GAIN WEALTH GLOBAL CREDIT & INVESTMENT LTD v. CHAN SUK FONG

CACV 28/2019

[2020] HKCA 737

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 28 OF 2019

(ON APPEAL FROM HCA NO 77 OF 2016)

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BETWEEN

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

Introduction

1.  This is an appeal brought by the plaintiff, who is a registered money lender under the Money Lenders Ordinance, Cap 163 (“the MLO”), against the dismissal of its claim by the judgment of Deputy High Court Judge Sherrington on 21 December 2018 (“the Judgment”) after a trial. Unless otherwise stated, all statutory provisions referred to in this judgment are of the MLO.

2.  The plaintiff’s claim against Madam Chan Suk Fong, the defendant borrower, is for recovery of the principal sum of a loan of $1 million with interest calculated up to the date of the writ on 11 January 2016 at $48,493.15 in the total sum of $1,048,493.15, with further interest on the principal sum at the rate of 30% per annum from 12 January 2016 to the date of judgment.

3.  The judge found there were breaches of sections 21, 22, 24, 25, 27 and 29^[1]. He dismissed the action as he found:

(1) the effective rate of interest exceeds 60% per annum^[2] (this makes the loan agreement unenforceable under s 24(2));

(2) the loan repayment schedule provided for a higher rate of interest, namely up to 5% per month, in the event of default of the borrower^[3] (this makes the loan agreement illegal and may be held unenforceable under section 22);

(3) even if the charges in relation to the loan made by another money lender Cash Credit Services Limited (“CCS” and “the CCS loan”) were excluded, the effective rate of interest is nonetheless over 48% per annum and therefore prima facie extortionate^[4] (the court is empowered under sections 25(1), (2)(a) and (3) to reopen the transaction to do justice between the parties); and

(4) even if the effective rate of interest were under 48% per annum, the cumulative effect of the plaintiff’s egregious conduct and its complete disregard for the provisions of the MLO manifestly contravened ordinary principles of fair dealing, such that the court would have required the defendant to be put back in the position she would have been had she never been approached by the fraudster, one Mr Cheung, in the first place^[5] (the court is empowered under sections 25(1) and (2)(b) to reopen the transaction to do justice between the parties). 

4.  In view of the court’s findings that “the plaintiff acted in collusion with others to the detriment of the defendant, that the defendant was the victim of unscrupulous lending practices which contravened ordinary principles of fair dealing and involved a conspiracy to have the defendant execute a number of documents which were never explained to her and finally its finding that the scale of these abuses suggested the need for greater scrutiny of the plaintiff’s business and the support it received from its solicitors” ^[6], the judge exercised his discretion to award costs against the plaintiff on an indemnity basis. 

5.  Mr Ross Yuen, who appeared for the plaintiff on appeal, did not challenge the findings of fact of the judge.  The issues he raised on appeal concern the proper construction of various provisions of the MLO, namely, (1) whether sections 27(3) and 29(10) were engaged in respect of the payments made by the defendant to one Mr Chan, who was an accomplice of Mr Cheung; (2) whether the payments made by the defendant to the fraudsters should be treated as “interest” under section 2 for the purpose of calculating the effective rate of interest under sections 24(2) and 25(3); (3) what should be the amount of the “principal” as defined in section 2 for the purpose of calculating the effective rate of interest; (4) whether there was breach of section 22(1) as regards the contractual provision for default interest; and (5) how should the discretion to enforce the loan agreement under section 22(2) and the discretion to reopen the transaction under section 25(1) be exercised.

Background

6.  The relevant background matters, taken largely from the Judgment, may be stated as follows.

7.  In a nutshell, the defendant, who had taken out a loan from Sun Hung Kai Finance (“SHKF”) in January 2015 for $200,000, was tricked by Mr Cheung and Mr Chan into borrowing $700,000 from CCS in September 2015 and then $1 million from the plaintiff in October 2015.  In the course of taking out the CCS loan and the plaintiff’s loan, the defendant paid over a total of $640,500 to Mr Chan under the false pretences of the fraudsters.  She was deceived into signing an “Instruction Letter” to the plaintiff’s solicitors K B Chau & Co authorising them to register the loan agreement with the plaintiff at the Land Registry against a property in Wong Tai Sin, Kowloon purchased from the Housing Authority and held by her and her husband as joint tenants (“the Property”), “to protect the interests of the Lender and show sincerity” and pursuant to which the loan agreement was registered against the Property^[7]. The fraud was perpetrated in this way.

8.  At the material time, the defendant was aged 59 and employed as a kitchen worker in a restaurant earning approximately $9,000 per month. She was educated up to Form One in Hong Kong.  She can read and write simple Chinese and cannot read English.  Her husband, who was then in his early 60s, worked as a part-time taxi driver earning about $5,000 a month.  They have four daughters.  The eldest daughter had moved out for some time.  The second daughter was a clerk earning about $15,000 a month and she moved out in 2016 after marriage.  The two younger daughters were students at the time and had no income.

