K CASH LTD (formerly known as mtree.money Limited) v. SO WANG FUNG by SO WANG MING his guardian ad litem

CACV 93/2020

[2021] HKCA 1472

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 93 OF 2020

(ON APPEAL FROM DCCJ NO. 5085 OF 2014)

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J U D G M E N T

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

I. The appeal

1.  The defendant is a mentally incapacitated person as defined under the Mental Health Ordinance, Cap. 136 (‘MHO’).  He has been in that condition since childhood.  He studied in a special school up to Form 3 and had been a cleaning worker in different companies.  He was earning about $7,000 to $8,000 a month.  He is the registered owner of a flat in Tseung Kwan O, which was a gift from his parents.  He is married and his wife is also a mentally incapacitated person.  According to the medical certificate issued by Dr. Cheung Hung Kin (‘Dr. Cheung’) with reference to Part II of the MHO, the defendant is a known case of mild grade mental handicap.  He is capable of performing the ordinary activities of daily living but he is vulnerable to exploitation by others and mentally incapable of managing and administering his property and finance. 

2.  The defendant’s elder brother, So Wang Ming, is his guardian (‘the guardian’).  According to the guardian, ‘ordinary people could easily notice from [the defendant’s] words and behaviour that [he] is a mentally retarded person; because of his unique behaviour, his slurred speech, every act of his would easily attract attention of others and he would be quickly identified by others as a mentally retarded person’.  The defendant’s ‘speech was disorganized, most of the time failing to express himself, the listener had to be very patient, listen to him slowly and to sort out what he said before (the listener) could understand what he was trying to express’.

3.  In 2010, a Chan Cheong Yin (‘Chan’) befriended the defendant and his wife.  Chan at his expense invited the defendant and his wife to meals and shopping.  Chan soon won the confidence of the defendant and his wife.  By 2014, Chan frequently told the defendant and his wife that he could borrow money on their behalf so as to improve their living condition and also to pay off the debts that they had incurred with their credit cards.  Although the defendant and his wife initially refused Chan’s request, eventually they succumbed to his persuasion. Chan then together with other persons arranged the defendant to take out three loans from three different moneylenders :

1)     On 10 November 2014, Chan took the defendant and his wife to see a Miss Chan (‘Ms Chan’) of Jone’s Consultant (HK) Company (‘Jone’s’).  Ms Chan took the defendant and his wife to a Premier Capital Management Limited (‘Premier’) on the same day to borrow $900,000.

2)     On 12 November 2014, Chan asked the defendant to make arrangements to meet Ms Cheung of the plaintiff and accompanied the defendant to the plaintiff’s office to sign a Loan Agreement and borrow $600,000.  The plaintiff is a moneylender.  The loan of $600,000 was given to the defendant by way of three cheques.  One cheque of $146,208 was made payable to Bank of China Credit Card to repay the defendant’s credit card debt and the balance of the loan being equally split into two cheques, one cash cheque of $226,896 and one cheque to the defendant which was marked for account payee only of $226,896.  The whereabouts of the cheque of $146,208 made payable to Bank of China Credit Card for the settlement of the defendant’s then credit card debt was unknown. According to the records of the defendant’s bank account in Bank of China, the defendant’s then credit card debt had already been settled by another cheque coming from the earlier loan taken from Premier.  The cash cheque of $226,896 was cashed by the defendant over the bank counter on the day of signing of the Loan Agreement (i.e. 12 November 2014) and the money was given to Chan right away, who claimed to keep it for the defendant.  The ‘A/C payee only’ cheque of $226,896 was paid into the defendant’s Dah Sing Bank account two days later on 14 November 2014. Nearly the whole sum was withdrawn within the next month and the balance on 20 December 2014 was just $6.63.  All the money was again given by the defendant to Chan who claimed to take care of it for the defendant. 

3)     A few months later, on 19 May 2015, through the arrangement of Chan and Ms Chan, the defendant took out another loan from another moneylender, M Success Finance Limited (‘M Success’), for $1,900,000.

4.  The plaintiff sued under the Loan Agreement.  It claimed that it should be entitled to the outstanding principal sum of $596,890.73 with interest and costs.  In the event that the Loan Agreement is found to be void and of no legal effect, on the ground of restitution and unjust enrichment, the plaintiff should be entitled to $569,257 being the loan amount less part repayment of $30,743 made on 6 January 2015.

5.  The case was tried by H H Judge Edmond Lee.  He dismissed the plaintiff’s claim.  Pursuant to leave granted by this Court, the plaintiff now appeals.

