DAH SING BANK, LTD v. CHAN FUNG NGA AND OTHERS

HCMP 482/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 482 OF 2009

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J U D G M E N T

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BACKGROUND

1. After the Applicant had exercised its right of sale under the Mortgage executed by the 4^th Claimant as Mortgagor and the 4^th Claimant and another person as borrowers, the Applicant had recovered possession and sold the property belonging to the 4^th Claimant under the said Mortgage.

2. After the outstanding amounts owed to the Applicant by the borrowers were paid from the proceeds of the sale, there was a surplus of $3,264,843.77 (“the Surplus Amount”).

3. The 1^st Claimant, a licensed money lender, is the creditor of the 4^th Claimant by virtue of two loan agreements entered between the parties:

(i)        The first Loan Agreement dated 12 September 2006(“the 1^st Agreement”), by which the 1^st Claimant agreed to lend to the 4^th Claimant a sum of HK$ 1 million (“the 1^st Loan”), with interest rate at 24% per annum;

(ii)       The second Loan Agreement dated 20 October 2006 (the 2^nd Agreement”), by which the 1^st Claimant agreed to lend to the 4^th Claimant a sum of HK$650,000 (“the 2^nd Loan”), with interest rate at 5% per month.

4. The 1^st Loan was secured by a Second Legal Charge dated 22 September 2006 in respect of the subject property and the 2^nd Loan was likewise secured by a Further Charge dated 24 October 2006 against the subject property.

5. The 2^nd and 3^rd Claimants are plaintiffs in HCA 1880/2007, who had obtained an interlocutory judgment with damages to be assessed against the 4^th Claimant as purchasers of the subject property, against which a sealed copy of the writ of summons of HCA 1880/2007 dated 4 September 2007 had been registered.

6. After the Applicant had paid into court the Surplus Amount, it has since ceased to be involved in the proceedings, leaving the 1^st Claimant on one side and the 2^nd and 3^rd Claimants on the other, interpleading for the entitlement to the Surplus Amount.

7. The  4^th Claimant has never participated in the proceedings despite the Originating Summons and the notice of the hearing having been served on her.

8. The 1^st Claimant as the second secured chargee, would have priority over the 2^nd and 3^rd Claimants in respect of the Surplus Amount.  The 1^st Claimant in the present proceedings claims that she is entitled to be paid from the Surplus Amount the outstanding sums of $1,253,311.8 and $1,480,050 owed by the 4^th Claimant under the 1^st and 2^nd Agreements.

9. Hence, if the 1^st Claimant’s claim is proved and allowed in full, there would virtually be nothing left for the 2^nd and 3^rd Claimants who are now potentially the unsecured creditors.

ISSUES BETWEEN 1^ST CLAIMANT AND THE 2^ND AND 3^RD CLAIMANTS

10. Counsel for the parties have framed two issues to be determined by this court.  The only substantial issue however is whether the effective rates of interest[1] under the 1^st and 2^nd Agreements exceed 60 % p.a. rendering the 1^st and 2^nd Agreements unenforceable by virtue of s. 24 (2)[2] of the Money Lenders Ordinance, Cap. 163 (“MLO”).

11. If the 1^st Claimant is successful on the substantial issue, I would need to decide if the amounts claimed by the 1^st Claimant are correct.

INTEREST RATE UNDER THE 1^ST AGREEMENT

12. According to the 1^st Agreement, the 1^st Loan in the amount of $1 million is for a period of 3 years (from 12 September 2006 to 12 September 2009).  Interest at 2% per month, that is 24% per annum.

13. There is a further provision for default interest at 3.5% per month on the outstanding principal sum and interest.

14. According to the affirmation of the 1^st Claimant filed in support of her application, the repayment of the principal amount of the 1^st Loan together with interest was to be repaid by 36 equal instalments of $47,778 per month, with the first instalment to commence on 20 October 2006, thereafter on the 5^th day of each month.  The 4^th Claimant had only paid 14 instalments with the last payment having been made on 5 December 2007.

