XCHRX The New China Hong Kong Finance Ltd. (in liquidation) v. To Sau Ching

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 14129 OF 2000

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J U D G M E N T

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1. There are before me two summonses taken out by the plaintiff. Firstly, an Order 14 summons for summary judgment. The second in amended form under Order 18, rule 19 to strike out the defence on the ground that it discloses no defence, or alternatively, that it is frivolous or vexatious or otherwise an abuse of the process of the court. I will take the Order 14 summons first and then, if necessary, deal with the summons under Order 18, rule 19.

2. It is necessary to set out the history and background to this matter. Much of what I am about to relate comes from the first affidavit of Mr James Wardell sworn on 30 November 2000 which starts at page 36 of the court's bundle. Mr Wardell is one of the joint and several liquidators of the plaintiff. I should make clear, as he has, that he has prepared his affidavit by looking at such contemporaneous documents as were available to him. Some documents, as will become clear presently, have been misplaced.

3. This claim in the sum of $190,325.38 is said to be the outstanding amount of principal and interest in respect of loans made by the plaintiff to the defendant to enable her to purchase shares through an associate company of the plaintiff. The framework by which this came about is as follows: the plaintiff used to be an associated company of the New China Hong Kong Securities Limited, NCHK, now known as Century City Securities Limited. Both of these companies are wholly owned subsidiaries of the New China Hong Capital Limited to which I need make no further reference in this judgment save to observe that as part of the securities arm of the New China Hong Kong Capital Limited, NCHK Securities acted as stockbroker and the plaintiff as the finance company for NCHK Securities' margin trading clients.

4. On 25 January 1999, the plaintiff went into creditors' voluntary liquidation and Mr Wardell and two others were appointed its liquidators with the duty and power to recover such debts as are owing to the plaintiff.

5. As to the amount allegedly owed by the defendant, Mr Wardell has looked at such documents as are available to him and he says as follows: on 26 June 1997, the defendant opened an account with NCHK Securities for her securities dealing, the securities account, essentially to buy and sell shares listed on the Hong Kong Stock Exchange, and another account with the plaintiff, the finance account, in order to finance the purchase of securities through the securities account. The arrangement was that if she did not have enough money to purchase securities through NCHK Securities, the plaintiff would, on a transaction by transaction basis, provide the necessary finance by lending her the money to make the purchase. The plaintiff would then keep the shares so purchased on deposit with itself as security for the loans made to the defendant.

6. The finance account upon which this action is brought was also opened by the defendant on 26 June 1997. It bears the number 101323. At page 38 of the bundle, Mr Wardell seeks to make good his point about this by drawing attention to five features of the evidence before the court which appear from the affidavits in the bundle. These features are as follows:

(a) an independent set of account ledgers with a serially assigned reference of 101323 exist in the physical and computer records of the plaintiff;

(b) the account ledgers clearly identify the defendant as the account holder;

(c) since 26 June 1997, a number of undisputed transactions were recorded in the account ledgers;

(d) a full set of duplicates of monthly statements were issued in relation to the account from June 1997 to January 1999 when the plaintiff went into liquidation;

(e) monthly interest charges were made to the account on the negative balance at the rate of prime plus 4 per cent per annum;

(f) the defendant admits the existence of the account; and

(g) the defendant has made repayments for her indebtedness in the account.

7. As will become apparent, most of those features are either not in dispute or the evidence in support is such that I will be in a position to accept the particular proposition that is being put forward on behalf of the plaintiff.

8. In paragraph 8 of his affidavit, page 39, Mr Wardell produces as JW-1 a copy of the plaintiff's standard form agreement and at paragraph 9 a standard form of two letters of authority which he says the defendant would have signed and given to the plaintiff authorising the transfer of funds and securities between the finance account and the securities account (Exhibit JW-2 starting at pages 70 and 81).

