SKYLINE CREDIT LTD v. LEUNG HING CHUNG

CACV 83/2019

[2022] HKCA 1241

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 83 OF 2019

(ON APPEAL FROM HCA NO 639 OF 2016)

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JUDGMENT

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Hon Chu JA (giving the Judgment of the Court):

A. Introduction

1.  This is the plaintiff’s appeal against the judgment of Deputy High Court Judge William Wong SC (“the Judge”) given on 23 January 2019 dismissing its claim with costs.

2.  In the action below, the plaintiff, who is a registered money lender, claims against the defendant borrower to recover a loan in the principal sum of $1.8 million together with interest up to the date of the writ in the sum of $117,054.25 and thereafter at 2.3% per month (27.6% per annum) until full payment pursuant to a loan agreement dated 16 December 2015 (“Loan Agreement”).

3.  The Judge dismissed the action as he found the defendant was the victim of a collusion between the plaintiff and an intermediary, Lamto International Business Limited (“Lamto”), to trick him into the Loan Agreement, and that the effective rate of interest of the loan exceeds 60% per annum rendering the Loan Agreement unenforceable under section 24 of the Money Lenders Ordinance (“MLO”), Cap. 163.  All sections mentioned in this judgment, unless otherwise stated, are of the MLO.

4.  In this appeal, the plaintiff challenges the Judge’s finding of collusion and his computation of the effective rate of interest for the purpose of section 24.  By way of a respondent’s notice, the defendant seeks, pursuant to section 27(4), to set off against the principal lent, the sums that he had paid to Lamto or to recover the same from the plaintiff.  

B.      Background

5.  At the time of the Loan Agreement, the defendant was a civil servant married with two children and earning a monthly salary of HK$20,305. He was the registered owner of a property in Cheong Shing Court, Fanling, New Territories, which was purchased from the Housing Authority (“the Property”).  The Property was initially mortgaged to Nanyang Commercial Bank (“NCB”) but the legal charge was released in January 2015.

6.  In December 2015, the defendant was indebted to (i) Once Finance Limited (“Once Finance”) for a loan of $600,000 made on 8 July 2015.  It was for a term of eight months with monthly repayment of $12,000 as interest, and repayment of the principal deferred to the end of the term; and (ii) United Asia Finance Limited (“United Asia”) for a loan of $250,000 made on 21 September 2015 to be repaid by 84 monthly instalments of $6,169 each.  By December 2015, part of the United Asia’s loan had been repaid.

7.  On or about 10 December 2015, the defendant received a call from one Mr Chan, who claimed to be calling from NCB and offered a concession package for a mortgage loan for a term of up to 288 months to be secured by the Property.  The defendant was interested in the offer as he wished to repay the loans with Once Finance and United Asia.  Mr Chan then referred the defendant to Lamto, which he claimed was a subsidiary of NCB.

8.  On 11 December 2015, the defendant went to the office of Lamto, where he met a Mr Gary Ho (“Mr Ho”), who offered him a mortgage loan of $1.8 million for a term of 288 months on condition that he would first obtain an intermediate loan of $1.8 million for a term of one year on the following basis to improve his credit portfolio:

(1)  $650,000 would be paid to Once Finance;

(2)  $270,000 would be paid to United Asia;

(3)  $49,680, being 3 months’ interest ($1,800,000 x 2.3% x 40% x 3), would be retained;

(4)  $18,000 would be paid to Lamto as handling fee;

(5)  $50,000 would be given to the defendant as his living expenses;

(6)  $762,320 would be paid to Lamto to be held as insurance money to secure the subsequent mortgage; and

(7)  $8,000 as legal fee to be paid by the defendant out of the loan obtained. 

9.  On 14 December 2015, the defendant returned to Lamto’s office with income proof and other relevant documents, and had further discussions with Mr Ho on the monthly repayment instalments. 

10.  On 16 December 2015, the defendant again went to Lamto’s office. According to the defendant, he gave the title documents of the Property and other documents to Mr Ho for checking.  Afterwards, a female staff of Lamto took him to a solicitors firm, KB Chau & Co (“KB Chau”).

