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Sun Entertainment Culture Ltd v Inversion Productions Ltd (Formerly Known As Tnc Productions Ltd)

Judgment Cited authorities 6 Cited in Precedent Map Related
Vincent
JurisdictionHong Kong
Judgment Date22 September 2023
Neutral Citation[2023] HKCFI 2400
Subject MatterCompanies Winding-up Proceedings
Judgement NumberHCCW444/2022
Year2023
HCCW444/2022 SUN ENTERTAINMENT CULTURE LTD v. INVERSION PRODUCTIONS LTD (FORMERLY KNOWN AS TNC PRODUCTIONS LTD)

HCCW 444/2022

[2023] HKCFI 2400

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 444 OF 2022

__________________

IN THE MATTER OF THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE, CAP 32, LAWS OF HONG KONG

and

IN THE MATTER of INVERSION PRODUCTIONS LIMITED (FORMERLY KNOWN AS TNC PRODUCTIONS LIMITED)

__________________

BETWEEN

SUN ENTERTAINMENT CULTURE LIMITED Plaintiff

and
INVERSION PRODUCTIONS LIMITED
(FORMERLY KNOWN AS TNC PRODUCTIONS LIMITED)		 Respondent

__________________

Before: Deputy High Court Judge Le Pichon in Court
Date of Hearing: 5 September 2023
Date of Judgment: 22 September 2023

_________________

J U D G M E N T

_________________

1. This is the substantive hearing of the winding up petition presented by Sun Entertainment Culture Limited (“the Petitioner”) against Inversion Productions Limited (formerly known as TNC Productions Limited) (“the Respondent”) based on an unpaid debt of approximately USD 24 million (“the Debt”). At the conclusion of the hearing, judgment was reserved which I now give.

Background facts

2. On 12 December 2014, the parties entered into a Loan Agreement for a loan of USD 7.5 million (“the Loan”) repayable on 30 April 2015 with interest in the amount of 10% of the Loan sum i.e. USD 750,000 (“the Interest”) to finance the pre-production stage of a movie. The Interest was payable in one lump sum together with the principal on the maturity date.

3. “Default Interest Rate” was defined in the Loan Agreement as follows:

“4% per month in addition to the Interest, so long as a Default or Event of Default is continuing.”

4. The amount of the Loan was increased by USD 1 million on 15 March 2019.

5. The original maturity date of 30 April 2015 was extended by agreement on 6 occasions between 30 April 2015 and 30 June 2020 (“the 1st to 6th Amendments”), with the final maturity date being 30 September 2020. Supplemental Interest as specified in each of the 6 Amendments was paid by the Respondent at the time of entering into the relevant Amendment.

6. After the Respondent failed to repay the outstanding debt, the Petitioner’s former solicitors served a statutory demand on the Respondent on 8 August 2022 which was subsequently revised twice. The final statutory demand was served on 18 October 2022 demanding payment of the Debt made up as follows:

Item Amount (US$)
Principal 8,500,000
Interest (pursuant to original Loan Agreement) 750,000
Supplemental Interest (pursuant to 1st to 6th Amendments) 6,450,000
Default Interest accrued from 1 October 2020 up to 18 October 2022 at the rate of 4% per month 8,357,419.35
Debt 24,057,419.35

The issues

7. The Respondent opposes the Petition. Its stance is that the Loan Agreement (as varied by the 1st to 6th Amendments) imposes an “annual default interest” exceeding 60% contravening section 24 (1) of the Money Lenders Ordinance, Cap 163 (“MLO”). The Debt which arises under the Loan Agreement is thus rendered unenforceable.

8. Whether or not the Debt is enforceable turns on the true meaning of “an effective rate of interest” in section 24 (1) (“the MLO issue”).

9. Further, in view of the fact that the Loan Agreement contains an arbitration provision, the Respondent’s stance is that the MLO issue falls to be determined by arbitration and, accordingly, the winding up proceedings should be stayed or dismissed pending final determination, whether or not by arbitration.

A. The MLO issue

10. It is the Respondent’s case that the Debt is substantively disputed. Thus, the threshold question is whether or not the Debt is rendered unenforceable debt which must first be resolved.