9.  As the family finance was tight, the defendant took out a loan from SHKF in January 2015 for $200,000 and was paying the instalments due of $7,474 a month.  In early September 2015, she received a call from Mr Cheung who purported to be from the Housing Authority.  He told her as she had not paid the land premium on the Property, it was contrary to the rules to take out a personal loan with SHKF and the Property could be repossessed.  At a meeting with Mr Cheung on 9 September 2015 in the office of Success International Mortgage Limited (“Success”), Mr Cheung advised her she would need to go through the process of “Sheung Wui” (上會) to solve her problem of contravention of the rules.  By that process, as explained by Mr Cheung, they would arrange for her to borrow a sum from HSBC to pay off the loan of SHKF, the interest payment of the HSBC loan would be about $17,000 per month for the first three instalments and thereafter at about $4,000 per month for about two years.  And that would be lower than the monthly repayments she was then making to SHKF.  Mr Cheung did not discuss with her how much she would need to borrow.  He said he would contact her to complete the formal procedures of “Sheung Wui” and she should have ready the documents of proof including proof of income, residential address and utility bills. 

10.  Two days later, Mr Cheung called the defendant and asked her to meet him at a location on 12 September to borrow money for “Sheung Wui”.  She was met by Mr Chan whom she had seen earlier in the office of Success.  Mr Chan took her to the office of CCS.  She gave the documents of proof to a staff of CCS and five to ten minutes later that staff came back with a loan agreement in English and other documents.  The documents were not explained to her and she was simply urged to sign.  After she had signed, she was told by the CCS staff that the loan was for $700,000 of which $200,000 was to pay off the SHKF loan.  She was surprised by the size of the new loan but since she was told that the monthly instalments would be $17,000 odd, which was what Mr Cheung had said the loan from HSBC would cost, she did not question the fact that the loan was made by CCS, thinking it was part of the “Sheung Wui” process.  She was given copies of the material documents.

11.  Mr Chan then took her to a firm of solicitors, Ho & Associates, for funds to be released. She was attended to by a legal executive Ringo Li. Mr Li told her of the principal of $700,000, $200,000 would be retained for repayment of the SHKF loan and he asked her to sign some documents. It was only after she had retained solicitors for this action that she learned the documents included two cheques of HSBC for $336,716.72 and $105,000 (the latter was a cash cheque) and an authorization letter for the solicitors to make payment to CCS on her behalf of the first three instalments totalling $52,283.28.  She did not notice what she was signing or why the total amount of the two cheques was $441,716.72 and not $500,000.  She believed at the time that Success would handle everything for her and she only had to sign. She thought the difference between the sum of the two cheques and the $500,000 was handling charges or legal fees and those were established procedures of “Sheung Wui”, so she just did what she was told to do.

12.  Mr Chan told her she needed to pass him the two cheques for him to deposit into HSBC for “Sheung Wui”.  She thought that was part of the procedure and only when the procedure was completed would this solve the crisis of repossession of the Property.  They went to a branch of HSBC where she cashed the cheque of $105,000 and gave him the money for which she received no receipt.  He told her to deposit the crossed cheque of $336,716.72 into her bank account and call him to confirm it had been cleared.

13.  On 14 September, she deposited the crossed cheque into her bank account at Bank of Communications and called Mr Chan.  He told her she needed to retain enough money to pay the first three instalments to CCS and withdraw the rest and give it to him to be deposited into HSBC to apply for “Sheung Wui”.  On 16 September, she withdrew $283,000 from her account and gave it to Mr Chan who did not give a receipt.  She retained $53,716.72 to pay the first three instalments.

14.  Mr Cheung and Mr Chan called her afterwards at different times to tell her that the process of “Sheung Wui” was under way.  In October 2015, Mr Cheung said to her if she used the Property to obtain a loan, she would enjoy a lower interest.  She did not understand what he was talking about and was worried that would mean selling the Property.  Mr Cheung told her to be at ease as the title deeds would be kept at a law firm for just three months and could be retrieved after the procedure of “Sheung Wui” was completed.  Although she did not understand what he was talking about, as she heard that the interest would be lower and believed Mr Cheung could help her solve the problem of repossession of the Property, she agreed to apply for a low interest loan using the Property.  Mr Cheung said he would pick a finance company and let her know.

15.  A few days later, Mr Cheung told her a finance company had been chosen for her to apply for a property loan.  He made an appointment with her to meet Mr Chan on 14 October and told her to bring the title deeds to complete the procedure at the finance company.

16.  On 14 October, Mr Chan took her to the plaintiff’s office.  He stood behind her while a female staff of the plaintiff came to handle the procedure.  The staff placed a pile of loan documents before her, saying that $1 million was being lent to her and kept asking her to sign all the documents without explaining the contents.  She felt great pressure being so urged, and did as told without noting what the documents contained. The whole process lasted less than ten minutes.  She was not given copies of the documents she signed.

17.  Mr Chan next took her to the plaintiff’s solicitors, K B Chau & Co, to get the cheque.  He told her that she was to let the solicitors keep the title deeds and she would be able to get them back within three months.  On arrival at the solicitors, they waited in the reception area for about 20 minutes.  A man in his twenties wearing glasses arrived and asked if she was Chan Suk Fong.  He took her into a separate room.  Mr Chan did not go with them.  The man introduced himself as a staff of the plaintiff.  He explained to her she should not make early repayment of the loan within three months or there would be penalty interest.  He did not explain anything else and asked her to sign several documents without giving her copies of what she signed.  Afterwards, they returned to the reception area.

