HANG SENG BANK LTD v. TSANG CHIU WA AND ANOTHER

DCCJ 3365/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL JURISDICTION NO.3365 OF 2008

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JUDGMENT

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1.  This is an appeal from Registrar R. Lai of the District Court against his decision giving final judgment against the 1^st and 2^nd Defendants upon the application by the Plaintiff under Order 14.

The Plaintiff’s Action

2.  The Plaintiff is suing the Defendants for amounts due on credit cards issued to them by the Plaintiff.  The 1^st Defendant was the principal cardholder and the 2^nd Defendant, who is the wife of the 1^st Defendant, the supplementary cardholder.  As at 28 July 2008, the outstanding balances were according to the Plaintiff $117,689.15 and $11,154.63 respectively.  The Plaintiff claims against the 1^st Defendant for both outstanding sums, and against the 2^nd Defendant for the latter sum only.

3.  Registrar Lai gave judgment on 15 January 2010.  Although the Defendants issued the Notice of Appeal within time on 25 January 2010, it was not served on the Plaintiff until 24 February 2010.  Strictly speaking, the Defendants would require leave to appeal out of time.  At the hearing before me, the Plaintiff opposed the application for leave, although its counsel Mr Domminick Chung was prepared to argue against leave on the basis that the appeal in any event had no prospects of success, i.e. the Defendants had no defence to the claims.

4.  Before Registrar Lai, the Defendants relied on a number of grounds in resisting the Plaintiff’s application for summary judgment, including the following:

(a)  That the Plaintiff is relying on terms which are different from the terms of the contract signed by the Defendants;

(b) That the Plaintiff has been charging interest and penalties, for the months of June and July 2008, higher than the 2.67% per month “contractual” interest rate, which the Plaintiff was not entitled to do;

(c)  That the Plaintiff unilaterally and without the consent of the Defendants deducted the Defendants’ bank balances from other accounts to pay for the amounts owed on the credit cards; and

(d) That the exemption given by section 3 of the Money Lenders Ordinance (Cap. 163) to banks from the provisions of that Ordinance contravenes Article 25 of the Basic Law and Article 22 of the Hong Kong Bill of Rights Ordinance (Cap. 383).  The exemption should be struck down and therefore the Plaintiff has been in breach of a number of provisions under the Money Lenders Ordinance.

5.  At the hearing, I gave leave to the Defendants’ son, Mr Tsang Hin Sing, to act as their McKenzie friend.  The Defendants in this appeal no longer pursued the matters in paragraphs 4(a) to (c) above.  In any event, I am satisfied on the evidence that the Plaintiff was entitled, as a matter of contract, to rely on the terms which it did in the present case, in charging the amounts of interest in question and to apply credit balances in the Defendants’ other accounts to the payment of outstanding sums on the credit card accounts.

Defendants’ Argument: Bill of Rights

6.  The main ground on which the Defendants rely in the hearing before me is that section 3 of the Money Lenders Ordinance contravenes Article 25 of the Basic Law and Article 22 of the Bill of Rights.  The former provides: “All Hong Kong residents shall be equal before the law,” while the latter provides: “All persons are equal before the law and are entitled without any discrimination to the equal protection of the law.  In this respect, the law shall prohibit any discrimination and guarantee to all persons equal and effective protection against discrimination on any ground such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status.”

7.  Mr Tsang’s argument is not that the Defendants belong to a group or subset in society who have been the object of discrimination under the Money Lenders Ordinance, but rather, that the Money Lenders Ordinance has singled out a group of institutions engaged in the business of money lending, namely banks (and all authorised institutions under the Banking Ordinance), for favourable treatment, by exempting them from the provisions of the Money Lenders Ordinance.  As a result, banks are entitled under the existing law to adopt certain practices from which other money lenders are prohibited.  They are also relieved from certain requirements of formality.  These are measures aimed at protecting the consumer, and the Defendants have been deprived of that protection vis-à-vis the Plaintiff, an authorised institution under the Banking Ordinance.  The Defendants have suffered as a result of the allegedly discriminatory legislation.  Had the provisions of the Money Lenders Ordinance applied to the Plaintiff, the calculation of the amounts due from the Defendants would have been different, as the Plaintiff would not have been able to levy certain charges and compound interest.

