CATHAY PORT LTD v. ZHU MING

HCA 2707/2008 and
HCA 1096/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 2707 OF 2008 AND 1096 of 2009

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(Heard Together)

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J U D G M E N T

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1.  I am seized of 3 applications.  There is an appeal and cross appeal in HCA 2707/2008 in relation to an application heard by Master Roy Yu when he entered a partial judgment in favour of the Plaintiff.

2.  The second application is a strike out application issued by the Plaintiff in the same action and the third is an application by the Plaintiff for summary judgment in HCA 1096/2009.

3.  The parties agreed that the most satisfactory way of proceeding with these applications was to hear them all together and then work out how my findings would impact upon each of the separate summonses.

4.  The Plaintiff is a private equity investment fund.

5.  The Defendant was the owner of China Group Logistics Investment Limited (“CGLI”) which owns Nantong Xinda Harbour Investment Limited (“BVI Nantong”) a BVI company.

6.  There are also a number of other companies within the Group.

7.  The business of BVI Nantong is the operation of a port in China.

8.  By a subscription and shareholder agreement dated 23 September 2005, the Plaintiff subscribed to 45% of BVI Nantong’s shares.  Thus the Defendant became a 55% shareholder.

9.  By a subscription agreement dated 22 December 2005 between the Plaintiff and CGLI the later agreed to issue to the Plaintiff a convertible note for US$10 million redeemable by the Plaintiff on demand.  The note is constituted by an instrument executed by CGLI and the Defendant dated the same day.  CGLI was the principal debtor and the Defendant was a Guarantor.

10.  Simple interest was payable to the Plaintiff at the rate of 25% per annum.  The interest accrued on a daily basis and was payable in arrear at the end of the year.

11.  Mortgages were also entered into by CGLI, DVI Nantong and China Group Logistics Company (“HKCGL”), one of the group of companies earlier referred to.  The mortgages were secured on the shares of the respective companies.

12.  The interest for the year 2006 was duly paid.  However, there was default in respect of the US$2.5 million payable for the year 2007.  A sum of just over US$1 million was repaid on 1 July 2008.

13.  On 1 December 2008 the Plaintiff, CGLI and the Defendant entered into two Deeds.

14.  The first was a Deed of Forbearance to sue and the second was a Deed of Modification.

15.  Under the first Deed, the Plaintiff agreed to withhold taking legal action against the Defendant in respect of the outstanding interest payable under the instrument which at the time of executing the Deed amounted to US$2,026,522.40.

16.  The Defendant was required to pay US$1.5 million by 8 December 2008 and the balance of US$526,522.40 was payable on 31 December 2008.

17.  The Defendant did not make the payments payable under the Deed of Forbearance.

18.  The Plaintiff issued a writ on 22 December.

19.  The claims made in the statement of claim were:

(1)     US$2,025,373.56 as outstanding interest under the instrument for the year 2007; and

(2)     US$2,854,022.75 being penalty interest payable under the Deed.

20.  A default judgment was entered against the Defendant on 18 March 2009.

21.  The Defendant applied to the court is set aside this default judgment.

22.  The application in question is the one referred to at the commencement of this judgment.

23.  The Master ordered that the judgment in respect of the interest payable under the instrument would stand and that unconditional leave was granted to the Defendant to defend the claim for the penalty interest payable under the Deed.

24.  The Defendant appeals against the order for the partial judgment and the Plaintiff cross appeals against the order for unconditional leave being granted to the Defendant to defend the second claim.

25.  The strike out summons issued by the Plaintiff relates to the drafting of the defence consequential upon the Master’s order and it should be a simple matter to make an appropriate order dependent upon my decision on the main issues.

26.  The order 14 summons relates to the claim for the principal moneys and again my decision on the main issues will have an impact on this.

27.  It may be helpful to consider the main grounds upon which Mr Jat Sew Tong, SC relies upon to support his contention that his client the Defendant should be granted unconditional leave to defend these proceedings.

28.  Mr Jat calls in aid the provisions contained in the Money Lenders Ordinance Cap. 163.

29.  While it appears now to be accepted that the Plaintiff is not a money lender as defined in that ordinance, Mr Jat contends that by virtue of the definition of a “loan” in section 2 of the ordinance the transactions entered into between the parties bring them within the ambit of the legislation.

“Loan” (貸款) includes advance, discount, money paid for or on account of or on behalf of or at the request of any person, or the forbearance to require payment of money owing on any account whatsoever, and every agreement (whatever its terms or form may be) which is in substance or effect a loan of money, and also an agreement to secure the repayment of any such loan, and “lend” (貸出) and “lender” (貸款人) shall be construed accordingly.”

30.  This being the case there must be compliance with the provisions contained in sections 24 and 25 of the ordinance.

24      “EXCESSIVE INTEREST RATES

(1)     Any person (whether a money lender or not) who lends or offers to lend money at an effective rate of interest which exceeds 60 per cent per annum commits an offence.

(2)     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 the rate specified in subsection (1).

(3)     The Legislative Council may by resolution alter the rate specified in subsection (1): Provided that in relation to any agreement for the repayment of any loan or for the payment of interest on any loan which is in force at the date when such rate is so altered, the rate so specified as at the coming into force of such agreement shall continue to apply.