18.  After waiting for about 15 minutes, a female clerk of the solicitors, Lau Wing Sze, came and took her to a room.  Ms Lau asked her for the title deeds.  She handed them over to Ms Lau who went off to prepare some documents.

19.  About ten minutes later Ms Lau returned with a large number of documents.  She explained that the loan from the plaintiff was $1 million at a monthly interest rate of 2.5% and an annual rate of 30%, to be fully repaid in 12 months, and that only the interest of $25,000 was to be paid in the first 11 months, while the interest and principal totalling $1,025,000 was to be paid in the last month.  Ms Lau said of the $1 million, $750,000 would be retained to repay CCS and $37,000 was kept for legal fees (this was described as an “upfront fee” for the plaintiff in a completion statement dated 14 October 2015).  She then asked the defendant to sign the documents.  The defendant did as told and was given copies of the documents signed including some documents she had signed earlier with the plaintiff’s staff.  Ms Lau did not give back the title deeds to the defendant.

20.  Ms Lau then gave her two cheques drawn on Wing Lung Bank, a cash cheque of $100,000 and a crossed cheque of $113,000.  Mr Chan led her to a branch of Wing Lung Bank to cash the cheque of $100,000 and she gave the money to him for handling the procedure of “Sheung Wui”.  He told her to deposit the other cheque of $113,000 into her bank account and when the money was in her account she was to call him and give him $110,000 for the fees of “Sheung Wui”.  She did as she was told.

21.  On 15 October, she withdrew $110,000 from her account at Bank of Communications and handed the money to Mr Chan.  He did not give her a receipt.  He told her the procedures would be completed within three months and she could get back the title deeds afterwards.

22.  Thereafter, she telephoned Mr Chan from time to time to ask about the progress of “Sheung Wui” and whether there was a balance from the $200,000 retained from the CCS loan after settling the loan from SHKF.  Mr Chan told her the procedures were ongoing. She also called Ringo Li of Ho & Associates to ask if there was a balance after full settlement of the SHKF loan.  Mr Li told her the accounts office was still doing the calculation.

23.  She called Mr Li again in about November 2015 and he told her there was a balance of $29,617 from the settlement of the SHKF loan to be refunded to her.  On 19 November 2015, she went to Ho & Associates to get the refund.  She was given two cheques for $29,617 and $34,855.52.  She later learned from her solicitors in this litigation that the cheque for $34,855.52 was refund of two instalments of the three instalments she previously authorized Ho & Associates to pay on her behalf.  She deposited the two cheques into her bank account.

24.  On 20 November, after the two sums were transferred into her account, she told Mr Chan about the refund of the two sums totalling $64,472.52.  He told her with the $53,716.72 left from the CCS loan, there should be a total of $118,189.24 and she was to retain $75,000 for payment of the first three instalments to the plaintiff and withdraw $42,500 which was to be handed to him as “Sheung Wui”.  She did as told on the same day. After that, she did not see him again and neither he nor Mr Cheung answered her calls.

25.  In December 2015, some other fraudsters pretending to be from HSBC told her that Success was not related to the Housing Authority and the funds taken from her were not deposited for “Sheung Wui” and she had been defrauded.  They tried to persuade her to apply for a property loan with her husband jointly so she could pursue a claim against Success.  At this point, the defendant discussed the matter with her family and made a report to the police.

26.  After making one instalment payment to the plaintiff, she defaulted in paying the monthly instalment in December 2015.  The writ in this action was issued on 11 January 2016.

27.  The judge concluded that the plaintiff was in collusion with Mr Chan and through him Mr Cheung in breach of section 29(10) as that phrase has been understood in the authorities (HKSAR v Wong Kwok Wai (2013) 16 HKCFAR 191 at §§8 and 11; Famous Zone Electronics Ltd v Hongkong and Shanghai Banking Corp Ltd [1998] 3 HKC 723 at 727F to G; Ever-Long Finance Ltd v Yeung Wah Lung [2017] 1 HKLRD 500 at §§86 to 93), in that “the plaintiff and Mr Chan and Mr Cheung were playing the same game; their roles were inextricably linked and designed to burden the defendant with a debt she could not afford to service and to do so at a very considerable cost to her and conversely at a very considerable advantage to the plaintiff.”^[8]

28.  He further found the plaintiff had conspired with K B Chau & Co to have the defendant execute a number of self-serving documents, which on the evidence he was satisfied were never satisfactorily explained to her by the plaintiff’s staff or by Ms Lau^[9], whose evidence was unsatisfactory, evasive and unconvincing^[10].  Ms Lau included in the completion statement a cheque of $37,000 for the plaintiff’s charge which is a clear breach of section 27(3) and which claim was abandoned by the plaintiff^[11]. Some other documents executed indicate breaches of section 21 which prohibits charging additional amounts for early repayment and section 22 which makes the contract illegal if it provides for increased payments in the event of default^[12]. There is no appeal in respect of the holding there was breach of section 21.  The scale of abuse of the documents executed by the defendant suggest the need for greater scrutiny of the plaintiff’s business and the support it has received from K B Chau & Co^[13].

