LEI SHING HONG CREDIT LTD v. ACCUFAST LTD AND OTHERS

HCMP 1749/2014

MISCELLANEOUS PROCEEDINGS NO. 1749 OF 2014

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D E C I S I O N
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1.  This is a mortgage action by way of an Originating Summons dated 18 July 2014 (“OS”). In this appeal, the defendants seek to set aside an order made against them by Master K Lo dated 17 July 2015 (“Order”), by which it was ordered, inter alia, that :

(1) the plaintiff (“LSH”) do recover against the defendants the sum of HK$270,793,522.71 (as at 17 July 2015)[1]; 

(2) the 1^st defendant (“Accufast”) do within 56 days deliver to LSH vacant possession of the property known as The Beachfront, No 7 Belleview Drive, Hong Kong (“Property”); and

(3) costs to LSH in the sum of HK$179,594.80.

Background

2.  These matters arose out of a loan granted by LSH, a licensed money lender, to Accufast in August 2013. The loan was secured by a legal charge against the Property and guaranteed by the 2^nd and 3^rd defendants.  The following background facts are not in dispute.  Accufast is a company incorporated under the laws of Hong Kong.  Its shares are held by the 3^rd defendant (“Abbie”) and Basab Inc, a BVI company owned by her.  Abbie is the daughter of the 2^nd defendant (“Andrew”).  Accufast’s directors are Abbie and Ms Chan Wai Yin (“Chan”).

3.  In July 2013, Andrew was introduced to Mr Yeung Kam Cheong (“Yeung”), Senior Business Manager of LSH, and applied for a loan to Accufast on the security of a property owned by it, namely, the Property.  An undated Property Loan Application Form was completed and executed by Accufast as borrower.  Yeung’s uncontradicted evidence is that Andrew was in control of Accufast despite not being a shareholder or director of that company.

4.  On 8 July 2013, Yeung attended the office of Andrew.  During the meeting, Andrew submitted to Yeung another undated Property Loan Application Form.  In that document, Andrew was added as a guarantor.

5.  At a subsequent meeting between, inter alia, Yeung, Andrew and Abbie, Abbie submitted to Yeung another undated Property Loan Application Form, where she was put forward as the 2nd guarantor for the loan.

6.  On 29 July 2013, LSH instructed Messrs K B Chau & Co (“KBC”) to prepare a First Legal Charge and a Deed of Guarantee in respect of the loan.

7.  By a Facility Letter dated 29 July 2013 (“Facility Letter”) and executed by the parties on 19 August 2013, LSH granted a loan to Accufast, secured on the Property with Andrew and Abbie acting as guarantors.  The Facility Letter, provided, inter alia, that : 

(a) The loan was in the sum of HK$168,000,000 (“Loan”), split into 2 portions:

(i) a revolving loan of HK$138,000,000 for the term of 1 year at the interest rate of 10% p.a. as at the date of the Facility Letter[2] (“HK$138m Portion”);

(ii) a revolving loan of HK$30,000,000 with a term of 1 year at the interest rate of 18% p.a. as at the date of the Facility Letter[3] (“HK$30m Portion”);

(b) Interest was payable on a monthly basis, whilst the principal of HK$168,000,000 was repayable after 1 year;

(c) The Loan was to be made on the security of (i) a First Legal Charge on the Property and (ii) unlimited personal guarantees from Andrew and Abbie;

(d) There was a “set up fee” of 1% of the Loan (“Set Up Fee”) to be deducted from the drawdown of the Loan;

(e) Late charges of HK$300 would be levied on any late payment; and

(f) There was a “service charge” of 4% per month on a day-to-day basis for “any outstanding amount due and not paid” (“Service Charge”).

8.  By a Deed of Guarantee (“Guarantee”) dated 19 August 2013 and executed by both Andrew and Abbie, it was provided, inter alia, that both of them would unconditionally and without limit guarantee the obligations of Accufast under the Facility Letter.

9.  By a First Legal Charge (“Charge”) dated 21 August 2013 and executed by Accufast, the Property became a security for the Loan. 

10.  On about 21 August 2013, the entirety of the Loan, after deductions under the terms of the Facility Letter, was advanced to Accufast via KBC.

11.  Accufast was unable to make repayments in accordance with the terms of the Facility Letter : 

(a) Regarding the HK$30m Portion, Accufast was in default after the 2^nd instalment (due on 21 October 2013[4]); 

(b) In respect of the HK$138m Portion, Accufast was in default after the 3^rd instalment (due on 21 November 2013).

12.  Accordingly, an event of default and a breach of the Facility Letter had occurred since about 21 November 2013.

13.  By a letter dated 24 January 2014, LSH, through its solicitors (Messrs de Bedin & Lee (“DBL”)), demanded payments from Accufast on or before 4 February 2014.   A similar letter was also sent to Andrew and Abbie as guarantors of the Loan. 

