ONTONE FINANCE CO LTD v. MS LEUNG LAI CHING, MARGARET AND ANOTHER

HCA 372/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 372 OF 2011

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J U D G M E N T

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1. This is an Order 14 application by Ontone Finance Company Ltd ("the plaintiff") to recover outstanding principal and interest from Leung Lai Ching, Margaret ("the first defendant"), the borrower under two loan agreements. As at 28 February 2011, the amount outstanding stood at $3,723,054.80.

FACTUAL BACKGROUND

2. The plaintiff is a licensed moneylender.

3. It entered into two loan agreements with the first defendant:

(a)   under loan agreement No. 416 dated 2 January 2009 ("the 1^st loan"), the plaintiff advanced the sum of $1 million to the first defendant for a term of 9 months at the rate of 36% per annum at simple interest;

(b)   under loan agreement No. 425/426 dated 5 February 2009 ("the 2^nd loan"), the plaintiff advanced the sum of $1.5 million to the first defendant for a term of 12 months at the rate of 42% per annum at simple interest.

4. They were fixed term loans with the principal payable at the end of the term but interest was payable monthly. It was the plaintiff's practice to require post-dated cheques to be deposited with the plaintiff to cover the monthly interest payments.

5. The loan agreements were in Chinese and the terms were identical save for the rate of interest. Clause 4 dealt with interest. The agreed translation is as follows:

"4. Interest

Interest shall be calculated once a month from the first day the funds are made available for use. If an interest repayment date falls on a bank holiday, the date of payment shall be deferred to the following bank working day.

The rate of interest for every $1 million shall be 36% (per annum).

Interest shall be paid in Hong Kong dollars.

Should the borrower delay in paying all or any part of such payment which is due, overdue interest shall be payable, (the rate of) the overdue interest shall be set at 12% (per annum) above the original interest rate for the loan."

6. On 8 March 2011, the plaintiff brought a moneylender's action under Order 83A of the Rules of the High Court against the first defendant as borrower and the second defendant (who is not a party to the summary judgment application) as guarantor.

7. The first defendant's defence was simple: it was based on full repayment of principal as well as interest. The first defendant provided particulars of the repayments by way of two tables on 7 June 2011. The firsttable comprised details of repayments said to have been made in cash by the first defendant upon which the cheques particularised therein were returned to the first defendant by the plaintiff as confirmation of repayment. The second table simply listed the dates and amounts of cash allegedly repaid. The last repayment was said to have been made in December 2009. The aggregate amount of repayments shown in the tables came to $4,672,500.

8. The defence advanced was remarkable in that the amount allegedly repaid exceeded the amount outstanding as at 28 February 2011 by almost $900,000.

9. The plaintiff took out the present summons for summary judgment on 19 March 2012. Ms Yau Sze Man, a director of the plaintiff, made the supporting affirmation which set out in detail the interest payable and payments received in respect of each of the loans. The plaintiff gave credit for the repayments for the two loans amounting to $855,000. As at 28 February 2012, the outstanding principal and interest stood at $3,723,054.80.

10. In her affirmation dated 3 April 2012 filed in opposition to the plaintiff’s summons, the first defendant sought to explain that she had difficulty gathering rebuttal evidence because she "did not maintain any records regarding the repayments" made to the plaintiff. The first defendant agreed that she had made the repayments totalling $855,000 identified by the plaintiff but claimed that those were in addition to the aggregate amount of $4,672,500 shown in the tables which she adopted in her affirmation. The total amount claimed to have been repaid thus came to $5,227,500.

11. In rebuttal, in May 2012, Ms Yau filed a second affirmation setting out the relevant background to the loans and demonstrating that many of the entries shown in the two tables were referable to repayments made under other loan agreements made with the first defendant’s business associates. That evidence is summarized in §§14 – 17 below.

