TREASURE SPOT FINANCE CO LTD v. LI CHIK MING AND ANOTHER

HCA 5387/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5387 OF 2001

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J U D G M E N T

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The Parties

1.  The Plaintiff is a company licensed under the Money Lenders Ordinance Cap. 163 (“the Ordinance”) to carry on business as a money lender.  It carries on its business from an office in Tai Po, New Territories.

2.  The 1^st Defendant is an indigenous villager living in Yuen Long, New Territories.

3.  The 2^nd Defendant was until her apparent disappearance also a resident in Yuen Long and a friend of the 1^st Defendant.

The Action

4.  The Writ of Summons with the Statement of Claim endorsed thereon was issued on 15^th December 2001.  By it, the Plaintiff claims against both Defendants for repayment of 3 loans made by the Plaintiff to them in 2001 (“the 3 loans”) together with interest thereon and against the 1^st Defendant for delivery of vacant possession of 5 properties mortgaged by the 1^st Defendant to it as security for the 3 loans.  The action was brought as a result of the failure by the Defendants to pay monthly interest on the 3 loans.

5.  The 1^st Defendant is defending this action vigorously.  He is now acting by his guardian ad litem, Ms. Li Lai Yuen (“Ms. Li”), who is his daughter.  She was appointed as his guardian ad litem by an Order of Master J. Wong dated 28^th March 2002 wherein the 1^st Defendant is described as “a person who is by reason of mental disorder incapable of managing and administering his property and affairs”.  It is to be noted that that Order of the Master was made on an ex parte application and without argument by any party with an interest to the contrary.  It does not mean that the Court is thereafter bound to accept that the 1^st Defendant was or is at any given time suffering from mental disorder to the extent that he was or is incapable of managing and administering his property and affairs.  Such an issue will have to be decided on the evidence adduced at the trial.

6.  The 2^nd Defendant has not filed any Notice of Intention to Defend and seems to have disappeared.

The Basic Facts

7.  It seems that there is no dispute between the parties that it was the 2^nd Defendant who arranged with the Plaintiff for the Plaintiff to grant to both Defendants the 3 loans on security to be provided by the 1^st Defendant and that the money (after deduction of the sums payable to the prior mortgagee to enable the relevant security to be first released as referred to below and all expenses) all went to the 2^nd Defendant but not the 1^st Defendant.

8.  By an Offer Letter dated 21^st June 2001 (“the 1^st Offer Letter”), the Plaintiff offered to grant a term loan of $550,000- (“the 1^st Loan”) repayable in 12 months on the security of a property registered in the name of the 1^st Defendant and described therein as “Agricultural land situate at Lot No. 1892 in D. D. 124, Yuen Long, New Territories together with messuages erections and buildings thereon” (“the 1^st Property”).  I shall deal with the other relevant terms of the 1^st Offer Letter below.  Although the letter asks the Defendants to sign and return the duplicate of this letter to the Plaintiff on or before 5^th July 2001 to signify their understanding and acceptance of the offer, there was no duplicate signed by either of the Defendants.

9.  According to Mr. Yu Chi Keung Danny (“Mr. Yu”), the senior manager of the Plaintiff, who was called to give evidence for it, in the morning of 3^rd July 2001, the Defendants attended his office in Tai Po for the purpose of finalising the 1^st Loan.  He gave an explanation to them of what was involved in the 1^st Loan and then sent them over to the office of Messrs. Kenneth Woo & Co. (“KWC”), a firm of solicitors acting for the Plaintiff, nearby for the completion of the rest of the procedure regarding the 1^st Loan.

10.  According to Mr. Woo Pui Ki Kenneth (“Mr. Woo”), the sole proprietor of KWC, who was called to give evidence for the Plaintiff, he had received instructions from the Plaintiff to prepare the documentation and carry out the necessary procedure to effect the 1^st Loan.

11.  It transpired that the 1^st Property was already the subject-matter of a charge by 1^st Defendant to another finance company called Currency Fortune Property and Finance Limited (“Currency Future”) as security for a loan.  Mr. Woo therefore had to arrange for the redemption of the 1^st Property from Currency Fortune so as to enable the Plaintiff to have a first charge on the 1^st Property.

12.  According to Mr. Woo, by 3^rd July 2001, he had prepared all the necessary documentation when the Defendants went to his office that morning.  On that occasion, he explained to the Defendants the gist of the 1^st Loan, the incidental matters and the documents which they were supposed to sign.  Both Defendants indicated their understanding of the same.

13.  The following documents were then signed or executed in the office of KWC: -

(i)        The Memorandum dated 3^rd July 2001 (“the 1^st Memorandum”) was signed by both Defendants.

(ii)       The Mortgage dated 3^rd July 2001 relating to the 1^st Property (“the 1^st Mortgage”) was executed by the 1^st Defendant as Mortgagor and by the Defendants as Borrowers.

(iii)       The Certificate of Independent Legal Advice dated 3^rd July 2001 (“the 1^st ILA Certificate”) was signed by both Defendants.

I shall deal with the terms of these documents as may be relevant below.

14.  KWC had been put in funds by the Plaintiffs.  The Defendants or either of them then instructed Mr. Woo to have the cheque representing the net proceeds of the 1^st Loan after the necessary deductions drawn in favour of the 2^nd Defendant solely.  A letter dated 3^rd July 2001 giving such instructions by the 1^st Defendant to KWC was prepared and signed by the 1^st Defendant.

15.  After that, a cheque for the net proceeds of the 1^st Loan in the sum of $128,416- was drawn by KWC in favour of the 2^nd Defendant and given to her.  KWC also issued a cheque in the sum of $410,084- in favour of Currency Fortune for the redemption of the mortgaged property.

16.  Subsequently, another application was made to the Plaintiff for a second loan in the sum of $1,100,000- or a bit more and 3 properties with the 1^st Defendant as the registered owner thereof were offered as security.

17.  Again, the Plaintiff issued another offer letter dated 12^th July 2001 (“the 2^nd Offer Letter”) offering to lend to the Defendants a term loan of $1,100,000- (“the 2^nd Loan”) repayable in 12 months upon the security of 3 properties to be mortgaged by the 1^st Defendant.  They are described therein as : -

“(1)    Three-storey village type house situate at Section A of Lot No. 1762 in D.D. 124, Yuen Long, New Territories;

(2)    Agricultural land situate at the Remaining Portion of Lot No. 1168 in D. D. 124, Yuen Long, New Territories together with messuages erections and buildings thereon (if any); and

(3)    Agricultural land situate at Lot No. 3440 in D. D. 124, Tuen Mun, New Territories together with messuages erections and buildings thereon (if any)”.

(These 3 properties will hereinafter be referred to as “the 2^nd Property”, the 3^rd Property” and “the 4^th Property” respectively.)

18.  Again, the 2^nd Offer Letter was not signed by the Defendants.

19.  According to Mr. Yu, the Defendants went to his office in the morning of 23^rd July 2001 and more or less the same things happened as on the occasion of the granting of the 1^st Loan.

20.  Again KWC had been instructed by the Plaintiff to prepare the documentation for the 2^nd Loan.

21.  The Defendants were sent by Mr. Yu to go to see Mr. Woo who again gave an explanation to them of what was involved.

22.  Prior to the Defendants attending his office on that occasion, Mr. Woo had discovered that one of the 3 properties offered as security on this occasion, namely, the 2^nd Property, had already been mortgaged to Currency Fortune as security for a loan.  He had to arrange for a redemption of the same to enable a first charge to be created in favour of the Plaintiff.

