JOHN ROBERT LEES and TSUI CHI CHIU, the Joint and Several Liquidators of GMF FINANCE LTD (in Creditors’ Voluntary Liquidation) v. CLOUTIER GUY EVON HUANG JIALIN

HCMP 3079/2016
[2018] HKCFI 366

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3079 OF 2016

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D E C I S I O N

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Introduction

1.  By summons dated 3 November 2017, the first and second defendants appeal against the following orders made by a master dated 7 November 2017 (“the Order”):

   (1)   That the sum of HK$6,377,248.79 be paid by the defendants to the plaintiffs with interest from the date of the decision at the rate of 18.1% per annum.

   (2)   That vacant possession of 2^nd Floor, Tower 5, Avignon, No,1 Kwun Chui Road, Tuen Mun, New Territories, Hong Kong and a car parking space on Lower Ground Floor (collectively“the Property”) be delivered by the defendants to the plaintiffs within 21 days of the order.

   (3)   That there will be no order as to costs for the hearings on 21 April 2017 and 29 May 2017 and the costs of the hearing on 7 November 2017 be to the plaintiffs on an indemnity basis, to be taxed if not agreed.

2.  According to the established principles, I shall deal with this appeal by way of an actual rehearing of the application of the plaintiffs. As such, this court should entertain any new points taken by the parties.

Background facts

3.  GMF Finance Limited (“GMF”) was a licensed moneylender and has gone into liquidation. The plaintiffs are its joint and several liquidators.

4.  The defendants entered into the agreement contained in a facility letter dated 14 September 2015 with GMF (“the Facility Letter”) for a loan of HK$5,000,000 (“the Loan”). According to the Facility Letter and its repayment schedule annexed thereto, the drawdown date of the Loan would be 16 September 2015 and the maturity date 30 August 2016. The Loan was repayable by instalments of interest payment in the sum of HK$75,000 save and except the first instalment in the sum of $35,547.95 on the 30^th day of each month and the principal of the Loan on the said maturity date. The interest rate (APR) was stipulated to be 19.192% p.a. and the interest rate (flat) was stipulated to be 1.5% p.a.. APR stands for annual percentage rate. Such interest rates were subject to fluctuation at the discretion of GMF.

5.  Simultaneously, a memorandum of summary terms (“the Memo”) was issued pursuant to the Money Lenders Ordinance, Cap 163 (“the MLO”). The Memo provides a summary of the essential terms of the Facility Letter and was signed by the defendants. 

6.  Pursuant to the Facility Letter, GMF advanced a sum of HK$4,754,252 to the joint bank account of the defendants. The defendants managed to make repayment of the 1^st to 6^th instalments albeit being late in making the 5^th instalment.

7.  The defendants further made two repayments of the 7^th and 8^th instalments belatedly but failed to make any repayment of the remaining instalments thereafter. They eventually defaulted in repaying the principal of the Loan on the maturity date.

8.  The Loan was also secured by a second legal charge on the Property (“the Second Charge”). The defendants are the registered owners of the Property.

9.  The plaintiffs brought this mortgagee action against the defendants by way of Originating Summons(“the OS”) on the basis of their default in repayment of the four instalments (the 9^th to 12^th instalments) as well as the principal of the Loan. The OS was amended on 1 June 2017 to revise the principal of the Loan to HK$4,754,252.

10.  The fact that under the Facility Letter, the Loan in the revised sum was advanced to the defendants and that the defendants have failed to make the relevant repayment is not in dispute. There is no challenge to the validity of the Second Charge. The burden is on the defendants to show that they have a defence to the claim of the plaintiffs by way of credible evidence.

The purported defence

11.  At the hearing, Ms Fong, for the defendants, principally relies on three allegations to challenge the claim of the plaintiffs at this summary stage. First, she contends that there were uncertainties of the amount of the Loan, interest rate and default interest rate. Second, she maintains that GMF breached certain provisions under the MLO and Order 88 of the Rules of the High Court (“RHC”). Lastly, she submits that the unsatisfactory conduct of the plaintiffs in these proceedings makes it inequitable to enforce the Facility Letter and the Second Charge.