15. The 1^st Claimant avers  in paragraph 8 of her affirmation that the outstanding principal together with accrued interest calculated up to 30 June 2009 (with overdue interest of 3.5% per month in the sum of $477,451.80 calculated on the principal outstanding sum of $757,860) is in the total sum of $1,253,311.80.

16. Mr. Ko, counsel for the 1^st Claimant submits that the effective interest rate does not exceed the unlawful rate of interest of 60% per annum.

INTEREST RATE UNDER THE 2^ND AGREEMENT

17. According to the terms of the 2^nd Agreement, the principal amount of the 2^nd Loan was in the sum of $650,000 and that the period was 1 year (20 October 2006 to 19 October 2007). The interest rate was stipulated at 5% per month.

18. The 4^th Claimant did not pay anything under the 2^nd Agreement. According to paragraph 14 of the 1^st Claimant’s affirmation, the outstanding principal and accrued interest calculated up to 30 June 2009 is in the sum of $1,480,050.

The 2^nd and 3^rd Claimants’ contentions

(I)  The collection agency fee

19. The contention of unlawful interest common to both 1^st and 2^nd Agreements is based on the demand made in the letter dated 13 September 2008 (“the Demand Letter”) by the 1^st Claimant’s solicitors to the former solicitors for the 4^th Claimant for payment, apart from the outstanding principal and interests, the collection agency charges.

20. In the Demand Letter, the 1^st Claimants demanded for payment in addition to the outstanding principal and interest, for collection agency charges of $320,668.20 for the 1^st Loan, and $409,500 for the 2^nd Loan.

21. Counsel for 2^nd and 3^rd Claimants, Mr. Chai, contends that the demand for the respective amounts of the “Collection Agency Fee” –as   evidenced by the Demand Letter- should be part of the 1^st and 2^nd Agreements in accordance with s.2 of the MLO[3].  As the fees for the collection agent are amounts in excess of the principal sums of the 1^st and 2^nd Loans, Mr. Chai therefore argues that the collection agent’s fees as set out in the Demand Letter should be included as part of the interest for the calculation of the effective rates of interest in respect of each of the 1^st and 2^nd Loans.

22. It is not in dispute that when the collection agency fees as demanded in the Demand Letter are taken into account for calculating interest, the effective interest rates in respect of the 1^st and 2^nd Agreements would be respectively at the rates of 68% and 227% per annum, which would therefore be (as Mr. Chai has contended) contravening s. 24(2) of the MLO.

(II)  Payment in arrears: 2^nd Agreement

23. In addition to the contention above, the 2^nd and 3^rd Claimants further contend that the effective rate of interest for the 2^nd Agreement would still be in excess of 60% even without the collection agency fee (as demanded by the 1^st Claimant) being taken into account for calculating interest.

24. This contention essentially arises from an averment made by the 1^st Claimant in paragraph 9 of her affirmation. In it the 1^st Claimant states that the payment of interest at 5% per month was to be paid monthly in arrears.  Based on this assertion, the solicitors for the 2^nd and 3^rd Claimants calculated interest in accordance with Schedule 2 of the MLO, which is entitled “Calculation of the Annual Percentage Rate of Interest”. According to their calculation as set out in exhibit LKC-4 exhibited to the 2^nd Affidavit of Lau Kam Chung, Anthony, the rate of interest is calculated to be 111% per annum.

DISCUSSION

(I)  The collection agency fee

25. It is common ground that the 1^st and 2^nd Agreements do not provide for payment of collection agency fee.  Hence, prima facie, the 4^th Claimant has no contractual obligation to pay.

26. Mr. Chai argues that as the 4^th Claimant had in fact made monthly instalment payments for the 1^st Loan even though such term was not expressly provided for in the 1^st Agreement, it could be inferred that the 1^st and 2^nd Loan Agreements were partly written and partly oral, and further that the demand made in the Demand Letter for payment of the respective collection agency fees was an oral agreement, obliging the 4^th Claimant to pay collection agency fees under the 1^st and 2^nd Agreements.

