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Authored by: Simon Deane and Jennifer Lok
The Court of Final Appeal in Totalcorp (Nominees) Limited v Hong Kong Sai Kung Ngong Wo Resort Development Limited  HKCFA 28 rejected the lower courts’ findings on the existence of an inferred agreement and held that a new agreement between the lender and borrower providing for retrospective revisions to the rate of interest over the relevant period did not create a new loan to pay off the existing loan.
In February 2015, the plaintiff granted a loan to the defendant in the principal amount of HK$45 million. The loan was secured by a legal charge over various lots of land in Sai Kung belonging to the defendant. The initial loan was for a term of 3 months, with interest at the rate of 2.5% per month, to be deducted from the loan proceeds at the outset.
The defendant was unable to repay the loan on its due date and the maturity date was extended four times, each documented in a loan extension application letter signed by the defendant and agreed by the plaintiff. It was not disputed that up to and including the fourth extension, the rates of interest charged by the plaintiff (which were in the region of 3.5% to 4% per month on the principal amount with arrears of interest up to 5 July 2015 (“Original Indebtedness”) fell within the then threshold prescribed by the Money Lenders Ordinance (Cap. 163) (“MLO”).
It transpired in the trial that a demand letter (“Demand Letter”) was issued by the plaintiff’s solicitors to the defendant approximately one year after the date of the fourth extension. The demand letter set out the calculation of the defendant’s indebtedness in accordance with the terms of the four extensions up to 31 May 2016, with a statement that “further interest continued to accrue on the sum of HK$63,241,006.00 [i.e. the outstanding indebtedness as at 31 May 2016 (“2016 Indebtedness”)] at the rate of 4% per month from 1st June 2016 until the date of payment.” If the aforesaid statement was true, according to the judgment of the court of first instance (albeit overturned by the Court of Appeal), this would amount to the rate of interest exceeding the statutory interest rate cap of 60%.
On October 2016, the parties entered into a further agreement (“Final Agreement”), in which the parties agreed to revise retrospectively the rate of interest over the whole period of extension to 3.8% per month and declared all documents previously signed to cease to be effective and be superseded. The documents listed in the Final Agreement were those previously signed concerning the payment of interest on the subject loan including the initial loan application and the applications for the four extensions but there was no mention of the Demand Letter.
Decision of the Court of Final Appeal
The Court of Final Appeal considered that there was no basis for finding that there had been an agreement that the monthly interest rate of 4% would accrue on the 2016 Indebtedness instead of the Original Indebtedness from the Demand Letter. It followed that there was no agreement between the parties in contravention of the MLO, and it was not necessary to deal with the question of whether the original loan was illegal or unenforceable.
The Court of Final Appeal disagreed with the lower court’s interpretation of the rule of construction laid down in BS Lyle Ltd v. Chappell  1 KB 691 and the cases following it, and clarified that none of these authorities was suggesting that whenever the parties agreed to vary the terms of a loan, by extending the term or changing the rate of interest, that must count as entering into a new loan. Whether or not a new loan is created is a matter of construction that must be interpreted based on the terms of the agreement between the parties and with reference to the intention of the parties.
Implications for the new usury rates under the MLO
The legislative amendments to lower the statutory limit of effective rates of interest stipulated under the MLO (from 60% per annum to 48% (illegal) and from 48% per annum to 36% (allows the courts to reopen the transaction)) took effect from 30 December 2022 with no retrospective effect.
The decision of the Court of Appeal provides useful guidance for money lenders who intend to amend, extend or provide refinancing in relation to their loan agreements entered into prior to 30 December 2022. Any amendment, extension or agreement entered into on or after 30 December 2022 in connection with an existing loan which is expressed to create a new loan by its terms must comply with the new usury rates. On the other hand, if the parties make it clear that they are only amending the terms of the existing loan, then whether the old usury rate or the new usury rate will apply will depend on whether such amendment or agreement is categorised as an “agreement for the repayment of a loan or for the payment of interest on a loan”. It seems that an extension or refinancing of an existing loan will be regarded as an agreement for repayment of a loan, and will be governed by the new usury rates under the revised MLO.
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