FU TAT CREDIT LTD v. LAU WAI MAN

HCA 1756/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1756 OF 2012

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AND

HCA 1757/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1757 OF 2012

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AND

HCA 1759/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1759 OF 2012

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AND

HCA 1773/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1773 OF 2012

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(Heard together)

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D E C I S I O N

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INTRODUCTION

1.  The Plaintiff (“Fu Tat”) is a registered Money Lender under the Money Lenders Ordinance, Cap 163 (“MLO”). 

2.  The subject matters of the present four actions are loans lent by the Plaintiff to Lau Wai Man (“the Son”) alone or to Lau Yung Tai (“the Father”) and the Son together.  

3.  The Plaintiff commenced the present actions respectively on 22 and 25 September 2012.  No Acknowledgment of Service or Notice of Intention to Defend has been filed by the Father or the Son.

4.  Accordingly, the Plaintiff took out summonses under Order 83A, rule 4 and Order 88 rule 6 of the Rules of the High Court for leave to enter default judgments against the Father and Son in the actions.  The Plaintiff’s applications were heard before a Master[1] in the same hearing and judgments were entered by the learned Master in in respect of all the actions.

5.  This is the appeal of the Father and Son against the orders of the learned Master.

6.  The Father and Son were both initially acting in person.  At the first hearing, this court adjourned for the Plaintiff to file further affirmations and for the Father to seek legal advice on, in particular, the possible defence of illegality and undue influence.  At the adjourned hearing, the Father was legally represented but the Son remained unrepresented.

7.  It is trite that an appeal from the master to the judge in chambers should be dealt with by way of an actual rehearing.

THE CLAIMS

HCA 1756/2012 (“1756”)

8.  Fu Tat claims against the Son only in 1756 for, inter alia :

(i) Possession of the mortgaged property known as Lot No 532 in DD No 184;

(ii) A sum of HK$1.32 million consisting of the principal loan of HK$1.1 million and interest; and

(iii) Further interest on the principal loan of HK$1.1 million at the rate of 24% per annum from 6-9-2012.

HCA 1757/2012 (“1757”)

9.  Fu Tat claims against the Father and Son in 1757 for, inter alia :

(i) Possession of the mortgaged property known as Section A of Lot No 338, Section D of Lot No 257 and Section A of Lot No 262 in DD No 184;

(ii) A sum of HK$7.2 million consisting of  the principal loan of HK$6 million and interest; and

(iii) Further interest on the principal loan of HK$6 million at the rate of 24% per annum from 6-9-2012.

HCA 1759/2012 (“1759”)

10.  Fu Tat claims against the Father and Son in 1759 for, inter alia :

(i) Possession of the mortgaged property known as Lot No 539 and Section A of Lot No 510 in DD No 184;

(ii) A sum of HK$6.84 million consisting of the principal loan of HK$5.7 million and interest; and

(iii) Further interest on the principal loan of HK$5.7 million at the rate of 24% per annum from 6-9-2012.

HCA 1773/2012 (“1773”)

11.  Fu Tat claims against the Son only in 1773 for, inter alia :

(i) Possession of the mortgaged property known as Lot No 252 in DD No 184;

(ii) A sum of HK$9,098,396.20 consisting of  a total principal of HK$7,722,100 for five Building Loans and the respective interest; and

(iii) Further interest on the principal loans of HK$7,722,100 million at the rate of 24% per annum from 6-9-2012.

12.  The case of Fu Tat is on the face of it very simple.  There were loan agreements and legal charges signed between Fu Tat and the Father and Son or the Son alone.  Upon default of payment of installments, Fu Tat took out the actions against them. 

13.  On the other hand, it is the case of the Father and Son that the loans by Fu Tat to them were in fact sham arrangements with a view to covering up the original loans lent by the related companies of Fu Tat to them which were illegal for, inter alia, charging excessive interest.

14.  Besides, it is the Father’s case that he signed the relevant loan agreements and legal charges under the undue influence of the Son and he has no idea of his land being charged.  The Father received limited education and at the time of signing the agreements he was 76 years old.  He can obtain no benefits from the transactions between Fu Tat and the Son.  It is submitted by Mr Shum, counsel for the Father, that a Class 2B[2] undue influence can be easily made out.

