WHITEHALL FINANCE LTD v. WIN AND FAIR SECURITIES CO LTD

Contract - illegality - sections 22 and 24C of Deposit-taking Companies Ordinance (Cap. 328)

                On the proper construction of section 22(1) of the Ordinance, read with section 24C(2), loans granted to one person or permitted to be outstanding, in excess of 25% of the paid-up capital and reserves of a D.T.C. are irrecoverable at the suit of the company unless it can show that due diligence has been exercised to avoid the contravention.

                The difference between the cost of property and a professional valuation arrived at on accepted principles can properly be regarded as part of the "reserves" of a company for the purposes of section 22(1) and remain so even if the property is mortgaged.

                Where there is a running account the task of the Court is to determine whether it has been established that the sum claimed by the D.T.C., or any part of it, is derived from the aggregate of loans made (or allowed to remain outstanding) beyond the statutory limit. Any amount not so tainted with illegality is recoverable by the D.T.C.

                Appeal allowed in part.

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JUDGMENT

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Fuad, J.A.:

1. This is an appeal from the judgment of a Judge of the High Court who, on the 10th October 1984, entered judgment for the Plaintiff in the sum of $4,449,525 with interest. The controversy which still divides the parties is the proper construction and application of the Deposit-taking Companies Ordinance, Cap. 328 ("the Ordinance").

2. The Plaintiff, Whitehall Finance Ltd., is a deposit-taking company registered under the Ordinance and is now in liquidation ("Whitehall"). The Defendant, who now appeals, is Win and Fair Securities Company Ltd.  ("Win and Fair"). It is common ground that on the 19th May 1981 Win and Fair signed two documents in favour of Whitehall - they were in common form, one headed "Memorandum of Deposit" and the other "General Loan Agreement". On the 22nd May 1981, in pursuance of the arrangements made between the parties, Whitehall advanced the sum of $8,632,466 to Win and Fair upon security and this amount was spread over three accounts named "A" "B" and "C". A running account was kept from that day of Win and Fair's indebtedness. During its currency, further advances were made and various sums repaid. Agreed interest was added to the amount outstanding. On the 8th March 1982 the "B" and "C" accounts were closed and the running account was maintained only in respect of account "A". Nothing was said in writing about any limit on the amount Win and Fair could borrow until they were informed on the 1st December 1982 by Whitehall that their credit facility would not be permitted to exceed the total amount then outstanding - $4,892,311. By the 4th January 1983 the indebtedness of Win and Fair stood at $4,449,525.

3. No further advances were made. Win and Fair went into liquidation on the 28th January 1983. The amount due was demanded but not paid and so Whitehall issued its writ on the 25th August 1983, claiming the $4,499,525 with interest. The amended Points of Claim pleads the loan agreement of the 19th May 1981 and that under its express terms Win and Fair had agreed (a) to pay all sums due on demand and (b) that interest should be charged at a rate to be determined by Whitehall. The pleading goes on to aver that 17% per annum had been determined at the appropriate rate of interest and that the sum claimed was due and remained unpaid.

4. In their amended Points of Defence, Win and Fair denied its indebtedness and put Whitehall "to strict proof thereof". At an early stage of the proceedings this ceased to be a live issue, and Win and Fair relied solely on section 22 of the Ordinance. They averred that both the credit facility announced in the letter of the 1st December 1982 ($4,892,400) and the amount actually claimed exceeded 25% of Whitehall's paid up capital and reserves, which were $13 million. In the alternative it was pleaded that if Whitehall's paid up capital and reserves exceeded $13 million, then the amount of facilities agreed to be extended at the inception of the agreement was $10.5 million, and advances or loans of more than $6.5 million had been made between the period May - June 1981 which exceeded 25% of Whitehall's capital and reserves. In view of the terms of section 22 of the Ordinance, the advance of $4,449,525 was made under an illegal agreement and was therefore irrecoverable.

5. To return to the amended Points of Claim. Whitehall pleaded that if the monies advanced did exceed 25% of their capital and reserves, they were recoverable as monies had and received without consideration and that Win and Fair should be required to account to them for all profits made by the use of the monies, and to pay interest.