II.     The Judge’s finding

6.  At the trial, the guardian gave evidence on behalf of the defendant.  He narrated the story of how the defendant had borrowed the money from the moneylenders.  The plaintiff called Ms Cheung.  The Judge accepted the evidence of the guardian and found him to be an honest and credible witness.  On the other hand, the Judge did not find Ms Cheung to be an honest and credible witness and he rejected her claim that there was no association or collusion between the plaintiff and others in this case.  The parties agreed that there were eight issues.  In respect of Issues (1) to (3), the Judge found the following :

Issue (1) – The plaintiff had made out the Loan of HK$600,000 to the defendant or for the defendant’s use.

Issue (2) – The defendant was suffering from mental incapacity at the time of the signing of the Loan Agreement.

Issue (3) – The plaintiff through Ms Cheung knew that the defendant was suffering from mental incapacity.

7.  In respect of Issue (4) – Whether the defendant had acknowledged the validity of the Loan Agreement by the part payment in cash on 6 January 2015, the Judge held that there was no evidence that the sum was paid by the defendant or whoever on his behalf nor was there any evidence to show that it represented part payment of the loan.  Accordingly, the plaintiff had failed in his argument that the defendant had acknowledged the validity of the Loan Agreement by the part payment in cash on 6 January 2015.

8.  The Judge then dealt with the remaining three issues together.

Issue (5) – Whether and how the plaintiff had been colluding with other parties to deceive the defendant as alleged;

Issue (6) – What acts or conduct the plaintiff had committed in colluding with others to deceive the defendant as alleged; and

Issue (7) – Whether the Agreement is unenforceable as alleged.

9.  The defendant was referred to the plaintiff by an intermediary company （「中介公司」）called ‘Ho Tin’　（ 「浩 天」）.  The Judge found there was collusion :

‘ 35. ...... the plaintiff was in collusion with others, including that male (be it Chan or whoever who accompanied the defendant to the meeting where the Agreement was signed) and/or the intermediary company “Ho Tin”, to deceive the defendant into signing the Agreement and obtaining the Loan so that they could cheat him of the money he purported to have borrowed from the plaintiff.’

10.  The Judge identified the conduct of the plaintiff in the collusion which we will elaborate when dealing with the grounds of appeal.

11.  The Judge found that the Loan Agreement was illegal and unenforceable.  As the defendant did not retain any unjust benefit thereof, the Judge refused the plaintiff’s claim on restitution and unjust enrichment for the balance of the loan.

III.     Grounds of appeal

12.  Five grounds of appeal were advanced by Mr. Hingorani (together with Mr. Chong) for the plaintiff.  We will deal with Grounds 2 to 4 first as they involve challenges to the finding of fact by the Judge.  In our view, it is necessary to address first the factual foundation upon which the Judge found that the Loan Agreement was unenforceable.  The well‑established principle in this context is that the appellant must show that the finding is plainly wrong before the Court of Appeal would step in and overturn the finding.  This is a high threshold.

Ground 2

13.  The plaintiff argued that the Judge erred in not drawing any adverse inference against the defendant’s failure to testify as a witness and accepting the guardian’s evidence and his hearsay evidence.  At the commencement of the trial, counsel for the defendant had confirmed that the defendant was a person who was competent to testify in the trial despite his mental capacity. 

14.  In our view, this is not a valid point.  The Judge was aware that the evidence narrated by the guardian in respect of the loans was hearsay in nature.  However, he was not prepared to draw adverse inference against the defendant for not giving evidence himself.  The Judge held :

‘ 30. To start with, as said, I bear in mind the plaintiff’s criticism of DW1’s evidence, a significant portion of which was hearsay evidence i.e. what he heard and understood from the defendant. I am aware of the defendant’s mental handicap which would adversely affect his memory of the events and his ability of accurately describing the same to DW1. I noted what DW1 admitted in his live evidence that the defendant had not been frank with him at the outset when he said he was borrowing money for a friend with surname “Ma” but subsequently disclosed another version of being persuaded by Chan to obtain the Loan. I also noted from DW1’s evidence that the matter was once reported to the Police but no investigation had been proceeded with. I remind myself, as the plaintiff submitted, that I would be entitled to draw adverse inference against the defence for not calling the defendant as witness to give viva voce evidence. I also remind myself, as invited by the plaintiff, of all the considerations relevant to weighing of hearsay evidence as prescribed under s. 49 of the Evidence Ordinance, Cap. 8.