8.  Mr Tsang refers to the Code of Banking Practice, jointly issued by the Hong Kong Association of Banks and the Deposit Taking Companies Association on a voluntary basis, and endorsed by the Monetary Authority.  The Code has no statutory effect, but contains a set of recommendations for minimum standards which the relevant institutions are expected to observe in their dealings with personal customers.  See Part 1 of the Code.  Mr Tsang relies on section 12.3 of the Code, which provides, “  While institutions are exempt from the Money Lenders Ordinance (Cap. 163) so that the interest rates they charge are not restricted, they should not charge customers extortionate interest rates.  If the APRs charged by them and calculated in accordance with the method set out in the relevant guidelines issued by the industry associations exceed the level which is presumed to be extortionate under the Money Lenders Ordinance, they should be able to justify why such high interest is not unreasonable or unfair.  Unless justified by exceptional monetary conditions, the APRs thus calculated should not exceed the legal limit as stated in the Money Lenders Ordinance.”  Mr Tsang makes the point that although banks are exempted from the requirements of the Money Lenders Ordinance, their own code of practice recommends that they follow, as far as possible, certain important provisions in the Ordinance, so that it is difficult to justify such complete exemption.

9.  Mr Tsang also refers to what is now section 27.2 of the latest version of the Code, which provides: “… Card issuers should not set off the debit balance in the credit card accounts of the principal cardholder or other subsidiary cardholders against the credit balance of a subsidiary cardholder.”  The recommendation is that banks should not apply credit balances belonging to a supplementary cardholder towards the payment of amounts due on a principal card.  As I understand the evidence, this is not what the Plaintiff did.  The Plaintiff has applied credit balances belonging to each Defendant towards his or her respective debt.  This does not take the Defendant’s case any further and is in any event not related to Mr Tsang’s argument on discrimination.

Discrimination

10.  Mr Domminick Chung on behalf of the Plaintiff submits that discrimination means a failure to treat like cases alike.  He submits that licensed banks and money lenders are very different types of organisation, each having its own regulatory framework.  Banks play an important role in maintaining the status of Hong Kong as an international financial centre, and are subject to a separate regulatory regime under the Banking Ordinance, which imposes strict requirements including, for example, a substantial capital requirement.  In short, banks and other money lenders are simply different cases calling for different treatment.

Banks and Money Lending

11.  In Hong Kong, banking business may only be conducted by a company holding a valid banking licence.  An important part of banking business is receiving money on current, savings, deposit or other accounts, from the general public.  The money so received are generally channelled by banks into lending activities or other financial services, such as trade and project finance, mortgage loans, letters of credit, the payment and collection of cheques.  The receipt of money on deposit from the general public requires oversight by the regulatory authority (the Monetary Authority), and the Banking Ordinance imposes a strict capital requirement, so that money placed on deposit by the public with banks enjoys a certain degree of protection.  Given the much wider range of business activities in which banks participate, it is not surprising that they come under a separate regulatory regime.  However, the fact remains that a major part of the business of banks is the lending of money.  The question is why banks have been exempted from the Money Lenders Ordinance.

Money Lenders Ordinance

12.  The current Money Lenders Ordinance was enacted in 1980.  Its purpose was, inter alia, to provide for the control and regulation of money lenders and money lending transactions, and to provide for relief against excessive interest rates and extortionate stipulations in respect of loans.  It replaced the previous ordinance dating back to 1911.  It introduced a 2-tier interest rate system.  Under the Ordinance, loans charging an effective interest rate (calculated in accordance with the Ordinance) of between 48% and 60% per annum are presumed to be extortionate.  The court has the power to reopen a transaction which is held to be extortionate, thus giving a degree of relief to a borrower against excessively high interest rates.  Furthermore, loans carrying interest of over 60% are prohibited and unenforceable.  It is also a criminal offence for any person to lend money at an interest rate of over 60%.