9. An important issue arises over these documents because as a result of the plaintiff's reorganisation, a change of office address and subsequent liquidation, the original agreement and the letters of authority, which it is said must have been signed by the defendant, have gone astray. It is said on behalf of the plaintiffs - and this is the only way in which they can now put it - is that the defendant must have signed the agreement and the two letters of authority pursuant to the plaintiff's usual course of conducting its business with its clients. The defendant does not accept this and so I must return to this aspect of the evidence presently.

10. Thereafter, the defendant began to trade on her securities account and to draw down loans on the finance account. The history of the defendant's drawings from and repayment into her finance account appears in the 33 monthly statements from June 1997 to January 1999 (Exhibit JW-3, pages 86 to 118). This produces the final balance together with contractual interest which the plaintiff now seeks to recover. The account and the amounts are in dispute. Mr Wardell has sought to explain this course of trading by the defendant from paragraphs 10 to 20, pages 39 to 44.

11. I summarise the effect of this evidence: he says these monthly statements were picked up by the defendant. She denies this. He also says that transaction notes would also have been issued to her by the stockbrokers, NCHK Securities, which is also denied. Mr Wardell then explains how this final balance developed on the defendant's account, which was the result of a purchase by her on 16 September 1997 of 200,000 Fairwood Holdings Limited shares through NCHK Securities. From the monthly statements he can say that on 16 September her finance account was in the red to the tune of $194,471.72 and that the defendant did not pay cash in order to make that purchase. Consequently, the plaintiff lent her a further $146,602.98 to enable her to make this purchase. This increased her indebtedness to $341,074.70. Those Fairwood shares were sold a week later, on 23 September, at a loss for $131,454.84. That sale reduced the negative balance to $212,047.64 when one takes into account contractual interest of $2,427.78, which was added to the negative balance.

12. Between 23 September 1997 and 31 December 1998, the defendant had credited to her account $225,172.87 (see paragraph 15, page 41 where Mr Wardell has been able to itemise and identify each and every amount credited to her account). These credited amounts were applied on a first in first out basis, the oldest debts being satisfied first and so on.

13. At paragraph 17, page 42, Mr Wardell says that by applying the "first in first out" method, the total of $225,172.87 paid into the account by various means had the effect of settling all of the defendant's indebtedness incurred before 16 September 1997 as well as $30,701.15 of the loan of $146,602.98 which had been advanced to her on 16 September supra.

14. Under clause 2.3 of the agreement (Exhibit JW-1), default interest applies to any outstanding debit balance calculated at 4 per cent above HSBC prime lending rate. This has been particularised in paragraph 18, pages 42 and 43, and at paragraph 19, page 43.

15. The claim is particularised as to principal, custodian charges and interest. Interest is claimed for two chronological periods: firstly from September 1997 to January 1999 when the plaintiff went into liquidation and then from 1 February 1999 to 26 September 2000 being the date of the issue of the writ. This therefore is how the amount of $190,325.38 is arrived at.

16. The defendant has filed a defence and made an affirmation dated 12 January 2001. A number of points have been taken on her behalf. The first is a pure point of law, which, if correct, would have the effect of completely disposing of the action, let alone entitling the defendant to unconditional leave to defend. It is therefore convenient to consider it as a discrete issue at this stage.

17. Following his pleaded case, Mr Bok, who appears for the defendant, submits that the plaintiff was a licensed moneylender under the terms of the Mondeylenders' Ordinance, Cap. 163, and held a valid licence under the ordinance. In view of this, Order 83A, rule 2 of the Rules of the District Court would apply with the effect that, inter alia, a writ beginning a moneylender's action must be endorsed with a statement that at the time of the making of the loan or contract, or the giving of security, the lender was licensed as a moneylender. It is submitted that as the original writ did not contain this statement, the proceedings are a nullity.

18. Once the point had been taken, the plaintiff sought and obtained leave to file an amended statement of claim, leave having been given on 14 March 2001, pages 22 to 35, which is said to cure any defect in this regard (see paragraph 2(a) of the amended pleading). Mr Bok says that this is a requirement which should have been dealt with correctly at the outset and which cannot be put right now by amendment. He relies on the case of Welfare Company v Hickok Plastic Manufactory & Another [1965] HKDCLR 190, a decision of Judge T L Yang, as he then was, as authority for this proposition where it was held that failure to comply with the then equivalent of Order 83A, rule 2 was not just an irregularity which could be cured by amendment, but that it went to the very substance of the matter so as to render the proceedings a nullity.