31. While I have found DW1 to be an honest and credible witness, I am cautious about handing [sic] his hearsay evidence, bearing in mind reliability is a completely different matter from credibility.  As what would be apparent in the following paragraphs, I would come to my findings mainly by relying on the undisputed facts and the reasonable inferences to be drawn instead of relying on the hearsay evidence of DW1 alone.  Also, I bear in mind that there is no evidence from the defendant to rebut the plaintiff’s case or to support the defence case.  Nevertheless, I am not prepared to draw any adverse inference against the defendant from his absence of evidence, in view of the peculiar circumstances, in particular his mental handicap, in this case.’

15.  Bearing in mind the medical certificate of Dr. Cheung which described the condition of the defendant and also of the guardian’s description of him, the Judge was clearly entitled to consider whether there was a legitimate reason for the defendant not to testify. It is clearly within the purview of the Judge to accept the credibility of the guardian after he had considered all the circumstances of the case.

Ground 3

16.  The plaintiff argued that the Judge erred in finding that Ms Cheung knew of the defendant’s mental incapacity.

17.  In our view, the evidence speaks for itself that Ms Cheung knew of the defendant’s mental incapacity.  The Judge was entitled to accept the evidence of the guardian mentioned in paragraph 2 hereof.  He did not find Ms Cheung to be an honest and credible witness.  It could not be said that no reasonable judge could have concluded it must have been apparent to Ms Cheung that the defendant had a mental problem.

Ground 4 and Ground 5

18.  Ground 4 and Ground 5 can be dealt with together.  The plaintiff argued that the Judge erred in finding that there was deception :

1)     The Judge erred in categorising the guardian’s allegation that all the money under the loan granted by the plaintiff was ‘cheated’ by Chan as ‘non hearsay’ evidence, when the question of whether and how the money was passed from the defendant to Chan must have been based on a recounting of events related to the guardian by the defendant, and hence hearsay evidence.  There was no evidence independent of the guardian about these matters.  His evidence that the defendant was cheated was not evidence of fact but his opinion.  Although the bank records are undisputed, they are only capable of showing the flow of funds, i.e. when and how much was credited into the bank accounts or debited out of the bank accounts.  These documentary records are neutral and silent on the question of whether the money was taken out under a scam or not.

2)     The Judge disregarded the defendant’s own case that there was no ‘cheating of money’ as the money passed to Chan was either to ‘help the defendant to manage the money’ or ‘for safekeeping’.

3)     The Judge erred in drawing an adverse inference by speculating on the whereabouts of the third cheque of $146,208 when the defendant has admitted that this cheque was duly honoured.  In other words, the money under the third cheque was duly deposited in the defendant’s bank account, albeit the debt had been paid off through another means.

Ground 5

19.  The Judge erred in finding that there was collusion and rejecting the plaintiff’s evidence.

20.  The Judge found there was collusion between the plaintiff, Chan and others.  The meaning of collusion is simply that the parties are ‘playing the same game or acting in concert’.  Bokhary NPJ held in HKSAR v Wong Kwok Wai (2013) HKCFAR 191 :

‘ 6. The conviction was based on two irresistible inferences: firstly, that all the persons and companies who dealt with the borrower were acting in concert and, secondly, that the applicant was colluding with a moneylender in the making of the demand for $3,600.

7.    It was open to the Magistrate to conclude, as he in effect did, that the demand was part of a dishonest and surreptitious enterprise which was meant to – and did – extract money from the borrower.

8.    The points of law said on the applicant’s behalf to arise go to the meaning of collusion. No such point really arises. It is plain in the circumstances that the applicant and the moneylender were acting in concert and surreptitiously in a dishonest enterprise to extract money from a victim. Whatever else may or may not be within the meaning of “collusion” under s.29(10), the applicant and the moneylender’s conduct certainly is fairly and squarely within that meaning.’  (emphasis added)

21.  Tang PJ held :

‘ 11. I agree. On such a charge, the question to ask and answer is whether the persons who are said to have acted in collusion were playing the same game. It should not be made more complicated.’

22.  The Judge had considered the following matters in finding there was collusion by the plaintiff and others to cheat the defendant :

1)     The plaintiff is a licensed moneylender with a paid up capital of $100,000.  It changed its name for three times in a period of seven years.  On 27 May 2009, it changed its name from Ever Concept Holdings Limited to Maxcolm Credit Limited.  On 30 November 2015, it changed its name to mtree.money Limited.  On 25 July 2016, it changed its name again.  This time to K Cash Limited.  No explanation was offered why the plaintiff needed to change its name so frequently and within such a short time.  The Judge was entitled to infer, together with the other evidence, that the plaintiff’s conduct was not above board.