12. About 2 months later and some 10 months after the plaintiff had filed its reply to the first defendant's defence, the first defendant amended her defence and for the first time raised an additional defence based on illegality. At about the same time, the first defendant also filed her second affirmation. The first defendant did not take issue with Ms Yau's second affirmation. Instead, she stated that she had located additional cash payment records and asserted that six payments totalling $2,095,000 had been made to the plaintiff between August 2009 and January 2010. That brought the total amount of repayments allegedly made by the first defendant to $7,322,500, almost double the amount claimed.

13. For an understanding of the evidence relating to the full repayment defence, it is necessary to outline the backdrop to the loans in question and the circumstances in which they came to be made. Those matters set out in Ms Yau's second affirmation are not controversial.

14. In summary, between 1 September 2008 and 17 April 2009 the plaintiff entered into five loan agreements respectively dated 1, 10, 29 September 2008, 6 October 2008 and 17 April 2009 ("the Other Loan Agreements") with four individuals ("the Other Debtors") including Chan Siu Lun ("Alan Chan") and Chan Fong Kong ("Francis Chan").

15. Ms Yau was introduced to the first defendant by Francis Chan whom she had known since 2005. She was given to understand that the first defendant was involved with the Other Debtors as business partners in projects in the Philippines and Mongolia. Prior to the making of the 1st and 2nd loans, the bulk of the Other Loan Agreements had already been made with the Other Debtors. While the first defendant was not one of the Other Debtors in relation to those loans, in respect of each of the Other Loan Agreements, the drawdown cheques were drawn in her favour at the direction of the Other Debtors and the requisite number of post-dated cheques the plaintiff required to cover the interest payments and the principal amount were drawn from the first defendant's personal bank accounts. Those cheques bore cheque numbers largely in sequential order.

16. In late December 2008, when approached for further funding by the Other Debtors, the plaintiff declined because their debt exposure had become too great. It was then that the request was made that the loan be made to their business partner, the first defendant. This resulted in the 1^st loan and was followed by the 2^nd loan approximately a month later. In each case it was the first defendant who provided the requisite number of post-dated cheques.

17. When the Other Debtors defaulted under the other Loan Agreements, the plaintiff brought two actions against them, viz. HCA 408 of 2011 and HCA 433 of 2011 and obtained summary judgment in both actions on 28 February 2012.      

IS THERE A TRIABLE ISSUE?

The full repayment defence

18. Without question, this defence clearly merits the epithet "moonshine".

19. Given the evidence before the court, Ms Abigail Wong (who appeared for the first defendant) fairly acknowledged the difficulties that stood in her way and all but abandoned the defence at the hearing. Apart from anything else, that a debtor faced with a claim of approximately $3.7 million as at the end of February 2011 should have repaid virtually double that amount by January 2010 beggars belief.

20. I would add that the plaintiff’s evidence is thorough and convincing. It has dealt painstakingly with the alleged repayments. It has produced helpful charts to correlate the payments said to have been received by the plaintiff to the relevant loan agreements. Having made random checks of some of the alleged payments, I am more than satisfied with the plaintiff's full explanation and that, apart from the sum of $855,000 that is attributable to the 1st and 2nd loans, the other amounts repaid were in respect of the Other Loan Agreements.

The Money Lenders defence

21. The first defendant contends that the loan agreements in question are illegal and unenforceable because section 22 (1) (c) of the Money Lenders Ordinance, Cap 163 ("the Ordinance") renders it illegal for a money lender to provide for a higher rate of interest on default.

22. The last paragraph of the provision for the payment of interest reads:

"Should the borrower delay in paying all or part of such payment which is due, overdue interest shall be payable, (the rate of) the overdue interest shall be set at 12% (per annum) above the original interest rate for the loan."

23. Mr Anson Wong, counsel for the plaintiff, submitted that the provision could be read in one of three ways:

(1)  overdue interest is payable on the balance then outstanding at 12% above the original rate;

(2)   overdue interest is payable on the default sum only at 12% above the original rate;

(3)   overdue interest is payable on the default sum only at an interest rate of 12%.