13.  Under the original 1980 Ordinance banks were exempted from Parts II and III of the Ordinance (which prohibited, among other things, the charging of compound interest).  They were not, however, exempted from Part IV, including sections 24 and 25 which referred to the 2 interest rates mentioned above.

1988 Amendment to the Money Lenders Ordinance

14.  Mr Chung for the Plaintiff points out that it was an amendment to the Ordinance in 1988 which exempted banks from the remainder of the Ordinance which had previously applied to them.  Between the original 1980 Ordinance and the 1988 amendment, the Hong Kong Dollar had been re-pegged to the US Dollar, at the rate of $7.8, in October 1983.  The then Financial Secretary, in moving the bill for the amendment, said, “We consider that the highly competitive environment for bank lending business provides adequate safeguards against exploitation of borrowers.  More importantly, the 60 per cent restriction could inhibit the proper working of the interest rate mechanism in the wholesale market in support of the linked exchange rate.”  See Official Report of Proceedings of the Legislative Council, p.1661, for 22 June 1988.

Justifying Differential Treatment

15.  Mr Chung submits that even if the court finds that there is difference in treatment of banks in the sphere of money lending, such difference is justified.  He cites the Court of Final Appeal case of Secretary for Justice v Yau Yuk Ling [2007] 3 HKLRD 903, in which Li CJ says that the guarantee of equality before the law does not invariably require exact equality.  Differences in treatment may be justified for good reason.  It must be shown that:

(a)  the difference in treatment must pursue a legitimate aim, and a genuine need for such difference must be established;

(b) the difference in treatment must be rationally connected to the legitimate aim;

(c)  the difference in treatment must be no more than is necessary to accomplish the legitimate aim.

16.  Mr Chung refers to the Hong Kong Government’s obligations, under Article 109 of the Basic Law, to provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre, and under Article 110 of the Basic Law, to formulate monetary and financial policies, safeguard the free operation of financial business and financial markets, and regulate and supervise them in accordance with law.  The exemption of the banks from Part IV of the Money Lenders Ordinance has the legitimate aim of preserving the currency peg.

17.  He argues that the difference in treatment is no more than is necessary to accomplish the legitimate aim.  He relies on Kong Yun Ming v Director of Social Welfare [2009] 4 HKLRD 382 in which Andrew Cheung J observed at paragraph 131, referring to Raza v Chief Executive-in-Council [2005] 3 HKLRD 561, that where one is concerned with measures taken in response to socio-economic needs, which are constantly evolving, the administration is best placed to make the necessary assessment on those needs and to formulate policies which would meet them.  The court would give greater deference to the administration’s judgement than they would in respect of immutable, fundamental right such as the right to freedom of religion or to fair trial.  Mr Chung argues that likewise, the realm of financial and monetary policies is not something that the courts are institutionally equipped to interfere with.

Money Lenders Ordinance: The Mischief to be Addressed

18.  The introduction of the interest rates in the 1980 Ordinance and the civil and criminal consequences flowing therefrom represented a legislative intervention in the freedom of contract in the business of money lending, a common and vital activity in any economy.  What generated the need for the Ordinance was the problem of what is commonly called loan-sharking, and the social ills (often triad-related) associated with it - the lending of money at exorbitant interest rates together with the use, in seeking repayment, of high-handed tactics, either illegal or bordering on illegal means.  Yet the provisions of the Ordinance had potentially wide-ranging effect on the business community.  Indeed at the second reading of the 1980 Bill, concern was expressed over the adoption of an interest rate ceiling (for fear it might hamper legitimate lending business) and the choice of the two particular interest rates.  The reason for introducing an interest rate ceiling was to make it easier for the police to prosecute loan sharks.  The relevant provision (applicable to any person whether a money lender or not) would also obviate the need to prove that someone has been carrying on the business of money lending, an evidential difficulty encountered in some other jurisdictions.  While some might quibble with the choice of the 2 interest rates, it was thought that they were workable solutions.  It was also thought that other intimidatory or undesirable conduct by loan sharks (which fell short of being criminal) could be controlled by the licensing court by means of the exercise of its power to refuse renewal of the licence of a money lender.   See Official Report of Proceedings of the Legislative Council for 25 June 1980, for the second reading of the Money Lenders Bill 1980, at pp.933-938.

