HONG NIN BANK LTD v. ROBERT HP FUNG

1986 No. A5736

IN THE HIGH COURT OF HONG KONG

HEADNOTE

The plaintiff bank took guarantees in and after 1983 from the defendant guarantor to secure repayment of moneys lent to the principal debtors in contravention of the related party lending provisions of section 23 of the Banking Ordinance 1964. In answer to the defendant guarantor's contention that this contravention rendered the guarantees illegal and void, the plaintiff bank relied on section 129 of the Banking Ordinance 1986 which (as later clarified by amendment) reads as follows :

"129 (1). The contravention of any prohibition in this Ordinance or in any Ordinance replaced by this Ordinance on the entering into of any contract shall not render that contract unenforceable.

(2). Subsection (1) shall be deemed to have had effect from 1 April 1976, so, however, that nothing in that subsection as read with this subsection shall have effect in relation to any legal proceedings commenced before the commencement of this Ordinance."

The present proceedings were commenced on 9th October 1986, after the commencement date (1st September 1986) of the Ordinance.

The question whether the bank could rely on section 129 was raised as a preliminary issue.

HELD : that, since the guarantees were given after 1st April 1976 and the action was not commenced before the commencement of the Banking Ordinance 1986, the preliminary issue, on the clear and unambiguous language of section 129, had to be decided in favour of the bank.

1986 No. A5736

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The plaintiff in these proceedings is a bank. (I shall refer to it as "the creditor".) It has lent substantial sums of money to one Cyril Fung and to various companies associated with Cyril Fung and his brother Kenneth Fung. (I shall refer to these borrowers collectively as "the principal".) The defendant, Robert Fung, is a third brother who, by a series of contracts of guarantee (the first of which was given in 1983), has guaranteed payment to the creditor of the monies owing to it by the principal. (I shall refer to him as "the surety".)

2. This action on the contracts of guarantee was commenced on 9th October 1986, by a writ issued by the creditor against the surety. The surety claims in his defence that his guarantees are not enforceable against him at the instance of the creditor. The facts, he says, are that the advances made by the creditor to the principal were made in contravention of statutory provisions which prohibited such advances; for present purposes the creditor accepts this. The result, says the surety, is to debar the creditor from recovering payment under the guarantees which the surety has given to the creditor. Whether the surety is right about this is the substance of the preliminary issue which I now have to decide pursuant to an Order of Sears J made on 24th October 1988.

3. The matter involves a consideration of the relevant legislation.

4. On 29th January 1948, the legislature passed (and I quote from the long title) "An Ordinance to provide for the regulation and licensing of the business of banking". (I shall refer to this Ordinance as the Banking Ordinance 1948.) The Banking Ordinance 1948 was the first Ordinance to make any such provision. By 1964, it had become apparent that further measures for the control of the business of banking were needed.  In September 1964, a new Banking Bill was published. (I shall refer to this Bill as the Banking Bill 1964.) The Banking Bill 1964 contained a clause, clause 23, intended by prohibition to limit the degree of exposure of a bank to any one person or group of connected persons; I shall refer to this as "related party lending". The Banking Ordinance 1948 had contained no such provision. The Banking Bill 1964 contained provisions imposing criminal sanctions upon every director and every manager of any bank which contravened or failed to comply with (among other things) the related party lending provisions to which I have referred. The Banking Bill 1964 contained no provision relieving the bank itself, or its depositors, against a contravention (and its consequences) of the statutory prohibitions against related party lending.

5. On 1st December 1964, the legislature passed the Banking Ordinance, no, 30 of 1964, to give effect the Banking Bill 1964. (I shall refer to this Ordinance as the Banking Ordinance 1964.) The long title of the Banking Ordinance 1964 reads as follows :

"An Ordinance to repeal and replace the Banking Ordinance [this is a reference to the Banking Ordinance 1948] and to make better provision for the licensing and control of banks, banking business and matters connected therewith".

6. Section 23 of the Banking Ordinance 1964 enacted the provisions directed against related party lending which had been contained in clause 23 of` the Banking Bill 1964. The Banking Ordinance 1964 contained the provisions imposing the criminal sanctions upon directors and managers for which provision had been made in the Banking Bill 1964. The Banking Ordinance 1964 contained no provision relieving the bank itself, or its depositors, against a contravention (and its consequences) of the statutory prohibitions against related party lending.

7. However, on 5th August 1983, a bill to amend the Banking Ordinance 1964 was published. (I shall refer to this bill as the Banking (amendment) Bill 1983.). By this time, an Ordinance for the regulation of deposit taking companies, the Deposit Taking Companies Ordinance 1976, had been passed, in terms in many ways reflecting the similar provisions of the banking legislation. The Banking (Amendment) Bill 1983 contained, in clause 6, provision for various amendments to section 23 of the Banking Ordinance 1964. Further, it contained, in clause 9, provisions for the further amendment of the Banking Ordinance 1964 by the insertion into that Ordinance of a new section 41B, in the following terms (so far as material) :

"41B.    The contravention of any prohibition......on the entry into any contract shall not render that contract unenforceable against the bank, if that contract was entered into in the ordinary course of the business of that bank and the persons seeking to rely upon the contract had no knowledge of the contravention; and may be enforced at the instance of the bank if the court is satisfied that the bank exercised all due diligence to avoid the contravention of the prohibition."

