KEY STEP VENTURES LTD v. FUGUINIAO GROUP LTD AND OTHERS

HCA 2327/2017

[2020] HKCFI 1087

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2327 OF 2017

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REASONS FOR JUDGMENT

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A.Introduction

1.  This action is for recovery of debt.  The debt arose from a straightforward borrowing.  The 1st Defendant borrowed a sum of HK$150 million and later a further sum of HK$104,764,398 from the Plaintiff.  They signed a Facility Agreement and executed a number of deeds, with the 2nd Defendant and the 3rd Defendant signing and executing as guarantors of the loan. The Defendants never repaid the principal and any interest thereon.  The Plaintiff therefore commenced these proceedings.

2.  The 2nd and 3rd Defendants did not file any notice of intention to defend nor defence.  In the Defence and Counterclaim filed by 1st Defendant, the 1st Defendant alleged that since the effective rate of default interest was on its calculation over 60%, the Facility Agreement was unenforceable under section 24(2) of the Money Lenders Ordinance (“the Ordinance”).  Alternatively, the 1st Defendant alleged that by reason of the default interest being of 59%, the loan transaction was deemed to be extortionate under section 25(3) of the Ordinance and should be reopened by the Court.

3.  At the trial, all the Defendants were absent.  Upon hearing the Plaintiff’s counsel and considering the evidence put before the Court, I ordered judgment to be entered against the 1st Defendant as claimed, and judgment in default of no notice of intention to defend to be entered against the 2nd and 3rd Defendants as claimed, for reasons which I now give.

B.The Parties, the Loans, the Supplemental Deeds and the Default

4.  The Plaintiff is a limited company incorporated under BVI laws.  The 1st Defendant is a company incorporated under Hong Kong laws.  The 2nd and 3rd Defendants are brothers and were the 1st Defendant’s directors.

5.  The 1st Defendant was the majority shareholder of Fuguiniao Co., Ltd., a company incorporated under the PRC laws and based in Fujian.  Fuguiniao Co., Ltd. were then listed on the Stock Exchange of Hong Kong (Stock Code: 1819) (“the Listed Company”). D2 and D3 were then also directors of the Listed Company.

6.  On 3 July 2015, the Plaintiff and the 1st Defendant entered into the Facility Agreement ("the Facility Agreement").  Under this agreement, the Plaintiff agreed to lend HK$150 million to the 1st Defendant, with the interest rate thereon at 20% per annum, and repayable within 3 months from the drawing down.

7.  The agreement provided that if the trading of the shares of the Listed Company on the Stock Exchange of Hong Kong was suspended for a continuous period of 15 days or more (clause 13.01(m)), it should amount to an event of default, in which event the plaintiff may issue a written notice to the 1st Defendant to declare that the loan shall be immediately due and repayable (clause 13.02(a)). Clause 14 further provided that if the 1st Defendant is in default, the 1st Defendant shall pay the Plaintiff default interest at the fixed rate of 59% per annum (clause 14).

8.  On 6 July 2015, the 1st Defendant drew down the borrowing of HK$150 million and issued a written confirmation to acknowledge its receipt of HK$150 million (“the 1st Loan”).

9.  Thereafter, the Plaintiff and the 1st Defendant executed six Supplemental Deeds to vary the Facility Agreement for extending the repayment dates, lowering the interest rates and increasing the loan amount.  It should also be noted that every time when a Supplemental Deed was executed, the 2nd and 3rd Defendants also executed at the same time a Deed of Confirmation confirming the loan and their obligations under the borrowing as guarantors.

10.  On 17 February 2016, by the 4th Supplemental Deed, Clause 2.02 of the Agreement was varied in that the Plaintiff agreed to lend a further sum of HK$104,764,398 to the 1st Defendant at the interest rate of 16% per annum for 3 months. On the same day, the 1st Defendant gave notice to drawing down the further loan of HK$104,764,398 on 18 February 2016 (“the 2nd Loan”). 

11.  On 7 April 2016, by the 5th Supplemental Deed, the Plaintiff and the 1st Defendant agreed to extend the repayment date of the 1^st Loan for 12 months from 5 April 2016.  They also agreed to reduce the interest rate to 15% per annum.

12.  On 16 May 2016, by the 6th Supplemental Deed, the Plaintiff and the 1st Defendant agreed to extend the repayment date of the 2nd Loan to 16 May 2017, and to reduce the interest rate to 15%.

13.  Since 1 September 2016, the trading of the shares of the Listed Company on the Stock Exchange of Hong Kong had been suspended for more than 15 days.  This constituted an event of default under the said clause 13.01(m) of the Facility Agreement. 

14.  On 28 September 2016, the Plaintiff served notice on the 1st Defendant pursuant to the said clause 13.02(a) of the Facility Agreement demanding immediate repayment of the 1st Loan and the 2^nd Loan (collectively “the Loans”).

15.  On 23 December 2016, pursuant to the terms of the 6th Supplemental Deed, the 1st Defendant executed a share charge in favour of The Plaintiff in respect of 212,550,000 shares of the Listed Company (“the Share Charge”) as security of the Loans. However, on 26 August 2019, the Listed Company published a public announcement that on 23 August 2019, Fujian Province Quanzhou City Intermediate People’s Court of the Mainland had announced the bankruptcy of the Listed Company.  And with effect from 25 November 2019, the listing status of the Listed Company was cancelled by the Stock Exchange of Hong Kong.