12.  I shall deal with these contentions in turn the assistance of the submissions of Ms Lee, for the plaintiffs.

13.  In the first place, Ms Fong validly points out the changes in the case of the plaintiffs in respect of the exact amount of the Loan and the interest rate and default interest rate. Mr Tsui of the plaintiff has altogether filed three affirmations and at the outset he stated that the Loan was HK$5 million and then in his second affirmation he changed to say that the Loan was HK$4,944,000. It was only after the defence evidence was filed revealing that the defendants have only received HK$4,754,252.05 that the plaintiffs saw fit to take out a summons to amend the OS to state the correct amount of the Loan. The plaintiffs waited until 3 November 2017 to apply for leave to file the 3^rd affirmation of Mr Tsui seeking to, among other matters, update the correct amount of the Loan.

14.  Similarly, the effective interest rate and the default interest rate have been changed from 19.192% to 18.1% without explanation in the 3^rd affirmation of Mr Tsui.

15.  Ms Fong submits that GMF was in breach of the Facility Letter, the MLO and Order 88 r.5(3), RHC as a result.

16.  Ms Fong has identified six problems with the Facility Letter and the Memo. They are as follows:

   (1)   The Facility Letter and the Memo do not set out the accurate principal of the Loan in breach of section 18(2)(d) of the MLO.

   (2)   The interest rate of 19.192% p.a. (APR) is not an “interest rate per cent per annum” or the rate per cent p.a. calculated in accordance with Schedule 2 in breach of section 18(2)(i) of the MLO.

   (3)   Interest rate may fluctuate at the discretion of GMF and that was in breach of section 18 of the MLO.

   (4)   Default interest rate is higher than the contractual interest rate as agreed by the parties in breach of section 22 of the MLO.

   (5)   Early repayment was restricted and with a penalty fee in breach of the MLO; and

   (6) Upfront interest and costs are allowed in breach of section 27 of the MLO.

17.  Section 18 of the MLO provides,

(1)  No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of any such agreement or loan, shall be enforceable unless—

(a)  within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and

(b)  there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed, and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.

(2)  The note or memorandum shall contain all the terms of the agreement and in particular shall set out—(a)the name and address of the money lender; (b)the name and address of the borrower; (c)the name and address of the surety, if any; (d)the amount of the principal of the loan in words and figures; (e)the date of the making of the agreement; (f)the date of the making of the loan; (g)the terms of repayment of the loan; (h)the form of security for the loan, if any; (i)the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2; and (Amended 69 of 1988 s. 15) (j)a declaration as to the place of negotiation and completion of the agreement for the loan.

(3)  Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable. (Amended 69 of 1988 s. 15)

18.  Section 22 of the MLO provides,

(1) Any agreement made for the loan of money by a money lender shall be illegal if it provides directly or indirectly for—

(a) …

(b) … or

(c) the rate or amount of interest being increased by reason of any default in the payment of sums due under the agreement:

… if the court before which the legality of any agreement comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement which does not comply with this section should be held to be unenforceable, the court may order that such agreement is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable.

19.  Ms Lee does not shy away from those breaches on the part of GMF of the MLO. She highlights section 18(3) of the MLO, which empowers this court discretion to allow enforcement of a claim notwithstanding any breaches of the MLO. She helpfully refers this court to the instructive guidelines set out by Ribeiro PJ in Emperor Finance Ltd v La Belle Fashion Ltd & Others [2003] 3 HKLRD 995 in relation to the exercise of the discretion under section 18(3) of the MLO.  Ribeiro PJ had this to say,

“In exercising the discretion, the court shall examine the breach or breaches in question, their consequences for the parties to the transactions and any other circumstances which may make it inequitable to hold the agreements unenforceable.”

20.  Ms Lee also underscores Clause 19.1 of the Facility Letter. It provided,

“Any provision of this Facility which is or declared by any court or tribunal of competent jurisdiction to be a legal, invalid or unenforceable in any respect under the applicable law shall be severed from this Facility to the maximum extent permissible by the applicable law without in any manner affecting the legality, validity or enforceability of the remaining provisions of this Facility, all of which shall continue in full force and effect.”