15.  It is not in dispute that all or nearly all the amount of the loans from Fu Tat to the Father and Son were in fact paid out to two companies namely, Good Fortune Finance Company (“Good Fortune”) and Diamond Dragon Finance Company (“Diamond Dragon”) instead of the Father and Son. 

16.  A director of Fu Tat, Hui Mei Ching (“Hui”), is also the owner of Diamond Dragon and the sister-in-law of the owner[3] of Good Fortune.  Although Hui said in her affirmation that she has never participated in the daily management of Good Fortune, she was authorized to sign cheques for Good Fortune and some of the cheques for payment from Good Fortune to the Son was actually signed by Hui.

17.  In 1756, among the principal sum of HK$1.1 million, HK$1,067,239 was paid to Good Fortune and only HK$32,761 was paid to the Son.  According to the evidence of Hui, the amount paid to Good Fortune was to pay off the loans owed by the Son to Good Fortune in respect of 7 loan agreements[4] signed during the period between August 2009 and May 2011.

18.  In 1757, among the principal sum of HK$6 million, HK$5,987,000 was paid to Good Fortune.  According to the evidence of Hui, the amount was to pay off the loans owed by the Son to Good Fortune in respect of 10 different loan agreements[5] signed during the period between May 2010 and March 2011. 

19.  The Father was not a party to any of these loan agreements between Good Fortune and the Son.  However, the Father’s land was mortgaged to Good Fortune to secure the Son’s loan.  No Legal Charge or any other document was disclosed to suggest that the Father has charged his land to Good Fortune.

20.  In 1759, among the principal sum of HK$5.7 million, HK$5,679,340 has been paid to Diamond Dragon and only HK$20,660 was paid to the Son. 

21.  According to the evidence of Hui, the amount paid to Diamond Dragon was to pay off the loans owed by the Father and Son together to Diamond Dragon in respect of 6 different loan agreements[6] signed during the period between January and April 2010.  Hui was the person who signed for Diamond Dragon on these loan agreements.

22.  In 1773, the Plaintiff claimed against the Son on two building loan agreements.  Under the first agreement, the Plaintiff lent a total sum of HK$1,472,100 to the Son. Out of this sum the amount of HK$932,100 was paid to Good Fortune to settle a debt owed by the Son to Good Fortune and the remaining HK$540,000 was paid to a construction company[7] in three equal installments on the instructions of the Son.  Under the second agreement, the Plaintiff lent a total sum of HK$6,250,000 to the Son.  Out of this sum the amount of HK$6,243,000 was paid to Good Fortune to settle a debt owed by the Son to Good Fortune and the remaining HK$7,000 was paid to the Son.

23.  According to the evidence of Hui, the amount of HK$932,100 paid to Good Fortune was to pay off the loans owed by the Son to Good Fortune in respect of four loan agreements[8].  However, contrary to what has been stated by Hui in her affirmation[9], no copies of the relevant loan agreements had been exhibited.

24.  The amount of HK$6,243,000 paid to Good Fortune was to pay off the loans owed by the Son to Good Fortune in respect of another four loan agreements[10] signed during the period between April 2010 and March 2011. 

THE DEFENCE

25.  As submitted by Mr Shum, the following irregularities can be found on the loan agreements in 1759 between Diamond Dragon and the Father and Son:

(i) here was nothing mentioned in the documents about Diamond Dragon being a licensed money lender;

(ii) Under two of the loan agreements[11], there are provisions charging 1% per day for default interest leading to an effective interest rate of 280% per annum;

(iii) A sum[12] was deducted from the principal loan amount in an agreement[13] to meet the charge of legal fee contrary to s 27 of MLO; and

(iv) The Father’s signature was not found on many[14] of the loan agreements.

26.  The Father also complained that no copy of the loan agreements had ever been provided to him by Diamond Dragon.

27.  In some of the loan agreements between Good Fortune and the Son in 1756[15] and 1773[16], similar provisions charging excessive default interest of 1% per day can also be found.