23.  Mr. Woo had also discovered that, in relation to the 3^rd Property, in order to perfect the title, an application would have to be made to court for the clearing off of a trusteeship.

24.  Further in relation to the 4^th Property, in order to secure good title, Mr. Woo realised that the 1^st Defendant would have to make a statutory declaration and to make an application for a vesting order.

25.  When the Defendants saw Mr. Woo, Mr. Woo explained to them what had to be done and the Defendants agreed.  Consequently, the following documents were signed or executed : -

(i)       A Memorandum dated 23^rd July 2001 (“the 2^nd Memorandum”) was signed by both Defendants.

(ii)      A Mortgage dated 23^rd July 2001 relating to the 2^nd Property, the 3^rd Property and the 4^th Property (“the 2^nd Mortgage”) was executed by the 1^st Defendant as Mortgagor and by the Defendants as Borrowers.

(iii)      A Certificate of Independent Legal Advice dated 23^rd July 2001 (“the 2^nd ILA Certificate”) was signed by both Defendants.

I shall again refer to the terms of these documents as may be relevant below.

26.  Again, KWC had been put in funds by the Plaintiff.  The 1^st Defendant signed a letter dated 23^rd July 2001 instructing KWC to issue a cheque for the net proceeds of the 2^nd Loan in favour of the 2^nd Defendant alone.  KWC then duly drew such a cheque in the sum of $322,400- in favour of the 2^nd Defendant and gave it to her.  KWC also issued a cheque in the sum of $702,960- in favour of Currency Fortune for the redemption of the mortgaged property.

27.  Subsequently, a third loan was applied for from the Plaintiff.

28.  By an offer letter dated 16^th August 2001 (“the 3^rd Offer Letter”), the Plaintiff offered to grant a term loan of $150,000- (“the 3^rd Loan”) to the Defendants repayable in 12 months on the security of another property registered in the name of the 1^st Defendant and described therein as

“Agricultural land situate at the Remaining Portion of Lot No. 1784 in D. D. 124, Yuen Long, New Territories together with messuages erections and buildings thereon (if any)” (“the 5^th Property”)

This was again not signed by the Defendants.

29.  Eventually, more or less the same things happened by the Defendants going to see Mr. Yu and then Mr. Woo on 22^nd August 2001.  The following documents were signed or executed : -

(i)         A Memorandum dated 22^nd August 2001 (“the 3^rd Memorandum”) was signed by the Defendants.

(ii)        A Mortgage dated 22^nd August 2001 relating to the 5^th Property (“the 2^nd Mortgage”) was executed by the 1^st Defendant as Mortgagor and by the Defendants as Borrowers.

(iii)       A Certificate of Independent Legal Advice (“the 3^rd ILA Certificate”) was executed by the Defendants.

I shall again refer to the terms of these documents as may be relevant below.

30.  Same as on the two previous occasions, KWC had been put in funds by the Plaintiff and the 1^st Defendant signed a letter dated 22^nd August 2001 instructing KWC to issue a cheque for the net proceeds of the 3^rd Loan in favour of the 2^nd Defendant solely.  This KWC did in the sum of $140,710-.

31.  According to Mr. Woo, prior to the meeting on 22^nd August 2001, he telephoned the 1^st Defendant to ask him whether he was in possession of the original title deeds and documents to the 5^th Property.  The 1^st Defendant replied that he had lost the same and therefore Mr. Woo had to prepare a statutory declaration for the 1^st Defendant to make in order to rectify the situation.  On this occasion, Mr. Woo also discussed with the 1^st Defendant about the title problems relating to the 3^rd Property and the 4^th Property referred to above and the problem of the lost title deeds regarding the 5^th Property.  Eventually, Mr. Woo instructed an assistant solicitor of KWC, namely, Mr. Fu Mau Ping (“Mr. Fu”) to deal with the 1^st Defendant regarding the documentation for rectifying the title problems referred to above.

32.  Despite the fact that the interest under each of the 3 loans was payable by the Defendants to the Plaintiff at the end of one month from the date of the granting of the respective loans and at monthly intervals thereafter, no payment was ever made.

33.  By letters dated 9^th and 16^th October 2001 which were sent by registered post to the Defendants, the Plaintiff made demands for the payment of interest and then repayment of the loans.

34.  As a result of the receipt of some of the letters of demand, on or about 15^th October 2001, the 1^st Defendant went with members of his family to the office of the Plaintiff to inquire about details of the loans and the circumstances surrounding them.  Certain information was there given by Mr. Yu to the 1^st Defendant or his family members.  I shall deal with this in greater detail below.

35.  Eventually, the 1^st Defendant and his family members made a report to the police on the basis that he had been defrauded by the 2^nd Defendant.

36.  Letters before action were subsequently issued by KWC to the Defendants on 6^th December 2001.  The same led to the issue of the Writ of Summons herein on 15^th December 2001.

The Plaintiff’s Case As Originally Pleaded

37.  In paragraph 2 of the Statement of Claim endorsed on the Writ of Summons, the Plaintiff referred to the 1^st Offer Letter, the 1^st Memorandum and the 1^st Mortgage.  It then goes on to plead as follows : -

“The 1^st Offer Letter, the 1^st Memorandum and the 1^st Mortgage altogether therefore formed the 1^st loan agreement between the Plaintiff and the 1^st Defendant made on the abovementioned dates (“the 1^st loan agreement”).”

The reference to “the 1^st Defendant” alone was obviously a typographical error because in the Amended Statement of Claim (which I will deal with below) that expression was amended to read “the Defendants”.

38.  In the subsequent paragraphs, the Plaintiff gave the 2^nd Loan and the 3^rd Loan the same treatment.  In other words, it was made quite clear that, for each of the 3 loans, the loan agreement consisted of the relevant Offer Letter, Memorandum and Mortgage.

39.  In paragraph 12 of the Statement of Claim, it was pleaded as follows : -

“12.  It was further stipulated under the 1^st Mortgage, the 2^nd Mortgage and the 3^rd Mortgage, inter alia, that the interest on all sums advanced and all other moneys payable at such rate as is applicable under the terms to any facility granted to the 1^st Defendant and the 2^nd Defendant or at such rate as shall be determined by the Plaintiff from time to time.”

40.  Under the heading “Particulars of interest under the 1^st, 2^nd and 3^rd loans”, paragraphs 15 and 17 of the Statement of Claim appeared.  They read as follows : -

“15.   By the 1^st Memorandum, the 2^nd Memorandum and the 3^rd Memorandum, it was agreed between the Plaintiff and the 1^st Defendant and the 2^nd Defendant that the 1^st loan, the 2^nd loan and the 3^rd loan shall bear the interest of 40% per annum respectively and shall be calculated on daily rate basis.

17.   It was further agreed by the Plaintiff and the 1^st Defendant and the 2^nd Defendant under the 1^st Offer Letter, the 2^nd Offer Letter and the 3^rd Offer Letter that the overdue interest for any amount unpaid beyond due date in respect of the 1^st loan, the 2^nd loan and the 3^rd loan respectively shall carry interest at the rate of 45% per annum.”

