing of the first tranches of the three loans.  The fact that the plaintiff may have needed the repayment of the Dadra loan in order to be in a position to make the three loans is not, of itself, sufficient to lead to the conclusion that the three loans were intended by the parties to serve as a roll-over of the Dadra loan.  In these circumstances, we do not think that the judge can be criticised for regarding this defence as at best shadowy, or of such a nature as to call for the imposition of conditions on the granting of leave to defend.  We will return later to the question of what condition should have been imposed in terms of the amount to be paid into court.

19. We turn next to consider the defences based on sections 22 and 23 of the MLO. Like the judge, we would accept that the prohibitions in sections 22(1)(a) and (c), and section 23, appear to be engaged in relation to the three loans.  But we would equally accept that there are solid grounds for thinking that a court dealing with the claim might well conclude that the loans should be held, pursuant to the court’s discretion conferred upon it by sections 22(2) and 23(2) respectively, to be enforceable in part, for the reasons given by the judge.  In these circumstances, we are of the view that it was open to the judge to grant leave to defend subject to the imposition of a condition of the sort that the judge imposed – again, we leave for later consideration the appropriate level of the payment in to be required.

20. The position in relation to the defence based on section 24 is different.  There is no question of any discretion on the court’s part to allow enforcement of part of all of the loans and their terms if a particular loan provides for an effective interest rate exceeding 60% per annum.  The question therefore is whether the particular loan agreement provides for such an interest rate to be payable.

21. Mr Aiken’s argument ran as follows.  Using Loan A as an example, he contended that the appropriate calculation (in accordance with the provisions of Schedule 2 of the MLO, which provide the method for calculation of the effective rate of interest), he pointed out that the principal amount of the loan was HK$40 million, and that according to the terms of the loan, which was of three months duration, interest was payable at 15% per annum, with the interest payable on the loan (HK$1.5 million) to be paid to the plaintiff together with repayment of the principal on the loan maturity date (three months from the date of the loan being advanced) (clauses 1.1 and 4.2).  As nothing was paid on the maturity date, default interest at the rate of 5% per month became payable on all sums due (i.e. the loan principal and the interest provided for under clause 4.2), so that default interest would run at 5% per month on the total sum of HK$41.5 million.  This meant, said Mr Aiken, that for any 12-month period after the maturity date, even assuming that the default interest was not compounded (as to which there was no evidence), some HK$24.9 million of interest would be payable.  When this was expressed as an annual percentage rate in terms of a loan with a principal amount of HK$40 million, this resulted in an effective rate of interest of 62.25% per annum, which was in excess of the maximum effective rate of interest permitted under section 24, rendering the loan irrecoverable pursuant to section 24(1).

22. Adopting the same methods of calculation, after default, the effective rate of interest in respect of Loan B was 38.7% per annum, and that in respect of Loan C was 64.5% per annum.

23. Mr Chan urged us to have regard to the fact that the plaintiff did not in fact claim default interest on the element of loan interest (and thus, according to Mr Chan, had not actually charged an effective rate of interest exceeding 60% per annum).  However, as Mr Aiken pointed out, whatever the plaintiff might in fact have done was not relevant.  What was relevant, for the purposes of section 24, was whether the loan agreement provided for the charging of interest at an effective rate of over 60% per annum.  On the basis of Mr Aiken’s calculations, Loans A and C did (although Loan B did not).

24. Mr Chan also suggested (without providing detailed calculations) that as the interest rate for the first three months of Loan A was less than 60% per annum, it followed that at the end of one year, the effective rate of interest for the full year would be less than 60% per annum (and that the average annual rate would remain below that level going forward).  But even if this is right, it does not provide an answer to the section 24 point, since in the second and subsequent years, the effective rate of interest would seem to be as suggested by Mr Aiken.  While it is not necessary to come to a concluded view as to the merits of the defence at this stage, it seems to us to be at least well-arguable that Loans A and C, on their terms, fall foul of section 24 so as to be irrecoverable.

25. That being the case, it seems to us that the judge was in error in failing to deal with the argument based on section 24 of the MLO when that had been raised before him.  Had he done so, he should have concluded that there was an arguable defence and granted unconditional leave to defend in respect of Loans A and C.  However, the position in respect of Loan B is different, in that (as Mr Aiken accepted) the effective rate of interest after default in repayment of principal and interest was 38.7%, so that the section 24 defence would not be available to the defendant in respect of that loan.  Thus, in respect of Loan B, the defendant is left with the defences under sections 22(1)(a) and (c) and section 23 of the MLO, and the argument that the Loan was a (partial) roll-over of the Dadra loan.  As we have already said, we think the judge was justified in thinking that those defences would at best entitle the defendant to conditional leave to defend.

26. As the principal amount of Loan B was HK$40 million, it seemed to us that taking account of such interest as might be allowed to be charged, and the repayments made, a payment into court of HK$30 million would be a suitable level of payment in to be required as a condition of obtaining leave to defend.  Although Mr Aiken suggested that the defendant might have difficulty in maintaining that amount of security for an extended period of time, there was no evidence before us to make good that contention.  On the basis that security of HK$30 million should be provided, it is not necessary to consider the question of the defendant’s ability to put up such security (it having already been lodged).

27. For the foregoing reasons, we allowed the defendants appeal to the extent of varying the condition upon satisfaction of which he should be given leave to defend the plaintiff’s claims to the making of a payment into court of HK$30 million.  As this amount has already been paid in, it will simply remain in court pending the outcome of these proceedings.

28. Finally, so far as costs are concerned, having heard the parties submissions on this at the conclusion of the oral hearing, we think that the appropriate costs orders are as follows:

(1)  in respect of the costs of the appeal, although the defendant failed on the roll-over point, he has been largely successful on the appeal as a whole, and we therefore order that the plaintiff should pay the defendant three-quarters of the costs of the appeal; and

(2)  in respect of the costs below, that costs should be in the cause, as although this was a proper case for a condition to be imposed, the condition should only have been in respect of Loan B, so that the amount would have to be varied in any event.