THE QUEEN v. CHAN WOON CHUNG AND OTHERS

Mag. App. 96/88

Scheme to avoid law - Money Lenders Ordinance Cap. 163 - offence of money lender accepting prohibited security - scheme by which security obtained and held by separate business, established for sole purpose of obtaining and holding securities in order that they may be used to repay loans - failure to avoid law - scheme illegal

Sentence - sought legal advice before embarking on venture - advised that it avoided the law - acted bona fide on the advice - mitigating factor.

IN THE SUPREME COURT OF HONG KONG

(Appellate Jurisdiction)

MAGISTRACY CRIMINAL APPEAL No. 96 OF 1988

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J U D G M E N T

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1. The appellants were convicted on various charges of being moneylenders, that trading as Pak Cheung Trading and Moneylenders Company, they had accepted prohibited securities, namely bank savings account passbooks. The notices of appeal incorrectly state the convictions as being for demanding, rather than accepting. in fact the charges had been amended from demanding, to accepting. The charges are laid under section 29(5) of the Money Lenders Ordinance, Chapter 163, and regulation 12(b) of the Money Lenders Regulations. They appeal against convictions and sentences.

2. There was no real significant: dispute about the primary facts. What was disputed, is the inferences that properly arise therefrom, and whether on a true consideration of the evidence and inferences therefrom, the appellants were in breach of the ordinance and regulation, or whether they had succeeded in avoiding the legislation.

3. The magistrate found from the primary facts, and inferences he drew therefrom, that two businesses were being run in harness in a scheme to evade the provisions of the ordinance. He found the businesses were in a scheme with that object. His conclusions on that matter were appropriate. Actually counsel at the trial told him that the businesses had an arrangement between themselves to lawfully avoid the provisions of the ordinance.

4. It appears that the appellants decided to setup as moneylenders, and they wished to ensure that they would suffer as little as possible from the risks inherent in that business. There is nothing wrong in that. They took the advice of counsel as to how they could lawfully have the best of both worlds, that is the benefits of the business without its attendant risks They, and counsel, were of course aware of the provisions of the ordinance, which forbade a moneylender from demanding or accepting certain items including bank savings books, as security for a loan a secheme which he advised achieved the desired end, by avoiding the provisions of the, ordinance, without breaching them

5. The scheme as implemented, was that a separate business was set up, a sole proprietorship owned by a person who was not a partner in the moneylending business.  The sole proprietor however was a codirector with the first and second appellants in a company Yolo Limited and all the appellants were shareholders in that company whose minute book was found in the premises of the moneylending business. The separate are business called Chung Shing Credit Company, which I shall refer to as Chung Shing, was engaged in providing letters of guarantee for the repayment of loans granted by the moneylender, Pak Cheung Moneylenders Company, which I refer to as Chung Shing, was engaged in providing letters of guarantee for the repayment of loans granted by the moneylender, Pak Cheung  Moneylenders Copany, which I shall refer to as Pak Cheung. Pak Cheung as a condition of granting a loan would ask for a guarantee, and would ask for and look at the bank savings book of a prospective borrower after ensuring that the prospective borrower was regularly employed, and had been making regular payments, usually his salary, into the account, Pak Cheung would direct the borrower to the nearby office of Chung Shing so that he could obtain a letter of guarantee; Chung Shing as a condition of giving the guarantee would take the bank savings book and hold it until the loan had been repaid to Pak Cheung. Chung Shing would also obtain signed withdrawal forms from the borrower, who would then be given the letter of guarantee, and sent back across the corridor with it to Pak Cheung, where he would then be given the loan.  Pak Cheung clients were required to provide Chung Shing with their bank savings pass books, together with the means to withdraw from their accounts the total salary of borrowers as they were paid into the accounts At regular intervals, upon the payment into the savings account of the borrower's wages, Chung Shing would present the bank book and a withdrawal slip at the bank, and withdraw a sum that would cover a repayment instalment of the loan.  Chung Shing's fee, and whatever sum the borrower wished from his savings for his monthly expenses.  Chung Shing would then pass the loan repayment instalment to Pak Cheung, retain its own fee, and pass the balance to the borrower.  As the learned magistrate said, Chung Shing effectively controlled all amounts of salary income received by Pak Cheung clients, and acted as banker in regard to the balance left over after repayments and charges had been deducted It was a cosy arrangement, but the issue is whether it was in beach of the ordinance or whether it lawfully avoided it.

6. The scheme was carried out in the manner I have set out. True, there were slight variations in the carrying out of it from one loan to another, for example persons who had borrowed on previous occasions did not thereafter show their bank savings books to Pal. Cheung, The explanation for this is that Pak Cheung, in such cases, consulted its records to satisfy itself that he had previously honoured his obligations, before sending him across the corridor to Chung Shing who would obtain the book. These variations in the scheme were quite inconsequential, and did not affect the substance of the matter. All loans, and deposits of bank savings books the subject matter of the charges, were carried out in pursuance of the scheme, and were dealt with within the scheme. There was evidence given rather vaguely by PW2 a staff member of Pak Cheung, that sometimes loans would. be given without a letter of guarantee. The magistrate did not accept that evidence. He gave sufficient reasons for taking that course.