(4)     Any person who commits an offence under this section shall be liable-

(a)     on summary conviction to a fine of $500000 and to imprisonment for 2 years;

(b)     on conviction on indictment to a fine of $5000000 and to imprisonment for 10 years. (Amended 82 of 1994 s. 33)

(5)          Nothing in this section shall apply to-

(a)     a loan specified in paragraph 12 in Part 2 of Schedule 1; or

(b)     as respects such loan, any person who makes such loan. (Replaced 69 of 1988 s. 20)

25      Reopening of certain transactions

(1)     Subject to section 24(2), where-

(a)     proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan; and

(b)     subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate, the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit.

(2)     For the purposes of this section, a transaction is extortionate if-

(a)     it requires the debtor or a relative of his to make payments (whether unconditionally or on certain contingencies) which are grossly exorbitant; or

(b)     it otherwise grossly contravenes ordinary principles of fair-dealing.

(3)     Any agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds 48 per cent per annum shall, having regard to that fact alone, be presumed for the purposes of this section to be a transaction which is extortionate; but except where such rate exceeds the rate specified in section 24(1), the court may declare that any such agreement is not extortionate for the purposes of this section if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair.

(4)     In determining whether a transaction is extortionate for the purposes of this section, regard shall be had to such evidence as is adduced concerning-

(a)     interest rate prevailing at the time it was made;

(b)     the factors mentioned in subsections (5) and (6); and

(c)     any other relevant considerations.

(5)     Factors applicable under subsection (4)(b) in relation to the debtor include-

(a)     his age, experience, business capacity and state of health; and

(b)     the degree to which, at the time of entering into the transaction, he was under financial pressure, and the nature of that pressure.

(6)     Factors applicable under subsection (4)(b) in relation to the lender or other person by whom the proceedings are taken include-

(a)     the degree of risk accepted by the lender, having regard to the nature and value of any security provided;

(b)     his relationship to the debtor;

(c)     whether or not a specious cash price was quoted for any goods or services included in the transaction; and

(d)     where one or more other transactions are to be taken into account, the question how far any such other transaction was reasonably required for the protection of the debtor or the lender, or was in the interest of the debtor.

(7)     Any court in which proceedings might be taken for the recovery of any loan or security in respect of a loan shall have and may at the instance of the debtor or any surety exercise the like powers as may be exercised under this section where proceedings are taken for the recovery of a loan; and the court may entertain any application under this subsection by the debtor or surety notwithstanding that the time for repayment of the loan or any instalment thereof has not arrived.

(8)     On any application relating to the admission or amount of a proof by a money lender in any bankruptcy proceedings, the court may exercise the like powers as may be exercised under this section where proceedings are taken for the recovery of money.

(9)     The Legislative Council may by resolution alter the rate specified in subsection (3) but, in relation to any agreement referred to in that subsection which is in force at the date when such rate is so altered, the rate so specified as at the coming into force of such agreement shall continue to apply.

(9A)  Nothing in this section shall apply to-

(a)     a loan specified in paragraph 12 in Part 2 of Schedule 1; or

(b)     as respects such loan, any person who makes such loan. (Added 69 of 1988 s. 21)

(10)   In this section “debtor” (債務人) means any person primarily liable for the repayment of a loan or for the payment of interest in respect of a loan.”

31.  Put simply if the amount of the interest as defined exceeds 60%, the agreement is unenforceable and any amount outstanding cannot be recovered.

32.  If the amount of interest exceeds 48%, the transaction can be reopened and section 25 sets out in some detail, the matters which have to be considered by the court.

33.  To ascertain whether the sections can be invoked, it is necessary to consider the terms contained in the relevant documentation.

34.  Mr Jat submitted that the starting point should be the said Deed of Forbearance.

35.  Paragraph 2 of the Deed reads:

“Conditional Forbearance To Sue

In consideration of Cathay entering into this Deed and agreeing to conditionally withhold legal proceedings against the Guarantor for payment of all outstanding accrued interest, both the Guarantor and the Company agree to fully settle the Uncontested Accrued Interests on or before 31 December 2008 in the manner set out in sub-clause (a) below and undertake with Cathay that:

(a)          the Guarantor shall pay to Cathay US$1,500,000 (“1^st Instalment”) in clear fund no later than 8 December 2008 (“1^st Payment Deadline”) and the remainder in the sum of US$536,522.4 (“2^nd Instalment”) in clear fund no later than 31 December 2008 (“2^nd Payment Deadline”).

(b)          if the Guarantor shall fail to punctually and fully settle the 1^st Instalment and/or the 2^nd Instalment in accordance with Clause 2(a) hereof, penalty interest shall become immediately payable in the following manner:

[i]      if the 1^st Instalment or the 2^nd Instalment shall not be fully settled before the respective Payment Deadlines set out in Clause 2(a) (but such failure shall not be more than 60 Days from the respective Payment Deadlines), a penalty interest (“Penalty Interest”) calculated at the rate of 12% per annum shall become immediately payable.  The Penalty Interest shall accrue daily for the actual number of days elapsed on the basis of a 360-day year charged on the principal amount of the Note together with any outstanding sums payable under the Note/Instrument or this Deed (including but not limited to the 1^st Instalment and the 2^nd Instalment) with retrospective effect from 1 January 2007 until the date of full payment of all such outstanding interests; and

