JAPAN LEASING (HONG KONG) LTD. v. FULLY WELL INVESTMENT LTD.

CACV 83/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 83 OF 2000

(ON APPEAL FROM HCMP 4359/1998)

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J U D G M E N T

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Hon Rogers JA :

Introduction

1. This is an appeal from an order of Suffiad J following a judgment given on 11 February this year. The matter before him was an appeal from Master Kwan. The Master had given judgment for the plaintiff on an originating summons. By consent of the parties, this matter was heard by two judges of the Court of Appeal under section 34B(4)(c) of the High Court Ordinance.

The facts

2. The matter arose in this way. The plaintiff had made three loans to the defendant. The first loan was made in 1992 pursuant to a "Facility Letter". It was for $4.8 million to be repaid by monthly instalments over a seven-year period. The second loan was made in 1996 pursuant to a "Loan Agreement" which I shall term the first loan agreement. It was for $4 million to be repaid by monthly instalments over a period of 75 months. The third loan was made in 1997 for $3.5 million to be repaid by monthly instalments over a 12-month period. There was also a loan agreement in respect of this loan. It can also be mentioned that this loan superseded two previous loans, but nothing turns on that. The defendant defaulted on the second and third loans in January 1998 and on the first loan in February 1998. Following that, there was a letter before action demanding repayment of the loans plus interest, which was dated 20 July 1998. The originating summons in this action was issued on 28 August that year. The loans were secured by a legal charge in respect of a flat with car parks in Stubbs Road.

3. Before the Master, there was no defence argued in respect of the plaintiff's claim for the principal sums. It was argued on behalf of the defendant that the provisions, if any existed, for overdue interest in the second and third loans were unenforceable. Three points were taken. The first was that the provision as to overdue interest was a penalty and therefore unenforceable. The second was that the provisions of the loan agreements in respect of overdue interest were vague and, therefore, for that reason, also, were enforceable. The other point taken was that on a proper construction, overdue interest was only payable on outstanding instalments but not on the entire outstanding loan amounts. Both the Master and the Judge held against the defendant on each of these points.

4. On this appeal, the defendant does not seek to challenge the judge's finding as to whether insofar as the agreement mandates the charging of overdue interest, it provides for a penalty but says that interest at the overdue interest rate should either not be payable or should only be charged in respect of those monthly instalments which had not been paid punctually and only from the date on which the said instalments should have been paid until they were actually paid. It is said on the defendant's behalf that in respect of all other amounts, the interest rate should be the normal interest rate provided by the two agreements.

5. The matter therefore turns on a small compass and is a question of construction of the two loan agreements. The first dated 23 September 1996 and the second dated 16 April 1997. Since both agreements are in identical terms, at least so far as concerns the issues which arise on this appeal, I will confine what I say to the first loan agreement but the same is equally applicable to the second.

6. It is necessary, first of all, to consider the provisions of the first agreement. The agreement provides in clause 1 for the advance from the plaintiff to the defendant of the principal sum. Clause 2 of the agreement reads :-

"In pursuance of the said agreement and in consideration of the Loan to be advanced to the Borrower now paid by the Lender the Borrower hereby covenants with the Lender that:-

(a) The Borrower shall pay to the Lender the Loan together with interest thereon at the interest rate and calculated in such manner as is hereinafter provided from the Commencement Date and in accordance with the Repayment Terms as are respectively specified in the said schedule until the moneys hereby secured together with interest shall be fully paid and satisfied.

(b) If any of the said instalments or any part thereof shall be unpaid after the date on which it ought to be paid as aforesaid or if the Borrower shall be in default or an event of default shall occur the Borrower shall pay to the Lender on demand such part of the Loan together with interest due as shall for the time being be unpaid and all other moneys payable hereunder provided that without prejudice to the rights powers and remedies of the Lender hereunder the Lender shall be entitled to charge and the Borrower shall pay to the Lender interest at the interest rate as specified in the said schedule(d) on any of the said monthly instalments which is not paid punctually as aforesaid from the date on which the said instalment should have been paid until the same is actually paid and received by the Lender."

7. The agreement then goes on in paragraph 3 to state :-

"3. The Borrower covenants that the interest on all moneys payable hereunder at the Interest Rate as specified in the said Schedule shall be payable as well after as before judgment and be calculated on the basis of actual days elapsed and a 365-day year Provided Always that the following provisions shall apply to the alteration of the rate of interest:-

.....

[The remaining part of this clause is not pertinent to the issues in the case.]"

Events of default which are referred to in clause 2 are, more specifically, also dealt with in clause 7. That clause reads :-

"7. Upon the occurrence of any of the following events of default :-

(a) failure to pay when due the Loan or any monthly interest on the Loan, or any other amount payable hereunder when the same becomes due;

...

(c) default by the Borrower in the due performance or observance of any other term contained in this Agreement and the continuance thereof for 14 days after the borrower being notified of such default by the Lender;

(d) if any other indebtedness of the Borrower for borrowed money shall become due and payable prior to the stated maturity thereof due to a default thereunder, or if such indebtedness shall not be paid at the maturity thereof, or if the Borrower shall be in breach of or in default of any agreement pursuant to which such indebtedness was incurred;

...

(g) if in the reasonable opinion of the Lender, taking into account all relevant circumstances, a material adverse change shall occur in the conditions, financial or otherwise of the Borrower;

...

Then, and in any such event, the Lender made by written notice sent to the Borrower at its registered office or its last known address (i) immediately terminate its commitment hereunder and/or (ii) declare the entire amount or all outstanding balance of the Loan to be forthwith due and payable whereupon the loan, together with accrued interest thereon, shall become immediately due and payable."