6. Before the Judge, the only witness called by Whitehall was the Senior Insolvency Manager of their liquidators, Mr. Maxim. The notes of evidence throughout mere very brief and I mean no disrespect to the learned Judge when I comment (recognising the burden placed on a Judge where short-hand writers are not available) that it would have been helpful if his notes had been rather fuller. Mr. Maxim told the Court that the managing director of Win and Fair was in Taiwan. He produced the accounts and went through them; and showed. how the sum claimed had been arrived at He referred to Whitehall's capita and reserves and said that they were "as stated in the accounts". I need only refer to the audited accounts for the year ending 31st March 1981 and these show that (a) the paid up capital was $12 million (12 million ordinary shares of $1.00 each, fully paid) (b) the share premium was $1,533,600 and (c) the "capital reserve" was $12,222,950.

7. The notes to the accounts indicated what made up the capital reserve. The cost of the "land and building" of half a floor in the United Centre, Queensway (of course, a long lease) had been $18,677,050. A valuation carried out by a named firm of Chartered Surveyors on the 25th March 1981 showed the then value of the interest in the building to be $30,900,000. The capital reserve had been created as a result of this revaluation and the difference between the cost and the then value ($12,222,950) was transferred to the Capital Reserve Account. I would mention here that the only other audited accounts available (for the year ending 31st March 1982) show a slight reduction of this figure to $11,679,374 on account of certain stamp duties and legal fees. This difference, I think, need not concern us.

8. From the notes of evidence, it is not clear how far Mr. Maxim explained all this to the Judge. He said that the reserves and paid up capital were as stated and added - "Capital reserve not available for distribution as dividends but can be used for bonus shares. Unappropriated profits can be used for dividends." He concluded his examination-in-chief by saying "if funds recovered they will be available to repay depositors."

9. In cross-examination, Mr. Maxim indicated the relevant pages to the Judge and said: "Capital reserve could have been re-valuation of property. [The accounts] seem to show that this was done." He commented that although the ownership of Whitehall's share. in the building was in the name of "Lipak" there was nothing unusual in this. (Nothing is made of this fact by the Appellant). Mr. Maxim then agreed that the property was mortgaged. He ended by saying "Reserve could be capital reserve or unappropriated profits. One is available for distribution, the other is not."

10. That was all the evidence called by Whitehall. Mr. Woo Wing-fai, the managing director of Win and Fair was the only witness for the defence. He explained the relevant transactions and said that when Whitehall first approached' them the credit limit was fixed at $10.5 million, although nothing had been said in writing. I would interpolate here that the Judge disbelieved Mr. Woo on this point, saying that he did not find him to be a convincing witness. Despite the fact that one of the complaints made in the Grounds of Appeal was "that the Judge had already decided to discard the evidence of the Defendant's witness before Counsel for the Defendant could make submissions on the same", I do not think that it can be said that this matter was canvassed on the appeal. It was rather contended that the Judge should not have disbelieved Mr. Woo in the absence of any evidence to the contrary. I would only say that I am not prepared to disturb the finding of the Judge, on the evidence and material before him, that' there was no agreement to limit advances to $10.5 million. By the same token, as I shall later discuss, there was no agreement to advance loans to that limit. There is nothing else in Mr. Woo's testimony that need detain us.

11. In a judgment delivered on the day following the hearing, the learned Judge reviewed the evidence and summarized the cases of the Plaintiff and the Defendant. He was satisfied that at the material time the "capital and reserves" of Whitehall, within the meaning of that term in the relevant provisions of the Ordinance, amounted to $25,756,550 made up of the total of the sums shown in the accounts as being "paid up capital", "capital reserve" and "share premium reserve". He did not include as "paid up capital and reserves" the amounts shown as "unappropriated assets" and "provision for taxation" for reasons that he gave, and this is not challenged.

12. As regards the basis upon which the capital reserve of $12,229,950 was arrived at, the Judge accepted that subsequent events had no doubt made the Chartered Surveyors' valuation unrealistic, but said that he had no reason to doubt that at the date of the valuation it was a reasonable estimate; adding: "In any event it is for the Defendant to show by evidence that this was not the correct value."

13. The Judge then dealt with the submission that the evidence showed (as it undoubtedly did) that the property which had been revalued had been mortgaged to secure general banking facilities to the extent of US$6 million (which we are told was worth about 43 million Hong Kong dollars at the relevant time), and that therefore the property should not be treated as being part of Whitehall's capital and reserves. He rejected the submission, holding that if authorized by its Memorandum and Articles of Association, a company was free to mortgage its property and that this did not operate as a reduction of capital. He expressed the view that monies obtained under such a mortgage were not profits and must not be paid out in the form of dividends, but remained capital. But, he added, there was nothing in the papers before him to indicate that the proceeds of the mortgage had been dissipated in an illegal manner. I may be permitted to add here that neither was there any evidence that any sum was drawn down on the mortgage.