The 1^st Defendant’s Case As Pleaded

41.  The defence of the 1^st Defendant is contained in the Amended Defence and Counterclaim of the 1^st Defendant filed on 13^th April 2005 (“the Defence”).  The main points made therein can be summarised as follows : -

(i)      At the time of entering into the 1^st, 2^nd and 3^rd Loan Agreements, the 1^st Defendant was suffering from mental disability so that he was incapable of understanding the nature and effect of the same.

(ii)      Such mental incapacity was known or ought to have been known by the Plaintiff and/or the 2^nd Defendant.

(iii)      The 1^st Defendant relies in particular, but without limitation, on the following facts and matters : -

“(a)  he was and is dull and unkempt in appearance and has a smelly body; and

 (b)  he expresses no facial expression of whatever questions posted on him.”

(iv)      Further or in the alternative, the conclusion and execution of the 1^st, 2^nd and 3^rd Loan Agreements were procured by the undue influence of the 2^nd Defendant over the 1^st Defendant and the Plaintiff had been fixed with constructive notice.

(v)       The “Plaintiff had failed to satisfy itself that the 1^st Defendant had exercised his own free will entering into transactions with the Plaintiff due to his own mental disability and/or the undue influence of the 2^nd Defendant over the 1^st Defendant.”

(vi)      The 1^st Defendant had no and/or had not been provided with independent legal advice before the execution of the 1^st, 2^nd and 3^rd Loan Agreements.

(vii)      By reason of all the aforesaid matters, the 1^st, 2^nd and 3^rd Loan Agreements are “void and not enforceable” by the Plaintiff as against the 1^st Defendant.

(viii)    The 1^st Defendant further denies that he has received any part of the subject of the 3 Loan Agreements in the sums of $550,000-, $1,100,000- and $150,000-.

(ix)     The 1^st Defendant counterclaims for declarations that the 3 Loan Agreements “were void” and “were set aside”.

42.  It is to be noted that the 1^st Defendant has not pleaded any defence of illegality whether under the Ordinance or otherwise.

Further Developments In The Course Of The Trial

43.  The first part of the trial lasted for five days between 25^th and 29^th June 2007 inclusive when all the evidence and submissions by Counsel had been completed without either side having based any argument on provisions in the Ordinance.

44.  After I had reserved judgment, I invited the parties to address me further on three matters : -

(i)       section 18(1) and (3) of the Ordinance;

(ii)       the question of “Overdue Interest” at the rate of 45% per annum;

(iii)     the method of calculation of the interest at 40% per annum “calculated on a daily basis” and the effect thereof.

45.  The parties re-appeared before me on 9^th July 2007 when Mr. Ng S. C. appearing for the Plaintiff made an application for leave to adduce in evidence the Supplemental Witness Statement of Mr. Woo dealing with the supply of a copy of the note or memorandum under the 3 loans to each of the Defendants in compliance with section 18 of the Ordinance, should Miss Lee for the 1^st Defendant decide to take the illegality point under that section on the basis that no note or memorandum was supplied to the 1^st Defendant as required under that section and be allowed by the Court to do so.  Miss Lee then confirmed that she was indeed taking an illegality point on such basis.  Mr. Ng submitted that Miss Lee should not be allowed to take such a point.

46.  On 10^th July 2007, I made a ruling to the following effect : -

(i)        The 1^st Defendant was allowed to raise the illegality point based on alleged non-compliance by the Plaintiff with section 18 of the Ordinance.

(ii)       The Plaintiff was given leave to adduce the Supplemental Witness Statement of Mr. Woo with a view to proving that the said section 18 had been complied with.

(See my Ruling made on 10^th July 2007.)

47.  What followed was that Mr. Woo, the 1^st Defendant and Ms. Li were all recalled and cross-examined.

48.  Counsel for the parties then made further closing submissions.

49.  On the part of Miss Lee, she took further illegality points based on the interest rates actually charged and on other provisions in the Ordinance.  I shall refer to these below.

Mental Capacity Of The 1^st Defendant

50.  I deal first with the question of the mental capacity of the 1^st Defendant at the time of the 3 loans.

51.  There is no dispute that the 1^st Defendant has a history as a mental patient.  According to a psychiatric report dated 10^th November 2001 (“Dr. Cheung’s Report”) written by Dr. Cheung Hung Kin (“Dr. Cheung”), Consultant Psychiatrist at the Castle Peak Hospital in response to a request by Messrs. Wong, Kwan & Co., the solicitors instructed by the family of the 1^st Defendant, the history and diagnosis of his mental illness were stated as follows : -

(i)          He was then aged 62 years.

(ii)        “Mr. Li was brought up in the rural background of New Territories.  He was a man of normal intelligence and had schooling up to Primary 5.

He had a record of 8 previous admissions to Castle Peak Hospital (1975, 75-6, 76-7, 77, 78, 84, 88, 89).  His diagnosis was Schizophrenia.  His chief symptomatology consisted of delusions and hallucinations, with intermittent mildly aggressive behaviours.  The single most important feature in the longitudinal course of his illness was that his mental illness always relapsed whenever he stopped his medications (such as shown by the frequent rehospitalisations between 1975 and 1978), but once he agreed to take his medications, his condition could remain stable and well for prolonged periods (such as between 1978 and 1984).  He could even participated actively and productivity in the family farmworks.”

(iii)      “After his last discharge on 11/12/89, he actually appeared at the follow-up clinic only 3 times (23/12/89, 13/1/90 and 10/2/90) and then refused to turn up any more.  His family-members, however, continued to collect medications regularly on his behalf but without his knowledge throughout the subsequent 12 years, and they put the drugs secretly into the patient’s foods and drinks.  In the same pattern as had occurred in the period 1978 – 84, he was able to remain reasonably stable and well in this even longer period 1989 – 2001.  He was no longer so actively engaged in any productive work during this period, but we should bear in mind he was getting older (into his fifties and sixties).  In general he was able to cope with the routine demands of life without much supervision.  There was no evidence of relapse of his psychotic illness throughout the 12 years, he was no longer aggressive as before, and he could actually manage to stay outside the mental hospital for so many years!”

(iv)      “Concerning the present dispute with the Finance Company, Mr. Li was extremely consistent in the accounts which he had given to the police, the solicitors and to myself, viz. he borrowed $150,000 on each of 3 occasions and transferred the cheques to his friend Miss Lam Nui’s bank account.  In a broad sense (such as would be expected from any layman of similar background), he was able to understand : -

a)     What he was doing (viz. the meaning of “borrowing”, “borrower”, “lender”, and “mortgage”),

b)    How he was doing it (viz. putting a signature in front of a lawyer),

c)    Why he was doing it (viz. helping a long-acquainted friend to overcome some financial difficulties as a result of losses in business),

d)    Consequences of what he had done (viz. his liability in debts and the potential risk of losing part of his properties, although he believed that Miss Lam should be able to pay back her debt eventually and he was just acting what a good friend should in helping her secure her loan).”

(v)       “As for the management of his existing properties, he was able to tell fairly accurately what they consisted of and how much approximate monetary worth they amounted to.  He was apparently also able to learn from his lesson, and said he was not going to lend money to others again.  As I examined his current mental condition on 1/11/01 and 8/11/01, I found that his intellectual functioning was quite satisfactory (for instance he could do moderately difficult arithmetic such as 93 – 7 = 86 & 86 – 7 = 79 unexpectedly quickly, and his memory and orientation were quite O.K.), and there was no evidence whatsoever of any possible relapse of his schizophrenic illness.  Although he might appear a little bit dull-looking, his speech was nevertheless quite clear and coherent.”