[ii]     if the 1^st Instalment or the 2^nd Instalment Payment shall not be fully settled after expiration of 60 days from the respective Payment Deadlines, then all additional penalty interest at the rate of 12% per annum (“Additional Penalty Interest”) shall be charged on the principal amount of the Note together with any outstanding sums payable under the Note/Instalment or this Deed (including but not limited to the 1^st Instalment, the 2^nd Instalment and the Penalty Interest) with effect from 1^st Payment Deadline and the 2^nd Payment Deadline (as the case may be) until the date of full payment of the 1^st Instalment, the 2^nd Instalment, the Penalty Interest and the Additional Penalty Interest.  For the avoidance of doubt, the Additional Penalty Interest is payable in addition to and not in substitution with the Penalty Interest as contained in Clause 2(b) [i] hereof but where the Additional Penalty Interest shall become payable as a result of delay in full settlement of the 1^st Instalment and the 2^nd Instalment for more than 60 days, the Penalty Interest shall be charged for the period from 1 January 2007 to the respective day(s) immediately before the 1^st Payment Deadline and/or the 2^nd Payment Deadline (as the case may be) and that the Additional Penalty Interest shall be charged for the period from 1^st Payment Deadline and/or the 2^nd Payment Deadline (as the case may be) until the date of full settlement of the 1^st Instalment, the 2^nd Instalment, the Penalty Interest and the Additional Penalty Interest.

(c)          Both the Company and the Guarantor agree and undertake that with effect from the date hereof:-

[i]      a default interest (“Default Interest”) shall be payable by the Company and/or the Guarantor if either the Company or the Guarantor shall fail to pay any interests payable (“Unpaid Interest”) under the Note and/or the Instrument.  If the delay for payment shall not be more than 60 days, the Default Interest shall be calculated at a rate of 12% per annum and shall accrue daily for the actual number of days elapsed on the basis of a 360-day year charged on the principal amount of the Note with retrospective effect from 1^st January of the relevant year in which such interests begin to accrue (“Default Interest Commencement Date”) up to the date of full payment of all sums payable under the Note and/or the Instrument and/or this Deed; and

[ii]     if the delay for payment shall be more than 60 days, an additional default interest (“Additional Default Interest”) shall become payable at the rate of 12% per annum and shall accrue daily for the actual number of days elapsed on the basis of a 360-day year charged on the principal amount of the Note together with any unpaid interests under the Note/Instrument and/or this Deed from the date when payment of the Unpaid Interest becomes due (“Interest Due Date”) up to the date of full payment of all sums payable under the Note and/or the Instrument and/or this Deed.  For the avoidance of doubt, the Additional Default Interest is payable in addition to and not substitution with the Default Interest as contained in Clause 2(c) [i] hereof but where the Additional Default Interest shall become payable as a result of delay in payment of the Unpaid Interest for more than 60 days, the Default Interest shall be charged for the period from the Default Interest Commencement Date till the day immediately before the Interest Due Date and that the Additional Default Interest shall be charged for the period from the Interest Due Date till the date of full settlement of all outstanding interests (including but not limited to the regular interests payable under the Note, the Unpaid Interest, the Default Interest and the Additional Default Interest).

The Default Interest and the Further Default Interest shall be in addition to the applicable interest on the Notes at the rate of 25% per annum on the principal amount of the Notes.

Both the Company and the Guarantor agree to execute any amendment documents to the Note and/or the Instrument which Cathay may consider appropriate for the purpose of re-confirming and acknowledging the Default Interest.  The Company and the Guarantor shall execute such amendment documents in such time and manner as per Cathay’s request.”

36.  He went on to contend that the amount upon which interest should be calculated was US$2,036,522.40 being the amount referred to in paragraph 1(b) of the Deed.

37.  So far as the calculation of interest was concerned, it was necessary to have regard to the 25% interest payable under the principal instrument, the 12% penalty interest if there was default and the further 12% additional penalty interest in the event of default beyond 60 days.

38.  In this connection, it should be borne in mind that where there are provisions in an agreement for the rate of interest to be increased in the event of default, it may operate with retrospective effect and the increase which may be payable could be exponentially large.  Lordsvale Finance Plc v Bank of Zambia (1996) QB 752 at 763.

“It is clear that, if a loan agreement were to provide that upon the happening of a defaulting in payment by the borrower the rate of interest were to increased with retrospective effect, that which would be payable on default would be a sum in addition to the amount of principal and interest outstanding which would be calculated by reference to a period of time during which the borrower was entitled to the use of the principal and which might vary in length depending upon when the default in payment occurred in relation to the period of borrowing.  Moreover, the amount of interest which would be payable would be unrelated to the extent of default.  If therefore default in payment triggered a retrospective increase in the rate of interest, it would be impossible to say in advance how much extra interest would become payable and what arithmetical relationship it would have to the amount of time during which the principal was outstanding.  Moreover, assuming that any increase in the rate of interest was to continue into the future, the period of time during which the default was continuing would be compensated by the continuing increased rate, but also by the accumulated increase in the interest derived from the period before default.  Such a provision would therefore have all the indicia of a penalty.”

39.  It will be appreciated that the aggregate effect of these provisions takes the interest payable well within the scope of section 24.

40.  Mr Wou who was representing the Plaintiff did not accept that this was the way in which the Deed should be interpreted.

41.  He argued that the amount upon which calculations should be based should include the whole of the principal amount owing to his client.