29.  The judge was satisfied on the evidence that the defendant has been the victim of unscrupulous lending practices and found it wholly unacceptable that a person of low income and poor education should be taken advantage of to the extent the defendant has been.  He found it inconceivable how the plaintiff, knowing that the defendant had an existing debt of $700,000 and an income of only around $10,000 a month, could reasonably have proposed her taking a loan of $1 million with interest payment of $25,000 per month with the entire loan repayable after 12 months.  This of itself manifestly contravenes ordinary principles of fair dealing such as to bring the transaction squarely within section 25^[14].

30.  Other pertinent holdings of the judge and his reasoning would be mentioned in the discussion below of the issues in this appeal.

Whether sections 27(3) and 29(10) were engaged

31.  The relevant part of section 27(3) reads as follows:

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

32.  Section 29(10) provides as follows:

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

33.  There is no dispute that these provisions would cover the $37,000 charged by the plaintiff as an “upfront fee”, so to that extent these provisions would be engaged.  The dispute concerns the amounts that the defendant was defrauded into paying Mr Chan^[15].  It is the contention of Mr Yuen that the defrauded monies are not within any of the five types of payment prohibited under section 27(3), in that they are not “costs, charges or expenses”, or “remuneration or reward whatsoever from a borrower or intending borrower for or in connection with or preliminary to procuring, negotiating or obtaining any loan made or guaranteeing or securing the repayment thereof”.  He contrasted the five types of payment specified in section 27(3) with a looser form of wording in the Money Lenders Amendment Act 1946 in Queensland (“any moneys for or in respect of the making, procuring, negotiating or obtaining of any loan”).

34.  Mr Yuen argued that on the defendant’s evidence as accepted by the judge, she paid the amounts to Mr Chan on the understanding that it was part of the “Sheung Wui” procedure for the monies to be deposited for her into HSBC as a loan was to be obtained from HSBC to pay off the SHKF loan and that would solve the crisis of repossession of the Property.  On that understanding, the defrauded monies were not “costs, charges or expenses” or “remuneration or reward” of the plaintiff’s loan.  Section 27(3) applies to genuine commercial transactions and is not meant to cover monies paid under a fraud.  Moreover, the object of the plaintiff’s collusion with others, as found by the judge, was to “[take] advantage of the defendant with a view to being in a position to enforce the loan against her property when she failed as she inevitably would, to repay the loan after 12 months”^[16]. It was not the object of the plaintiff’s collusion to receive the defrauded monies.

35.  In deciding whether the defrauded monies would come within “costs, charges or expenses” or “remuneration or reward” of the plaintiff’s loan, we are inclined to think that the true nature or substance of the payments should be considered, and not with regard to the falsehood under which the borrower or intending borrower was labouring under.  Section 27(3) makes it unlawful, not just for the money lender to charge or receive the types of payment specified, but extends it to “any person acting … in collusion” with the money lender and section 27(4) provides that any money paid in contravention may be recovered from “such person or from the money lender”.  In charging the defendant and receiving the payments from her, it could fairly be said that the object of the persons acting in collusion with the plaintiff was to receive their “remuneration or reward” in obtaining the loan for the defendant, or it could be said that the payments were the “costs” for obtaining the loan.  For these provisions to be engaged, it is not necessary to find that the money lender was somehow involved in the fraud pertaining to these payments.  Whatever the object of the plaintiff’s collusion might be as regards the defrauded monies is irrelevant.

36.  We reject the contention that sections 27(3) and 29(10) were not engaged as regards the defrauded monies paid to Mr Chan.  Although this would mean that these amounts might in principle be recoverable from the plaintiff under section 27(4), this possibility does not need to be considered in the present case in the light of our conclusions below that the judge was right to hold that the transaction should be reopened pursuant to section 25(1), and the way in which we would exercise the court’s discretion as discussed in paragraphs 76 to 79 below.

Whether the defrauded monies should be treated as “interest”

37.  Section 2(1) provides that “interest” “does not include any sum lawfully agreed to be paid in accordance with this Ordinance on account of stamp duty or other similar duty, but save as aforesaid includes any amount (by whatever name called) in excess of the principal, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan”. 

38.  The judge treated all the monies the defendant was defrauded to pay Mr Chan as “interest”.  Having concluded that there was collusion between the plaintiff and the fraudsters, he reasoned that the effect of the transaction was that in return for a loan of $1 million, charges of $289,500 (made up of $100,000, $110,000, $42,500 and $37,000) were levied in respect of the plaintiff’s loan, in addition to interest payments of $300,000 during the life of the loan.  In other words, the defendant would be charged a total of $589,500 amounting to 58.95% of the loan amount.  To these charges, he would add the earlier payments made to Mr Chan in connection with the CCS loan ($105,000 and $283,000), given his finding on collusion and that payments to agents can properly be included for this purpose^[17].  Thus taken together, he held that the effective rate of interest exceeds 60%.