(vi)     “Opinions

(1)   Mr. Li’s mental condition has remained satisfactorily stable over the last 12 years while under the therapeutic effect of secretly given anti-psychotic medication.

(2)   His mental ability is such that he should be able to manage his property and general affairs.

(3)   His mental competence as he signed those documents in relation to the financial dispute in question should be comparable to any ordinary layman of similar cultural and educational backgrounds.

(4)   If he did not realise the implication of “All Monies & General Credit Facilities”, it appeared more derived from lack of adequate explanation than lack of understanding capacity.

(5)   He should probably understand the meaning of Statutory Declaration.”

52.  At the trial, the 1^st Defendant called a Dr. Benjamin Lai (“Dr. Lai”), a psychiatrist, to give evidence. Dr. Lai has written 2 psychiatric reports on the 1^st Defendant : -

(i)       the first one dated 23^rd November 2001 (“Dr. Lai’s 1^st Report”) and

(ii)      his supplemental report dated 4^th November 2006 (“Dr. Lai’s 2^nd Report”).

53.  In Dr. Lai’s 1^st Report, he says that he examined the 1^st Defendant and interviewed his family members for about 3 hours.  He also referred to Dr. Cheung’s Report.  In his oral evidence, Dr. Lai agreed that Dr. Cheung was a very experienced and highly respected psychiatrist.  Dr. Lai made the following points in Dr. Lai’s 1^st Report : -

“31.     In sum, Mr. Li has impaired mental capacity as compared to a normal average person.

32.      Concerning the Statutory Declaration, Mr. Li should have the mental capacity to understand the contents if he has been given the appropriate explanation.

33.      Concerning the other legal documents involving mortgage, Mr. Li should be able to understand the meaning of ‘mortgage’, ‘borrowing money’ and ‘lending money’.  He may not be able to understand the meaning of terms like ‘all monies and general credit facilities’ and the implication.

34.      As to whether he understands that the co-borrower, Lam Nui, can draw money from the finance company without further reference from him I believe he is not aware of it.  This may be because he has not been told and explained about it or he does not understand it.

35.      Concerning his mental capacity to manage his properties, I think Mr. Li knows how many properties he has and roughly how much they are worth.  He is able to rent his properties and collect the rents.  It is, however, of risk to Mr. Li if he is left alone to manage his own properties as seen by the financial difficulty he has got himself into.  He did not show concern and participate in the work concerned when the family was to build a house.  As to his ability to manage his own affairs, he has no insight into his mental illness and he has no insight into his need of continual treatment.  With the history of aggressive behaviour during his past relapses of mental illness, it is necessary that Mr. Li should be put under the guardian and supervision of his family member such that he might receive continual and necessary psychiatric treatment.”

54.  Dr. Lai’s 1^st Report on the whole certainly does not give me the impression that as at November 2001 (which was 3 or 4 months after July and August 2001 when the 3 loans were made) that the 1^st Defendant was suffering from such mental disability that he was incapable of understanding the nature and effect of the 3 loans or of managing his own affairs.

55.  The Plaintiff called a Dr. Peter W. T. Yu (“Dr. Yu”), another psychiatrist, to give evidence.  Dr. Yu had examined the 1^st Defendant for 1- hours and interviewed Ms. Li for half-an-hour on 14^th July 2005.  Dr. Yu wrote his first report dated 16^th August 2005 (“Dr. Yu’s 1^st Report”) in which he said the following : -

“Likely Mental Condition in 2001

47.    Equipped with the present assessment findings and Dr. Lai’s findings, it is possible to determine, retrospectively, Mr. Li’s mental condition in 2001.

48.    If a schizophrenic patient has a similar clinical course to Mr. Li’s, the mental condition throughout the last 10-odd years is expected to remain the same or be deteriorating slowly.  Any significant improvement is most unlikely.  For this reason, I think Mr. Li’s mental condition in 2001 was either the same as his present or be slightly better.  That is to say, he was free of schizophrenic symptoms and functioned within normal limits in 2001.

Capacity to Understand the Nature and Effect of the Loan Transactions in 2001

49.    At present, Mr. Li is free of intellectual impairment or abnormal state of mind that affect his ability to make sound judgment.  He can reason and make rational decisions.  He can comprehend the nature and effect of his acts.  He is mentally competent in most tasks, say, making a will or entering into a contract.  Because his mental condition was the same or even better in 2001, it is fair to assume that he had the same mental capacity in 2001.

50.    The specific task was the understanding of the mortgage agreement in 2001.  Judging from his own description, he knew then the nature and extent of his property, he knew the nature and effect of taking out a mortgage, and that his decisions were not influenced by intellectual impairment or abnormal state of mind.  In sum, he had sound mental capacity when he entered into the mortgage contracts in 2001.

According to his report (para. 30), Dr. Lai believed Mr. Li ‘may not understand the nature and extent of the contract involved’; and there were a need for repetitions and a need to spell out risks and benefits/pros and cons for him.  I do not agree.  Mr. Li was of normal intelligence then.  He was also free of mental symptoms that would adversely affect the capacity to understand the important aspects of the contracts.

According to his report (para. 33), Dr. Lai stated that Mr. Li should be able to understand the meaning of ‘mortgage’, ‘borrowing money’ and ‘lending money’.  I think such understanding meant that Mr. Li understood the important aspects of the contracts.  The understanding was not only the mere literal meaning of the terms but also included knowledge of the ramifications of what he was doing at the time, that is, entering into mortgage agreements.

According to his report (para. 35), Dr. Lai stated that Mr. Li knows how many properties he has and roughly how much they are worth and he is able to rent his properties and collects the rents.  I think these abilities suggested that he was mentally competent to manage his properties and affairs.”

56.  Dr. Yu wrote another report dated 8^th August 2006 (“Dr. Yu’s 2^nd Report”) after he had been shown Dr. Cheung’s Report and an earlier memo written by Dr. Cheung to the police both of which were obtained by the Plaintiff in the process of discovery by the 1^st Defendant.  He said that Dr. Cheung’s Report and the said memo suggested that his opinion expressed in Dr. Yu’s 1^st Report was valid and that no revision of the same was necessary.

57.  Dr. Lai then produced Dr. Lai’s 2^nd Report in order to deal with Dr. Yu’s 1^st Report and Dr. Yu’s 2^nd Report.  Dr. Lai disagreed with a number of the points made by Dr. Yu.  It is to be noted that before writing Dr. Lai’s 2^nd Report, Dr. Lai had not examined the 1^st Defendant again.

58.  Dr. Yu then wrote yet another report dated 15^th December 2006 (“Dr. Yu’s 3^rd Report”) in which he dealt with the points made in Dr. Lai’s 2^nd Report.

59.  It is not necessary for me to deal with the detailed contents of all the medical reports other than what I have done above.

60.  Having considered all the evidence and all the medical reports, I have come to the conclusion that the opinion of Dr. Yu is to be preferred to that of Dr. Lai.

