GG v. LL Ltd

HCSD 21/2024

[2024] HKCFI 2302

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 21 OF 2024

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J U D G M E N T

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DHCJ Yuen:

1.  This is an application by the applicant whom I shall call GG (Applicant) to set aside a statutory demand (SD) issued by the respondent whom I shall call LL Ltd (Lender). It arises out of the following matters.

Background

Loan Agreement

2.1.  On 21 December 2022, a Loan Agreement was signed between the Lender, a company as borrower (Borrower), and two individuals including the Applicant as guarantors. 

2.2.  Under the Loan Agreement, the Lender agreed to lend $120 million to the Borrower for a period of 24 months at 17.5% p.a. interest, guaranteed by the two guarantors. 

2.3.  The loan was also secured by Second Mortgages on three properties owned by companies (mortgagor companies) which were not parties to the Loan Agreement.  The mortgagor companies are wholly legally and beneficially owned by a company I shall call RR Co Ltd (RR) which is in turn wholly legally and beneficially owned by the Applicant¹.  In this Judgment, I shall use the term “third party-owned security” to mean security owned by a party which is not the recipient of the SD.

Fee Letter

3.1.  On the same day as the Loan Agreement, a Fee Letter was signed between the Borrower and a company I shall call KK Ltd as introducer (Introducer).  Under the Fee Letter, the Borrower agreed to pay the Introducer an introducer fee in an amount equal to 9% of $120 million ($10.8 million) upon drawdown of the loan under the Loan Agreement. 

3.2.  It was provided in the Fee Letter that:

-  any amount due and payable under the terms of the Fee Letter shall be an amount payable under the Loan Agreement²;

-  if the Borrower fails to pay any sum payable under the Fee Letter on the drawdown date in accordance with the Loan Agreement, interest equivalent to 35% p.a. shall accrue on the overdue sum from due date to date of receipt³.

3.3.  The Fee Letter was signed on behalf of the Introducer by a person I shall call PP, who was described as its executive director.  

3.4.  The sum of $120 million was drawndown on the date of the Loan Agreement. 

3.5.  On the same day, the Borrower paid the sum of $10.8 million to the Introducer by cheque.  A copy of the cheque was signed by a person I shall call WW who had also signed the Loan Agreement on behalf of the Lender as “the authorized representative for and on behalf of [AC] as sole director and corporate director for and on behalf of” the Lender.

Letter of demand  

4.  On 21 March 2023, the Borrower failed to pay interest of $5,235,616.44.  The next day, the Lender’s solicitors demanded this sum as outstanding interest, as well as default interest from that date until the outstanding interest is fully repaid.

SD

5.1.  On 18 January 2024, the Lender issued an SD for outstanding principal of $120 million, and outstanding interest pursuant to the Loan Agreement up to 21 December 2023 of $5,235,616.44 (excluding default interest).  

5.2.  On 23 April 2024, the SD was served on the Applicant by advertisement.

Application to set aside SD

6.  On 10 May 2024, the Applicant applied to set aside the SD.  She filed an affirmation the same day.  The Lender filed an affirmation of WW in opposition.

Grounds

7.  The Applicant relies on the following grounds:

(1)  the Lender holds the three Second Mortgages as security, the value of which equals or exceeds the debt (Security ground);

(2)  the Lender is an unlicensed money lender; consequently, pursuant to s.23 Money Lenders Ordinance Cap.163 (MLO), the loan is not recoverable (Unlicensed money lender ground);

(3)  the Fee Letter was a sham, and the Introducer was the Lender’s agent; consequently, the Borrower’s payment of $10.8 million to the Introducer constituted partial repayment of the loan; as such, the amount of the debt has been overstated by at least that sum (Overstatement of Debt ground);

(4)  alternatively to (3), the sum of $10.8 million should be treated as interest as it satisfies the definition of “interest” under s.2 MLO as follows:

“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”;

if this sum of $10.8 million is treated as interest, in addition to $5,235,616.44 demanded as interest as at 21 March 2023, the effective rate of interest would amount to 53.6% [$10,800,000 + $5,235,616.44)/(91/365) x 100%] which under s.25 MLO would entitle the court to reopen the transaction (Interest ground).

8.1.  ; Based on the above, the Applicant submits that rules 48(5)(b) and/or (d) of the Bankruptcy Rules Cap.6A (BR) apply, which provide:

“48(5) The court may grant the application [to set aside the SD] if -

...