(I shall refer to the latter part of Section 41B as "the due diligence".) As appears from the explanatory memorandum accompanying the Banking (Amendment) Bill 1983, the legislative purpose was "to provide for the consequences in civil law of a contravention of Part V of the [Banking] Ordinance", (Section 23 is contained in Part V.)

8. I pause there. What has now happened is that the legislature has been invited to consider the introduction, into the Banking Ordinance 1964, of a relieving provision, enabling a bank to enforce a contract, even one entered into contravention of the statutory prohibitions against related party lending, if the bank can satisfy the due diligence provision. If the bank cannot satisfy the due diligence provision, the effect of such a contravention will be to render unenforceable any claim by the bank, sounding in contract, for the recovery of its money. If the bank cannot satisfy the due diligence provision, not only will it be unable to recover its money from its customer under its contract with the customer; it will also be unable to recover its money from any guarantor who has guaranteed to the bank the repayment by the customer to the bank of the money owing by the customer to the bank. (See Swan v. Bank of Scotland (1836) 10 Bligh (N.S.) 627.)

9. By section 10 of Ordinance no. 67 of 1983, (the Banking (Amendment) Ordinance 1983) the proposed section 41B was duly incorporated into the Banking Ordinance 1964. But it was introduced only as subsection (1) of section 41B. There was also introduced, as subsection (2) of section 41B, the following provision :-

"Sub-section (1) shall be deemed to have had effect from 1st April 1976, so, however, that nothing in that subsection as read with this subsection shall have effect in relation to any legal proceedings commenced before 5th August 1983''.

10. The result of this was that in any proceedings (except proceedings commenced before 5th August 1983) the relieving provision contained in section 41B (1) would protect the bank, so long as it satisfied the due diligence provision, in relation to any contract entered into after 1st April 1976. (The relevance of this latter date appears to be that it ties in with comparable provisions in the Deposit Taking Companies Ordinance 1976, Section 16 of the Deposit Taking Companies (Amendment) Ordinance, no. 66 of 1983 had introduced, as section 24C, a similar provision into the Deposit Taking Companies Ordinance 1976.)

11. On 7th March 1986, the Banking Bill 1986 was published. The purpose was to repeal and replace the Banking Ordinance 1964. I shall refer to the 1986 Bill as the Banking Bill 1986. The Banking Bill 1986 contained a section, section 81, replacing section 23 of the Banking Ordinance 1964, and a section, section 133, reading (so far as material) as follows :

"133(1).    ............ the contravention of any prohibition in this Ordinance on the entering into of any contract shall not render that contract unenforceable against the authorised institution [this expression includes banks and deposit taking companies] if that contract was entered into in the ordinary course of business of the institution and the person seeking to rely upon the contract had no knowledge of the contravention; and may be enforced at the instance of the institution if the court is satisfied that the institution exercised all due diligence to avoid the contravention of the prohibition.

(2)    Subsection (1) shall be deemed to have had effect from 1st April 1976, so, however, that nothing in that subsection as read with this subsection shall have effect in relation to any legal proceedings commenced before 5th August 1983."

12. So Section 133 of the Banking Bill 1986 contains no material difference from the provisions of section 41B of the Banking Ordinance 1964 as introduced into that Ordinance by the Banking (Amendment) Ordinance 1983.

13. On 28th May 1986, the Financial Secretary made reference to section 133 of the Banking Bill 1986 during the debate on the second reading of that bill. The Financial Secretary said this :

"Clause 133, which is carried over from the existing Banking Ordinance and [Deposit Taking Companies] Ordinance, provides, inter alia, that in case of contravention of the Ordinance on the entry into of any contract, the institution may enforce the contract if the court is satisfied that the institution exercised all due diligence to avoid the contravention of the prohibition. ...... Our attention [has been drawn] to the difficulties this provision has caused in a recent case where a deposit taking company could not enforce repayment of some loans due to it. This is clearly not in the interest of the depositors of the institution. The more sensible alternative is to provide that contravention of this Ordinance on the entry into of any contract will not render that contract unenforceable. But contravention of any provision of this Ordinance will, of course, attract the sanction provided for under that provision".

    (The case to which the Financial Secretary referred was the case of Whitehall Finance Ltd. v. Win and Fair Securities Co. Ltd., 7 February 1985 (unreported), a decision of the Court of Appeal of Hong Kong.)

14. Clause 133 became, in due course, section 129 of the Banking Ordinance 1986; but in the "more sensible alternative" form. In its final form, section 129 reads as follows :

"129    (1).     The contravention of any prohibition in this Ordinance on the entering into of any contract shall not render that contract unenforceable.