42.  This was notwithstanding the fact that a substantial amount of the principal was not yet payable.

43.  In addition to this, he claimed that it could be seen from a proper interpretation of the clauses that the relevant payments were payable in the alternative and not in the aggregate as contended for by Mr Jat.

44.  If his interpretation of the clauses was accepted by the court, the rate of interest payable would only amount to 37%.

45.  While this is only an interlocutory application I would have no hesitation in accepting the submissions of Mr Jat and rejecting those of Mr Wou.

46.  This then brings us to what appears to be the attempts made by the Plaintiff to add a clause to the Deed of Forbearance which would have the effect of capping the amount of interest payable thus avoiding the terms contained in sections 24 and 25.

47.  The addition which was drafted was intended to follow clause 2(c) cited about and reads as follows:

“Whether interests shall become payable by the Company and/or Guarantor in the form of the regular interest on the Notes at the rate of 25% per annum, Penalty Interest, Additional Penalty Interest, Default Interest or Additional Default Interest, it is agreed that all interests payable under the Note/Instrument shall not exceed an effective interest rate of 48% per annum of the principal sum of the Note/Instrument (or such higher rate if an amendment shall be made to the Money Lenders Ordinance whereby any agreement for payment of interest on a loan in respect of which the effective interest rate at that higher rate shall not be presumed to be a transaction which is extortionate).”

48.  The photostat copy of the clause available to me contains what appears to be either the initials or signature of one or two of the parties to the Deed.

49.  Before me, Mr Wou contended that the addition was intended to be for the benefit of both the Plaintiff and the Defendant.

50.  Having regard to the fact that the Money Lenders Ordinance is referred to in the addition this contention would seem to be slightly disingenuous.

51.  What appears to be much more likely is that the draftsman of the Deed suddenly realized that the penalty interest would contravene sections 24 and 25 and set about attempting to rectify the situation.

52.  Be that as it may, it is necessary to consider the evidence which was before me concerning the events taking place on the 1 December 2008 and the following days.

53.  It is common ground that on 1 December, the Defendant was in Shanghai and was being pressed to execute the Deed of Forbearance and a Deed of Modification which I will be referring to later in this judgment.

54.  The extent to which the Defendant had access to legal advice is controversial.  It is not appropriate for me to attempt to resolve this on affidavit evidence.

55.  However what is clear is that the Deeds were received in their original form on 1 December and executed by the Defendant and sent back to Hong Kong for execution by the Plaintiff.

56.  There was evidence that copies of the executed Deeds were faxed to the Plaintiff’s solicitors on 1 December and the originals were received by them on 3 December.

57.  The original had been sent to the Defendant by the Plaintiff’s solicitors and copied to the Defendant’s solicitors in Hong Kong.

58.  It also appears to be clear that the Plaintiffs were insisting that the Deeds be executed and returned to their solicitors on 1 December failing which they would institute legal proceedings which would have severe consequences for the Defendant.

59.  On 3 December, the Plaintiff sent the proposed modification contained in clause 2(d) to the Defendant and requested him to initial it or sign it and return it immediately to them.

60.  The Defendant complied with the request.

61.  There is evidence that the Plaintiff executed their parts of the amended Deeds on 8 December.

62.  There was an issue between the parties as to whether clause 2(d) had validly been incorporated into the Deeds.

63.  It was Mr Jat’s case that on the evidence I have referred to there had been on 1 December unconditional delivery of the Deeds to the Plaintiff.  His authority for this proposition was contained in paragraph 31 and volume 13 of the 4^th edition of Halsbury’s Laws of England 2007, Butterworths.

“31.   Delivery of deed.  In order to be effective a deed must be delivered as the act and deed of the party expressed to be bound by it, as well as sealed¹.  No special form or observance is necessary for the delivery of a deed, and it may be made in words or by conduct².  The traditional form of delivering a deed by words was for the executing party to say, while putting his finger on the seal, ‘I deliver this as my act and deed’³.  It was not necessary, however, to follow this form of execution⁴, and it fell into disuse; nor is it necessary that the deed should actually be delivered over into the possession or custody either of the person intended to take the benefit of the deed, or to a third person to the use of the party taking the benefit of the deed⁵; though if the party to be bound so hands over the deed, that is sufficient delivery without any words⁶.

What is essential to delivery of the document as a deed is that the party whose deed the document is expressed to be (having first sealed it⁷) must by words or conduct expressly or impliedly acknowledge his intention to be immediately and unconditionally bound by the provisions contained in it⁸.  Thus where a deed has been executed by an attorney in excess of his power, a subsequent acknowledgment by the principal, whether oral or in writing, that the deed expresses his intentions amounts to a delivery or redelivery of the deed⁹.

If the sealing of a deed is proved, its delivery as a deed may be inferred, provided there is nothing to show that it was only delivered as an escrow¹⁰.”

64.  He went on to argue that in the absence of a valid and binding agreement, a variation to a validly executed Deed must itself be signed, sealed and delivered.  See Berry v Berry (1929) 2 KB 316 at 319.

65.  There is a further problem in the present case.  At best the addition was only signed by the Defendant.  If it was intended to have contractual effect there had to be consideration.  Clearly it was arguable that there was no consideration here.

66.  This could be tested in this way.  If the Defendant had refused to comply with the request being made by the Plaintiff’s solicitors on 3 December could he have relied upon the terms of the Deed of Forbearance ?  It would appear that he could.

67.  At least it would appear to be arguable that clause 2(d) did not form part of the Forbearance Deed and that sections 24 and 25 do take effect.