(b)  the debt is disputed on grounds which appear to the court to be substantial;

...

(d)  the court is satisfied, on other grounds, that the demand ought to be set aside”.   

8.2.  It is noted that the Applicant does not seek to invoke rule 48(5)(c) which would apply in a situation where the debtor has given up her own assets as security. In the present case, the security comprises Second Mortgages over properties owned by the mortgagor companies which are held by RR which is in turn held by the Applicant.   

Discussion

Principles

9.  It is common ground that the burden is on the applicant to satisfy the court that there are valid grounds to set aside an SD, and what she must establish is a defence of substance, not just a fair probability of one.      

(1)  Security ground

10.  As noted above, the Applicant acknowledges that the mortgaged properties are owned by the mortgagor companies, with an intermediate company (RR) between them and herself, and consequently, she has not sought to set aside the SD under rule 48(5)( c).

11.  1.  The Applicant however submits that the court should exercise its residual discretion under rule 48(5)(d) to set aside the SD.

11.2.  In this connection, the Applicant relies on the judgment of DHCJ Maurellet SC in X v Y⁴, where he said the following regarding third party-owned security [§46]:

“It however seems to me that in an extreme case where the security, albeit one provided by a third party, would be of such an amount and of such liquidity (say cash or cash equivalent) that it could be said that no reasonable creditor would have proceeded to bankrupt the Debtor rather than realize the security, then perhaps the residual discretion could be relied upon”. (Emphasis added).

11.3.  Pausing here, it would be noted that the deputy judge had in an earlier paragraph [§45] said that the issue under rule 48(5)(d) “has become largely academic” in that case, and so he did “not consider that it would be the right opportunity to delve into it”.  The language he used in §46 (italicized above) underscores the tentative nature of his views. 

12.  Linda Chan J did not agree with those views in another case also called X v Y⁵.  The judge first referred to the 2-stage process of an SD followed by a bankruptcy petition [§22], and quoted Nicholls LJ in In re a Debtor (No.1 of 1987)⁶:     

“ ... the circumstances which normally will be required before a court can be satisfied that the demand ‘ought’ to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences ...”(emphasis added)

the said consequences being simply that the debtor would be regarded as being unable to pay the debt, thus enabling the creditor to present a bankruptcy petition [§§23-24].  At the SD stage, the court would not consider whether the petition would succeed or fail [§22].

13.  I agree that an SD is part of a 2-stage process in the bankruptcy regime, and that at the SD stage, the court simply considers if there is a debt and inability to pay it.   What are the circumstances in the present case that would make it unjust for the SD to give rise to those consequences?

14.  First, in clause 7.3 of the Loan Agreement, the Applicant had agreed that:

“(b) The Lender shall not be obliged, before taking any steps to enforce any of its respective rights and remedies under this Guarantee and Indemnity, to make, demand, enforce or seek to enforce any claim, right or remedy against, or to take any action, commence any proceedings or make or file any claim or enforce any security against the Borrower or any other person”. (Emphasis added).

15.  Secondly, and more importantly, as far as the availability of third party-owned security is concerned, it is a well-established principle in civil actions that a creditor is not obliged to resort to third party-owned security first, before suing a guarantor.  The creditor’s freedom to choose between selling third party-owned security, or suing a guarantor, is clearly set out in the judgment of the Privy Council in China and South Sea Bank Ltd v Tan Soon Gin⁷:

“ ... The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all. If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety. ...

... The creditor was not under a duty to exercise his power of sale over the mortgaged securities at any particular time or at all”.

16.1.  China and South Sea Bank concerned a civil action, not bankruptcy, but the principle was applied in the bankruptcy regime in Mark Eugene White v Davenham Trust Ltd⁸. 

16.2.  In that case, the English Court of Appeal first explained why insolvency proceedings should not be allowed to commence (even at the SD stage) if full security had been given over the assets of the person receiving the SD.