21.  Some of the breaches were indeed spotted by Master R. Lai and he duly ordered that the plaintiffs should file an affirmation to explain such breaches. Accordingly, the 2^nd affirmation of Mr Tsui was filed. There, Mr Tsui expressly indicated the plaintiffs’ readiness to deduct from the principal of the Loan a sum of HK$50,000 paid by the defendants as upfront interest and a sum of HK$6,000 as the fee for the preparation of the documentation of the Loan.

22.  Further, as indicated by an email dated 11 September 2015 from GMF to the 1^st defendant, a sum of HK$6,000 would be deducted from the principal as valuation fee and so would another sum of HK$185,548 representing the interest from September to November 2015.

23.  For the apparent breach of the prohibition against penalty fee under section 21 of the MLO, I accept the submission of Ms Lee that GMF in the present case did not ever invoke the relevant provision in the Facility Letter to charge any penalty fee. The remaining provision of the Facility Letter should remain enforceable by reason of Clause 19.1 of the Facility Letter in any event.

24.  For the alleged breach of the prohibition against charges of expenses and/or costs for arranging a loan under section 27 of the MLO, given the concession of the plaintiffs that such sum should be deducted from the principal of HK$5 million, the defendants did not really pay such sum to GMF. In any event, these charges do not appear to be unreasonable or exorbitant to this court. Moreover, section 27(4) makes it clear that any agreement in breach of section 27(1) to pay such charges would only be rendered illegal and unenforceable. It does not really render the entire loan agreement unenforceable: see Easy Fortune Property Limited v Yung Chun Him, unreported, HCA 1484/2014, 12.8.2016 per Recorder Pow SC at §§33-34.

25.  As regards the issue of interest, I accept Mr Tsui’s explanation in his 3^rd Affirmation as to how the plaintiffs have come up with the interest rate of 18.1% p.a.. It was down to the revision of the amount of the principal of the Loan from HK$5 million to HK$4,754, 252.

26.  I accept Ms Lee’s submission that such a reduction of the interest rate would only work in favour of the defendants and it would be grossly unfair to allow them to rely on this reduction to vitiate the entire Facility Letter.

27.  Furthermore, there is no merit in the complaint about the default interest rate (19.192%) as provided by Clause 6.2 of the Facility Letter. This court has a discretion under section 22(2) of the MLO to enforce the enhanced interest rate if this court is satisfied that in all the circumstances it would be inequitable not to do so.

28.  In the balancing exercise, this court takes into account the fact that it was an ordinary commercial transaction whereby the defendants did obtain a large amount of loan and the default interest rate was only slightly higher than the effective interest rate. The defendants accepted the default interest rate as stipulated in the Memo without demur and have never complained about the same. In making these observations, I am by no means suggesting that the parties can contract out the MLO contrary to the submissions of Ms Fong. I merely look at the matter in the round and try to find out if there was any prejudice suffered by the defendants. I have found none. In all the circumstances, I opine that it would be inequitable to deprive GMF of the fruit of the bargain and there is no reason why the integrity of the entire Facility Letter should be affected by the enhanced default interest rate.

29.  Nevertheless, the position of the plaintiffs before the master and this court is that they are content to adopt the actual rate of interest (18.1% p.a.) and forego the default interest rate as stated in the last affirmation of Mr Tsui. I, as with the master, accept their concession. Thus, nothing can turn on the enhanced default interest rate.

30.  I now deal with the major objection raised by Ms Fong. She submits that this case is on all four with Dunn Trust Limited v Feetham [1936] 1 KB 22 in that the Facility Letter and the Memo did not set out the correct principal of the Loan. In Dunn Trust Limited, the Court of Appeal set aside the transaction due to the moneylender’s non-compliance with the Moneylenders Act 1927 in that the amount of the principal of the loan was not correctly stated in the memorandum. Ms Fong stresses that in the present case, the situation is even worse with the interest rate wrongly stated in the Facility Letter and the Memo.