14. The Judge then went no to consider the effect of the Ordinance. He referred to part of its Long Title "To regulate the taking of money on deposit and to make provision for the protection of persons who deposit money..." and concluded that the Ordinance was designed to protect the interests of the public depositing money with deposit-taking companies, remarking "it would seem very much against their interest if monies, having been lent in excess of the statutory provision should be irrecoverable." He said he was satisfied that there was never any intention in the legislature to prohibit the contract which was entered into between the parties - it was a perfectly normal contract, very similar to an overdraft contract, which companies and individuals enter into with banks everyday. The Judge was of the opinion that while the manner of its performance might at a certain stage have been illegal, even if on the 1st January 1983 the amount owing by the Defendant had exceeded the 25% limit, he would have held that the amount was still recoverable. He concluded his judgment by referring to section 24C(2) of the Ordinance and holding that it did not cover a contract which was on the face of it perfectly proper but was carried out illegally. He added "the section does not assist the Defendant here even if the amount lent at the time the Plaintiff sought to enforce its rights exceeded the 25% ratio, and I am satisfied it does not".

15. Before I address myself to the issues that arise on this appeal, I wish to express my appreciation to Mr. Kaplan and to Mr. Mills-Owens (neither of whom represented the parties in the lower Court) for the very considerable assistance they have afforded us in the resolution of the problems raised in this difficult case.

16. It is clear that central to the issues that fall for determination is the proper meaning to be given to the word "reserves" which occurs in section 22(1) of the Ordinance, for if it be found that the true capital and reserves of Whitehall only amounted to $13,537,600 as submitted by Mr. Kaplan for Win and Fair, then the sum claimed exceeds 25% of that sum by something over $1 million, and Win and Fair might succeed on that ground alone.

17. Subsection (1) of section 22 of the Ordinance (omitting the proviso which is not relevant) is in these terms:

"	22.    (1) A deposit-taking company shall not grant or permit to be outstanding -
	(a)	to any one person; or
	(b)	to 2 or more companies which are -
		(i)	subsidiary companies of the same holding company; or
		(ii)	controlled by any one person (not being a company); or
	(c)	to any holding company and one or more of its subsidiary companies; or
	(d)	to any person (not being a company) and to one or more companies which are controlled by him,
	any advances, loans (whether by way of deposit or otherwise) or credit facilities, including irrevocable documentary letters of credit to the extent to which they are not covered by marginal cash deposits, or give any financial guarantees or incur any other liabilities on their behalf to an aggregate amount of such advances, loans, facilities, guarantees or, liabilities in excess of 25 per cent of the paid-up capital and reserves of the deposit-taking company."

18. The word "reserves" is not defined anywhere in the Ordinance. Mr. Mills-Owens has invited us to treat section 22 of the Ordinance as being in pari materia with certain provisions of the Banking Ordinance (Cap. 155) and to. use this fact as an aid to construction. He draws our attention to the definition of the word "reserves" in section 32(3) of the Banking Ordinance, which is as follows:

 

"(3)	for the purposes of sections 23, 24, 27, 28, 29, 30 and 31, the expression 'reserves' means reserves which appear in the accounts of a bank, and does not include any reserves which are represented by the Writing down of the value of assets or by provision for the depreciation of fixed assets."

19. To appreciate Mr. Mills-Owens' contention, it is necessary to note that section 23(1) of the Banking Ordinance is virtually identical in terms to the section we have to interpret, and that the other sections mentioned in section 32(3) of the Banking Ordinance provide for limitations on certain advances and holdings governed by the amount of the capital and reserves of the bank.

20. It is certainly strange that in respect of sets of provisions so similar in character, there should be a definition of "reserves" in one Ordinance and not the other. But since certain expressions are defined in section 22 of the Ordinance, in my view the Court must regard the omission by the legislature to define "reserves" for the purposes of that section as deliberate. I have never understood the rule of construction relied upon by Mr. Mills-Owens to permit a court to import a statutory definition found in one statute into another in pari materia. If I am wrong, while the meaning given to the word "reserves" by section 32(3) of the Banking Ordinance makes it clear that two particular items may not be regarded as reserves, the subsection is not otherwise of great assistance. I do not think that an item which is shown as a reserve in the accounts of 2 bank must be treated as such if the entry is shown to be illegitimate. In such circumstances the ipse dixit of the accountant would surely not be enough.

