HONG KONG PROPERTY MORTGAGE LTD v. NG LAI PING CATHY

DCCJ 3903/2015

[2018] HKDC 431

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3903 OF 2015

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JUDGMENT

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BACKGROUND

1.  This is a money lender’s action brought under Order 83A of the Rules of the District Court.  The plaintiff is and was a licensed money lender under the Money Lenders Ordinance (“MLO”) at all materials times and the defendant was a customer of the plaintiff who had been granted three loans by the plaintiff.  The defendant was introduced to the plaintiff by Honest Service Property Consultants Limited (“HSPC”).  By this action, the plaintiff seeks to enforce the agreement in respect of the third loan.

2.  An agreement in respect of the first loan was signed on 30 June 2014 at the office of the plaintiff, with the loan amount being HK$880,000, the drawdown date being 25 July 2014 and the assigned Loan No being LA06004/2014 (“1^st Loan Agreement”).  On 25 July 2014, the defendant attended the office of Messrs KB Chau & Co (“KBC”), solicitors, to sign a formal loan agreement (“1^st Formal Agreement”). 

3.  In the Second Schedule to the 1^st Formal Agreement, the date of making of the loan agreement is stated as 25 July 2014.  Both the 1^st Loan Agreement and the 1^st Formal Agreement provide for repayment by way of 12 instalments, but the repayment schedule signed by the defendant on 25 July 2014 shows a total of 13 instalments.  There would be no repayment of principal until the last instalment. 

4.  An agreement in respect of the second loan was signed on 5 March 2015 at the office of the plaintiff, with the loan amount being HK$660,000, the drawdown date being 6 March 2015 and the assigned Loan No being LA3001/2015 (“2^nd Loan Agreement”).  On 6 March 2015, the defendant signed a formal loan agreement (“2^nd Formal Agreement”) prepared by Messrs CP Cheung & Co, solicitors (“CPC”). 

5.  The 2^nd Loan Agreement and the 2^nd Formal Agreement both refer to repayment by 3 instalments, but the amount of the first instalment is stated as HK$21,120 in the 2^nd Loan Agreement and HK$18,053 in the 2^nd Formal Agreement.  As in the case of the first loan, there would be no repayment of principal until the last instalment.

6.  The agreement in respect of the third and last loan was signed on 26 June 2015 at the office of the plaintiff, with the loan amount being HK$680,000, the drawdown date being 30 June 2015 and the assigned Loan No being LA06007/2015 (“3^rd Loan Agreement”).  Repayment of this loan was to be in one go, with principal and interest to be paid on 30 July 2015.  No formal agreement had been executed in respect of this loan. 

7.  This action was commenced by the plaintiff for enforcement of the 3^rd Loan Agreement.  The defendant challenged, inter alia, the enforceability of the 3^rd Loan Agreement on the following grounds:-

(1) The defendant only received HK$612,880 as principal from the plaintiff under the 1^st Loan Agreement;

(2) In breach of section 29(10) of the MLO, the plaintiff was acting in concert or colluding with HSPC to procure the defendant to pay HSPC consultation fees;

(3) The three loan agreements were in reality a single illegal transaction providing for payment of compound interest within the meaning of section 22(1)(a) of the MLO, with the interest accrued on the loan amount under 1^st Loan Agreement as at the date of the 2^nd Loan Agreement added to the principal of the loan under the 2^nd Loan Agreement and the interest accrued on the loan amount under the 2^nd Agreement as at the due date added to the principal of the loan under the 3^rd Loan Agreement;

(4) The 3^rd Loan Agreement prohibited the repayment of the loan by instalments within the meaning of section 22(1)(b) of the MLO;

(5) The effective interest rate under the agreements was 65.15% per annum, being an excessive interest rate pursuant to section 24 of the MLO;

(6) Each of the agreements provided for the rate or amount of interest being increased, from 38.40% per annum to 48.65% per annum, by reason of default in the payment of sums due under that agreement within the meaning of section 22(1) of the MLO;

(7) By reason of the effective rate of interest exceeding 48% per annum and/or the circumstances under which each of the agreements were made, the transaction between the plaintiff and the defendant was extortionate within the meaning of section 25 of the MLO.

(8) The 3^rd Loan Agreement was an unconscionable contract in contravention of the Unconscionable Contracts Ordinance (“UCO”).

Evidence

8.  The defendant did not file any witness statement, nor did she attend the trial on 23 January 2018, when the witness of the plaintiff was called.  The only evidence before the court was that of the plaintiff.  Ms Chan, counsel for the defendant, submitted that the court is not bound to accept the evidence of the plaintiff even though it has not been challenged by the defendant.  

9.  Ms Chau Chiu Yung Amen, clerk of the plaintiff, was the only person who gave evidence at trial.  Ms Chau was overly conscious about protecting the interest of the plaintiff and not at all straightforward in answering the questions put to her.  At times the clarification she sought bordered on the legal position of the matter and she had to be steered back to her role of giving evidence on the facts as she remembered them to be.  I will therefore have regard to the evidence of Ms Chau with such concerns in mind.  