2)     The defendant is a mentally handicapped person.  Ms Cheung knew of his condition.

3)     Despite accepting that the loan was referred to by an intermediate company called Ho Tin, Ms Cheung was reluctant to disclose further information about Ho Tin.  Ms Cheung agreed under cross-examination that she would not care about which intermediary gave her the referral and she did not care what fees, if any, the latter charged.  Notwithstanding that, during the meeting with the defendant which was audio‑recorded, Ms Cheung specifically said to the defendant, that they and the intermediary were two different and independent companies, the plaintiff did not charge any fees, and if there were handling charges involved, the defendant should go to the intermediary.   Right after that, she told the defendant to sign the document and at the same time, she said to the defendant that he clearly understood the Loan Agreement and signed it without any duress by any third party.  The Judge found that :

‘ It is simply unnecessary and apparently artificial for [Ms Cheung] to say all these during the meeting. It is contrary to common sense that “Ho Tin” or whatever intermediary person/company would derive no benefit at all in referring the defendant to the plaintiff for borrowing the Loan. Apparently, [Ms Cheung], knowing full well that the meeting was audio-recorded, said all these only for the record and tried to distance herself and the plaintiff from the intermediary company in this case.’

23.  The defendant was accompanied, according to him, by Chan to the meeting with Ms Cheung. Strangely, Ms Cheung accepted under cross‑examination that she had never ascertained the identity, the role or anything at all about that male from the beginning to the end.  She agreed that she simply treated that male as ‘non‑existing’. The Judge found that :

‘ Strange enough, at the end of the meeting, that male, who was supposed to have nothing to do with the Loan or the Agreement, was obviously eager to ask (by asking thrice) about the possibility of extending the repayment period. When [Ms Cheung] said that the repayment period was already almost the longest possible, that male said “will contact you again”. All the above point to the fact that the defendant, who was a mental handicapped [sic], was under the manipulation by that male who apparently had an interest in the Loan to be obtained. [Ms Cheung], being the handling person of the defendant’s case throughout, must be fully aware of that. That explained why [Ms Cheung] said she did not bother to ask anything about that male and treated him as non‑existing on the day of the meeting. Apparently, [Ms Cheung], again, tried to distance herself and the plaintiff from that male.’

24.  The Judge held that the most suspicious part of the transaction is the splitting of the cheques.  Although Ms Cheung repeatedly said that it was the plaintiff’s practice to split the cheques like that, the Judge held that :

‘ [Ms Cheung] gave no valid or reasonable explanation as to why the cheques had to be split that way in this case. Even assuming there is a legitimate reason to prepare a cheque specifically for the settlement of the existing credit card debt, one can hardly think of a legitimate reason for splitting the balance of the Loan into two cheques with one as a cash cheque. An irresistible inference to be drawn, from splitting the cheques that way with no valid reason, was to facilitate that male (be it Chan or whoever) and/or others to easily obtain at least a substantial part of the Loan in cash, by way of the cash cheque of $226,896 (which represented more than one-third of the Loan), from the defendant shortly after the signing of the Agreement.’

25.  The Judge was clearly entitled to find on the facts that the plaintiff had in collusion with Chan and others practised deception on the defendant.  The plaintiff has simply failed to demonstrate that the Judge was plainly wrong in making these findings.

Ground 1

26.  The plaintiff argued that the Judge erred in finding that the Loan Agreement was illegal and invalid in that the defendant’s only pleaded defence was that the Loan Agreement was illegal and invalid by reason of section 27 of MHO.  The Judge having rejected this defence that there was no other legal basis for the Judge to find that the Loan Agreement was illegal and invalid. 