11.  While at KB Chau, the defendant signed some documents.  Afterwards, he met with a Mr Justin Ng (“Mr Ng”), the marketing manager of the plaintiff, who briefly explained the contents of the documents to him. He was told the loan was in the sum of $1.8 million at the interest rate of 2.3% per month for a term of 12 months, the monthly payment for the first 11 months in the sum of $41,400 was for interest, and the principal of $1.8 million was to be repaid together with the final interest payment of $41,400 in the 12^th month. 

12.  The defendant was also informed that three cheques were issued by KB Chau, namely a cheque for $270,000 to United Asia and another for $650,000 to Once Finance, both drawn on Public Bank; and a third cheque for $872,000 payable to the defendant drawn on HSBC (“HSBC Cheque”).  Mr Ng gave the HSBC Cheque to the defendant and told him that KB Chau would settle the loans owed to United Asia and Once Finance.  KB Chau did subsequently settle the two loans for the defendant.

13.  Later, the defendant, accompanied by the female staff of Lamto, went to the head office of HSBC to deposit the HSBC Cheque in his account.  The sum of $872,000 was withdrawn in cash immediately, and given to Mr Ho.  The defendant claimed that Mr Ho gave him $50,000 as living expenses. Mr Ho also told him that $762,320 of the withdrawn cash would be deposited with NCB as insurance or security for the mortgage loan to be arranged and that an application for mortgage permission would be made to the Housing Authority. 

14.  Thereafter, the defendant signed a service agreement (“Worldwide’s Agreement”) dated 16 December 2015 in favour of Worldwide Commercial Company Limited (“Worldwide”), which Mr Ho claimed was the parent company of Lamto.  Under the agreement, the defendant agreed to:

(1)  Authorize Worldwide to arrange a mortgage loan of $1.8 million;

(2)  Pay 1% administrative fee ($18,000) to Worldwide;

(3)  Pay $49,680 as three months’ interest for the loan; and

(4)  Pay $762,320 as insurance premium, which would be refunded to the defendant in cash within seven working days after the completion of the mortgage loan. 

15.  Between 16 December 2015 and 25 January 2016, the defendant made repeated unsuccessful attempts to contact Mr Ho to inquire about the mortgage application with NCB.  He eventually went to Lamto’s office only to discover it had closed down.  He then made a report to the police.

C.      The parties’ respective case

16.  As pointed out by the Judge[1], the defendant’s primary case is that the plaintiff, Lamto and Worldwide colluded together to charge or receive interest or remuneration or reward in the form of security money, insurance premium, share of repayment, administrative fee, handling fee from him, in contravention of sections 2, 24(1), 27(3) and 29(10).  It is also the defendant’s case that, by reason of the collusion, the effective rate of interest charged by the plaintiff exceeded 60% per annum, rendering the Loan Agreement unenforceable under section 24(1) and (2).    

17.  In [27] and [30] of the Re-Amended Defence, the defendant also pleaded that the payment of (i) $8,000 legal cost; (ii) $18,000 handling fee; (iii) $49,680 as interest for the first three months; and (iv) $762,320 as insurance money for the subsequent mortgage loan (collectively “the Four Sums”) was in contravention of section 27(1) and (3) and that pursuant to section 27(4) he was entitled to recover from the plaintiff these sums or such reasonable sum with interest at an enhanced rate, or to have the same set off against the amount actually lent.

18.  The Re-Amended Defence[2] further relied on contraventions of sections 7, 18, 21 and 22 and section 6 of the Unconscionable Contract Ordinance, Cap. 458 as rendering the Loan Agreement illegal and unenforceable.  The Judge found it was unnecessary to deal with these sections since he held that the Loan Agreement was unenforceable by reason of section 24, while noting that the defendant had not pursued these points in closing submissions. 

19.  The plaintiff’s case[3], in gist, is that it had no connection or communication with, or knowledge of, Mr Chan and/or Lamto, and that it received the defendant’s personal particulars and information of the Property from the defendant himself before 16 December 2015.   

