KWOK YING LUNG v. KO CHI HUNG MAXWELL MABEL STRAUBE

CACV 635/2000 & CACV 142/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEALS NOS 635 OF 2000 & 142 OF 2001

(ON APPEAL FROM HCMP 209 OF 1999)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

Introduction

1. There are two appeals before this court. They arise out of Order 88 proceedings instituted by the plaintiff for payment of moneys and interest due and owing to the plaintiff under a Second Legal Charge dated 15 July 1998 and for delivery of vacant possession of the mortgaged property which was a flat in Bisney Road together with a car parking space. Under the terms of the Second Legal Charge, the principal of $1.1 million was repayable on 14 January 1999, being the expiration of 6 months from the date of the advance, with interest at $55,000 per month until full discharge.

2. CACV 635 of 2000 ("the 1st Appeal") is an appeal from the order of Master Cannon dated 17 August 2000 whereby it was ordered that judgment be entered for the defendants following her ruling given on 26 May 2000 on a preliminary issue. CACV 142 of 2001 ("the 2nd Appeal") is an appeal against the judgment on the preliminary issue.

3. The appeals first came before this court, differently constituted, on 20 February 2001. Only half a day had been reserved for the hearing of those two appeals. It became apparent that the appeals could not be dealt with in the time allocated and, by consent, the court ordered that there be a hearing de novo. Hence this hearing before a differently constituted court.

4. At the conclusion of the appeals, they were allowed with written reasons to be handed down later. My reasons appear below.

Jurisdiction

5. At the outset of the hearing, this court raised with counsel for the plaintiff its jurisdiction to entertain these appeals which are from orders made by Master Cannon. It was not apparent from the procedural history of these proceedings (albeit somewhat convoluted and unusual for Order 88 proceedings) that the court had jurisdiction.

Procedural history

6. The originating summons which was issued some two and a half years ago on 12 January 1999 was heard by Master Muttrie on 25 June 1999. Prior to that hearing, the property had been sold and the proceeds of sale were ordered to be paid into court. Master Muttrie entered judgment in favour of the plaintiff in respect of HK$1.06 million together with interest at the rate of 12% per annum from 15 July 1998 to the date of the order. Both parties appealed and the appeal came before Cheung J on 27 July 1999. The defendants had opposed the Order 88 application on the ground that the plaintiff was an unlicensed moneylender and also that extortionate interest had been charged on the loan.

7. Cheung J concluded that the issue of whether or not the plaintiff was a moneylender could not be dealt with by way of affidavit evidence only. Further, as it appeared that interest charged was 5% per month or 60% per annum, there was also an issue arising from section 25 of the Money Lenders Ordinance which enables the court to re-open a transaction where the court is satisfied that the transaction is extortionate. Under the provisions of section 25(3) a transaction is presumed to be extortionate where the effective rate of interest exceeds 48% per annum but the court may declare that any such agreement is not extortionate if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair. The factors to which the court has regard are set out in subsections (4), (5) and (6) of section 25 and evidence as to those matters had not then been adduced.

8. The order made on 27 July 1999 set aside the order of Master Muttrie and directed that the hearing of the originating summons be adjourned to be heard before a different master with an estimated length of one day. Directions were given for the filing of further evidence and for cross-examination of the deponents of the affirmations.

9. The originating summons then came before Master Cannon on 27 October 1999 when the defendants raised, for the first time, the issue that the Second Legal Charge was rendered unenforceable by section 24 of the Ordinance because the effective interest rate exceeded 60% per annum. Master Cannon gave directions for the filing of expert evidence. Meanwhile the hearing was adjourned to 28 January 2000.

10. At the adjourned hearing, counsel for both parties agreed to limit the hearing to the preliminary issue as to the effective rate of interest (and whether it exceeded 60% p.a.) and oral evidence from the experts took up most of the day. The hearing was further adjourned to 10 March for written submissions. In fact, further oral submissions were made at that hearing. Two and a half months later, on 26 May 2000, Master Cannon handed down her decision on the preliminary issue holding that the effective rate exceeded 60%, being 66.38%.