10.  One other matter I remind myself is that the burden of proof rests squarely on the plaintiff.  The plaintiff has to show, on a balance of probabilities, that the 3^rd Loan Agreement is enforceable as claimed.

Amount of principal under the first loan

11.  The first loan of HK$880,000 was paid to the defendant by way of 4 cheques.  All the cheques were dated 24 July 2014 and issued by the plaintiff, for the sums of HK$23,990, HK$420,877, HK$267,120 and HK$168,013 respectively.  The first two cheques were issued to KBC and the remaining two cheques were cash cheques.  A copy of the four cheques shown on one single sheet of paper (“Cheques’ Receipt”) can be found in the trial bundle and the cash cheque of HK$168,013 is the only one against which the signature of the defendant appears. 

12.  The splitting of the loan amount into the 4 cheques was carried out according to the instructions in a document entitled “提取貸款確認書” signed by the defendant and dated 25 July 2014.  According to this document, the cheque for HK$23,990 issued to KBC was for payment of legal fees, fees payable to the Housing Authority and registration fees, while the other cheque issued to KBC for HK$420,877 was for the discharge of a loan owed by the defendant to Rise Honest International Limited (inclusive of collection charges and legal fees). A letter of KCB dated 26 July 2014 showing the use of HK$420,877 to discharge such loan on behalf of the defendant has been produced.

13.  The remaining two cheques were cash cheques.  For the cash cheque in the amount of HK$267,120, there are two receipts signed by HSPC both dated 25 July 2014, for the amount of HK$70,000 and HK$197,120 respectively.  Ms Chau admitted to the knowledge of the plaintiff that HK$70,000 was for payment of consultation fees by the defendant to HSPC, and HK$197,120 was for payment of 7 instalments (of HK$28,160 each) under the agreements in respect of the first loan. 

14.  Another document in the bundle that relates to the first loan is a letter to HSPC and signed by the defendant dated 26 June 2014 (“26 June Letter”).  It was mentioned in this letter that the loan of HK$880,000 referred to by HSPC had been approved. According to this letter, because the defendant did not have time, she asked HSPC to help in making the payment of 7 instalments to the plaintiff in the amount of HK$197,120, fees of Housing Authority for additional mortgage in the amount of HK$7,820, legal fees of HK$10,000 and consultancy fees of HK$70,000, and if there was any balance, such balance was to be paid over to the defendant in full. 

15.  At the time of the signing of the agreements for the first loan, a repayment schedule was also signed by the defendant.  According to Ms Chau, this repayment schedule was signed by the defendant at the plaintiff’s office after the defendant had attended the office of KBC to sign the 1^st Formal Agreement.  This repayment schedule lists out a total of 13 instalments of interest payment, the first being the amount of HK$6,480.70 payable on 1 August 2014 and the rest being the amount of HK$28,160 each and payable on the 1^st day of each succeeding month. However, both the terms of the 1^st Loan Agreement and the 1^st Formal Agreement refer to only 12 consecutive monthly payments of interest of HK$28,160 each.  There is an apparent inconsistency in the terms of repayment as stated in the 1^st Loan Agreement and the 1^st Formal Agreement on the one hand and the repayment schedule on the other hand.

16.  It is the testimony of Ms Chau that the extra instalment of HK$6,480.70 represents the interest on HK$880,000 for the period from 25 July 2014 to 31 July 2014.  Ms Chau said she had explained the amount to the defendant and the defendant did not indicate she had any problem with it.  Ms Chau confirmed that the defendant had repaid this amount of HK$6,480.70 in cash on 1 August 2014, although the receipt issued for this amount had not been disclosed by the plaintiff.

17.  Since it is the defendant’s case that she had only received HK$612,880 as principal of the first loan from the plaintiff, the challenge raised by the defendant as to the actual amount of the principal relates only to the cash cheque in the amount of HK$267,120.  As I have already noted, there is no signature of the defendant next to this cheque in the Cheques’ Receipt. 

18.  Two receipts were issued by HSPC for the sum of HK$267,120, one for HK$197,120 and the other for HK$70,000.  The defendant averred in the Defence to the plaintiff acting in concert or colluding with HSPC to procure the defendant to pay HSPC consultation fees to obtain the loan from the plaintiff.  As for the HK$197,120, it is pleaded as 7 instalments of monthly interest payments to the plaintiff (HK$28,160 x 7) under the 1^st Loan Agreement. 