16.3.  Lloyd LJ⁹ then compared that situation where the security was owned by the person receiving the SD, with the situation where it was owned by a third party, resulting in different legal consequences:

“As against a given debtor, if a creditor has security over that debtor’s assets which is more than sufficient, there is no reason to allow the creditor to pursue bankruptcy proceedings because the existence of the security means that the creditor has no interest in that debtor’s estate. He would not be able to prove for his debt, and there is no reason for him to be able to invoke the collective realisation of assets which is the point of insolvency proceedings, unless he is willing to give up his security. By virtue of s.267 of the 1986 Act¹⁰ he is not even entitled to present a bankruptcy petition. It follows that there is every reason why he should not be entitled to take the preliminary step of serving a statutory demand. If, however, the security given to the creditor is over the assets of a different person, then the existence of that security does not constitute any reason why the particular creditor should not proceed against this other debtor, who has given no security over his assets, for an undoubted debt by way of a personal claim or by way of insolvency proceedings. There is no bar to the creditor presenting a bankruptcy petition in relation to such a debtor and there is therefore no reason why the creditor should not serve a statutory demand as a preliminary to the presentation of a petition if the demand is not satisfied”. (Emphasis added).

17.  The mere fact that third party-owned security is available to the Lender does not change the Applicant’s inability to pay into her ability to pay.  And when the Lender is doing what the law entitles it to do (i.e. pursuing the guarantor rather than resort to third party-owned security), there is no injustice to the Applicant which the court should prevent in the exercise of its residual discretion under rule 48(5)(d)¹¹. 

(2)  Unlicensed money lender ground

18.1.  The Lender is not licensed under the MLO.  That is common ground.  The Applicant therefore submits that under s.23 MLO, the loan is not recoverable.

18.2.  However the Lender submits that the loan in this case is an exempted loan under para. 2(a) of Part 2 of Schedule 1 of the MLO.  If that submission is correct, then the entity making such a loan is excluded from the definition of “money lender” in s.2 MLO.

18.3.  Counsel for the Lender submits that the loan in the present case comes under para. 2(a), in that it is:

“a loan made to a company secured by a mortgage, charge, lien or other encumbrance

(a) registered, or to be registered, under the Companies Ordinance (CO)”.

18.4.  He submits that para. 2(a) applies because:

-  a loan has been made to a company (the Borrower), and

-  the mortgagor companies have registered the Second Mortgages at the Companies Registry.

18.5.  He submits that there is nothing in the language of para. 2(a) that says that the company to which the loan is made must be the same company providing the security registered with the Companies Registry.  He relies on a passage [§18] in Silver Bound Capital Ltd v Ho’s Holding Co Ltd and others¹².  I will discuss that passage later.   

19.1.  In my view, on an ordinary and natural reading of para. 2(a), the legislature must have intended to refer to one and the same company to whom the loan is made and which has provided security for that loan, which security is duly registered at the Companies Registry. 

19.2.  Purposively, the following scenarios may be considered:

(a)  a loan is made to an individual, for which a company provides security;

(b)  a loan is made to a company, for whom an individual provides security;

(c)  a loan is made to a company, for whom another company provides security.

In the context of money lending legislation, I cannot see any reason why the legislature would have intended that the loans at (a) and (b) would not be exempt, and yet, according to the Lender’s submission, the loan at (c) would be exempt.  Counsel for the Lender has not referred me to any materials on the passing of this piece of legislation in support of his submission.

20.1.  I shall now come to Silver Bound.  In that case,

-  the plaintiff was in fact a licensed money lender [§§14 and 18];

-  the mortgagors of the real properties in that case (the 5^th and 6^th defendants) were individuals [§1].  Therefore, registration of the mortgages at the Companies Registry under para. 2(a) of Part 2 of Schedule 1 would not have applied anyway;

-  the borrower (the 1^st defendant company) provided a debenture over its assets [§6], and registered the debenture at the Companies Registry, pursuant to section 80 of the then CO, Cap. 32¹³ [§9].  

20.2.  It is in the context of the above facts that §18 of that judgment should be considered:

“The 1^st Defendant is a company incorporated under the Companies Ordinance. The Loan was secured by a mortgage and a debenture registered under section 80 of the Companies Ordinance. It is therefore an exempted loan within Paragraph 2(a) of Part 2 of Schedule 1 to the Money Lenders Ordinance. That takes the Plaintiff outside the definition of ‘money lender’ in section 2(1) of the Money Lenders Ordinance which specifically excludes, as respects a loan specified in Part 2 of Schedule 1, any person who makes such loan ...”. (Emphasis added).

20.3.  The inclusion of the words “a mortgage and” in the second sentence above was confusing and, with respect to the judge, incorrect. The mortgages in that case were provided by individuals and could not have been registered under s.80 CO.  The correct position was that the loan was an exempted loan because the borrower company had given a debenture over its assets as security and had registered the debenture at the Companies Registry under s.80 CO.

