EVER-LONG CAPITAL LTD v. FIRST STAR ENTERTAINMENT GROUP LTD AND OTHERS

HCA 929/2020

[2021] HKCFI 3344

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 929 OF 2020

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DECISION

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INTRODUCTION

1.  This was the hearing of an appeal by the Defendants against Master Anthony HK Chan’s decision dated 21 April 2021, whereby summary judgment was entered against the Defendants for the sum of HK$13,569,536.72 (“the Sum”), with interest at 27% per annum compounded monthly from 10 June 2020 to the date of judgment and thereafter at judgment rate.

2.  At the hearing before this Court, the Plaintiff was represented by Counsel Candy CH Chan and the Defendants were represented by Counsel Jacquelyn Ng.

BACKGROUND

3.  The Plaintiff is a licensed money lender under the Money Lenders Ordinance.

4.  As set out in the Statement of Claim dated 7 July 2020, the Plaintiff’s claim against the Defendants is in respect of a written loan agreement dated 26 September 2019 (“Loan Agreement”), whereby inter alia a loan facility was granted to the 1^st Defendant in the sum of HK$12,134,728.00 (“the Loan”).  The 2^nd to 4^th Defendants executed guarantees in favour of the Plaintiff in furtherance of the arrangements related to the Loan Agreement.

5.  It is the Plaintiff’s case that there has been a default in payment of the Loan and the contractual interest, and that consequently, the Plaintiff is entitled to claim for the Sum (comprising outstanding principal and interest), with further default interest calculated at 27% per annum.

6.  The 1^st Defendant filed a defence dated 5 October 2020, and the 2^nd to 4^th Defendants filed their defence on the same date.

7.  The Plaintiff then proceeded to apply for summary judgment by way of summons dated 27 November 2020.

8.  There is no dispute between the parties that prior to the entering into of the Loan Agreement, there were various other agreements and/or arrangements entered into between the Plaintiff and the 1^st Defendant.  These were:

(1)  A facility agreement dated 2 May 2017 between the Plaintiff and the 1^st Defendant (“1^st Facility Agreement”);

(2)  Pursuant to the 1^st Facility Agreement, a promissory note issued by the 1^st Defendant on 2 May 2017 (“1^st Promissory Note”);

(3)  A facility agreement dated 30 June 2017 between the Plaintiff and the 1^st Defendant (“2^nd Facility Agreement”); and

(4)  Pursuant to the 2^nd Facility Agreement, a promissory note issued by the 2^nd Defendant on 3 July 2017 (“2^nd Promissory Note”).

9.  There is also no dispute that the sum advanced in the Loan Agreement was for the repayment of the 1^st Defendant’s outstanding indebtedness under the aforementioned Facility Agreements and Promissory Notes.

10.  There is, finally, no dispute that the 1^st Defendant has only made partial interest repayment on the Loan in the sum of HK$900,000.

RELEVANT LEGAL PRINCIPLES

11.  The relevant legal principles for summary judgment are well settled. In short (Hong Kong Civil Procedure 2022, §§14/4/1, 14/4/4, 14/4/9 – 14/4/9B):

(1)  It is incumbent on the defendant to raise a defence or triable issue, and in so doing to condescend upon particulars. The issue is not whether the defendant is believed, but whether the assertions are believable (Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 at 158; Toy Major Trading Co Ltd v Plastic Toys Ltd [2007] 3 HKLRD 345 at §12).

(2)  Unless it is obvious that the defence is frivolous and practically moonshine, Order 14 ought not be applied.

(3)  Where there are doubts or suspicion as to the validity of the plaintiff’s case or if possibly genuine weaknesses were exposed in the plaintiff’s case, then summary judgment ought not be granted (Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262 at 268C-D).

(4)  The Court will not embark on a mini trial on affidavits.

12.  An appeal from a master to a judge proceeds by way of rehearing. Fresh points may be taken upon such hearing (Hong Kong Civil Procedure 2022, §§58/1/1 & 58/1/5).

THE DEFENDANTS’ CONTENTIONS

13.  Whilst a number of defences were set out in both the filed defences and the evidence in opposition by the Defendants, by the time the matter was heard in this Court, the Defendants’ contentions in answer to the summary judgment application had crystallized into two points. In short, the Defendants contend that:

(1)  The Loan Agreement is illegal and should not be enforced, because the provisions therein relating to default interest contravene S.22(1)(c)  of the Money Lenders Ordinance (Cap 163)  (“MLO”); and/or

(2)  The 1^st and 2^nd Facility Agreements were themselves illegal, because they provided for “late payment interest” contrary to S.22(1)(c)  of the MLO.  The said provisions were incorporated into the 1^st and 2^nd Promissory Notes, which are to be read together with the 1^st and 2^nd Facility Agreements.  Consequently, the Loan Agreement serves an illegal purpose, since the Loan was used to facilitate repayment of the outstanding sums which came about as a result of the 1^st and 2^nd Facility Agreements and the 1^st and 2^nd Promissory Notes.