(i)   HK$70,000

19.  Turning first to the HK$70,000 paid to HSPC as consultation fees, which has to be considered in conjunction with the challenge of the defendant that the plaintiff was acting in concert or colluding with HSPC to procure the payment of consultation fees to obtain the loan, in breach of section 29(10) of the MLO.  Section 29(10) of the MLO reads:

(10) Any money lender or his partner, employer, employee, principal or agent or any person acting for or in collusion with any money lender who charges, recovers or receives any sum as for or on account of any costs, charges or expenses (other than stamp duties or similar charges) referred to in section 27(3) or demands or receives any remuneration or reward whatsoever from a borrower or intending borrower for or in connection with or preliminary to procuring, negotiating or obtaining any loan made or guaranteeing or securing the repayment thereof commits an offence.

Section 27(3) of the MLO is referred to in section 29(10).  For easy reference, this sub-section (3) is reproduced below:

27.Charges for expenses etc. not recoverable

…

(3) Subject to section 33A(5), it shall not be lawful for any money lender or his partner, employer, employee, principal or agent or any person acting for or in collusion with any money lender to charge, recover or receive any sum as for or on account of any such costs, charges or expenses (other than stamp duties or similar charges) or to demand or receive any remuneration or reward whatsoever from a borrower or intending borrower for or in connection with or preliminary to procuring, negotiating or obtaining any loan made or guaranteeing or securing the repayment thereof.

The provision of section 33A(5) of the MLO, as referred to in section 27(3), concerns the transitional position of loan agreements made before the Money Lenders (Amendment) Ordinance 1988 and does not apply in the present case.

20.  That the defendant paid HSPC a consultation fees was known to the plaintiff.  Ms Chau said that the 26 June Letter was among the papers provided by the defendant on 30 June 2014 and so she was aware of the charging of the consultation fees by HSPC.  Ms Chau was not specific about the nature of the consultation fees but at one point she did say that they were for services provided by HSPC to look for loans for the defendant in view of her urgent need to borrow money.  Ms Chau confirmed that other customers introduced by HSPC had given similar instructions to the plaintiff for payment of consultation fees to HSPC before.  Ms Chau did clarify that the plaintiff had nothing to do with such consultation fees.

21.  The evidence of Ms Chau on this matter was uncontroverted.  Ms Chau was firm when testifying on the charging of this consultation fees by HSPC, that it was solely a matter between the defendant and HSPC.  I see no reason to doubt her.  Knowledge on the part of the plaintiff about the nature and reason for the payment of the consultation fees is per se not sufficient to justify a finding of collusion between the plaintiff and HSPC.  I therefore find no contravention of section 29(10) of the MLO by the plaintiff in respect of this HK$70,000.

(ii) HK$197,120

22.  Time now to turn to the HK$197,120 that represents the total of the 7 instalments of interest payment of HK$28,160 each that were payable to the plaintiff under the first loan (that is, not counting the first instalment of HK$6,480.70).  That this sum was paid together with the consultancy fees of HK$70,000 by one single cash cheque for the amount of HK$267,120 has some significance.  In issuing one cash cheque for the amount of HK$267,120 which was passed to HSPC, the plaintiff would have knowledge that the defendant did not have the money for her use.

23.  Looking at the reason stated in the 26 June Letter for the payment of this sum of HK$197,120 to HSPC, the statement that the defendant did not have time appears more like a pretext than an explanation for withholding the amount from the defendant.  The evidence of the plaintiff is that the defendant paid for the first instalment of HK$6,480.70 by cash herself on 1 August 2014, while the subsequent 7 instalments were paid by HSPC on behalf of the defendant.  Why would the defendant know she had no time to make repayment of the subsequent instalments even before she repaid the first instalment herself? 

24.  More importantly, why would someone in need of money like the defendant hand over part of a loan to someone else to assist in the repayment because she would have no time to do so herself, when in doing so would mean that she would not have the benefit of that part of the loan?  There is no reason at all for her to borrow that part of the loan.  The only sensible thing for someone in the defendant’s situation to do would be to borrow a lesser amount. 

25.  The wording of the 26 June Letter also suggests that the defendant did not borrow the extra HK$197,120 on her own volition.  A person in urgent need of money should be rather conscious about the money he or she can get from a loan.  The request of the defendant in the 26 June Letter that any balance should be passed to her, if there was a balance, presents a picture of the principal of the first loan being determined for her, rather than by her.

26.  Ms Chau testified to the request of the defendant on 5 March 2015 to reduce the amount of the principal under the 1^st Loan Agreement because the defendant was expecting to have a loan in hand shortly which would enable her to repay about HK$330,000 of the principal under that 1^st Loan Agreement.  In response to such request of the defendant, the plaintiff agreed with the defendant to split the loan under the 1^st Loan Agreement, with HK$330,000 to be repaid by the defendant by her own means and HK$550,000 to be repaid by the loan to be advanced under the 2^nd Loan Agreement.  The intention therefore was to have the first loan discharged partly by funds arranged by the defendant and partly by the second loan.  The HK$330,000 was eventually repaid by the defendant on 30 June 2015 by a cheque from KBC for the amount of HK$340,560.