16.  On 9 October 2017, the Plaintiff commenced the present proceedings, claiming for the principal of HK$254,764,398 (being the sum of HK$150,000,000 and HK$104,764,398), interest before the default and interest after the default, totalling HK$170,901,542.05 (the calculation of which was set out in Schedule 1 of the Amended Statement of Claim and verified by the Plaintiff’s witness and director, Mr Ma, Shen Yee Andrew).

C.Discussion of The 1st Defendant’s Defence

17.  As mentioned in the beginning of this Reasons for Judgment, the 1st Defendant’s two defences are based on sections 24(2) and 25(3) of the Ordinance.  The 1st Defendant did not allege that the Plaintiff was a money lender within the meaning of the Ordinance, nor there was any evidence before the Court to suggest so.  All that the 1st Defendant alleged was that the default interest of the Loans was over 60% per annum, hence contravening section 24(1), or that the default interest of the Loans was exceeding 48% per cent per annum, hence extortionate.

18.  In summary, as pleaded in the Defence and Counterclaim, the 1st Defendant asserted as follows:

(1)  As mentioned in paragraph 16 above, the amount of default interest (up to 16 November 2017), according to the Schedule to the Amended Statement of Claim, was HK$170,901,542.05.

(2)  The actual principal amounts of the 1st Loan should be HK$145,850,000 and HK$100,000,000 respectively.  The total principal amount actually lent to the 1st Defendant under the Loans should therefore be HK$245,850,000, and not HK$254,764,398 as recorded in the loan documents.

(3)  Based on the said loan amount of HK$245,850,000 as contended for by the 1st Defendant and the said amount of default interest set out in the Schedule of the Amended Statement of Claim, the effective rate of the default interest was 61.14% or 60.01% per annum.

(4)  Therefore, the Facility Agreement as varied by the Supplement Deeds is unenforceable under section 24(2) of the Ordinance.

(5)  Alternatively, as the default interest rate as stipulated in the Facility Agreement was 59%, the transaction was deemed to be extortionate under section 25(3) of the Ordinance and the Court should reopen the transaction pursuant to section 25(1).

19.  The 1st Defendant did not raise any issue in relation to the normal rate of the interest accrued before the 1st Defendant defaulted on repayment.  The 1st Defendant’s defence centred entirely on the rate of the interest charged in the situation of the 1st Defendant’s default.  Two questions should be asked:

(1)  Whether section 24 and section 25 are engaged in relation to the interest charged after the 1st Defendant defaulted on repayment?

(2)  If affirmative, whether the default interest rate charged did exceed 60% per annum, which contravened section 24(1), or 48% per annum, which should be presumed to be a transaction which was extortionate under section 25?   

20.  Section 24(1) and (2) reads as follows:

“24. Prohibition of 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).”

21.  The issue is then whether the “effective rate of interest” in sections 24(1) and (2) covers the default interest rate.  If not, section 24 is not applicable.

22.  In Easy Fortune Property Limited v Yung Chun Him, HCA 1484/2014, 12 August 2016, Mr Recorder Pow SC explained the operation of section 24([1]) at paragraphs 38 to 43 of the judgment:

“Excessive interest rate

38. In this regard, it is my view that the defendant’s argument and his calculations under his various Tables have been made under a misconception about section 24 and section 22.

39. Section 24 prohibits the charging of interest on a loan at an effective interest rate of interest which exceeds 60% per annum. Section 2 defines the words ‘effective rate’ to mean the true annual percentage rate of interest calculated in accordance with Schedule 2. However, the Court of Appeal in Kwok Ying Lung v Ko Chi Hung & anor (CACV 635/2000 and CACV 142/2001) decided that the words “effective rate” in sections 24 and 25 bear a different meaning. Where the interest charged is capable of being expressed in terms of a rate, Schedule 2 has no application. In such case, the ‘effective rate’ must mean the actual rate of interest per annum. In particular, Yuen J (at para 41) said that where an actual rate is specified in the memorandum of loan agreement, Schedule 2 has no application. In the present case, the principal was to be repaid in a lump sum at the end of 12 months. In the meantime, monthly interest were payable at the contractual rate of 1.8% per month, ie 21.6% per annum. That is also the rate of interest stated in the memorandum. Schedule 2 has no application. …

41. In other words, when one seeks to analyze whether section 24 has been contravened, one does not analyze it on a scenario of default. One simply looks at the rate of interest agreed to be charged and compare it with the statutory maximum of 60% per annum. One should not analyze it in the context of a default situation. If a higher rate of interest is charged by reason of default, it runs into the realm of section 22[2] and would be illegal / unenforceable but for the proviso therein.

42. At the hearing, the defendant clearly confirmed that his case is that under normal situation, the interest rate (taking the 1st and 2nd loans together, and including the set-up charge as if it were an interest element) would not result in an effective interest rate of over 60%. There was thus no contravention of section 24.

43. The defendant’s case is that upon default, a higher interest rate and retrospective interest would be charged resulting in an effective interest charge above 60% per annum.  That would be a contravention of section 22.  In this scenario, Mr Wong accepted that the defendant has an arguable case of contravention of section 22.”

23.  The learned Recorder held at paragraph 41 of Easy Fortune Property Limited that “the effective rate of interest” in section 24 would not be applicable to the situation when the borrower defaulted on repayment of the loan.