27.  It is clear from the judgment that, apart from referring to collusion and deception, the Judge has not identified the basis for holding the Loan Agreement to be illegal and unenforceable.  The mere fact that a transaction is illegal does not necessarily mean that it is unenforceable.  Mr. Hingorani referred to Colen v Cebrian (UK) Ltd [2003] EWCA Civ 1676 [44] where Carnwath LJ held :

‘ 44. I agree with Waller LJ’s analysis of the authorities. I have also been assisted by the consideration given to this subject by Law Commission in its consultation paper on Illegal Transactions: the Effect of Illegality on Contracts and Trusts (LCCP 154, para 229 to 231). The proposition there stated was:

“Generally it seems that the commission of a legal wrong or acting otherwise contrary to public policy in the course of performing a contract does not at common law affect enforcement.” ’

28.  The Judge in [42] and [44] of his judgment referred to passages in Chitty on Contracts (32^nd Ed) in support of his holding that the Loan Agreement was unenforceable.  The current edition of Chitty is now the 33^rd Edition. Mr. Ho for the defendant has not sought to uphold this point, instead, the whole tenor of his written submission before us is that the Loan Agreement is illegal and unenforceable by the operation of section 27 of MHO. This point was squarely raised by Mr. Ho below.  The Judge dealt with this very briefly.  He said in [39] it was no longer necessary for him to decide on that as he held the Loan Agreement was illegal and invalid because of the deception of the defendant.  For completeness, he stated that he did not think the present situation would come within the wording of the provisions in section 27. 

29.  Section 27 provides that :

‘ 27. Charges for expenses etc. not recoverable

(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.

(2)     –

(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...is ... paid ... in contravention of this section, the amount or value thereof, ... 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.’  

30.  In our view, section 27 serves two purposes.  First, it declares payments by the borrower in certain situations to be illegal and unlawful : sections 27(1) and (3).  Second, it provides for the remedy if these payments are illegal and unlawful : section 27(4).  By section 27(4) the lender is not entitled to enforce the loan in the sense that the borrower is entitled to set off from the money lent or recover from the lender the money that he had paid under such situations.

31.  This Court in Gain Wealth Global Credit & Investment Limited v Chan Suk Fong [2020] 4 HKLRD 831 recently considered the operation of section 27(3) where the defendant had been defrauded by two fraudsters who tricked her into borrowing $700,000 from another moneylender and then $1 million from the plaintiff, another moneylender. Kwan VP held :

‘ 35.    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.’

32.  We now turn to the question whether the money that Chan took and received from the defendant comes within the wording of section 27(3), namely ‘...receive any remuneration or reward whatsoever from a borrower ... for or in connection with .... obtaining any loan made ...’ and is, therefore, unlawful.  The Judge found that there was collusion and the purpose of the collusion was ‘to deceive the defendant into signing the Agreement and obtaining the Loan so that they could cheat him of the money he purported to have borrowed from the plaintiff’.  The Judge was entitled to this finding based on the evidence he had heard, in particular, the suspicious circumstances he had identified.  In our view, on this basis, the money that Chan received from the defendant comes within the section.  Chan received the money by way of remuneration and reward whatsoever from the defendant for and in connection with the loan of $600,000.  That is the only proper inference to be drawn from the circumstances.  The receipt of money by Chan was unlawful under section 27(3).

33.  We are not impressed with the argument of Mr. Hingorani that the money Chan took from the defendant was on the basis that he borrowed the money from the defendant but failed to return the debts or on the basis that the defendant needed someone to manage his affairs. This is pure surmise which is not open to be drawn on the facts of this case.

34.  Accordingly, the section 27(4) remedy comes into operation.  In our view, the remedy under section 27(4) is the only available remedy if the section 27(3) illegality is relied upon by the defendant.  On that basis, we have no doubt that the two sums of $226,896 can be set off from the money lent by the plaintiff but we are not prepared to say that the cheque payable to Bank of China Credit Card can be set off as well.  Although the Judge found the credit card debt was paid off by the loan from Premier, the defendant has not been able to show what happened to this cheque after it was deposited.  There is a missing link whether the proceeds of this cheque eventually ended up with Chan.  Accordingly, we hold the defendant is not entitled to set off this sum from the $600,000 loan.  As a result, the plaintiff is only entitled to recover $146,208 from the defendant.

35.  Mr. Ho had argued that this Court’s decision on interest and principal in Gain Wealth is plainly wrong.  We disagree.  In any event, in the light of our conclusion on section 27, it is not necessary to consider this argument.

IV.     Conclusion

36.  The appeal is allowed to the extent that there will be judgment to the plaintiff for the sum of $146,208 with interest.  The parties are required to submit within 14 days a draft order on the rate of interest and the period covered.

V.     Costs

37.  There will be an order nisi that notwithstanding the plaintiff has succeeded partially in this appeal, there should be no order as to costs in respect of the appeal and the applications for leave to appeal as it has failed in its challenge to the substantial issues found against it by the Judge.

38.  The defendant’s own costs are to be taxed according to the Legal Aid Regulations.

39.  We do not propose to disturb the costs order of the action made by the Judge.