27.  It is worth noting that up to 5 March 2015, the date of the request from the defendant for partial early repayment of the loan under the 1^st Loan Agreement, apart from the very first instalment of HK$6,480.70 which Ms Chau said was paid by the defendant herself in cash, all the instalments that had become due, 7 in total, for repayment under the 1^st Loan Agreement were paid by HSPC from the HK$197,120 withheld from her, and not by the defendant herself.

28.  As for the principal of HK$660,000 advanced under the 2^nd Loan Agreement, it is the plaintiff’s case that it comprised of HK$550,000 being the outstanding principal under the 1^st Loan Agreement less the HK$330,000 the defendant wanted to repay early, HK$17,600 being the interest on HK$550,000 for one month, HK$91,973 being payment to be made to HSPC for repayment to be made by HSPC on behalf of the defendant, and HK$427 being the legal fees payable to CPC.  There are three other documents signed by the defendant, all dated 5 March 2015, that have been produced in support – 提取貸款確認書, a letter to HSPC (“5 March Letter”) and a power of attorney authorizing the plaintiff to pay HK$91,973 to HSPC.

29.  Copies of the cheques issued by the plaintiff for the second loan have not been produced.  According to the 提取貸款確認書signed by the defendant for the second loan, the loan amount is to be split into three payments, one for the repayment of part of the principal and interest under the loan LA06004/2014 in the amount of HK$567,600 (HK$550,000 of which was in respect of the principal), one to be paid to CPC for legal fees in the mount of HK$427, and the last one was to be a cash payment, probably in the form of a cheque, in the amount of HK$91,973.

30.  It was mentioned in the 5 March Letter that the loans of HK$660,000 and HK$330,000 referred to by HSPC had been approved.  As in the case of the 26 June Letter, the defendant referred in the 26 June Letter to herself not having time and asking HSPC to help in making the payment of 3 instalments to the plaintiff in the amount of HK$91,973.

31.  On the entitlement to include the amount of one month’s interest on $550,000 as the principal of the second loan, Ms Chau pointed to the early repayment clause in the 1^st Loan Agreement, which is reproduced below:

“The Borrower shall have an option at any time to make early repayment of the whole or part of the said loan after the data of loan drawdown SUBJECT TO the Borrower:

1. giving the Lender not less than one calendar month’s advance notice in writing; or

2. payment to the lender of one month’s interest on the outstanding loan in lieu.”

32.  Since the early partial repayment of HK$330,000 only took place in June 2015, it is, to say the least, baffling to me why the defendant would agree to the incurring of one month’s interest in March 2015.  The early partial repayment was to take place more than one month away.  The defendant could simply give the requisite one month’s advance notice in writing to the plaintiff, in which case she would not have to pay the one month’s interest on the outstanding loan.    

33.  A point arose during trial on whether the early repayment clause in the 1^st Loan Agreement is permissible under section 21 of the MLO.  Section 21 of the MLO provides as follows:

“Early payment by borrower

(1) A borrower under any agreement for the loan of money by a money lender shall be entitled at any time by notice in writing to the money lender and the payment to the money lender of all amounts payable as principal by the borrower which are outstanding under the agreement, together with interest computed up to the date of such payment, to discharge his indebtedness under the agreement:

Provided that the effective rate of such interest shall not exceed the effective rate at which interest would have been payable under the agreement if the borrower had not exercised his right under this section to discharge his indebtedness. ”

34.  In paragraph 9-088 of Chitty on Contracts, Hong Kong Specific Contracts, 5^th Ed, it is said that “…any attempt by the moneylender to expressly provide in the loan agreement for a reasonable and agreed notice period for any early repayment by the borrower may not be effective as the right to prepayment appears to be exercisable “at any time””.

35.  The plaintiff pointed me to the case of Swiss Finance Mortgage Services Limited v Wong Kam Fan, HCA 1244/2015, 22 December 2016 where the court took the view that section 21 of the MLO is a right-conferring provision, guaranteeing the borrower a right to early repayment, but a contravention of section 21 does not render the entire loan agreement void for illegality.  The court’s acceptance of this position in the case of Easy Fortune Property Limited v Yung Chun Him HCA1484/2014, 12 August 2016 was also drawn to my attention.

36.  With the defendant not taking any issue with this position, and as my decision does not turn on this point, I am prepared to proceed on the basis that section 21 does not prohibit the stipulation of a notice period for early repayment and a requirement of payment in lieu of such stipulated notice in writing.

37.  Since the early partial repayment of HK$330,000 only took place in June 2015, by March 2015, the first loan was not discharged yet but was revised after the 2^nd Loan Agreement came into effect.  The loan amount of the first loan was amended to HK$330,000 on 6 March 2015, and an updated repayment schedule in respect of the revised first loan was issued on the same day, showing the revised figures to be repaid by the defendant for the remaining 5 instalments for the first loan (4 instalments of payment of HK$10,560, being interest on HK$330,000 and the 5^th instalment of HK$340,560 being the revised principal and one month’s interest). 