31.  As stated above, section 18(3) of the MLO gives this court a discretion to uphold a transaction notwithstanding any breaches of section 18 of the MLO and this court is guided by Emperor Finance Ltd as to how the discretion is exercised.

32.  The Loan was actually extended to the defendants pursuant to the Facility Letter with the Memo. The defendants accepted the terms and transfer of HK$4,754,252 instead of HK$5 million without any complaint. They even paid the first few instalments without raising any queries about the interest rate and the reduced principal of the Loan. They have never complained that they were in any way misled and misguided by GMF. They have suffered no prejudice due to the non-compliance of section 18 of the MLO in my view. They did not even make any such allegation by way of evidence.

33.  I also reject the submission of Ms Fong that that there had been any sharp practice on the part of the plaintiffs. This is not supported by any evidence adduced by the defence.  Mr Chuk who filed the only affirmation of the defence did not make such an allegation at all.

34.  The plaintiffs are the liquidators of GMF and it is understandable that they could merely rely on GMF for the details of the transaction. Whilst I agree that the OS and the supporting affirmations should have been prepared more satisfactorily after due enquiries had been made, in my view the subsequent amendments to the OS and the 3^rd affirmation of Mr Tsui put everything into order and should be sufficient to silence any critics. I should mention that Ms Fong initially complained that the said affirmation was filed without leave. However, the Order clearly shows that the master did read the same before she made the Order. Implicitly, the master must have granted leave for the same to be used for the purpose of these proceedings.

35.  As with the master, I have no difficulties with the 3^rd affirmation of Mr Tsui and I accept his evidence without any reservation.

36.  The first defendant was, and is, a businessman and the Loan was obtained by the defendants for their purposes. According to Mr Chuk, he was pre-occupied with a big business project on the Mainland and could not make an affirmation by himself. The interest rate cannot be said to be anything close to excessive. It appears to me that it was an everyday commercial transaction. It would be inequitable if this court allows the entire transaction to be invalidated merely due to the inaccuracies in the Facility Letter and the Memo whilst the defendants have pocketed the Loan of HK$4,754,252.

37.  In the premises, I believe I should exercise my discretion under section 18(3) of the MLO to uphold the validity of the transaction notwithstanding the breaches.

38.  By the same token, the apparent non-compliance with Order 88 r.5(3) of the RHC does not cause me any concern and in any event the 3^rd affirmation of Mr Tsui has adequately remedied the situation without causing any real prejudice to the defendants.

39.  For completeness, I should point out that the facts in Dunn Trust Limited are very different from the present case. The breaches in that case were far more serious and that explained the court refused to exercise the discretion to uphold the loan. There, the memo stated that in advance of 100l had been made with interest at the rate of 64l per cent per annum. In truth, the actual amounts advanced was only 50l whereas the remaining 50l was retained by the money lenders in consideration of the loan. This is obviously a far cry from the facts of the present case. In light of this court’s observations above, the discrepancies between the figures stated in the Memo and the actual figures relating to the principal and the interest rate are really insignificant and excusable. This could not cause any prejudice to the defendants. This court is of the view that the loan transaction should not be invalidated.    

40.  There are other minor complaints raised by Ms Fong but I do not find it necessary to deal with all of them here. Suffice it to say that my foregoing observations can adequately justify my exercise of discretion in favour of the plaintiffs.

Conclusion and orders

41.  In the premises, I agree with the master and adopt the figures in the 3^rd affirmation of Mr Tsui save those conceded by the plaintiffs at the hearing. Ms Fong has indeed made a tenacious effort and said everything possible on behalf of the defendants though only being armed with the affirmation of Mr Chuk with five short paragraphs. Nonetheless, I am not persuaded that there is any credible defence to the plaintiffs’ claim. I conclude that the Order cannot be faulted and should remain intact.

42.  Accordingly, the appeal falls to be dismissed. I make a costs order nisi that the defendants do pay the plaintiffs their costs of and occasioned by the appeal on an indemnity basis, to be taxed if not agreed.

43.  Last but not least, I thank both Ms Lee and Ms Fong for their able assistance in this matter.