FONG SAI QUEN v. PANG MAN KIN NIXON AND OTHERS

HCA546/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 546 OF 2007

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DECISION

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1. This is an appeal against an order of Master M. Yuen dated 14 June 2008 by which the defendants’ application to strike out the statement of claim was allowed and the plaintiff’s application to re-amend (in green) the statement of claim was refused. 

2. In outline the background facts are as follows.  In July 2006 the parties entered into a loan agreement.  The plaintiff is a licensed moneylender.  The 3^rd defendant borrowed HK$6 million on terms (to which I refer later).  

3. By October 2006 the terms (in particular those for payment of interest and penalty) had not been complied with.  Therefore a second agreement was reached and signed on 23 October 2006.  The 23 October agreement was to pay a sum of money (on terms) said to be due under the July agreement.  The next day, 24 October 2006, the parties signed a “settlement” agreement by which the 3^rd defendant was released from all obligations under the July agreement upon repayment of HK$6 million.  The settlement agreement was signed because the plaintiff was apparently protected for all sums said to be due to her (under the July agreement) by virtue of the new October agreement. 

4. However, many months later, in mid 2007, it became apparent that the October agreement was unenforceable because it was in breach of the Money Lenders Ordinance, Cap. 163 (“the Ordinance”).  The plaintiff has conceded that the effective rate of interest in the October agreement exceeded the maximum permitted by the Ordinance. 

5. The principal of HK$6 million was in fact repaid on 26 October 2006 following the settlement agreement. 

6. The plaintiff now seeks to amend its statement of claim so as to sue for the unpaid interest, fees etc. due under the July agreement.  The plaintiff submits that because the October agreement is unenforceable, the settlement agreement (which released the defendant from all further obligations under the July agreement) is also of no effect.  The plaintiff submits that the October agreement and the settlement agreement are inextricably linked.  If one is unenforceable, they are both unenforceable.  But for the former, the latter would never have come into existence.  The consideration coming from the plaintiff, namely its forbearance to sue on the July agreement, is conditional on the validity and enforceability of the October agreement.  Given that the October agreement was unenforceable (even though both parties, at the time, believed it to be valid) there was no consideration for the settlement agreement.  Therefore all that remains is the July agreement.  I agree. 

7. The plaintiff now seeks to sue for breach of the July agreement and seeks leave to amend the original statement of claim so as to delete all reference to the October agreement and settlement agreement. 

8. The master correctly struck out the original claim because the October agreement offended the Ordinance.  The master also refused the proposed amendments on the basis (as explained to me by counsel on appeal) that the July agreement also fell foul of the Ordinance.  

9. In my judgment the defects in the plaintiff’s original claim are capable of being cured by the proposed amendments and the matter should proceed to trial (or settlement). 

10. The terms of the July agreement are as follows :

“B)  Terms

1,    Borrowing sum of HK$6m (‘the loan’)

2,    for a term of 1 month

3,    Interest at (4)% per month, fee of 1% on loan payable on maturity

4,    Securities

   25,000,000 shares of Aurora Global Holdings Limited (Listed co no.353) as securities of the loan to the Lender

5,    Guarantee

-    Major shareholder and CEO, with signed personal posted cheque

6,    Costs

-    Legal costs be borne by the Borrower

7,    On maturity date and when loan can’t be repaid:

-    Penalty of 5% per month to the Lender

-    Lender shall have an option to take over from Kingston Securities (‘Kingston’) the share-pledged loan of approx. 250m (share securities of the Listed co share no.353) representing 48% of the Borrower’s shares

-    Lender shall have an option to take over all shares held by Kingston by providing not more than approx. HK$22m as new loan and new loan be extended for a further period of 3 months, with:

    Interest at (2.5)% per month and fee at (1.5)%

8,    Share option for 7,500,000 shares of listed co. share no.353 at prince of HK$0.35 per share, option period of 12 months (after 3 months from the date of drawdown, to be issued or allotted by the Borrower in trenches or in whole).  Further terms to be agreed.”

11. The defendants submit that these terms breach the Ordinance in two respects.

12. Firstly, that Clauses 3 and 7 taken together require interest to be paid at the rate of 9% per month after the first month.  Indeed, this was the position advanced by the plaintiff in early correspondence.  The plaintiff’s solicitor has acknowledged, by recent affirmation evidence, that their original stance was plainly wrong.  They concede that, originally, they claimed that the plaintiff was lawfully entitled to 4% plus 5% per month after the first month.  They now unequivocally withdraw from this position.  The affirmation evidence explains why the erroneous position was pursued and for the purpose of this appeal I accept the explanation.  

13. Thus, the claim now is that 4% was due for the first month and 5% (Clause 7) after the first month if the defendants were in default.  The plaintiff’s revised position is plainly arguable.  Clause 3 deals with the interest up to maturity and Clause 7 deals with a “penalty” after maturity in default.

14. The defendants’ second argument is that once the 5% per month is triggered, the annual rate becomes 60% which is the maximum permitted by the Ordinance.  However Clauses 7 and 8 confer further benefits to the lender.  The argument then goes that any benefit over and above 60% must be construed as an increase to the 60%.  Against this argument the plaintiff points to section 24 and Schedule 2 of the Ordinance. 

15. In the event the option in Clause 7 was not taken up.  However the option in Clause 8 was, in part, taken up which resulted in a profit to the plaintiff of $552,000.  These are all matters for the trial judge to consider when deciding, inter alia :

(i)    if the Ordinance has been breached;

(ii)  whether it is a case for invoking section 25 of the Ordinance (“Reopening of certain transactions”); and

(iii)    whether section 22(1)(c) and (2) have any application. 

16. The plaintiff has already abandoned its claim against the 2^nd defendant.  Mr Jin Pao, counsel for the defendants, submits that even if the proposed amendments are allowed the claim should proceed against the 3^rd defendant (the company) alone.  He submits that the claim against the 1^st and 4^th defendants, as guarantors, is void for uncertainty, there being no deed of guarantee and no terms of guarantee ever having been formulated or agreed. 

17. Whilst I accept that there is some force in his submission, I think that it is a matter, along with all other issues, for the trial judge.  It is yet another matter which may become relevant should the court decided to “reopen the transaction so as to do justice between the parties …” pursuant to section 25 of the Ordinance. 

18. There are a number of unusual features in this case which, taken together, may cause the parties to consider the advantages of spending a proportionate amount of time and money on bringing the matter to a consensual conclusion rather than solely preparing for trial. 

19. However, for present purposes, the appeal is allowed to the limited extent of granting leave for the proposed amendments in so far as they narrow the claim to the terms of the July agreement alone. 

20. There will be a costs order nisi that the costs of and occasioned by the amendment shall be to the defendants in any event and the costs of the hearing here and below shall be in the cause.