38.  Up until right before the plaintiff and the defendant entered into agreement in respect of the third loan, all payments of interest under the revised first loan and the second loan were made by way of the HK$91,973 passed to HSPC upon signing of the documents relating to the second loan.  According to the respective repayment schedules of the revised first loan and the second loan, the interest payable for the second loan from April to June 2015 is HK$60,293 (HK$18,053 + HK$21,120 + HK$21,120) and the interest payable for the revised first loan from April to June 2015 is HK$31,680 (HK$10,560 x 3), and the sum of these two figures is HK$91,973. 

39.  The discussions in paragraphs 23 and 24 above equally apply to the arrangement of withholding HK$91,973 from the loan amount under the second loan.  Further, what was supposedly an arrangement for early partial repayment of the principal to reduce the liability of the defendant under the first loan ended up with her owing the increased total principal in the amount of HK$990,000, which was split into two loans of HK$660,000 and HK$330,000, as well as the obligation to pay interest on the increased total figure of HK$990,000.    

40.  Then came another request from the defendant for the advance of a new loan in the amount of HK$680,000 since, according to Ms Chau, there was some delay in the defendant getting an application for a loan from bank approved.  The 3^rd Loan Agreement thus came to be signed on 26 June 2015 at the office of the plaintiff.  As for the principal of HK$680,000 advanced under the 3^rd Loan Agreement, it comprised of HK$660,000 being the outstanding principal under the second loan, HK$20,000 being one month’s interest of HK$21,120 on the principal of HK$660,000 still outstanding under the second loan less a cash payment of HK$1,120 made by the defendant on 26 June 2015. 

41.  One thing is clear from the factual situation as emerged from the plaintiff’s account of how the loans were advanced to the defendant under the 1^st and 2^nd Loan Agreements, that is, the plaintiff had handed over to HSPC an amount representing 7 instalments of interest in the case of the 1^st Loan Agreement, 3 instalments of interest in the case of the 2^nd Loan Agreement and 3 instalments of interest in the case of the revised 1^st Loan Agreement, the company that introduced the defendant to the plaintiff.  Although the instructions of the defendant authorizing such handing over have been produced, I have no hesitation in finding that the defendant did not have use of such money, but she was required to pay interest on it as well.  The plaintiff was well aware of the arrangement between HSPC and the defendant on this, and that the payments of all those instalments of interest were all made by HSPC.

42.  Whilst I am prepared to accept Ms Chau’s testimony that the plaintiff had nothing to do with the consultation fees paid by the defendant to HSPC and so there is no contravention of section 29(10) of the MLO in respect of the consultation fees, I have difficulty in coming to the same conclusion in relation to the HK$197,120 withheld from the defendant under the first loan and the HK$91,973 withheld from the defendant under the second loan.  The plaintiff was fully aware of the purpose of withholding the money, and more importantly the fact that the payment of those instalments would thus be assured.  Not only did the defendant receive less than the actual amount of the loan, the plaintiff also had security, albeit in disguise, for the payment of those interest instalments.

43.  It is noteworthy that at the time of the grant of the second loan and the third loan, the defendant had not been in default of any of the interest payment.  That however was the case not because of diligent compliance with the terms of repayment on the part of the defendant, but because of the amounts of repayment had already been borrowed by her and held by HSPC specifically for the purpose of such repayment.  I have no difficulty in finding that the money was held by HSPC for the plaintiff.  The defendant had been providing security for the repayment of the interest on the loans by prepaying them before they became due.  Stripped of all such disguised security arrangement, the principal that the defendant would have to borrow could be much less.

44.  The provisions of section 29(10) of the MLO apply not only in the situation where there is collusion between a money lender and another person.  With the withholding of the aforesaid sums, HSPC, as agent of the plaintiff, was effectively receiving a remuneration from the defendant for or in connection with securing the repayment of the first loan, the revised first loan and the second loan, an act also prohibited by section 29(10). 

45.  Section 27(4) of the MLO comes into play in terms of the consequence of the receipt of money or money’s worth by a person in contravention of section 27(3) of the MLO which is cross referenced to in section 29(10) of the MLO.  The provisions of section 27(4) of the MLO are set forth below:

(4) If any money or money’s worth is directly or indirectly paid or allowed to or received by any person in contravention of this section, the amount or value thereof, to the extent of such contravention and notwithstanding any agreement to the contrary, may be recovered by the borrower from such person or, if such person is the money lender or a partner, employer, employee, principal or agent of the money lender or is in any way acting for or in collusion with him, may be set off against the amount actually lent (and that amount shall be deemed to be reduced accordingly) or may be recovered by the borrower from such person or from the money lender.