7. From the evidence it appears drat Pak Cheung only granted loans where repayment had been guaranteed by Chung Shing and the only guarantees given by Chung Shing related to loans granted by Pak Cheung. To put it another way, Pak Cheung was the only source of Chung Shing's business; and Chung Shing guaranteed every loan granted by Pak Cheung.

8. The magistrate concluded and in my view rightly concluded that the sole raison detre for Chung Shing, was to obtain the bunk savings books of borrowers from Pak Cheung to ensure that those books were used in order to repay the loans, and to retain the books until loans had been repaid.

9. One ground of appeal was that the magistrate had wrongly concluded that it was unlawful to evade the law. The magistrate expressed no such view He did not hold that to evade the law was unlawful, as a generality, but that this-scheme was an unlawful attempt to evade the law rather than a lawful attempt to do so.

10. The distinction between a scheme which avoids the law, which is lawful and one which attempts to evade it, which is unlawful, is explained in Yorkshire Railway Wagon Co. v.Maclure [1882] 21 Ch, 309 at page 313, in that case the scheme successfully avoided the law, see also Stoneleigh Finance Ltd. v Philips (19G5) 2 Q.B 537 .

11. On appeal, counsel for the appellant says the simple issue is whether Chung Shing was a sham. Then counsel referred me to a number of cases in which consideration was given to what amounted to a sham, and counsel contended that Chung Shing was not a sham as that word is explained in the cases. However the magistrate did not use the word 'sham', and therefore it is inappropriate to tie him to the meaning of that word as it is explained in case law.

12. I will, however, briefly, refer to the case law, as opened by counsel, on the meaning of a sham.  It appears that in order to be a sham, the documents or arrangements would have to be intended to not have effect according to their terms.  They would have to be a mere pretence.  A transaction is not a sham if it genuinely does what it purports to do, even though there may be an ulterior purpose. It must be shown that the outward and visible form does not coincide with the inward and substantial truth, Miles v Ball [l989] 1 Q E. 259 at 263F-264E, for there to be a sham, the arrangements must be intended by the parties, to give third parties or the court the appearance of creating between the parties legal rights and obligations different from the legal rights and obligations (if any) which the parities intend to create. The parties must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the impression of creating per Diplock L.J., as he then was, in Shook v London and West Riding Investments Ltd [1967] 2 QB 786 at 502C-F See also Chow Yoong Hong v. Choong Fah Rubber Manufactory 1962 A.C. 209 at 216-7.   

13. The arrangements between Pak Cheung and Chung Shing did not amount to a sham as that concept is explained in the cases. The transactions did have the effect they purported to have, but that is not the issue, which is whether they had and wore intended to have an additional effect which breached the ordinance. However as the magistrate did not say that Chung Shing was a sham nor was it necessary for Chung Shing to be a 'sham' in order for the appellants to be guilty. T pass on to what the magistrate did say.

14. He said that Chung Shing was the alter ego of Pak Cheung and enjoyed no independent existence in fact from Pak Cheung, that it was simply set up as part of the moneylending apparatus in an attempt to unlawfully evade the law. He specifically found that Chung Shing was a part of Pak Cheung.

15. There was no evidence that Pak Cheung paid Chung Shing staff or vice versa, nor was there any evidence of intermingling of funds. They did not share premises though they were, undoubtedly by design, across the corridor from each other.

16. The magistrate, on the evidence could not properly find that Chung Shing was the alter ego of Pak Cheung; nor could he properly find that Chung Shing had no independent existence and that that it was a part of Pak Cheung. However he was entitled to find it was simply set up as part of a moneylending scheme with the object of attempting to evade the law, and that it did not succeed in doing so. The magistrate expressed himself rather unfortunately but it is clear that he was finding that Pak Cheung and Chung Shing were established with the object of being as it were run in harness with each other, neither to run on its own or in harness with any other business. Furthermore he was entitled to, and did find that the intent on the part of the appellants, was to ensure that the bank savings books of borrowers, would be available as the source for repayment of loans, and that the books would not be returned to the borrowers, until the loans had been repaid.

17. The scheme as implemented, in effect by passed the guarantees, rendering them otiose The whole object was to obtain and hold the bank savings books so that Pak Cheung, the moneylender, when granting a loan, would feel secure that it would be repaid. This feeling of security was engendered by the confidence that the means of repaying loans was ensured by Chung Shing holding the books for the purpose of repaying the loans, it is contended on behalf of the appellants that the books were security for the guarantees, not for the loans. One must look at the essential nature of the scheme and how, it operated It was a disguise for what was really the true purpose, intent, and effect of what was happening. I consider the books were securities for both. The ordinance is intended for the protection of borrowers, as is indicated in the preamble. The word security in. the section is to be given a meaning that promotes the object of the legislation. The object is to ensure that the bank savings books of borrowers are not tied up for the purpose of repaying loans. That is exactly what the scheme was intended to do and did.

