YU TAI HING CO. LTD. v. TERESA CHEUNG

HCA 5453/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5453 OF 2001

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J U D G M E N T

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1. This is an appeal from a decision of the Master giving summary judgment under Order 14. The Master has given the judgment for the plaintiff against the defendant for the sum of $254,633,479.23.

2. The claim arises in the following way. The defendant and her husband were engaged in a substantial property speculation. Between 1992 and early 1997 they had purchased a number of properties, some of which have been sold at a profit. In April 1997 they were introduced to the plaintiff company and between 21 April 1997 and 10 September 1997 borrowed five loans from the plaintiff. With the collapse of the property market in late 1997 the properties have not been sold, but repossessed by the plaintiff company under the terms of mortgages granted to secure the loans. The plaintiff now sues the defendant for outstanding principle and interest.

3. The defendant raises two defences to the claim. First, it is contended that the interest payable on the loans exceeds the amount of 60% p.a. thereby raising the defence contained in s 24(2) Money Lenders Ordinance Cap 163, (the Ordinance), which renders such loans unenforceable. Alternatively it is contended that the transactions are extortionate and are subject to reopening under s 25 of the Ordinance. In this respect, s 25 contains a presumption that, if the effective interest rate exceeds 48% p.a., the transaction is extortionate. Second, it is contended that the circumstances of the transactions are such that, at the time they were entered into, the defendant was subject to undue influence from her husband, and that the plaintiff had been put on notice of that undue influence, and that thereby the principles contained in the recent decision of the House of Lords in Royal Bank of Scotland plc v Etridge (No 2) [2001] 3 WLR 1021 ought to apply to relieve the defendant of liability.

4. The Master, in dealing with the Money Lender's defence, dealt with the matter somewhat peremptorily holding that as the loans were secured by mortgages they were exempted loans under Part II of Schedule 1 of the Ordinance. It is right that they are contained in part 2 of Schedule I and described there as "exempted loans", but any "exemption" does not extend to the provisions of ss 24 and 25 of the Ordinance. Care must be taken in reading the schedule because the expression "exempted loans" is no longer contained in the Ordinance, following an amendment in 1988 to s 3 which formerly made provision for exempted loans. Unfortunately the draftsman did not take the expression from the schedule and confusion as to the effect of the schedule may arise if reference is not made to the specific provisions of the Ordinance to which the schedule relates.

5. The effect of the definition of "money lender" in s 2 of the Ordinance is that a person who makes a loan specified in Part 2 of Schedule 1 is not included in the definition of a money lender. Thus, loans of the type set out in Part 2 are not required to meet various technical requirements of the Ordinance in relation to documentation and other matters. In that respect they are "exempted loans". However both ss 24 and 25 specifically provide that they apply whether the loan is made by a money lender or not. Thus, although certain procedural steps need not be met, the loans are still subject to the strictures of ss 24 and 25. It is therefore necessary to consider whether the defendant is entitled, in these proceedings, to raise either ss 24 or 25 of the Ordinance.

6. Mr. Mok put before me a series of calculations of interest on each loan, based upon the terms of the Facility Letter's signed by the defendant and her husband. The terms of each letter are the same, except for the specific rate of interest. The provision for default interest is in the following terms:

"we also agree to pay default interest upon maturity and expiration of the said Loan at the rate of 3% per month on the said Loan or any outstanding part thereof and overdue interest thereon (if any) provided that such interest payable to you shall not be more than an effective rate of interest which exceed 60 per cent per annum as provided under part IV of the Money Lender's Ordinance." (sic)

It will be noted that this provision allows the plaintiff to charge interest on outstanding interest. Mr. Mok put in a calculation in relation to each loan demonstrating the accumulation of interest and capital to show the total amount of interest payable in respect of each loan. He then applied the figures to the terms of Schedule 2 of the Ordinance to calculate the effective interest rate. Thus, it was contended that the effective interest rates of the loans were, as to the first loan, 88.36%, as to the second loan, 50.71%, as to the third loan, 64.68%, as to the fourth loan, 67%, and as to the fifth loan, 56.87%. Consequently the argument is open to the defendant that three of loans are unenforceable as being contrary to s 24, and all five loans are extortionate having interest rates exceeding the presumed extortionate rate of 48%. No doubt at trial an appropriately qualified accountant or actuary will be called to establish the calculations. But for the purpose of these proceedings Mr. Mok has satisfied me that his calculations are arguably correct.

7. It will be noted that the provision for default interest contains a cap limiting the amount of interest that may be charged to 60%. It is arguable for the defendant however, that the interest cap does not save the plaintiff's position because, in relation to each loan, a commission was payable in addition to interest. By virtue of the definition of "interest" in s 2 of the Ordinance any amount, by whatever name called, in excess of principle, is to be regarded as interest. It is thus arguable that the sums of commission are payable in addition to the prescribed interest, even that is limited to 60%, and not limited by the interest cap. The effect of that would be to take the interest rate charged beyond 60%. In any event, the interest cap does not save the plaintiff's position in relation to the argument for extortionate loans which need only contain an interest rate exceeding 48%.