46.  According to section 27(4) of the MLO, the amount of the remuneration received by an agent of a money lender in contravention of section 27 may be recovered by the borrower from the money lender or set off against the amount actually lent, which shall be deemed to be reduced accordingly.  I therefore find that the amount of HK$197,120 should be set off against the principal of the first loan and the amount HK$91,973 should be set off against the principal of the second loan.

Compound interest?

47.  It is the defendant’s pleaded case that the three loans were in reality a single illegal transaction providing for payment of compound interest within the meaning of section 22(1)(a) of the MLO.  The complaint of the defendant is that the interest accrued on the loan amount under the 1^st Loan Agreement as at the date of the 2^nd Loan Agreement was added to the principal of the loan under the 2^nd Loan Agreement and the interest accrued on the loan amount under the 2^nd Agreement as at the due date was added to the principal of the loan under the 3^rd Loan Agreement.  The interest rate provided in all the loan agreements is 38.40% per annum.

48.  Section 22 of the MLO reads –

“22. Illegal agreements

(1) 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 that provision may be made by any such agreement that if default is made in the payment upon the due date of any sum payable to the money lender under the agreement, whether in respect of principal or interest, the money lender shall be entitled, subject to Part IV, to charge simple interest on that sum from the date of the default until the sum is paid at an effective rate not exceeding the effective rate payable in respect of the principal apart from any default, and any interest so charged shall not be reckoned for the purposes of this Ordinance as part of the interest charged in respect of the loan.

(2) 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. (Added 69 of 1988 s. 18)”

49.  The plaintiff has drawn my attention to the case of New Japan Securities International (HK) Ltd v Lim Yiong Lin [19876] 3 HKC 153and the recent case of Honip Credit Limited v Tang Wing Hong & Anor [2018] HKCFI 56which applied the proposition in the New Japan Securities case.  In the New Japan Securities case, there was a series of rolled over loans and the Court of Appeal held that the last of the rolled over loans was recoverable as a new loan, and the new loan cannot be regarded as charging compound interest.

50.  The finding in the New Japan Securities case was based on the fact that the loans had successively been rolled over in the sense that the lender made fresh loans to the borrower to discharge the latter’s accrued liability for principal and interest.  The court in the case quoted the following passage from what Greer LJ said in the case of BS Lyle Ltd v Chappell:-

“…… if the transaction means that the money is lent to the borrower and that the borrower with that money pays off the old loan, the court is no longer in a position to treat the transaction as a mere renewal …… What has happened is that the old loans have been paid off and a new loan has been entered into, and the position is exactly the same as it would have been if the borrower had borrowed from someone else the money necessary to repay the old loan and obtained a new loan ……”

51.  On the authority of the above case law, there is nothing objectionable if the plaintiff only granted a new loan to pay off the principal and accrued interest under the old loan.  However, with the deduction that should be made from the principal of the first loan and the second loan because of the withholding of the sums of HK$197,120 and HK$91,973 respectively, the present case is different from the situation considered in the New Japan Securities case. 

52.  The definition of “interest” in section 2 of the MLO has to be considered as well.  It reads as follows:

““interest” does not include any sum lawfully agreed to be paid in accordance with this Ordinance on account of stamp duty or other similar duty, but save as aforesaid includes any amount (by whatever name called) in excess of the principal, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan”

53.  In light of the above definition, the sums of HK$197,120 and HK$91,973 are in excess of the principal and have to be regarded as interest.  As the defendant is required to pay interest on these sums under the first loan and the second loan, they fall foul of section 22(1)(a) of the MLO.

54.  There is still the question of whether the extra month’s interest charged by the plaintiff for the early partial repayment of the first loan is payment of interest in which event there may be further contravention of section 22(1)(a) of the MLO.

55.  In the case of the second loan, the loan amount included a sum of HK$17,600, being one month’s interest on the sum of HK$550,000.  The entitlement to charge this amount is provided for in the 1^st Loan Agreement and the 1^st Formal Agreement.  However, I have indicated in the above discussions that there was no reason for the defendant to incur this amount as the early partial repayment did not occur until June 2015 and she had all the time to give the requisite one month’s notice in writing to the plaintiff. 

56.  Furthermore, in March 2015, there had actually been no early partial repayment because the amount intended to be repaid early still remained due and owing under the revised first loan.  Hence, despite the early repayment clause, the amount of HK$17,600 should not have been included in the principal of the second loan.  It therefore comes within the definition of “interest” in section 2 of the MLO and with the plaintiff charging interest on this amount as well under the 2^nd Loan Agreement, section 22(1)(a) of the MLO is contravened.

57.  In paragraph 8(h) of the Amended SOC, the plaintiff has included a claim for HK$595.21, as interest accrued on the interest payable under the 3^rd Loan Agreement for the period from the due date of payment to the date of the Writ.  The complaint of charging compound interest is also directed to this claim.  The plaintiff has since abandoned this claim and there is thus no further need for me to deal with it.

