SUN ENTERTAINMENT CULTURE LTD v. INVERSION PRODUCTIONS LTD (FORMERLY KNOWN AS TNC PRODUCTIONS LTD)

HCCW 444/2022

[2023] HKCFI 2400

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 444 OF 2022

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BETWEEN

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J U D G M E N T

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1.  This is the substantive hearing of the winding up petition presented by Sun Entertainment Culture Limited (“the Petitioner”) against Inversion Productions Limited (formerly known as TNC Productions Limited) (“the Respondent”) based on an unpaid debt of approximately USD 24 million (“the Debt”). At the conclusion of the hearing, judgment was reserved which I now give.

Background facts

2.  On 12 December 2014, the parties entered into a Loan Agreement for a loan of USD 7.5 million (“the Loan”) repayable on 30 April 2015 with interest in the amount of 10% of the Loan sum i.e. USD 750,000 (“the Interest”) to finance the pre-production stage of a movie. The Interest was payable in one lump sum together with the principal on the maturity date.

3.  “Default Interest Rate” was defined in the Loan Agreement as follows:

“4% per month in addition to the Interest, so long as a Default or Event of Default is continuing.”

4.  The amount of the Loan was increased by USD 1 million on 15 March 2019.

5.  The original maturity date of 30 April 2015 was extended by agreement on 6 occasions between 30 April 2015 and 30 June 2020 (“the 1^st to 6^th Amendments”), with the final maturity date being 30 September 2020. Supplemental Interest as specified in each of the 6 Amendments was paid by the Respondent at the time of entering into the relevant Amendment.

6.  After the Respondent failed to repay the outstanding debt, the Petitioner’s former solicitors served a statutory demand on the Respondent on 8 August 2022 which was subsequently revised twice. The final statutory demand was served on 18 October 2022 demanding payment of the Debt made up as follows:

Item	Amount (US$)
Principal	8,500,000
Interest (pursuant to original Loan Agreement)	750,000
Supplemental Interest (pursuant to 1st to 6th Amendments)	6,450,000
Default Interest accrued from 1 October 2020 up to 18 October 2022 at the rate of 4% per month	8,357,419.35
Debt	24,057,419.35

The issues

7.  The Respondent opposes the Petition. Its stance is that the Loan Agreement (as varied by the 1^st to 6^th Amendments) imposes an “annual default interest” exceeding 60% contravening section 24 (1) of the Money Lenders Ordinance, Cap 163 (“MLO”). The Debt which arises under the Loan Agreement is thus rendered unenforceable.

8.  Whether or not the Debt is enforceable turns on the true meaning of “an effective rate of interest” in section 24 (1) (“the MLO issue”).

9.  Further, in view of the fact that the Loan Agreement contains an arbitration provision, the Respondent’s stance is that the MLO issue falls to be determined by arbitration and, accordingly, the winding up proceedings should be stayed or dismissed pending final determination, whether or not by arbitration.

A. The MLO issue

10.   It is the Respondent’s case that the Debt is substantively disputed. Thus, the threshold question is whether or not the Debt is rendered unenforceable debt which must first be resolved.

11.  Section 24 provides as follows:

“Prohibition of excessive interest rates

(1) Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 48[1] per cent per annum commits an offence.

(2) No agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds the rate specified in subsection (1).

(3) The Legislative Council may by resolution alter the rate specified in subsection (1):

Provided that in relation to any agreement for the repayment of any loan or for the payment of interest on any loan which is in force at the date when such rate is so altered, the rate so specified as at the coming into force of such agreement shall continue to apply.＂

12.  Mr Martin Li, counsel for the Petitioner, in submitting that interest payable under the Loan Agreement does not contravene section 24 (2), relied on the CA judgment in Easy Fortune Property Ltd v Yung Chun Him [2020] 4 HKC 1.

13.  The CA (Yuen, Chu and Poon JJA) unanimously upheld the judge on his interpretation of ‘effective rate’. 　In that case, the Court held that whether section 24(2) of the MLO had been contravened should not be determined on a scenario of default and rejected the submission that default interest must also be included in ascertaining the effective rate of interest of the loan.

14.  In giving the judgment of the Court, Chu JA (at §42) applied the principles set out in Kwok Ying Lung v Ko Chi Hung & Anor [2001] 3 HKC 480.