D.      The Judge’s decision

20.  The Judge identified the key factual issue in the case to be whether there was collusion between Lamto and the plaintiff in procuring and/or causing the defendant to enter into the Loan Agreement[4].

21.  Applying the legal principles on collusion in the authorities[5], the Judge held that it had to be shown on the evidence that the parties were acting in concert and playing the same game.  Further, in deciding whether there was collusion, the court is entitled to rely on overt acts of the parties involved and established facts to draw appropriate inferences. 

22.  The Judge held that the evidence of the defendant was to be preferred to that of the plaintiff’s witness, Ms Simmy Yau (“Ms Yau”), whom the defendant briefly met on 16 December 2015 at the office of KB Chau after he received the HSBC Cheque[6]. They were the only witnesses at the trial.

23.  The Judge rejected the plaintiff’s case that it had no connection, communication with and/or knowledge of Mr Chan or Lamto[7], as he found:

(1)  It was inherently improbable that the defendant had directly contacted the plaintiff to ask for a loan, having regard to the defendant’s telephone records which showed no outgoing telephone calls being made to the plaintiff’s office or Mr Ng, but only calls made to Lamto and Mr Ho, and the plaintiff had no record of the defendant’s attendance at its office[8].   

(2)  As supported by the defendant’s work attendance and leave records, there was no meeting between Ms Yau and the defendant on 15 December 2015, contrary to Ms Yau’s evidence.   

(3)  Accordingly, the plaintiff could only have reached the defendant as a borrower through the introduction or cooperation of Lamto which acted as the intermediary.  It followed that there must be some prior communication between the plaintiff and Lamto.[9]

(4)  It also followed that it was impossible for the defendant to hand over his documents to Ms Yau personally.  The only way the plaintiff could have obtained the defendant’s loan application documents and bank account particulars was through Lamto, and this is the only plausible and irresistible inference to be drawn[10].

(5)  The irresistible inference to be drawn from the splitting of the cheques, notably the cheque payable to the defendant was drawn on HSBC ($872,000) with which the defendant maintained an account, was that KB Chau knew that the plaintiff and Lamto acted in concert and it had facilitated the collusion[11].

24.  The Judge concluded that the plaintiff and Lamto had colluded to trick the defendant into entering into the Loan Agreement, and that they were playing the same game and cooperating with each other to enrich themselves at the expense and prejudice of the defendant[12].

25.  On the computation of the effective rate of interest (“ERI”), the Judge noted there were conflicting decisions of Court of First Instance and District Court on how the ERI was to be calculated when certain payments made by the borrower were found to be unlawful under section 27.  After reviewing the cases[13], he concluded that in computing the ERI under sections 2, 24 and 25, principal should comprise the amount actually lent to the borrower, and interest should include 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. 

26.  Applying this to the facts of the case, the Judge found the amount actually lent was $962,000, which was arrived at by deducting the Four sums (which come to a total of $838,000) from the contractual sum of $1.8 million[14].

27.  As to the amount in excess of the amount actually lent, the Judge held that this comprised the Four Sums, and that the total amount of $838,000 was to be included as interest in calculating the ERI, in addition to the contractual interest of $496,800.  Accordingly, for $962,000, being the amount actually lent, the amount that the defendant had to repay at the end of the term of the loan was $2,296,800 (i.e., $1,800,000 + $496,800).  The total actual interest was therefore $1,334,800 (i.e., $2,296,800 - $962,000).  By dividing the total actual interest ($1,334,800) with the amount actually lent ($962,000) would arrive at an ERI of 138.75%.

28.  The Judge took the view that in calculating the ERI, section 27 and the set-off in section 27(4) were not engaged[15].  He further held that the defendant had not relied on section 27(4), and the court was not obliged to invoke the sub-section on its own motion for the benefit of the money lenders[16].

29.  The Judge concluded that as the ERI was in excess of 60% per annum, the Loan Agreement was unenforceable under section 24. He accordingly dismissed the claim with costs to the defendant.  

E.      The grounds of appeal and the respondent’s notice

30.  The grounds of appeal in the supplemental notice of appeal, which replaced the notice of appeal, may be summarised as follows:

(1)  The Judge’s finding that there was collusion between the plaintiff and Lamto is wrong in law and not supported by the evidence and facts of the case.