21. On the other hand, on the question of construction, Mr. Kaplan has urged us to look at sections 21A and 23C of the Ordinance to assist in our task. I will say at once that I have read and re-read these sections and find nothing in them which could possibly help us to determine the issue I am addressing.

22. I reach the conclusion therefore that we must give effect to the ordinary meaning of the word "reserves" but, of course, in the context of the Ordinance. If it is to be suggested that the word has a special meaning in what I will call for convenience "banking business", so that everyone conversant with that business understands the word in a particular way, then, it seems to me, a party contending for that special meaning should call evidence on the matter. The same can be said about accepted accounting practice.

23. The most relevant of the meanings given to the word "reserve" in the Shorter O.E.D. is: "b. the amount of capital kept on hand by a banker, insurance company etc., in order to meet ordinary or probable demands." The word is given the following meaning in Jowitt's Dictionary of English Law (2nd Edition): "an amount which is not derived from the necessity to provide for a known or anticipated liability. A capital reserve is one which is not free for distribution through the profit and loss account."

24. Mr. Kaplan submits that the judge should not have included in the capital and reserves of Whitehall the sum of $12,229,950 (representing, as we have seen, the difference between the purchase price and the March 1981 revaluation of their property in the United Centre) because he should have taken judicial notice of the fact that property prices in Hong Kong had fallen sharply since March 1981, and certainly by the 25th August 1983 and that in any event paper property values are not properly to be regarded as "reserves" within the meaning of section 22(1) of the Ordinance.

25. In my view it would not be right to take judicial notice of the fall in the property market for the purpose suggested by Mr. Kaplan. No one living in Hong Kong in recent times can be unaware of what has happened to the property. market but the onus was placed on Win and Fair to call evidence on the issue, as, indeed, it would have been on the prosecution had criminal proceedings been launched against Whitehall under subsection (11) of section 22 on the basis that their reserves had been reduced to an degree which resulted in a contravention of section 22(1).

26. As regards the "paper value", I remark in passing that the auditors clearly thought that this was a proper entry as a capital reserve and there is no evidence that the Commissioner of Deposit-taking Companies took any objection when Whitehall's annual accounts were lodged with him under section 17 of the Ordinance. But be that as it may (and it must be acknowledged that these facts cannot assist Whitehall to resist Mr. Kaplan's contention) I am not persuaded on the evidence and material before the Judge that the difference between the cost of the property and a professional valuation arrived at on accepted principles, cannot be regarded as part of Whitehall's "reserves" within the meaning of that word as used in the Ordinance. I think that Dimbula Valley (Ceylon) Tea Co. Ltd. v. Laurie⁽¹⁾ offers some guidance in that it shows that a capitalisation of a reserve resulting from the revaluation of capital assets is not unknown.

27. Does the fact that Whitehall's property was mortgaged, if I may put it, to the hilt and more, make any difference? Mr. Kaplan says that it does. As I have earlier remarked, there was no evidence before the Judge that any part of the monies available under the mortgage was drawn upon. I am quite unable to accept the contention advanced by Mr. Kaplan.

28. For these reasons, I think the learned Judge was right, as the case was presented to him, to approach the issues on the basis that at material times, the capital and reserves of the company were in excess of $25 million.

29. In the forefront of Mr. Kaplan's submissions on behalf of Win and Fair was the proposition that the contract agreed between the parties on the 19th May 1981, having been put into operation only three days later by advancing sums far in excess of the section 22 limit, was itself illegal and could not be relied upon. In the circumstances of the case, it was, he contended, fallacious to draw a distinction between the written agreement to make advances and the first advances which in fact created the relationship of debtor and creditor. There was a very strong connection between the agreement and the first advances made under it, and no distinction should be drawn between them.

30. Mr. Kaplan went on to argue that if the contract (of the 19th May) was legal, the sums advanced by Whitehall were still irrecoverable because:

(a)	Whitehall must have intended to carry out the contract in an illegal manner (the date, amounts and number of accounts were highly significant); or
(b)	the performance of the contract necessarily and to the knowledge of Whitehall (but not to Win and Fair) involved an act known to be legally objectionable; or
(c)	the Court should look to the creation of the relationship of debtor and creditor.