61.  I find as a fact that as at July 2001, the 1^st Defendant was not suffering from mental disability to the extent that he was unable to understand the nature and effect of the 3 loans and all that they entailed, including the security given by him to the Plaintiff.

62.  I base my finding on the following matters : -

(i)        Dr. Cheung’s Report which was written only about 3 or 4 months after July – August 2001 when the 3 loans were made;

(ii)       Dr. Yu’s 3 reports;

(iii)      the evidence of Mr. Yu, Mr. Woo and Mr. Fu which I accept to the effect that the 1^st Defendant was able to understand the explanation given to him about the 3 loans and all the legal documents connected therewith;

(iv)      the evidence of Ms. Li to the following effect :

(a)   since his discharge from hospital in 1990, the 1^st Defendant has been continuously fed with medicine by his family members which helped him to remain in stabilized condition without the need to be re-admitted to hospital;

(b)   the 1^st Defendant has maintained the habit of playing majong for a few hours everyday;

(c)   the 1^st Defendant had since September 2001 (if not earlier) been given charge of one of his grandchildren and the task of taking him or her to and from school everyday usually by cycling.

(v)     The evidence of the 1^st Defendant himself which by and large confirmed the evidence of Ms. Li.

63.  If the members of the 1^st Defendant’s family had not been convinced that he was not suffering from mental incapacity, it would be highly unlikely that they would have allowed him to take charge of his grandchild.

64.  I further do not accept the allegation that the 1^st Defendant would not take a bath for a year or change his clothes regularly or that he was always smelly.  His family members would be unlikely to allow that to happen.  In any event, he showed none of such unattractive features when he appeared in Court both in the witness box and in the public gallery.  I also do not find anything unusual in his facial expression considering his age and background.

65.  The law on this subject is well summarised in Chitty on Contracts (29^th ed.) vol. 1 p. 608 para. 8 – 670 as follows : -

“Liability generally.  In the case of contracts other than for necessaries, the general rule is that a mentally disordered person is bound by his contract unless he can show that owing to his mental condition he did not understand what he was doing, and further that the other party was aware of this incapacity.  But if these two conditions are satisfied, the contract is voidable at his option.  This rule was laid down in Imperial Loan Co Ltd v Stone where Lord Esher M. R. said :

“When a person enters into a contract, and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding on him in every respect, whether it is executory or executed, as if he had been sane when he made it, unless he can prove further that the person with whom he contracted knew him to be so insane as not to be capable of understanding what he was about.””

66.  The case of Imperial Loan Co. Ltd. V. Stone [1892] 1 Q. B. 599 was approved and applied by the Privy Council in the case of Hart V. O’Connor [1985] 1 A. C. 1000.

67.  Even if I were wrong in finding that the 1^st Defendant did have the mental capacity to enter into the 3 loans, I find as a fact that the Plaintiff and its representatives did not know about the lack of mental capacity on the part of the 1^st Defendant.  In this regard, I accept the evidence of Mr. Yu, Mr. Woo and Mr. Fu all of whom said in evidence that there was nothing unusual in the 1^st Defendant’s facial expression, appearance, attire or body odour.

68.  The 1^st Defendant therefore fails in his defence based on his alleged lack of mental capacity to enter into the 3 loans.

Undue Influence

69.  I now deal with the defence of undue influence.  The allegation of the 1^st Defendant is that he entered into the 3 loans as a result of undue influence exerted by the 2^nd Defendant over him and that the Plaintiff had constructive notice of such undue influence.  Hence, the 3 loans are void or voidable.

70.  The equitable doctrine of undue influence is neatly summarised in Chitty on Contracts (29^th ed.) vol. 1 p. 534 para. 7 – 047 as follows : -

“7-047     Equitable doctrine of undue influence.  The equitable doctrine of undue influence is a comprehensive phrase covering cases in which a transaction between two parties who are in a relationship of trust and confidence may be set aside if the transaction is the result of an abuse of the relationship.  The transaction may be set aside if the claimant shows that the other party obtained it by abusing the relationship; this, as we shall see, is often termed “actual undue influence”, but it is probably better to refer to such cases as ones in which undue influence is actually proved.  A transaction may also be set aside in the absence of direct proof if claimant shows the existence of a relationship of trust and confidence with the other party, and that the transaction is one that “calls for explanation”.  Then it will be presumed that the transaction was the result of undue influence unless the presumption is rebutted.  The doctrine extends to cases of coercion, domination, or pressure outside those special relations.”

71.  Thus, where there exists between the complainant and the person alleged to have exerted undue influence a special relationship, e.g. parent and child, guardian and ward and solicitor and client, there is a presumption of undue influence which may be rebutted.  See Chitty (supra) pp. 544 – 548.

72.  On the other hand, where no such special relationship exists between the two relevant parties, the burden is on the complainant to prove that there was actually undue influence exerted on him.

73.  In the case of Li Sau Ying V. Bank of China (Hong Kong) Ltd. [2005] 1 HKLRD 106, Lord Scott NPJ delivering the judgment of the Court of Final Appeal first reviewed all the relevant authorities including the leading cases decided by the House of Lords.  In that case the complainant and the person alleged to have exerted undue influence on her were merely friends for a few years.  At page 118H, Lord Scott said : -

“28.  This is not a case in which the relationship between the appellant and Mr. Li was one of the well established categories of relationship where the relationship is such would lead the court to presume that undue influence had been exerted unless evidence was adduced proving the contrary.”

At page 121A – D, the learned Judge said : -

“34.  I do not wish to leave this issue without expressing the hope that in future cases, where undue influence has to be proved but where the relationship between the parties is not a relationship that falls within Slade LJ’s Class 2A category, the parties will concentrate on whether the evidence justifies the inference that, on a balance of probabilities, the impugned transaction was procured by undue influence, that is to say, by an abuse by the allegedly dominant party of the trust and confidence reposed in him by the allegedly subservient party.  Reference in such cases to, and attempts to invoke the assistance of, an alleged evidential presumption of undue influence are, in my opinion, likely to be, as they have been in this case, a source of confusion and an impediment to the evaluation of the available evidence.”

74.  In the present case, the undisputed evidence is that the 1^st Defendant and the 2^nd Defendant were friends for many years.  In the witness statement of the 1^st Defendant, he says he had been acquainted with her for more than 30 years.  In his oral evidence, he says that he had known her for 10 odd years.  The discrepancy is of no great significance.  What is important is that on the evidence there existed no special relationship between the two Defendants.  Thus, no presumption of undue influence has arisen and the burden is on the 1^st Defendant to prove, first, that the 2^nd Defendant did exert undue influence on him and, secondly, that the Plaintiff had constructive notice of such undue influence.

75.  It is to be remembered that not all the proceeds of the 3 loans went to the 2^nd Defendant.  A substantial part of the 1^st Loan and the 2^nd Loan was paid over to Currency Fortune to redeem the prior mortgages and to discharge the liability of the 1^st Defendant thereunder.  There is no clear evidence as to how and why the prior mortgages arose.

76.  The 1^st Defendant gave an account in paragraphs 7 – 14 of his witness statement of signing documents in solicitors’ offices in Central.  He gave no specifics about the time and he said he had no idea of going to a solicitors’ firm in Tai Po.  He said he did all that at the behest of the 2^nd Defendant and that nobody ever gave any explanation to him as to what he was signing.  He was adamant that he only borrowed 3 sums of $150,000- each without specifying from which financial institution.  In oral evidence, the 1^st Defendant said that the 2^nd Defendant told him that her factory on the Mainland was losing money and asked him to help her borrow money from financial institutions by providing security.  He agreed to help her because of their friendship.  He said that she cheated him.

