NEW JAPAN SECURITIES INTERNATIONAL (HK) LTD v. LIM YIONG LIN

HEADNOTE

162 of 1986
(Civil)

Moneylender - Loan Transaction - Borrowing to pay off former Loan - Sufficiency of Memorandum - Illegality of provision for the payment of Compound Interest - Moneylenders Ordinance (Cap. 163)

Licensed moneylenders had lent to a borrower sums expressed in Japanese yen which had been applied to discharge his respective accrued liabilities for principal and interest under earlier loans and were not acknowledged in memoranda satisfying section 18 of the Ordinance. When the moneylenders sought to recover the principal and interest under the loans the borrower pleaded that the loans were irrecoverable in the context of section 18 and, further, that directly or indirectly the loans provided for the payment of compound interest and were therefore illegal and irrecoverable in the context of section 22. The trial judge, while holding that the loans sued upon were fresh loans, nonetheless also held that they were illegal and irrecoverable as indirectly providing for the payment of compound interest. The plaintiffs appealed.

Held (Allowing the appeal)

(1) Being new the loans sued upon provided neither directly nor indirectly for the recovery of compound interest and were recoverable.

(2) Discretion under section 18(3) should be exercised in the plaintiffs' favour. B.S. Lyle Ltd v Chappell [1932] 1 KB 691 and B.S. Lyle Ltd v Castle [1938] 158 LT 242 at p.243 (Note to Re British Games Ltd) followed.

IN THE COURT APPEAL

No. 162 of 1986
(Civil)

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JUDGMENT

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Kempster, J.A.:

1. On 2^nd October 1986 Deputy Judge Barnett gave judgment in two actions commenced in the High Court of which the distinctive numbers were 1983 No. 1466 and 1984 No. 704. Presumably an order had at some stage been made within the parameters of RSC O.4. In the first of those actions the plaintiffs, who are licensee moneylenders, sought to recover the principal and interest under six loans expressed in Japanese Yen pursuant to an agreement in writing dated 14th January 1982. The trial Judge gave judgment for the defendant as regards five of such loans and for the plaintiffs as regards that remaining. We are not concerned with the other action. The plaintiffs appeal from the dismissal of their claims on the five loans and the law applicable thereto is the sole matter for our consideration.

2. It was common ground that each of the relevant loans was made for a period of 3 months and that simple interest was payable. It was also common ground, however, that these loans were the successors of earlier loans on similar terms which, as and when the defendant had defaulted on his obligations, had successively been rolled over in the sense that the plaintiffs made fresh loans to him of sums sufficient to discharge his accrued liability for principal and interest. Thus at trial the plaintiffs claimed, as they do before us to-day, the monies certified due as at 1st February 1983 together with interest. The defendant conceded that nothing had been repaid to the plaintiffs in respect of his prima facie liability under the final five rolled over loans but contended that all were illegal or at lease unenforceable by reason of the provisions of the Moneylenders Ordinance (Cap. 163).

3. The equivalent English Statutes, the Moneylenders Acts 1900 and 1927, now repealed and replaced by the more widely cast Consumer Credit Act 1974, were described by Lord Diplock in Orakpo v. Manson Investments[1] as being

- designed to protect unsophisticated borrowers from being overreached by unscrupulous moneylenders.

He went on.

As the present case shows, however, they are capable of being used by unscrupulous borrowers to avoid paying their just debts to moneylenders who, in the words of the learned judge - did not do

anything which was not perfectly straight-forward, agreed in advance and perfectly understooe1 by the borrower, who … is well able to look after himself in these matters.

Those words would seem to apply to the facts of the instant case in circumstances where the trial Judge described the defence as wholly unmeritorious.

4. The substantial defence, successfully relied upon below, was that offered by section 22 of the Ordinance:

Any agreement made for the loan of money by a moneylender shall be illegal if it provides directly or indirectly for -

(a) the payment of compound interest: -

Provided that provision may be made by any such agreement that if default is made in the payment upon the due date of any sum payable to the moneylender under the agreement, whether in respect of principal or interest, the moneylender shall be entitled, subject to Part IV, to charge simple interest on that sum from the date of the default until the sum is paid at an effective rate not exceeding the effective rate payable in respect of the principal apart from any default, and any interest so charged shall not be reckoned for the purposes of this Ordinance as part of the interest charged in respect of the loan.

