LEO LEE alias LEE HOK YUEN v. CHEONG OI SUM ADER

HEADNOTE

MONEY LENDERS ORDINANCE (Cap.163) - loan at effective rate of interest exceeding 60 per cent per annum - power of court to re-open transactions - whether subsequent transfer of property a transaction for purpose of S.25 - effect of disposal of properly by lender - whether borrower should give credit for the unenforceable loan in order to do "justice between the parties ".

IN THE DISTRICT COURT OF HONG KONG

CIVIL JURISDICTION

ACTION NO. 19219 OF 1991

________________

-------------------------

REASONS FOR DECISION

-------------------------

His Honour Judge Downey:

1. Earlier in the year, I gave judgment in favour of the defendant in these very difficult and complicated proceedings. In essence, I found that the plaintiff had lent sums of money to the defendant at an effective rate of interest which contravened the provisions of the Money Lenders Ordinance (Cap.163) to the extent of empowering the court to re-open the transaction between the parties, in accordance with the broad provisions of section 25 of Cap.163. When I delivered judgment, I indicated that some, if not all, of my views on the scope of that provision were tentative as I had not received full legal argument thereon because of the nature of the disputed issues of fact at the trial. Furthermore, it seemed to me that further evidence was required before I could be finally persuaded to re-open the transaction or transactions between the parties. For that reason, I ordered the taking of certain accounts relating to the acquisition and resale of a flat formerly owned by the defendant. These accounts have been taken; and both parties have had the opportunity of making further submissions on the questions whether, and to what extent, the powers conferred on the court by section 25 of Cap.163 should be exercised in this case. I am grateful to Mr. Pang and Mr. Emerson for their further submissions. Mr. Emerson assembled a considerable dossier of authorities and extracts from textbooks from England and the Commonwealth. Unfortunately, these are of very limited assistance since the Money Lenders Ordinance, which was originally based on the English Act of 1900, was drastically amended in 1980 to bring the legislation up to date and to introduce some innovations to deal with the serious social problem of loan sharking. Many of the provisions of the present ordinance are taken from English and Commonwealth statutes. But those dealing with the court's power to re-open transactions have been rewritten in a way which leaves few, if any, of the many decided cases as authoritative aids to the construction of the legislation.

2. In my earlier judgment, I found that the plaintiff had lent money to the defendant at an effective rate of interest of 216 per cent per annum. Any person who lends money at an effective rate of interest which exceeds 60 per cent per annum commits an offence (s.24(1); and no agreement to repay the loan or interest or security is enforceable (s.24(2). Furthermore, it is irrebuttably presumed that the agreement is an extortionate transaction (s.25(3), for the purposes of the power to re-open transactions. The borrower is not required to prove that the transaction required him to make payments which are grossly exorbitant; or that it contravenes ordinary principles of fair-dealing (s.25(2)). And, the lender cannot persuade the court to uphold the agreement by showing that it is not unreasonable or unfair. The court's power to reopen is conferred by Section 25(1) in the following terms:-

" 25. (1) Subject to section 24(2), where -

(a) proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan: and

(b) subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate.

the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit."

3. In my view, this provision gives the court a very wide and unfettered discretion "to do justice between the parties." The language is much more general than the earlier provisions, which were described as imposing a "terrible burden" upon the judges or conferring on them an "embarrassing jurisdiction"; although one judge "rejoiced" that he had this power. (See The Law of Money Lenders in Australia and New Zealand: Clifford L. Pannam (1965) and authorities cited at p.277). In my respectful view the words of section 25(1) are to be welcomed, but need to be applied with great care. For my part, I hope that it can no longer be said that the legislation can only be understood by a judge with the wisdom of King Solomon. (See Money-lenders and Borrowers: C. Grenville Alabaster (1908) Preface).