77.  In my judgment, such evidence by the 1^st Defendant falls far short of proving on a balance of probabilities that the 2^nd Defendant had exerted undue influence on him in order to cause him to enter into the 3 loans.

78.  In such circumstances, the question of whether the Plaintiff had constructive notice or was put on inquiry about any undue influence simply does not arise.

79.  Even if I am wrong and the 2^nd Defendant did exert undue influence over the 1^st Defendant in arranging for him to enter the 3 loans, in my judgment, the Plaintiff was not put on inquiry at least as regards the 1^st Loan and the 2^nd Loan because a substantial part of each of those two loans was used to repay Currency Fortune.  There is no evidence that the Plaintiff was aware of the circumstances under which the mortgages in favour of Currency Fortune were created.  The repayment to Currency Fortune was to discharge the liability of the 1^st Defendant.

80.  Furthermore, even if the Plaintiff had been put on inquiry, I find that the Plaintiff has discharged its duty through Mr. Woo.  I accept the evidence of Mr. Woo to the effect that he did explain clearly to the Defendants the nature and effect of all the loan documents signed and that he did advise the Defendants that they should consider getting independent legal advice, after which they signed the 1^st ILA Certificate, the 2^nd ILA Certificate and the 3^rd ILA Certificate on the relevant occasions.  I further accept the evidence of Mr. Woo that, when instructed to issue a cheque in favour of the 2^nd Defendant solely on each occasion, he did explain to the 1^st Defendant what he was doing and asked him whether that was really what he wanted and that the 1^st Defendant affirmed it.

81.  In all the circumstances, in my judgment, the 1^st Defendant also fails in his defence based on the alleged evidence influence exerted on him by the 2^nd Defendant.

Section 18(1) Of The Ordinance

82.  I now deal with the point based on section 18(1) of the Ordinance.

83.  Section 18(1) of the Ordinance provides as follows : -

“18.  Form of agreement

(1) No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be enforceable unless –

(a)   within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and

(b)   there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,

and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.”

84.  It is alleged that the Defendants were not supplied with copies of the 1^st Memorandum, the 2^nd Memorandum and the 3^rd Memorandum at the time of signing them.

85.  When the 1^st Defendant was recalled to give evidence on this point, all he said was that he could not remember anything about what took place in Mr. Woo’s office.

86.  On the other hand, Mr. Woo was clear in his evidence that he did supply copies of the 1^st Memorandum, the 2^nd Memorandum and the 3^rd Memorandum to the Defendants on each occasion.  Mr. Woo started practising as a solicitor in 1991 and started his own firm, KWC, in October 1993.  He would often deal with money lenders transactions in his practice.  By 2001, he would have had such experience for over 7 years.  He clearly recognised the duty of a money lender under section 18(1) of the Ordinance.  Indeed, annexed to each of the 1^st Memorandum, the 2^nd Memorandum and the 3^rd Memorandum was a summary of the relevant provisions of the Ordinance including the words : -

“a copy of the signed note of the agreement must be given to the borrower with a copy of this summary at the time of signing.”

87.  I accept the evidence of Mr. Woo to the effect that he did give copies of the 1^st Memorandum, the 2^nd Memorandum and the 3^rd Memorandum to the Defendants at the time of signing on each occasion.

88.  The 1^st Defendant therefore fails in his defence based on the alleged contravention of section 18(1) of the Ordinance by the Plaintiff.

The Interest Rates Points

89.  Whilst it is possible for money lenders to charge very high interest rates, the Ordinance does impose stringent restrictions and conditions against lenders of money (whether money lenders within the meaning of the Ordinance or not) regarding, inter alia, the question of interest rates charged against borrowers as can be seen from the provisions set out below.

90.  Section 24(1) and (2) of the Ordinance provide as follows : -

“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).”

(emphasis added)

It is to be noted that there is no provision for relief by the courts in favour of a lender of money who has committed a breach of section 24(1).

91.  Section 25(1), (2) and (3) of the Ordinance provide as follows :-

“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.”

          (emphasis added)

92.  Thus, the scheme of the Ordinance insofar as interest rates are concerned is that no person (whether a money lender or not) is allowed to charge an “effective rate of interest” exceeding 60% per annum.  In the case of a person (whether a money lender or not) who lends money and charges interest at an “effective rate” exceeding 48% per annum but not exceeding 60% per annum, the Court may re-open the transaction so as to do justice between the parties having regard to all the circumstances set out under section 25 of the Ordinance.

93.  Section 22(1) of the Ordinance provides as follows : -

“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.”

(emphasis added)

This applies only to a loan made by a money lender.  It prohibits the charging of compound interest (sub-section (1)(a)) and the charging of interest the rate or amount of which may be increased by reason of any default in the payment of sums due under the loan agreement (sub-section (1)(c)).  On the other hand, there is power on the part of the Court to grant relief to the money lender who has contravened section 22(1).  Thus, sub-section (2) of that section provides as follows : -

“(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.”

94.  Section 18 of the Ordinance which relates to the form of a loan agreement and the note or memorandum in writing required thereunder has been partly dealt with in paragraphs 82 – 88 above.  Section 18(2) provides as follows : -

“(2)  The note or memorandum shall contain all the terms of the agreement and in particular shall set out –

(a)   the name and address of the money lender;

(b)   the name and address of the borrower;

(c)   the name and address of the surety, if any;

(d)   the amount of the principal of the loan in words and figures;

(e)   the date of the making of the agreement;

(f)    the date of the making of the loan;

(g)   the terms of repayment of the loan;

(h)   the form of security for the loan, if any;

(i)    the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2; and

(j)    a declaration as to the place of negotiation and completion of the agreement for the loan.”

(emphasis added)

This sub-section is in imperative terms and one of the terms of the loan agreement which must be set out is the rate of interest charged on the loan (sub-paragraph (i)).

95.  Although there is also power under sub-section (3) of section 18 of the Ordinance (which is similar to that under section 22(2) referred to in paragraph 93 above) on the part of the Court to give relief to a money lender who has contravened subsection (1) by, for example, not making out a note or memorandum containing all the particulars required under subsection (2), nevertheless such contravention still amounts to an offence under that Ordinance.  Thus, section 29(4) provides as follows : -

“(4)  Any money lender who –

(a)   fails to make a note or memorandum in writing of an agreement in compliance with section 18;

(b)   fails to give a copy of such note or memorandum to the borrower in compliance with section 18(1)(a); or

(c)   fails to include in or attach to such copy a summary in writing in compliance with section 18(1)(b),

commits an offence.”

96.  I shall deal with the definitions of “interest”, “effective rate” or “effective rate of interest” and Schedule 2 to the Ordinance below.

97.  Leaving aside the statutory provisions for the moment, I now turn to how the case of the Plaintiff regarding interest rates has developed on the pleadings and in argument.

98.  I have already dealt with the way in which the Plaintiff pleaded its case in the original Statement of Claim in paragraphs 37 – 40 above.