14.  The demand was not met.  By a letter dated 4 March 2014, DBL demanded full repayment of the Loan together with all the accrued interest from Accufast on or before 11 March 2014.  A similar letter was also sent to Andrew and Abbie.

15.  On about 8 April 2014, Accufast sought to sell the Property for the price of HK$228,000,000.  The intended sale was communicated to LSH by Andrew on about 15 April 2014.  However, the sale did not materialise.

16.  Some repayments were made after a meeting attended by Andrew at LSH’s office on 15 April 2014[5], but the last of such repayment was made on 19 June 2014.  The OS was then issued.  No repayment has been made since the filing of the OS on 18 July 2014. 

17.  LSH proceeded with the OS by way of summary determination on the basis that there was no triable issue in these matters (see O.28, r.4(1))[6], and obtained the Order. 

18.  The Notice of Appeal against the Order was filed on 30 July 2015.  On 5 February 2016, LSH managed to obtain possession of the Property with the assistance of the court’s bailiff. 

Issues

19.  It should be noted that O.28, r.4(1) differs from O.14 in that there is no burden cast on the defendant, ie, the plaintiff must first justify its entitlement to summary judgment, but once this is demonstrated prima facie on the evidence, the burden falls on the defendant to make out a defence to the action (see Hong Kong Civil Procedure 2016, vol 1, rubric 28/4/1 at p.667).  However, in light of the circumstances of this case, I believe that LSH has demonstrated that it is prima facie entitled to the Order. 

20.  There are 3 issues raised by the defendants and they will be considered in turn below.

Misrepresentation

21.  The defendants say that there was a misrepresentation by Yeung in respect of the effect of the Service Charge provision such that LSH’s claims are liable to be vitiated.  The evidence put forward by Andrew is as follows. 

22.  After the Loan was approved by LSH, Chan, Andrew and Abbie (“Accufast Party”) went to KBC’s office on 19 August 2013 to execute the relevant documents, namely, the Facility Letter, the Charge and the Guarantee.  Yeung and his colleague, Ronald Chiu, were also at that office.

23.  A solicitor of KBC, Peter Law (“Law”), then interpreted the documents to the Accufast Party.  When the Service Charge provision was interpreted, Andrew expressed disagreement with it, but he was assured by Yeung who said that it was a penalty on outstanding interest only, not applicable to outstanding principal.  The explanation was confirmed by Law.

24.  Relying upon such explanation (“Explanation”), the Accufast Party then executed the documents. 

25.  In his evidence, Yeung maintained that no question at all was raised in respect of the Service Charge Provision. 

26.  I bear in mind the submission of Mr Li, who appeared for LSH, that the Explanation is inconsistent with the terms of the Service Charge provision, and is therefore unlikely to have been given.  In addition, for obvious reason, I approach this issue with a healthy degree of scepticism. However, I am of the view that the allegation cannot be rejected summarily for the following reasons :

(a) I agree with Mr Lau, who appeared for the defendants, that given that the repayment during the 1 year duration of the Loan was confined to interest, it is possible for the Accufast Party to have believed (and relied upon) the Explanation;

(b) I am troubled by the fact that no evidence has been adduced from Law;

(c) None of the Loan Application Forms referred to the Service Charge, which lends credence to the evidence that Andrew was surprised by the Service Charge and disagreed with it in strong terms;

(d) The Service Charge was very high – nearly 5 times the interest payable on the HK$138m Portion.  Again, this lends credence to the defendants’ evidence that the Service Charge was only agreed in light of the Explanation.

(e) Finally, it was (on its face) a handsome transaction from LSH’s point of view.  The Set Up Fee alone was HK$1.38 million.  Yeung might well stand to earn an attractive commission or bonus from the transaction.  Such circumstances suggest that there might be a temptation for Yeung to ensure that the transaction would not fall through.

27.  Mr Li did not dispute the proposition that a statement as to the effect of a contractual provision can constitute a misrepresentation : see Chitty on Contracts, 32^nd edn, vol 1, rubric 7-016.

28.  In the premises, I believe that the allegation of misrepresentation should be properly explored at trial.

Penalty

29.  Mr Lau argued that the Service Charge constituted a penalty and therefore unenforceable.  If that be right, the amount of liability under the Facility Letter would be very different to what is set out in the Order. 

30.  There is no dispute on the law here.  It must be pointed out that the Service Charge is (on its face) very high indeed, right at the borderline of being “extortionate” under s.25 of the Money Lenders Ordinance, Cap 163 (putting aside for the present purpose the refinement about effective interest rate, as to which see below).

31.  In his submission, Mr Li has referred this court to a number of authorities in support of the proposition that it is not the function of the court to remake any contract.

32.  In Philips Hong Kong Ltd v The Attorney General of Hong Kong [1993] 1 HKLR 269 at 280, the Privy Council held that, in determining whether a contractual provision is a penalty clause : 

“… the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach will lead to undesirable uncertainty especially in commercial contract.”