4. Returning to my findings in this case, I found that the plaintiff agreed to lend $110,000 to the defendant in March 1990 although she only received $75,665 after the plaintiff had deducted interest in advance and an introduction fee. The defendant gave postdated cheques to cover future interest. Shortly afterwards the defendant became further indebted to the plaintiff when he redeemed a Rolex watch which she had pawned. When she could not repay those debts she was pressed into transferring her flat in Shatin to the plaintiff for a consideration less than its real value, and which the plaintiff sold at a substantial profit in the following year. The agreement for repayment of the loans and payment of interest being unenforceable by virtue of Section 24(2) of Cap.163, there is strictly no need to reopen them. The first and essential question is whether the transfer of the flat is a "transaction" which, in the circumstances of this case, can be reopened. On behalf of the plaintiff Mr. Pang submitted that it could not because it was unconnected with the loan in March 1990; and "transaction" in section 25(1) must be confined to the original loan or any security given at the time of the loan, and should not be extended to subsequent transactions.

5. It should be noted that the section uses the word "transaction" in contrast to "agreement", "security" or "loan". It may be that "transaction" is intended as no more than a generic description of the matters which can be reopened, and is limited to the matters expressly stated in section 25(1) (a). However, the Ordinance is clearly a piece of remedial legislation and, in my view, the court should be slow to place a restricted construction upon the language of such legislation. As Lord Loreburn, L.C. said in Samuel v. Newbold [1906] AC 461, at 467:

"It seems to me that the policy of this Act was to enable the Court to prevent oppression, leaving it in the discretion of the Court to weigh each case upon its own merits and to look behind a class of contracts which peculiarly lend themselves to an abuse of power."

6. In this and similar areas of commercial activity the courts look to the substance of the transaction; and not its mere form. An agreement for a loan may appear to be perfectly fair and reasonable. But, when examined in the light of all the circumstances of the parties, and their relationship, it may turn out to be extremely extortionate. In B.S. Lyle Ltd. v. Pearson [1941] 2 KB 391, the plaintiff lent two sums of money in March and June 1939, each at rates of interest of 150 per cent for one month. In the following January, when £490 was still owing to the plaintiff, it took a promissory note for that amount with interest at 25 per cent per annum. Although the latter note was not harsh or unconscionable, the Court of Appeal held that it could reopen the whole series of loans because they were part of the same transaction. In the present case, I would be disposed to adopt a similar approach because I am satisfied that the transfer of the flat to the plaintiff was one of a series of related transactions connected with the loan in March 1990.

7. I have found that the transfer was not the act of a willing vendor at a freely negotiated or fair price. The defendant did not receive be stated deposit of $100,000. Instead of paying $500,000 for the flat, the plaintiff became the owner, and obtained vacant possession thereof, essentially by taking over the defendant's liability under the mortgage thereon. Whereas the defendant occupied the flat as her home; the plaintiff was able to resell it with vacant possession for $960,000 in the following year. Although he agreed to give an option to repurchase the flat, he knew, in my view, that she would be unlikely to be able to do so because of the nature and extent of the financial pressure she was under. She had not repaid any part of the loan when the suggestion for transferring the flat was carried into action. Although the transfer was not completed until the summer of 1990, I do not think that this interval of time renders it something entirely divorced from the loan in March. The defendant had offered her flat as a form of security during the discussions regarding the loan; and the plaintiff had asked for details and checked with the Land Office before he agreed to make the loan. I am satisfied that both parties contemplated that the flat would be used to repay, or as security for repayment of, the loan if the defendant defaulted. For these reasons, I conclude that the transfer of the flat was a transaction which the court can re-open under section 25(1), if it is just to do so in all the circumstances.