19. Perhaps surprisingly, this is the only reported case in Hong Kong which bears on the effect of a breach of the rule (see Hong Kong Civil Procedure, 2001 Edition, the White Book, and the notes to the rule, page 1068). I have not been able to discover any other case which addresses the issue and apparently neither have the editors.

20. In Welfare Company v Hickok Plastic Manufactory Supra, the plaintiffs did not treat the loan that they were suing on as a moneylending transaction within the terms of the ordinance because part of the loan had been advanced on a friendly basis without interest. They merely brought the action on the basis of two dishonoured cheques. The learned judge held that this was a moneylending transaction as part of the plaintiff's business as moneylenders and that the plaintiff could not avoid the consequences of the rule by dressing up the action as something else. He held that such non-compliance was misleading and prejudicial to the defendants in that this had the effect of failing to inform them that this was a moneylender's action. There does not appear to have been application before the judge to amend the writ to comply with the rule but, in any event, it would appear that had such an application been made, it would have made no difference by virtue of his holding that non-compliance of the rule rendered the action a nullity.

21. It is right to observe, of course, that this case being a decision of this court cannot bind me, although if I may say so, any decision of Judge Yang is one which must be accorded proper weight and respect. Nevertheless, I am bound to say that the facts of the case before me are materially different.

22. If the plaintiff is correct and their standard form of contract was brought to the notice of the defendant, it is very clear indeed from a reading of that comprehensive document that this was a moneylending transaction within the terms of the Moneylenders' Ordinance. See Rider A, page 78 of the bundle and Rider B, page 80. Both are headed, "The Moneylenders' Ordinance" and draw attention in detail to a borrower's rights under this ordinance. No person who has had this agreement drawn to their attention could fail to realise that this was a moneylending agreement within the terms of the Moneylenders' Ordinance. The facts of this case are wholly different from those in Welfare Company v Hickok Plastic Manufactory.

23. I am of the view that Order 83A, rule 2 is mandatory as to its requirements, but that the court retains the discretion to allow an amendment and thereby cure an initial failure to comply with the rule. To hold that an initial failure to plead the Moneylenders' Ordinance results in the action becoming a nullity goes too far. I am therefore respectfully of a different view to that arrived at by Judge Yang on the construction and effect of the rule.

24. The court of course retains a discretionary power to allow amendments to pleadings any time up to judgment. In the exercise of its discretion, it will allow or refuse such applications having regard to the particular factors which bear on the matter before it. Prejudice to the party opposing the amendment will always sound heavily in the exercise of the discretion. In this case the amendment has already been allowed by the Master. There can be no prejudice on the facts of this case provided it can be shown that the defendant knew that she was facing a moneylender's action.

25. It depends therefore on the circumstances of the particular case whether an amendment to comply with the rule will be allowed. In some cases the prejudice will be such that the amendment may have to be refused, which would mean that the plaintiff would have to discontinue the action and start again. In most cases I would have thought that provided the amendment is sought early, it will be allowed, and before me the amendment has been allowed. I hold that the failure to comply with the rule at the outset does not render the action a nullity, but merely irregular. The irregularity has been corrected.

26. That having been said, this is an Order 14 proceeding and I must consider whether this issue is such, even though I have come to a firm conclusion about it, that it must of its nature raise a triable issue sufficient to require the matter to go to trial. I have decided that this of itself would not, where for my part I have come to the firm view that the initial non-compliance with Order 83A, rule 2 does not render the action a nullity.

27. I can now go on to decide the other matters raised by Mr Bok which amount to factual issues. Mr Bok has rightly submitted that the plaintiff bears a very heavy burden to persuade the court to enter summary judgment. The rule is clear; the court must be satisfied on a balance of probabilities that there is no defence to the claim.