68.  Earlier in this judgment, I made reference to the Deed of Modification executed on 1 December 2008.

69.  What this Deed was intended to do was to incorporate the new interest provisions contained in the Deed of Forbearance into the Instrument thus making them applicable to the principal outstanding.

70.  Clearly the observations which have been made in relation to the Deed of Forbearance are equally applicable to the instrument thus providing an arguable defence to the claims being made in HCA 1096/2009.

71.  This then leads to the final matter raised in this application.

72.  As stated earlier in this judgment various mortgages were entered into secured on the shares of various companies in the CGLI group of companies.

73.  What seems clear is that there is a paucity of reliable information concerning the steps taken by the Plaintiff to protect their interests under the mortgages.

74.  It was stated in an affirmation made by Mr Leung for the Plaintiff that they had enforced the HKCGL mortgage and that they had become the sole beneficial owner of the company.

75.  It is not denied that the Plaintiffs are taking steps to enforce the mortgages.

76.  In this connection, it would appear that they are involved in the operation of the Port.  Also it is apparent that they have not been forthcoming in giving details of the action they have taken or in attempting to obtain a valuation of the underlying assets of the various companies.  Indeed, when a joint valuation was proposed by the Defendant the idea was rejected.

77.  However, it is established by Lloyds Scottish Trust Limited v Britten (1982) 44 P & CR 249 that the burden is placed upon the Plaintiff of clarifying the position.

“It therefore seems established that a mortgagee cannot sue his mortgagor on any express or implied covenant after he, the mortgagee, has foreclosed and then sold the foreclosed property to a third party. The plaintiffs therefore cannot sue Impact for the balance of the original debt which remains owing.  Since the plaintiffs cannot sue Impact, I do not see how they can sue the defendants as guarantors for part of the sum owing by Impact, in that the defendants guaranteed the obligations of Impact to the plaintiffs and such obligations at the date of the writ did not include an obligation to pay the debt part of which the plaintiffs now claim from the guarantors.

Mr. Christie, for the plaintiffs, pointed out that none of the cases mentioned above was concerned with the effect of foreclosure on a guarantee.  That may be so.  But, as I see it, if the money is not recoverable from Impact, the principal debtor, it cannot be recovered from the defendants as guarantors.”

78.  Until that is done, it would be premature to enter summary judgment against the Defendant.

79.  The result of all of this is that on the appeal from Master Yu’s decision, the Defendant’s appeal is allowed and the Plaintiff’s cross appeal is dismissed.

80.  The strike out summons is dismissed as also is the order 14 summons in HCA 1096/2009.

81.  I make an order nisi that the Defendant will have his costs on the appeal and that the order in favour of the Plaintiff below will be set aside and costs will be to the Defendant.

82.  The Defendant will also have their costs on the strike out summons and the order 14 summons.

83.  There will be a certificate for two counsels.

Application for leave to appeal by the plaintiff to Court of Appeal refused with costs. Please refer to HCMP447/2010 dated 14 September 2010

HCA 2707/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2707 OF 2008

_________________________

BETWEEN

_________________________

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RULING

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1.   This is an application by the Defendant under Order 13 rule 9 of the Rules of High Court to set aside the Final and Interlocutory Judgment entered against him on 18 March 2009. It is not disputed that the said Judgment was entered regularly. Accordingly, to set aside the said Judgment, the burden rests on the Defendant to show a meritorious defence which is not merely arguable, but one that carries a real prospect of success.

Background

2.   It is not disputed that the Defendant is and was at the material time the Director of China Group Logistics Investment Limited (“the Company”). The Plaintiff was interested in investing in the Company by subscribing for its shares. By a subscription agreement between the Plaintiff and the Company dated 22 December 2005, the Company agreed to issue and the Plaintiff agreed to subscribe for a US$10,000,000 note (“the Note”) which is exchangeable into shares in the Company. The Defendant is also a party to the subscription agreement as a guarantor guaranteeing unconditionally the performance of the agreement by the Company.

3.   Further, by Instrument in Writing dated 22 December 2005 (“the Instrument”), the Note was established for subscription and the Defendant acted as the guarantor. It is not disputed that the Plaintiff has subscribed for the Note in the value of US$10,000,000 issued by the Company.

4.   Clause 4 of the Instrument provides the payment of interest by the Company, which reads as follows: -

(A) The Note shall bear interest at the rate of 25% per annum on the principal amount of the Note outstanding from time to time in accordance with condition 4(B) below.

(B) Interest shall accrue on a daily basis from the date of issue of the Note calculated on the basis of a 365 day year on a principal sum of the Note for the time being outstanding, and shall be payable annually in arrears [my emphasis] on or before 31 December in each year (“each and interest payment date”) with the first interest payment date being 31 December 2006. Interest on any notes not for the whole of the period between any two successive interest payment dates shall be calculated on a pro rata basis. Interest on the principal sum outstanding shall cease to be payable as from the exchange date or date of the redemption (as the case may be).

(C) In the event that the whole of the principal amount of a note exchange in accordance of condition 5(A), such note holder shall be entitled the interest accrued but unpaid in respect of the whole of the principal amount up to but excluding the exchange date.

5.   Accordingly, by 31 December 2006, the Company should pay interest to the Defendant in the sum of US$2.5 million. It is not disputed that this has been paid. On 31 December 2007, another payment for US$2.5 million became due. The Company failed to pay this amount. It was only around 1 July 2008 when the Company made the payment of US$1,001,340.95.