11. On 31 May 2000, the plaintiff lodged a notice of appeal and applied for a stay of execution. Master Jones dismissed the application for a stay and the plaintiff issued a notice of appeal against that dismissal. Meanwhile, the defendants issued a summons for payment out of the proceeds of sale.

12. Both applications came back before Cheung J on 29 June 2000. Upon the undertaking by the plaintiff to lodge an application before Master Cannon as soon as possible "regarding the effect of the determination of the preliminary issue", the plaintiff was granted leave to withdraw the two notices of appeal filed on 31 May 2000 and 13 June 2000 (i.e., the notice of appeal against the preliminary issue ruling and the Master's refusal of a stay of execution) and directions were given for the hearing of the defendants' summons for payment out at the same time as the hearing of the plaintiff's application. The judge's reasons for allowing the withdrawal of the two notices of appeal are not apparent from the papers before us.

13. The summonses were heard by Master Cannon on 17 August 2000. She ordered that judgment be entered in favour of the defendants but that payment out be stayed pending appeal.

14. The 1st Appeal was filed on 10 October 2000 and the 2nd Appeal on 3 February 2001.

15. Counsel for the plaintiff submitted that the court had jurisdiction under O. 58, r. 2(a) in that the hearing before Master Cannon was pursuant to O. 36, r. 1. That rule reads as follows:

"1. (HK) In any cause or matter other than a criminal proceeding by the Crown, the Court may, with the consent of the parties, order that the cause or matter, or any question or issue of fact arising therein, be tried before a master or that the master do inquire and report thereon and, in the case of inquiry and report, giving consequential directions."

It is a condition precedent to the trial of a cause or matter by the Master that the parties thereto consent to such a trial, and such consent should be written into the order. See Hong Kong Civil Procedure 2001 at 36/1/1.

16. The relevant order for the purposes of O. 36 r. 1 must be the July 1999 order of Cheung J. But the order is silent as to the parties' consent. Nor was consent mentioned in the judgment of Cheung J given at that hearing as to the further conduct of the case. All Cheung J said was:

"I do not think further pleadings are required, instead the matter should be adjourned for argument and that the deponents of the affidavits be tendered for cross-examination at the adjourned hearing."

Then there was the fact that the appeal which came before Cheung J was lodged within 5 days of the Master's ruling. Whilst that was allowed to be withdrawn, the order did not refer to any reasons.

17. Absent the consent of the parties in July 1999 to the originating summons being heard by the master rather than the judge which consent had to appear on the face of the order, there would not have been any jurisdiction to entertain these appeals. It was therefore incumbent on the plaintiff to remedy the deficiency. Suffice to say that by the time the court reconvened after the lunch adjournment, the July 1999 order had been amended by Cheung J on the plaintiff's application, so that it is now an order by consent.

18. In the event, the court was satisfied that it had jurisdiction to hear the appeals but not before considerable time and effort had been expended to resolve that issue.

The 2nd appeal

19. This appeal relates to Master Cannon's ruling on the preliminary issue given on 26 May 2000 which is earlier in time than the order made on 17 August 2000 entering judgment for the defendants, the subject matter of the 1st appeal. The preliminary issue ruling, being earlier in time, was therefore dealt with first.

20. Master Cannon stated the preliminary issue in these terms:

"whether the effective rate of interest under the second legal charge is 60 per cent per annum as asserted by the plaintiff or 66.38 per cent as asserted by the defendants."

The relevance of whether the rate is or is not over 60% becomes apparent when one looks at section 24(2) of the Money Lenders Ordinance, Cap. 163, which provides:

"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 [60 per cent per annum]."

21. If, as is the defendants' case, the effective rate exceeds 60%, the loan of $1.1 million is irrecoverable. If, as is the plaintiff's case, the effective rate of interest is 60%, it does not exceed 60% and the Second Legal Charge is not rendered unenforceable per se. The question which would then arise would be whether the transaction should be re-opened under the provisions of section 25(3).

22. Section 2 is the interpretation section and, so far as material for present purposes, provides as follows:

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

...