This section in all material respects corresponds with section 7 of the repealed 1927 Act albeit Mr. Chan, who appears for the defendant, has sought to suggest that a different construction should be put upon it by reason of the definition of loan appearing in section 2 of the Ordinance. We have all considered that submission with close attention but are unable to find that in any essential the drift, purport and effect of section 22 of the Ordinance differs from that of section 7 of the Act.

5. Deputy Judge Barnett, having rightly held that rolling over involved the making of fresh loans, went on to say and find

It seems to me in the present case to be flying in the face of reality to say that indirectly no compound interest is being levied by the rolled over loans. However viewed, there is an element in the new or the rolled over loans of interest accrued but unpaid, and it seems to me to defy common sense to say that is not compound interest.

For my part I am satisfied that this conclusion was erroneous. Having referred to B.S. Lyle Ltd v Chappell[2] the Judge emphasised a passage from the judgment of Scrutton L.J, at p.702 which reads:

The case must go back for a new trial, in which the effect of the two prima facie harsh rates of interest, will have to be considered, and the question of compound interest investigated.

Also of possible relevance is what that Lord Justice had earlier observed, obiter, at p.699:

It seems obvious that by reason of the provisions of ss. 7, 15 subs. 2, and the first Schedule, compound interest is being charged on this transaction.

6. The Judge failed to allow for the fact that the other members of the Court, Greer and Slesser LJJ, expressed no such reservations. Had he been afforded the advantage vouchsafed to us of being referred to judgments which those Lord Justices later gave in B.S. Lyle Ltd. v Castle he would surely have come to a different conclusion. The reference to that authority is [1938] 158 LT 242 at p.243 being a note to Re British Games Limited.

7. In B.S. Lyle Ltd v Castle at p.243 Greer LJ stated

But in my judgment B.S. Lyle Ltd v Chappell⁽²⁾ decides conclusively that if the transaction means that the money is lent to the borrower and that the borrower with that money pays off the old loan, the court is no longer in a position to treat the transaction as a mere renewal, notwithstanding the observations of Scrutton, J.J. What has happened is that the old loans have been paid off and a new loan has been entered into, and the position is exactly the same as it would have been if the borrower had borrowed from someone else the money necessary to repay the old loan and obtained a new loan from the money lenders.

To like effect Slesser, L.J:

The present transaction being identical with that in B.S. Lyle Ltd v Chappell⁽²⁾ it is not open to the borrower to deny that the transaction was a new loan and a new transaction. In these circumstances, it is clear that, whether the sum which was released did or did not included compound interest, there was no compound interest leviable under the agreement of the 16th September, other than interest which was covered by the proviso to section 7 of the Act of 1927.

8. All three Lord Justices in their earlier decision had emphasised that the last of the rolled over loans was recoverable as a new loan. I am satisfied that the loans here sued upon are new loans which; since neither directly nor indirectly do they provide for the payment of compound interest, are recoverable.

9. The proviso to section 22 is not relied upon by the plaintiffs today; perhaps because there was some change in the interest rates charged on roll over and no provision for roll over had been made in the original agreements. Subject to such considerations these transactions would, in my view, have come four square within its parameters. B.S. Lyle Ltd v Castle (supra) at p.243 per Slesser LJ; Mutual Loan rune Association v Sanderson[3] per Porter J (as he then was).

10. The second defence, at trial and before us, was that there was no sufficient note or memorandum to satisfy section 18 of the Ordinance. This the plaintiffs at all stages conceded; inviting the court to exercise its discretion under sub-section (3). In the absence of any strong opposition on the part of counsel for the defendant below the Judge did so in the context of the sixth loan adding.

If it had been appropriate to do so, I would have exercised my discretion in respect of the other five loans as well; and I say that in case the matter goes further.

Now that it has I would adopt his words for the purposes of appeal and express my satisfaction that in all the circumstances it would be inequitable that the relevant agreements should be held not to be enforceable. I would declare them fully enforceable according to their tenor. It follows that I would also allow the appeal and enter judgment in the plaintiffs' favour for the several amounts claimed in respect of the five loans.

Yang, J.A.:

11. I too would allow the appeal for the reason given by my Lord Kempster.

Clough, J.A.:

12. I agree and have nothing to add.