33.  In Japan Leasing (HK) Ltd v Fully Well Investment Limited, HCMP 4359/1998, unrep, 11 February 2000, at p.5, the court dealt with a mortgage loan which provided for a default rate of interest of 24% p.a. (normal rate being HIBOR plus 3.5% and 1.75%).  The line of defence taken was that the provision relating to default interest was a penalty and therefore unenforceable.  A Master gave judgment for the plaintiff.  On appeal, Suffiad J upheld the judgment, referred to Philips Hong Kong Ltd and stated that : 

“Moreover, provisions for overdue interest, usually being of a higher rate than the normal interest, is perfectly acceptable in law …”[7]

34.  In South China Strategic Ltd v Celsion Corp, HCA 9963/2000, unrep, 7 August 2001, at p.8, DHCJ Woolley dealt with a situation where the normal interest rate was 1%, and the default rate was 28.65%.  It was held : 

“… I am not convinced that it is appropriate to look at the percentage increase alone, but at the resulting rate, and then in commercial terms. On that basis an annual rate of 26.8% (or even 28.65% for the first year) can hardly be said to be extortionate, being, as I have observed above, not dissimilar to rates charged by the large financial institutions on certain transactions. Neither can it be said to be excessive when looked at in the light of the interest rates which are considered extortionate (48%), or illegal (60%), under the Money Lenders Ordinance.”

35.  Finally, I have been referred to a more recent judgment of DHCJ Yee in Lee Shing Hong Credit Ltd v World-East Engineering Ltd & Ors, HCMP 396/2014, unrep, 18 March 2015.  Unsurprisingly, the default interest in that case was also 48% p.a.  However, I do not find any issue of principle decided in that case in connection with the default interest, because there was no argument advanced to challenge the enforceability of the same (see paras 46-51).

36.  The present case can be distinguished with Japan Leasing and South China Strategic in that the interest rate here is right at the margin of being extortionate.  Indeed, it may be said that the dicta of the latter case quoted above is supportive of the defendants’ argument on penalty. 

37.  There is no evidence before the court to justify this very high Service Charge.  I have to bear in mind also that the Loan was secured on the Property.  It was valued at HK$220 million at the material time, more than sufficient to cover the Loan. 

38.  In the premises, it is at least arguable that the Service Charge constituted a penalty instead of a genuine estimate of loss, and would not be enforced by the court.

Extortionate interest rate

39.  Section 25 of the Money Lenders Ordinance, Cap 163 provides :

“(1) Subject to section 24(2), where-

(a) proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan; and

(b) subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate,

the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit.

…

(3) Any agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds 48 per cent per annum shall, having regard to that fact alone, be presumed for the purposes of this section to be a transaction which is extortionate; …”

40.  This issue was eventually conceded at the hearing on 24 February 2016.

41.  The parties are in agreement that once the Loan agreement (set out in the Facility Letter) was terminated by LSH in March 2014, the applicable interest rate was 48% p.a. pursuant to the Service Charge provision.  Based on the calculations advanced by Mr Li in Annexure 1[8] to his submissions dated 10 September 2015, and with the substitution of HK$115.7 million by HK$145.8 million for “Service Charge on unpaid total” to reflect the foregoing agreement, the effect rate of interest for the Loan becomes about 50%.

42.  Therefore, the Loan agreement is subject to reopening by the court pursuant to s.25.  It is not a matter to be dealt with summarily: see Yu Tai Hing Co Ltd v Teresa Cheung, HCA 5453/2001, unrep, 27 August 2002, paras 10 to 11 per DHCJ Saunders (as he then was).

43.  Mr Li argued that LSH did not apply the Service Charge fully to the outstanding obligations in question until after the issuance of the OS.  In my view, the question of effective interest rate is one of law.  The answer is not dependent upon evasive actions taken by the lender.

Conclusions

44.  By reason of the aforesaid, this appeal must be allowed.  I am satisfied that para 1[9] of the Order must be set aside, and I do so. 

45.  I have hesitated about disturbing paras 2[10] and 3[11] of the Order because it is indisputable that the defendants have not even repaid the principal of the Loan.  Although the Loan agreement is liable to be reopened, I do not see any serious argument that LSH should be entitled to recover at least the principal.  Further, Mr Lau has made no suggestion that the defendants are in a position to repay any part of the Loan.  Without repayment, it is difficult to see how the court can order recission of the Loan transaction even if the case of misrepresentation is eventually upheld.  However, it would not be right for this court to tie the hands of the trial Judge, and it is not inconceivable that the defendants will be able to raise finance (especially with the Property) to repay the Loan.  Therefore, despite my reluctance, I must set aside the remainder of the Order, including the costs order.   

46.  I make an order nisi that the costs of this appeal and the application below be paid by LSH, to be taxed if not agreed.

47.  The parties should endeavour to agree the directions for the further conduct of this action.  Failing agreement, a succinct joint letter should be written to the court to set out the agreed and non-agreed directions.  The matter may then be disposed of on paper if the court sees fit.

48.  I give liberty to apply.