28.  The Son alleged that the Plaintiff, Good Fortune and Diamond Dragon perpetrated duress and misrepresentation to cause him to sign on the loan agreements and legal charges.  However, not many particulars of the alleged duress or misrepresentation have been given by the Son.

29.  The Son also said that his loan agreements with Good Fortune and Diamond Dragon were illegal and it would be unfair to enforce the loans from the Plaintiff to pay off the previous illegal loans.

UNDUE INFLUENCE

30.  The Father and Son shared the same address and the Son was a policeman.  As mentioned above the Father is an elderly man who received limited education.  It would not be surprising that trust and confidence would be placed on the Son when the Father was involved in these loan transactions.

31.  As stated by the learned Recorder Ma SC (now Ma CJ ) in Bank of China (Hong Kong) v Wong King Sing[17], for the presumption of undue influence to arise under Class 2B, apart from showing trust and confidence placed with the influencer, the complainant has to satisfy that the transaction cannot be readily explicable by the relationship of the parties.

32.  As submitted by Mr Shum, the HK$6 million loan in 1757 was to repay the loans to the Son by Good Fortune which the Father himself was not a borrower.  As for the underlying loans in 1759, none of the documents disclosed shows that any money has been paid to the Father.  In fact, most of the money was to settle the Son’s debts owed to other parties including Good Fortune. 

33.  Besides, the risk of the Father losing the charged properties, which includes his ancestral home, was high.  The Son was earning around HK$21,000 per month as a policeman and there is nothing to indicate that he has got other incomes.  The total amount of the two loans exceeded HK$11 million and it would be very difficult, if not impossible, for the Son to be able to pay for the installments, not to say to discharge the debts.

34.  As submitted by Mr Shum, which I agree, the Father was indeed risking his arms and legs for nothing in return.

35.  Given the long history of dealings between the Son and Good Fortune and Diamond Dragon, it would be difficult for the Plaintiff or Hui to say that she was unaware of the relationship between the Father and Son and the vulnerable situation the Father was in.

36.  Whether a case of undue influence can be made out are facts sensitive.  At this stage, I am unable to say that the case of the Father is not arguable.  On the contrary, on the evidence before me at this stage, I incline to view that the Father has a reasonable chance of success in his defence of undue influence.

TAINTED BY THE ILLEGALITY OF PREVIOUS LOANS

37.  In Wa Lee Finance Co Ltd v Staryork Investment Ltd & others[18], in deciding whether a loan agreement is valid in a similar situation as the present case, Deputy High Court Judge To (now To J) had this to say:

“By itself, there was nothing illegal about the Wa Lee Loan Agreement. It is not a loan agreement at an excessive rate of interest. However, quite apart from the issue of duress, the Wa Lee Loan Agreement was entered into for the purpose of repaying the illegal Snyder Loan and illegal interest. In my view, the Snyder Agreement, the Snyder Action and the Cancellation Agreement were all part of a sham, a charade to give effect to the earlier illegal Snyder Loan agreement so that the illegal loan and illegal interest would become secured under the Wa Lee Loan Agreement which is clothed with legality. The Money Lenders Ordinance protects borrowers from unscrupulous money lenders. Section 24 protects borrowers against loan sharks charging an unconscionable rate of interest. If the purpose of an agreement is to give effect to such unscrupulous and unconscionable agreement prevented by law, it must be illegal as being contrary to public policy. The Wa Lee Loan Agreement must be tainted with illegality. The agreement was illegal at its inception. If the Court were to turn a blind eye to the true nature of the Wa Lee Loan Agreement, it is allowing it to be used as the teeth of the loan shark, injuring the public instead of protecting it. It would be singular if the law were otherwise.”

38.  In her evidence, Hui tried to portray a picture to this court that the Plaintiff, Good Fortune and Diamond Dragon are in fact distinct companies having no substantial link of business among them.  However, having considered Hui’s roles in each of the companies and the history of dealings of the three companies with the Son, in particular the repeated arrangements of new loans from one company to pay off the loans owed by the Son to another, it is in my view unrealistic to suggest that the three companies do not have a close link in conducting their business in money lending.