24.  The borrower in that case appealed.  The Court of Appeal upheld the said judgment of the learned Recorder.  In the Court of Appeal’s judgment, [2019] HKCA 1055, 27 September 2019, at paragraphs 36 to 53, Madam Justice Chu JA (giving the judgment of the Court of Appeal) referred to Kwok Ying Lung (as referred to by Mr Recorder Pow SC in paragraph 39 of his judgment cited above) and agreed that the “effective rate” must mean the actual rate of interest per annum, and that the actual rate of interest, as explained by Madam Justice Yuen (as Yuen JA then was) at paragraph 42 in Kwok Ying Lung, must by definition be a single, constant rate charged on the entire loan, ie 15% per annum charged on the Loans as set out in the 5th Supplemental Deed and the 6th Supplemental Deed.  In paragraph 53 of the Court of Appeal’s judgment, the holding of Mr Record Pow SC at paragraphs 41 and 42 cited above was expressly approved.

25.  Section 25(3) of the Ordinance bears the same term of “the effective rate of interest”.  It reads:

“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.”

26.  The same analysis for “the effective rate of interest” in section 24 applies here in section 25(3).  The effective rate of interest in both sections 24 and 25(3) refer to the actual rate of interest charged on the entire loan, charged before the borrower defaults on repayment[3].  It does not refer to the rate of interest charged after the borrower’s default.  In the present case, the interest rate charged before the 1st Defendant defaulted was at the constant rate of 15% per annum, well below the 60% limit in section 24(1) and the 48% limit in section 25(3). 

27.  Consequently, both sections 24 and 25 were not engaged.  The 1st Defendant’s defence fails.

28.  For completeness, I should deal with two further points.

29.  Firstly, even if section 24 was engaged, I would still hold that section 24(1) was not contravened.  This is because the default interest rate was fixed at 59% per annum and did not exceed 60% per annum.  The 1st Defendant’s calculation (see paragraph 18 above) was based on a smaller principal amount for each of the 1st Loan and the 2nd Loan of HK$145,850,000 (instead of HK$150,000,000 as stipulated in the loan documents) and HK$100,000,000 (instead of HK$104,764,398 as stipulated in the loan documents) respectively.  It is likely that the 1st Defendant derived these figures from deducting various expenses, such as interest prepayment, arrangement fee and legal fee, incurred in obtaining the Loans.  I do not consider such deduction is correct as the expenses formed part of the Loans and were so paid in accordance with the 1st Defendant’s instruction in the notices of drawing down.  Furthermore, the 1st Defendant has repeatedly confirmed the correctness of the amounts of the principals in almost every loan document executed by it, which included the Facility Agreement and the 6 Settlement Deeds.  In any event, the 1st Defendant’s assertion must fail because even assuming the principal amounts so calculated by the 1st Defendant were correct, this would only mean that the amount of default interest calculated and charged by the Plaintiff was incorrect and should be rectified.  The default interest rate nonetheless remained at 59% and did not exceed the 60% limit.  section 24(1) would not be contravened.

30.  Secondly, even if section 25 was engaged, having regard to all the circumstances basing on the evidence put before the Court, I do not consider the transaction as extortionate and will not reopen the transaction.  I accept the Plaintiff’s counsel’s submission in this regard, that I should take into account the following matters:

(1)  Section 25(4) provides that the Court shall have regard to interest rate prevailing at the time it was made, the factors mentioned in Subsections (5) and (6), and any other relevant considerations. 

(2)  In asserting that that the transaction was extortionate, the 1st Defendant did not suggest that there was a “prevailing” default interest rate.  There was no evidence pointing towards any yardstick which the Court can consider.

(3)  Section 25(5)(a) refers to factors personal to a borrower.  Factors such as “his age, experience, business capacity and state of health" is not applicable, or in the lest not directly applicable, to a corporate borrower.  I do not see, and there is no such evidence showing, how these factors could be linked to the 1st Plaintiff in the present case.

(4)  The 1st Defendant was managed by experienced businessmen and had obtained professional advice before entering into the Facility Agreement.  The 2nd and 3rd Defendants were then executive directors of the Listed Company. The 2nd Defendant was the Chairman of the board of the Listed Company.  The other directors of the 1st Defendant, Mr Lam Kwok Keung and Mr Lam Wing Ho were also executive directors of the Listed Company.

(5)  The 1st Defendant was represented by a Ms Jain Yang during the negotiation with the Plaintiff.  She was then the vice general manager of the Listed Company.  She was primarily responsible for the overall financial and accounting management, auditing, investment and financing.  As at early 2015, she had about 18 years of experience in finance and accounting.  Before becoming the vice general manager of the Listed Company, she was the chief financial officer of the Listed Company from March 2008 to June 2014. She was a qualified accountant.

(6)  Prior to the signing of the Facility Agreement, the Defendants had substantial experience in seeking finance and borrowing.  For examples:

(a)  Prior to the Loans, on 1 December 2014, through the Plaintiff’s introduction, the 1st Defendant had borrowed HK$250 million from another company. This loan was guaranteed by the 2nd and 3rd Defendants.

(b)  As at 31 December 2014, the Listed Company had put in place credit facilities totalling RMB1,174 million.

