KONEW FINANCE LTD. v. WONG KAI MING AND ANOTHER

DCCJ 17916/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 17916 OF 2000

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JUDGMENT

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1. This is an appeal against the decision made by Ms. Registrar Au-Yeung on 24th March 2001, refusing the Plaintiff's applications to enter default judgments in the five related cases herein. In these actions, the Plaintiff is seeking to enforce money lending agreements against the Defendants, and so leave has to be sought from the court under Order 83A, r. 4, Rules of the District Court before judgments can be entered against the Defendants.

2. Like the procedure adopted in the Court of First Instance, appeal against the decision of a master in the District Court is conducted by way of rehearing of the relevant application.

3. Except for the Defendants in DCCJ No. 17916 of 2000 who had not filed an acknowledgement of service, all the Defendants in the other four cases filed an acknowledgment of service indicating that they had no intention to defend the Plaintiff's claims.

4. In her judgement, the learned Registrar was satisfied that all the Defendants actually received the loans and the interest rates charged were not excessive. However, the learned Registrar refused to enforce the five money lending agreements on the following grounds:

(i) the loan agreements are void by virtue of section 17B of the Housing Ordinance, Cap. 283, Laws of Hong Kong; and

(ii) the loan agreements are not enforceable under section 18(1) of the Money Lenders Ordinance, Cap. 163, Laws of Hong Kong, and the court should not give any relief in favour of the Plaintiff under section 18(3) of the same Ordinance.

5. I will address these issues in turn.

Whether the loan agreements are void under section 17B of the Housing Ordinance?

6. In all the five cases, the Plaintiff has kept the title deeds of the Defendants' properties as some kind of security for the loans advanced. However all the Defendants' properties are subject to the Home Ownership Scheme, and so according to terms in the assignments assigning the interest of the properties to the Defendants, the properties cannot be mortgaged or charged without the consent of the Housing Authority. Apparently, no consent has been obtained from the Housing Authority relating to the deposition of title deeds in the present cases.

7. Section 17B of the Housing Ordinance reads as follows:

"Where the person to whom the land is sold purports to mortgage or otherwise charge the land or to assign or otherwise alienate it; and that person acts in breach of any term or condition of the agreement for sale and purchase or any covenant in the deed of assignment relating to the land; or in the case of such a mortgage or other charge, any term authorised under paragraph 4(a) of the Schedule as regards the mortgage or other charge, the purported mortgage, other charge, assignment or other alienation, together with any agreement so as to mortgage, charge, assign or otherwise alienate, shall be void."

8. In the present appeal, there is an issue as to whether the deposition of title deeds has created an equitable mortgage or charge. It is the submission of Mr. Chan, counsel for the Plaintiff, that the Plaintiff, with the benefit of legal advice and knowing full well the provision of the said section 17B, could not have intended to enforce the security as some kind of equitable mortgage or charge, and so the arrangement between the parties was no more than a pledge of the title deeds. On the other hand, if Mr. Chan's submission is correct, the Plaintiff would have been able to obtain some kind of security for the loans by-passing the provision of the said section 17B. As I see it, the result of the present appeal does not depend on the resolution of this issue, and so without the benefit of having full legal arguments presented on both sides, I decide to leave this issue for further argument in the future. For the purpose of this appeal, I would proceed on the basis that the arrangement between the parties amounts to an agreement to create an equitable mortgage or charge, which is a case disputed by the Plaintiff.

9. Even assuming that an equitable mortgage or charge has been created by the deposition of the title deeds, I cannot accept that whole of the five loan agreements are void by virtue of the said section 17B. In my judgment, each of the five agreements herein consists of two separate agreements: the first one relates to the advancement and the repayment of the loan, and the second one relates to the creation of an equitable charge to secure the granting of the loan. Such interpretation is supported by the definition of the term "mortgage" as set out in Words and Phrases legally defined, 3rd ed., vol. 3, pp. 177-178, which reads as follows:

"A mortgage consists of two things, namely a personal contract for payment of a debt and a disposition or charge of the mortgagor's estate or interest as security for the repayment of the debt; in equity the estate or interest so transferred is no more than a pledge or security. Every mortgage implies a debt and a personal obligation by the mortgagor to pay it. If there is a covenant or bond for its payment it is a specialty debt; if not, it is a simple contract debt."