(2)  The Judge erred in his computation of the ERI under section 24, and in his approach to the determination of the amount of the “principal” and “interest” under section 2(1) in the event there was collusion between the plaintiff and Lamto.

31.  At the appeal hearing, with no objection from the plaintiff, we gave leave to the defendant to put in a respondent’s notice which primarily contended that the Judge, having found there was collusion, ought also to have found that the defendant is entitled to recover from the plaintiff, or set off against the principal actually lent, the sum of $838,000 or such reasonable sum pursuant to section 27(4). 

F.      Our reasons for decision

F1.   The Judge’s finding of collusion

32.  The plaintiff’s first complaint against the finding of collusion is that the Judge erred in law in applying the concept of collusion.  Essentially, the plaintiff argues that “collusion” as explained in HKSAR v Wong Kwok Wai (2013) HKCFAR 191 was referring to the offence to act in collusion with a money lender to demand remuneration or reward for or in connection with or preliminary to procuring, negotiating or obtaining a loan or guaranteeing or securing the repayment thereof pursuant to section 29(10).  It is said that as the term “collusion” only appears in sections 27 and 29, the context of the respective section is important, and there is no basis to adopt the wide interpretation in Ever-Long Finance Ltd v Yeung Wah Lung, supra,at [90] to [93].

33.  We do not agree.  As this Court held in Gain Wealth Global Credit & Investment Ltd v Chan Suk Fong [2020] 4 HKLRD 831, at [49], collusion has a broad meaning under section 27(3) and (4) and Ever-Long Finance Ltd v Yeung Wah Lung was correctly decided.  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.  Further, this Court has held in K Cash Ltd v So Wang Fung [2021] 4 HKLRD 796 at [20] that the meaning of collusion is simply that parties are playing the same game or acting in concert as held in HKSAR v Wong Kwok Wai, supra, at [6] to [8] and [11]. 

34.  We also do not see it as a cause for complaint that the collusion found by the Judge is that the plaintiff and Lamto colluded to trick the defendant into entering into the Loan Agreement, whereas the collusion pleaded by the defendant is that the plaintiff, Lamto, Worldwide and Ho colluded together to charge or receive interest or remuneration or reward in the form of security money, insurance premium, share of repayment, administrative fee, handling fee from the defendant in breach of sections 2, 24(1), 27(3) and 29(10). 

35.  The plaintiff’s second complaint is directed at the factual findings of the Judge.  It argues that the Judge failed to have regard to the evidence and matters that militate against the existence of collusion between the plaintiff and Lamto, namely, (1) there was no direct evidence of collusion; (2) some of the documents in the plaintiff’s possession could not have come from Lamto as the defendant admitted under cross-examination that he did not provide them to Lamto; (3) the defendant had lied about giving the title documents of the Property to Mr Ng; (4) on the defendant’s case, Lamto had made two different loan offers; (5) Mr Ho had asked the defendant for a copy of the Loan Agreement after the loan was drawn down; (6) no adverse inference should be drawn against the plaintiff from the failure to call Mr Ng to testify; and (7) the plaintiff has been chasing the defendant for repayment.  It is said that the matters relied on by the Judge, whether individually or collectively, could not have justified the finding of collusion.

36.  The plaintiff also argues that the Judge had not properly considered the relative inherent improbability or probability of: (1) the plaintiff, who is a registered money lender still in business, colluding with an intermediary to defraud the defendant of almost half of the amount lent to him and when it is also a victim in the hands of the intermediary; (2) the defendant agreeing to hand over $872,000 in cash to Mr Ho, who was a complete stranger, without even asking for a receipt, having regard to the fact that he is an experienced civil servant with prior experiences of borrowing, and could hardly be described as financially prudent in committing to monthly repayments of $18,169 (under the loans with Once Finance and United Asia) when his monthly earning was only $21,000; and (3) the defendant making up a story of being defrauded by Mr Ho, who has since vanished, given that it will be difficult for the plaintiff to rebut, and he does not have much to lose and further stands the chance of getting a windfall out of it by not having had to repay the entire loan. 