11. Section 24 provides as follows:

“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 48[1] 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.＂

12. Mr Martin Li, counsel for the Petitioner, in submitting that interest payable under the Loan Agreement does not contravene section 24 (2), relied on the CA judgment in Easy Fortune Property Ltd v Yung Chun Him [2020] 4 HKC 1.

13. The CA (Yuen, Chu and Poon JJA) unanimously upheld the judge on his interpretation of ‘effective rate’. 　In that case, the Court held that whether section 24(2) of the MLO had been contravened should not be determined on a scenario of default and rejected the submission that default interest must also be included in ascertaining the effective rate of interest of the loan.

14. In giving the judgment of the Court, Chu JA (at §42) applied the principles set out in Kwok Ying Lung v Ko Chi Hung & Anor [2001] 3 HKC 480.

15. The CA in that case held that when ascertaining the meaning of ‘effective interest’ for the purposes of section 24, regard is to be had to section 18 (2)(i) of the MLO which gives the moneylender the choice between two formulations i.e. stating an actual rate and a deemed rate. Where an actual rate specified, the schedule has no application. The actual rate is the rate charged on the entire loan and does not admit of the rate varying from time to time. The calculations in the Schedule are relevant to produce a deemed rate only where the total sum of interest is not capable of being expressed in terms of an actual rate per cent per annum, for example, where a loan is repayable by a number of instalments, each instalment comprising principal as well as interest: Kwok Ying Lung at §§29-30, 32, 42-44.

16. It also rejected the argument that the words “effective rate of interest” in sections 24 and 25 mean only the rate according to the statutory calculations, only agreements with a deemed rate (to which Schedule 2 would apply) would come within the purview of sections. As a matter of statutory interpretation, that could not have been the legislature’s intention when those sections are read in the context of section 18 (2)(i): see §§34 and 45.

17. The CA in Easy Fortune considered the defendant’s authorities said to support its submission that in addition to the total amount of interest, default interest must also be taken into account in ascertaining the effective rate and found that they did not support the defendant’s case.

18. Mr Law Man Chung SC, leading counsel for the Respondent, submitted that the Petitioner’s interpretation of section 24 is based on a misreading/misinterpretation of Easy Fortune. He submitted that if Easy Fortune has the interpretation the Petitioner advances, it would be inconsistent with another CA decision, namely, Chan Ping Che v Gao Gunter unrep., CACV 253/2014, 5 June 2017.

19. The Chan case was an appeal from two decisions of DHCJ Seagroatt who had granted conditional leave to the defendant to defend proceedings brought against him in respect of the cheques he had provided as security for 3 loans made by the plaintiff. The condition was payment into court of the amount of the outstanding debt. The defendant contended that the defendant should be given unconditional leave and if any condition for payment in were to be imposed, the amount should be varied.

20. The dishonoured cheques were provided in settlement of the underlying loans between the parties and the issue was whether the loans were invalid rendering the cheques unenforceable. One of the defences the defendant raised below was that the effective interest rate under each of the loans or at least in respect of loans A and C exceeded 60% per annum[2]. On appeal, counsel for the defendant placed revised calculations before the CA for consideration. Kwok Ying Lung was not referred to.

21. The revised calculations factored in default interest at 5% per annum on the total amount due on the maturity date. The base amount used was not only the amount of the loan but also the total amount of interest payable during the period of the loan. When so calculated, it showed an effective rate of interest of 62.25% per annum on loan A.

22. On the basis that it was not necessary for to come to a concluded view as to the merits of the defence at that stage, the CA (Lam VP and Barma JA) considered it to be at least well-arguable that in ascertaining the effective rate of interest, the default interest rate charged is to be taken into account. Accordingly, it allowed the defendant’s appeals and varied the condition the judge had imposed.

23. The Chan Ping Che case had not been decided when Easy Fortune was heard. The revised calculations the defendant in Chan Ping Che presented to the CA were said to be prepared in accordance with the provisions of the Schedule 2 which provide the method for the calculation of the effective rate of interest.

24. The term “effective rate” is defined in section 2 of the MLO as follows:

“2. Interpretation

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

…

effective rate (實際利率), in relation to interest, means the true annual percentage rate of interest...

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