27. In spite of Mr. Chai’s valiant submissions, I am unable to accept his arguments.  As the 4^th Claimant has never participated in the proceedings, there is effectively no evidence to contradict the assertions made by the 1^st Claimant although I am not bound to accept her evidence after all the evidence has been considered.

28. I cannot agree with Mr. Chai’s argument that simply the Demand Letter was written by the 1^st Claimant’s solicitors, it ought to therefore be give a weight so as to regard the demands for payment of collection agent fees as a contractual term of the 1^st and 2^nd Agreements as a result of “a conduct subsequent” (as Mr. Chai described).

29. The 1^st Claimant has not claimed any such fees.  Neither has the 1^st and 2^nd Agreement provided for the payment of such fees.  I am unable to find any authorities that a demand by solicitors in such circumstances would become a term of the contract.

30. Hence, this contention fails.

31. Since it is not in dispute that the effective interest rate does not offend s.24 (2) of the MLO if the amount for collection agency fees stated in the Demand Letter is excluded from the calculation of effective rates of interest in respect of the 1^st Loan, the 2^nd and 3^rd Claimant’s challenge to the 1^st Loan must fail.  This argument in respect of the 2^nd Loan is likewise unsustainable.

(II)  Payment in arrears: 2^nd Loan

32. Since it is common ground that the effective rate of interest in respect of the 2^nd Loan would only contravene s.24 (2) of the MLO if the 2^nd Agreement contains an oral agreement of payment of principal and interest in arrears, there is in fact no need for me to consider the application and mechanism of Schedule 2 of MLO, governing how an effective rate of interest is to be calculated. 

33. According to the 1^st Claimant, the assertion of “payable in monthly arrears” stated in her first affirmation is a typo mistake.  She avers that the terms are fully expressed in the 2^nd Agreement.

34. As I have stated above, without the participation of the 4^th Claimant, there is in fact no evidence at all contradicting the 1^st Claimant’s assertion.  I am also unable to find any evidence showing that the 2^nd Agreement does not reflect the entire agreement between the parties.  Hence, I also reject this contention.

35. As a result, I also find that the 2^nd Agreement does not contravene s.24 (2) of the MLO.

CONCLUSION

36. For the reasons above, the 1^st Claimant, being a secured second chargee having priority over the 2^nd and 3^rd Claimants, is entitled to be paid the amount owed by the 4^th Claimant from the Surplus Amount.

37. I would leave the parties to agree on the calculations, with interest to be strictly calculated in accordance with the terms of the 1^st and 2^nd Agreements.  There shall be liberty to apply should there be a dispute over calculation.

38. Hence, upon the total sum to be paid out from the Surplus Amount is agreed, and subject to the production of a copy of the Money Lender license for the relevant the period of the 1^st and 2^nd Agreements, I order payment to be made from the Surplus Amount in favour of the 1^st Claimant for the amount (to be agreed, and ordered by me) owed by the 4^th Claimant under the 1^st and 2^nd Agreements. 

39. As the 1^st Claimant is successful in the present proceedings in respect of the Surplus Amount, I grant the usual costs order nisi that the 2^nd and 3^rd Claimants do pay the costs in connection with the interpleader proceedings, including costs reserved, and certificate for counsel, to be summarily assessed in lieu of taxation.

40. The nisi order is to become absolute 14 days after the judgment (that is on 23 December 2009) unless an application by summons is made to vary the nisi order.

41. Upon the order nisi becoming absolute, and that parties are unable to agree costs within 14 days thereafter, I direct the parties to attend before me for a hearing for summary assessment of costs with 30 minutes reserved. I further direct the 1^st Claimant to lodge (not file) and serve a statement of cost 7 days before the hearing for assessment.

42. If they wish to object to the payment of any items of costs, the 2^nd and 3^rd Claimants shall likewise lodge and serve a statement of objections to the statement of costs 3 days before the hearing.

[1]     Section 2(1), MLO, “ ‘effective rate’, in relation to interest, means the true annual percentage rate of interest calculated in accordance with Schedule 2”.

[2]    Section 24(2), MLO, “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 of 60% per annum”.

[3]     Section 2, MLO, “  ‘ interest’… 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.”