31. Mr. Kaplan asked us to keep Anderson v. Daniel ⁽²⁾ firmly in mind. In that case every seller of artificial fertilisers was required by statute to give the buyer an invoice setting out the percentages of certain chemical substances contained in the goods. A quantity of artificial manure was supplied in breach of this statutory requirement. It was held that since the object of the statute (in requiring, the vendor to give the statutory invoice, and imposing a penalty on him if he failed to do so) was to protect purchasers of fertilisers, the effect of noncompliance with the statute was not merely to make the vendor liable to penalties provided, but also to make the sale illegal. Thus the seller failed in his action for the price of the manure.

32. This decision has been followed in a number of cases, including, e.g. B. and B. Viennese Fashions v. Losane⁽³⁾. St. John Shipping Corporation v. Joseph Rank Ltd. ⁽⁴⁾ is important for it emphasises, if emphasis is necessary, that no one test is decisive. In each case that falls for decision, the purpose of the legislature has to be considered in the light of all the facts and circumstances. The facts there were that an Act of 1932 prohibited the loading of a ship so that the loadlines became submerged, with the sanction of penalties. During the course of a voyage this happened and the master was prosecuted. Part of the freight due was withheld by the person who should have paid it upon the "contention that a contract which had been performed in an illegal manner could not be enforced. Devlin, J. held that the illegal overloading was to be regarded as merely an incident in the course of performance of the contract and did not affect the core of the contract. I will read a passage from Devlin, J.'s judgment, which explains his approach, (page 289):

"I have said enough, and perhaps more than enough, to show how important it is that the courts should be slow to imply the statutory prohibition of contracts, and should do so only when the implication is quite clear. I have felt justified in saying as much because, to any judge who sits in what is called the Commercial Court, it must be a matter of special concern. This court was instituted more than half a century ago so that it might solve the disputes of commercial men in a way which they understood and , appreciated, and it is a particular misfortune for it if it has to deny that service to any except those who are clearly undeserving of it.

 

        I think also that it is proper, in determining the scope of the statute, to have regard to the consequences I have already described and to the inconveniences and injury to maritime business which would follow from upholding the defendants' contention in this case. In the light of all these considerations I should not be prepared to treat this statute as nullifying contracts for the carriage of goods unless I found myself clearly compelled by authority to do so. I can find no such authority in the cases which Mr. Wilmers has cited, nor even any analogous cases in which the law has been stretched as far. Of course, the construction of each Act depends upon its own terms, but I can find no authority in which any Act has been given anything like so wide an effect as Mr. Wilmers wants the Act of 1932 to be given. In the statutes to which the principle has been applied, what was prohibited was a contract which had at its centre - indeed often filling the whole space within its circumference - the prohibited act; contracts for the sale of prohibited goods, contracts for the sale of goods without accompanying documents when the statute specifically said there must be accompanying documents; contracts for work and labour done by, persons who were prohibited from doing the whole of the work and labour for which they demanded recompense. It is going a long way further to say that contracts which depend for their performance upon the use of an instrument which has been treated in a forbidden way should also be forbidden."

 

33. Archbolds (Freigtage) Ltd. v. S. Spanglett Ltd. ⁽⁵⁾ is another illustrative case. A traffic Act in force provided that no person who did not hold a particular class of licence could use a vehicle for the carriage of goods. A holder of the wrong class of licence agreed to carry goods from Leeds to London and they were stolen on the way. The Plaintiff's claim for damages for loss succeeded. It was held that upon a true construction of the terms of the Act, the contract was not expressly or impliedly forbidden by it. The Act struck not at contracts to carry goods but at the use of unlicensed vehicles on the road.

34. While there can be no doubt regarding the principles relied upon by Mr. Kaplan derived from these cases, in my view nothing turns upon what was agreed in the General Loan Agreement signed by Win and Fair on the 19th June 1981. This was not itself a contract of loan. No obligation was assumed by Whitehall to grant loans under it. The document begins:

"In consideration of your from time to time giving credit to us or granting one or more loans or making, issuing and extending financial accommodation to us, we hereby agree as follows - "

then follow the obligations assumed by Win and Fair when, for example, loans are advanced. And para. 4 contains the following - "The acceptance of this Agreement shall not be deemed a commitment by you to make any loan or extend any credit to us." If nothing else had happened I do not see how Win and Fair could have sued for damages for failure to advance any money, relying on that document alone. Nor would the Memorandum of` Deposit assist for it begins: "In consideration of your agreeing to our request to open an account or accounts with you in our name granting or continuing to grant advances or credits to us from time to time at your sole discretion...."