37.  It is trite that an appellate court, which does not enjoy the advantages enjoyed by the trial judge who received the evidence at first hand, should only interfere with a finding of fact when it is satisfied that the conclusion on facts was plainly wrong: Ting Kwok Keung v Tam Dick Yuen & Others (2002) 5 HKCFAR 336, at [41] and [42].  The Court of Appeal must be satisfied that the first instance judge had fallen into palpable error in his findings of fact under appeal, such as where the conclusion was one (i) not supported by evidence, (ii) based on a misunderstanding of the evidence, or (iii) one which no reasonable judge could have reached: China Gold Finance Ltd v CIL Holdings Ltd, CACV 11/2015 (27/11/2015)at [15]- [16]; and ZJW v. SY CACV 10/2017, (01/12/2017) at [28]- [29]. The threshold for appellate interference with a judge’s findings of fact is high.

38.  It is evident from the judgment[17] that the Judge had given careful and full consideration to the evidence in the case.  He had provided clear and cogent reasons for his assessment of the witnesses’ credibility, evaluation of the evidence and findings of facts.  He did not accede to the defendant’s submission to draw adverse inference against the plaintiff for not calling Mr Ng as a witness, as he did not find it necessary to do so[18].  He was also aware that the defendant’s evidence that he gave the title documents of the Property to Mr Ng was contradicted by the letter from Once Finance’s solicitors to KB Chau forwarding the title documents of the Property[19], and had observed that the defendant’s evidence was not perfect.  He was, however, of the view that even if the defendant had lied on this, the defendant’s case was in general good and his overall evidence was believable[20].  This is a view that he is well entitled to take having regard to the evidence before him. 

39.  The Judge had also considered the other matters and evidence raised by the plaintiff in this appeal (see [35] above), and had dealt with them in his judgment.  Similarly, the probabilities or improbabilities argued by the plaintiff (see [36] above) are repetitions of arguments that had been made to the Judge.  The plaintiff has not identified any error, let alone palpable error, in the Judge’s analysis and discussions of the evidence and arguments.  As this Court has repeatedly said, the purpose of the appellate process is not to give a dissatisfied litigant a second attempt to re-run submissions on the evidence with the hope that the appellate court may come to a different view from the trial judge.  No useful purpose is served by merely reiterating points and arguments that were made, but had been rejected, in the court below.     

40.  In short, we see no proper basis to interfere with the Judge’s findings of fact and his conclusion that there was collusion between the plaintiff and Lamto in tricking the defendant into entering the Loan Agreement.

F2.   Determination of the principal, interest and ERI

41.  At the heart of the plaintiff’s challenge to the Judge’s computation of the ERI is that the Four Sums should not be deducted from the contractual sum of $1.8 million to arrive at the deemed principal, or included as deemed interest for the amount lent. 

42.  “Principal” and “interest” are defined in section 2(1) and (3) as follows:

(1)  “Principal” means the amount actually lent.  For the purpose of determining the amount of the principal of a loan, any amount thereof which is not shown to have been lent except for the purpose of treating it as an instalment paid by the borrower in repayment of the loan and which is so treated by the lender shall be disregarded.

(2)  “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.

F.2.1    The amount of the “principal”

43.  As we have pointed out in Gain Wealth Global Credit & Investment Limited v Chan Suk Fong, supra, at [57], what was actually lent is a question of fact, not a question of law. Money is lent if it is applied by the lender to the purposes of the borrower in any way which the borrower authorises but excludes any sums handed back by the borrower to the lender as a pure gift or not in the satisfaction of any obligation. 

44.  Mr Chan, who appeared for the plaintiff, argued firstly that out of the $872,000 cash handed to Mr Ho, a sum of $50,000 was returned to the defendant as his living expenses.  Secondly, it was said that the Judge might have misunderstood the plaintiff’s position when he stated[21] that the plaintiff’s trial counsel did not dispute that the amount actually lent is $962,000.  The plaintiff’s position, he submitted, was that in the event there was a finding of collusion, then $962,000 would be the figure after the set off under section 27(4).  Thirdly, Mr Chan argued that no inference should be drawn that the defendant was defrauded of the amount of the HSBC Cheque ($872,000) or that he did not in fact receive it, hence this amount should form part of the money actually lent.