(2).    Subsection (1) shall be deemed to have had effect from. 1 April 1976 so, however, that nothing in that subsection as read with this subsection shall have effect in relation to any legal proceedings commenced before the commencement of this Ordinance".

(The commencement date of the Ordinance, so far as material, was 1st September 1986; it will be recalled that the present proceedings were. commenced on 9th October 1986, and so were not commenced "before the commencement of this Ordinance.") Section 129 of the Banking Ordinance 1986 is the subject of the following comments (which I gratefully adopt) in Williams and Bates, The Hong Kong Banking Ordinance, 1988, at p. 275 :-

"The [Banking Ordinance 1964] and [Deposit Taking Companies Ordinance 1976] both contained provisions stating that the contravention of certain prohibitions on the entering into of any contract would not render that contract unenforceable by or against the institution concerned. These provisions were however, subject to two provisos. The first proviso is that in the case of the proceedings against the institution, the contract must have been made in the ordinary course of the institutions business and the person seeking to rely upon the contract had no notivce of the contravention. The second proviso is in that the case of enforcement by the institution, the court was satisfied that the institution had exercised all due diligence to avoid the contravention .......

The potential effect of these provisions was demonstrated in [the Whitehall Finance Ltd. case] ...... The court held that the sums advanced were irrecoverable by the deposit taking company to the extent that loans had been made in excess of the permitted maximum (no evidence having been introduced to show that all due diligence had been exercised to avoid the contravention), This clearly prejudiced depositors with authorised institutions who might not only have found that their deposits were imperilled by loans made in deliberate breach of the [statutory prohibitions against related party lending] but also that a liquidator was prevented from recovering those loans for the benefit of the depositors by the operation of the rules against the enforcement of illegal loans."

15. As Williams and Bates point out (in my judgment correctly) "This has now been remedied by the provision's of subsection 1, which effectively overrules the Whitehall Finance decision"

16. After Section 129 had come into force, the fact that contracts of guarantee had been entered into to secure the repayment of loans to a customer made in contravention of the statutory prohibitions against related party lending would not render those contracts of guarantee unenforceable, at any rate if (like the contracts of guarantee here) they had been entered into after lst April 1976, and the relevant legal proceedings before the court had not been commenced before the commencement of the Banking Ordinance 1986 (the commencement date was in fact 1st September 1986, and, it will be remembered, the date of the commencement of the present proceedings was 9th October 1986.)

17. I need only add that the reference, in section 129 (1), to the contravention of any prohibition "in this Ordinance" is clarified, by the Banking (Amendment) Ordinance 1987, by the addition of the words "or in any Ordinance repealed by this Ordinance" : see section 27 of the Banking (Amendment) Ordinance 1987, (The Banking Ordinance 1964 had been repealed by the Banking Ordinance 1986.) This clarification, in my judgment, was obviously intended to have relation back to the time when the Banking Ordinance 1986 was originally passed.

18. In the present case, the guarantees were given after 1st April 1976. The proceedings were commenced after 1st September 1986. The legislature has demonstrated that a contravention of the related party lending provisions contained in the Banking Ordinance 1986, or of the Ordinance which it repealed and replaced, is not to render contracts of guarantee unenforceable in such a case.

19. That concludes the point presently in issue in favour of the creditor.

20. I was treated to some intricate arguments on illegality, public policy, retrospectivity, and the like; but since on the clear view I have formed of the case none of these matters arise, the legislature having at every stage made its intentions perfectly plain. I say nothing about them. I have referred to the legislative history of the statutory provisions I have had to consider in order to demonstrate the purpose behind I them. I have not referred to that history in order to construe those provisions, which are framed in clear and unambiguous language. If the question had been one of construction (which, in my judgment, it is not) it would not have been permissible to refer to the legislative history in order to help resolve the question.

21. In the present case the real point in issue may (and in my judgment, should) be framed as follows :

"Is the plaintiff bank in these proceedings, commenced against the defendant guarantor on 9th October 1986 on contracts of guarantee made after 1st April 1976, entitled as against defendant guarantor to rely on the provisions of section 129 of the Banking Ordinance 1986 (as amended by the Banking (Amendment)" Ordinance 1987)?"

22. As I have already indicated, in my judgment in the light of the legislative history and clear language of the statutory provisions I have had to consider, that question must be decided in favour of the plaintiff bank. I find it unnecessary and indeed undesirable to go further than this in determining the preliminary issues raised (in much wider terms) for determination by the Court under the Order of 24th October 1988. It is not the function of the Court to decide academic questions which do not need to be resolved for the purpose of determining the real matters in issue between the parties. Such questions when raised as preliminary issues tend to be "unintelligible" or "unanswerable (see the protest registered by Lord Wilberforce in Allen v. Gulf Oil Refining Limited [1981] 1 All E.R. 353, at p.356).

23. The parties may want time to consider the implications of this judgment and I shall stand over further consideration of this matter to a date to be fixed, when I will hear counsel on the form of the order to be made consequent upon this judgment and upon all questions of costs.