35. In my judgment what we have to look at here, in the context of the prohibitions in section 22 of the Ordinance, is the separate contracts of loan whereby Whitehall advanced money to Win and Fair and determine whether it has been established that the sum claimed by this action, or any part of it, can be traced to the aggregate of loans made or allowed to remain outstanding beyond the statutory limit.

36. It was clearly illegal for Whitehall to grant a loan or loans which exceeded in aggregate the 25% limit - or to allow loans exceeding that limit to remain outstanding, and they could (and perhaps could still be, I do not know) be prosecuted for infringing the law. However, I do not think that because Whitehall appears to have contravened the law in the past, that the sum claimed is necessarily tainted with illegality. Mr. Kaplan relies heavily on the fact that it was a running account but I am not aware of any authority that treats loans made from time to time, and evidenced by a running account which also shows payments in, and the current balance, as being in a special category so that the whole arrangement is to be regarded as one transaction when the question of illegality arises.

37. I now turn to discuss whether section 22(l) of the Ordinance intended to render any contract made in breach of its provisions unenforceable or whether it merely intended to impose the penalties provided for by section 22(11) on the deposit-taking company. This is a matter of construction but despite the forceful arguments addressed to us by Mr. Mills-Owens, and with all respect to them, I do not see how it can successfully be maintained that a deposit-taking company which advances money in breach of section 22 can enforce a claim to repay the loan. The whole context and purpose of the Ordinance must be looked at. I do not think we need to examine the guide-lines generally used by the Courts in determining such a question. Here one only has to look at section 24C(2) of the Ordinance which provides:

"     (2) The contravention of any prohibition in this Part on the entering into of any contract shall not render that contract unenforceable against the deposit-taking company if that contract was entered into in the ordinary course of the business of that deposit-taking company and the person seeking to rely upon the contract had no knowledge of the contravention; and may be enforced at the instance of the deposit-taking company if the court is satisfied the company exercised all due diligence to avoid the contravention of the prohibition."

38. It seems to me clear, beyond peradventure, that the legislature is, by very strong implication, stating the only circumstances in which either party to a contract. made in breach of section 22 of the Ordinance can maintain an action notwithstanding a contravention. I would add here that no attempt was made by Whitehall to rely on the "due diligence" ground for which provision is made in section 24C(2).

39. I am unable to accept the argument put forward on behalf of Whitehall that this clear indication can be overcome by looking at the position of the. other depositors in Whitehall and that to hold any part of the sum claimed to be irrecoverable would defeat the objects of the Ordinance revealed by its Long Title and other provisions. Nor can I accept the proposition advanced that this case must be approached differently because Whitehall is in liquidation and the liquidator is anxious, for obvious reasons, to recover as much as he can. I would observe here that in my view to say that the objects of the legislature were merely to safeguard the interests of the depositors of the particular deposit-taking company concerned is to adopt too narrow an approach. I need only read the second part of the Long Title of the Ordinance which was not quoted by the learned Judge: "....and for the regulation of deposit-taking business for monetary policy purposes."

40. If my construction of the Ordinance be correct, I do not think it would be possible to hold that any claim that is rendered unenforceable by its provisions can be enforced on principles, of what might, conveniently be called "unjust enrichment". If it is right that the Court should not lend its aid directly to enforce a contract made in breach of section 22, I am unable to accept that it can do so by any other route. Surely, many of the cases cited to us would have had a different result if Mr. Mills-Owens' contentions were well founded. It may well be that it is unconscionable for Win and Fair to retain any money advanced in contravention of the Ordinance but this is not a consideration which must influence us.