15.  The CA in that case held that when ascertaining the meaning of ‘effective interest’ for the purposes of section 24, regard is to be had to section 18 (2)(i) of the MLO which gives the moneylender the choice between two formulations i.e. stating an actual rate and a deemed rate. Where an actual rate specified, the schedule has no application. The actual rate is the rate charged on the entire loan and does not admit of the rate varying from time to time. The calculations in the Schedule are relevant to produce a deemed rate only where the total sum of interest is not capable of being expressed in terms of an actual rate per cent per annum, for example, where a loan is repayable by a number of instalments, each instalment comprising principal as well as interest: Kwok Ying Lung at §§29-30, 32, 42-44.

16.  It also rejected the argument that the words “effective rate of interest” in sections 24 and 25 mean only the rate according to the statutory calculations, only agreements with a deemed rate (to which Schedule 2 would apply) would come within the purview of sections. As a matter of statutory interpretation, that could not have been the legislature’s intention when those sections are read in the context of section 18 (2)(i): see §§34 and 45.

17.  The CA in Easy Fortune considered the defendant’s authorities said to support its submission that in addition to the total amount of interest, default interest must also be taken into account in ascertaining the effective rate and found that they did not support the defendant’s case.

18.  Mr Law Man Chung SC, leading counsel for the Respondent, submitted that the Petitioner’s interpretation of section 24 is based on a misreading/misinterpretation of Easy Fortune. He submitted that if Easy Fortune has the interpretation the Petitioner advances, it would be inconsistent with another CA decision, namely, Chan Ping Che v Gao Gunter unrep., CACV 253/2014, 5 June 2017.

19.  The Chan case was an appeal from two decisions of DHCJ Seagroatt who had granted conditional leave to the defendant to defend proceedings brought against him in respect of the cheques he had provided as security for 3 loans made by the plaintiff. The condition was payment into court of the amount of the outstanding debt. The defendant contended that the defendant should be given unconditional leave and if any condition for payment in were to be imposed, the amount should be varied.

20.  The dishonoured cheques were provided in settlement of the underlying loans between the parties and the issue was whether the loans were invalid rendering the cheques unenforceable. One of the defences the defendant raised below was that the effective interest rate under each of the loans or at least in respect of loans A and C exceeded 60% per annum[2]. On appeal, counsel for the defendant placed revised calculations before the CA for consideration. Kwok Ying Lung was not referred to.

21.  The revised calculations factored in default interest at 5% per annum on the total amount due on the maturity date. The base amount used was not only the amount of the loan but also the total amount of interest payable during the period of the loan. When so calculated, it showed an effective rate of interest of 62.25% per annum on loan A.

22.  On the basis that it was not necessary for to come to a concluded view as to the merits of the defence at that stage, the CA (Lam VP and Barma JA) considered it to be at least well-arguable that in ascertaining the effective rate of interest, the default interest rate charged is to be taken into account. Accordingly, it allowed the defendant’s appeals and varied the condition the judge had imposed.

23.  The Chan Ping Che case had not been decided when Easy Fortune was heard. The revised calculations the defendant in Chan Ping Che presented to the CA were said to be prepared in accordance with the provisions of the Schedule 2 which provide the method for the calculation of the effective rate of interest.

24.  The term “effective rate” is defined in section 2 of the MLO as follows:

“2. Interpretation

(1) In this Ordinance, unless the context otherwise requires—

…

effective rate (實際利率), in relation to interest, means the true annual percentage rate of interest calculated in accordance with Schedule 2[3];

…

(2) For the purposes of this Ordinance, where by an agreement for the loan of money the interest charged on the loan is not expressed in terms of a rate, any amount paid or payable to the lender under the agreement (other than simple interest charged in accordance with the proviso to section 22) shall be appropriated to principal and interest in the proportion that the total amount of principal bears to the total amount of the interest, and the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2 shall be deemed to be the rate of interest charged on the loan.”

25.  The Chan Ping Che case was decided shortly after the hearing of Easy Fortune but before judgment in that case was delivered. While Kwok Ying Lung had been decided, it was not cited to the Court.

26.  §21 of the Chan judgment records the methodology counsel applied in arriving at the revised calculations. As earlier noted, they were said to have been calculated in accordance with Schedule 2. No other provision in the MLO was considered relevant.

27.  The CA in Chan Ping Che was only concerned with whether a triable issue been shown. Also, it did not have the benefit of considering Kwok Ying Lung. Plainly, its decision was not a decision on the merits. Thus, the Respondent’s inconsistency objection must fall away.

