CELESTIAL FINANCE LTD v. YU MAN HON AND OTHERS

CACV 2/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 2 OF 2003

(ON APPEAL FROM HCA NO. 4044 OF 2001)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a decision of Deputy Judge Fung given on 12 December 2002. The matter before the judge was an appeal from a decision of the master who had dismissed a summons by the 2nd and 3rd defendants to strike out the relevant paragraphs relating to the 2nd and 3rd defendants in the amended statement of claim as being frivolous, vexatious and an abuse of the process of the court, and to dismiss the action against the 2nd and 3rd defendants. The judge below dismissed the 2nd and 3rd defendants' appeal and reserved costs but granted leave to appeal in respect of costs. At the conclusion of the hearing of this appeal this court allowed the appeal with reasons to be given in writing.

The action against the 2nd and 3rd defendants

2. The plaintiff is a licensed money lender. On 30 September 1997, a loan of $5 million was made to the 1st defendant. There is no dispute that there was a subsequent default and on 26 November 2002 the plaintiff obtained judgment against the 1st defendant in the sum of $2,949,276.48.

3. The basis of the present claim is that the 2nd and 3rd defendants executed a mortgage and a guarantee both dated 30 September 1997. There is no dispute between the parties that the plaintiff did not supply the 2nd or 3rd defendant with a statement which was required under section 20(1)(c) of the Money Lenders Ordinance, Cap. 163 ("the Ordinance") until 22 May 2002. Mr Grossman SC on behalf of the 2nd and 3rd defendants' contends that the failure to supply that statement within 7 days of 30 September 1997 is fatal to the plaintiff's claim. In support of that contention he relies upon the decision of this court in Emperor Futures Ltd & Another v La Belle Fashions Ltd & Others [2003] 1 HKLRD 424. It will, of course, be noted that that decision was only handed down two days before the hearing in the court below and, by that stage, the parties had not become aware of it. Mr McCoy SC on behalf of the plaintiff has argued that that decision was given per incuriam. His primary point is that the court failed to consider the proper interpretation of section 20 particularly in the light of section 19 of the Ordinance. As a subsidiary point Mr McCoy also relies upon a statement made by Mayo JA in an unreported decision of this court in Yelsen Finance Holdings Limited v Chan Mei Suen CACV 170 of 1999.

4. As was pointed out by Mr Grossman in the course of argument, this court should not depart from a previous decision of this court unless it is satisfied that that decision was wrong and had been given without having considered relevant matters.

This appeal

5. In considering the construction of section 20 of the Ordinance it is convenient to refer to the two preceding sections. Section 18(1) prohibits the enforcement by a money lender of any agreement for the repayment of money or any security unless a note which complies with subsection (2) has been signed by the borrower and provided to him within 7 days of the making of the agreement. The prohibition in subsection (1) is to some extent alleviated by subsection (3) which reads:

"Notwithstanding subsection (1), if the court before which the enforceability of any agreement or security comes in question is satisfied that in all the circumstances it would be inequitable that any such agreement or security which does not comply with this section should be held not to be enforceable, the court may order that such agreement or security is enforceable to such extent, and subject to such modifications or exceptions, as the court considers equitable."

6. Section 19 of the Ordinance relates to the position where a borrower requires the lender to provide him with ongoing information in relation to the loan. That section reads as follows:

"(1) In respect of every agreement, whether made before or after the commencement of this Ordinance, for the repayment of money lent by a money lender, the money lender shall, on demand in writing being made by the borrower at any time during the continuance of the agreement and on tender by the borrower of the prescribed fee for expenses, supply to the borrower or, if the borrower so requires, to any person specified in that behalf in the demand, a statement (consisting of the original and a copy) signed by the money lender or his agent showing- (Amended 69 of 1988 s. 16)

(a) the date on which the loan was made, the amount of the principal of the loan and the rate per cent per annum of interest charged;

(b) the amount of any payment already received by the money lender in respect of the loan and the date on which it was made;

(c) the amount of every sum due to the money lender but unpaid, and the date on which it became due, and the amount of interest accrued due and unpaid in respect of every such sum;

(d) the amount of every sum not yet due which remains outstanding, and the date on which it will become due; and

(e) the following words, in both English and Chinese, prominently and legibly on its face-

'THE BORROWER OR OTHER PERSON TO WHOM THIS STATEMENT IS SUPPLIED IS REQUIRED UNDER SECTION 19(1A) OF THE MONEY LENDERS ORDINANCE TO ENDORSE ON THE COPY OF THE STATEMENT THAT HE HAS RECEIVED THE ORIGINAL OF THE STATEMENT AND TO RETURN THE COPY AS SO ENDORSED TO THE MONEY LENDER.

借款人或其他獲得供給此結萛書的人須依照放債人條例第19(1A)條的規定,在結算書的副本上簽註己經收到結算書正本, 以及將經如此簽註的副本回放債人。'. (Added 69 of 1988 s. 16)

(1A) The borrower or other person to whom the original and a copy of a statement referred to in subsection (1) is supplied under that subsection by a money lender shall, as soon as practicable after being so supplied-

(a) endorse on the copy of that statement words to the effect that he has received the original of that statement; and

(b) return the copy of that statement as so endorsed to that money lender, who shall then retain it during the continuance of the agreement to which that statement relates. (Added 69 of 1988 s. 16)

(2) A money lender shall, on demand in writing by the borrower, supply a copy of any document relating to a loan made by him or any security therefor to the borrower or, if the borrower so requires and on payment by the borrower to the lender of the prescribed fee, to any person specified in that behalf in the demand. (Amended 69 of 1988 s. 16)

(3) Subsection (1) or (2) does not apply to a request made by a borrower less than 1 month after a previous request thereunder relating to the same agreement was complied with.