8. For the purposes of reopening this transaction, accounts were ordered to be taken. Happily, that exercise has resulted in a measure of agreement between Mr. Pang and Mr. Emerson, at least for the purpose of this part of the proceedings. Mr. Pang accepted the summary in paragraph 8 of the defendant's affirmation filed on the 15th May 1993, subject to the deletion of $100,000, being the disputed deposit which I found was never paid by the plaintiff to the defendant. Mr. Emerson invited me to order the plaintiff to pay the defendant the difference between the total of $985,000 (i.e. the resale price of flat of $960,000 + rents received by plaintiff) and a total of $500,685, being various sums paid by the plaintiff in acquiring and disposing of the flat. On the other hand, Mr. Pang submitted that the amount of the loans which the defendant admits receiving should be taken into account.

9. In my view, the first question is whether the court should exercise its power to reopen the transaction at all. The fact that the flat has been sold to a third party is not a good reason for not doing so. The court's power to make orders or give directions is unfettered. In the earlier legislation the court was specifically empowered to order the lender to indemnify the borrower if the security had been parted with or the debt assigned. Neither Mr. Emerson nor Mr. Pang has addressed me on this aspect beyond their suggestions stated in the previous paragraph. In fairness to them, it is not easy to do so because no guidelines are offered by the statute. Some guidelines as to what is or may be "extortionate" are contained in sub-sections (2) (4) (5) and (6) of section 25. But, whether they can also be taken into account when considering the wide discretion conferred by subsection (1) of Section 25 is, in my view, doubtful. The legislature clearly intended the new Ordinance to deal with a wide range of social problems and very grave criminal activities. It would be quite wrong to whittle down the language of the statute in a manner which might result in it being ineffective to deal with these social evils. But, as a starting point, it seems to me that the transaction should be reopened if the court is clearly satisfied that the transaction is extortionate because the rate exceeds 60 percent. The real difficulty is how to arrive at a result which does justice between the parties.

10. In the present case it could be said that the plaintiff's conduct whereby be acquired the flat might or did make him a constructive trustee thereof; and that he should be held accountable to the defendant for any profit made by him. That, in effect, is the substance of Mr. Emerson's submission. But, in my view, that would not be entirely just since the defendant would not be giving any credit for the actual benefits received from the plaintiff in respect of sums received by way of loan or the redemption of the pawned Rolex watch. In principle they should be brought into account. The only difficulty is whether to do so would disregard the fact that section 25(1) is made expressly subject to section 24(2). In the present case, it might be argued that the plaintiff would obtain indirectly that which is denied him expressly by section 24(2). However, when it comes to doing justice between the parties, I think that it might be unjust if the benefits actually received by the defendant were wholly ignored. In my view, the $61,800 paid for redeeming the Rolex watch should certainly be brought into account, since there is no evidence to suggest that this sum was greater than what the defendant would have had to pay to the pawnbroker. But, not without some misgivings, I have come to the conclusion that it would be contrary to the policy of the statute to bring into account the $75,665, which was the net amount received by the defendant in March 1990.

11. It is in, my view, abundantly clear that the legislature intended that persons engaging in illegal money lending transactions should pay heavy penalties. Apart from fines of $100,000 and imprisonment for 2 years, they run the risk of losing substantial sums of money by the court re-adjusting their civil rights and obligations through reopening extortionate transactions. Lenders like the plaintiff in this case are not totally deprived of "justice between the parties" under section 25(1). But, the extent to which their civil rights should be recognized or protected must depend upon the degree of their greed and illegality. In this case, the effective rate of interest was 216 per cent per annum. It was so far beyond the limit which the law will tolerate for high-risk lending, that I do not think that it would be just to grant any other allowance to the plaintiff. If he had not parted with her flat, but kept it as his second residence, as he represented he intended to do, the defendant would have had a very strong case for setting aside the transfer and recovering her flat. In the circumstances I see no injustice in requiring him to indemnify her for its loss. I direct that he do so by paying to her the sum of $422,515.

12. Although I have not had the benefit of any argument on the matter, I am satisfied that I have jurisdiction to make that order, because the court's jurisdiction is, in my view, based on the amount claimed in the proceedings taken by the lender: not on the amount likely to be recovered by the borrower or a surety.