39.  The judge took the view that the defrauded monies are within the definition of “interest” in section 2(1) as the definition is very broadly drawn and it is clear that the legislation is designed to catch this sort of unscrupulous behaviour.  He reasoned that if it were otherwise, it would be open to an unscrupulous money lender to load the charges and lower the interest rate on the basis that if caught he would still be able to pursue the principal and interest^[18].

40.  Mr B K Ho, who appeared for the defendant throughout, does not seek to support the judge that the payments made to Mr Chan in connection with the CCS loan should be included in the calculation of interest.  This is because two scams were perpetrated by Mr Cheung and Mr Chan involving different money lenders, and Mr Ho accepted that there is no proof of any connection between CCS and the plaintiff.  We think this concession is rightly made.  The payments defrauded in the first scam cannot be regarded as “paid or payable in consideration of or otherwise in respect of” the plaintiff’s loan, no matter how wide the definition of “interest” may be.  Nor could these earlier payments be treated as payments made to the plaintiff’s agents (we will come back to the question of agency), once it is accepted that there is no proof of connection between CCS and the plaintiff.

41.  Mr Ho however contended that the amount of $42,500 paid to Mr Chan in November 2015 should be included in the calculation of interest.  This cannot be right.  This amount was derived from the CCS loan, being part of the refund the defendant received from CCS’s solicitors, albeit she made payment of this amount to Mr Chan after the plaintiff’s loan was obtained.  The judge was wrong to include this amount in $289,500 in arriving at the interest rate of 58.95% before he added the earlier payments in connection with the CCS loan.  This amount should be treated in the same way as the two earlier payments in September.

42.  This leaves the upfront fee of $37,000 before we come to the monies paid to the fraudsters out of the plaintiff’s loan.  It seems to us this amount should come within “interest”.  It is money paid to the plaintiff by whatever name called “in consideration of or otherwise in respect of a loan”, and is in excess of the principal in that the plaintiff’s claim in this action is for the entire amount of $1 million as the principal.  Mr Yuen accepts this amount should be treated as interest.

43.  We come to the question whether the payments made to Mr Chan in respect of the plaintiff’s loan ($100,000 and $110,000) could be regarded as payments to the plaintiff’s agents.  It does not appear controversial if these payments could be so regarded, they could properly be considered to come within the definition of “interest”.  The further question is if the payments could not be regarded as made to the plaintiff’s agents, would they still fall within the definition of “interest” in light of the judge’s finding of collusion of the plaintiff and the fraudsters under section 27(3).

44.  The judge accepted the defendant’s evidence that Mr Chan played an instrumental role in introducing her to the plaintiff so that she could obtain the loan she did.  However, as Mr Chan has disappeared and the plaintiff denies involvement with or knowledge of him, there is no evidence as to what happened to the monies the defendant gave to him and no evidence if any of these monies found its way back to the plaintiff or whether Mr Chan recovered anything by way of extra payment for his services from the plaintiff^[19].

45.  Mr Ho submitted that given the finding that the plaintiff was in collusion with Mr Chan and through him Mr Cheung, the plaintiff would be liable as a party in collusion for the acts of the other party and the defrauded payments would be caught by the definition of “interest” which “included any amount (by whatever name called) in excess of the principal … paid or payable in consideration of or otherwise in respect of a loan”.

46.  In support of his contention, Mr Ho relied heavily on Skyline Credit Ltd v Leung Hing Chung [2019] HKCFI 169, which involved a similar scam to defraud the defendant borrower who was induced by fraudsters to pay them a substantial part of the loan proceeds and it was found there was “collusion” for the purpose of section 27(3) between the plaintiff money lender and the fraudsters. Deputy High Court Judge William Wong, SC held that in calculating the effective rate of interest under sections 2, 24 and 25, the court has to take into account 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, as the definition is cast in the widest possible terms “in order to catch any payments which borrowers were made to pay to money lenders under various names or labels” and the court looks at the substance not the form (at §§120, 124, 125).  Interest is the cost of borrowing, and it includes the sort of charges, costs and expenses described in section 27 (at §126).  He therefore included as interest the amounts paid by the borrower to the fraudsters purportedly as handling fee and insurance payment (at §§111 and 121).

47.  We note in that case the lender put its solicitors in funds and the fraudster informed the solicitors how to split the cheques, one of which was issued to the borrower who paid over the entire proceeds to the fraudster and the fraudster kept most of the money under false pretences.  The lender denied any connection with the fraudster but the judge found they were acting in concert as it was through the introduction and liaison of the fraudster that the lender made the loan to the borrower.  There was however no specific finding as to any involvement of the lender regarding the monies that the borrower was tricked into paying the fraudster.

48.  There is no problem with treating as interest any amount in excess of the principal that the borrower was made to pay to the lender under whatever name, or to an agent of the lender who sought and received such payment on its behalf.  The difficulty with scams of this type is that very often it could only be established on the available evidence that the fraudster was acting as an intermediary, in putting the lender in contact with the borrower and passing on information obtained from the borrower to the lender^[20]. And that is the case here.

