CHOW TAI FOOK JEWELLERY CO LTD v. WONG SHUN AND ANOTHER

HCA22168/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.22168 OF 1998

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J U D G M E N T

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1. By this action, the plaintiff sues the 1^st and 2^nd defendants on the Guarantee dated 23 June 1994 (“Guarantee”) given by the two defendants to the plaintiff as security for a loan of $1,500,000 (“Loan”) made by the plaintiff to Shun Kai Bullion Company Ltd (“the Borrower”).  As part of the granting of the said Loan to the Borrower, securities furnished to the plaintiff consisted of firstly, a legal charge of a property owned by the Borrower which legal charge dated 23 June 1994 was registered under the Companies Ordinance (“the Loan Agreement”) and secondly, the said Guarantee of the 1^st and 2^nd defendants.

2. The Borrower defaulted on the Loan and the charged Property was enforced by the plaintiff.  By this action the plaintiff is seeking to recover from the aforesaid Guarantors the shortfall in a sum of some $1.2 million.  The claim of the plaintiff is resisted by the defendants and in addition to defences of misrepresentation and undue influence, both defendants have relied on a defence that the plaintiff was in breach of sections 18 and 20 of the Money Lenders Ordinance (“the Ordinance”) and that therefore there could be no recovery by the plaintiff under the said Guarantee.

3. At the trial of the action, it was agreed and I directed that the legal defence based on the breach of the Ordinance should be heard first because if the plaintiff should fail on that question then it would not be necessary to hear the contested factual evidence on misrepresentation and undue influence.

4. The legal issue of illegality is deceptively simple but presents statutory construction of some difficulty and has implication of general importance to Hong Kong.

5. Sections 18 and 20 of the Ordinance are in the following terms :

“	18	(1)	No agreement for the repayment of money lent by a money lender or for the payment of interest on money so lent, and no security given to any money lender in respect of such agreement or loan, shall be enforceable unless
			(a)	within 7 days after the making of the agreement, a note or memorandum in writing of the agreement is made in accordance with subsection (2) and signed personally by the borrower, and a copy of such note or memorandum is given to the borrower at the time of signing; and
			(b)	there is included in or attached to such copy a summary, in such form as may be prescribed, of such provisions of this Part and Part IV as may be prescribed,
			and no such agreement or security shall be enforceable if it is proved that the note or memorandum was not signed by the borrower before the money was lent or the security was given.
		(2)	The note or memorandum shall contain all the terms of the agreement and in particular shall set out —
			(a)	the name and address of the money lender;
			(b)	the name and address of the borrower;
			(c)	the name and address of the surety, if any;
			(d)	the amount of the principal of the loan in words and figures;
			(e)	the date of the making of the agreement;
			(f)	the date of the making of the loan;
			(g)	the terms of repayment of the loan;
			(h)	the form of security for the loan, if any;
			(i)	the rate of interest charged on the loan expressed as a rate per cent per annum, or the rate per cent per annum represented by the interest charged as calculated in accordance with Schedule 2; and
			(j)	a declaration as to the place of negotiation and completion of the agreement for the loan.”
“	20	(1)	A money lender who makes any agreement for the loan of money in relation to which security is provided shall within 7 days after the making of the agreement give to the surety (if a different person from the borrower)
			(a)	a copy of the note or memorandum n writing made under section 18(1);
			(b)	a copy of the security instrument, if any; and
			(c)	a statement in writing signed by or on behalf of the money lender showing —
				(i)    the total sum payable under the agreement by the borrower;
				(ii)   the various amounts comprised in that total sum with the date, or the mode of determining the date, when each        becomes due.”

6. The Ordinance provides under section 2(1), two very important definitions of the word “loan” and the word “money lender” as follow :

“In this Ordinance, unless the context otherwise requires —

……

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

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

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

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

7. Part 1 of Schedule 1 sets out a total of 10 exempted persons including a subsidiary of a Bank (para.1), a co-operative society (para.2), a credit union (para.3), a trade union (para.4), an insurer (para.5), University Grants Committee (para.7), a foreign bank (para.8), a Berne Union Insurer (para.9), a securities margin financier (para.10) and a securities margin dealer (para.11).  It is agreed that the plaintiff does not come within Part 1 of Schedule 1.  Exempted Persons provision is irrelevant to our consideration.  