'effective rate', in relation to interest, means the true annual percentage rate of interest calculated in accordance with Schedule 2.

...

(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."

(emphasis added)

23. Schedule 2, so far as material, provides as follows:

"Calculation of True Annual Percentage Rate of Interest

1. Any amount paid or payable to the lender under the agreement (other than simple interest charged in accordance with the proviso to section 22(1)) shall be appropriated to principal and interest in the proportion that the total amount of principal bears to the total amount of the interest.

2. The amount of principal outstanding at any time shall be taken to be the balance remaining after deducting from the principal the total of the portions of any payments appropriated to principal in accordance with paragraph 1.

3. The several amounts taken to be outstanding by way of principal during the several periods ending on the dates on which payments are made shall be multiplied in each case by the number of calendar months during which those amounts are taken to be respectively outstanding, and there shall be ascertained the aggregate amount of the sum so produced.

4. The total amount of the interest shall be divided by one-twelfth part of the aggregate amount mentioned in paragraph 3 and the quotient, multiplied by one hundred, shall be taken to be the rate of interest per cent per annum.

..."

24. The preliminary issue was purely one of statutory interpretation. Surprisingly, Master Cannon heard expert evidence and allowed each party to call experts. The experts had differing approaches to the application of the provisions of Schedule 2 which, in turn, depended on their respective views as to the meaning of various provisions of the Ordinance. Pausing here, I would observe that where what has to be ascertained is the true meaning of statutory provisions, that is not a matter for expert evidence. It is for the court to construe the provisions. Experts have no role to perform in such a situation. It was thus wholly inappropriate for expert evidence to have been adduced.

25. Whilst accepting that interest of $55,000 per month on a loan of $1.1 million produces a simple interest rate of 60% p.a. and that throughout the agreement the loan of $1.1 million remained owing, Master Cannon did not regard these as sufficient grounds for holding that the agreement satisfied the requirements of the Ordinance as to the effective rate of interest. She held that the interest charged on the loan was not expressed in terms of a rate so that pursuant to section 2(2), any amount paid or payable to the lender must be appropriated to principal and interest as set out in Schedule 2. She held that the effective rate had to be determined by applying the method of calculation as set out in Schedule 2 and she accepted the defendants' expert's calculations which produced an effective rate of 66.38% p.a.

26. It is the plaintiff's case that Master Cannon's interpretation of section 24 was erroneous. Put simply, the plaintiff's submissions involve the following propositions:

(a) The scheme of the Ordinance like that of the Moneylenders Act 1927 upon which it was modelled permitted interest to be charged on a loan to be expressed in terms of a simple actual rate per centum per annum. Where it could not be so expressed, resort was to be had to a deemed rate, to be calculated in accordance with Schedule 2.

(b) The interest payable under the Second Legal Charge was "expressed in terms of a rate" within the meaning of the opening words of section 2(2).

(c) Where interest is expressed in terms of a rate, that is to say an actual rate of interest, there is no scope for the application of Schedule 2.

(d) The definition of effective rate in section 2(1) is not absolute. Rather, it applies "unless the context otherwise requires".

(e) In situations within (c) above, effective rate can only mean the actual rate.

(f) As the interest in the Second Legal Charge is capable of being expressed in terms of a rate, namely 60% p.a., that is the effective rate for the purposes of section 24.

27. That the Ordinance is modelled on the Moneylenders Act 1927 is clear from a comparison of the relevant provisions. Sections 2(1) and (2), 18(2), 25(3) and the Schedule 2 correspond to sections 15(1) and (2), 6(2), 10(1) and the First Schedule to the 1927 Act. Whilst section 2(2) of the Ordinance corresponds substantially to section 15(2) of the 1927 Act, it is to be noted that "effective rate" is not an expression that is to be found in the 1927 Act. Further, the heading of Schedule 2 differs from that of the First Schedule to the 1927 Act although the contents are essentially the same. Schedule 2 bears the description "Calculation of True Annual Percentage Rate of Interest" whereas the First Schedule is headed "Calculation of Interest Where the Interest Charged on a Loan is not Expressed in Terms of a Rate."