49.  We do not accept Mr Ho’s submission that a finding of collusion between the plaintiff and the fraudsters would mean that a party to the collusion should be legally liable for the fraudulent act of the other party.  As rightly stated in Ever-Long Finance Ltd v Yeung Wah Lung at §§90 to 93, “collusion” in the context of sections 27(3) and (4) is a wider concept than “conspiracy”; there was no need to establish a prior agreement between the lender and the intermediary to extract payment from the borrower in a fraudulent way, it would be sufficient for the lender and the intermediary to co-operate with each other to do or abstain from doing something with a view to facilitate the conclusion of the loan transaction against the borrower’s interest or otherwise to his prejudice.  In E-way (Hong Kong) Property Credit Ltd v Fung Wing Tim [2019] HKDC 39, it was held that although the available evidence was sufficient to establish collusion, it was not sufficient to establish an agency relationship between the lender and the fraudster (at §§83, 100).  Insofar as the judge has held that payments to the fraudsters were payments to the plaintiff’s agents as agents in the legal sense, we think the judge was in error, as there is no evidence that those payments were sought or received on behalf of the plaintiff.

50.  We go on to consider whether an unlawful payment in contravention of section 27 made to an intermediary without the lender’s involvement could be treated as “interest” within section 2(1).

51.  In contrast with section 15 of the Moneylenders Act 1927 in the UK, which defines “interest” as including “any amount, by whatsoever name called, in excess of the principal, paid or payable to a moneylender in consideration of or otherwise in respect of a loan”, the definition in our section 2(1) does not provide that the amount must be “paid or payable to a moneylender”.  Mr Yuen submitted that notwithstanding the omission of these words, “interest” as defined should still be construed as requiring the amount to be paid or payable to the lender.  He pointed to two other provisions which expressly provide for this, namely, section 2(2) and Schedule 2 paragraph 1, and submitted that the definition of “interest” in section 2(1) should be read in a similar way.

52.  Section 2(2) governs the situation where by an agreement for loan of money the interest charged on the loan is not expressed in terms of a rate, and provides that “any amount paid or payable to the lender under the agreement” shall be appropriated to principal and interest in the proportion that the total amount of principal bears to the total amount of the interest, and the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2 shall be deemed to be the rate of interest charged on the loan.  Schedule 2 deals with the calculation of the true annual percentage rate of interest in the situation envisaged in section 2(2) and paragraph 1 again provides that “any amount paid or payable to the lender under the agreement” shall be appropriated to principal and interest in the proportion that the total amount of principal bears to the total amount of the interest.

53.  We do not think these two provisions would support Mr Yuen’s submission.  Section 2(2) and Schedule 2 paragraph 1 deal with a specific situation, namely, where the interest charged on the loan is not expressed in terms of a rate in the loan agreement and makes provision that “any amount paid or payable to the lender under the agreement” shall be appropriated in the way as stipulated.  It is understandable that the words “paid or payable to the lender under the agreement” should appear in those provisions.  The definition in section 2(1) covers not just the specific situation in section 2(2) but a much broader situation where “any amount (by whatever name called) in excess of the principal … has been or is to be paid or payable in consideration of or otherwise in respect of a loan”.  We do not think there is justification to read the words “paid or payable to the lender” into the definition provision.

54.  In Skyline Credit Ltd v Leung Hing Chung, it was said at §137 as the money lender can be made directly and personally liable under section 27(4) for payments collected by intermediaries acting in collusion with the lender, “the law treats any such sum received by intermediaries as if it was received or charged by the money lender”.  If this statement of the effect of section 27(4) is invoked to expand the meaning of “interest” in section 2(1), we do not agree with this approach.  We do not think it justified to read into the definition provision of “interest” the effect of section 27(4), where the legislature has given a range of additional and/or alternative remedies to the borrower in sections 24, 25 and 27.  It could not be said that the lender would be able to circumvent the prohibitions imposed by law for the borrower’s protection with no legal consequence.

55.  In our view, to qualify as “interest” under section 2(1), the amount is not required to be paid or payable to the lender or its agent.  It could be paid to someone else so long as it is “paid or payable in consideration of or otherwise in respect of a loan”.  Where there is no evidence of any involvement of the lender regarding the monies defrauded by the intermediary and nothing to link the payment by the borrower with the loan made by the lender, that could be difficult to establish.  On the available evidence here, we are not satisfied that was established.

56.  For the above reasons, we are of the view that the judge has erred in law in holding that the defrauded monies paid to the fraudsters are within the definition of “interest” for the purpose of calculating the effective rate of interest under sections 24(1) and 25(3).  The total amount of interest for calculating the effective rate should be the contractual amount of $300,000 plus the upfront fee of $37,000, making a total of $337,000.