6.   Pursuant to the guarantee provided by the Defendant under the Instrument, as from the date of default of payment of the said interest, the Defendant shall upon demand paid all sums of which default have been made. And pursuant to clause 17(H) of the Instrument, the Defendant as guarantor agrees to pay interest on such outstanding sums at the rate equal to the rate of interest paid under the Note. Accordingly, as further set out in paragraph 7 of the Statement of Claim, the balance of interest including default interest thereon payable by the Defendant as at 22 December 2008 came to US$2,025,373.56.

7.   It is not disputed that the Plaintiff demanded for payment of the said interest due. And sometime in November, there had been active negotiation between the Plaintiff and the Defendant for payment. It is indeed the request of the Defendant that he would pay US$1.5 million in the first week of December 2008 (“the 1^st Installment”) and the balance of the interest on or before the end of December 2008 (“the 2^nd Installment”). The negotiation ended up with a Deed of Forbearance To Sue dated 1 December 2008 signed by the Plaintiff with the Defendant and the Company (“the Deed of Forbearance”).

8.   It is provided by clause 2(b) of the Deed of Forbearance that if the 1^stInstallment is not fully settled on time but within 60 days of the scheduled time, a penalty interest shall be payable by the Company calculated at the rate of 12% per annum on the principle sum of the Note together with any outstanding sum payable under the Note or the Deed of Forbearance (including the 1^st and 2^nd Installments) with retrospective effect from 1 January 2007 until the date of full payment. If the 1^st Installment or the 2^nd Installment is not fully settled after expiry of 60 days from the respective payment deadlines, then an additional penalty interest at the rate of 12% per annum shall be charged on the principal sum of the Note together with any outstanding sum payable under the Note or the Deed of Forbearance from the 1^st Payment and/or the 2^nd Payment due date until payment.

10.   A Deed of Modification dated 1^st December 2008 was executed at the same time with the Deed of Forbearance. It serves the purpose of amending the Instrument to reflect the aforesaid penalty interest and additional interest. It adds nothing to the legal effect of the Deed of Forbearance.

11.   After the Deed of Forbearance was executed, the parties further agreed to add a provision, being clause 2(d), for capping the effective interest payable on the Note at 48% per annum. This forms the last amendment to the Instrument, on the provision of default interest.

11. In breach of the Deed of Forbearance, the Defendant and the Company failed to pay the 1^st Installment. As a result, this Writ has been issued by the Plaintiff against the Defendant for the said sum of US$2,025,373.56, being the outstanding interest payable for the year 2007, and the penalty interest pursuant to the Deed of Forbearance in the sum of US$2,854,022.75. (It is noted that the Plaintiff did not claim additional penalty interest in this Writ.)

The Proposed Defence

12.   Mr. Mok for the Defendant submitted that by subscribing for the Note and advancing the payment, the Plaintiff had made a loan to the Company and was at the material time a money lender. Since the Plaintiff was not registered as a money lender under the Money Lenders Ordinance at the material time, it was in breach of section 23 of the said Ordinance. Section 23 reads: -

“No money lender shall be entitled to recover in any court any money lent by him or any interest in respect thereof or to enforce any agreement made or security taken in respect of any loan made by him unless he satisfies the court by the production of his license or otherwise that at the date of the loan or the making of the agreement or the taking of the security (as the case may be) he was licensed:

Provided that if the court is satisfied that in all the circumstances it would be inequitable if a money lender who did not satisfy it that he was licensed at the relevant time was thereby not entitled to so recover such money or interest or to enforce such agreement or security, the court may order that the money lender is entitled to recover such money or interest or to enforce such agreement or security to such extent, and subject to such modifications or exceptions, as the court considers equitable.”

13.   Mr. Mok submitted that the Plaintiff is not entitled to recover the loan unless the Court in its discretion allows the Plaintiff to recover the loan or interest or any part thereof. Hence, the judgment should be set aside.

14.   The question turns on whether the Plaintiff is or was at the material time a money lender. Section 2 of the Money Lenders Ordinance provides that: -

“money lender” means every person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business, but does not include-

(a) a person specified in Part 1 of Schedule 1; or

(b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such loan.

15.   While the Defendant alleges that the Plaintiff was at the material time a money lender, there is no evidence suggesting that the Plaintiff has carried on the business of making loans. I do not believe the intention of the Ordinance is to provide that any person who makes a loan would become a money lender.

16.   And in accordance with Schedule 2, Part 2 of the Money Lenders Ordinance, there are a number of exempted loans. Granting the exempted loans would not render a person a money lender. And sub-paragraph 5 of Part 2 reads: -

“A loan made by company or a firm or individual whose ordinary business does not primarily or mainly involved the lending of money, in ordinary causes of that business.”

17.   Plaintiff’s counsel submits that if necessary, they would rely on Schedule 2 to argue that the subscription for the Note is an exempted loan. I believe this is a complete answer to the argument that the Plaintiff is a money lender. There is no evidence to suggest that the Plaintiff carries on the business of making loans.

18.   It is the evidence of the Plaintiff that it is an investor. It would invest in a potential company for listing and during that process it makes profit. Mr. Mok makes a very ingenious suggestion. He submits that similar to the situation of the Defendant, in making such investment, the Plaintiff has to advance money to the individual companies. As such, money lending becomes part of their business.