28. Section 18(2) of the Ordinance specifies the matters that have to be set out in the note or memorandum relating to a loan by a moneylender and includes, amongst others, the following:

"(i) the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2 ..."

It contemplates that the rate of interest changed could be stated in one of two ways. There is a parallel provision in the 1927 Act, namely, section 6(2), the effect of which has been considered by the English Court of Appeal. In Askinex Ltd v. Green [1969] 1 QB 272, Lord Denning M.R., held (at 281F-282A):

"... section 6(2) ... gives the moneylender a choice between two alternatives, which I will call alternatives (A) and (B). The choice is between stating an actual rate and a deemed rate. The first alternative (A) applies when the interest charged on the loan (i.e., the total amount payable in money over the full period) is capable of being expressed in terms of a simple actual rate per cent per annum over that period. In such a case the moneylender satisfies the statute by stating that rate in the memorandum. The second alternative (B) applies when the total sum of interest is not capable of being expressed in terms of a single actual rate per cent per annum, with the result that resort must be had to a deemed rate. In this second alternative the moneylender has to ascertain the deemed rate by making the calculation prescribed in the First Schedule and he must state in the memorandum that it is 'calculated in accordance with the provisions in the First Schedule' to the Act."

29. So where an actual rate is specified in the note or memorandum, the schedule has no application. The calculations in the schedule are only 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.

30. I would respectfully adopt the same construction for section 18(2)(i) of the Ordinance. It is a construction that accords with the provisions of section 2(2): the calculations set out in Schedule 2 produce a deemed rate of interest and resort to Schedule 2 is only necessary where the interest charged "is not expressed in terms of a rate". Indeed, the requirement in the main part of section 2(2) to appropriate to principal and interest any amount paid or payable to the lender, repeated in paragraph 1 of Schedule 2, makes no sense and is difficult to apply where, as in the present case, the nature of each payment (i.e. whether it is a payment of interest or of principal) is clear. Nor, in my view, is it really possible to perform the calculations set out in Schedule 2 where an actual rate has been specified. In such a case, the calculations cannot readily be performed because they are not meaningful and cannot be meaningfully applied to produce a deemed rate where interest is charged at an actual rate.

31. It is also clear from the majority judgment in Askinex that so long as the interest is capable of being expressed in terms of a simple actual rate per centum per annum, it matters not that the actual amount of interest payable is set out rather than being expressed as a rate per centum per annum. That is precisely the situation in the present case: interest at $55,000 per month corresponds to simple interest on the loan at 60% p.a.

32. In my judgment, Schedule 2 to the Ordinance has no application unless the interest payable under a loan is not capable of being expressed in terms of an actual rate per cent per annum. In such a case, the calculations set out in Schedule 2 yield a deemed rate.

33. It is, to say the least, curious that the draftsman has chosen to define "effective rate" in the interpretation section by reference only to the deemed rate. As noted above, the expression "effective rate" has no counterpart in the 1927 Act. It is evident that the question of statutory construction that has arisen in the present case stems from the changes that the draftsman saw fit to make to the provisions of the Act upon which the Hong Kong provisions were modelled. As will become apparent, no such problem arises under the 1927 Act.

34. The question of statutory interpretation is the meaning to be given to "the effective rate of interest" in section 24 and, for that matter, section 25 of the Ordinance. Those sections are meant to strike down excessive interest rates. Given my view of the construction of Schedule 2, the expression "effective rate" when read literally by reference to its statutory definition, only agreements with a deemed rate calculated in accordance with Schedule 2 would come within the purview of these sections. This clearly could not have been the intention of the legislature. Plainly, section 24 is meant to render unenforceable cases where the actual interest is stated and that exceeds 60%, for example, where simple interest is charged at 65% per annum. That being so, the context requires that "effective rate" used in section 24 (and section 25) be given a different meaning in cases where Schedule 2 can have no application, i.e., where the interest charged is capable of being expressed in terms of a rate. In such cases, "effective rate" must mean the actual rate of interest per centum per annum.