(c)  In April 2015, the Defendants, Mr Lam Kwok Keung and Mr Lam Wing Ho had provided guarantee in favour of China Guangfa Bank Co., Ltd., Macau Branch in respect of a loan made to Fuguiniao Holding Limited, a Cayman Islands company.

(7)  Regarding the terms of the Loans, in the first place, it was the 1st Defendant who proposed to the Plaintiff to adopt the same terms of the facility agreement for the loan mentioned in paragraph (30)(6) above.  In that facility agreement, the interest rate was 30% per annum and the default interest rate was 59% per annum – same as that in the Facility Agreement.  I accept the Plaintiff’s counsel’s submission that if the 1st Defendant did not agree, or was in doubt of its lawfulness, the 1st Defendant would not have proposed adopting that facility agreement as the precedent in preparing the Facility Agreement.

(8)  In approving each of the Facility Agreement and the 6 Supplemental Deeds, the 1st Defendant’s directors, ie the 2nd and 3rd Defendants, Mr Lam Kwok Keung and Mr Lam Wing Ho passed a resolution confirming that it was in the 1st Defendant’s best interest to enter into each agreement/ deed.  However, there was no evidence from any of these four directors explaining why the Loans should now be regarded as extortionate.

(9)  Troutman Sanders, an international law firm, was engaged to prepare the loan documents. The drafts, including the Facility Agreement, were sent to the 1st Defendant for consideration before execution. On 3 July 2015, both the 2nd and 3rd Defendants the office of Troutman Sanders.  The evidence mentioned that Troutman Sanders spent well over an hour to go through the loan documents, including the Facility Agreement, the 2nd Defendant’s Deed of Guarantee and the 3rd Defendant’s Deed of Guarantee with both the 2nd and 3rd Defendants.  This is so notwithstanding the terms of the Facility Agreement were drafted basing on the facility agreement mentioned in paragraph 30(7) above, the contents of which the 2nd and 3rd Defendants would have been familiar.

(10)  Section 25(5)(b) of the Ordinance refers to the factor of “the degree to which, at the time of entering into the transaction, he was under financial pressure, and the nature of that pressure”.  The Defendants did not produce any evidence, and indeed there was no suggestion pleaded or made elsewhere, that the 1st Defendant was at the time under any financial pressure.  To the contrary, the Interim Report of the Listed Company for the 6 months ended 30 June 2015 mentioned that the Listed Company had a “strong” liquidity position and “strong cash position”.  One must bear in mind that the interest rate under complained was not the interest rate on the Loans before default but the interest rate on the Loans after default.  If the 1st Defendant had repaid the Loans in compliance of its primary obligation, the default interest would have not been triggered.

(11)  Even in the Listed Company's annual report for the year ended 31 December 2015, the Listed Company stated to the public that the liquidity position and cash position of the company remained “strong”, and that it held net current assets of over RMB3 billion and had utilized Less than 50% of its credit facilities.

(12)  In late April 2016, the Listed Company announced its plan to apply for listing in the Mainland.  I agree with the Plaintiff’s counsel that the Listed Company could not have planned for a listing in the Mainland if it was facing financial pressure.

(13)  The factors referred to in section 25(6) of the Ordinance did not assist the 1st Defendant either:

(a)  The Loans were lent to a private company (ie the 1st Defendant) with a nominal share capital of HK$10,000 only.

(b)  In the absence of any event of default, the fixed rate of 59% would have no application.

(c)  The 1st Defendant’s only known assets were shares in the Listed Company.  As it subsequently turned out, the trading of the shares in the Listed Company was suspended, and the company was even declared bankrupt and its listing status cancelled.  The risks of default, albeit from hindsight, could be very serious.

(d)  Although the 2nd and 3rd Defendants had provided personal guarantee, they were residing in the Mainland, ie outside the jurisdiction.

31.  The Plaintiff has also raised other arguments in reply to the 1st Defendant’s defence, namely severance (ie the default interest clause in the Facility Agreement can and should be severed), restitution (ie the 1st Defendant should return the principals to the Plaintiff on the alternative basis of restitution and unjust enrichment) and estoppel (ie the 1st Defendant is estoppel from denying or challenging the amount of the Loans). In light of my decision on the 1st Defendant’s defence in relation to sections 24 and 25 of the Ordinance above, I do not consider necessary to express my view on those arguments raised by the Plaintiff.

D.Conclusion on the 1st Defendant’s Defence and Counterclaim

32.  For the above reasons, the defence of the 1st Defendant failed, and judgment was entered against the 1st Defendant as claimed.

33.  The 1st Defendant has counterclaimed that the Share Charge mentioned in paragraph 15 above was unenforceable under section 24(2) of the Ordinance, because, arguing in the same way as its defence, the effective rate of default interest was on its calculation over 60% per annum, in contravention of section 24(1) of the Ordinance.  For the same reasons above, the counterclaim was dismissed.

E.Service of Process on the 2^nd & 3^rd Defendants

34.  Having perused the affirmations of service filed on behalf of the Plaintiff, I reach the same reasoning and conclusion as Madam Justice B Chu (in the learned judge’s Decision dated 7 December 2018, [2018] HKCFI 2667, where she decided to stand over the Plaintiff’s application for default judgment against the 2nd and 3rd Defendants until the trial) that the Writ and the Amended Writ must have come to the notice of the 2nd and 3rd Defendants (see paragraphs 20 to 38 of the Decision).