18. Pak Cheung and Chung Shing with the common intent that the books be tied up for the purpose of repaying . The loans took the concerted action envisaged by the scheme, thereby causing, as they intended, the bank books to be tied up for the purpose of repaying the loans. They did not successfully avoid the law, They breached it. The legal advice upon which they acted was misconceived. Whether file counsel advising them is liable as a counsellor and procurer or a co-conspirator, would require consideration of R. v. Tighe & Maher [1926] 26 S R(N S W ) at 108, and O'Donovan v. Vereker (1987)76 ALR 97, at.100-101, 117-120, 120-121. .

19. They also appeal against sentence. The 1st Appeliant was sentenced on one count and the 2nd and 3rd Appellants were each sentenced on four counts. The amounts of loans involved vary from $2,000 to $5,000.

20. The magistrate before passing sentence said that these were instances of serious on-going organised crime and in his findings he said that deterrent sentences were called for and that only for the clear records he would have imposed immediate immediate imprisonment In fact he fined each appellant $25,000 on the count of which they were all charged. He also sentenced each appellant to six months imprisonment suspended for six months on each count.

21. I consider the magistrate was pitching the matter too high in saying that these were examples of serious on-going organised crime, and it also appears to me that the circumstances were not such as to call for deterrent sentences.

22. The attitude of the courts to persons who have acted on legal advice that conduct would not breach the law is that this is a mitigating factor. In. R.v. Sachs 1953 (1) S.A. 392 at 909A-H the following was said on behalf of the majority.:

"It seems to me that, while ignorance of the law can never be a defence to, a criminal prosecution there is every reason why it should be regarded as a mitigating circumstance. When a person is punished for a crime, one of the most important factors in assessing the punishment is the moral guilt of that person. This is such a truism today that it is perhaps hardly necessary to refer to it. But it may be pointed out that even in the case of murder the moral guilt of the murderer is taken into account in assessing the punishment. Thus a belief in witchcraft is a factor which does materially bear upon the accused's blameworthiness. See rex v. Fundakubi and Others, 1948 (3) S.A. 810 at p. 818 (A.D.). Where a crime is committed through ignorance of the law, whether such ignorance is or is not induced by wrong legal advice, moral guilt is absent and the punishment must obviously be more lenient than in the case of a person who knowingly transgresses the law. The Legislature recognises that there are degrees of guilt hence statutes do not as a rule provide for minimum sentences. Moreover secs. 359 and 360 of the Code are designed to enable-the Courts, in appropriate cases, to avoid sending a convicted person to gaol and the Legislature has for long recognised the undesirability of sending first offenders to gaol where circumstances exist for not doing so.

In England also it is recognised that a mistake of law may be a mitigating circumstance in relation to punishment. Kenny in his Outlines of Criminal Law, 5th ed. at pp. 68 and 69 refers to cases where foreigners in ignorance of English law committed offences and to a case where a sailor was convicted of an offence that had been forbidden only by an Act of Parliament of which he could not possibly have known, since it was enacted when he was far away at sea and the offence was committed before the news of the enactment could have reached him. He also refers to a veterinary surgeon whose mistaken belief that an operation, which he knows to be painful and purposeless, is nevertheless unpunishable; legally, will afford him no defence for performing it. The learned author then: says:

'These mistakes are reasonable enough; yet they afford no excuse. Nor would, they do so, even if the prisoner could show that. he had taken pains to obtain a lawyer's advice and had been misled by it.

23. The learned author concludes by saying:

But although mistakes of law, unreasonable or even reasonable, thus leave the offender punishable for the crime which he has blundered into, they may of course afford good grounds for inflicting on him a milder punishment.

From the context of Kenny's remarks it is evident that he regarded a mistake of law which is induced by an erroneous legal opinion as a mitigating, circumstance in relation to punishment. The cases of The King v. Lynn, 100 E R. 39.9 and Re. v. Richard Bailey, 168 E.R. 651 supports Kenny's view. See too Trayner's Legal-Maxinis s.v. ignorantia juris neminem excusat, and Russell on Crime, 10th ed. p. 76.

24. There is also a valuable dissent by Schreiner J.A.

25. Support for the view that the fact a person has been led into committing an offence by accepting the opinion of someone in authority or a lawyer that the conduct was lawful, is found in Surrey Co. Council v. Battersby [1985] 2 Q.B. 194, at 203F; R. v. Arrowsmith [1974] 60 Cr. App. R. 211, at 219; Universal Salvage Ltd. v. Boothby [1984] R.T.R. 269, at 310D - G and 311E; R. v. Pitchford and Cook [1982] 66 c.c.c. (2d) 569.

26. The prosecution accepted that the appellants acted bona fide, on legal advice, when initiating and carrying out this scheme. The magistrate erred in finding deterrent sentences were appropriate, and he did not give sufficient weight to the fact that the appellants' relied on legal advice. The appellant's conduct was reprehensible in itself, and in the words of the preamble to the Ordinance it was aired at imposing 'extortinate stipulations in respect of loans'. In the circumstances I do not consider it would be appropriate to give discharges. Unfortunately the counts were not presented to the court as sample counts, and accordinly sentences cannot be passed as if they were. I set aside the sentences imposed, and in place thereof I fine each appellant $2,500 in respect of each charge on which he was convicted.