35. This, of course, is the position under the 1927 Act. Section 10(1) which corresponds to section 25(3) of the Ordinance applies where "the interest charged exceeds the rate of 48% per annum", the "interest charged" being the actual rate if it is capable of being expressed in terms of a rate or the deemed rate under the second part of section 15(2) of the Act.

36. In my judgment, the interest payable under the Second Legal Charge is capable of being expressed as an actual rate per cent per annum, i.e., 60% p.a. It follows that the Second Legal Charge is not rendered unenforceable under section 24.

37. Accordingly, the judgment dated 26 May 2000 holding that the effective rate of interest under the Second Legal Charge amounted to 66.38%, rendering the loan agreement unenforceable under the provisions of section 24 of the Ordinance must be reversed and set aside.

Directions

38. The issue which remains to be determined is whether the transaction ought to be re-opened on the basis that it is extortionate. That was exactly the issue identified by Cheung J on 27 July 1999 since which time there has been a fruitless and expensive legal odyssey of some 22 months, ending up at the starting point. Had the section 24 point been raised before Cheung J, notwithstanding the parties' consent, I doubt if he would have ordered that a preliminary issue of a difficult point of law be determined by a master. For one thing, no saving in time or expense would have been likely. When it did arise, the directions of the Judge should have been sought as to the further conduct of the O. 88 application. It should not have been assumed that the change in the issues arising made no difference and that it was an issue for the master to determine.

39. The case must now be remitted back for trial. In view of what has occurred, it would not be desirable for the case to be determined (for the third time) by a master. I would remit it back for trial by a judge of the Court of First Instance. It should be listed before such a judge for directions at the earliest opportunity.

The 1st appeal

40. This is an appeal from the order dated 17 August 2000 of Master Cannon entering judgment in favour of the defendants. The order would not have been made but for her earlier ruling on the preliminary issue which has been set aside. For this reason, the August 2000 order must also be set aside and I would so order. It is therefore unnecessary to consider the submissions which would have been relevant had the ruling on the preliminary issue been upheld.

Hon Yuen J:

41. I respectfully agree with the Judgment of Hon. Le Pichon JA. I would only like to emphasize one refinement to the proposition that where an actual rate is specified in the note or memorandum, Schedule 2 has no application.

42. The "actual rate" there referred to is the first means in s.18(2)(i) of formulating interest payable, i.e. "the rate of interest charged on the loan expressed as a rate per cent per annum". That rate must by definition be a single, constant rate charged on the entire loan. The language does not admit of a rate varying from time to time.

43. Therefore, it cannot apply to agreements where repayments comprise elements of both principal and interest. In those agreements, with each (say, monthly) repayment the principal is steadily reduced. Even though the borrower is making the same monthly repayment at ostensibly the same rate of interest, the truth is that (since the principal is steadily reducing) there is a hidden increase in the interest rate. There is no single constant rate of interest and the "actual rate" formulation does not apply.

44. In those situations, the second formulation in s.18(2)(i), i.e. the statutory calculations, is applied by s.2(2). According to Schedule 2, the repayments have to be appropriated between principal and interest, to arrive at a "statutorily averaged" true rate of interest for that agreement.

45. As for the argument that the words "effective rate of interest" in s.24 and s.25 mean only the rate according to the statutory calculations, that could not have been the legislature's intention when s.24 and s.25 are read in the context of s.18(2)(i).

46. The purpose of enacting s.18(2) was to inform the borrower of facts relating to his loan. Those facts must obviously be true facts. So when the legislature provided for the two formulations of interest in s.18(2)(i), the legislature was indicating that the true rate of interest may be arrived at by either one or the other formulation (depending on whether there was a single constant rate to enable the first formulation to apply). There is no reason why it would reject that concept in another part of the statute.

47. The definition in s.2(1) of "effective rate" as the "true annual percentage rate of interest calculated according to Schedule 2" is qualified by the words "unless the context otherwise requires". In the context of a single constant rate of interest under the first formulation in s.18(2)(i), the "true annual percentage rate of interest" is just that.

Hon Wong JA:

48. I agree with the judgment of Le Pichon JA and the directions that she proposes.