ZUCCHINI FINANCE CO., LTD. v. CHEUNG KA FAT

HCA 5035/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5035 OF 2001

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J U D G M E N T

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1. This is an appeal from a decision of the Master giving summary judgment under Order 14. The plaintiff is a registered moneylender from whom the defendant borrowed $2 million on 4 July 1997. The plaintiff says that the defendant has not repaid the loan and has issued a writ for the sum of $2 million plus accrued interest of $1.6 million.

2. In its defence the defendant raises points under the Moneylenders Ordinance. The Moneylenders Ordinance requires, by section 18(1)(a), that within seven days of the making of the agreement the borrower must sign a note or memorandum of the agreement and a copy of the memorandum or note must be given to him at that time.

3. There is no doubt that a note or memorandum was signed. In this case it is the loan agreement itself for I am satisfied that in the case of a simple loan, such as this one is, the loan agreement itself may be sufficient to constitute the memorandum.

4. The issue that is raised is as to the copy. The defendant says no copy was given to him. The plaintiff says it was and points to a provision in the memorandum that requires the defendant to "sign and return the attached copy of this letter directly to us." Mr Carolan says the only inference is that the defendant got the other copy, but in my view that is not the only inference that may be drawn from that statement. The original may have been retained by the plaintiff when the documents were signed. There may never have been another copy despite the words in the document. Significantly, the document does not contain the usual provision whereby the borrower acknowledges receipt of a copy of the memorandum. Even such an acknowledgement has been held not to be conclusive against a borrower: see Kwan Fat-hong v Chan Wai-yiu HCA 4458 of 1998.

5. I am satisfied that there is a triable issue as to whether the plaintiff has complied with the provisions of section 18(1)(a).

6. Section 18(1)(b) requires the lender to give to the borrower a summary of the provisions of the Ordinance in a prescribed form. The form is in the subsidiary legislation. It is conceded by Mr Carolan that no such summary was provided.

7. Section 18(2) sets out the requirements of the note or memorandum. Mr Carolan was obliged to concede that the note is deficient in some respects. Mr Mok goes so far as to say that it complies in only three respects: the date the agreement was made, the date of the loan and the terms of the repayment.

8. Section 18(2)(a) requires the name and address of the lender. The lender is named but on the only copy of the document produced in evidence there is no address for the lender. Mr Carolan says that is because the address is on the original given to the borrower but I have found that there is an issue as whether or not the borrower received the original. Further, there was no evidence that a form of letterhead with an address was used. The address is important for it will be at that address that payment must be made of both interest and principal.

9. Section 18(2)(b) requires the borrower's name and address. The defendant is named as the borrower but has given no address. This omission, which might assist a surety or guarantor, does not advance the defendant's case.

10. Section 18(2)(d) requires the amount of the loan to be in both words and figures. It is in figures only. Again, this does not by itself advance the defendant's case, but it may be legitimate for Mr Mok at the end of the day to include both subparagraph (b) and (d) as cumulative matters upon which he can rely as default by the plaintiff.

11. Section 18(2)(h) requires the form of the security to be set out. Two forms of security were taken: first, a promissory note signed by the defendant and, second, an undated cheque for the principal sum drawn on the defendant's bank account. The promissory note is set out but not the cheque.

12. Section 18(2)(i) requires the interest rate to be set out and expressed as a rate per annum. It is set out only at a monthly rate of 3 per cent and requires calculation to determine the annual rate, albeit a simple calculation. A default interest rate is provided which is entirely at the discretion of the lender.

13. Section 18(2)(j) requires a declaration of the place of negotiation and completion of the agreement for the loan. This is entirely omitted.

14. This is accordingly a case which even at its best the plaintiff must ask the court to exercise discretion under section 18(3) as to the enforceability of the transaction.

15. If the defendant succeeds in establishing all of the points of deficiency he claims, then all of those points will need to be taken into account in the exercise of the discretion.

16. Mr Carolan says that even on that basis it is so plain that the discretion ought to be exercised in the plaintiff's favour that the matter can be dealt with today on summary judgment proceedings.

17. The Hong Kong legislation is in terms virtually identical to that in New Zealand. It is right that in Roscoe Investments Limited v New Fashions Limited [1957] NZLR 55 McCarthy J held that the purpose of section 55 of the Statutes Amendment Act - which, I interpolate, is in identical terms to section 18(3) - is to overcome the rigid nature of sections 7 and 8 of the Moneylenders Amendment Act 1933 and, to that end, to enable the court in appropriate cases to waive non-compliance with those sections. The early New Zealand cases, some of which were relied upon by Mr Carolan, show a distinct willingness on the part of the courts to waive non-compliance and enforce transactions against borrowers.

18. But times have changed and in these days of consumer protection legislation, as this legislation is now considered, these matters are looked on to protect consumers.

19. That that is so may be seen from the judgment of Bokhary J, as he then was, in Cheung Chau v Cheung Ng, Stephen Civil Appeal 119 of 1993, where the judge said this:

"It is at least reasonably argued that, as those learned judges held at first instance, the courts should be slow to relieve moneylenders who fail to comply with the Ordinance regulating their activities, since any other approach would be to frustrate rather than to promote the objects of such legislation. One can understand that point of view as moneylenders are sometimes companies and the financial penalty is not particularly high when it comes to the criminal sanctions for breaches of the provisions of the relevant legislation. In a final appeal with all of the facts having been investigated as opposed to an interlocutory one with many relevant facts in issue, this court would be in a position to give further guidance as to how the discretion is to be approached."

20. There are a wide range of matters that need to be addressed in the exercise of the discretion under section 18(3) of the Ordinance. This will include the extent to which the plaintiff has been prejudiced by any deficiencies in the documentation and the general practices of the plaintiff.

21. Two matters in my view are likely to be particularly relevant. First, the only documentation produced to the court is in English. While I accept that by virtue of decisions such as Gallie v Lee [1971] AC 1004 and Kincheng Banking Corporation v Kau Yu-kwei [1986] HKC 212, a person may not normally complain as to the terms of a transaction if he signs a document in a language he does not understand and chooses not to have it explained or translated, the fact that the document is in English only may well be a factor relevant to the exercise of discretion. In this respect I note that the prescribed summary required under section 18(1)(b) is in both English and in Chinese.

22. Second, the loan agreement contains a provision whereby default interest may be set a rate according to the lender's discretion so at the beginning of the transaction the borrower did not know what rate he may have to pay if there was default. As he was not given the summary he did not know that the maximum lawful rate that would have been able to have been charged was 60 per cent.

23. It may be that the provision for discretionary interest is severable and it is right that discretionary interest was not charged, but I am confident that a court would be slow indeed to enforce a transaction by a registered moneylender in any way in which it might be seen to give approval to a concept of discretionary default interest. If it is the lender's regular practice to include such a provision and if it is the lender's regular practice not to supply the summary to borrowers, the court may well decide in its discretion not to enforce this particular transaction.

24. I have no doubt at all therefore that it is not possible in this case to deal with such matters in a summary way under Order 14. There may well be cases of moneylender claims where Order 14 is appropriate. This is not one.

25. The defendant shall have unconditional leave to defend. There will be order for costs in the cause. I do not make the order "defendant's costs in the cause" because if the judgment at the end of the day goes to the plaintiff, the plaintiff would be entitled to costs on today's hearing.