8. Mr. Ng sought to rely on s 22 of the Ordinance to contend that simple interest on interest may be charged, and that any interest so charged shall not be reckoned, for the purposes of the Ordinance, as part of the interest charged in respect of a loan. I confess to some difficulty in understanding the argument. First, s 22 applies only to a money lender and, in relation to these transactions, by definition, the plaintiff is not a money lender for the purposes of the Ordinance. Thus s 22 simply does not apply and is irrelevant to the present case. Mr. Ng however seemed to contend that if that rule were to apply to a money lender under the Ordinance, then a fortiori it ought to apply to someone who was not a money lender. But the section does not make any such provision, and Mr Ng could not point to anything in the general law or even the common law to say that such a rule ought to apply.

9. Second, the proviso relied upon does not appear to be a substitutionary provision, replacing a defective provision in an agreement, but a provision that sanctions a term in the agreement which conforms to the terms of the proviso. There is no such term in the agreements in this case.

10. It is only if s 22 can provide a complete and absolute answer to the defendant's contention that it could be relied upon to say that there is no defence. Mr. Ng was unable to point to any other matters to contend that in the circumstances ss 24 and 25 ought not apply. Where it is arguable that the provisions of ss 24 and 25 of the Ordinance apply, it is a matter for the trial judge, not a judge on O. 14 procedure, to determine the consequences of those sections to the loans because the relief that may be given, either to a lender or a borrower under the provisions of s 25(1), are a matter for discretion. For the reasons I set out in Zucchini Finance Co., Ltd. v Cheung Ka-fat HCA 5035/2001, it will only be in the rarest of cases that matters which require the exercise of a discretion could ever be determined without a trial on O. 14 procedure.

11. For these reasons I am satisfied that it is open to the defendant to contend that the provisions of ss 24 or 25 of the Ordinance apply to these transactions. These are clearly not matters which are capable of being dealt with in O. 14 procedures and on this basis alone the defendant must have leave to defend.

12. The defendant has also raised issues of undue influence. The Master came to the conclusion that she could not be believed upon those assertions and that accordingly leave to defend should not be given. He reached that conclusion upon the basis of affidavits only and took into account matters such as the fact that the defendant appears to have, from time to time, changed her version of events, and omitted to contend for undue influence in relation to one of the loans. While these are plainly matters which are relevant to determine credibility at trial, it will only be in exceptional cases that a court in O. 14 proceedings will be able to determine matters of credibility without hearing the witnesses.

13. In this case it is contended by the defendant that at a meeting with an officer of the plaintiff company the defendant's husband behaved towards her in such a way that the plaintiff company ought to have realised that she was under undue influence or, that that situation potentially existed. The meeting alleged by defendant is denied by the plaintiff. Plainly whether or not the meeting took place and whether or not the husband so conducted himself is a matter for the trial judge and not a matter that can be determined upon the affidavits.

14. Mr Ng relied upon documents, (Bundle E2 pp 666-9), signed by defendant and her husband in which they acknowledged that they had been offered the opportunity to take independent legal advice but had declined that opportunity. This he said would, in any event, be a complete answer to the contention that there was undue influence. The document and the circumstances in which it arose fall a very long way short of the steps illustrated in Etridge that ought to be taken by a lender to overcome an undue influence situation. Again that is not a matter which can properly be determined upon O. 14 summary procedures.

15. It was contended by Mr Ng that as the loans were loans to both the husband and wife jointly the transactions did not fall within the category of transactions which may be caught by the principles in Etridge. I am not satisfied that it is sufficient that the loans merely be to the husband and the wife jointly to take the matter out of the scope of that decision. Where there are circumstances in which it may be contended that a wife is subject to her husband's undue influence it will be necessary to examine the whole circumstances of the transaction, for the wife's participation as a joint partner in the transactions may be as a result of the undue influence and not necessarily of her own volition for her own purposes. Again this is plainly not a matter which may be determined summarily on affidavits.

16. Mr. Ng relied upon a handwritten fax (Bundle E2 p 544) sent by the defendant to the plaintiff which he said demonstrated her own involvement in the matter. A superficial reading of that document shows that the inference may be drawn from its terms that the defendant was a most reluctant participant in the venture, for at a time when the property market was booming and spectacular profits apparently available, she was determined to "get rid" of the properties. The document, far from providing an absolute answer, may well go to support the defendant's position

17. I am satisfied that there is an arguable case to be made for the defendant that she was subjected to undue influence from her husband, that the plaintiff was on a notice of that influence, and that she was not given a proper opportunity by the plaintiff to obtain independent advice before entering into the transactions. It may well be that her case in this respect is not strong and that she will not succeed. But I cannot dismiss the matter out of hand and say that it is completely unarguable or, to use the words Lord Lindley in Codd v Delap (1905) 92 LT 510 at 511, "frivolous and practically moonshine".

18. It is important to remember that under O. 14 it is only when it can be said that there is no defence that summary judgment may be entered. Where, as here, defences are arguably open, even if not strong, there must be leave to defend.

19. For these reasons the appeal is allowed and the defendant shall have unconditional leave to defend. The defendant, having succeeded on the appeal, is entitled to costs. There will be an order nisi that she shall have her costs on the appeal, with a certificate for counsel, paid by the plaintiff forthwith, taxed on a party and party basis if not agreed.