28.  What the Respondent sought to do was to put forward a different interpretation of the expression “the effective rate of interest” in section 24(2). It was submitted that it could not have been the intention of the legislature for default interest to be excluded when calculating the effective rate because that would create a lacuna in the law. As I understand it, the submission was that if default interest were so excluded, a person could offer to lend money at a very low interest rate, and recoup ‘excessive’ interest by end-loading the rate of default interest. It would mean that the court would not be able to take that default interest into account for the purpose of considering the effective rate of interest with the consequence that those persons, effectively charging excessive default interest, would not be subject to the court’s jurisdiction under section 24.

29.  What the Respondent has not done is to explain why this court is not bound by Easy Fortune, a clear CA decision on the meaning of “effective rate of interest” and its application under sections 2, 24 and Schedule 2 as a matter of statutory interpretation. The fact that the lender in Easy Fortune was a licensed money lender and the Plaintiff is not makes no difference.

30.  Further, on the Respondent’s interpretation, if the effective rate applies to section 24, it is entirely unclear in what way Schedule 2 can be relevant to its calculation on the facts of the present case. Schedule 2 provisions only come into play when no actual rate is specified. They are directed at producing a deemed rate when there is no actual rate specified. As a practical matter, it is impossible to apply those provisions when an actual rate is specified as is the case of the Loan Agreement. Schedule 2 does not in terms provide that in ascertaining the effective rate, default interest is to be taken into account.

31.  Although not strictly necessary given my conclusion above, I will comment on the point of legislative intention in view of the oral submissions made at the hearing.

32.  The Respondent invited attention to the scheme of the MLO. Section 22 falls under Part III which only applies to money lenders whereas section 24 falls under Part IV which prohibits excessive interest rates and applies to everyone, whether or not a money lender. A contravention of provisions under Part III (i.e. section 22) attracts civil liability whereas a contravention of provisions under Part IV (i.e. section 24) has serious and punitive consequences: a fine of $5 million and imprisonment for 10 years.

33.  It was said that the principal objective of the legislation is to prohibit excessive interest rates, to be inferred from the heavy criminal consequences for infringing section 24 and the fact that it applies across the board, to any person, whether or not a money lender.

34.  For my part, I would have thought that the prohibition of excessive interest rates is but an aspect of the legislation, the main objective being to regulate money lending.

35.  Be that as it may, in reply to the Respondent’s submission, the Petitioner submitted that the principle that a person should not be penalised except under clear law i.e. the presumption against doubtful penalisation (which is of long-standing) militates against the Respondent’s interpretation. If there is any ambiguity in legislation which imposes serious civil and criminal consequences, the legislative intent should be taken to be against criminalisation and penalisation unless it is made abundantly clear. The more severe the penalty is, the greater the presumption applies: see Bennion, Bailey and Norbury on Statutory Interpretation at [26.4].

36.  In my view, the presumption is plainly applicable if the default interest is to be calculated on the basis but forward by the Respondent, namely, on the basis of principal plus interest payable for the loan.

Conclusion

37.  For the reasons set out above, I have no hesitation in concluding that the defence based on the MLO is frivolous and an abuse of process.

B. The arbitration issue

38.  As earlier noted, the Loan Agreement contains an arbitration provision. It is common ground a winding up petition falls outside the scope of section 20 of the Arbitration Ordinance such that the court had a discretion whether to dismiss or stay a petition for winding up petition presented in respect of a contractual claim that was subject to an arbitration agreement.

39.  There are differing approaches to the exercise of the court’s discretion. In the majority judgment (delivered by G Lam JA) of the CA in Re Lam Kwok Hung Guy [2022] 4 HKLRD 793 (“the Guy Lam case”) the following approaches were identified, namely:

(1) the court would proceed with the petition and generally make a winding up order unless the debtor showed that the debt was bona fide disputed on substantial grounds (the “Established Approach[4]”);

(2) a winding up petition would generally be dismissed, provided: (a) the debtor disputed the debt relied on by the petitioner; (b) the contract under which the debt was alleged to arise contained an arbitration clause covering any dispute relating to the debt; and (c) the debtor took the steps required under the arbitration provision to commence the contractually mandated dispute resolution process with evidence to show that it had been done (“the Lasmos Approach”): see Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 following the English CA judgment in Salford Estates (No 2) Limited v Altomart Limited [2015] Ch 589; and

(3) the CA in But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 questioned the propriety of the Lasmos Approach since it involved containment of a creditor’s statutory right to petition for bankruptcy or winding-up, while acknowledging that considerable weight should be given to the factor of arbitration in the exercise of the discretion. There are subsequent cases decided in the CFI [5] that applied the Established Approach instead of the Lasmos Approach.