41. I now return to the figures. Counsel have very helpfully provided us with reconciliations which greatly assist our task, as I have discerned it. During the whole period of the account, advances (including interest on outstanding sums) totalling $18,385,485 were made by Whitehall. Of this sum Win and Fair repaid $13,935,960 and this is how the sum claimed in the action - $4,449,525 - is made up. But when one looks at the dates of each advance and repayment, one sees that after the 31st July 1981 no advances were made, and no debit allowed to remain outstanding, beyond the 25% limit imposed by section 22 of the Ordinance ($6,439,137). At the 31st July 1981 the balance outstanding was $4,764,585 which, although below what I will call the permitted maximum, was nevertheless derived from monies which had been advanced, and allowed to remain outstanding, in contravention of the Ordinance. No part of this sum, being tainted with illegality, can, therefore, be recovered with the aid of the Court.

42. However, since that date $4,624,533 was repaid so that at the time the account was closed, only $140,052 could be traced to loans illegally advanced and allowed to remain outstanding. The remainder of Whitehall's claim is made up of loans advanced (or allowed to remain outstanding) after the 31st July 1981 at times when the debit balance was always below the permitted maximum. In my judgment it cannot be said that an amount arrived at as a result of lawful transactions entered into after the 31st July 1981 is tainted with illegality.

43. For the reasons I have given, I would allow the appeal but only to the extent of reducing the amount for which the Judge entered judgment (as will have been seen, by a very different route) by $140,052 so that the judgment is entered for $4,309,472.

Sir Alan Huggins, V.-P. (read by Fuad, J.A.):

44. The statute does not define "reserves" and the word must be given its ordinary meaning having regard to the context in which it is used. Jowitt defines a reserve as "an amount which is not derived from the necessity to provide for a known or anticipated liability". The witness called by the respondent Plaintiff said that the Plaintiff's reserves were shown on what is page 314 of the appeal record, but he added that the "UNAPPROPRIATED PROFITS" could be used for dividends. The judge correctly held that those unappropriated profits. were not reserves, for until any part of them was expressly appropriated to a reserve they could be said to be "derived from the necessity to provide for" dividends. The witness was not challenged. about his statement that the "capital reserve" was a "reserve", nor was it suggested to him that it was not a reserve for the purpose of s.22 of the Ordinance.   The figure shown was, as it seems to me, no more a reserve in any practical sense than the land to which it was related, but I accept that for accounting purposes it was a reserve and had to be shown in the accounts in order to balance the books. It was a figure which would necessarily vary with any substantial rise or fall in the property market, and no one could say when such a rise or fall would lead a valuer to re-appraise this particular land, or to what extent. Valuation is not a precise art. It was therefore legitimate for the judge to base his calculation of the reserves upon the books of the company as they stood: the directors could not be expected to make a fresh calculation of the reserves at the moment of each new advance made by the company. It is true that the "reserves" may in consequence include an element which is wholly artificial, but it was considered by the Legislature that a provision based upon "the paid up capital and reserves" would afford proper protection to depositors, and I see no sufficient reason for giving to the word "reserves" an unusual meaning in an attempt to avoid the effects of this artificiality. I have assumed, of course, that any "capital reserve" is assessed upon a genuine valuation of the capital asset made within a reasonable time before the assessment, as was the case here.

45. Mr. Kaplan then argues that, as the lard upon which the capital reserve has been assessed has been mortgaged for a sum in excess of its value, as estimated by the professional valuer, the capital reserve is even more an artificial figure and should be ignored altogether. The mortgage moneys it is argued, could not possibly be any protection to the depositors. The mortgage is presumably included in the "Bank Loans and Overdrafts (Secured)" which appear under "CURRENT LIABILITIES" in the accounts, and, so long as the mortgage moneys had not been dissipated, they would appear in the accounts as cash. They would thus represent the land, and $11,679,374.50 would be no less a "Capital reserve" than before the land was mortgaged. We have no reason to believe that the mortgage moneys have been dissipated, for the accounts show sum of $253,172,029.86 "Cash at Banks". If it had been shown that the mortgage moneys had been spent, the argument on behalf of the Defendant might have carried more weight, but in the circumstances I do not think it necessary to consider the matter further.