35.  In light of the finding above that the 1st Defendant fails in its defence, judgment in default of notice of intention to defend was also entered against the 2nd and 3rd Defendants.

HCA 2327/2017

[2018] HKCFI 2667

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2327 OF 2017

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D E C I S I O N

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Introduction

1.  The plaintiff in this action applies for default judgment against the 2^nd defendant (“D2”) and 3^rd defendant (“D3”), the directors of 1^st defendant (“D1”).  Master Ho refused to grant default judgment on 21 May 2018.  P lodged a Notice of Appeal on 1 June 2018.

2.  The appeal was first fixed before this Court on 11 July 2018 (“Hearing”).  This Court raised two issues at the Hearing, (i) on service and (ii) as P has to proceed to trial against D1 which has filed a defence and counterclaim, whether the cause of action against D2 and D3, as guarantors, is severable from that against D1[1]. The Notice of Appeal was later adjourned sine die with liberty to apply. Subsequent thereto, a 3^rd affirmation of the service clerk Tam Kai Ho (“Tam”) was filed and P’s Counsel Mr Kenneth KY Lam lodged further written submissions for written disposal of the matter.

The claim, defence and counterclaim

3.  P is a company incorporated under BVI laws and D1 is a company incorporated under HK laws. D2 and D3 are brothers.   According to P, D1, D2, and D3 all held shares in a Mainland Chinese company Fuguiniao Co Ltd, which is listed in the Hong Kong Stock Exchange as 1819 HK (“Listco”), and at material times, D2 and D3 were directors of the Listco.  

4.  It is not disputed that on 3 July 2015, P as the “Lender” and D1 as the “Borrower” entered into a Chinese written facility agreement (“Facility Agreement”) with an initial credit limit of HK $150m and the 1^st Loan was drawn down on about 3 July 2015. The Facility Agreement was later varied by 6 Supplemental Deeds (collectively “Supplemental Deeds”) and pursuant to the 4^th Supplemental Deed, the 2^nd Loan was lent by P to D1.  As a security for the two Loans, D2 and D3 each executed a Deed of Guarantee on 3 July 2015 (“Deed of Guarantee”) and 6 Deeds of Confirmation between 6 October 2015 16 May 2016 (“collectively “Deeds of Confirmations”). 

5.  The Facility Agreement contains, amongst other provisions, the following provisions on payment of interests:

(i) D1 must pay interest to P in accordance with the terms of the Facility Agreement;

(ii) Interests shall be at 20% per year, accrued daily (“Non-Default Interests”)[2];

(iii) The suspension of trading of the shares of the Listco on the Hong Kong Stock Exchange for a continuous period of 15 days or more shall be an event of default;

(iv) If D1 is in default, D1 must pay P default interests at the rate of 59% per year, accrued daily (“Default Interests”);

6.  The trading of D1’s shares on the Hong Kong Stock Exchange was suspended on 1 September 2016.  According to P, (i) the due date for the 1^st Loan in the Facility Agreement was 6 October 2015 which was subsequently extended to 4 April 2017 under the 5^th Supplemental Deed; and (ii) the due date for the 2^nd Loan advanced on 18 February 2016 was 16 May 2016 which was subsequently extended to 16 May 2017 under the 6^th Supplemental Deed.  However, due to the suspension of D1’s shares, an event of default had occurred and a written notice was issued and served by P to D1 on 28 September 2016, which was also the date of default (“Date of Default”).  According to P, demand letters dated 28 September 2016 were served on D2 and D3 and duly received by them.

7.  Later, on or about 23 December 2016, D1 executed a share charge in favour of P in respect of 212,550,000 shares of the Listco (“Share Charge”). 

8.  It was not until 9 October 2017, over a year after the Date of Default that P issued the writ herein (“Writ”).  Its statement of claim was filed on 17 November 2017 (“SOC”) and later on 4 December 2017, the Writ was amended (“Amended Writ”) and so was the SOC (“ASOC”). 

9.  In the ASOC, P claims against each of the defendants for a total sum of HK$413,583,692.61 being principal of the 1^st Loan and the 2^nd Loan and Default Interests from Date of Default less part payment of a sum of HK$12,082,247.44, as certified by P’s “Certificate on Quantum” at 16 November 2017, and thereafter at daily interests.  P’s claims against D1 are based on D1’s breach of the Facility Agreement as varied by the Supplemental Deeds, and P’s claims against D2 and D3 are based on their breach of their respective Deeds of Guarantee and the Deeds of Confirmations.

10.  D1’s defence and counterclaim (“D&C”) was filed on 29 January 2018.  Essentially, in the D&C, D has pleaded that the Facility Agreement as varied by the Supplemental Deeds is unenforceable for reasons set out in paragraphs 21 to 25 in the D&C and that P is not entitled to demand for repayment pursuant to the Facility Agreement.  In particular, D1 has made no admission to P’s allegations regarding breaches on the part of D2 and D3 but has averred that P is not entitled to demand payment against D2 and D3 under the Facility Agreement which is unenforceable for reasons set out in paragraphs 21 to 25 in the D&C.

11.  Under paragraphs 21 to 25, D1 says the Default Interests are either prohibited under section 24(1) of the Money Lenders Ordinance, Cap 163 (“MLO”) or deemed to be extortionate under section 25(3) of MLO.  According to D1, the effective Default Interest rate as reflected in P’s Certificate of Quantum comes to 61.14% per annum which exceeds 60 percent per annum.  Although it is not disputed that there was a payment of HK$12,082,247.44 made by D1 to P, it is D1’s case that P has unlawfully applied the entirety of that payment towards settlement of Default Interests.