40.  The Guy Lam case involved an exclusive jurisdiction clause (“EJC”) and not an arbitration provision. While the arbitration authorities were considered as the debtor had argued that the Lasmos Approach should be extended to EJCs, the majority of the CA dismissed the petition on the basis that the approach to staying an ordinary action based on an EJC should be extended to winding-up and bankruptcy proceedings. It did not adopt the Lasmos Approach.

41.  The CFA upheld the majority approach: [2023] HKCFA 9. It is accepted by the parties that the ratio in Guy Lam only applies to an EJC and not to an arbitration provision.

42.  Shortly after the CFA judgment in Guy Lam, the Companies Court had to consider the proper approach to be adopted where the contract under which the debtor arose contained an arbitration provision.

43.  In Re Simplicity & Vogue Retailing (HK) Co Limited [2023] HKCLC 403, Linda Chan J (§35) considered that the guiding principles are those stated in the CA’s judgments in But Ka Chon[6] and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646 at §§33-39. The judge’s reasons appear in §37:

“37. It does not seem to me to be right that once there is an arbitration clause in the agreement which gave rise to the petitioning debt, the Companies Court should invariably refuse to consider the merit of the “defence” raised by the company and require the parties to litigate their dispute in arbitration. There is no reason why the Companies Court should adopt such a mechanistic approach or fetter the exercise of its discretion in this way. In my view, where, as here, the company raises a substantive “defence” to the petitioning debt, the court should consider whether the “defence” is one which can readily be shown to be wholly without merit. If the court is able to come to that view without considering any detailed arguments or disputed evidence, it would have no difficulty in concluding that the “defence” is one which “borders on the frivolous or abuse of process” even if Guy Lam approach applies. There is no proper basis to require the parties to refer their “dispute” to arbitration in the absence of any genuine “dispute” in respect of the debt.”

44.  The Petitioner submitted that while the Lasmos requirements should be considered[7] when determining how the court’s discretion is to be exercised, where the debtor’s defence is wholly without merit, there is no proper basis for withholding the winding-up.

45.  In a later decision, Harris J declined to follow Re Simplicity. In Re Shandong Chenming Paper Holdings Limited [2023] HKCFI 2065 at §§5 and 18, he held that the approach to be adopted should be the same as that in cases involving an EJC. In other words, the approach in Guy Lam should also apply to cases involving an arbitration clause.

46.  Mr Law urged the court to follow Re Shandong. That was premised upon his submission that there is a bona fide or substantial dispute relating to the debt.

47.  In the course of his submissions, Mr Law sought to highlight the fact that what is set out in §§63 and 64 of the CFA Judgment[8] was merely a summary of the appellant’s contention rather than a determination. However, those public policy considerations are reflected in the CFA judgment[9].

48.  The Respondent placed reliance on the fact that there is no evidence of a ‘creditor community risk’, a factor mentioned in §102 of the CFA judgment in evaluating public policy considerations.

49.  But the funding agreement in the present case was entered into to enable the Respondent to engage in the production of a movie which necessarily involves the Respondent employing staff and entering into different types of agreements. In the circumstances, I agree with the Petitioner that public policy considerations cannot be ruled out.

50.  The Petitioner submitted, and I agree, that even if Re Shandong is followed and Guy Lam is applied to an arbitration provision, the frivolous nature of the defence would be a recognised “countervailing factor[10]” against staying or dismissing the Petition.

Conclusion

51.  For the reasons stated, the Respondent has failed to show a proper basis for staying or dismissing the Petition. Accordingly, there is to be an immediate winding up order against the Respondent.

Costs

52.  In his written submissions, Mr Li submitted that the Respondent’s continued opposition to the Petition at the hearing before Master KH Hui on 22 March 2023 was unjustified, as by that time it would have been evident from Petitioner’s Answer to Notice of Arbitration (filed on 17 March 2023) that the Respondent could not possibly succeed given the CA’s catchment in Easy Fortune.

53.  The Petitioner’s submissions referred to Re Carnival Group International Holdings Limited [2022] HKCLC 997 at §30 and Re Carnival Group International Holdings Limited [2022] HKCFI 3097 (Decision on Costs), where the court ordered that the directors be joined as respondents for the purpose of costs only. As Mr Li made no application at the hearing for such joinder, the Petitioner’s position is unclear.

54.  In the circumstances, there is to be an order nisi of costs of the Petition to be paid out of the assets of the Respondent to the Petitioner.