14.  These arguments are addressed below in turn.

THE DEFAULT INTEREST PROVISIONS IN THE LOAN AGREEMENT

15.  S.22(1)  of the MLO provides as follows:

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

(a)  the payment of compound interest;

(b)  prohibiting the repayment of the loan by instalments; or

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

Provided that provision may be made by 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 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, 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.”

16.  The relevant clauses in the Loan Agreement as to interest and repayment are as follows:

“6. INTEREST

6.1 The Borrower shall pay interest on the Loan in accordance with the following provisions.

6.2 The rate of interest applicable to the Loan shall be 27% per annum (“Interest Rate”). All interest shall be calculated on the basis of the actual number of days elapsed and a 365 day year and shall subject to Clause 6.3 be paid monthly on the last Business Day in each month after the Drawing Date and before the full repayment of the Loan. In any event, the Interest Rate will not exceed 48% per annum of the effective interest rate under section 25(3)  of the Money Lenders Ordinance (chapter 163 of the laws of Hong Kong).

6.3 If a default is made by the Borrower in the payment upon the due date of any sum payable to the Lender under this Agreement, whether in respect of the principal or interest, the Lender is entitled to charge interest at the Interest Rate on that sum from the date to the default until the sum is paid.

6.4 The Lender’s certificate of the amount of interest payable under this Agreement shall in the absence of manifest error be conclusive and binding on the Borrower.

7. REPAYMENT

7.1 Without prejudice to Clause 7.2, the Borrower shall repay the Loan in accordance with the repayment schedule set forth in Schedule VI and in particular the Borrower shall repay the Loan together with any unpaid accrued interest thereon on or before the Maturity Date. …”

17.  Schedule VI (referred to in Clause 7.1)  relevantly sets out as follows:

“Repayment Schedule

First Star Entertainment Group Ltd

Principal: HKD12,134,728.00

Loan Period: 26 Sep 2019 to 28 Feb 2020

Interest rate: 27% per annum

Default Interest: 36% per annum”

18.  There is then a table showing the dates and number of instalments, applicable interest rate, and the principal and interest that needs to be repaid for each instalment. Schedule VI is separately signed by the representatives for both parties.

19.  It is the Defendants’ contention that, taking the approach of the ‘ordinary and natural’ meaning of the language used in the Agreement (citing Eminent Investments (Asia Pacific)  Ltd v DIO Corporation (2020)  23 HKCFAR 487 at §§43-45):

(1)  By Clause 6.3 the Plaintiff has an entitlement to charge interest at the Interest Rate (of 27%), but this clause does not suggest that this is the only option open to the Plaintiff.

(2)  Clause 7.1 uses the imperative word ‘shall’. It is that wording, read together with Schedule VI, which actually provides for the default interest rate of 36% (i.e. higher than the 27%).

(3)  If the above interpretation is correct, then the agreement falls foul of S.22(1)(c)  of the MLO.

20.  The Plaintiff’s answer to this is that the 36% figure in Schedule VI was simply an inconsistent typo, and that it is Clause 6 (in particular, Clause 6.3)  which stipulates the rate of interest that would be charged upon default.[1]

21.  I do not consider the Defendants’ construction of the clauses outlined above to be arguable.

(1)  Upon a plain reading of Clause 6, it is clear that the clause is intended to govern the charging of interest. This is made clear by inter alia Clause 6.1.

(2)  Clause 6.2 then sets out the interest rate to be charged generally in absence of default.

(3)  Read in context, it is clear that the purpose of Clause 6.3 is to specify that default interest may be charged, and that the rate of interest to be charged in those circumstances is the 27% per annum rate (defined as ‘Interest Rate’ in Clause 6.2).

(4)  Insofar as Clause 7.1 and Schedule VI are concerned, these clauses are concerned with the repayment schedule and not the rate of interest that is to be charged upon default.

(5)  I do not agree that the reference in Clause 7.1 and the imperative wording therein renders the rate of interest upon default to be the 36% figure as referred to in Schedule VI.

(6)  In summary, it is apparent that a natural and ordinary understanding of the relevant terms, seen in proper context, means that the default interest to be charged is 27% as stipulated in Clauses 6.2 and 6.3.

22.  In the premises, I consider that there is no arguable defence or triable issue surrounding the interpretation of the Loan Agreement and the alleged illegality of the same under S.22 of the MLO.

THE FACILITY AGREEMENTS AND THE PROMISSORY NOTES

23.  The Defendants’ alternate argument is that the Loan Agreement serves an illegal purpose, in that the Loan was advanced to repay obligations which were themselves incurred under arrangements that contravened S.22(1)  of the MLO.

24.  In making this argument, the Defendants rely on the following aspects of the prior agreements:

(1)  Clause 5.1 of the Facility Agreements (both of which are in substantially similar form)  provide for “late payment interest” of 5% per month.

(2)  These provisions are said to apply to the subsequent Promissory Notes, since the Facility Agreements refers to “Transaction Documents” the definition of which includes the Promissory Notes.