24. In pertinent part, section 22 of the Money Lenders Ordinance, Cap. 163 ("the Ordinance") provides as follows:

"22. Illegal agreements

(1)   Any agreement made for the loan of money by a money lender shall be illegal if it provides directly or indirectly for…

   …

(c)  the rate being increased by reason of any default in the payment of sums due under the agreement:

   Provided that provision may be made by any such agreement that if default is made in the payment upon the due date of any sum payable to the money lender under the agreement, whether in respect of principal or interest, a money lender shall be entitled, subject to Part IV, to charge simple interest on that sum from the date of default until the sum is paid at an effective rate not exceeding the effective rate payable in respect of the principal apart from any default, and any interest so charged shall not be reckoned for the purposes of this Ordinance as part of the interest charged in respect of the loan.”

25. Unless the interest provision is incapable of having the meaning set out in either (1) or (2) of §23 above, it must be arguable that it falls foul of section 22. For present purposes, suffice it to say that, at the very least, it must be arguable that the interest provision has the second of the three possible meanings set out above.

26. But the fact that the interest provision may conceivably be rendered illegal and unenforceable by reason of section 22 of the Ordinance does not of itself get the first defendant home. Section 22 (2) becomes relevant. It provides:

" (2) Notwithstanding subsection (1), if the court before which the legality of any agreement comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement which does not comply with this section should be held to be unenforceable, the court may order that such agreement is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable."

27. The questions which now arise are whether the court may exercise the wide discretion so conferred in summary proceedings and, if so, whether it is appropriate to do so in the present case and, if so, in what manner.

28. The discretion under section 22 (2) arises when there has been a contravention of section 22 (1). For present purposes, such a contravention is assumed.

29. In §18 of the plaintiff’s supporting affirmation, it is stated that:

"The Plaintiff has not claimed any additional interest for late payment or any penalty interest for default of the Loan Agreements, which it is entitled to do pursuant to Clause 4 thereto and has only claimed interest based on the contractual rate of interest as stated in the respective Loan Agreements."

That statement is not challenged.

30. Counsel for the plaintiff submitted that the discretion in section 22 (2) may be exercised in summary proceedings. He cited the decision of Deputy High Court Judge Lam (as he then was) in Celestial (International) Securities & Investment Ltd v William Henry Woo, HCA 9659/2000, unreported, 4 December 2001 as an example of the court exercising that discretion in an Order 14 application. It appears from that decision that in Orix Asia v Grant Forward Industrial Ltd, HCCL 79/1999, unreported, 15 June 2000 Waung J had also granted summary judgment notwithstanding some technical breaches of the Ordinance.

31. Celestial concerned a provision in the loan agreement for compound interest which contravened section 22 (1). Like the plaintiff in the present case, the plaintiff in that case did not seek to take advantage of the offending provision and did not include compound interest in the calculation of its liquidated claim .

32. The judge concluded, after considering Brother's Company v Ah Puk Transportation [1986] HKLR 821, Adams v Paul's Properties [1965] NZLR 161 at 171 and Cheung Chau v Cheung Ng Sheung, Civil Appeal No. 119 of 1993, unreported, 24 November 1993 that those authorities did not decide as a matter of law that summary judgment could not be granted without a full investigation (at trial) of the general business practice of a money lender. Rather, in considering whether the discretion should be exercised,

"[the] focus should be on the equity of the particular transaction before the court although in appropriate cases, the general practice of the money lender could be relevant."

33. I respectfully agree. Clearly subsection (2) is directed at the particular case before the court. I can find nothing in the language used that would preclude the exercise of the wide discretion in Order 14 proceedings.

34. Whether the discretion should be exercised is necessarily fact-sensitive. Clearly regard must be had to all the facts and circumstances of the particular case. The court must be satisfied it has sufficient evidence before it to warrant the exercise of the discretion.