19.  It is clear that the mischief which the Money Lenders Ordinance was intended to address was loan-sharking – providing for civil relief in appropriate cases and facilitating the criminal prosecution of loan sharks - rather than money lending per se (even at what some may regard as high interest rates).  The adoption of the 2 interest rates was to make it easier for courts to intervene in cases of loan sharking, and to facilitate the prosecution of loan sharks.  It represented a compromise between the freedom of contract and the need to prevent or discourage loan-sharking.

Purpose of Exemptions

20.  One of the difficulties faced by the legislature in such legislation is, in trying to tackle unscrupulous loan sharks, other legitimate lending businesses which form an important part of any economy may also be caught in the net, businesses which are not considered proper targets of the legislation.  To avoid such a situation, exemptions are to be granted to classes of persons or loans to which some or all of the provisions in the Ordinance should not apply, either because there is no need for the legislature to intervene in such exempted areas or there already exist sufficient regulatory frameworks in those areas.

21.  Thus understood, the exemptions are there simply to exclude from the application of the Ordinance areas of lending activities not generally associated with the social problem of loan-sharking which requires legislative intervention.  Although such exemptions create an apparent difference in treatment of classes of money lenders, such difference in treatment is called for, either because one is not dealing with “like cases”, or because the difference in treatment can be justified in accordance with the principles enunciated in Yau Yuk Ling.

22.  It is fair to say that banks are not generally associated with the social problem of loan-sharking, and they have been exempted from the provisions of the Ordinance.  Banks are not the only class of money lenders exempted.  Other exemptions can be found in Parts 1 and 2 of Schedule 1 of the Money Lenders Ordinance.  Exempted classes include subsidiaries of banks, credit unions, trade unions and insurers, who incidentally have their own regulatory frameworks.  Exempted transactions include loans made bona fide by an employer to an employee, loans for the purchase of immovable property secured by a mortgage, and loans made by licensed pawnbrokers.  These exemptions have the legitimate aim (and are rationally connected thereto) of preserving the freedom of contract in otherwise normal business activities (in the form of money lending) which do not form part of the target of the legislation.  Specifically in the case of banks, the aim is to avoid undue restriction of the legitimate operation of banking business in Hong Kong, which is vital to our economy and financial system.

23.  In particular, the exemption of banks from the interest rate restrictions under Part IV of the Money Lenders Ordinance has the further legitimate aim of maintaining the linked exchange rate which is essential to the economic stability of Hong Kong.  The measure taken is rationally connected to that aim, in that the exemption removes a restriction on the interest rate chargeable by banks, a restriction which could work against the maintenance of the linked exchange rate.  This is not a mere theoretical problem.  The Hong Kong currency was under severe attack by speculators during the Asian Financial Crisis.

24.  Furthermore, the measure taken is no more than is necessary to achieve the legitimate aims stated above.  Banks are not given a completely free rein in the realm of money lending to personal customers.  The Code of Banking Practice (approved by the Monetary Authority) referred to above contains a set of recommendations for banks to follow.  While self-regulation is not always a complete answer, in this case, it should be borne in mind that the Monetary Authority retains a supervisory role over banks in Hong Kong, and interest rates charged by banks to personal customers which would otherwise fall foul of the Money Lenders Ordinance would need to be justified by banks.  By virtue of this regulatory framework, banks as vital institutions of the financial system are allowed to operate relatively freely in the conduct of their lending business, while at the same time a degree of protection is given to consumers.

Conclusion

25.  For the above reasons, I find it unarguable that the exemption given to banks from the Money Lenders Ordinance contravenes the Basic Law and the Bill of Rights.  There is no defence to the Plaintiff’s action.  I would therefore refuse leave to appeal out of time and give judgment to the Plaintiff for the sums claimed against the respective Defendants, with interest thereon at the rate of 2.67% per month from 28 July 2008 until judgment, and thereafter at the judgment rate.  I also make an order nisi that the Defendants pay the costs of this appeal and below, to be taxed if not agreed.