12.  Further, according to D1, under section 2 of the MLO, the “principal” in relation to a loan means the actual amount lent, and it is D1’s case that the principal of the 1^st Loan actually lent by P and received by D1 was a sum of HK$145,850,000, and subsequently D1 received only HK$100,000,000 as the 2^nd Loan, and that the total principal amount actually lent to D1 was HK$245,850,000, and not HK$255,764,398 as stated in P’s “Certificate on Quantum”.  D1 also counterclaims that the Share Charge is unenforceable and/or otherwise of no effect.

13.  Notwithstanding that D1 has filed its D&C and later a statement of truth signed on 29 January 2018 by D3 as Executive Director, there has been no acknowledgment of service nor defence filed by either D2 and D3.

14.  P first applied for default judgement on 28 December 2017, which was supported by two affirmations of service by P’s solicitors’ service clerk Tam Kai Ho (“Tam”).

15.  There were requisitions raised by the Master’s office on 11 January 2018 (“Requisitions”), to the following effect: -

(1) P was required to provide information under sections 25(4)(a), 25(5)(a) & (b) and 25(6)(a) & (b) of the MLO for the consideration of the Master as to whether the transaction was extortionate under section 25(3) of MLO;

(2) As P’s claims for damages in prayer (1A) of the amended endorsement of claim in the Amended Writ and prayer II of the ASOC are for an unliquidated sum, why was Form 16 for liquidated amount annexed to the Amended Writ used instead of Form 16C;

(3) Why was the amount claimed in the Amended Writ and the ASOC different, and P was to show calculation of the amount of HK$397,934,876.72;

(4) whether P was abandoning the claim for damages sought in the prayer (1A) of the amended endorsement of claim the Amended Writ and prayer II of the ASOC.

16.  On 8 May 2018, P’s director Mr Ma Suen Yee Andrew (“Ma”) filed an affirmation to respond to the Requisitions and on 9 May 2018, P applied for default judgment again.  P has abandoned any claim for damages for the purposes of the application for default judgment against D2 and D3 and without prejudice to P’s claim for the same against D1.

17.  On 9 May 2018, Master Ho refused to grant default judgment in that the amount claimed by P against D1 and guaranteed by D2 and D3 may be regarded as extortionate, if not prohibited, under the MLO and unenforceable and therefore it would be undesirable if the Court were to grant default judgment against D2 and D3.

18.  P lodged its Notice of Appeal on 1 June 2018. 

19.  It is trite that an appeal from the master to the judge in chambers is dealt with by way of an actual rehearing of the application which led to the order under appeal and the judge treats the matter as though it came before him for the first time[3].

Affirmations of service on D2 and D3

20.  There are now 3 affirmations of service filed by Tam, the first two were filed prior to the Hearing.

21.  As seen in Tam’s 1^st and 2^nd affirmations of service, the mode of service of the Writ and the Amended Writ and accompanying documents on D2 and D3 respectively on 10 October 2017 and 4 December 2017 was by way of registered post to an address at Unit 2006, 20/F, West Tower,  Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong (“Unit 2006 Shun Tak Centre”), and that Tam had said in his two affirmations that the said envelopes containing the Writ and the Amended Writ and accompanying documents had not been returned by the Post Office.  Thus, in the opinion of Tam, the Writ and/or Amended Writ so posted would have come to the knowledge of D2 and D3 within 7 days after the date of posting.

22.  At the time of executing the Facility Agreement and the Supplemental Deeds (the 6^th Supplemental Deed being dated 16 May 2016), D1’s registered office was stated to be at Unit L on the 19^th floor, Block 2 of Kam Fung Industrial Building in Kwai Chung (“Kam Fung Building”).  As for D2 and D3, on the Deeds of Guarantee and Confirmation (the last one dated 16 May 2016), their addresses for service of any notice on them were stated to be Unit 1908, 19^th floor, West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong (“Unit 1908, Shun Tak Centre”).

23.  At the Hearing, one of the queries raised by this Court in relation to service was that there was no supporting evidence from P or in Tam’s first two affirmations to explain why Unit 2006, Shun Tak Centre was the usual and last known address of D2 and D3.

24.  Tam’s 3^rd affirmation was subsequently filed on 9 October 2018 confirming that the Writ and the Amended Writ served by registered posts to D2 and D3 at Unit 2006 Shun Tak Centre had by then still not been returned by the Post Office or by any entity.

25.  In Tam’s 3^rd affirmation he exhibited, amongst other things, copies of annual returns of D1 filed in 2017 and 2018 and company particulars of the Listco from the Companies Registry.

26.  The annual returns of D1 were respectively dated 9 April 2017 and 9 April 2018 and indicated that D1’s registered address has since 9 April 2017 been at Unit 2006 Shun Tak Centre.  D2 and D3 remained directors and shareholders of D1 as at those dates.  However, their addresses stated in the annual returns were at Flat A, 18/F, Block 2, Majestic Park, 11 Farm Road, Tokwawan, Hong Kong (“Majestic Park Address”).