The schedule sets out the name and address of the borrower, the surety, the loan amount, term of the loan and then it specifies :-

"Interest Rate: Prime Rate plus 1.75% per annum.

Overdue Interest: 2% per calendar month, such interest to be calculated on the actual number of days elapsed on the basis of a 365-day year and to be compounded at monthly intervals."

8. There then is set out the repayment terms which specify the date of the first instalment and the date of each successive month when interest must be paid.

9. It is clear therefore that turning back to clause 2 of the loan agreement, sub-clause (a) refers to the repayment of the loan and the payment of interest in accordance with the provisions in the schedule and the interest referred to there must indisputably be the rate described in the schedule as "Interest Rate". Nothing, in my view, turns on the use or non-use of capital letters for the words "interest rate", although it is to be noted that in clause 3 capital letters are used.

10. The opening words of sub-clause (b) require the payment of all unpaid amounts and "interest due as shall for the time being be unpaid" together with all other moneys payable under the agreement on the happening of three different events. The first is if any of the instalments of the loan or any part of them are unpaid. The second is if the borrower is in default. The third is if an event of default has occurred. It will be noted that event of default is widely defined in clause 7 to include not only a situation where the Borrower fails to pay an amount due but also where the Lender forms the reasonable opinion that there is a material adverse change in the financial or other conditions relating to the borrower.

11. In considering the first part of clause 2(b), it can be noted that the words "shall pay" in the third line clearly give an entitlement to the lender and create an obligation on the borrower to make payments in accordance with that clause. The words "interest due as shall for the time being be unpaid" must, in my view, relate to interest which is due under the loan, namely the "Interest Rate" being the normal rate of interest for the loan. It seems to me that this conclusion must follow from the fact that the demand can immediately follow from a default in which case the interest due and unpaid would be the normal interest rate.

12. Mr Fok, SC, on behalf of the plaintiff, respondent, argued that from the moment of demand, the Lender's entitlement was to a higher rate of interest, namely the "Overdue Interest" identified in the schedule. There is nothing in the wording of this clause or any other part of the agreement which seems to me to show that these words as used at this part of the agreement must so refer to Overdue Interest nor, in my view, do they create an entitlement to such interest on behalf of the Lender. Still less do the words "all other moneys payable hereunder" create any entitlement. Rather, those words relate to moneys which are otherwise payable under the agreement.

13. In my view, to construe this part of the agreement to mean an entitlement on the part of the Lender to "Overdue Interest" would involve either interpolating words into the agreement or otherwise implying terms which do not exist. There is no ground for doing so from the point of view of business efficacy. Nor could it be said that it would be a standard provision in loan agreements that a high rate of interest (amounting in this instance to almost 27% when compounded) should be paid in all the circumstances covered by the first part of clause 2(b).

14. The second part of clause 2(b) starting with the words "Provided that" does not specifically refer to "Overdue Interest". Indeed, the only place in the whole agreement where those words appear is in the Schedule. However, that part of sub-clause 2(b) refers to "any of the said monthly instalments which is not paid punctually as aforesaid ...". It may be implicit, therefore, that the instalment is overdue. The words "entitled to charge" in line 7 of the sub-clause and the words "the borrower shall pay to the lender" appear to me to create an entitlement to charge on the part of the lender and an obligation on the part of the borrower to pay interest as specified in the schedule on any of the outstanding instalments.

15. This part of sub-clause 2(b) which starts at line 6 of the sub-clause, which might be termed the proviso part of the sub-clause, would appear to give an option to the lender to keep the loan on foot and not to call in a loan but with the entitlement to make a charge for interest as specified in the schedule. Although the words "Overdue Interest" are not used, it seems to me that reading the agreement as a whole, it is to be understood as providing for the payment of Overdue Interest on outstanding instalments in the situation where the proviso part of sub-clause (b) is applicable, namely where the Lender chooses to keep the loan in being. It is not explicit nor is it implicit that Overdue Interest would be payable on any other amount other than a monthly instalment which has not been paid punctually.

16. In my view, therefore, the loan agreement, when properly construed, allows the Lender to charge overdue interest on instalment payments which have become due but are not paid. It does not relate to the payment of other sums due under the contract. It is of interest that the basis on which the interest was demanded in the letter before action of 20 July 1998 might seem to accord with this reasoning.

17. I would also add that clause 3 of the agreement seems to me to specify that the normal rate of interest, in other words, that described as "Interest Rate" applies both before and after judgment, presumably to the capital amount even when it has been the subject of a judgment and therefore presumably there has been default under the agreement. This would tend to confirm my reading of the agreement that overdue interest is only payable in respect of monthly instalments not paid punctually.

18. The judge below considered correctly, in my view, that the interest referred to in clause 2(a) was the interest which is described as "Interest Rate" in the Schedule. However, he interpolated into clause 2(b) the supposition that any amount which had been called in as a result of any of the three categories of event referred to at the commencement of clause 2(b) would attract "Overdue Interest". Not only does the first part of clause 2(b) not say so, the proviso part of clause 2(b) which relates to "Overdue Interest" does so in relation to the instalments which are overdue. That part of clause 2(b) does not relate to outstanding principal or any such words, it simply refers to instalments. Insofar as the judge appears to have relied upon business efficacy or supposed intention of the parties, as I have indicated, I do not consider that the conclusions he drew followed. Nor do I consider that the officious by-stander test could have any application; if it were to do so, it would be in the context of implication of terms; that is neither argued for by the plaintiff nor something for which any grounds exist.

19. For these reasons, I would allow this appeal to the extent put forward in the notice of appeal. There should be an order nisi that the defendant should have the costs of the appeal. In view of the fact that additional points were taken in the court below, the defendant should have half its costs before Suffiad J.

Hon Ribeiro JA :

20. I entirely agree and have nothing to add.