(3)  Although the Promissory Notes do not themselves contain any provision for late payment interest, by reference to Clause 5.1 of the Facility Agreements, this late payment charge was incorporated.

(4)  In support of this construction, the Defendants rely on Chitty on Contracts, 34^th ed., §15-017; Panorama Developments v Fidelis Fabrics [1971] 2 QB 711 at 716B-C per Dennig LJ.

(5)  It is then said that the 1^st and 2^nd Facility Agreements fall foul of S.22(1)  of the MLO.

(6)  Reference was also made to the definition of “loan” in S.2 of the MLO which the Defendants contend is broad enough to encompass the Facility Agreements.

25.  In the above context, relying on Chitty (supra)  at §§18-052 and 18-189, the Defendants rely upon common law illegality to say that the purpose of the Loan Agreement is illegal because its purpose is to enforce the terms of the 1^st and 2^nd Facility Agreements.

26.  In answer, the Plaintiff submits that:

(1)  The 1^st and 2^nd Facility Agreements, which were framework agreements for subsequent transactions, did not of themselves create any repayment obligations and did not specify any interest rates.

(2)  The 1^st and 2^nd Promissory Notes specified interest rates (viz. 2.5% per month / 30% per annum for the 1^st Promissiory Note and 2% per month / 24% per annum for the 2^nd Promissory Note)  and did not refer to any specific default interest rate.

(3)  In any event, and following on from the above, the interest rates actually applied by the parties in calculating the facility amount of HK$12,134,178.00 in the Loan Agreement did not take into account any late payment charge or the like. All that was applied were the rates mentioned at paragraph 26(2)  above.

(4)  There is thus no merit in the argument that the 1^st and 2^nd Facility Agreements fell within the MLO, specifically S.22(1)  thereof, and the argument is untenable.

27.  The Plaintiff also took the procedural point that there was nothing in the defence or the evidence in opposition which alluded to this common law illegality argument, and that consequently it was not open to the Defendants to put forward this as a triable defence.

28.  At the hearing, I enquired whether there were any particulars or evidence before the Court to indicate whether, at the time of the entering into of the 1^st and 2^nd Facility Agreements and/or the 1^st and 2^nd Promissory Notes, the parties themselves considered these agreements to be subject to the MLO (for instance, by complying with the information provision obligations set out in S.19 of the MLO).  It appears that neither party had filed any evidence along those lines. The only indication or complaint about the prior agreements was a suggestion in the Affirmation of Cheung Kin Wilson that “The 1^st Defendant and the rest of us did not knew that such loan agreements were illegal.”

29.  Upon considering the above matters, I consider that there is no arguable defence or triable issue as to the alleged common law illegality of the Loan Agreement.

30.  First, on their face, the Facility Agreements were not loans. Instead, they set out a mechanism whereby debt instruments (viz. the Promissory Notes)  could be sold by the 1^st Defendant to the Plaintiff on terms to be agreed.  Indeed, in Clause 2.2(e)  of the respective Facility Agreements, it was expressly stated that “The Seller [i.e. the 1^st Defendant] and the Purchaser [i.e. the Plaintiff] each intends that (a)  the sale and purchase of the [promissory notes] under this [Facility Agreement] shall be a true sale and (b)  the delivery of the payment of the Purchase Price shall not be construed as an advance of a loan secured by the [promissory notes].”

31.  Whilst in the Loan Agreement itself, the Facility Agreements and certain supplemental arrangements thereon were referred to as “Existing Loan Agreements”, this did not focus on the particular nature of the prior arrangements which had been expressly agreed and set out in the 1^st and 2^nd Facility Agreements. 

32.  Second and in any event, even if one might argue that 1^st and 2^nd Facility Agreements could potentially be considered to be loan agreements, I consider the argument on common law illegality to be wholly tenuous. The reality is that the amount of the Loan Agreement facility itself was calculated on the basis of the usual interest rates set out in the Promissory Notes and did not take into account any late payment charge. In this sense, any potential argument that the Loan Agreement by its operation endorsed or sanctioned the late payment charge (and hence, the alleged illegality of the prior agreements)  is neutralized. It is thus incredibly difficult for the Defendants to argue that the Loan Agreement was entered into for an illegal purpose.

33.  Finally, I have noted the Plaintiff’s objection regarding the Defendants’ belated particularization of the common law illegality argument (summarized at paragraph 27 above). Since I consider there to be no merit in the substantive point in any event, this objection does not need to be considered further.

CONCLUSION

34.  For the above reasons, I do not consider there is any merit to the Defendants’ arguments. There are no credible defences or triable issues raised. Accordingly, I make the following orders:

(1)  The Defendants’ appeal be dismissed.

(2)  There be a costs order nisi that the Defendants do pay the Plaintiff’s costs, to be assessed by way of gross sum assessment in writing. The Plaintiff shall lodge and serve its statement of costs within 7 days of this Decision, and the Defendants shall provide comments thereon within 7 days thereafter.

35.  I thank Counsel for their assistance.