Prohibition of payment by instalments

58.  The defendant’s case that the 3^rd Loan Agreement prohibits payment by instalments is based on the requirement of section 22(1)(b) of the MLO.  The plaintiff refers me to the specific request of the defendant at the time of entering into the 3^rd Loan Agreement, that she would secure a sum of money in due course and hence would be able to repay the loan in one month. 

59.  The following observations of Yuen JA in Emperor Futures Ltd v La Belle Fashions Ltd [2003]1HKLRD 424, as pointed out to me by Mr Ng, counsel for the plaintiff, are relevant:-

“85. It cannot be the case that s.22(1)(b) requires that all loans by moneylenders must be loans repayable by agreed instalments from time to time.  Although the Ordinance does contain a number of provisions which would apply only where the loan is so repayable (eg the requirements in s.19(1)(d) and s.20(1)(c)(ii) and 20(2)(c) that information be given of the amount and due date of “various amounts comprised in the total sum”), in my view one would expect the draftsman to use much clearer language if it were the legislative intention that only loans of that nature would be legal.  If the defendants were right as to the effect of s.22(1)(b), it would render illegal bridging loans where repayment by instalments from time to time would be impractical and nonsensical.

86. In my view, s.22(1)(b) provides no more than that, part repayment of the loan must not be prohibited in the agreement.  Whether the loan is repayable by agreed instalments from time to time, on demand or on the expiry of a term, the borrower should be free to repay such part of it as he wishes, so as to reduce his indebtedness, so that he would not become “locked” into the loan.  This view is consistent with the rationale behind s.21, which entitles the borrower to make early payment of the whole amount outstanding so as to discharge is indebtedness.”

60.  I agree that section 22(1)(b) of the MLO should be interpreted in the manner explained in the Emperor Futures Ltd case.  Although only one instalment is set out in the repayment schedule, the 3^rd Loan Agreement does not prohibit part repayment. It does not fall foul of section 22(1)(b) of the MLO.

Rate of interest

61.  The defendant has pleaded the contravention of section 24 and 25 of the MLO.  Relevant parts of the two provisions are set forth below:

24.Prohibition of excessive interest rates

(1) Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 60 per cent per annum commits an offence.

(2) 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).

…

25.Reopening of certain transactions

(1) 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.

(2) For the purposes of this section, a transaction is extortionate if—

(a)it requires the debtor or a relative of his to make payments (whether unconditionally or on certain contingencies) which are grossly exorbitant; or

(b)it otherwise grossly contravenes ordinary principles of fair-dealing.

(3) 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.

(4) In determining whether a transaction is extortionate for the purposes of this section, regard shall be had to such evidence as is adduced concerning—

(a)interest rate prevailing at the time it was made;

(b)the factors mentioned in subsections (5) and (6); and

(c)any other relevant considerations.

(5) Factors applicable under subsection (4)(b) in relation to the debtor include—

(a)his age, experience, business capacity and state of health; and

(b)the degree to which, at the time of entering into the transaction, he was under financial pressure, and the nature of that pressure.

(6) Factors applicable under subsection (4)(b) in relation to the lender or other person by whom the proceedings are taken include—

(a)the degree of risk accepted by the lender, having regard to the nature and value of any security provided;

(b)his relationship to the debtor;

(c)whether or not a specious cash price was quoted for any goods or services included in the transaction; and

(d)where one or more other transactions are to be taken into account, the question how far any such other transaction was reasonably required for the protection of the debtor or the lender, or was in the interest of the debtor.

…

62.  The 1^st Loan Agreement, the 1^st Formal Agreement, the 2^nd Loan Agreement and the 3^rd Loan Agreement all provide for the charging of default interest at the rate of 0.133% on a day to day basis on any sum that is not paid when due, which is equivalent to 48.65% per annum.  It is accepted by the plaintiff that the default interest clause was in contravention of section 22(1)(c) of the MLO, but the plaintiff invites the court to exercise its discretion under section 22(2).

63.  As for sections 24 and 25 of the MLO, both sections refer to the effective rate of interest.  There is a concern on whether the effective rate of interest under the 3^rd Loan Agreement is to be computed in accordance with Schedule 2 of the MLO.  The plaintiff submitted that Schedule 2 has no application in the present case, since the actual rate has been expressed as a certain percent per annum.  Mr Ng referred to the following passages in the judgment of Le Pichon JA in Kwok Ying Lung v Ko Chi Hung & Anor CACV635/2000 and CACV 142/2001, 25 May 2001:

“…So where an actual rate is specified in the note or memorandum, the schedule has no application. The calculations in the schedule are only relevant to produce a deemed rate only where the total sum of interest is not capable of being expressed in terms of an actual rate per cent per annum, for example, where a loan is repayable by a number of instalments, each instalment comprising principal as well as interest.