8. Exempted loan is however critical to this case.  Part 2 of Schedule 1 sets out a total of 15 exempted loans including loan by employer to employee (para.1), loan secured by a mortgage or charge registered or to be registered under the Companies Ordinance (para.2), loan by credit-card company to credit-card holder (para.3), loan to buy property with the security of that property (para.4), loan by a company whose ordinary business is not primarily the lending of money (para.5), loan by licensed pawnbroker (para.6), loan by statutory body under power of statute (para.7), loan from a special legal fund or provident fund (para.8), loan made from chit-fund (para.9), loan by holding company to its subsidiary or vice versa (para.10), loan in relation to export or import of goods and services (para.11), loan to a company with paid up capital of over $1 million (para.12), loan involving issue of debentures or other securities (para.13), loan made to a public company (para.14) and loan made to a subsidiary of a public company (para.15).

9. It is not in dispute that by reason of the fact that the Loan was to a company secured on a mortgage which was capable of being registered against the Borrower under the Companies Ordinance that the Loan to the Borrower was an exempted loan under para.2 of Schedule 1 Part 2 of the Ordinance.  In other words, it is agreed that the provision of section 18 of the Ordinance does not apply to the Loan vis-a-vis the plaintiff as lender and the Borrower.  As lender of an exempted loan to the Borrower, the plaintiff was regarded not as a money lender for the purpose of the Ordinance and therefore as not being subject to the statutory constraint of section 18 of the Ordinance.

10. The dispute between the parties is, notwithstanding the non-application of section 18 to the Borrower, whether sections 18 and 20 are applicable to the defendants, in relation to the very same loan, which was exempted against the Borrower but which was guaranteed by the defendants.  I will consider the question firstly on the basis of statutory construction and secondly by an examination of the case law on the matter.

Statutory construction

11. Sections 18, 19 and 20 all grouped under Part III of the Ordinance under the heading of Money Lenders’ Transaction are to be read together.  Section 18 imposes three main obligations on the money lender (i) to make a memorandum containing the salient terms of the loan, (ii) to obtain the borrower’s signature on the statutory memorandum and (iii) to give the borrower a copy of the statutory memorandum.  In the absence of compliance with the statutory obligations by the money lender, no loan agreement (and no security given in respect of such loan agreement) can be enforced by the money lender, but subject to the overriding equitable discretion of the court under section 18(3) to allow full or partial enforcement.  Section 18 therefore seeks to protect essentially as a group, the borrower of the loan and the guarantor of the loan.  The main vice section 18 seeks to attack is the non-furnishing of the statutory memorandum to the borrower.  There is no requirement in section 18 for the money lender to furnish the statutory memorandum to the guarantor.

12. Section 20 on the other hand, is to supplement Section 18 constraints of the money lender.  Section 20 is however only relevant to the guarantor and provides the requirement on the money lender (in addition to the requirements relating to the statutory memorandum under section 18) to provide information to the guarantor in the form of furnishing to the guarantor the documents under section 20(1) which includes the section 18 statutory memorandum.  Section 20 is a complimentary provision of section 19 which imposes a corresponding duty on the money lender to give information to the borrower.  Section 18 is however fundamental to the statutory scheme (“the core of the protection given by the legislation” per Ribeiro PJ at para.70 of Emperor Finance Ltd v. La Belle Fashions Ltd [2003] 3 HKLR 995 at 1020).  Sections 19 and 20 are merely add on requirements imposing additional obligations on the money lender but section 18 is the foundation to the add-on. 

13. As described by Ribeiro PJ in Emperor Finance, Section 18 imposes on the money lender the triple obligations of (1) making the statutory memorandum, (2) obtaining the signature of borrower on the statutory memorandum, and (3) giving a copy of the statutory memorandum to the borrower.  This triple obligations lie at the heart of the right to the enforcement of the loan agreement and the security (which of course includes the guarantee).  The primary right on the loan (of non-enforceability) of the borrower and the secondary obligation on the loan (of non-enforceability) of the guarantor are both tied, as twins, to the Section 18 statutory obligations of the money lender.  That the primary and secondary rights are tied as twins can be seen from the use of the language of “any such agreement …” (underlining supplied) in section 18(1).  It is in my judgment not possible to read section 18(1) as imposing two separate and each free standing right of non-enforceability.  The non-enforceability right of the surety under section 18(1) is tied to the non-enforceability right of the borrower in respect of the very loan in question.