In my judgment, the same principle can be applied in the construction of the five loan agreements in the present cases.

10. As I construe the wordings of the said section 17B, the effect of such provision is only limited to "the agreement to charge the property concerned". Such statutory provision does not have the effect of nullifying the agreement relating to the advancement and the repayment of the loan. Indeed, it is clear that the object of the said statutory provision will be sufficiently answered by making the agreement to create the equitable charge void, and to go further, to borrow the wordings used by Lord Ellenborough CJ in the case of Kerrison v. Cole 8 East, 234 at p. 332, "would be going beyond the reason and object of the legislation in order to work injustice." In that case, whilst a bill of sale for transferring the property in a ship by way of mortgage was rendered void for infringement of certain statute, it was held that the mortgage could be sued upon by way of the covenant contained in the same instrument for the repayment of the money lent. As Lawrence J. had further put it in p. 332 of the judgment:

"..... this construction is according to the rule of the common law, .... that when a good thing and a void thing are put together in the same grant, the common law makes such a construction that the grant shall be good for that which is good, and void for that which is void."

11. Hence even if the agreements relating to the deposition of title deeds were to create equitable mortgages or charges, I do not accept that the other separate agreements for the repayment of the loans are likewise void by virtue of the said section 17B.

Whether the agreements are unenforceable under section 18 of the Money Lenders Ordinance?

12. Section 18 of the Money Lenders Ordinance reads as follows:

"(1) No agreement for the repayment of money lent by a money lender 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 ...........

(2) The note or memorandum shall contain all the terms of the agreement and in particular shall set out -

............

(h) the form of security for the loan, if any;

..........

(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."

13. The learned Registrar held that the five loan agreements failed to satisfy the requirements under section 18(2) as: (i) the terms of the securities were not set out or adequately set out in the agreements; (ii) there was inconsistency in the terms of the agreements as to the place of the completion of the loan agreements; and (iii) the declarations contained in the agreements as to the time when the Defendants received the loans might have been wrong.

14. However after perusing the affirmations filed on behalf of the Plaintiff in these applications, I am of the view that the matters raised by the learned Registrar above were only technical breaches. All the Defendants actually received the loans, and they apparently understood the terms for advancement and the repayment of the loans. Further, there is no indication that the Defendants have suffered any prejudice by reason of the inaccurate statements, if any, made in the loan agreements. Hence in such circumstances, the alleged breaches were only technical ones.

15. According to her judgment, the learned Registrar was very concerned about the arrangement of the securities, which was a scheme adopted by the Plaintiff with the object of defeating the provisions in the Housing Ordinance. I share the same concern. However on the other hand, being a money lender, it was quite legitimate for the Plaintiff to obtain some kind of security for the advancement of the loan. It was only the means to obtain the security that was open to objection. In such circumstances, I do not see it fair to deny the Plaintiff's right to enforce the separate agreements relating to the repayment of the loans. To hold otherwise would mean that the Plaintiff would receive a "punishment" which is out of proportion to its "objectionable" conduct. Hence, even if the five loan agreements do not satisfy the requirements laid down in section 18(2), I would exercise my discretion in favour of the Plaintiff allowing it to enforce the agreements for the repayment of the loans against all the Defendants.

16. In setting out the reasons for refusing to exercise the discretion in favour of the Plaintiff, the learned Registrar pointed out that if the court were to grant monetary judgments against the Defendants, the Plaintiff might eventually be able to obtain charging orders against the properties. In such circumstances, the Plaintiff would be able to obtain full registered securities which it would otherwise not be entitled to. With respect to the learned Registrar, I do not accept that this is a valid consideration. The charge purportedly to be created by the deposition of title deeds and the charging order resulting from the non-payment of monetary judgment are two separate matters. If the learned Registrar's observation is correct, it would not be possible for any plaintiff who is a money lender to obtain charging order against a property subject to the Home Ownership Scheme. This simply cannot be right.

17. By reason of the aforesaid, I see no justification not to enforce the five loan agreements in the present cases, and I therefore allow the appeal and set aside the orders made by Ms. Registrar Au-Yeung on 24th March 2001. I now listen to the Plaintiff's submission on the form of the orders that should be made by the court and on the issue of costs.