(4) If a money lender to whom a demand has been made under this section fails without reasonable excuse to comply therewith within 1 month after the demand has been made, he shall not, so long as the default continues, be entitled to sue for or recover any sum due under the agreement on account either of principal or interest, and interest shall not be chargeable in respect of the period of default."

7. It will be noted that subsection (4) prohibits the money lender from recovering the principal sum unless and until the information is provided and also suspends any entitlement to interest during the period when there is a default.

8. Section 20 provides for two things. In the first place, it requires the money lender to provide to the surety copies of the note or memorandum under section 18 as well as a statement in writing containing particular information within 7 days of the making of the agreement to give security. This can, to a certain extent, be paralleled with the requirement in section 18 to provide similar information to the principle debtor within a like period. Subsection (2) provides for ongoing information to be provided at the request of the surety and this can be contrasted with the provisions of section 19. The section reads as follows:

"(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 in 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.

(2) Without prejudice to subsection (1), a surety may at any time during the continuance of an agreement (whether made before or after the commencement of this Ordinance) in relation to which the security is provided require the money lender by notice in writing to furnish him with a statement in writing signed by or on behalf of the money lender showing-

(a) the total sum paid under the agreement by the borrower;

(b) the total sum which has become payable under the agreement by the borrower but remains unpaid, and the various amounts comprised in that total sum, with the date when each became due; and

(c) the total sum which is to become payable under the agreement by the borrower, and the various amounts comprised in that total sum, with the date, or the mode of determining the date, when each becomes due.

(3) Subsection (2) does not apply to a request made by a surety less than 1 month after a previous request under that subsection relating to the same agreement was complied with.

(4) If a money lender fails to comply with subsection (1) or a request to which subsection (2) applies he shall not be entitled, while the default continues, to enforce the security so far as provided in relation to the agreement."

9. In the Emperor decision, in considering section 20, this court said at paragraph 68:

"... When the section is read as a whole it is clear that the failure to provide the copy of the note or memorandum within seven days is a breach. It is not a continuing default. It is a default which occurs at the conclusion of the seventh day. There is therefore no question of the default ceasing: if the copy of the note is not provided within seven days, the breach has occurred and a copy of the note could never be provided as required within sub-s.(1), namely, within seven days of its making. In contrast, s.20(2) simply requires the furnishing of a statement. Any failure to provide such a statement can be rectified at any stage because there is no time-limit."

10. Mr McCoy took two points in relation to that statement. His primary point was that as a matter of construction of the Ordinance the wording of section 20(4) should be read in the same way as it is clear that section 19(4) must be read. Section 19(4) makes it clear that a failure to comply with a demand within one month can be cured. So, Mr McCoy argues a failure to provide documents within 7 days under section 20(1) could likewise be cured. In relation to that argument it must first of all be observed that the provisions are different and their wording is different. Section 20(1), as section 18(1), provides for the provision of copies of the relevant contractual documents within 7 days of the making of the loan or the giving of the security respectively. Under section 18(3) the court is given a discretion to enforce an agreement or security despite non-compliance with section 18(1). Unless that discretion were exercised the security would be unenforceable. Section 19 in contrast relates to the provision, from time to time, of information relating to the current status of the loan. As already noted interest ceases to run if there is default in providing that information and unless and until the information is provided any sum due under the agreement cannot be recovered.

11. Section 20(1), as already noted, provides for the provision of copies of relevant contractual documents within 7 days of the giving of the security. Section 20(2) deals with the question of the requirement to provide information from time to time to a surety who requests it. It is thus quite understandable that the requirement to provide the documents within 7 days of the making of the agreement to give security is an absolute requirement. If the construction of section 20(4) were to be that that requirement could be satisfied at any time two consequences would follow.

(A) In the first place, the statutory requirements in relation to the provision of copies of the relevant contractual documents would be far more lenient in respect of sureties than they were in respect of the principle debtor. This would be a highly surprising result and one which could not be justified on any reasonable explanation. Indeed, it is clearly far more important to bring home the extent of his obligations to a surety who would not, on the face of it, have received any benefit from the lender and thus not, perhaps, appreciate the extent of the liability which is incurred. In contrast, the principle debtor would have received the loan amount from the lender and could be expected to know from that fact alone that an obligation to repay had been incurred. Hence, the discretion in the court to enforce the loan agreement against the principle debtor.

(B) In the second place, taken to its logical conclusion, if a default in the provision of the relevant documentation by the lender to the surety could be cured at any time until judgment to enforce the security against the surety, there would be no point in having any provision along the lines of section 20(1).

12. Mr McCoy also relied upon a statement made in the judgment of Mayo JA in the course of his judgment in the decision of this court in Yelsen Finance Holdings Limited v Chan Mei Suen CACV 170 of 1999. At page 5 of the printed version of the judgment Mayo JA appeared to indicate that a provision of a copy of a guarantee after commencement of proceedings would satisfy the provisions of section 20(1) and (4). However, that statement was clearly obiter since the decision in the case involved the judge's decision as to whether it would not be inequitable to decline to enforce the principle agreement and hence the plaintiff's case under section 18(3) was rejected. Once the principle loan was held to be unenforceable because of non-compliance of section 18(1), whether or not the provisions of section 20 were complied with became irrelevant, as indeed Mayo JA stated at page 9 of the judgment. In any event, this aside observation of Mayo JA was not adopted by all the members of the court.

13. In those circumstances this appeal was allowed.

Hon Le Pichon JA:

14. I agree.