What should be the amount of the “principal”

57.  Under section 2(1), “principal” in relation to a loan “means the amount actually lent”.  As was stated by the Court of Appeal of New South Wales in a rather different context, what was actually lent is a question of fact, not a question of law (Baystone Investments Pty Ltd v Commissioner of Stamp Duties (1977) 8 ATR 709 at 712).  Further, that court qualified the statement of Greer LJ in B S Llye Ltd v Chappell [1932] 1 KB 691 at 706 (said in the context of the Moneylenders Act 1927) and opined that money is lent within the meaning of the Moneylenders Act if it is applied by the lender to the purposes of the borrower in any way which the borrower authorises but should not include any sums handed back by the borrower to the lender as a pure gift or not in the satisfaction of any obligation (at 713, lines 7 to 16).

58.  The judge adopted the principal as provided in the loan agreement being $1 million as the principal for calculating the effective interest rate^[21]. Mr Yuen supported this approach. Mr Ho disagreed with it.

59.  Mr Ho argued that the deemed principal for this purpose should be $753,000, which is arrived at by deducting from $1 million the sums of $37,000, $100,000 and $110,000.  Alternatively, the deemed principal should be $710,500, arrived at by deducting from $1 million the three sums aforesaid and $42,500.

60.  We are of the view that only the sums of $37,000 (the upfront fee charged by the plaintiff in the completion statement of the same date as the loan) and $100,000 (the proceeds of the cash cheque issued to the defendant) should be deducted from the contractual sum of $1 million to arrive at “the amount actually lent”.  The amount of the deemed principal would be $863,000.  Our reasons are as follows.

61.  As mentioned earlier, $42,500 has no connection with the plaintiff’s loan as it was the refund the defendant received from the CCS loan.  There is no question of deducting this figure from the contractual sum of $1 million.

62.  As for the $37,000, this was deducted by the plaintiff’s solicitors at source as an upfront fee.  It should not be included in “the amount actually lent” by the plaintiff as it never went to the defendant and was not applied to discharge any legal obligation owed by the defendant to the plaintiff.  Even though we have included this amount as “interest”, we do not think there would be ‘double counting’ in deducting this amount to arrive at the deemed principal.  We note that the judge has rejected an argument of ‘double counting’^[22].

63.  In Skyline Credit Ltd v Leung Hing Chung, there was no dispute that the amounts defrauded should be deducted from the contractual sum to arrive at the deemed principal (at §110).  In calculating the effective rate of interest, the judge included the same amounts as interest (at §§111, 121) and rejected the lender’s submission there would be double counting in this situation (at §§115, 123, 135).  We are inclined to agree there would not be double counting. $37,000 should be included as “interest” as it falls within the definition.  This sum should be deducted from the contractual sum of the principal as it does not come within “the amount actually lent”.  It is only right that this amount should be accounted for in considering the amount of interest and the amount of the deemed principal.  There is no valid reason why it should be taken into consideration just once.

64.  Mr Yuen contended that since this sum of $37,000 was an amount charged by the plaintiff in contravention of section 27(3), this sum “may be set off against the amount actually lent (and that amount shall be deemed to be reduced accordingly)” as provided in section 27(4).  Hence, $37,000 should not be taken into account again by deducting it from the contractual amount of the principal.

65.  We do not accept this contention.  It does not follow from the finding that an amount charged in contravention of section 27(3) would necessarily be set off against the amount actually lent under the remedies provided in section 27(4).  As noted in Skyline Credit Ltd v Leung Hing Chung at §§131 to 134, section 27 gives additional and/or alternative remedies to the borrower when the requirements therein are satisfied and it is up to the borrower whether to invoke his rights under section 27(4) and if so which of the three options in that provision he would wish to pursue according to the circumstances of the case (setting off against the amount actually lent is one of the options).  The choice rests with the borrower and the lender does not have the right to invoke section 27(4).  Despite the pleading of set off in the defence^[23] as one of the remedies sought by the defendant, we do not think there was any or any clear election of pursuing the remedy of set off in this instance.  There was no determination of this in the Judgment.

66.  In respect of the amount of $100,000, it is not in dispute that the split cheques (a cash cheque of $100,000 and a crossed cheque marked “account payee only” of $113,000) issued by the plaintiff’s solicitors were not done on the defendant’s instructions.  No one had told her why split cheques were issued, or why the cheques were split in those amounts.  No evidence was adduced by the plaintiff to explain why a cash cheque in the said sum was issued in the absence of any request of the borrower.  Nor did the plaintiff adduce evidence that this was done at its own initiative.  Given that an intermediary was involved in the transaction and it must be expected that the intermediary would be remunerated out of the funds made available by the plaintiff, it seems to us a compelling inference can be drawn that the cash cheque was issued to facilitate payment of its proceeds to the intermediary at the earliest opportunity and it was not envisaged that such proceeds would go to the borrower, who was issued a separate cheque marked “account payee only”.

67.  We reject Mr Ho’s submission that the sum of $110,000 should also be deducted to arrive at the deemed principal, because we do not think a similar inference could be drawn for this amount which was paid out from the proceeds of the crossed cheque of $113,000 marked “account payee only”.

68.  We hold that the judge was in error in using the contractual sum as the principal for the calculation of the effective rate of interest.  The correct figure for the deemed principal should be $863,000.