19.   To begin with, there is no evidence in support of Mr. Mok’s submission or any information on how the Plaintiff invested in other companies. It is nothing more than Mr. Mok’s speculation as to how the Plaintiff invested in other companies. Taking all matters into consideration, notwithstanding the able submission of Mr. Mok, I am not persuaded that there is a reasonable chance to argue that the Plaintiff is a money lender. I dismiss this argument.

20.   Mr. Mok also relies on section 24 and section 25 of the Money Lenders Ordinance. It is not disputed that these two sections apply to all loan transactions, no matter if the loan is made by money lender or not. Under section 24, any loan that carries an effective interest rate of over 60% per annum is illegal. It is not recoverable without leave of the Court. And pursuant to section 25 of the Money Lenders Ordinance, the Court may re-open certain money lender transaction if the transaction is extortionate. It is provided that if the effective interest rate exceeds 48% per annum, it is deemed to be extortionate. It may also be extortionate if it requires the debtor or relatives of him to make payments which are grossly exorbitant or if otherwise grossly contravenes ordinary principles of fair-dealing. In such situation, the Court may re-open the transaction to do justice between the parties.

21.   It’s the second proposed ground of defence of the Defendant that the Plaintiff was in breach of either section 24 or section 25 of the Money Lenders Ordinance as the interest chargeable on the Notes exceeds 60% or 48% per annum. In the former case, the Plaintiff would not be entitled to enforce the loan without first obtaining leave of the Court. In the later case, the Court may re-open the loan.

22.   On the said provision for interest payment in the Instrument, the interest to be charged is 25% per annum. That does not come close to the statutory effective rate of 48% per annum.

23.   What Mr. Mok seeks to argue is paragraph 7(B) of the Instrument, which provides that the Plaintiff may demand the Company to redeem the outstanding note and on such demand, the Company, and hence the Defendant as the guarantor, is liable to pay the aggregate of : -

(1) The principal amount outstanding under the Note.

(2) All interest accrued but unpaid in respect of the Note pursuant to condition for up to and including the date of the redemption notice; and

(3) An additional amount that would result in the note holder receiving a compound interest of 25% to be received by such note holder under condition 4(A) on the aggregate principal amount outstanding under the Note calculated from the date of issue of the Note up to and including the actual dates of payment (“sub-clause (3)”).

24.   The Defendant exhibited the calculation from an accountant to submit that the effective rate of interest, according to this calculation would exceed 48% and in some years exceed 60%. Before I look at the expert opinion, I reminded myself of the judgment of Madam Justice Le Pichon in the case Kwok Ying Lung v Ko Chi Hung and others CACV 635/2000 and CACV 142/2001 when Her Ladyship ruled that the calculation of effective interest is clearly one of statutory interpretation that is not a matter for expert evidence. Experts have no role to perform in such a situation. Her Ladyship further stated that in assessing the effective rate of interest, it is not necessary to refer to Schedule 2 in all situations: -

“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 the actual rate percentage per annum, for example, where loan was repayable by a number of installments, its installments comprising principal as well as interest.”

25.   Mr. Mok does not argue against the able ruling of her Ladyship. He only seeks to adopt the calculation by the accountant as his understanding and calculation of clause 7(B). Mr. Mok submits that on redemption, the Company has to repay the principal, which is a fair term. The Company has to pay all interest accrued but unpaid. This would reflect proviso of clause 4(A) that the Company would be liable for 25% interest per annum on the value of the Note for the whole period of time. What the tricky part is sub-clause (3) which provides that an additional amount has to be paid. Mr. Mok submits that it provides for an additional amount of 25% compound interest on the principal from the date of issue of the Note up to the date of actual payment. This would make the interest payable under the Note on redemption to become 25% simple interest plus 25% compound interest. It must exceed 48% and likely to exceed 60%. And even if it just exceeds 48%, then it would be a meritorious defence as the Defendant would have a ground to re-open the loan.

26.   Mr. Wou, counsel for the Plaintiff responds by commenting that sub-clause (3) does not ask for an additional 25% compound interest. The clause merely provides that “an additional amount that would result in the note holder receiving a compound interest rate of 25% to be received by note holder under condition 4(A) …”

27.   Mr. Wou submits that the joint effect of clause 4(A), (B) and (C) is that, the Company is ultimately liable to pay 25% compound interest per annum for the value of the Note. It is liable at the end of each year to pay simple interest. If it has honoured its obligation at each year-end, it has discharged most of its duty in paying interest. The difference between compound interest and simple interest is the additional sum that the Plaintiff could receive under sub-clause (3).

28.   I agree with the submission of Mr. Wou. It is obvious that this is not an additional sum equal to 25% compound interest for the whole period when the Note is outstanding. It only covers the difference between simple interest and compound interest which the Plaintiff is entitled to receive.

29.   Compound interest is not a complicated concept. It only means that interest is reckoned not only on the principle but also on the accumulated unpaid interest (The New Short Oxford English Dictionary). And sub-clause (3) refers to interest received under clause 4(A). And if we look at clause 4(A), there is no provision for compound interest.

30.   Reading the plain wording of clause 7(B) with clause 4 (A), and if the Company has paid all interest at the end of each year, there is no outstanding interest for accruing further interest, and I would have thought that there is no further payment required. I need not rule on this point but there is sufficient material before me to reject the argument that sub-clause (3) requires an additional payment of another 25% compound interest.