45.  In respect of the first point, although [26] of the judgment stated that when the defendant handed to Mr Ho the sum of $872,000 in cash, Mr Ho gave him $50,000 as living expenses as previously promised, the Judge was only reciting the defence case.  The Judge had not made any finding that out of the $872,000 cash handed over to Mr Ho, a sum of $50,000 was indeed returned to and pocketed by the defendant.  In fact, when considering the amount that the defendant had paid over to Mr Ho or Lamto, both the Judge and the parties proceeded on the basis that $872,000 was the amount handed over to Mr Ho or Lamto.

46.  As to the second and third points, we are of the view that three sums should be deducted from the contractual sum of $1.8 million to arrive at the deemed principal.  The first sum is the legal fee of $8,000. It was deducted at source and never went to the defendant.  The second sum is the three months’ interest of $49,680.  The sum did not go to the defendant and had instead went back to the plaintiff.  On the plaintiff’s case, the defendant only defaulted from the second payment onwards.  The first payment was not paid by the defendant; it came out of the $1.8 million.  Applying section 2(3), this sum should be disregarded when determining the amount of the principal lent. This was accepted by Mr Chan. 

47.  The third sum is the $18,000 handling fee. We consider it is probable, and a compelling inference can be drawn, that the plaintiff would expect the intermediary to charge a handling fee or be remunerated out of the funds made available by the plaintiff to the defendant. This sum was in fact not received by the defendant, and should not form part of the money actually lent.

48.  We, however, do not consider that a similar inference could be drawn for the insurance money of $762,320, which the Judge also deducted from the contractual sum.  This sum was paid out of the proceeds of the HSBC Cheque, which was marked “A/C payee only”.  There was no specific finding by the Judge as to any involvement of the plaintiff regarding the monies which the defendant was tricked into paying Mr Ho or Lamto. Although the Judge had found there was collusion between the plaintiff and Lamto, the facts as found by him only show that Lamto was an intermediary but are insufficient to establish that this sum was sought or received by Lamto as agent on behalf of the plaintiff.

49.  Hence, only the three sums of $8,000, $49,680 and $18,000 are to be deducted from the contractual sum. The deemed principal is therefore $1,724,320 (i.e., $1,800,000 - $8,000 - $49,680 - $18,000). 

F.2.2    The amount of the “interest” 

50.  In Gain Wealth Global Credit & Investment Limited v Chan Suk Fong, supra, at [48], [50] to [55], it was held that to qualify as “interest” under section 2(1), the amount does not have to be paid or payable to the lender or its agent, and can 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, it could be difficult to establish that the payment was paid or payable in consideration of or otherwise in respect of the loan.

51.  In the present case, the Judge included the Four Sums as deemed interest as he was of the view that the definition of “interest” in section 2(1) 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, including the sort of charges, costs and expenses as described in section 27[22].  It is said that as a money lender can be made directly and personally liable under section 27(4) for costs, charges and/or expenses collected by intermediaries acting in collusion with it, the law treats any such sum received by the intermediaries as if it was received or charged by the money lender[23].  

52.  We see no justification to expand the definition of “interest” in section 2(1) in the way the Judge did.  As pointed out in Gain Wealth Global Credit & Investment Limited v Chan Suk Fong, supra, at [54], given that section 27(4) has provided various remedies which are in additional or alternative to those under sections 24 and 25, it cannot be said that a money lender would be able to circumvent the prohibitions imposed by law for the borrower’s protection with no legal consequence by colluding with intermediaries.  There is thus no warrant for reading into the definition of “interest” in section 2(1) the effect of section 27(4).     

53.  Of the Four Sums, we see no difficulty with including the $8,000 legal fee, $49,680 interest for three months and $18,000 handling fee in the deemed interest, as they are or can be regarded as monies paid in consideration of or otherwise in respect of the plaintiff’s loan to the defendant. 