14. By reason of the Loan being exempted under Schedule 1 Part 2, the plaintiff is considered not a money lender for the purpose of section 18.  The defendants seek to argue that, the plaintiff is not a money lender in relation to the Loan Agreement but is a money lender in relation to security in respect of the same Loan Agreement, by resorting to the extended meaning of “loan” in section 2(1) of the Ordinance which provides that

“In this Ordinance, unless the context otherwise requires … ‘loan’ includes … also an agreement to secure the repayment of any such loan ….”

In my view, the context does not require such unnatural reading of section 18(1) as contended by the defendants.  The natural reading of section 18(1) is that the plaintiff is not a money lender in relation to both aspects of unenforceability (of borrower and of surety).  It is a forced and wholly unnatural and artificial reading to construe section 18 as creating an unenforceability of the secondary Guarantee when there is no unenforceability of the primary Loan Agreement.  It is an unnatural reading of section 18(1) to refer to two different loans, one loan which is enforceable (being the Loan Agreement) and another “loan”, the extended meaning of the loan (being the security in respect of the Loan Agreement) which is unenforceable.  In reality and in law there is only one Loan and that Loan whether by way of the Loan Agreement vis-à-vis the Borrower or the security of the Loan by way of the Guarantee vis-à-vis the defendants are both enforceable and not to be regarded as transaction subject to the constraint of section 18.  In the context of the facts of this case and in the application of these facts to section 18, there is only one Loan and the Guarantee is security for the Loan and not a “loan” in the extended sense of the definition.  The context does not require the application of definition of the “extended loan”.  

15. Once it is seen that the Loan Agreement and the Security in respect of the Loan Agreement lie outside section 18 restrictions, it follows that sections 19 and 20 are also not applicable to these transactions. 

16. If the argument of the defendants is to be accepted, it would involve the plaintiff as lender having no obligation to make the statutory memorandum or obtain the signature of the borrower on the statutory memorandum or to give a copy of the same statutory memorandum to the borrower but yet has to carry out all these acts in order to comply with sections 18 and 20 as far as the Guarantors are concerned.  I do not accept that the Ordinance is so incoherent or schizophrenic, as will be the case if the argument of the defendants is accepted.

17. As a matter of statutory construction, I am of the judgment that the Guarantee of the defendants is not subject to sections 18 and 20 of the Ordinance.  It follows that as a matter of law, I am of the conclusion that there was no breach of the Ordinance as contended by the defendants.  The Guarantee is enforceable against the defendants.

Authorities

18. In the light of my aforesaid construction of the statutory provisions, it will only be necessary for me to consider in detail the authorities if there is decided and binding or persuasive authority against such construction.  There is none.  The limited authorities touching the point is to the contrary and against the argument of the defendants.

19. In Silver Bound Capital Ltd v. Ho’s Holdings Company Ltd, HCA9682/2000 (unreported judgment dated 17 April 2003), Deputy Judge To rejected a similar defence of the unenforceability of the guarantee in respect of an exempted loan.

20. In Chow Kin Ming v. Always Fortune Ltd, HCA906/2003 (unreported judgment of Reyes J dated 5 January 2004), and in Chin Choi Wan v. Hong Kong Long Shan Pharmaceutical Ltd (unreported judgment of Reyes J dated 8 January 2004), both cases being on the unenforceability of guarantee under section 24 of the Ordinance, Reyes J rejected similar arguments of the unenforceability of exempted loans.  In the Chow Kin Ming judgment Reyes J took into account both the statutory construction as well as the decision of Grantwin Co. Inc v. Chang So Luis [1989] 2 HKC 530 and concluded that Grantwin was wrongly decided and that the guarantee of exempted loan was enforceable.  In many respects, the reasoning in Chow Kin Ming is similar to mine, although expressed in language and vigor of analysis which I will not attempt to emulate.

Conclusion

21. In the light of the aforesaid consideration of statutory construction and legal authorities, I have come to the conclusion that the legal argument of the defendants that the Guarantee is not enforceable by reason of the alleged breach of sections 18 and 20 of the Ordinance must be rejected.  The plaintiff is to have against both defendants the costs of the hearing relating to this Money Lenders Ordinance defence.