39.  The Plaintiff has not been forthcoming in disclosing the documents relating to the Father and Son’s loans with Good Fortune and Diamond Dragon which is not a difficult job to do given the relationship between the three companies.  Some irregularities[19] which might render the loan agreements unenforceable were spotted upon the disclosure of the relevant documents. 

40.  The Son has been borrowing money from Good Fortune and Diamond Dragon at least as early as 2008.  In the vast number of loan agreements signed by the Son, and some also by the Father, the mode of repayment was always that only a disproportionately small sum of money needed to be paid in the first few installments whereas a very substantial part of the loan was to be repaid in the last installment. And inevitably, the last installment was repaid by another loan from either of the two companies.

41.  Under all the four actions herein, monies were lent by the Plaintiff to the Father and Son in November 2011, on terms substantially different from the usual terms for the loans by Good Fortune and Diamond Dragon.  In 1756, 1757 and 1759, the subject loan agreements were coincidentally all signed on 5 November 2011.  Legal proceedings were later on instituted against the Father and Son upon their failure to repay any installment.

42.  In my view, at the time when the Father and Son signed the loan agreements with the Plaintiff, it would be too obvious to the Plaintiff or Hui that the Father and Son would be unable to repay the loans.  It is highly suspicious that the arrangement for the Plaintiff to take over the debts from Good Fortune and Diamond Dragon was a move in preparation for instituting legal proceedings against the Father and Son.

43.  The next question would be: why would the arrangement be necessary?  Was there anything the companies wanted to hide? 

44.  Mr Koo, counsel for the Plaintiff, submitted that the Father and Son had put forward different defences at different stages and ought not to be believed.  Some of the allegations they made were even self-contradictory. 

45.  Mr Koo submitted that although the Plaintiff produced no evidence to prove that Diamond Dragon was a licensed money lender, there is also no evidence to prove that it was unlicensed.  Mr Koo admitted that the charging of default interest of 1% per day has exceeded the legal limit under the MLO but submitted that this provision should be severed from the other provisions of the relevant loan agreements.  He also submitted that the absence of the Father’s signature on the loan agreements does not affect the total sums the companies had actually lent to the Father and Son.

46.  In his submission, Mr Koo asked this court to find that even if illegalities were found from the previous loan agreements, it is not proved that the Plaintiff had knowledge of the illegality and therefore, the Plaintiff should not be held responsible for it[20]. 

47.  To a certain extent, I share Mr Koo’s sentiment regarding the Son’s swaying stance as to his defence. However, the Father and Son were initially unrepresented and the present case is not as simple as what has been pleaded by the Plaintiff.  At this stage, I do not have to be satisfied that the Father and Son have a very strong case but merely that they have put forward an arguable defence.

48.  As to whether Diamond Dragon and Good Fortune were licensed money lenders, my view is that the burden is on the Plaintiff to prove in view of the close relationship between the Plaintiff and the two companies.  By the same token, it would also be incumbent upon the Plaintiff to show that the previous loan agreements were not unenforceable due to illegalities.

49.  As I have mentioned above, the motive behind the arrangement for the Plaintiff to takeover all the debts from Good Fortune and Diamond Dragon is suspicious.  In the circumstances, it would be unrealistic to suggest that the Plaintiff, or Hui, would have no knowledge of the illegalities existed in the previous loan agreements if they are to be proved to have existed.

50.  The previous transactions between Good Fortune and Diamond Dragon and the Father and Son are complicated and covered a long period of time.  It requires a forensic exercise to trace after each available document to ascertain the actual amounts lent to the Father and Son and the interest charged in respect of each loan.

51.  In my view, it would only be fair to allow the present actions to go for trial, where further discoveries will have to be made by the parties and witnesses are to be tested in the witness box.

52.  For the above reasons, I am satisfied that leave should be given to the Father and Son to defend the Plaintiff’s claims.  The Father and Son’s appeals are allowed and the respective orders of the learned Master shall be set aside.

53.  I direct that the Father and Son are to file and serve their Defences to the actions within 28 days.

54.  I make costs order nisi as follows: (1) costs of the appeals be to the Father and Son to be taxed if not agreed.  (2) costs of the Plaintiff’s summonses be in the cause.  The order nisi will become absolute upon the expiry of 14 days from the date of this decision.