UNITED MERCHANTS FINANCE LTD v. TANG KAM YUK AND ANOTHER

HEADNOTE

                The aggregated rate of interest on (a) principal and hire charges and on (b) total sum due upon default together must not exceed the permissible rate of 48% or 60% under Part IV of the Money Londor's Ordinance.

                Impermissibly excessive interest severed from the remainder of the terms of the hire-purchase agreement enforced.

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT VICTORIA

CIVIL JURISDICTION

ACTION NO. 12321 OF 1984

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EX TEMPORE JUDGMENT

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1. This is an application for summary judgment in default by the Plaintiff a financial company against the 1st Defendant for money lent and for interest and costs.

2. The legal matter on interest upon interest on default is a rather intriguing one on the interpretation of section 22 of the Money Lander's Ordinance which prohibits compound interest that is interest upon interest with a proviso.  For ease of reference, the section is herein - below sot out: -

        Provided that prevision may be made 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 en 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.

3. S.22 has no application to hire-purchase agreements by virtue of S.3. But the agreements on the interpretation of S.22 and the logics behind them will, as we shall see, throw light on how and why Part IV on Excessive Interest Rate shall be the over-riding guiding principle to be applied in the case.

4. The question is did the Legislature intend by "subject to Part IV" to mean that the overall interest rate that is the simple interest rate to be imposed upon default plus the rate on the earned portion of the interest at the time of default taken together cannot exceed 48% or 60% as the case may be under Part IV or did it intend to mean an interest rate not exceeding that provided for under Part IV is permissible in addition to the interest already earned so as to allow not only double interest for an overlapping period of time when both sets of interest are being enforced at the same tine but also that the aggregated rate could exceed 48 % or 60%.

5. One agreement in favour of the second-mentioned interpretation is that the reference to Part IV in the proviso was to avoid any doubt that the interest chargeable on default to whatever sum due could not exceed the rates of interest laid down in Part IV. This arguement really cannot hold water as being superfluous in view of the express mention that the rate for that simple interest shall not exceed the effective rate payable in respect of the principal sum.

6. There is the further arguement that the Legislature had very much section 25 in mind, which enables the Court to re-open any extortionate transaction and confers on the Court the widest decretionary power possible to make such order as it thinks fit. This argument is certainly sound, and I have no doubt that that was part of the true intention of the Legislature. However, the inclusion of section 25(1) does not necessarily mean the exclusion of the rest of Part IV. By "subject to Part IV", the whole of Part IV was brought into play for the purpose of the proviso.

7. Then there is the argument of "whether in respect of principle or interest", and let me say at once that, from this phrase on its own, it is not certain whether it meant either principle or interest or both of them, i.e. disjunctively or conjunctively. At any rate it must be read together with the rest of the proviso as a whole and must not be taken in isolation to give it an odd meaning. In the light of the proviso as a whole, it is really neutral in a sense that it just refers to allowance of double interest and being subject to Part IV.

8. The strongest argument in favour of double interest on default is that the express reference under the proviso that any interest charged upon default shall not be reckoned for the purposes of this ordinance as part of the interest charged in the respect of the loan. At first sight, it would appear very attractive that the legislature intended not only to allow double interest but also to allow it to such an extent as to make it possible for doubtl interest in the overlapping period lest there would be no need to expressly refer to this last sentence.  As what had boon stated before this sentence in the proviso was sufficiently clear that double interest was permissible. However, in reading the proviso as a whole I have come round to the view that this last sentence was to put it beyond a shadow of doubt that double interest was allowable but net necessarily to the extent that double interest was permissible so that the aggregated rate of interest could exceed what was considered to be unconscionable under Part IV.

9. "Subject to Part IV" was the clear intention of the legislature that the proviso must be read subject to Part IV.  In ether words, the allowance of double interest must not run contrary to the previsions of Part IV as a whole. The clear intention behind Part IV was to regulate interest specifically laying down what interest would be so excessive as to make the whole agreement void, i.e. 60% under section 24(1) and what interest would be considered extortionate on the face of it, i.e. section 25(3) with consequential follow-up previsions and of course provisions for the Court to re-open an extortionate transaction. The main object of Part IV was to prohibit unconscionable transaction, and it was the crystal clear intention of the legislature that that an interest rate which exceeds 60% per annum would be conclusively unconscionable. To adopt the interpretation that interest upon interest to be allowed ever an overlapping period with the result that the accumulated overall effective rate might exceed 60% would be contrary to public policy plainly declared by the legislature in Part TV to be unconscionable.  In this case, effective rate of interest calculated in accordance with the second schedule of Money Lenders Ordinance en the principle is 26.78% per annum. If double interest is allowed by the addition of 3% per month to this rate of interest, the effective rate per annum is very likely to exceed 60% for the overlapping period when both sets of interest are enforced. With or without S.22, I so rule in this case.

10. The further legal question is whether the part of illegality in the contract which provided for 3% per month on the sum due upon default for which I have held to be illegal can be severed from the remainder of the contract. In this context I refer to V.C.J. Action 997 of 1984, particularly pages 3 and 4. The law is that the illegal part of a contract can only be severed from the legal part if the severance of the offending part does not alter the scope of the whole contract as to make it a now contract, and if the illegal promise is not substantially the whole or main consideration for the promise sought to be enforced.  In other words, if the illegal promise forms only a subsidiary part and not the main part of consideration to support the promise of the defendant, it is severable. See Goodinson v. Goodinson 1954 2 Q.B. 18 and Chitty on Contract Vol. 1, 25th Editions page 554.

11. Now the consideration for this money lending was no doubt interest payable by the borrower. If the borrower was not in default, all he had to pay was the interest provided for, i. e effective rate of 26.78%. It was only when he was in default that interest upon interest in the form of additional 3% per month came into being. This rate of 3% was not the main consideration for lending the money. It was the interest upon the principal sun which was the quid pro quo. In my opinion, the 3% was merely a subsidiary consideration for the contingency of default and for that contingency only. It follows that the illegal part relating to excessive interest can be severed and I am satisfied in all the circumstances that it should be severed in this case. In the result, judgment is entered for the Plaintiff against the 1st Defendant in the sun of $9,446.80 as the principal sun due plus contractual interest thereupon duo (principal and hire charges) with Court interest of 8% per annum from the date of writ, to date of judgment and there after at 13% till payment. Costs on the Upper scale for this application is also awarded to the Plaintiff against the 1st Defendant.