27.  Tam only disclosed in his 3^rd affirmation that service had been attempted at the Majestic Park Address, but according to Tam, this address appeared to be a “false” address and this was because P’s solicitors had attempted service at that address, and the service envelopes were later returned to P’s solicitors marked “addressee unknown 查無此人” by the Post Office, and therefore no further documents had been sent by Tam to the Majestic Park Address, and Tam said P did not rely on the attempted service at the Majestic Park Address for the default judgment application.

28.  From the company particulars of the Listco which Tam obtained from the Companies Registry, as at the date of 7 November 2017, the registered principal place of business of the Listco was at Unit 2006 Shun Tak Centre and both D2 and D3 were directors of the Listco, but as of the date of 6 October 2018, D3 has ceased to be a director of the Listco while D2 has remained a director. 

29.  According to Tam, he had also visited Unit 2006 Shun Tak Centre on 10 October 2017 and on 5 October 2018.  He took 2 photographs on 10 October 2017 which only showed that Unit 2006 was the office of Fuguiniao (Hong Kong) Limited and/or Listco and that lights in the office were turned on but no one was at the reception.  The photographs did not show the address or Unit 2006 Shun Tak Centre was the office of D1.

30.  On 5 October 2018, according to Tam, he attended Unit 2006 Shun Tak Centre again at around 4:20pm and when he rang the bell, a male person came out and that the staff was there and he was just the younger brother of someone who worked there.  When asked by Tam whether the office was still that of D1, the male person said yes.

31.  Clause 12 of the Deeds of Guarantee provides that, amongst other things, any notice issued to D2 or D3 under their respective Deed of Guarantee has to be delivered, or sent to the office address/email address/fax address stated therein.  The office address stated in Clause 12 was Unit 1908, Shun Tak Centre and the email address stated thereunder was “[email protected]” (“Email Address”).  The Email Address was according to P that of Jane Yang, Vice General Manager of the Listco.  As for Unit 1908 Shun Tak Centre, it was not clear what address this was, as it was not the registered address of D1 stated on the transaction documents.  No service seemed to have been attempted on D2 and D3 at the Unit 1908 Shun Tak Centre.

32.  Ma had produced in his 1^st affirmation some 181 pages of email correspondence between P and Jane Yang through the Email Address but those emails appeared to be during the period between 25 June 2015 and 7 July 2015, ie the period surrounding the 1^st Loan.  No emails/communications between the parties after July 2015 seemed to have been produced, even though there must have been further communications between P and D1, as according to D1’s D&C, D1 executed the Share Charge in favour of P on 23 December 2016.

33.  Anyway, according to Tam, he had taken the extra step of emailing PDF copies of the Writ to D2 and D3 on 12 October 2017 to the Email Address and that there was an email issued to Tam by his computer software Microsoft Outlook on 19 October 2017 indicating delivery was complete.

34.  What is clear from Tam’s 3 affirmations that P relies on Unit 2006 Shun Tak Centre, ie the registered company address of D1 and the Listco since 9 April 2017, being the usual and last known address as of D2 and D3 and that the service effected on D2 and D3 at Unit 2006 Shun Tak Centre to be due service. 

35.  P also relies on the fact that there was a a Public Notice dated 25 July 2018 which was issued by D2 as Chairman of the Listco under the Listing Rules indicating that as at that date, D2 was still an executive director of the Listco, although D3 was not.

36.  Mr Lam submits that D3 has signed a statement of truth for the D&C filed on behalf of D1, and that as D2 and D3 remained directors of D1 and in particular D3 had signed the statement of truth of the D&C, and that D2 and D3 are brothers, it is Mr Lam’s submission that the Writ and the Amended Writ must have come to the knowledge of both D2 and D3. 

37.  As Stone J said in Transamerica Occidental Life Insurance Co(Hong Kong Branch) v King Sound Industry Co Ltd [2005] 1 HKLRD 125, at paragraph 45 :

“The object of service of process upon a party is to bring the process to the notice of the party to be served, and such manifestly has occurred. The manner in which service has been effected has caused no prejudice, and none is alleged.”

38.  Having considered the above, I am of the view, as D3 had signed the statement of truth and that D2 and D3 are brothers, and further that in the D&C, it was pleaded that P was not entitled to demand payment against D2 and/or D3 due to unenforceability of the Facility Agreement, the Writ and the Amended Writ must have come to the notice of D2 and D3.

Whether P entitled to default judgment against D2 and D3

39.  Mr Lam argued that P is entitled as of right to the liquidated sum claimed when D2 or D3 does not file any notice of intention to defend, and that P is entitled to judgment of the debt as of right.  Mr Lam quoted a passage from what was said by Barma J, as he then was, in paragraphs 15 and 16 of Re Mai Xi Hong, HCB 550/1996, 17 December 2004.  The applicant in that case Mr Mai sought to annul an adjudication order made against him pursuant to the then section 33 of the Bankruptcy Ordinance which was made on the basis of a petition of the creditor who alleged that Mr Mai had committed an act of bankruptcy by failing to make payment to the creditor under a default judgment.  As said by Barma J, the creditor’s claim against the applicant was for a liquidated demand plus interest and costs and on failure of the applicant to give notice of intention to defend the claim, the creditor was entitled as it did to enter judgment for the amount claimed by the writ and costs.