54.  We, however, have difficulty with the inclusion of the $762,320 insurance money as deemed interest.  As noted above, there is no finding by the Judge of any involvement of the plaintiff regarding the monies that the defendant was tricked into paying to Mr Ho or Lamto.  There is insufficient evidential basis to infer that this sum was sought or received by Lamto or Mr Ho as agent on behalf of the plaintiff.  The facts as found by the Judge do not link the payment of this sum to the loan made by the plaintiff.  We are not satisfied that it has been shown that the sum was paid in consideration of or otherwise in respect of the plaintiff’s loan.    

55.  Accordingly, we disagree with the Judge’s inclusion of all the Four Sums as deemed interest.  The deemed interest should only comprise the contractual interest of $496,800, plus the legal fee of $8,000, the three months’ interest of $49,680 and the handling fee of $18,000, making a total of $572,480. 

F.2.3   Calculation of the ERI

56.  It follows from the above that the ERI should be calculated as $572,480/$1,724,320 x 100% = 33.2%.  This is below the 60% limit under section 24(1) and (2), or the 48% stipulated under section 25(3).  The Judge therefore fell into error in holding that the Loan Agreement was unenforceable under section 24.  Neither is section 25 engaged.  

F.3  Section 27(4)

57.  This brings us to the consideration of the respondent’s notice and the issue of the application of section 27(4).  At [135] of the judgment, the Judge held that section 27(4) is not engaged as the defendant had not relied on section 27(4).  With respect, this is incorrect as the Judge had overlooked [30] of the Amended Defence where the defendant averred that he is entitled, pursuant to section 27(4) to recover from the plaintiff $838,000 or such reasonable sum with interest at enhanced rate, or have the same set off against any amount actually lent to him. 

58.  Mr Chan submitted that section 27(4) does not apply because there is no factual basis to assert that the plaintiff had colluded with Lamto to demand or receive the Four Sums from the defendant, given there is no specific finding of any involvement of the plaintiff regarding these monies which the defendant was tricked into paying Mr Ho or Lamto.      

59.  Section 27(1), (3) and (4) provide as follows:

“(1) Any agreement entered into between a money lender and a borrower or intending borrower for the payment by the borrower or intending borrower to the money lender of any sum for or on account of costs, charges or expenses (other than stamp duties or similar duties) incidental to or relating to the negotiations for or the granting of the loan or proposed loan or the guaranteeing or securing of the repayment thereof shall be illegal.”

“(3) Subject to section 33A(5), 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.

(4) If any money or money’s worth is directly or indirectly paid or allowed to or received by any person in contravention of this section, the amount or value thereof, to the extent of such contravention and notwithstanding any agreement to the contrary, may be recovered by the borrower from such person or, if such person is the money lender or a partner, employer, employee, principal or agent of the money lender or is in any way acting for or in collusion with him, may be set off against the amount actually lent (and that amount shall be deemed to be reduced accordingly) or may be recovered by the borrower from such person or from the money lender.”

60.  The thrust of Mr Chan’s argument is that for section 27(4) to be successfully invoked, there has to be a collusion between the money lender and the fraudster as regards the defrauded monies.  This is a misreading of the section and does not accord with what this Court decided in Gain Wealth Global Credit & Investment v Chan Suk Fong, supra, at [35] as follows:   

“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 s. 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.”

(emphasis added)

61.  Mr Chan suggested that there is some conflict between this passage and another passage in the case (at [49]) where the Court held that a finding of collusion between the lender and the fraudsters does not necessarily mean that a party to the collusion should be legally liable for the fraudulent act of the other party[24].  However, the Court was not dealing with section 27 in the other passage.  Instead, it was in the context of a discussion on whether defrauded payments would be caught by the definition of “interest” in section 2(1) as “amounts … paid or payable in consideration of or otherwise in respect of a loan”.  We do not accept there is any conflict between the two passages.    