99.  At the commencement of the trial, the Plaintiff sought and was granted leave to file the Amended Statement of Claim.  It can be seen from paragraphs 15, 17, 19 and 20 thereof that it was still claiming interest at 40% per annum and default interest at 45% per annum.

100.  In the Closing Submissions of Counsel for the Plaintiff dated 29^th June 2007, it was said in paragraph 7 as follows : -

“7.   The P seeks interest as pleaded in ASOO §19 (as corrected by Exh “P1”), 20 and 21 [A/67(7)-(11)] to judgement and thereafter at judgment rate.”

101.  Subsequently, in response to my queries, the parties made further closing submissions (see paragraphs 44 – 49 above).  In the Further Submissions of the Plaintiff dated 10^th July 2007, it was said in paragraph 8 as follows : -

“8.   On a proper analysis, the unsigned offer letter is superseded by the signed terms set out in the Memorandum.  For this simple reason, the offer letter is not a contractual document and the 45% overdue interest is not a contractual term.  This is not a case where P backtracks and elects not to pursue a viable part of its pleaded claim – it is a case where the part of the pleaded claim is not supported by evidence.”

102.  Thus, the approach of Counsel for the Plaintiff appears to be that if the pleaded claim is not supported by the evidence, then the Court should simply make a finding on the face of the contractual documents which have been signed by the Defendants.  In other words, Counsel for the Plaintiff submits that the Court should give judgment in favour of the Plaintiff for the principal sums plus interest at 40% per annum.

103.  On the other hand, Ms. Lee on behalf of the 1^st Defendant has referred the Court to documents which have emanated from the Plaintiff, namely, demand notes issued by the Plaintiff against the Defendants, to show that in fact the Plaintiff has been charging interest at very high rates, notwithstanding what is stated on the face of the loan agreements.  Such documents are Exhibits D1, D2 and D3 and pages 302 and 354 in Trial Bundle C.

104.  Such demand notes are all itemised in standard form.  I shall examine them in turn below.

105.  Exhibit D1 is a copy of a demand note dated 10^th October 2001 and the calculation is for repayment due on 15^th October 2001.  The particulars set out are as follows : -

“	(HK$)
Loan Principal	550,000.00
Loan Interest	8,438.36
Overdue Amount	56,276.92
Overdue Interest	971.36
Prepayment Charges	18,333.33
Amount Due To Pay	634,019.97”

106.  Exhibit D2 is likewise a copy of a demand note dated 10^th October 2001 and the calculation is for repayment due on 15^th October 2001.  The particulars set out are as follows : -

“	(HK$)
Loan Principal	1,100,000.00
Loan Interest	16,876.71
Overdue Amount	86,597.00
Overdue Interest	1,494.69
Prepayment Charges	36,666.67
Amount Due To Pay	1,241,635.07”

107.  Exhibit D3 is again a copy of a demand note dated 10^th October 2001 and the calculation is for repayment due on 15^th October 2001.  The particulars set out are  as follows : -

“	(HK$)
Loan Principal	150,000.00
Loan Interest	2,301.37
Overdue Amount	6,636.15
Overdue Interest	114.54
Prepayment Charges	5,000.00
Amount Due To Pay	164,052.06”

108.  Page 302 in Trial Bundle C is a copy of a demand note dated 20^th September 2001 and the calculation is for repayment due on 1^st October 2001.  The particulars set out are as follows : -

“	(HK$)
Loan Principal	550,000.00
Loan Interest	0.00
Overdue Amount	56,276.91
Overdue Interest	0.00
Prepayment Charges	18,333.33
Amount Due To Pay	624,610.25”

109.  Page 354 in Trial Bundle C is a copy of a demand note also dated 20^th September 2001 and the calculation is for repayment due on 1^st October 2001.  The particulars set out are as follows : -

“	(HK$)
Loan Principal	150,000.00
Loan Interest	0.00
Overdue Amount	6,636.15
Overdue Interest	0.00
Prepayment Charges	5,000.00
Amount Due To Pay	161,636.15”

110.  Ms. Lee has made an analysis of the 5 demand notes referred to above.  The result is contained in 2 tables compiled by her as follows : -

“Respective interest rate charged by the Plaintiff on the 1^st ,2^nd and 3^rd Loans based on Exhibits D1, D2 and D3, the demand notes issued by the Plaintiff.

1^st Loan

Interest rate from 3 Jul 01 (date of contract) to 15 Oct 2001 (“the Period”)

Based on Exh D1 – Demand Note from the Plaintiff

Principal:	HK$550,000.00
Amount due to pay as at 15 Oct 01 :	HK$634,019.97
Total interest for the Period :	HK$84,019.97
3 Jul 01 – 15 Oct 01	= 105 days
550,000 (X%) (105/365)	=  84,019.97
X	= 53.1%

2^nd Loan

Interest rate from 23 Jul 01 (date of contract) to 15 Oct 2001 (“the Period”)

Based on Exh D2 – Demand Note from the Plaintiff

Principal:	HK$1,100,000.00
Amount due to pay as at 15 Oct 01 :	HK$1,241,635.07
Total interest for the Period :	HK$141,635.07
23 Jul 01 – 15 Oct 01	= 85 days
1,100,000 (X%) (85/365)	=  141,635.07
X	= 55.29%

3^rd Loan

Interest rate from 22 Aug 01 (date of contract) to 15 Oct 2001 (“the Period”)

Based on Exh D3 – Demand Note from the Plaintiff

Principal:	HK$150,000.00
Amount due to pay as at 15 Oct 01 :	HK$164,052.06
Total interest for the Period :	HK$14,052.06
22 Aug 01 – 15 Oct 01	= 55 days
150,000 (X%) (55/365)	=  14,052.06
X	= 62.17%

Respective interest rate charged by the Plaintiff on the 1^st and 3^rd Loans based on the demand notes included in Trial Bundle C.

1^st Loan

Interest rate from 3 Jul 01 (date of contract) to 1 Oct 2001 (“the Period”)

Based on P. 302 of Bundle C – Demand Note from the Plaintiff

Principal:	HK$550,000.00
Amount due to pay as at 1 Oct 01 :	HK$624,610.25
Total interest for the Period :	HK$74,610.25
3 Jul 01 – 1 Oct 01	= 91 days
550,000 (X%) (91/365)	=  74,610.25
X	= 54.41%

2^nd Loan

Interest rate from 22 Aug 01 (date of contract) to 1 Oct 2001 (“the Period”)

Based on P. 354 of Bundle C – Demand Note from the Plaintiff

Principal:	HK$150,000.00
Amount due to pay as at 1 Oct 01 :	HK$161,636.15
Total interest for the Period :	HK$11,636.15
22 Aug 01 – 1 Oct 01	= 41 days
150,000 (X%) (55/365)	=  11,636.15
X	= 69.06%”

111.  Section 2(1) of the Ordinance contains the following definitions : -

(i)      “interest” –

““interest” does not include any sum lawfully agreed to be paid in 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;”

(ii)     “effective rate” –

““effective rate” in relation to interest, means the true annual percentage rate of interest calculated in accordance with Schedule 2;”

112.  Schedule 2 to the Ordinance contains a formula containing 6 paragraphs for “Calculation of True Annual Percentage Rate of Interest”.  The formula appears to be based on the assumption that the loan agreement in question provides for repayment of principal as well as interest by instalments.