…

The question of statutory interpretation is the meaning to be given to “the effective rate of interest” in section 24 and, for that matter, section 25 of the Ordinance. Those sections are meant to strike down excessive interest rates. Given my view of the construction of Schedule 2, the expression “effective rate” when read literally by reference to its statutory definition, only agreements with a deemed rate calculated in accordance with Schedule 2 would come within the purview of these sections. This clearly could not have been the intention of the legislature. Plainly, section 24 is meant to render unenforceable cases where the actual interest is stated and that exceeds 60%, for example, where simple interest is charged at 65% per annum. That being so, the context requires that “effective rate” used in section 24 (and section 25) be given a different meaning in cases where Schedule 2 can have no application, i.e. where the interest charged is capable of being expressed in terms of a rate. In such cases, “effective rate” must mean the actual rate of interest per centum per annum.”

Yuen J (as she then was) also had this to say in the Kwok Ying Lung case:

“The definition in s.2(1) of “effective rate” as the “true annual percentage rate of interest calculated according to Schedule 2” is qualified by the words “unless the context otherwise requires”. In the context of a single constant rate of interest under the first formulation in s. 18(2)(i), the “true annual percentage rate of interest” is just that.”

64.  Mr Ng also drew my attention to the case of Easy Fortune Property Limited v Yung Chun Him HCA 1484/2014, 12 August 2016, where the Kwok Ying Lung case was applied. 

65.  The allegation of the defendant that the effective interest rate under the loan agreements was 65.15% per annum is based on the computation set forth in a table in the Answer to the Plaintiff’s Request for Further and Better Particulars to the Defendant’s Defence.  The table shows the appropriation of each instalment in a particular proportion for repayment as to principal and as to interest.  It is not clear whether the calculation is in accordance with Schedule 2 of the MLO.  In any event, I do not agree to the adoption of HK$612,880 as the principal in that table and the defendant has not pursued this point in her submissions.

66.  I also accept the position as stated in the Kwok Ying Lung case that Schedule 2 of the MLO has no application in the present case.  I shall therefore proceed on the basis of the stipulated contractual rate of interest in respect of all three loans, i.e. 38.40% per annum.  From this, I have to work out the effective rate of interest after taking into account the findings I have made in the above on what should be regarded as the principal and interest of the loans.

67.  My finding is the sum of HK$197,120 should be deducted from the principal under the first loan, pursuant to section 27(4) of the MLO.  This means that the principal under the first loan is HK$682,880 (HK$880,000 – HK$197,120).  According to the repayment schedule dated 25 July 2014, the total amount of interest payable under the first loan is HK$344,407.70.  As that covers the period from 25 July 2014 to 31 July 2015 (372 days), the effective rate of interest per annum is to be computed as follows:

HK$344,407.70 ÷ HK$682,880 ÷ 372 x 365 x 100% = 49.49%

68.  Since the principal of the first loan should be HK$682,880, at the time of splitting the first loan into the revised first loan and the second loan, the principal of the second loan should be HK$352,880 (HK$682,880 – HK$330,000).  Out of the HK$91,973 that was withheld from the defendant, HK$60,293 relates to the interest for the three instalments of repayment of the second loan, which is also the total amount of interest payable under the second loan for the 87 days covered by the term of the loan. As per the discussions above, this amount should also be discounted from the principal, and so the reduced figure of the principal of the second loan is HK$292,587.  Thus, the effective rate of interest per annum for the second loan is to be computed as follows:

HK$60,293 ÷ HK$292,587 ÷ 87 x 365 x 100% = 86.45%

69.  With the third loan, the unpaid principal under the second loan should be HK$292,587, adding to this the sum of HK$8,243 representing the unpaid portion of one month’s accrued interest (HK$292,587 x 38.4% ÷ 12 – HK$1,120), the principal should be HK$300,830.  The one month’s interest payable under the third loan is HK$21,760.  This means that the effective rate of interest per annum for the third loan is to be computed as follows:

HK$21,760 ÷ HK$300,830 x 12 x 100% = 86.8%

70.  In the case of the second and third loans, the effective rate of interest exceeds 60%.  It is therefore a case of contravention of section 24 rather than section 25 of the MLO.  The 3^rd Loan Agreement is not enforceable and there is no room for the court to reopen the transaction. 

Other matters

71.  I raised the point about section 18 with the plaintiff at trial.  In view of the above findings, there is no further need for me to deal with the arguments advanced by the plaintiff on it.  The same goes for the challenge raised by the defendant that the 3^rd Loan Agreement was an unconscionable contract in contravention of the Unconscionable Contracts Ordinance, as well as the question of whether the discretion under section 22(2) of the MLO is to be exercised.

Costs

72.  Costs should follow event.  On a nisi basis, I order the plaintiff to pay costs of this action, including all costs reserved, to the defendant, to be taxed if not agreed.