62.  In our view, section 27(3) and (4) is clearly engaged.  The Judge found there was a collusion between the plaintiff and Lamto to trick the defendant into enter into the Loan Agreement.  Section 27(4) will apply if money is received by anyone in contravention of section 27.  Under section 27(3), “costs, charges or expenses” charged by the fraudster or “remuneration or reward” demanded or received by the fraudster “for or in connection with or preliminary to procuring, negotiating or obtaining any loan made or guaranteeing or securing the repayment thereof” will constitute unlawful payments.  Such unlawful payments may be set off against the amount actually lent or recovered from the lender, pursuant to section 27(4).  There is no requirement that the lender must be involved in the fraud pertaining to the unlawful payments or that the collusion must be as regards the defrauded monies.

63.  Taking an overall view of the facts in this case, the $762,320 insurance money is clearly some form of “remuneration or reward” demanded or received by the fraudster.  It is a remuneration or reward for or in connection with the plaintiff’s loan given that the defendant was induced into entering into the Loan Agreement because he was given by the fraudster to understand that it was connected to, and was part and parcel of, the mortgage that the fraudster promised to arrange for him.

64.  It follows that under section 27(4), this sum may either be set off against the amount actually lent or recovered from the plaintiff.  Mr Ho had at [44(c)] of his written submission taken the fall-back position that, upon proving collusion, the defendant is entitled under section 27(4) to set off the Four Sums against the contractual principal, and should only be required to pay $962,000 to the plaintiff.  Given the stance taken by Mr Ho, we will order the sum of $762,320 to be set off against the amount actually lent to the defendant ($1,724,320). Accordingly, the amount that the defendant is liable to pay to the plaintiff is $962,000 (i.e., $1,724,320 - $762,320).      

F4.   Enhanced interest

65.  The defendant seeks enhanced interest on the amount to be set off or recovered under section 27(4) at the rate of 27.6% per annum.  He argued that since the plaintiff charges this rate under the Loan Agreement, the defendant should be afforded the same entitlement if he succeeds in recovering from the plaintiff under section 27(4).

66.  Given that we have ordered the sum of $762,320 to be set off, the question of interest does not arise for consideration.  Even if the amount is to be recovered from the plaintiff, we do not see any basis for ordering interest at the contractual rate charged by the plaintiff under the Loan Agreement.         

F.5   The defendant’s other arguments in the written submission

67.  Apart from seeking a set off under section 27(4), the defendant’s written submissions argued extensively that the decision in Gain Wealth Global Credit & investment Limited v Chan Suk Fong, supra, was wrongly decided.  It is not necessary to go into them, other than to point out that the arguments had been addressed in the judgment refusing leave to appeal to the Court of Final Appeal: [2021] HKCA 1219.

F.6   Conclusion and costs

68.  For the above reasons, the plaintiff’s appeal should be allowed and the Judge’s judgment should be set aside, and there should be judgment for the plaintiff in the sum of $962,000 together with interest at judgment rate from the date of the judgment below.

69.  Despite we allow the appeal and enter judgment for the plaintiff, the plaintiff is only partially successful in this appeal and its claim is only allowed in part.  In particular, it has failed to overturn the finding of collusion and the Judge had also made adverse findings on its evidence.  On the other hand, although the defendant has succeeded on the respondent’s notice, it was only put in at the hearing and without it, the defendant would not have been able to have a set off under section 27(4).  Looking at the matter in the round, we consider it would be appropriate to make no order as to the costs of the appeal and of the respondent’s notice, and to award to the plaintiff half of its costs in the action below.  This will be an order nisi. 

G.      Disposition

70.  The order we make is as follows:

(1)  The plaintiff’s appeal is allowed.

(2)  The respondent’s notice is allowed.

(3)  The Judge’s order of 23 January 2019 is set aside.

(4)  Judgment be entered for the plaintiff in the sum of $962,000 together with interest at judgment rate from 23 January 2019 until full payment.

(5)  There is an order nisi that:

(a)  the plaintiff shall have 50% of its costs in the action below;

(b)  there is no order as to the costs of the appeal and the respondent’s notice; and

(c)  the defendant’s own costs here and below be taxed in accordance with the Legal Aid Regulations.