28. In Man Earn Limited v Wing Tong-fong [1996] HKC 225, the Court of Appeal held that unless it was obvious that a defence put forward was frivolous and practically moon-shine summary judgment ought not to be applied for.

29. It has been put less graphically in other cases such as Ng Shu-chun v Hung Chun-san [1994] 1 HKC 155, 158G to H as follows:

"Is what the defendant says credible? If so, he must have leave to defend. If not, the plaintiff must have summary judgment. The issue is not whether the defendant's assertions are to be believed, it is whether those assertions are believable."

30. So the principle is clear.

31. Mr Bok submits that there has been non-compliance with section 18(1) of the Moneylenders' Ordinance which requires a number of important formalities to be complied with in the form of the moneylending agreement. This part of his argument must fail because Mr Sit for the plaintiff has put in two certificates in the statutory Form 10 covering the whole of the period of the lending transactions with the defendant exempting the plaintiffs from the requirements of section 18 provided certain conditions are complied with.

32. I must therefore go on and consider whether I am satisfied that the conditions have been complied with. This involves me deciding whether the plaintiff's standard form of agreement was drawn to the defendant's attention and signed by her (see condition (b), (i) and (ii) of the conditions to the exemption. This also overlaps with Mr Bok's general point which he says gives rise to a triable issue, and that is that the plaintiffs have failed to prove the existence of this agreement between themselves and the defendant.

33. It is right to say that the plaintiffs start from the disadvantageous position of being unable to produce the defendant's original signed form of contract. She denies having had one. Mr Bok says that in the circumstances, that denial of itself is sufficient and he must therefore have unconditional leave. Such an approach, in my view, although understandable, fails to address the practical realities of the relationship between the parties. The defendant admits that she was a client of the plaintiff's and that they offered her the services which give rise to the action. Her affirmation leaves no doubt about that, confirmed as it is by her letter (Exhibit JW-5, page 126 to Mr Wardell's affidavit) and the cheques sent on her behalf (Exhibit JW-4, page 119).

34. In my judgment, having regard to the fact that the plaintiff's practice was to have these agreements and the two letters of authority signed by their clients prior to the start of the trading, I find it inconceivable that this lady was not required to do the same when she became the plaintiff's client. Mr Wardell's affidavit is to the effect that this was their practice, very much, I suppose, like a bank requiring a customer to sign basic documents such as the standard mandate and terms of banking. I have no doubt that the defendant signed those three documents. She would not have been accepted as a client had she not done so.

35. That finding has the effect of disposing of the section 18(1) Moneylenders' Ordinance point raised by Mr Bok because I am therefore satisfied that the conditions attached to the exemption have been complied with. It also more generally establishes the contractual basis for the transactions that were performed on the defendant's finance account.

36. The matter then becomes one of deciding whether this account itself has been correctly kept. In other words, is the computer generated record (JW-3, pages 86 to 118) accurate? Mr Wardell says that the defendant would have received these monthly statements. She says otherwise. Again, I am satisfied that with these computer generated documents, the balance of likelihood, favours Mr Wardell's evidence that copy statements were made available for her. But even if I am wrong about that, this does not detract from the accuracy of the monthly statements.

37. It is clear that what has occurred in this case - and I get this from the defendant's letter to the plaintiff, page 128, Exhibit JW-5 - is that she, having entered into these transactions after initial enthusiasm and some successes, rather ignored this risky margin account and then went to live in Canada for some time with her husband. Now that she has returned to Hong Kong, she has had to face up to the difficulty of dealing with a liability that is somewhat larger than she had expected.

38. I am satisfied that subject to the question of interest, the principal owing has been proved by the plaintiff and there can be no defence to the claim.

39. Mr Bok then goes on to submit that the interest charged amounts to compound interest. He submits that the effect of clause 2.3 of the agreement, page 71, is that the borrower has to pay interest on the unpaid interest. It seems to me that this would be unobjectionable in principle. The unpaid interest at the end of each month then forms part of the principal outstanding and simple interest is then charged on that. This cannot be described as compound interest. Mr Wardell has explained the basis of calculation, which is also reproduced in the monthly statements (see paragraph 6, page 38). This supports the claim for interest in the sum of $41,086.62 which is from September 1997 until January 1999 when the plaintiff went into liquidation.