46. It is common ground that even upon this assessment of the "paid up capital and reserves" the company was in breach of s.22. Mr. Kaplan submits that the fact that an unlawful advance was made within a few days of the start of dealings between the parties proves that they intended to perform "the contract" illegally throughout. He contends that, as a result, the entire dealings between the parties have been tainted with illegality. I cannot accept that contention. The Plaintiff never bound itself to advance any money at all: the General Loan Agreement and Memorandum of Deposit were merely concerned with the rights of the parties once an advance was made. There never was "a contract": each advance has to be considered in the light of the circumstances existing at the time it was made. It is agreed that there were unlawful advances and balances and that, of the balance now held by the Plaintiff in favour of the Defendant, $140,052 was originally unlawfully advanced. I can see no possible ground upon which the Plaintiff can be barred from recovering the remainder. It has been conceded that a deposit-taking company which once makes an unlawful advance does not thereby become outlawed in relation to that customer so long as the company continues to exist.

47. The only real question, is whether the $140,052 can be recovered. On the one hand it is said that the object to the statute was to protect depositors and that to refuse to allow the company to recover unlawful advances made to the Defendant would damage rather than protect the depositors. On the other hand it is submitted that the interest of depositors in deposit-taking companies generally would best be protected by holding that an offending company was not only subject to the penalties prescribed by the Ordinance for a breach of s.22 but also that it was disabled from recovering an unlawful advance: save where the company was insolvent the loss would fall upon the company's shareholders and not upon its creditors, and that would be an additional incentive to deposit-taking companies to observe the provisions of the section. It is often difficult to decide what construction would best fulfil the intention of the Legislature where the matter is one of public policy. Although I appreciate that, unless a deposit-taking company is bankrupt, it will have to bear the loss itself if it is not' allowed to sue for recovery of an unlawful advance, it seems to me that an advance in breach of s.22 may well be the cause of the company's becoming bankrupt, so that the depositors will in the end be the sufferers. I have particularly in mind the judgment of Devlin J. in St. John Shipping Corporation v Joseph Rank Ltd. [1957] 1 Q.B.267, a case which is, of course, distinguishable because what was he held/that contracts for the carriage of goods were not at all within the ambit of a statute aimed at preventing the overloading of ships. Nevertheless, at p.288 the judge said:

"Persons who deliberately set out to break the law cannot expect to be aided in a court of justice, but it is a different matter, when the law is unwittingly broken. To nullify a bargain in such circumstances frequently means that in a case - perhaps of such triviality that no authority would have felt it worth while to prosecute - a seller, because he cannot enforce his civil rights, may forfeit a sum vastly in excess of any penalty that a criminal court would impose; and the sum forfeited will not go into the public purse but into the pocket of someone who is lucky enough to pick up the windfall or astute enough to have contrived to get it. It is questionable how far this contributes to public morality. In Vita Food Products Inc. v Unus Shipping Co. [1939] A.C.277 Lord Wright said: 'Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds.' It may be questionable also whether public policy is well served by driving from the seat of judgment everyone who has been guilty of a minor transgression. Commercial men who have unwittingly offended against one of a multiplicity of regulations may nevertheless feel that they have not thereby forfeited all right to justice ......"

The penalties described in the Deposit-taking Companies Ordinance are themselves substantial, and but for S.24C(2) it might have been open to us to hold that this was a case where the bargain should not be nullified. However, I agree that that section puts it beyond doubt that such was not the intention of the Legislature. Moreoever, if the Legislature has provided that the money cannot be recovered by an action on the contract, it cannot be recovered on the basis of the unjust enrichment of the particular borrower.

48. Accordingly I agree with the order which Fuad, J.A. has proposed.

Cons, J.A. (read by Fuad, J.A.):

49. I am in general agreement with the judgment delivered by my Lord Fuad J.A. and with the order he proposes. I would like to add only this comment with regard to the mortgage of the Plaintiff's interest in United Centre. I agree with the comment of Mr. Mills-Owens that, so far as the calculation of reserves is concerned, it is no more than a red herring. With respect the submission of Mr. Kaplan confuses assets with accounts and overlooks the fact that it is the profit on revaluation, not the interest in the land and building itself, which is carried into the Company's reserves. When this was done in the preparation of the Company's accounts as at 31st March 1981, the mortgage was not even in existence. We are told it was not executed until the 10th July. I agree with my Lord that in the context of this ordinance, reserves must be taken to be the reserves as properly shown in the accounts. Any monies drawn down under the mortgage would be entered elsewhere in the books of the Company and appear in the balance sheet as Current Liabilities.

(1)    [1961] Ch.353

(2)    [1924] 1 K.B.138

(3 )    [1952] 1 All E.R.909 C.A.

(4)    [1957] 1 Q.B.267

(5)    [1961] 1 Q.B.374