What should be the effective rate of interest

69.  In light of the holdings above as to interest and principal, we arrive at the effective rate of interest as 39% per annum ($337,000/$863,000 x 100%).  The judge’s holding that the loan agreement is unenforceable for exceeding the effective rate of 60% per annum and his alternative holding that the agreement is extortionate for exceeding the rate of 48% per annum cannot be supported.

70.  There remains the judge’s holding that even if the effective rate should be less than 48% per annum, the plaintiff’s egregious conduct and its complete disregard for the provisions of the MLO manifestly contravened ordinary principles of fair-dealing, such that the court is empowered under sections 25(1) and (2)(b) to reopen the transaction to do justice between the parties.  There is no appeal against this holding, and we are satisfied that it is correct. 

Whether there was breach of section 22(1)

71.  It was provided in clause 11 in one of the loan agreements signed by the defendant and the plaintiff^[24] that the contractual rate of interest is 2.5% per month and upon the borrower’s default, the lender is entitled to charge interest which will not exceed a monthly rate of 5%.

72.  The judge held that there was breach of section 22 which renders the agreement illegal in that section 22(1)(c) prohibits “the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement”.

73.  We agree with Mr Yuen that the judge has erred in law in that he has apparently overlooked the proviso to section 22(1).  By the proviso, provision may be made by the agreement if default is made in the payment of any sum payable to the lender thereunder, whether in respect of principal or interest, the lender shall be entitled, subject to sections 24 and 25, 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.

74.  The effect of the contractual provision here is that upon default, the plaintiff would be entitled to charge additional simple interest on the overdue payment at the rate of 2.5% per month, on top of the existing contractual rate of 2.5%, so the total monthly rate would not exceed 5%. This would be permissible under the proviso.

75.  As there was no breach of section 22(1), the discretion to enforce the agreement under section 22(2) does not arise.

How should the discretion under section 25(1) be exercised

76.  As mentioned earlier, it is not challenged on appeal that the court does have a discretion to reopen the transaction under section 25(1) to do justice between the parties.  The judge mentioned that in the exercise of this discretion, he would have required the defendant to be put back in the position she would have been had she never been approached by Mr Cheung in the first place^[25].

77.  Mr Yuen submitted that on the judge’s approach, the plaintiff should be ‘subrogated’ to the position of SHKF so the defendant should pay the plaintiff the amount required to discharge the balance of the SHKF loan, which is $167,183 as evidenced by a cheque issued by Ho & Associates in favour of SHKF dated 2 October 2015.  Further, the defendant has retained a total of $53,689.24 which should be repaid to the plaintiff.  The amount of $53,689.24 is arrived at by adding up the figures in (1) to (3) below less the amount in (4):

(1) $336,716.72 (crossed cheque issued to the defendant on 12 September 2015) less $283,000 (amount paid by the defendant to Mr Chan);

(2) $113,000 (crossed cheque issued to the defendant on 14 October 2015) less $110,000 (amount paid by the defendant to Mr Chan);

(3) $34,855.52 and $29,617 (the cheques issued to the defendant on 19 November 2015) less $42,500 (amount paid by the defendant to Mr Chan);

(4) less $25,000 (the only instalment payment made by the defendant to the plaintiff).

78.  Mr Ho does not dispute the above figures or take issue with the manner suggested by Mr Yuen as to how the discretion to reopen the transaction should be exercised.  In light of this, we would adopt the approach that appears to have the consensus of the parties in exercising the discretion under section 25(1).  We would reopen the transaction by reducing the amount the defendant should repay the plaintiff to $220,872.24 ($167,183 + $53,689.24).

79.  In respect of interest on the reduced amount owing to the plaintiff, Mr Yuen asked for the same rate of interest as the SHKF loan (at 20.4% per annum) and would leave it to the discretion of the court as regards the period from which such interest should run.  We decline to order interest at the rate he suggested.  The plaintiff has only put forward the reduced sum as mentioned above in the skeleton argument served by Mr Yuen in this appeal.  We think justice would be served by ordering the defendant to pay interest at the judgment rate from the date of the judgment below, being the date on which it was established that the discretion under section 25(1) could be exercised. 

Conclusion and orders

80.  We allow the plaintiff’s appeal and set aside the judgment below dismissing the plaintiff’s claim.  We replace it with a judgment in favour of the plaintiff in the amount of $220,872.24 with interest at the judgment rate to run from 21 December 2018.

81.  We will not disturb the judge’s order awarding the costs of this action to the defendant on an indemnity basis.  There is no sufficient basis to interfere with the judge’s discretion on costs, even though we have substituted his order for dismissal of the action with an order reducing the amount claimed by the plaintiff. 

82.  For the costs of this appeal, we make an order nisi that there should be no order as to costs, save that the defendant’s own costs are to be taxed in accordance with the Legal Aid Regulations.  Even though the appeal is allowed, it was only in the plaintiff’s skeleton argument that specific amounts were put forward for the proposed reduction of the sum claimed in the event the transaction is reopened.  As we have mentioned, there is no appeal against the holding that the discretion to reopen the transaction under section 25(1) was established.  By the time the plaintiff’s skeleton argument was served in mid-July 2020, it would be too late as the defendant would have incurred substantial costs for this appeal.