40. There is a further claim from 1 February 1999 until 26 September 2000 when the writ was issued. As to this latter period, I am not persuaded that this contractual rate should be recoverable where the company was in liquidation.

41. I am entirely satisfied therefore that the defendant has no defence in respect of the outstanding principal advanced on the loan to purchase the Fairwood shares, which is $115,901.83, $200 for custodian charges and $41,086.62 for contractual interest at 4 per cent over HSBC prime, giving a total of $157,188.45. I propose to enter judgment in favour of the plaintiff in that amount. There is simply no defence to this. To that there must be interest at half the judgment rate from the date of the writ until today, and thereafter at the judgment rate until payment.

42. As to the remainder being the post-liquidation interest, the defendant must have unconditional leave to defend. I leave it to the plaintiff to decide whether to abandon this excess or to press on for trial and I shall hear from Mr Sit on this in a moment.

43. My judgment on the Order 14 summons renders the summons under Order 18, rule 19 academic although there remains a potential claim for $31,000-odd for the post-liquidation interest. Nevertheless, in the event of an appeal, I propose to rule on the Order 18, rule 19 application which I can take shortly.

44. In bringing this summons, the plaintiff takes upon itself a very high burden. The note to the rule, 18/-19/-6 and 18/-19/-7, page 289 of the Hong Kong White Book make clear that it is only in plain and obvious cases that the court should exercise its power summarily to strike out pleadings and endorsements under this rule. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. Ha Francesca v Tsai Kut Kan [1982] 1 HKC 328:

"The jurisdiction should not be exercised if it requires a minute and protracted examination of the documents and facts of the case in order to see whether the plaintiff really has a cause of action. Where an application to strike out pleadings involves a prolonged and serious argument, the court should as a rule decline to proceed with the argument unless it not only harbours doubts as to the soundness of the pleadings, but in addition is satisfied that striking out the pleading would obviate the necessity for a trial."

45. Winland Investment Limited v King's Dyeing and Weaving Company Limited (in liquidation) [1987] 2 HKC 542:

"However, where the court comes to the conclusion after full argument that the case is plainly and obviously one for striking out, it should not decline to do so on the ground that the issues are difficult or complicated (see Byjoy Limited v Througood Estates Limited [1985] 2 HKC 746).

It is for the parties seeking to strike out an endorsement on a writ, a pleading, to demonstrate that the case is a plain and obvious one in which the other party's claim is bound to fail (see The Artemis [1983] 1 HKC 46).

A reasonable cause of action means a cause of action with some chance of success. When only the allegations and the pleading are considered, the mere fact that the case is weak and unlikely to succeed is no ground for striking it out (see Brilliant Star Investment Limited v International Acceptances Limited [1989] 1 HKC 275 and Karex (HK) Ltd v Fortune Talent Development Limited [1994] HKC 203)."

46. The defence in this matter as a pleading appears to me to be perfectly proper although much of it merely puts the plaintiff to proof with the result that had there been a trial, it might have been difficult for the defendant to develop a specific case because it had not been pleaded.

47. The way the matter has been put amounts to a perfectly adequate pleading. Mr Sit has come nowhere near to showing that the defence should be struck out under this rule, notwithstanding that he has succeeded under Order 14, which enables the court to have regard to the evidence and which also calls for a consideration of different principles.

48. Accordingly, had I been put to it, on a practical basis, to decide this summons, I would have dismissed it. But as a matter of form, and in the event that there is an appeal against my decision on the Order 14 summons, I will dismiss the summons under Order 18, rule 19.

49. The parties therefore have my ruling on both summonses and that now then brings me to costs.

(Discussion re costs)

50. Costs on the Order 14 summons to the plaintiffs on a party and party basis.

(Further discussion re costs)

51. Costs to you, Mr Bok, on the Order 18, rule 19 summons.

(Discussion re certificate for counsel)

52. With certificate for counsel.