35. The evidence in the present case establishes the following. The plaintiff is a licensed money lender. It has given a full account of its dealings with the first defendant, their relationship and how the loans in question came to be made. None of that has been challenged. It is not suggested that, apart from the section 22 (1) contravention, the plaintiff has failed to comply with the provisions of the Ordinance. Unlike the plaintiff in Brother's Company, it has not acted in 'blatant disregard' of the provisions of the Ordinance. While in Brother's Company the plaintiff‘s modus operandi (described in §4-5 and 13 of the report) enabled it to have "complete control over the situation" which the court found objectionable, no such features exist in the present case.

36. Rather, what emerges from the evidence is that the plaintiff maintains full and detailed records of its transactions and dealings: that can readily be inferred from its ability to correlate and explain each of the repayments the first defendant claimed to have made to the relevant loan agreement. Nothing in the evidence remotely suggests sharp practice on the plaintiff's part.

37. The first defendant is a businesswoman. At the relevant time, she was engaged in mining and forestry projects in Mongolia and the Philippines with business partners. The loans were obtained to finance her business ventures. No complaint has been made of the rate of interest charged. In any event, whatever one might think of those rates, they were nonetheless within the permissible range under the provisions of the Ordinance and ones that the borrower was willing to pay in order to obtain the funding needed. As between the parties, it was nothing more than a commercial transaction.

38. In balancing the equities in this case, it is relevant that the first defendant has not been prejudiced by the “higher rate” provision since the plaintiff has not sought to charge interest at the higher rate. While I have found nothing in the evidence that suggests sharp practice on the plaintiff's part or conduct that is unbecoming, the same cannot be said of the first defendant. Rather, I am seriously troubled by the fact that the first defendant saw fit to advance the full repayment defence. That remained her sole defence until two weeks before the hearing.

39. The following example serves to illustrate, and offers some insight, into the first defendant's attitude. More than six weeks after Ms Yau’s second affirmation (which had set out a full chronological account of the parties' dealings and painstakingly explained each of the alleged repayments), the first defendant saw fit to file her second affirmation which, instead of addressing or responding to Ms Yau's second affirmation, claimed that further repayments in excess of $2 million had been paid to the plaintiff based on records located through Francis Chan.

40. The first of the payments was one of $382,500 made on 18 August 2009. In §§25-28 of her second affirmation, Ms Yau had given a detailed explanation relating to that lump sum payment and exhibited a repayment schedule showing the apportionment of the lump sum that had been attached to an e-mail dated 20 August 2009 from Alan Chan to Ms Yau and three others including Francis Chan. It is as plain as a pikestaff that only a sum of $30,000 was apportioned to the 1st loan and a sum of $52,500 to the 2nd loan. The balance was apportioned to payments due under the Other Loan Agreements.

41. I regret to say that the first defendant must have known that in all honesty she could not claim that the entire amount of $382,500 was in repayment of the 1st and 2nd loans. It smacks of bad faith on her part: it was little short of an attempt to mislead the court and wasting the court’s time by presenting it with what can only be described as a pack of lies.

42. In the present case, I have no hesitation in concluding that I should exercise the discretion conferred by section 22 (2) of the Ordinance. A trial would serve no purpose since the first defendant has no defence other than the section 22 (1). In my view, the first defendant does not merit any sympathy and certainly does not deserve any windfall.

43. In the circumstances of the present case, I consider that it would be equitable to hold the 1^st and 2^nd loans enforceable but only on the basis that the offending provision, namely, the last paragraph of clause 4, be excised.

44. Accordingly, I order that final judgment be entered against the first defendant for

(1)  the sum of $3,723,054.80;

(2)   interest on the sum of $1,000,000 at the rate of 36% per annum from 1 March 2011 to the date of this order and thereafter at judgement rate until payment; and

(3)   interest on the sum of $1,500,000 at the rate of 42% per annum from 1 March 2011 to the date of this order and thereafter at judgement wait until payment.

45. I also make an order nisi that the costs of this action including the costs of and occasioned by this application be to the plaintiff, to be taxed if not agreed.