21.  As a matter of completeness, I should record that WW said in his affirmation that the Lender engages in investment in securities and “does not run any money lending business as such”¹⁴.  This argument was not advanced in its counsel’s written or oral submissions and I need say no more about it.

22.  In conclusion on this ground, the Applicant has satisfied me that there is a substantial defence that the Lender was not a licensed money lender, that the loan was not an exempted loan, and it is thus unrecoverable under s.23 MLO.  Of course, under the proviso to s.23, the Lender may still recover the money lent if it satisfies the court that in all the circumstances, it would be inequitable if it was thereby not entitled to recover such money.  However, an application to set aside an SD is not the time or procedure for these considerations.  As it is, the Unlicensed money lender ground is enough to set aside the SD. 

23.  In case I am wrong in my conclusion on the above ground, I shall discuss the other two remaining grounds briefly.

(3)  Overstatement of debt ground and (4) Interest ground

24.1.  These grounds may be discussed together as they both stem from the Introduction Fee which the Applicant alleges was paid to the Lender and not the Introducer.  She alleges in her affirmation that she was informed by the Borrower that:

-  the Loan Agreement was brokered by the Introducer, which was “related to the Lender if not sharing the same ultimate beneficial owner” [§17];

-  the Loan Agreement was not facilitated by the Introducer but by WW [§20];

-  the receipt for the cheque for the Introduction Fee was signed by WW [§21].

24.2.  In opposition, WW said in his affirmation that:

-  none of the Introducer’s holding company, director or signatory held any interest in the Lender or in its holding company, and there was “no affiliation/relationship between [the Introducer] and [the Lender/its holding company]” [§28];

-  the Introducer was not the Lender’s agent [§32] and it was market practice for such introduction fee to be paid [§25]; 

-  as to why he signed on the copy of the cheque, he said:

“As to why my signature is found on the cheque to be handed to KK ... all the relevant documents such as the Loan Agreement were signed at [LL’s] office ... including the cheque to be handed over to KK. As a matter of convenience, when all these documents were signed before me and when the Borrower’s representative gave us the cheque, I signed on it to acknowledge receipt. I then immediately sent the said cheque to KK’s office. That does not mean that the said sum was later routed back to [LL]. There is simply no truth in that allegation” [§31].

25.1.  I note that no affirmations were filed by the Borrower to support the Applicant’s allegations, and of course the burden is on an applicant to satisfy the court that there are substantial grounds for disputing the debt. 

25.2.  At the same time, I note the following:

-  the provision in the Fee Letter that any amount due and payable under its terms shall be an amount payable under the Loan Agreement¹⁵;

-  if all the relevant documents including the Fee Letter were signed at the Lender’s office, and the Fee Letter was signed on behalf of the Introducer by PP, there is no explanation why receipt of the cheque was not acknowledged by him (PP) but by WW.

26.1.  Be that as it may, I do not consider these grounds justify setting aside the SD in this case.  In relation to the overstatement of debt, it is well-established that:

“... deficiencies in the form and content of a statutory demand, including errors involving the over-statement of the debtor’s indebtedness, would not automatically entitle the debtor to have the demand set aside. The relevant question is whether injustice would be caused to the debtor by allowing the particular demand to stand. See Re a Debtor (No.1 of 1987)”¹⁶.

26.2.  In the present case, the documentary evidence shows that the sum of $120 million was paid to the Borrower¹⁷.  Even assuming there has been overstatement of the debt by $10.8 million, the Applicant has not suggested that she is able to repay the balance which is substantial.

27.1.  As for the excessive interest ground, as I understand the Applicant’s submission, the $10.8 million may be treated as interest payable (and paid) on the day of the drawdown.  

27.2.  However, it seems to me that if it is regarded as interest on the loan (which was for 2 years), then the amount of interest per annum would be $5.4 million, not $10.8 million.  In that case, the calculation would be as follows:

Principal	$120,000,000
Contractual interest @ 17.5% p.a.		$21,000,000
Introducer fee (1 year)		$5,400,000
Total interest p.a.		$26,400,000

The effective rate of interest would then be $26.4m/$120m x 100% = 22% p.a., which would not exceed the statutory threshold.

28.  In conclusion, the Applicant has not satisfied me that the SD should be set aside on grounds (3) and (4).

Order

29.  For the above reasons, I set aside the SD on the Unlicensed money lender ground.  The parties have agreed that costs should follow the event, so there will be an order that the Respondent do pay the Applicant’s costs, to be taxed if not agreed.