113.  In the present case, since the 3 Loan Agreements provide for repayment of the principal at the end of one year with interest being payable by monthly instalments, the formula in the said Schedule 2 does not appear to be applicable.  This is confirmed by paragraph 11 of the Further Submissions of the Plaintiff dated 10^th July 2007.

114.  Theoretically, all that the Court has to do is to see what sums (by whatever name called) other than principal are charged against the Defendants by the Plaintiff and such sums constitute the interest element.  The effective or true rate of interest can then be worked out based on the amount of the principal in respect of each of the 3 loans.

115.  Thus, in the demand notes, all the items “Loan Interest”, “Overdue Amount”, “Overdue Interest” and “Prepayment Charges” would be regarded as part and parcel of the interest element for the purpose of calculating the effective or true rate of interest in respect of each of the 3 loans.

116.  My understanding is that, in such circumstances, Ms. Lee is asking the Court to draw the inference that the Plaintiff was charging interest on the 3 loans at effective rates between 48% – 60% per annum and even above 60% per annum in contravention of sections 24 and/or 25 of the Ordinance.

117.  It is to be noted, however, that the 5 demand notes are calculated for repayment due up to 15^th October 2001 at the latest, only 3 or 4 months after the 3 loans were made.  Thus, the effective rates set out in the tables compiled by Ms. Lee may not represent the true rates if the calculations had been taken up to 12 months after the dates of the respective loans.  One would expect, for instance, that “prepayment charges” were intended to be levied only once.

118.  Moreover, there are included in Trial Bundle C at pages 581, 582 and 583, 3 Interest Debit Advices which appear to have the effect of demanding payment of interest at the rate of 40% per annum.

119.  Furthermore, included in Trial Bundle C at pages 115, 117 and 119, are 3 letters before action by KWC to the Defendants dated 6^th December 2001 demanding repayment of the 3 loans together with contract interest at the rate of 40% per annum and overdue interest at the rate of 45% per annum.

120.  It is to be borne in mind that none of the witnesses has been questioned on the contents of the 5 demand notes relied on by Ms. Lee.  No illegality point has ever been pleaded by the 1^st Defendant.  In fact, Ms. Lee only placed reliance on the 5 demand notes for the first time in her Further Submissions and produced her 2 tables on the very last day of the trial on which the parties were making their closing submissions to the Court for the second time.

121.  It is true that when the Court sees on the evidence that a transaction sought to be enforced involves an illegal element, it will not enforce it, even when the illegality point has not been pleaded, but this is only when certain conditions are satisfied.  The position is neatly summarised in Chitty on Contracts (29^th ed.) Vol. 1 at page 1055, paragraph 16 – 199 as follows : -

“Pleading of illegality.  Where a contract is ex facie illegal, the court will not enforce it, whether the illegality is pleaded or not; secondly, where the contract is not ex facie illegal, evidence of extraneous circumstances tending to show that it has an illegal object should not be admitted unless the circumstances relied on are pleaded; thirdly, where unpleaded facts, which, taken by themselves, show an illegal object, have been put in evidence (because, perhaps, no objection was raised or because they were adduced for some other purpose), the court should not act on them unless it is satisfied that the whole of the relevant circumstances are before it; but fourthly, where the court is satisfied that all the relevant facts are before it and it can clearly see from them that the contract had an illegal object, it may not enforce the contract, whether the facts were pleaded or not.  It has been said that counsel is not acting improperly in inviting the court to consider the possible, though unpleaded, illegality of a transaction but that on the contrary counsel’s duty is to prevent the court from enforcing illegal transactions.”

(emphasis in the text added)

122.  I find that the present case falls into the third category in the passage cited above.  In other words, I am not satisfied that the whole of the relevant circumstances are before the Court so as to enable the Court to come to the conclusion that the rates of interest set out in Ms. Lee’s 2 tables were or would have been the true rates of interest charged by the Plaintiff in relation to the 3 loans on a per annum basis.  If the point had been pleaded and if the Plaintiff’s witnesses had been questioned on the 5 demand notes, an explanation might well have been offered to refute Ms. Lee’s suggestion.

123.  In the circumstances, I do not think that I am in a position to find that the Plaintiff had contravened section 24 or section 25 of the Ordinance.

124.  In my judgment, however, the Plaintiff has been in breach of sections 18 and 22 of the Ordinance.  I shall deal with this below.

125.  Each of the 1^st Offer Letter, the 2^nd Offer Letter and the 3^rd Offer Letter contains, inter alia, the following terms : -

“Overdue Interest :	Any amount unpaid beyond due date shall carry interest at the rate of 45% per annum.
Handling Fee :	A non-refundable handling fee of 1% on Facility Amount payable upon execution of documents.
Prepayment :	The Borrowers may prepay the Loan upon giving the Lender a minimum of three business days’ written notice.  The Borrowers may not reborrow any amount prepaid or repaid.
Early Redemption Charges :	1 month interest calculated on contract rate on the repayment amount will be charged on the early redemption within the first 6 months.  No redemption fee shall be charged thereafter.”

126.  The Statements of Account issued by KWC in respect of each of the 3 loans bear out the fact that indeed a 1% handling fee had been deducted from the loan amount.  The same should be regarded as part of the interest charged against the Defendants.

127.  The 5 demand notes also bear out the fact that a prepayment or early redemption charge as well as overdue interest (presumably at the rate of 45% per annum) were levied in respect of each loan.

128.  Such provisions for the charging of a handling fee, prepayment or early redemption charges and overdue interest at 45% per annum do not appear in any of the 1^st Memorandum, the 2^nd Memorandum and the 3^rd Memorandum.

129.  The Plaintiff has therefore contravened section 18(2) of the Ordinance in that the requisite note or memorandum in respect of each loan has not set out the true rate of interest charged on the loan.

130.  The Plaintiff has also contravened section 22(1)(c) of the Ordinance in that the agreement in respect of each loan provides directly or indirectly for “the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement”.

131.  In my judgment, it is not open to the Plaintiff to say at this stage that the 1^st Offer Letter, the 2^nd Offer Letter and the 3^rd Offer Letter do not form part of the 1^st loan agreement, the 2^nd loan agreement and the 3^rd loan agreement respectively, because that was not how the Plaintiff’s case was pleaded and originally argued.  The original case of the Plaintiff is also in accordance with the documentary evidence, namely, the 5 demand notes.

132.  It is not open to the Plaintiff to try to get out of the difficulty it faces by its Counsel simply saying that the Plaintiff would just claim simple interest at 40% per annum and waive the rest of its original claim.

133.  One of the mischiefs which section 18 aims to prevent or address is that a money lender should stipulate that it charges interest at a certain rate on the face of the requisite note or memorandum whilst in actual fact he is charging interest at a much higher rate.

134.  I therefore hold that the 3 loans have been rendered illegal and unenforceable by reason of sections 18(1) and (2), 29(4)(a) and 22(1)(c) of the Ordinance.

135.  The question then arises as to whether and, if so, how the Court should exercise its discretion under section 18(3) and 22(2) of the Ordinance.  As there has been no argument at all by Counsel on this point, I have no alternative but to have to ask the parties to appear before me again to make submissions.  Subject to representation by the parties, I reckon that the time for the further hearing is one day.

136.  I shall deal with the question of costs after I have made my decision on the matters set out in paragraph 135 above.