31.   Pausing here, the above discussion is on the original wordings of the Instrument. I shall also look at the Instrument together with the provision of the Deed of Forbearance dated 1^st December 2008. As discussed above, for future default, the Company would be liable to pay, over the 25% interest per annum, a penalty interest of 12% per annum for default below 60 days, and for over 60 days, another additional penalty interest of 12% per annum. It is simple calculation that in the worst situation, the Company could be liable to pay 49% per annum.

32.   Mr. Wou refers me to clause 2(d) of the Deed of Forbearance, (which I set out above, is the late amendment to the Instrument). It provides that if the interest charged on the Note exceeding an effective interest rate of over 48% per annum, it would be capped at that rate. Accordingly, any interest charged by the Plaintiff under the Note would not exceed the statutory limit and accordingly, it would not be extortionate. I agree. The provision of the Note on default interest as being modified by the Deed of Forbearance provides a protection to the Company and the Defendant against interest rate higher than 48%.

33.   I am sure Mr. Mok would argue, though he did not, at the moment when the Deed was signed without the capping provision, it was extortionate. Nevertheless, it has been superceded by subsequence event and which must be a genuine settlement of the parties after taking into consideration of the Money Lenders Ordinance. It is well established in cases which there were genuine consideration of a compromise, such compromise shall be recognized and enforce by the Court. (Binder v Allachouzos [1927] 2 QB 151). And it is the agreement that the Court is being asked to enforce that the Court may re-open (per Deputy High Court Judge Muttrie in HCA 1198/1996). Hence, I need not consider the Deed of Forbearance without the capping provision for today’s purpose.

34.   And after the modification, the interest is capped at 48% per annum. I do not see any room to argue that the Instrument as modified by the Deed of Forbearance is deemed to be extortionate.

35.   Mr. Mok has also addressed me on the claims by the Defendant that he had to enter into the Deed of Forbearance in a rush and he had no legal advice. I note that this is a business transaction which starts with an Instrument which the Defendant is the guarantor. There is evidence to suggest that he is assisted by solicitors at all time. And he stated in his affirmation that if he did not do what the Plaintiff wanted at the time, legal action would have been issued against him as threatened and his other investments and business ventures would as a result be severely affected. And as mentioned herein before, the Defendant and/or his agents made various proposals on asking for time. In the commercial world, what is the value of a day to a businessman vary from business to business. It is consideration given and the Court does not normally look into the sufficiency of consideration. It is clear that the Defendant entered into the Deed for commercial reason.

36.   There is no sufficient material to support the argument that the Note is extortionate on other grounds. I conclude that there is no merit in the suggested defence that the Note was extortionate and the amount claimed thereunder, being paragraph 1 of the default judgment should be uphold.

37.   The more difficult consideration is on the claim for penalty interest. It is clear that the penalty interest is not provided in the original Instrument. And according to the Statement of Claim, the basis of the claim is from the provision of the Deed of Forbearance. Mr. Mok argues that the Deed provides for time to repay the said interest in the amount of about US$2M. But the amount that has to be paid for penalty interest would be about $2.8M (excluding additional penalty interest which has not been claimed in this action). This would clearly be exceeding 60% per annum, and is illegal. There is much force in this submission.

38.   In answering, Mr. Wou submits that the Deed of Forbearance is not a loan, but a Deed of Settlement. Section 2 of the Money Lenders Ordinance provides that: -

“loan” (貸款) includes advance, discount, money paid for or on account of or on behalf of or at the request of any person, or the forbearance to require payment of money owing on any account whatsoever, and every agreement (whatever its terms or form may be) which is in substance or effect a loan of money, and also an agreement to secure the repayment of any such loan, and “lend”(貸出) and “lender” (貸款人) shall be construed accordingly;

39.   Mr. Mok submitted that the Deed of Forbearance is a loan because it is a forbearance to require payment of money owing by the Defendant to the Plaintiff.

40.   I believe the section is drafted in an all embracing manner to cover all situations that a loan might be dressed up. Whether a transaction is a loan would be determined by “the overall nature of the transaction rather than taking any of the words contained in the definition individually and out of their context. In other words, what was required was to consider in overall terms what it was that the parties to the transaction were attempting to achieve and then decide whether the transaction was a "loan" according to the definition.” (Talcott Factors Ltd. v. G. Seifert Pty. Ltd. [1964] NSWR 1205).

41.   Iaccept that a settlement may not be a loan. But the Deed of Forbearance provides for extension of time to pay the outstanding interest for 2007. It provides for penalty interest for breach of compliance of the Deed of Forbearance. I put it no higher that it is a meritorious defence that the Deed is a loan and the interest payable under the Deed is illegal.

42.   But the claim under the Instrument, being paragraph 1 of the judgment, and the claim under the Deed of Forbearance, being paragraph 2 of the judgment are clearly severable and based on different contracts.

43.   I conclude that the judgment dated 18 March 2009 do stand, save that the judgment for penalty interest in the sum of US$2,854,022.75 be set aside and the Defendant has unconditional leave to defend. Leave be granted to the Defendant to file a Defence within 21 days from handing down of this judgment.

44.   I further order that there be an order nisi that the Plaintiff do have costs of this application with certificate for Counsel, to be taxed if not agreed, such order to become absolute within 14 days from handing down.