40.  Mr Lam also referred to Bpost Hong Kong Ltd v Jade Incorporation Ltd [2017] 5 HKLRD 453 where Deputy Distrct Judge Benny Lo had said in paragraphs 46-48 thereof, as follows:

“46. To the extent relevant, O 13 contains the following provisions: -

‘1. Claim for liquidated demand (O 13, r 1)

(1) Where a writ is indorsed with a claim against a defendant for a liquidated demand only, then, if that defendant fails to give notice of intention to defend, the plaintiff may, after the prescribed time, enter final judgment against the defendant for a sum not exceeding that claimed by the writ in respect of the demand and for costs …’

‘6A. Prescribed time (O 13, r 6A)

In the foregoing rules of this Order, “the prescribed time” (訂明的時限), in relation to a writ issued against a defendant, means the time limited for the defendant to acknowledge service of the writ or, if within that time the defendant has returned to the Registry an acknowledgment of service containing a statement to the effect that he does not intend to contest the proceedings, the date on which the acknowledgment was received at the Registry.’

‘7. Proof of service of writ (O 13, r 7)

(1) Judgment shall not be entered against a defendant under this Order unless—

(a) the defendant has acknowledged service on him of the writ; or

(b) an affidavit is filed by or on behalf of the plaintiff proving due service of the writ on the defendant; or

(c) the plaintiff produces the writ indorsed by the defendant’s solicitor with a statement that he accepts service of the writ on the defendant’s behalf …’

47. Thus, the two key conditions for default judgment to be entered under O 13 r 1 are: - (i) a writ containing a liquidated claim has been duly served on the defendant, and (ii) the prescribed time for the defendant to acknowledge service has expired. Once the plaintiff demonstrates that those conditions have been met, the plaintiff is normally entitled to judgment. There is no requirement under O 13 for a statement of truth to be filed or served before default judgment can be entered. It is not apparent to this court why the irregular SoT filed in the circumstances of the present case would, as Mr Wan submitted, necessarily affect the plaintiff’s entitlement to judgment under O 13.”

41.  Mr Lam thus submitted that that it was P’s entitlement to enter judgment so long as (1) due service has been proved; and (2) the prescribed time for acknowledging service has expired.  Mr Lam also referred to Pendelton v Westwater [2001] EWCA Civ 1841 where Laws LJ of the English Court of Appeal had said that a default judgment required no consideration of the merits[4].

42.  Mr Lam further referred to the case of Football Dataco Ltd v Smoot Enterprises Ltd (Ch D) [2011] 1 WLR 1978 where Briggs J had said:

“Default judgment is not, in any circumstances, a judgment on the merits. It is in that respect to be contrasted both with judgment after a trial and with summary judgment. The essential distinction between default judgment and a judgment on the merits is that the court is not when asked to give default judgment called upon to form any view about the merits of the claimant’s claim, whether as a matter of fact or law[5].”

43.  However, none of the above cases indicates that it is mandatory under Order 13 rule 1 for the Court to give judgment upon application.  As seen in paragraph 19/7/13 pf the Hong Kong Civil Procedure2019, Vol 1, even when Order 19 rule 7(1) is expressed in mandatory terms, the court still retains its discretionary power whether to give judgment or to extend a party’s time to plead when it is just to do so.  It may, for instance, where there are matters affecting other parties waiting to be decided, order the motion to stand over until trial.

44.  Having considered the provisions in those rules providing for default judgment, I agree with the Master that whether the court will give default judgment upon application by a plaintiff is a matter of discretion of the court.

45.  P has pleaded that under the express terms of the Deeds of Guarantee, D2 and D3 are now personally liable to indemnify P for all losses, damage and/or other expenses arising out of any non-performance and/or breach of the Facility Agreement and/or the Supplemental Deeds. 

46.  In relation to the issue of severability, Mr Lam referred the Court to the case of The China and South Sea Bank Ltd v Tan Soon-gin George [1990] 1 HKLR 546, a Privy Council judgment on appeal from Hong Kong and submitted a creditor with more than one person to sue is free to decide for himself who (if anyone at all) would like to go after and when, and there is no obligation on the part of the creditor to sue everyone at one go, or indeed to do anything.  Mr Lam had also referred to the case of HSBC Bank (China) Co Ltd and Yip Kim Po, HCA 2472/2007, (unrep) 16 May 2008, and also Re Yohan Chandra, ex p United Overseas Bank Ltd, CACV 671/2001, [2002] 1 HKLRD 404.

47.  Even if the claim against D2 and D3 may be severable from the claim against P, in the present case P is suing against 3 defendants and one of the defendants, namely D1, has filed the D&C in which D1, amongst other things, (i) disputes the amount of the principal amounts of the two loans and (ii) raises the defence that the Facility Agreement (as varied by the Supplemental Deeds) is unenforceable (iii) avers that P is not entitled to demand payment against D2 and/or D3 on the basis of alleged non-payment under the Facility Agreement due to its unenforceability. 

48.  In particular, the defence raised by D1 of unenforceability is an issue common to all the defendants.  If the Facility Agreement and the Supplemental Deeds are found at the trial to be unenforceable, this will affect the P’s claim against D2 and D3.  Further, a default judgement against D2 and D3 may affect the issue of unenforceability raised by D1.

Conclusion

49.  Having considered the above, I am not prepared to give default judgment as claimed by P.  I am of the view that the application should be stood over until trial.

50.  Costs of this appeal be costs in the cause.